ACCT 2001: Kimberly Peters LSU Final Exam

Sole Proprietorship

A business owned by one person:

Advantage- owner-controlled tax advantages

Disadvantage- Personal liability

Partnership

A business in which two or more persons combine their assets and skills

Advantage- simple, shared control, more skills and assets

Disadvantage- personal liability

Corporation

A business that is owned by many investors.

Advantage- Easy to transfer ownership and raise funds

NO PERSONAL LIABILITY

Disadvantage- Pay higher taxes

Internal Users

Persons using accounting information who are directly involved in managing the organization. Ex. Managers, Supervisors, and Employees

External Users

Persons using accounting information who are not directly involved in running the organization. Ex. Investors, Consultants, and Creditors

Sarbanes-Oxley Act of 2002

To reduce unethical corporate behavior and corporate scandals

Financing Activities

Cash flow activities that include (a) obtaining cash from issuing debt and repaying the amounts borrowed and (b) obtaining cash from stockholders, repurchasing shares, and paying dividends.

Investing Activities

Cash flow activities that include (a) cash transactions that involve the purchase or disposal of investments and property, plant, and equipment using cash and (b) lending money and collecting the loans.

Operating Activities

Cash flow activities that include the cash effects of transactions that create revenues and expenses and thus enter into the determination of net income.

Assets

Resources owned by a business

Liabilities

Amounts owed to creditors in the form of debts and other obligations.

Stockholders' Equity

The owners' claim to assets.

Revenues

An increase in assets or decrease in liabilities resulting from the sale of goods or the performance of services in the normal course of business

Expenses

The cost of assets consumed or services used in the process of generating revenues.

Dividends

Payment of cash from a corporation to its stockholders

Income Statement

A financial statement that reports a company's revenues and expenses and resulting net income or net loss for a specific period of time. (revenue - expenses)

Retained Earnings Statement

A financial statement that summarizes the amounts and causes of changes in retained earnings for a specific time period. (beginning retained earnings + net income - dividends)

Balance Sheet

A financial statement that reports assets, liabilities, and owner's equity on a specific date. (liabilities + stockholders equity)

Statement of Cash Flow

A financial statement that provides financial information about the cash receipts and cash payments of a business for a specific period of time.

Internal Revenue Service (IRS)

Trying to determine whether the company complied with tax laws

Creditors

Trying to determine whether the company can pay its obligations

Marketing Mangers

Trying to determine whether an advertising proposal will be cost-effective

Investors in Common Stock

Trying to determine whether the company's net income will result in a stock price increase

Chief Financial Officer (CFO)

Trying to determine whether the company's net income will result in a stock price increase

Generally Accepted Accounting Principles (GAAP)

A set of rules and practices, having substantial authoritative support, that the accounting profession recognizes as a general guide for financial reporting purposes.

Securities and Exchange Commission (SEC)

Protect investors by regulating/overseeing the US markets

Financial Accounting Standards Board (FASB)

The private organization that oversees the creation and governance of accounting standards in the United States (GAAP)

International Accounting Standards Board (IASB)

Issues standards called International Financial Reporting Standards (IFRS)

Public Company Accounting Oversight Board (PCAOB)

A board created by SOX that regulates the auditing profession; created as part of SOX.

What organization makes sure useful information possesses relevance and faithful compensation?

FASB

What are FASB's enhancing qualities of useful information?

Compatibility, Consistency, Verifiability, Timeliness, and Understand-ability

What is not expressed in accounting records?

Customer Satisfaction

Monetary Unit Assumption

Principle that assumes transactions and events can be expressed in money units.

Economic Entity Assumption

An assumption that every economic entity can be separately identified and accounted for.

Periodicity Assumption

An assumption that the economic life of a business can be divided into artificial time periods.

Going Concern Assumption

The assumption that the company will continue in operation for the foreseeable future.

Full Disclosure Principle

Accounting principle that dictates that companies disclose circumstances and events that make a difference to financial statement users.

Historical Cost Principle

Companies record assets at their cost

Fair Value Principle

Assets and Liabilities are recorded at fair value

What does the Accounting Information System do?

Collects and processes transaction data and then communicates the financial information to interested parties.

The Accounting Cycle

Analyze, Journalize, Post, Trial Balance, Adjusting Entries, Adjusted Trial Balance, Financial Statements, Closing Entries, Post-Closing Trial Balance.

What is the basic accounting equation?

Assets = Liabilities + Stockholders' Equity

Debits of assets, expenses, and dividends should be?

Greater than credits

Debits of liabilities, common stock, retained earnings, and revenues should be?

Less than credits

What is a perpetual inventory system?

A detailed inventory system in which a company maintains the cost of each inventory item, and the records continuously show the inventory that should be on hand.

What is a periodic inventory system?

An inventory system that requires businesses to obtain a physical count of inventory to determine quantities on hand.

What does 2/10, n/30 mean?

