Exam 3 Flashcards
Internal controls definition/purpose
Monitor and control business activities
1. Protect assets
2. Ensure reliable accounting
3. Uphold company policies
4. Promote efficient operations
Internal control principles
- Establish responsibilities
- Maintain adequate records
- Insure assets and bond key employees
- Separate record keeping from custody of assets
- Divide responsibility for related transactions
- Apply technological controls
- Perform regular and independent reviews
Fraud triangle
Opportunity, pressure, and rationalization
Cash over and short: Overage entry
Debit Cash 555
Credit COAS 5
Credit Sales 550
Cash over and short: shortage entry
Debit Cash 621
Debit COAS 4
Credit Sales 625
Voucher system
- Verifying, approving, and recording liabilities for eventual cash payments
- Issuing checks for payment of verified, approved, and recorded liabilities
Establish petty cash entry
Debit Petty Cash
Credit Cash
Reimburse petty cash entry
Debit inventory/expenses
Credit Cash
Increase and decrease petty cash fund
Debit Petty Cash, credit cash
Or
Debit cash, credit petty cash
Cash equivalents
Short-term, highly liquid investments that are readily convertible to a cash amount and close to maturity date and not sensitive to changes
Bank reconciliation definition
Prepared periodically to explain difference between cash reported on the bank statement and the cash balance on company’s books
Only books side needs adjustment
Bank balance adjustments
+ deposits in transit
- outstanding checks
+- corrections of bank errors
Book balance adjustments
+ interest earned and unrecorded cash receipts
- bank fees and NSF checks
+- corrections of book errors
Deposits in transit
Deposits made and recorded in depositors books but not yet listed on bank statement
Outstanding checks
Checks written by the depositor, subtracted on the depositors books, and sent to the payees but not yet turned in for payment at the bank statement due
Factoring
Selling receivables
Debit cash
Debit factoring fee
Credit AR
Direct write off method of AR
Debit BDE
Credit AR
Direct write off method- recovering bad debt
Debit AR
Credit BDE
Debit Cash
Credit AR
Allowance method recording BDE + writing off a BD entries
Debit BDE
Credit Allowance for Doubtful Acc
Debit Allowance for Doubtful Acc
Credit Acc Receivable- J Kent
Allowance method: recover bad debt entries
Debit Acc Receivable- J Kent
Credit Allowance
Debit Cash
Credit Acc Receivable- J Kent
% of sales method
affects income statement, BDE
Bad debts expense=current period sales*BD%
% of AR method
Affects balance sheet, allowance
T account:
Allowance credit or debit
+Adjusting amount
=uncollectable AR
Adjusting entry:
Debit BDE
Credit Allowance
Aging of AR
Classify each by how long past due, each age group x BD%, BD for each group totaled
Adjusting entry same as % of AR
Remembering days of months
Knuckle- 31
Middle- 30
Feb- 28
Interest calculation
Principal x Rate x Days/360
Record notes receivable
Debit Notes Receivable
Credit Sales
Honored note entry
Debit Cash
Credit Notes Rec
Credit Interest Rev
Dishonored note entry
Debit Acc Rec
Credit Int Rev
Credit Notes Rec
End of period interest adjustment
Debit int rec
Credit int rev
Record collection of note at maturity entry
Debit Cash 3060
Credit Int Rev 45
Credit Int Rec 15
Credit Notes Rec 3000
Depletion definition/formula
The process of allocating the cost of a natural resource to the period when it is consumed
Depletion expense=depletion per unit x Units extracted and sold in period
Amortization definition
Intangible asset with limited life is expensed
General depreciation definition/formula
The process of allocating the cost of a plant asset to expense in the accounting periods benefiting from its use
Cost-salvage/useful life
If partial year: * (x/12)
Straight line depreciation formula
General or
per unit:
Dep per unit= c-s/total units
Dep expense=dep per unit x # in period
Declining balance method steps:
- Straight line rate=100%/useful life
- DDB rate=2 x SLR
- Dep expense=DDB rate x beginning period book value
Change in estimates for long term assets
Book value-revised salvage/revised remaining useful life
Discarding plant asset not fully depreciated entries
Update dep. expense then
Debit Acc Dep
Debit Loss on disposal
Credit Equipment
Selling plant asset at book value entries
Update Dep Expense then
Debit Cash
Debit Acc Dep
Credit Equipment
Selling plant asset above book value entries
Update Dep Expense then
Debit Cash
Debit Acc Dep
Credit Gain on disposal
Credit Equipment
Selling plant asset below book value
Update dep expense then
Debit Cash
Debit Loss on disposal
Debit Acc dep
Credit equipment
AR turnover formula
AR turnover=net sales/average AR, net
Total asset turnover formula
TA turnover=net sales/average TA
Days’ Sales Uncollected formula
DSU=AR/net sales * 365
