Accounting Exam 2

Internal Controls

a company’s plan to safeguard company assets and improve accuracy and reliability of accounting information

Control Activities

a variety of policies and procedures used to protect a companys assets

Preventative Controls

designed to keep errors or fraud from occuring in the first place

Separation of Duties

separates employees' duties of authorization, record keeping, and physical control over assets

Physical Controls

implementing safes and locks on rooms with assets, and data back up on electronic information

Proper Authorization

Only management is allowed to authorize purchases over a certain dollar amount

Employee Management

Appropriate training and guidance are given to employees so they know the company's internal control procedures

E-commerce Control

Only authorized personnel have access to conduct electronic business transactions

Detective Controls

designed to detect errors and fraud that have already occured

reconciliation

Accounting records should be reconciled with the cash balance shown by the bank

Performance Reviews

Actual performance of employees should be checked against their expected performance

Audits

Public companies are required to have their internal control procedures tested by an independent auditor

Cash

includes currency, coins, balances in saving and checking accounts, and checks

Cash Equivalents

short term investments (no longer than 3 month maturity)

Bank reconciliation

matches the balance of cash in the bank account with the balance of cash in the company's records

Petty Cash

small amounts of cash on hand used by a business to pay for incidentals

Petty Cash Internal Controls

Having a petty cash custodian, setting a specific amount of petty cash to establish the fund, conduct audits or surprise counts of petty cash fund, and requre a petty cash ticket to be filled out describing purchase

Credit Sales

when a company provides goods or services to customers, not for cash, but on account

Net revenues

Total revenues - any amounts for returns, allowances, and discounts

Benefit of Extending Credit

The seller makes it more convenient for the buyer to purchase goods and services, long term increases companys pr’s profitability

Cost of extending credit

delay in collecting cash, some customers may not end up paying at all

Trade Discounts

A reduction in the listed price of a good or service, can provide an incentive for larger customers or groups.

Sales Returns

when a customer returns goods previously purchases, contra revenue account

Sales Allowance

When a seller reduced the customer’s balance owed, or provides a partial refund because of deficancy in the companys goods or services

Sales Discounts

a reduction in the amount to be received from a credit customer if collection occurs within a certain period

Allowance for Uncollectible Accounts

A contra asset account that represents the amount of accounts receivable not exoected to be collected

Net accounts receivable equation

accounts receivable - allowance for uncollectible accounts

Inventory

items a company intends for a sale to customers in the ordinary course of business, recorded as an asset

Merchandisers

sells finished goods to customers

manufacturers

produce the inventories they sell

Cost of Goods Sold

An expense in the income statement that represents the cost of the inventory sold during the year

Perpetual

Records inventory purchases and sales on a continuous basis

Periodic

Does not continuously record inventory amounts, calculates the balance of cost of goods sold once per period basis

Freight Charges

the cost of shipments of inventory from suppliers

FOB Shipping point

The title of goods and risk of ownership passes to the buyer at the time the goods are shipped

FOB Destination

The title of goods and the risk of ownership passes to the buyer at the time the goods reach their destination

Lower of Cost or Net Realizable Value

if the cost of inventory is higher than the net realizable value, the company is required to report its inventory at the lower cost

Specific Identification

matches each individual unit of inventory with its actual cost

Inventory Cost Methods

specific identification, FIFO, LIFO, weighted average