Fraud, Internal Control, and Inventory Management in Accounting

What is fraud?

Intentional misrepresentation of facts that causes injury or damage to another party.

How has fraud increased in recent years?

Fraud has increased with the expansion of e-commerce via the Internet.

What are the two common types of fraud that impact financial statements?

Misappropriation of Assets and Fraudulent Financial Reporting.

Who typically commits misappropriation of assets?

Employees, through theft of money or inventory, bribery, or kickback schemes.

Who typically commits fraudulent financial reporting?

Managers, through false and misleading entries in the books.

What is the Fraud Triangle?

A model that explains the three elements that lead to fraud: Motive, Opportunity, and Rationalization.

What is the primary purpose of internal control?

To promote operational efficiency and prevent, detect, or correct fraud and errors.

What are some limitations of internal control?

Circumvention through collusion, management override, fatigue, and negligence.

What is bank reconciliation?

The process of explaining the differences between a company's cash records and its bank statement.

What is the purpose of sales discounts?

To offer incentives to credit customers to speed up cash receipts.

What is the Direct Write-Off Method?

A method that records bad debt expense when a specific customer's account is deemed uncollectible, not compliant with GAAP.

What is the Allowance Method?

A method that estimates uncollectibles using the Percent-of-Sales Method or Aging-of-Receivables Method.

What is Net Realizable Value (NRV)?

The amount of accounts receivable expected to be collected, calculated by subtracting the allowance for doubtful accounts from accounts receivable.

What are the key terms related to notes receivable?

Creditor (lender), Debtor (borrower), Interest (cost of borrowing), Maturity date (due date), Maturity value (principal + interest), Principal (amount borrowed), Term (length of time until payment).

How is interest typically expressed for notes receivable?

As an annual percentage rate, with fractions used for time periods less than a year.

What is the typical incentive structure for sales discounts?

2/10, n/30: 2% discount if paid within 10 days, full amount due in 30 days.

What is the adjusting entry for bad debt expense under the Allowance Method?

Debit Bad Debt Expense and Credit Allowance for Doubtful Accounts.

What entry is made when a customer account is written off under the Allowance Method?

Debit Allowance for Doubtful Accounts and Credit Accounts Receivable.

What is the impact of the Direct Write-Off Method on financial statements?

It overstates receivables and net income, violating the matching principle.

What is the entry when a loan is made?

Debit Note Receivable $25,000; Credit Cash $25,000.

How is interest income recorded at year-end?

Debit Interest Receivable $625; Credit Interest Income $625.

What is the total cash received when a loan is repaid?

Cash $26,042; Credit Note Receivable $25,000; Credit Interest Receivable $625; Credit Interest Income $417.

What does a higher Quick (Acid-Test) Ratio indicate?

It indicates that it is easier to pay current liabilities.

What does Days' Sales Outstanding measure?

It measures the speed in collecting accounts receivable.

What is the formula for A/R Turnover?

A/R Turnover = Net Credit Sales / Average Accounts Receivable.

How do you calculate Days' Sales in Receivables?

365 days / A/R Turnover.

What are the two types of companies that carry inventory?

Manufacturing Companies and Merchandising Companies.

When does the cost of inventory sold shift from asset to expense?

When the seller delivers the goods to the buyer.

What is the formula for Gross Profit?

Gross Profit = Sales Revenue - Cost of Goods Sold.

What is the Cost of Goods Sold (COGS) equation?

COGS = Beginning Inventory + Net Purchases - Ending Inventory.

What are the four inventory costing methods?

Specific unit cost, Average cost, FIFO, and LIFO.

How do you calculate the average cost per board?

Average Cost = Total Cost of Inventory / Total Number of Boards.

What is the COGS using FIFO for Scooby's Skateboards?

? = (25 boards x $10) + (45 boards x $13) = $835.

What is the COGS using LIFO for Scooby's Skateboards?

? = (15 boards x $18) + (20 boards x $15) + (35 boards x $13) = $1,025.

What does Gross Profit Percentage indicate?

It indicates a company's ability to sell inventory at a profit.

How is Inventory Turnover calculated?

Inventory Turnover = Cost of Goods Sold / Average Inventory.

What is the Gross Profit Method used for?

It is used to estimate ending inventory.

How do you estimate the cost of inventory destroyed by fire?

Estimate using the gross profit percentage on sales.

What is the effect of inventory errors on accounting periods?

Errors in ending inventory create errors for two accounting periods.

What is the formula for calculating ending inventory after a fire?

Ending Inventory = Cost of Goods Available for Sale - COGS.

What is the gross profit percentage formula?

? = Gross Profit / Net Sales Revenue.

What is the significance of the gross profit percentage for managers?

It is a key indicator of a company's ability to sell inventory at a profit.

What happens to inventory errors in consecutive periods?

Inventory errors counterbalance in two consecutive periods.

What is the impact of using FIFO on reported profits?

FIFO provides a more up-to-date inventory cost and affects reported profits.

What is the impact of using LIFO on reported profits?

LIFO provides a more realistic net income figure by assigning recent costs to COGS.