Shared Flashcard Set

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Chapters 8&9
Concepts & Definitions
99
Accounting
Undergraduate 1
03/31/2010

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Cards

Term
What three things must be present for a fraudster to set to work?
Definition
1. The opportunity to commit fraud.
2. The incentive to commit fraud.
3. The fraudster's ability to rationalize their own actions
Term
A company that is more likely to be victimized by fraud not only lacks sufficient controls to detect fraudulent activities but ...
Definition
also lacks ethics, values, programs and systems that discourage fruad (this includes a well-developed culture that protect employees who expose fraud)
Term
What is the largest type of fraud in corporations today?
Definition
Asset misappropriation
Term
What is corporate culture?
Definition
The specific collection of values and norms that are shared by people and groups in an organization and that control the way they interact with each other and with stakeholders outside the organization.
Term
What does SOX have to say about internal controls?
Definition
Public companies must issue internal control reports. Independant auditors must evaluate internal controls. They created the PCAOB to oversee the work of auditors of public companies.
Term
What is the most effective in preventing institutional fraud?
Definition
In short, consequences. Stiff penalties and thourough prosecution along with clearly established tone at the top of the organization.
Term
Can accounting firms audit and provide consulting services for the same client?
Definition
No, not usually. There are penalties for violators.
Term
How does SOX protect whistleblowers?
Definition
It says that you can't discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee because the employee has provided information or otherwise assisted in an investigation ...
Term
What do companies do to stay out of whistle-blower trouble?
Definition
Write a corporate code of conduct that encourages reporting, includes a no-retaliation policy, establish a corporate hotline or ethics officer and keep well-documented personnel files, disciplinary records and termination records.
Term
What is Internal Control?
Definition
All policies and procedures used to: safegaurd assets, encourage employees to follow company policy, promote operational efficiency and ensure accurate, reliable accounting records
Term
What is fraud?
Definition
an intentional act that results in a material misstatement in financial statements.
Term
What are two types of fraud (considered by SAS 99)
Definition
Misstatements arising from fraudulent financial reporting and Misstatements arising from misappropriation of assets
Term
What are "soft controls"
Definition
intangible, difficult to verify, essential controls necessary to run any organization that are to do with ethics and integrity. Management philosophy, integrity and ethics are all examples
Term
What are the elements of Internal Control?
Definition
Control Environment, Risk Assessment, Control Procedures, Control Monitoring, Information Systems
Term
How is separation of duties an internal control?
Definition
It limits fraud, promotes accurate financial statements
Term
How is an audit a principle of internal control?
Definition
It is an examination of a company's financial statements and accounting system. There are internal and external auditors
Term
What is separation of duties?
Definition
Dividing responsibilities for transactions limits the chances for fraud and promotes accuracy of the accounting records.
Term
What are a few examples of seperation of duties?
Definition
Operations from accounting - the entire accounting function should be completely separate from the operating departments. And Custody of assets from accounting - accountants should not have access to assets and those that have access to assets should not have access to the accounting records.
Term
What are a few of the more tangible examples of good internal controls?
Definition
documents and records - prenumbered documents call attention to any missing. Electronic devices and computer controls as well as fireproof vaults, burglar alarms, POS terminals, mandantory vacations, etc.
Term
What IC principles are common to all companies?
Definition
Establishing responsibilities, maintaining adequate records, insuring assets and boding key employees, separate recordkeeping from custody of assets, divide responsibilitiy for related transactions, apply technological controls, preform regular and independant reviews.
Term
What are some of the pitfalls of e-commerce?
Definition
Phishing, stolen credit card numbers, computer viruses, etc. Some security measures against these: encryption, firewalls
Term
How does technology effect internal control?
Definition
More extensive testing of records, crucual separation of duties, increased e-commerce, limited evidence of processing, reduced processing errors
Term
What is Collusion?
Definition
when two or more employees work together to defraud a company.
Term
What is good cash management practices?
Definition
Plan cash receipts to meet cash payments when due, keep a minimum level of cash necessary to operate.
Term
What are examples of effective cash management?
Definition
encourage collection of receivables, delay payment of liabilities, keep only necessary levels of assets, plan expenditures, invest excess cash
Term
What are some controls on a bank account?