2% discount if paid within 10 days, otherwise net amount due within 30 days

If a purchaser is dissatisfied because goods are damaged, defective, or do not meet specifications it is a?

Contra: purchase return or purchase allowance

Make a journal entry for returning goods

Debit Accounts Payable, Credit Inventory

What does profit margin mean?

% of net sales kept in net income

What are goods in transit?

Purchased goods not yet received, sold goods not yer delivered, and legal title determined bu the terms of the sale.

What is FIFO?

First in first out: Earliest goods purchased are first to be sold

What is LIFO?

Last in first out: Latest goods purchased are first to be sold

In periods of rising prices, FIFO reports lowest...

cost of goods sold

In periods of rising prices, FIFO reports highest...

ending inventory and net income

In periods of rising prices, LIFO reports lowest...

ending inventory and net income

In periods of rising prices, LIFO reports highest...

cost of goods sold

What is net realizable value?

The amount of cash the company expects to collect

What is fraud?

A fraud is a dishonest act by an employee that results in personal benefit to the employee at a cost to the employer

What are the 3 elements of the fraud triangle?

Opportunity, financial pressure, rationalization

What element of the fraud triangle is most important?

Opportunity

Control Environment

The overall attitude of management and employees about the importance of controls.

Risk Assessment

Identifying the factors that create risk for the business and must be determined how to manage

Control Activities

To reduce the occurrence of fraud, management must design policies and procedures to address the specific risks faced by the company

Information and Communication

Capture and communicate all pertinent information

Monitoring

Systems must be monitored periodically for their adequacy

What are the 6 principles of control activities?

1. establishment of responsibility

2. segregation of duties

3. documentation procedures

4. physical controls

5. independent internal verification

6. human resource controls

When is control most effective?

When only one person is responsible for a given task

What are the 2 different segregation of duties?

1. Different individuals should be responsible for related activities

2. The responsibility for record keeping for an asset should be separate from the physical custody of that asset

Who are internal auditors?

Company employees who continuously evaluate the effectiveness of the company's internal control systems

What is bonding?

Obtaining insurance protection against theft by employees

What contributes to good internal control over cash?

Minimizes the amount of currency on hand, creates a double record of bank transactions, and bank reconciliation.

What is an EFT?

Electronic Funds Transfer - any movement of funds by means of an electronic terminal, telephone, computer or magnetic tape

What are adjustments to the bank balance?

Deposits in transit, outstanding checks, or bank errors.

What are adjustments to the book balance?

EFT collections and other deposit receipts, service charges and other payments, or company errors.

On a bank reconciliation, the adjusted cash balance per bank and per books are...

Equal

To record collection of EFT:

Debit Cash, Credit Accounts Receivable

To record NSF check:

Debit Accounts Receivable, Credit Cash

To record bank service charges:

Debit Bank Charges Expense, Credit Cash

To correct error in recording checks:

Debit Cash, Credit Accounts Payable

Cash equivalents are short term highly liquid investments. They are?

1. Readily convertible to known amounts of cash

2. Near maturity: market value is relatively insensitive to changes in interest rates

What is restricted cash?

Cash that is not available for general purpose but is restricted for a special purpose: reported seperately on balance sheet.

What are 2 main issues of accounting receivables?

Recognizing (LO1) and valuing (LO2)

To record a sale on account:

Debit Accounts Receivable, Credit Sales Revenue

To record a return on account:

D Sales Returns and Allowances, C Account Receivable

To receive payment for balance due within time of discount:

D Cash, D Sales Discount, C Accounts Receivable

To receive payment for balance due after the time of discount:

D Cash, C Accounts Receivable

What is the direct write off method?

Recording bad debt expense at the time we know the account to be uncollectible

To record a write off when balance is uncollectible:

D Bad Debt Expense, C Accounts Receivable

What is the allowance method?

Bad debts are estimated each period and a contra receivables account called "allowance for bad debts" is used

To record the estimated uncollectible accounts:

D Bad Debt Expense, C Allowance for Doubtful Accounts

To write off an uncollectible account:

D: Allowance for Doubtful Accounts

C: Accounts Receivable

To record a payment made on a written off account

D: Accounts Receivable

C: Allowance for Doubtful Accounts

D: Cash

C: Accounts Receivable

If a company has $150,000 of Accounts Receivable at year end and 5% is estimated as uncollectible, the desired ending Allowance for Doubtful Accounts balance should be:

7,500

(150,000 x .05)

Why does the Allowance for Doubtful Accounts already have a balance?

Permanent Accounts

How can the unadjusted balance be either a debit or credit?

The credit balance means write offs were less than expected, the debit balance means write offs were more than expected

To record a sale with a service charge:

D: Cash

D: Service Charge Expense

C: Accounts Receivable

What is a common form of factoring?

Acceptance of national credit cards

What are major advantages of credit cards to the retailer?

Retailer does not have to offer credit, Increases sales, Convenient

To record a VISA payment with a service charge:

D: Cash

D: Service Charge Expense

C: Sales Revenue