Financial accounting (chapter 7)

Commitee of Sponsoring Organizations (COSO)

A committee that provides thought leadership related to enterprise risk management, internal control, and fraud deterrence.

Public Company

A company that sells its stock to the general public.

Internal control report

A report by management describing its responsibility for and the adequacy of internal controls over financial reporting.

Internal Auditor

An employee of the business who ensures that the compnys’s employees are following company policies, that the company meets all legal requirements, and that operations are running efficiently.

External Auditor

An outside accountant, completely independent of the business, who evaluates the controls to ensure that the financial statements are presented fairly, in accordance with GAPP

Separation of duties

Dividing responsibilities between two or more people to limit fraud and promote the accuracy of accounting records.

Encryption

Rearranging plain - text messages by a mathematical process - the primary method of achieving security in e-commerce.

Firewalls

A device that enables members of a local network to access the network, while keeping nonmembers out of the network.

Collusion

Two or more people working together to circumvent internal controls and defraud a company.

Remittance advice

An optional attachment to a check that tells the business the reason for the payment.

Lock-Box-System

A system in which customers send their checks to a post office box that belongs to a bank. A bank employee empties the box daily and records the deposits into the company’s bank account.

Evaluated Receipts Settlements (ERS)

A procedure that compresses the payment approval process into a single step by comparing the receiving report to the purchase order.

Electronic Data Interchange (EDI)

A streamlined process that bypasses paper documents altogether. Computers of customers communicate directly with the computers of suppliers to automate routine business transactions.

Petty cash

A fund containing a small amount of cash that is used to pay for minor expenditures.

Imprest system

A way to account for petty cash by maintaining a constant balance in the petty cash account. At any time, (Cash + petty cash tickets) must total the amount allocated to the petty cash fund

Signature card

A card that shows each authorized person’s signature for a bank account.

Deposit ticket

a bank form that is complete by the customer and shows the amount of each deposit

Check

a document that instructs a bank to pay the designated person or business a specified amount of money

Maker

the party who issues the check.

Payee

the individual or business to which the check is paid

routing number

on a check, the 9-digit number that identifies the bank upon which the payment is drawn

account number

on a check, the number that identifies the account upon which the payment is drawn

Bank statement

a document from the bank that reports the activity in the customer's account. It shows the bank account’s beginning and ending balances and lists the month’s cash transactions conducted through the bank account

Canceled Checks

physical or scan copies of the makers cashed (paid ) checks

electronic funds transfer (EFT)

A system that transfers cash buy electronic communication rather than by paper documents

bank reconciliation

a document explaining the reasons for the difference between a depositor’s cash records and the depositor’s cash balance in its bank account

Timing differences

Difference that arises between the balance on the bank statement and the balance on the company's books because of a time lag in recording transactions

deposit in transit

A deposit recorded by the company but not yet by its banks

Outstanding check

a check issued by a company and recorded on its books but not yet paid by its bank

Credit Memorandum

An increase in a bank account.

Debt Memorandum

A decrease in a bank account

Nonsufficient Funds (NSF) Checks

A check for which the maker’s bank account has insufficient money to pay the check.

Cash Ratio

A measure of a company’s ability to pay current liabilities from cash and cash equivalents. ((cash+ cash equivalents) / total current liabilities).

Cash equivalents

A highly liquid investment that can be converted into cash in 3 months or less.