Accounting and Internal Controls Exam 3 Review

Comprehensive vocabulary flashcards covering internal controls, financial statement formulas, inventory methods, bad debt accounting, and stockholders' equity based on the lecture transcript.

Internal Controls

A company's plan to 1) safeguard assets and 2) improve the accuracy and reliability of accounting information.

Separation of duties

A control policy where monitoring transactions, recording transactions, and maintaining control of related assets should be separated among different employees.

Multi-Step Income Statement

An income statement that reports multiple levels of income or profitability by separating operating and non-operating items.

Residual (Salvage) Value

The amount a company expects to receive from selling the asset at the end of its service life.

Straight-Line depreciation

Allocates an equal amount of depreciation to each year of the asset's service life. Formula: $\text{Straight-Line Depreciation} = \frac{\text{Cost} - \text{Salvage}}{\text{Life}}$

Intangible asset

Long-term assets that lack physical substance, and whose existence is often based on a legal contract.

Net accounts receivable

The difference between total accounts receivable and the allowance for uncollectible accounts. Formula: $\text{Net Accounts Receivable} = \text{A/R} - \text{Allowance}$

Matching principle

The accounting principle of recognizing expenses in the same period as the revenue they help generate.

Net Sales Formula

$$\text{Net Sales} = \text{Sales} - \text{Returns} - \text{Discounts} - \text{Allowance}$$

Cost of Goods Sold (COGS) Formula

$$\text{COGS} = \text{Beginning Inventory} + \text{Purchases} - \text{Ending Inventory}$$

Allowance Method

A method of reporting accounts receivable where a company estimates losses from bad debts before they actually happen.

Bad Debt Expense Formula

$$\text{Bad Debt Expense} = \text{Target Allowance} - \text{Current Allowance}$$

Book Value

The carrying value of an asset calculated as: $\text{Book Value} = \text{Cost} - \text{Accumulated Depreciation}$

Trial Balance

A list of all accounts and their balances where the total debits must equal the total credits.

FIFO (First-In, First-Out)

An inventory costing method often associated with cheaper old inventory and higher net income.

LIFO (Last-In, First-Out)

An inventory costing method often associated with expensive new inventory and lower net income.

Contra Accounts

Accounts with a balance opposite to the normal balance of the related account, used to reduce the related account's carrying value (e.g., Allowance for Uncollectible Accounts).

Fraud Triangle

The three elements typically present when fraud occurs: Opportunity, Motivation, and Rationalization.

Sarbanes-Oxley Act of 2002

A congressional act applying to all financial statements with the SEC that established guidelines for internal control procedures and auditor-client relations.

Control Environment

Often referred to as the 'Tone at the top,' it sets the overall ethical tone and includes formal policies related to management's philosophy.

Risk Assessment

The element of internal control that identifies and analyzes internal and external risk factors and determines procedures to deal with them.

Preventative controls

Internal controls designed to keep errors or fraud from occurring in the first place, such as physical controls and proper authorization.

Detective Controls

Internal controls designed to find errors or fraud that have already occurred, such as reconciliations and performance reviews.

Deferred Revenue

A liability representing cash received for a product or service that is still owed to the customer.

Accounting Equation

$$\text{Assets} = \text{Liabilities} + \text{Stockholders' Equity}$$

Revenue Recognition Principle

The principle that revenue should be recorded in the period in which products or services are provided to the customer.

Paid in Capital

The total amount stockholders have invested in the corporation, including common stock, preferred stock, and additional paid in capital.

Earned Capital

The amount of earnings that the corporation has retained over time.

Treasury Stock

A corporation's own stock that has been reacquired by the company.

Preferred Stock

A form of stock that gives shareholders advantages such as receiving dividends and liquidation assets before common stockholders.