principles of acconting exam 2

fraud triangle

fraud triangle

opportunity, financial pressure, rationalization

establish responsibility

assign each task to one employee

segregation of duties

one employee should not be responsible for all parts of a process

restrict access

do not provide access to assets or info unless it is needed to fulfill assigned responsibilities

documentation

documents to show activities that have occurred

independently verify

check others’ work

establish responsibility example

cashier

control limitations

two reasons that internal controls never completely prevent fraud, benefits must exceed costs, human error, or collusion

bank reconciliation

to determine the appropriate cash balance, these balances need to be reconciled

what do bank reconciliations do

identify the deposits in transit, identify the outstanding checks, record transactions, and correct errors

goals of inventory management

maintain a sufficient quantity of inventory, ensure quality, minimize cost

merchandisers

buy and sell finished goods

manufacturers

buy raw materials, produce and sell finished goods

FOB shipping point

ownership transits when it is in tarnsit

FOB destinitaion

ownership transfers when it is delivered

cosigned goods

hold goods of other parties, without taking ownership of goods

FIFO

oldest items are the first out

LIFO

Newest items are the first out

Specific identification

used when items are easy to identify and of a high value

weighted average

COG available for sale price/COG available for sale units

why would a company lower net income

to lower income taxes

why would a company higher net income

to apply for a loan

inventory turnover ration

COGS/Average inventory

days to sell

365/turnover ratio

Gross profit

Netsales-COGS

Net Sales

Sales rev-sales return-sales discounts

COGS

Beg inv+purchases-ending inv

ending inv

Beg ing+puchases-COGS

periodic inventory system

sales and returns at the end of the accounting period, Must physically count the inventory

perpeutal inventory system

records are updated perpetually, dont have to physically count

shrinkage

loss of inventory from fraud

bank adjustment

deposits in transit, outstanding checks, errors

gross profit percentage

gross profit/ net sales reveneue *100

advantage of extending credit

increases the seller’s revenues

disadvantages of extending credit

increased wage costs(track and collect), bad debt costs, delayed receipt of cash

accounts recievables

usually collecte in 30-60 days, amounts cstomers owe on account for puchase of goods or services

notes recievable

a more formal instrument, usually collected over longer time period

two objectives for accounting AR and bad debts

report A/R at the amount the company expects to collect, match cost of ba debts to period in which the related credit sales are made

net realizable value

the amount we will actually recieve after allowance for doubtful accounts

allowance for doubtful accounts

contra asset, on the balance sheet

method 1 of estimating allownace

percentage of receivables method

method 2

aging of accounts receivables method

accounts receivable turnover

net sales revenue/average net receivable

meaning of accounts recievable turnover ratio

measure number of times a company collects receivables during period, higher number is better liquidity

days to collect raito

365/receivable turnover ratio

sppeding up collecitions

factoring, credit card sales

factoring

sell receivables to collection agency for a percentage fee