Final Exam

Question 1

Fraud Triangle

Answer 1

The Fraud Triangle is a model that explains the rationalization that leads to fraud; this includes a motive, opportunity, and rationalization.

Question 2

What are internal controls and what do they do

Answer 2

Internal controls are essential procedures conducting by company management and and board of directors to accomplish objectives such as safeguard assets, encouraging employees to follow company policy, promote operational efficiency, ensure accurate reliable records, and comply with legal requirements; these contribute to preventing, detecting, and correcting fraud and accounting errors.

Question 3

What does fraud seek to do?

Answer 3

Fraud seeks to deceive another party causing damage using intentional misrepresentation, deception, and damage

Question 4

What is a controlled environment

Answer 4

A controlled environment is a crucial element of internal controls. It sets the “tone at the top” of a business. The control environment includes setting leadership. For example, having a strong, reliable leader who demonstrates the importance of internal controls and implements a corporate code of ethics.

Question 5

What is revenue recogniton

Answer 5

Revenue recognition is the idea that revenue is recognized when it is earned; basically, when the product or service is given/delivered to the customer

Question 6

FOB

Answer 6

FOB is a common shipping term that indicates the point at which the seller no longer has ownership over the good. At this point, the buyer is now holds ownership and is responsible for any losses. When goods are shipped FOB shipping point, ownership changes hands and revenue is recognized when the goods leave the sellers shipping dock. When goods are shipped FOB destination, ownership changes hands and revenue is recognized at the point of delivery to the customer.

Question 7

Subsidiary ledgers

Answer 7

Subsidiary ledgers are detailed records that support the general ledger by providing detailed info. for specific accounts such as accounts receivable, accounts payable, and inventory. Each subsidiary ledger is linked to a control account in the general ledger. Benefits of subsidiary ledgers include improved accuracy, enhanced reporting, and efficient auditing.

Question 8

What do you value inventory at on the balance sheet?

Answer 8

On the balance sheet, inventory is valued at cost, however, if the inventory market value decreases below the cost value then the LCM process kicks in and inventory values would be reduced to reflect the fact.

Question 9

Perpetual and periodic systems

Answer 9

Perpetual system is a system uses computer software and barcodes to keep a continuous record of inventory; where every purchase and sale is recorded in real time, inventory and COGS is updated with every transaction, but physical periodic counts are still preformed to identify theft or detect errors. This system is more accurate.
While a periodic system is a system where inventory is counted and priced at specific intervals (monthly, quarterly, yearly) Here, there is no continuous record of inventory, inventory purchases are recorded in a purchases account, and inventory is usually counted at the end of the period.

Question 10

Rising costs and the effect it has

Answer 10

Rising costs can affect a business in many different ways. One being the fact that an increase in price can lead to the increase in of COGS which can reduce gross profit. Higher COGS can result in lower net income on the income statement, and on the balance sheet, increased inventory costs can raise the value of current assets. It can also affect consumer demand.

Question 11

When inventory methods are used for each situation?

Answer 11

-Special ID is used for customized, non uniform commodities such as automotive dealers, jewelers, and antique dealers
-FIFO is used for time sensitive goods; often time perishable goods; maximizes reported income when costs are rising
-LIFO is used for industries where inventory costs are rising; minimizes income tax when costs are rising

Question 12

LIFO vs FIFO

Answer 12

FIFO , or the first in last out item, sells the oldest items first, and is often used with items that are time sensitive or perishable. LIFO allows for maximized reported income when costs are rising; matches older costs to current revenue
LIFO; or last in first out sells the newest items, and is best for keeping accurate track of inventory. LIFO also minimizes income tax when prices are rising. LIFO matches the most recent inventory cost to the most recent revenue, providing a more realistic net income than FIFO

Question 13

What is included in internal controls

Answer 13

In internal controls, there is control environment, risk assessment, information system, control procedures, and monitoring of controls

Question 14

Handling of cash and checks

Question 15

FOB terms

Answer 15

Terms and conditions for when we sell on account; incentives such as getting a discount for payment within 30 days

Question 16

What is the proper method for a company when receiving checks in the mail

Answer 16

When receiving checks in the mail, a company should designate specific employees to open the mail, have another employee recording checks in an accounting system, deposit checks daily, regularly reconcile bank statements with recorded check receipts to ensure that all checks are accounted for an deposited correctly, , lastly there should be cross checking, where separate employees compare the recorded check receipts with the bank deposits to verify accuracy.

Question 17

Terms of a sale, repayment terms, general journal for sale

Answer 17

For a general journal entry for a sale, debit cash or accounts receivable and credit sales revenue. Terms of sale refers to the conditions under which a sale is made which includes the payment terms such as credit period and discount terms and shipping terms such as FOB shipping point and FOB destination. Repayment terms refer to the conditions under which a borrower agrees to repay a loan to the lender. This includes the principal, interest, term, maturity date, and maturity value.