accounting exam 7 & 8

what is the purpose of internal control

protect /safegaurd assets, provide accurate info, comply with laws and regulations.

What are the five components of internal control?

• Control environment

• Risk assessment

• Control procedures

• Monitoring

• Information and communication

control environment

Management’s attitude toward internal control; sets the ethical tone for employees.

risk assessment

Identifying where errors or fraud could occur and how likely they are.

control procedures

Actions used to reduce risk—like separation of duties, authorization, and physical safeguards.

What is separation of duties?

No single employee should control all parts of a transaction.

What is a cash receipt?

Money coming into the business, such as cash sales or customer payments.

What is a cash payment?

 Money going out of the business, usually via checks or electronic transfers.

Why should companies deposit cash daily?

Reduces theft risk and keeps accounting records accurate.

What is a bank reconciliation?

A process that matches the company’s cash balance with the bank’s cash balance.

What causes differences between bank and book balances?

Outstanding checks, deposits in transit, bank fees, interest, NSF checks, and errors.

What are outstanding checks?

Checks the company wrote that have not cleared the bank yet.

What are deposits in transit?

Money the company deposited but the bank has not yet recorded.

What is an NSF check?

A check from a customer that “bounced” due to insufficient funds

Which side do bank fees adjust—bank balance or book balance?

Book balance.

Which side do outstanding checks adjust—bank or book?

Bank balance.

Which side do deposits in transit adjust—bank or book?

Bank balance.

What is petty cash?

A small amount of cash kept on hand for small expenses.

• Stamps

• Snacks

• Office supplies

• Taxi fares

What is the imprest system for petty cash?

total petty cash + receipts equal the fund amount.

what is information and communication

Clear communication of policies and reporting channels.

what is authorization

Only approved individuals can approve transactions (Purchases, Payments, Refunds, Discounts)

What is independent verification?

Someone other than the person handling transactions checks accuracy.

What are sound personnel practices?

Background checks, training, mandatory vacations.

Why should payments be made by check/EFT?

Creates a written trail and requires authorization.

What items affect the book balance?

Bank fees, NSF checks, interest earned, company errors.

What items affect the bank balance?

Outstanding checks, deposits in transit, bank errors.

Does interest earned increase or decrease book balance?

Increase

Do bank service charges increase or decrease book balance?

decrease

Do outstanding checks increase or decrease the bank balance?

decrease

Do deposits in transit increase or decrease bank balance

increase.

When is petty cash debited again?

When increasing the fund amount.

Does the bank reconciliation require a journal entry for outstanding checks?

No — they only adjust the bank side, not the books.

Which side is normally “wrong”? Bank or books?

Books (bank has fewer errors).

Does the reconciliation itself appear in the journal?

No — only book-side adjustments get journal entries.

Does petty cash appear on the bank reconciliation?

No.

Which internal control would catch employee theft?

Independent internal verification.

What reduces risk of collusion?

Separation of duties.

What helps detect errors?

Reconciliations and independent reviews.

Accounts Receivable vs Notes Receivable?

• Accounts Receivable: Informal, no interest, short-term

• Notes Receivable: Formal written promise + interest

Why do companies record bad debt expense?

Because not all customers will pay what they owe.

What is Bad Debt Expense?

The cost of uncollectible accounts (customers who don’t pay).

What account is used to estimate future uncollectible accounts?

Allowance for Doubtful Accounts (a contra-asset).

What financial statement does Allowance for Doubtful Accounts affect?

A: Balance Sheet — it reduces Accounts Receivable.

Is Allowance for Doubtful Accounts normally a debit or credit?

A: Credit balance.

Net Realizable Value (NRV) formula?

Accounts Receivable – Allowance for Doubtful Accounts

Two methods for recording uncollectible accounts?

1. Direct Write-Off (NOT GAAP)

2. Allowance Method (GAAP)

Does writing off an account under the Allowance Method affect Bad Debt Expense?

A: No — expense was already recorded earlier.

Percent of Sales Method focuses on which statement?

A: Income Statement (records expense based on sales).

Aging of Receivables Method focuses on which statement?

A: Balance Sheet (ensures correct Allowance balance).

Interest formula for Notes Receivable?

interest = Principal × Rate × Time

(Time is always fraction of a year)

What is the advantage of the Allowance Method?

A: Matches bad debt expense to the same period as sales (GAAP/matching principle).

Someone not involved in the daily activity checks the work.

• Supervisor counts cash drawer

• Accounting department reviews payroll

Document Procedures

Use receipts, logs, invoices, check numbers, and prenumbered documents.

NSF checks decrease the company’s book balance.
True / False

True

other Receivables

Money owed for something other than sales

direct write off method 

small companies, not GAAP, record loss only when a customer fails to pay

Allowance Method

big companies, GAAP, estimate loss before it happens

Aging of Receivables Method

Estimate how much AR won’t be collected, focuses on balance sheet

Allowance for Doubtful Accounts

Contra-asset used to reduce Accounts Receivable

Interest Revenue

Income earned on Notes Receivable

treatment oon bank recoonciliation for a check drawn by a company for $850 for a payment of a liability recorded in the journal as $580

deduction from the balance per company record

this represents a receivable with a written formal note

notes receivable

this mehtod of accounting for uncollectable accounts is not accepted bc it violates the matching principle

direct write off method

a note is reffered to as this when the maker of a promissory note fails to pay the note on the due date

dishonored not receivalbe

accounts receivable are reported as this on the balance sheet

net realizable

in the allowance method this account will be debited when writting off a specific account as uncollectable

allowance for doubtful accounts 

a credit balance Cash Short and Over will be re[prted in this financial statement 

income on hte income statement

this is found on the bank reconciliation and represents the cash tobe reported on the balance sheet

adjusted balance

this is the treatment on a bank reconciliation of a credit memo due to a note recievable collected on behalf of the company

+ addition to the balance per company records

these two items dont require a nournal entry at the ompletion of a bank reconcilition 

depost in transit and outstanding checks

of actual write offs exceed the previous provision or estimate for bad debts this will happen to allowance for dobtful accs

caryy a debit balance

this is the treatment of deposits in transit on the bank reconciliation

addition to the balance per bank 

this is the treatment of a debit memo for bank service charges on a bank reconciliation 

dudction from the balance per company records

treatment of outstanding checks on a bank reconciliation

deduction from balance per bank statement

defined as a highly liquid investment available for immediate with drawl

cash equivalent

when estimating bad debt expense under the allowance method the balance in allowance for doubtful accoutns will directly impact the amount of the adjusting entry when applying this method

analysis of receivables or balance sheet method

due date of a 60 day note with an issuance date of june 2nd 

august 31

this is the classification and normal balance of allowance for doubtful accounts 

contra asset with a credit balance

is a system in which computers rather than paper are used to effect cash transactions

EFT

shows the begginging balance additions, deductions and ending balance for a compnays bank account 

bank statement