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.

committee that defines best-practice internal control frameworks.

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.

A formal report that evaluates how effective a company’s internal controls

Internal Auditor

An employee of the business who ensures that the companys’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

outsider who checks the books for accuracy and compliance.

Separation of duties

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

no one-person under control.

Encryption

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

converting information into a coded form

Firewalls

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

a locked door where only members are allowed

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.

tells the business what the payment is for

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.

bank-managed box to receive payments rather than sending them to the business

Lockbox = customers pay the bank, bank pays you.

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.

the automatic accountant / automated payment system

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.

digital messenger of business documents to other businesses

Petty cash

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

cash kept on hand

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

reset to the same amount every time.

Signature card

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

bank’s record of who can sign for the account.

Deposit ticket

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

A form completed by the depositor to instruct the bank on the amount being deposited, the type of funds (cash, check, etc.), and the account to be credited.

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

the one getting paid

routing number

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

bank ID

account number

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

your account’s unique ID at the bank.

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 checks

used as evidence of payment

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

a process that compares the bank and company for timing differences

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

outstanding check

deposit in transit

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

cash in, not yet on bank statement

timing differences due to delayed processing

Outstanding check

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

written but not yet cleared by the bank.”

timing differences due to delayed processing

Credit Memorandum

An increase in a bank account.

documents, Sent by the bank, to Inform you, update books

Bank receives money for you (lockbox, note collection)

Seller reduces what customer owes (return, allowance)

Debt Memorandum

A decrease in a bank account

documents, Sent by the bank, to Inform you, update books

Bank charges a fee or NSF check, Your cash decreases

Seller corrects underbilling, Customer now owes more

Nonsufficient Funds (NSF) Checks

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

Bank rejects 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.