Definition
Signature cards - ensure that only an authorized person has access. Deposit tickets maintain a record of amounts deposited.
Term
Checks - how are they useful and explain the parts
Definition
they maintain a record of monies withdrawn from the bank. They include the date, the name of the payee and the sigure of the maker
Term
What do bank statements tell us?
Definition
The monthly activity in an account. For instance, canceled checks, which have cleared the bank and electronic funds transfers
Term
What are a few things that would be included on a bank reconsiliation?
Definition
deposits in transit, outstanding checks, book errors, eft's, service charges, NSF checks, interest revenue, check printing/service charges, bank errors
Term
What is bank reconciliation?
Definition
Explains all the differences between general ledger cash accounts and bank statement cash balance. They key is: Which ones don't you know about?
Term
On the bank reconciliation, what are you including?
Definition
The bank statement and what the bank knows (i.e. what you don't know) and the book balance or what you know (i.e. what your bank doesn't know) you add or deduct these things accordingly and then adjust each balance
Term
What is the useful rule of thumb for bank recs?
Definition
"Put it where it isn't"
Term
When you finish a bank rec and compare the adjusted balances what should you see?
Definition
They should be equal. If not, do it again. The balance should be the true, correct amount of cash as of that date.
Term
After you do a bank rec how do you journalize it?
Definition
If you have to increase the cash you will debit cash and credit another account. If you are decreaseing the cash you will credit cash and debit another account
Term
What is the accounting use and method for cash reciepts over the counter?
Definition
A receipt is issued for each transaction, the drawar opens at the time of transaction. At the end of the shift, the manager proves cash by comparing the cash to the machines record of sales. The cash is deposited and the register tape is sent to accounting.
Term
How are cash receipts by mail handled?
Definition
Incoming mail is opened by a mailroom employee, this person compares the check received with the remittance advice, receipts sent to reasurer and casheir deposits money, remittance advice sent to accounting for journal entries and controller compares records of the day bank deposit vs. debit to cash from accounting
Term
How does the voucher system for handling cash work?
Definition
A voucher is a document authorizing a cash payment. The voucher register is similar to a purchases journal. The check register is similar to a cash payments journal
Term
Explain petty cash
Definition
Cash fund kept on hand to pay for small expenditures. Someone is designated a custodian for petty cash and you keep a specific amount on hand. All fund payments are supported with a petty cash ticket.
Term
How do you replinish petty cash?
Definition
Using the information from the vouchers, record expenses in journal. A new check is cashed for the total amount of expenses and cash is placed in the cash box.
Term
What is cash short and over?
Definition
A temporary account used whenever cash fund is short or over. May have either a debit or credit balance and is reported as miscellaneious expense or revenue depending on ending balance. Closed at the end of the accounting period to income summary
Term
When does "earnings management" occur?
Definition
When managers use judgement in financial reporting and structuring transactions to alter financial reports to either mislead some stakeholders about the underlying economic performance of a company or to influence contractual outcomes that depend on reported accounting numbers.
Term
Earnings management usuall involves aggressive accounting tactics to ...
Definition
artificially increase or decrease revenues, profits, or earnings per share. This is a form of fraud and differs from reporting error.
Term
Is there such a thing as a single "right" earnings figure?
Definition
No, that is where the difficulty lies. It is recognized that it is possible for legitimate business practices to develop into unacceptable financial reporting.
Term
Is there such a thing as a single "right" earnings figure?
Definition
No, that is where the difficulty lies. It is recognized that it is possible for legitimate business practices to develop into unacceptable financial reporting.
Term
What are the main forms of earnings management?
Definition
Unsuitable revenue recognition, inappopriate accruals and estimates of liabilities, excessive provisions and generous reserve accounting, intentional minor breaches of financial reporting requirements that aggregate to a material breach.
Term
Receivables are ...
Definition
monetary claims against businesses and individuals. These claims arise from selling goods or services on credit or from lending money. Each credit transaction involves a creditor who sells something and obtains a receivable, and a debtor who makes the purchase and has a payable.
Term
What is the difference between an accounts receivable and a notes receivable?
Definition
Accounts Receivable is current while notes receivable is current or long-term depending on when the note matures
Term
An accounts receivable represents an ..
