Term
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Definition
Costs assigned to inventory item when sold is the actual cost paid for item
Cost flow through accounting records exactly matches physical flow of goods
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Term
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Definition
Assumes earliest inventory costs are assigned to items when sold
Cost flow through accounting records will closely match physical flow of goods
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Term
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Definition
žAssumes most recent inventory costs are assigned to items when sold
žCost flow through accounting records will be nearly opposite of physical flow of goods
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Term
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Definition
Assumes a weighted-average cost per item is assigned to items as sold
Cost of goods sold and ending inventory will fall between amounts determined by FIFO and LIFO
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Term
| Cost Flow vs. Physical Flow |
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Definition
Cost Flow
Inventory method used by accounting department
Physical Flow
How goods are stocked and how they are removed when sold
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Term
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Definition
Begining Balance
Purchases
Shipping
Purchase Discounts
Purchase returns & allowances
Sales
Ending Balance |
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Term
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Definition
| Begining Inventory + Net Purchases = Costs of goods available ---> Units sold "cost of good sold" and Units on hand " ending inventory" |
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Term
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Definition
Most closely matches actual flow of goods;
Maximizes net income which attracts investors and creditors
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Term
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Definition
Minimizes net income and income taxes; reduces cash paid for taxes
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Term
| Benefits From Average Cost |
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Definition
A “middle-ground” solution for reporting income and paying taxes
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Term
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Definition
Companies should use same accounting methods from period to period
If a company does change methods, it must be justified and disclosed in the financial statements
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Term
| Inventory on the Balance Sheet |
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Definition
Reported as a current asset
Financial statement footnotes describe inventory costing method and whether valued at LCM
Full-disclosure principle
Inventory is reported as a current asset and is often listed after receivables on the balance sheet. In addition to showing the inventory amount, a business must disclose the costing method used to value inventory (specific-identification, FIFO, LIFO, or average cost) and whether the inventory is valued using LCM.
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Term
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Definition
Loss due to employee or customer theft, damage, and spoilage
Physical inventory count taken to adjust inventory records
Inventory account is debited or credited as needed
Cost of goods sold is corresponding credit
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Term
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Definition
| Costs of goods sold / Average inventory (Begining inventory + Ending inventory/2) |
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Term
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Definition
| are defined as the principles of right behavior that guide decision making |
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Term
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Definition
Use of deception or trickery for personal gain
One of fastest growing crimes in the U.S |
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Term
| Management Fraud. Top Management can overstate earnings by: |
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Definition
Overstating Revenue (overstating receivables, understating unearned revenue.)
Understating Expenses (overstating values of assets, understating liabilities) |
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Term
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Definition
Steal cash and other assets
Establish fake companies and intercept payment
Engage in disbursement schemes:
Check tampering
Cash register schemes
Expense schemes
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Term
| Bribes and Kickbacks (another form of employee embezzlement) |
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Definition
žFrom suppliers
—For ignoring higher purchase prices charged to employer
—For ignoring delivery of inferior goods
—For authorizing payment for goods never delivered
žFrom customers
—For granting a lower sales price
—For giving goods and services for which employer is never paid
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Term
| 3 Elements in the Triangle of fraud |
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Definition
| Perceived Opportunity ---- Perceived Pressure ----- Rationalization |
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Term
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Definition
Financial pressure
Greed
Addictions
Poor credit rating or money management
Work pressure
Dissatisfaction with pay
Overlooked for promotion
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Term
| Rationalization for Fraud |
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Definition
Employees who commit fraud justify actions
“I will pay it back.”
“I deserve a raise.”
“It’s for a good purpose.”
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Term
| Perceived Opportunity for fraud |
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Definition
Easy access to assets or assets poorly accounted for
Businesses have most influence over this element of fraud triangle
Can be reduced through a good system of internal control
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Term
Internal control is a comprehensive system that helps an organization do the following:
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Definition
• Safeguard assets
• Operate efficiently and effectively
• Ensure proper reporting of financial information
• Ensure compliance with applicable laws and regulations
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Term
There are five key elements that affect an organization’s internal control system. The complexity of, and the effectiveness of, the internal control system depends upon these elements. They include:
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Definition
- The control environment
• Risk assessment
• Control activities
• Information and communication
• Monitoring
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Term
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Definition
Foundation for all other components of intern control
Factors include:
Leadership philosophy & operating style
Competency of employees
Integrity and values of employees
Delegation of authority and responsibility
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Term
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Definition
Identifies and analyzes risks
Takes steps to reduce risks
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Term
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Definition
žEmployment of competent personnel
žSeparation of duties
—Authorizing transactions
—Maintaining custody of assets
—Keeping accounting records
žMandatory vacations
Restricted access
Security measures
Proper authorization
Adequate documents and records
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Term
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Definition
Internal control system needs to be continually monitored to locate weaknesses
Can be accomplished through:
Ongoing activities
Separate evaluations
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Term
| Effectiveness of control systems are limited by: |
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Definition
• Employees can become tired, careless, or distracted and make mistakes. They may also use poor judgment or misunderstand policies and procedures.
• Controls can be poorly designed.
• Staff size limitations may hinder efforts to properly segregate duties.
• Two or more people can work together to circumvent controls. This is known as collusion.
• Management can override controls.
• The cost of implementing some internal controls may exceed the benefits of these controls.
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Term
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Definition
Examination of company’s financial statements and accounting systems
Internal audits
Conducted by company’s employees
External audits
Performed by Certified Public Accountants (CPAs)
Outcome is issuance of opinion
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Term
| International Accounting Standards |
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Definition
International Financial Reporting Standards (IFRS) developed in 1970’s
Currently used by over half the countries in the world
U.S. is considering a switch to IFRS
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Term
| International accounting standards board |
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Definition
Members from around the world
Goal is to create a set of global, high-quality, enforceable accounting standards
Standards are a principle-based system
As opposed to a rule-based system
Many differences exist between U.S. GAAP and International Standards
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