ACC 201 Exam 2

Internal Control system

Protect operations, reporting and compliance

Collusion - 2 or more pepole circumvent controls to steal from a company

Components:

• control enviornment

• risk assessment - business and strategic risks

• control activities - detective or preventative

• information and communication

• monitoring/internal audit

Control Actvities:

• segregation of duties - cash controls

• safeguards/physical controls (locks)

• documentation

• checks/reconcilliations

• authority and responsibility

  • procedures

• info technology controls - passwords

Reporting cash

Cash controls are more effective when companies pay w mostly checks

Cash increases w debt, decreases w cerdit

Reported on balance sheet and CF statement

Petty cash - used to pay small dollar amounts

Cash equivalents - short term, high liquid investments readily convertible to cash in <3 months

Bank reconcilliation

process of reconciling differences between bank and company’s records due to time lag

Cash balance from bank statement - need to LESS outstanding/ not cashed check + ADD deposit in transit

• eschetment - non cashed checks go to government after 3 years

• deposit in transit more than a few days could be stolen or entered twice

Cash balance from company records - need to LESS service charge from bank + NSF check as credit to cash and ADD interest as cash

Cash over and short

- records discrepancies between actual deposited cash and total recorded

• record debit to cash balance/count

• record credit to sales revenue

• record debit cash for short or credit to cash for over so they match

Operating cycle

avg time for a company to purchase goods, resell and collect cash fromc ustomers

Petty cash flow

1. establish policy and process

2. appoint petty cash custodian

3. determine petty cash amt - initial fund = debit to petty cash, credit to cash

4. secure cash box

5. determine bookeeping formalities

6. maintain log of receipts

7. replenish petty cash = debit miscellaneous expense to return to full amount, credit to cash

8. audit the petty cash fund - increase or decrease = debit to petty cash

Timing of Revenue Recognition

Cash basis - recognzies revenye in the period it is recieved

Accrual basis - recognizes revenue when company “does what they said” - service is provided or ownership of good is transferred

5 step revenue recognition model

1. identify the contract (order a good)

2. identify performance obligation

3. determine price

4. allocate price to the obligations

5. recognize revenue when obligation is satisfied

Sales discount

price reduction offered to encourage prompt payment

• cheaper for buyer, faster cash for seller

2/10, n/30 = 2% discount for payment in 10 days instead of expected 30

Sales revenue = net amount w discount or gross amount for no discount

Cash discount can be used by seller to asses customers recdit risk/cash flow + if no one takes the discount, indicates it needs to increase

Different from trade discount or quantity discount

Sales return and allowances

Contra revenue accounts!

Sales return - customer returns a good

Sales allowance - reduction in price due to product issues

Both recorded in period of sale - must reduce sales revenue based on expected sales returns and allowances (just in case)

Bad debt expense

Unpaid receivables

Direct write off - wait until default; only works if debt is unredeemabke under GAAP

Allowance method - recognize in period of sale before default under allownace for doubtful accounts

• percentage of credit sales method:

  • total credit sales * %credit sales estimated to default = estimated bad debt

  • focused on income statment

• aging method (better):

  • deteremine bad debt by using desired ending balance in doubtful accounts and adjusting balance to fit; expected collection is higher for newer debts

  • focused on balance statement

Factoring

seller receives immediate payment by buying at a price lower than what receievables are worth

factor fee - 1-3% to compensate for risk and time value of money

credit cards - form of factoring where credit company pays the seller the amount of the sale (minus a service fee) then collects the payment from the buyer later

• credit company absorbs unpaid sales not seller

Securitization

large businesses package factored receivables and sell them to investors

Notes receivable

specifies an interest rate and maturity date

• interest = principal * annual rate * fraction of year

Steps:

Changes accounts receivable to notes receievable an sales revenue to accounts receievable

Add interest from period where it is incurred as interest income + from last period as interest receivable

Debit to cash when paid, cried to notes and interest income

Internal controls for sales

3 way match of purchase order from customer, shipping docs and billing/invoices

Profitability ratios

measure operations creating profit and profit vs investments

gross profit margin = gross profit/net sales

operating margin = income from operations/net sales

net profit margin = net income/net sakles

Analyzing accounts receivable

used to asses asset management

accounts receivable turnover = net sales/average net accounrs receivable

• how fast turns become cash

days sales outstanding = 365/avg accounts receivable turnover