chapter 4 accounting

errors

unintentional mistakes in recording transactions or applying accounting rules

fraud

intentional mistake

occupational fraud

using job to enrich yourself from employee’s resources

(pockets cash from sales)

fraud triangle

people commit fraud when things line up

1) opportunity: they can do it (nobody’s watching)

2) motivation: they need to (money problems/pressure)

3) rationalization: they tell themselves it’s ok (“they owe me”/ “i’ll pay back”)

what happens if you remove one from the fraud triangle

fraud is less likely

internal controls

company’s rules/safeguards that make it hard to commit fraud

what side of opportunity triangle does internal controls target

the opportunity side

what are the 2 goals for internal controls

1) protect company’s assets such as cash & inventory

2) make the accounting info accurate & reliable

where does a company’s money come from and who is trusted to look after that

a company’s money comes from lenders/owners and managers are trusted to look after that money (stewards) but some managers broke that trust

what did Enron do?

hid billions in debt and losses so the company looked healthier than it was

World Com did what?

made company look like it had more money and profit than it actually did

who follows the sarbanes-oxley act of 2002 (sox)

all public companies that are required to file financial statements with SEC

why was SOX passed

in response to these scandals by enron, world com, etc. and it applies to all public companies.

Name the five parts of internal controls from bottom to top.

1) control environment

2) risk assessment

3) control activities

4) monitoring

5) info & communication (throughout triangle)

what is control environment

a company’s ethical tone. do bosses care about honesty?

what is risk assessment

figuring out what could go wrong inside or outside the company that would stop it from reaching its goals

what are control activities

actual rules and procedures that make sure things get done right

monitoring

constantly checking that controls work and reporting problems

info + communication

getting the right info to the right people on time so they can do their job

separation of duties

different people authorize, record, and handle the assets for a transaction

physical controls

keep assets and records physically safe (locks, safes, bank deposit boxes)

proper authorization

only approved people can approve of things (train and guide employees so they know their jobs)

employee management

train and guide employees so they know their jobs

e-commerce controls

only authorized people can make online transactions

reconciliations

compare actual assets to what the accounting records say. they should match.

performance reviews

compare actual performance to expected performance

audits

an independent auditor checks the controls and looks for weakness/fraud

what is coso

a rule book that tells companies how to check if their financial rules are working properly

collusion

2 or more people working together to get around controls (separation of duties no longer protects)

what falls under cash

1) coins

2) checks received

3) bank balances (savings/checking accounts)

4) credit/debit card sales

what are cash equivalents

money you’ve temporarily put somewhere but can get back very soon (mature within 3 months)

what are examples of cash equivalents

money market funds, treasury bills, certificates of deposit

if something matures in more than 3 months from purchase

its not a cash equivalent but a short-term investment

what are the 6 main ways customers can pay a business

1) cash & checks (“paper”)

2) credit and debit cards (“plastic”

3) mobile payments

4) electronic fund transfers (EFTs)

5) prepaid cards

6) crypto

credit cards

the card company lends the customer money which customer pays back later.

retailers pay a processing fee (usually higher than debit)

debit cards

money comes directly from the customer’s bank account

• retailers pay a processing fee less than credit usually

money receipt

money coming IN to a business

cash disbursement

money going out of business

credit card falls under

accounts payablede

debit card falls under

cash

timing differences

company and bank record same transaction at different times

reason 2 for why balances differ —> errors

company/bank recorded the wrong amount

why does bank switch cr. dr. terms

when a company deposits cash they debit cash as it increases their asset. but for banks it’s the opposite effect and that cash is a liability for them.

deposit outstanding

bank side; add

check outstanding

bank side; subtract

money received by bank

company side; add

money paid out of your account

company side; subtract

how do you know if it’s bank or company side

put on side of who hasn’t recorded it yet

what requires journal entires

item’s on company’s side that hasn’t been recorded or need correction

what happens if two balances still don’t match after bank reconciliation

management investigates for errors/wrongdoings

1) either mark as miscellaneous expense (debit/loss)

2) miscellaneous revenue (credit/gain)

what do you not make journal entries for

• deposits/checks outstanding

• bank errors

petty cash

a small amount of cash kept on hand to pay for minor purchases (lunch, stamps)

at end of period, petty cash is replenished

cash ratio

cash ratio = cash/noncash assets * 100%

balance sheet and statement of cash flows

both give same end result

what does balance sheet show

shows the balance of cash and how much you have

what does statement of cash flows

• how cash came and went

• operating

• investing

• financing

where do dividends and common stock go (o, i, f activity)

they fall under financing activities

with the cash ratio, what does it mean if there is higher cash to non cash asset ratio

there is more flexibility to pay bills but it’s not better in every situation

statement of cash flows is useful because

it provides information on the company’s ability to maintain long-term success

what cash flow category is closely related to a company’s profitability is cash from

operating activities