Definition
amount due from a customer for goods or services sold. It is classified as a current asset on the balance sheet and a subsidiary ledger includes a separate account for each customer.
Term
A notes receivable is ..
Definition
a written promise to receive cash and is more formal than an AR. It is either current or long-term, depending on maturity date and may include loans to employees or subsidiary companies.
Term
A promisary note is ..
Definition
a negotiable document that serves as evidence of a note receivable
Term
Receivables should be reported how?
Definition
On the balance sheet, at the amount the company expects to collect (net realizable value). And on the income statement the expense associated with the failure to collect would be reported (uncollectible accounts expense)
Term
What is net realizable value?
Definition
The amount a company actually expects to collect on a receivable
Term
What is the income statement account associated with bad receivables?
Definition
Uncollectible accounts expense
Term
What happens on both the retail and client side of a credit card sale?
Definition
The retailer receives cash almost imediately for the sale while the customer receives a monthly bill for the the amoount they spent and writes just one check for the statement balance
Term
How does a debit-card sale differ from a credit card sale?
Definition
Does not require a third party, the buyer uses the card and his or her bank cash account is immediately decreased and the vendor's bank cash is immediately increased.
Term
How does the banking end of credit card sales work?
Definition
The seller deposits the cc sales receipt and the bank increases the balance in the companies checking account. There is usually a 1-5% fee for the service.
Term
What are the retailer benefits of providing credit card sales?
Definition
Customers credit is evaluated by the credit card issuer, sales are increased by providing purchase options, the risk of extending credit are transferred to the issuer and cash collections are quicker.
Term
What is the journal entry for a retailer when they make a credit card sale?
Definition
Debit AR - Visa, credit CC Discount expense and sales revenue.
Term
What is the journal entry when the retailer collects the discounted amount of a sale transaction?
Definition
debit to cash, credit to AR - Visa
Term
What is the journal entry when a bankcard is used?
Definition
Debit cash, credit bankcard discount expense and sales revenue
Term
When do you record the cash receipt of a credit card sale?
Definition
When you actually receive that cash
Term
What are the steps of credit control for a company?
Definition
Establish a credit department who evaluates customers for credit worthiness and pursues collection from customers. This department should have no access to cash.
Term
What are the pros and cons of selling on credit?
Definition
It creates the benefit of more sales and the cost of some customers not paying. Uncollectible-account expense results from customers not paying. This can also be called doubtful-account expense or bad-debt expense
Term
What are the two methods for recording credit expense?
Definition
The allowance method and the direct write-off method
Term
What is the best method of credit expense to use and why?
Definition
The allowance method because it matches collection losses with revenues in the period in which the sales were made. The direct write-off method fails to match the expense with the sales revenue.
Term
What are the benefits of the loss allowance method?
Definition
Expenses are matched with revenue, A/R reported on balance sheet at the amount of cash expected to be collected
Term
The allowance method of recording uncollectible account expense is based on ...
Definition
estimates of collection losses
Term
Allowance for Uncollectible Accounts or ADA - Allowance of Doubtful Accounts is a ...
Definition
Contra Account, an asset account with a credit balance which represents the estimated amount of collection losses. It is reported on the Income Statement.
Term
How do you find Net Accounts Receivable or the expected collections?
Definition
Accounts Receivable (which is an asset on the balance sheet) minus the contra account ADA = Net AR or the expected collections and net realizable value on the balance sheet
Term
When will the allowance method be put into effect and an adjusting entry be made based on estimates?
Definition
At the end of the fiscal year
Term
What is Net Realizable Value?
Definition
The amount the company actually expects to be collected
Term
What is the journal entry for the adjustment of Allowance for uncollectible accounts?
Definition
A debit to uncollectible accounts expense, an operating expense on the Income statement and a credit to the Allowance for Uncollectible Acounts a contra-asset account on the balance sheet.
Term
What are the two ways to estimate uncollectible account expense?
Definition
Percent of sales and aging of accounts.
Term
Which of the allowance methods is the income statement approach?
Definition
Percent-of-sales because the estimate being made is Uncollectible Accounts Expense.
Term
Which of the allowance method approaches is balance sheet?
