Financial Accounting Exam 2

Key roles of fin acc

Measure biz activities and communicate that to decision makers

Two reasons companies issue incorrect financial statements

• errors, accidental

• fraud, intentionally deceiving another person for gain

Two sources of occupational fraud

• misuse of company resources

• financial statement manipulation

Three elements of fraud

• motivation

• opportunity

• rationalization

What eliminates fraud opportunity

internal controls

Preventive controls vs detective controls

Preventive: eliminate opportunities

Detective: find fraud

Physical Controls

The company should maintain security over assets and accounting records

Reconciliations

Management should periodically determine whether the amounts of physical assets of the company match the accounting records

Audits

Inspect the company’s internal controls and accounting records by an independent auditor

Seperation of duties

Authorizing transactions, recording transactions, and maintaining control of the related assets should be seperated among employees

Cash equivalents

Investments that mature within 3 months from the date of purchase (90 days)

Operating

Revenues + Expenses

Investing + Financing

Long term, how to pay for it (dividends)

Sales Return

Goods previously purchased and returned by a customer (contra-revenue)

Sales allowance

Seller reduces the customers balance owed for goods/services provided because of some deficiency in the companys goods/services (contra-revenue)

Sales Discount

A reduction in the amount to be received from a credit customer if collection occurs within a specified period of time. To provide incentive to the customer for a quick payment, (contra revenue)

Net Revenue

Refers to a companies total revenues less any amounts for sales returns, sales allowances, and sales discounts.

Uncollectable accounts

Customer account receivable that we no longer consider collectible (bad debts)

Allowance Method

A company reports its accounts receivable at the net amount expected to be collected. Companies are required to estimate future uncollectable accounts and report those estimated in the current year.

Allowance for uncollectable accounts

A contra asset account that represents the amount of accounts receivable not expected to be collected

Net Accounts Receivable

Equals the difference between total accounts receivable and the allowance for uncollectable accounts. (also the Net Realizable value NRV)

Bad Debt Expense

Represents the cost of estimated future bad debts that is reported as an expense in the current year’s income statement. also (the cost of credit sales)

When is an account receivable written off?

when they become uncollectable (entry: debit allowance for uncollectables credit: accounts receivable)

When does a contra asset increase?

With credit

Income Statement and Balance Sheet

Income: Over a point of time

Balance Sheet: At a point in time

Allowance for uncollectable is what

contra asset

What does a multiple-step income statement report

• gross profit

• operating income

• income before taxes

• net income

Inventory is reported as a what on the balance sheet

Current asset

What are the three categories of inventories

• Raw Materials

• Work-in Progress

• Finished Goods

Specific identification

Matches each unit of inventory with its actual cost

FIFO

assumes first units produced are the first ones sold

LIFO

Assumes the last units purchased are the first ones sold

Weighted-average cost

Assumes each unit of inventory has a cost equal to the weighted average unit cost of all inventory items

Cost of goods sold is a

expense

Average weighted cost equation

Total cost/ total units

FIFO

ending inventory reflects current cost

balance sheet approach

LIFO

• Costs of goods sold reflects current cost

• income statement approach

• LIFO conformity rule; companies that use LIFO for tax reporting have to use LIFO for financial reporting

Inventory turnover ratio

costs of goods sold/ average inventory

Average days in inventory

365/inventory turnover ratio

Gross Profit Ratio

Gross Profit/net sales revenue

Gross Profit =

sales revenue - COGS

COGS

Income statement (over a period of time) (expense)

Inventory

balance sheet (at a period of time) asset

When a company sells inventory, they make two entries

• increase an asset account (cash or accounts receivable) and increase sales revenue

• increase costs of goods sold and decrease inventory