Acct 201 Exam 3

Establishment of responsibility

assign responsibility of a specific job to a specific employee and no one else

Segregation of duties

different individuals should be responsible for related activities; also employees who have access to the assets should not also have access to the accounting records.

Documentation procedures

all transactions should be supported by some type of documentation; those documents should be prenumbered

Physical control

provide protection for assets and accounting records

Independent internal verification

an internal auditor continuously reviews data prepared by employees throughout the company

Human resource controls

bonding employees, requiring rotation/vacation for employees and performing background checks before hiring individuals

Limitations of internal control

no matter how many controls are implemented by a company, employees can always find ways to get around them

Bank reconciliation

process which explains why the bank’s cash balance differs from the company’s cash balance and which determines the actual amount of cash the company has

Cash equivalents

short-term highly liquid investments that can be converted into specific amounts of cash; cash equivalents are reported with cash as the first item under the current assets section of the balance sheet

Restricted cash

cash that is reserved for a specific purpose; restricted cash is never reported with cash – it must be reported separately as either a current asset or a non-current asset

Notes Receivable/Promissory Note

written promise to pay a specified amount of money on a specific date to a specific party

Principal

face value

Maker

makes the promise to pay (borrower)

Payee

party to whom payment is made (lender)

Determining the maturity date

know how to determine the maturity date of a note whose term is stated in days

Maturity value

it is the amount that will be received from the maker

Interest

the cost of borrowing money or the reward for saving it, expressed as a percentage rate over time

Recognizing accounts receivable

involves recording revenue and a corresponding current asset when goods or services are delivered on credit, rather than when cash is received

Valuing accounts receivable

determines the net realizable value of money owed to a business, representing the amount expected to be collected, not just the total invoiced

Disposing of Accounts Receivable

removing unpaid customer invoices from financial records, typically to accelerate cash flow or clear uncollectible debts

Property, Plant and Equipment

long-lived assets that have physical substance, are used in operations of the business and are not intended to be sold to customers

Land

a tangible, long-term plant asset used in business operations to generate revenue, characterized by an indefinite life

Land Improvements

structural additions made to land such as driveways, parking lots, landscaping, etc

Buildings

facilities used in operations

Equipment

assets used in operations such as machines, vehicles, furniture, etc

Depreciation

allocation of the cost of a plant asset to the period of use

Plant Asset Disposals

plant assets can be disposed three ways: retirement, sale or exchange

Retirement

plant asset is scrapped

Sale

plant asset is sold for cash

Natural Resources

long-lived assets that are physically extracted in operations and are replaceable only by an act of nature; also called “wasting assets”

Intangible Assets

long-lived assets that lack physical substance; owner of an intangible has the right to do something no one else can do

Patent

exclusive right to manufacture, sell or otherwise control an invention

Copyright

exclusive right to reproduce and sell an artistic or published work

Trademarks and Trade Names

word, phrase, jingle or symbol that identifies a particular enterprise or product

Franchises and Licenses

contractual agreements giving one party the right to use the name and products of another company to generate sales

Goodwill

favorable attributes associated with a company such as brand recognition, good location, high-quality products

Research and Development

expenditures that lead to patents, copyrights, new processes and new product

Internal controls are

established primarily to safeguard assets

Allowance for Doubtful Accounts

a contra asset account (normal credit balance) that reduces the total Accounts Receivable to its net realizable value