Definition
Aging-of-Accounts because the estimate is being made to the contra asset account
Term
Explain the percent-of-sales allowance method approach.
Definition
Also called the income statement approach considers the credit sales fot he period. Focuses on the amount of expense to be reported on the income statement. The percentage used in an historical percentage based on prior uncollectible accounts and past collection experience. To calculate the uncollectible-account expense, the percentage is multiplied by the credit sales.
Term
What is the equation for percent-of-sales method?
Definition
Net credit sales x bad debt % = bad debts expense
Term
Explain the aging-of-accounts allowance method approach.
Definition
Also called the balance-sheet approach, it considers teh age and amount of accounts receivable at the end of the period. Focuses on the amount of net accounts receivalbe to be reported on the balance sheet.
Term
How do you execute the aging-of-accounts method?
Definition
First, the accounts are classified according to the age of the account, then a historical percentage is applied ot each age category. This amount represent the estimated amount of uncollectible accounts from each age catagory, when these amounts are added together, the total is the desired ending balance in the Allowance account. The longer an account goes uncollected, the higher the percentage is applied to it because it is more likely to become bad debt.
Term
How do you record a collection of a debt already written off?
Definition
Reverse the first entry and then record the receipt of cash. Even though you are crediting AR and then immediately debiting it, it is important to show in your records that the account was re-established and then paid off.
Term
When is the direct write-off method used?
Definition
When an account is so deliquent that a company deems it uncollectible. The entry is a debit to uncollectible account expense and a credit to accounts receivable.
Term
What are the issues with the direct write-off method?
Definition
It is defective because it does not set up an allowance for uncollectibles, resulting in a receivable that may be overstated on the balance sheet. It also does not match revenue and uncollectible-account expense. In soem cases, the expense may be recorded ina later period than the revenue.
Term
What are the benefits of the direct write-off method?
Definition
Easy to use and will not create significant distortions in income or assets if collection losses are insignificant
Term
What is interest? What is principal?
Definition
Interest - price paid by a borrower for using a lender's money. Principal is the amount borrowed by the debter.
Term
What is the equation for maturity value?
Definition
principal + interest due at maturity
Term
How is interest calculated?
Definition
It is stated on an annual basis unless specified. The equation is: Principal x rate x time = interest
Term
Identifying a maturity date ...
Definition
it is stated in terms of months or days. Count the exact days or months from the issue date of the note. Start counting on the day following the date of the note.
Term
How would you record a note receivable when disbursed?
Definition
debit to note receivalbe - maker and credit to cash (or sales rev or AR)
Term
When and how would you journal accrued interest on a note?
Definition
At the end of the accounting period and it is a debit to interest receivable and a credit to interest revenue
Term
What is the entry to record collection on the maturity date?
Definition
a debit to cash and a credit to interest revenue and notes receivable
Term
When do you prepare the adjusting entry to record accruing interest revenue?
Definition
At the end of the period
Term
What is discounting/factoring?
Definition
A oompany holding a note receivable may sell the note before its maturity date; this is referred to as discounting a note receivable. They can sell or factor receivables, They may pledge receivables as security for a loan.
Term
What does it mean to default or dishonor a note?
Definition
If it is not paid at maturity, the maker of the note is said to dishonor or default on the note. The payee records interest revenue earned ont he note and debits AR for the full maturity value of the note.
Term
How does a company report receivables?
Definition
Usually, a business reports its accounts receivable at net realizable value and discloses the allowance account paranthetically. Or it can include details in the footnotes.
Term
Acid-Test Ratio ... what is it and how is it done?
Definition
Also called quick ratio, it measures liquidity and measures entity's ability to pay its current liabilities immediately. (cash + short-term investments + net current receivables) / total current liabilities
Term
what is days' sales in receivables?
Definition
Also called "collection period". It measures how many days it takes to collect the average level of receivables. The shorter the collection period, the more quickly the company has cash.
Term
What is the equation for days' sales in receivables?
Definition
one days' sales = net sales / 365 days
Term
What is the equation for days' sales in average accounts receivable?
Definition
average net accounts receivable/one days' sales
Term
what does accounts receivable turnover calculate?
Definition
this ratio provides useful information for evaluating how efficient management has been in granting credit to produce revenue. net sales/ average accounts receivable
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