Accounting final exam

cash equivalents

short term, highly liquid investments. Generally, only investments with original maturities of three months or less

internal controls

encourage adherence to company policies and procedures, ensure compliance with laws and regulations, safeguard assets, minimize error and theft, and enhance the reliability and accuracy of accounting data and financial reporting

sarbanes-oxley act

requires that each annual report includes an assessment by management of the effectiveness of internal controls

net method for receivables

assumes the customer will take advantage of the discount. If the customer does not take advantage, an additional revenue account called Sales Discounts Forfeited is used to record deficit

gross method for receivables

assumes the customer will not take advantage of the discount. If the customer does take advantage, an account called Sales Discounts is used

allowance method

bad debts from sales to credit customers are probable and estimable in an AJE. This AJE records Bad Debt Expense and an adjustment to Allowance for Doubtful Accounts. When the bad debt is revealed, a journal entry records the write-off of the bad debt and takes it off the A/R balance and the related AFDA

direct write-off method

this method is not allowed under GAAP. There is no AJE. When the bad debt is revealed, a journal entry records the bad debt expense and takes off the customers A/R balance.

note receivable

an unconditional written promise made and signed by the maker/borrower to pay the bearer or stated payee a definite amount of money

interest bearing notes

these notes have a stated interest rate and require periodic interest payments. Cash interest payment computed as the face value of the note multiplied by the state rate

non-interest bearing notes

no stated interest rate. The note does not call for periodic interest payments but for financial reporting purposes, we accrue interest at the appropriate market rate of interest. The face value will exceed the principal amount

Discount on notes receivable

an account used under the gross method for non interest bearing notes. This includes the difference between the face value of the notes and amount borrowed.

lower cost or net realizable value rule

Used by firms using FIFO: compare the cost of inventory to the net realizable value and choose the lower value. If NRV is lower than cost, then the inventory is written down to the lower NRV amount

lower cost or market rule

used by firms using LIFO: find current replacement cost, celing, and floor. The market value is the middle of the three values