Accounting and Internal Control Lecture Notes

This flashcard set covers essential accounting principles, inventory valuation methods, internal control objectives, and the steps of the accounting cycle based on the lecture notes.

Internal Control Objectives

To provide reasonable assurance that assets are safeguarded, financial reports are accurate, and laws and regulations are complied with.

Sarbanes-Oxley

A law applying to publicly held companies intended to maintain public confidence and trust in financial reporting.

Elements of Internal Control

Includes monitoring, information and communication, risk assessment, and the control environment.

Internal Control Environment Factors

Influenced by organizational structure, personnel policies, and management's operating style.

Deposits in Transit

An addition to the balance per bank statement on a bank reconciliation.

Bank Reconciliation Deductions (Per Books)

Items such as service charges that are subtracted from the company's book balance.

Bank Reconciliation Additions (Per Books)

Items such as notes collected by the bank.

Gross Profit

The excess of revenue from sales over the Cost of Goods Sold ($COGS$).

Lower-of-Cost-or-Market Method

An inventory valuation method that can be applied to each item, each major class, or the total inventory as a whole, especially when items cannot be sold at normal prices due to spoilage or style changes.

Inventory Classification

Classified as a current asset on the balance sheet.

Credit Terms: 3/15, n/45

Terms where $3$ represents the percentage of the cash discount, $15$ represents the number of days in the discount period, and $45$ represents the number of days when the entire amount is due.

Inventory Control Documents

Standard documents including the vendor's invoice, purchase order, and receiving report.

FOB Destination

Shipping terms where the seller is responsible for the freight costs.

FOB Shipping Point

Shipping terms where the buyer is responsible for the freight costs.

Administrative Expenses

Expenses incurred in the administration or general operations of the business.

Other Income and Expense

Items that are not related to the primary operations of the business.

Income from Operations

The excess of gross profit over operating expenses.

Accounts Receivable

Classified as a current asset on the balance sheet.

Last-In, First-Out (LIFO)

The inventory method that assigns the most recent costs to cost of goods sold.

Inventory Turnover

A ratio measuring the relationship between cost of merchandise sold and amount of inventory; a higher ratio means a company is more efficient in inventory control.

Perpetual Inventory System

A system where the amount sold and inventory records are continuously updated for each purchase and sale.

Accounting Equation

$$Assets = Liabilities + Owner's Equity$$

Profit

The difference between the amounts received from customers and the amounts paid for the inputs used to provide services or goods.

GAAP

Generally Accepted Accounting Principles.

SEC

The Securities and Exchange Commission; the organization with authority over accounting and financial disclosures for publicly traded companies.

Journalizing

The process of initially recording a business transaction.

Trial Balance

A summary used to identify errors that impact the equality of debits and credits.

Liabilities

Obligations of the business, such as Wages Payable, Unearned Revenue, and Interest Payable.

Unearned Revenue (Deferred Revenue)

Revenue that is not yet earned but the cash has been received; reported as a current liability on the balance sheet.

Prepaid Insurance

Reported on the balance sheet as a current asset.

Account Increases

Expenses, Drawing, and Assets are increased with a debit; Liabilities, Capital, and Revenues are increased with a credit.

Matching Principle

The principle indicating that revenues and related expenses should be reported in the same period.

Managerial Accounting

The area of accounting that provides information to internal users.

Financial Accounting

The area of accounting that provides information to external users.

Proprietorship

A business owned by one individual.

Balance Sheet

A financial statement listing assets, liabilities, and owner's equity as of a specific date.

Accrual Accounting

An accounting method where expenses are recorded when they are incurred and revenue is recognized when services are performed, regardless of when cash is paid or received.

Accrued Revenue

Revenue that is earned but the cash has not been received.

Net Book Value

The original cost of a fixed asset less accumulated depreciation.

Accumulated Depreciation

Appears on the balance sheet in the property, plant, and equipment section.

Notes Receivable (Due in 390 Days)

Reported on the balance sheet in the noncurrent assets section.

Temporary Accounts

Accounts including Rent Revenue, Fees Earned, and Miscellaneous Expense that are closed at the end of the period.

Post-closing Trial Balance

The trial balance prepared after closing entries that only includes balance sheet accounts and excludes income statement accounts.

Accounting Cycle Trial Balance Order

$1$. Unadjusted, $2$. Adjusted, $3$. Post-closing.