Chapter 8-11 Financial Accounting

Collusion

2 or more people working together

3 components of Internal Control

Segregation of duties,

Bonded meaning

• Anyone who deals with cash/high-ticket items is _____.

• Ex: teller at bank

• Type of insurance

• Protects against intentional or unintentional offages

Balancing a Bank statement(per bank)

1. get bank balance from end of period statement

2. + deposits in transit

3. - outstanding checks or debits

Balancing a bank statement(per books)

1. Get general ledger cash balance

2. + ACH(collection of Note Receivable, can include interest

3. +/- Error in recording(transposition error)

4. - NSF check

5. - Bank service charge

What is a cutoff date

It is the day the bank prepares and publishes bank statements fro the month. Ex: Every 23rd of the month, your checking account statement is made available

When you balacne your statement, you bring it up to date as of…

the date you balance it on

How many times can you deposit a bounced check?

Twice

SOX

BOD + President are required to know whats going on in their company, maintain close observation and tight security on activities of employees

Accounts Receivable cannot charge vs. Notes Receivable can charge

Interest

2/10/30 notation

2% discount if paid in 10 days, otherwise term is 30 days

Allowance for doubtful accounts (define)

The further you go past due on a loan, the more % you will reserve $ that you think will go bad(never get paid)

Direct Write-Off Method(not recognized by GAAP)

• Debit Bad Debt Expense

  • Credit Accounts Receivable

Allowance method

• Debit Bad Debt expense

  • Credit Allowance for doubtful accounts

What type of account is allowance for doubtful accounts?

Contra asset

How to get Net Realizable Value

Accounts receivable

-Allowance for doubtful accounts

Net sales

Sales(gross)

-Sales Returns & Allowances

-Sales discounts

= Net sales

Accounts Turnover Ratio

(Accounts Receivable x 365) divided by Net sales

Define accounts receivable turnover ratio

Avg # of days it takes your customer to pay you

Fixed assets, plant assets

1. Land

2. Land improvements(leasehold improvements)

3. Building

4. Equipment

Only businesses can deprecuate these plant assets…

Land improvements, Building, equipment

Cost basis:

Purchase price + every expenditure necessary to make the fixed asset ready for its intended use

Ex. You buy a car, and put your face and phone number on it as a decal. This is part of cost basis

Components of depreciation

• Cost Basis

• Salvage Value

• # of years of useful life

Straight-line depreciation method

(cost basis - salvage value) ÷ # of years of useful life = fixed cost

Units of activity depreciation method

(Cost - salvage value) ÷ TOTAL # of units of activity = variable cost(projected)

Double Declining Balance Method

Cost basis x 2x straight-line percentage

Entry for deprecitaion

• Depreciation Expense

  • Accumulated Depreciation(contra asset)

Net book value equation

Cost Basis

-Accumulated Depreciation

=Net book value

Gain or loss on sale of fixed assets(need another equation to get a component of this)

Sales Price

-Net book value

= Gain(revenue) or loss(expense) on sale of fixed assets

Examples of intangible assets

Trademarks, patents, goodwill, copyright

Return on assets equation

Net income ÷ Total Assets

Contingent liability

A potential liability that may become an actual liability in the future

11. Sales tax is

NOT an expense

Types of contingent liabilities

• Probable(put in accounts)

• Possible(put in footnotes)

• Remote(no recording at all)

Sales tax computation if:

You know the total amount of the sale

Example: Total owed $10,600. Find sales tax in $ if sales tax rate is 6%.

10,600÷(1+.06(sales tax rate of 6%)) = 10,000 - amount of sale

Sales tax amount computation if:

You know the sale amount of the product and the sales tax % of the state

Example: Product cost $10,000. Find sales tax in $ if sales tax rate is 6%.

$10,000 x (.06(sales tax rate of 6%)) = $600 - amount of sale tax

Entry: Cash $10,600

Sales $10,000

Sales Tax $600

Net Pay equation

﹢ Hourly rate x # of hours

﹢ Hourly rate x 1.5 x (# of hours over 40 hours)

= Gross Pay

﹣Mandatory deduction

﹣Voluntary deduction

= Net Pay

Mandatory payroll deduction(employee)

• Federal

• State

• FICA(Medicare and social security)

• Garnishments(child support)

Voluntary payroll deduction(employee)

• Health Insurance

• 401K

• Nonprofits

Mandatory payroll deduction(employer)

• FICA Match'

• Federal Unemployment

• State Unemployment

What happens when a retailer deos not pay sales tax on a quarterly basis?

The state will remit the money of of the levee account(aka directly force them to pay by taking money out of their account)

Retailer role in sales tax

Collector for state sales tax of which they are doing business in

How to caculate liquidity

Current assets ÷ current liabilities

Depletion

You can depreciate land only if it has a natural resource(oil, etc)

Current ratio

Current assets/ current liabilities