Exam 3 UCF Principles of Financial Accounting

Internal Controls

A company's plan to 1.) Safeguard the company's assets, and 2.) Improve the accuracy and reliability of accounting information.

Separation of duties

Authorizing transactions, recording transactions, and maintaining control of related assets should be separated among different employees.

Multi-step income statement

An income statement that reports multiple levels of income (or profitability).

Residual (Salvage) value

The amount the company expects to receive from selling the assets at the end of its service life.

Straight line depreciation calculation

Allocated an equal amount of depreciation to each year of the asset's service life.

Double declining balance depreciation calculation

An accelerated method that allocates a higher depreciation in the earlier years of the asset's life and lower depreciation in later years.

Intangible asset

Long-term assets that lack physical substance, and whose existence is often based on a legal contract.

Net accounts receivable

The calculated difference between total accounts receivable and the allowance of uncollectible accounts.

Net revenues

Calculation: total revenues - any discounts, returns, and allowances.

Gross profit

Calculation: sales revenue - cost of goods sold.

Book value

Calculation: original cost of long-term asset -accumulated depreciation.

Contra revenue account

An account with a balance that is opposite, or contra, to that of its related (companion) revenue account.

Allowance for uncollectible accounts

Contra asset account representing the amount of accounts receivable that we do not expect to collect.

Sales allowance (Contra Revenue)

Seller reduction of customers' balance owed or provision of a partial refund because of some deficiency in the company's product or service.

Sales discount (Contra Revenue)

Reduction in the amount to be paid by a credit customer if payment on account is made within a specified period of time.

Sales return (Contra Revenue)

Customer returns a product.

Bad Debt Expense

The amount of the adjustment to allowance for uncollectible accounts, representing the cost of estimated future bad debts charged to the current period.

Cost of goods sold

Cost of inventory that was sold during the period.

Amortization Expense

Allocation of the cost of an intangible asset over its service life.

What is the revenue recognition principle?

Record revenue when it is earned, not when cash is received.

What is the matching principle?

Match expenses to the period when related revenue is earned.

Why do we record bad debt expense?

To match uncollectible accounts with revenue in the same period.

Why do we record depreciation?

To spread asset cost over time and match expense to revenue.

What is the order of financial statements?

Income Statement → Statement of Stockholders' Equity → Balance Sheet

What is included in a multi-step income statement?

Net Sales → COGS → Gross Profit → Operating Expenses → Net Income

What does the statement of stockholders' equity show?

Changes in equity (investments, net income, dividends)

What does the balance sheet show?

Assets = Liabilities + Equity

What must you know for each account?

Name, definition, category, financial statement, normal balance

What is Cash?

Asset, Balance Sheet, Debit balance

What is Deferred Revenue?

Liability from cash received before service provided

What is a contra account?

Account that reduces another account (opposite normal balance)

What are the two objectives of internal controls?

Safeguard assets and ensure accurate financial reporting

What is the Fraud Triangle?

Opportunity, Motivation, Rationalization

What are control activities?

Policies to prevent or detect fraud

What is an example of a preventative control?

Separation of duties

What is an example of a detective control?

Bank reconciliation

What are sales discounts?

Reduction in price for early payment (contra revenue)

What are sales returns?

Refunds for returned goods (contra revenue)

What is the Net Sales formula?

Net Sales = Sales - Returns - Discounts

What is Bad Debt Expense?

Estimated uncollectible accounts (expense)

What is Allowance for Uncollectible Accounts?

Contra asset that reduces A/R

What is the journal entry for estimated bad debt?

Debit Bad Debt Expense, Credit Allowance

What is the write-off entry?

Debit Allowance, Credit Accounts Receivable

What is the Net A/R formula?

A/R - Allowance = Net A/R

What is the inventory purchase entry?

Debit Inventory, Credit Cash/AP

What is the purchase returns entry?

Debit Cash/AP, Credit Inventory

What are purchase discounts?

Reduce inventory cost

What is Step 1 of a sale?

Debit Cash/A/R, Credit Sales Revenue

What is Step 2 of a sale?

Debit COGS, Credit Inventory

What is FIFO?

First in, first out (older costs used first)

What is LIFO?

Last in, first out (newer costs used first)

What is the Weighted Average method?

Average cost of inventory

What is the COGS formula?

Beginning Inventory + Purchases - Ending Inventory

What is the Gross Profit formula?

Net Sales - COGS

What is the treatment of Land in accounting?

Not depreciated

What are Land Improvements?

Depreciated

What is Equipment classified as?

Depreciated asset

What is a basket purchase?

Lump-sum purchase allocated by relative value

What is the straight-line method of depreciation?

Equal expense each year

What is the activity-based method of depreciation?

Based on usage

What is the double declining balance method?

Accelerated depreciation (more early)

Why use the straight-line method?

Time-based usage

Why use the activity-based method?

Based on actual use

Why use double declining balance?

Higher early expense → lower taxes → more cash flow

What is accumulated depreciation?

Total depreciation over time (contra asset)

What is book value?

Cost - Accumulated Depreciation

What are intangible assets?

Non-physical assets (patents, copyrights)

What is amortization?

Expensing intangible assets over time

What is the amortization entry?

Debit Amortization Expense, Credit Intangible Asset

Contra Accounts

→ opposite balance of the accounr

Every Sale

→ 2 entries

Every Estimate

→ use the matching principle

Every Asset

→ think cost allocation over time.