Accounting Module 3

What is the accounting equation?

Assets = Liabilities + Stockholders equity

What is accrual?

Paying cash before. Ex- Car insurance

What is defferal?

Paying cash after

What is a receivable?

Get cash and receive from customer

What is a payable?

Paying someone (owe)

What are the 4 financial statements?

The 4 financial statements are the Balance Sheet, Income Statement, Cash Flow Statement, and Statement of stockholders Equity. They provide a comprehensive overview of a company's financial position, performance, and cash flows.

What are the Balance Sheets uses?

assets, liabilities, and stockholders equity

What are the income statements uses?

Revenues, expenses, and net income

What are the Statement of Cash flows uses?

Cash inflows and outflows

What are the statement of stockholders equity uses?

retained earnings and common stock

What are the 4 accounting cycle steps?

1. Record Transactions

2. Adjust Accounts

3. Prepare financial statements

4. Close Temporary accounts into the permanent accounts

What is a product cost?

What goes into making the cost

What is a period Cost?

Not what goes into making products (expensed immediately)

What are the 4 business types?

Retailer/Merchandiser, Manufacturer, Wholesaler, Supplier

What do Retailers/Merchandisers do?

Sell products to customer/people

What do manufacturers do?

Make stuff and sell it

What do wholesalers do?

Sells to other businesses

What do suppliers do?

sell to manufacturers

FOB Shipping point

Buyer pays

FOB Destination

Seller pays

How do you calculate net sales?

Sales - deductions (returns,discounts) - net

Asset Exchange

One asset goes up while one asset goes down

Asset Source

assets goes up, Liabilities goes up

Asset Use

Assets go down, Liabilities go down

Claims exchange

One liability goes up, one liability goes down

What are the five key features of internal control systems?

1. Control Environment

2. Risk Assessment

3. Control Activities

4.Information and communication

5. Monitoring (Know details)

How do we control cash payments?

To effectively control cash, a company should make all disbursements using checks, thereby providing a record of cash payments.
• All checks should be prenumbered, and unused checks should be locked up.
• The duties of approving disbursements, signing checks, and recording transactions should be
separated.
• Supporting documents with authorized approval signatures should be required and marked Paid
when the check is signed.

How do we control Cash receipts?

A record of all cash collections should be prepared immediately upon receipt.
• The amount of cash on hand should be counted regularly.
• Employees who receive cash should give customers a copy of a written receipt.
• Cash receipts should be deposited in a bank on a timely basis.
• Every effort should be made to minimize the amount of cash on hand.
Controlling cash, more than any other asset, requires strict adherence to internal control procedures.

What is the role of the auditor?

Analysts and other statement users rely on audits conducted by certified public accountants (CPAs).

1. Conducts a financial audit.
2. Assumes both legal and professional responsibilities to the public as well as to the company paying the auditor.
3. Determines if financial statements are materially correct.
4. Presents conclusions in an audit report that contains an opinion.
5. Maintains professional confidentiality of client records.

Do auditors guarantee a report?

Auditors do not guarantee that financial statements are absolutely correct—only that
they are materially correct

What is materiality?

An error, or other reporting problem, is material if knowing about it would influence the decision of an average prudent investor.

What is an unqualified opinion?

An unqualified opinion means the auditor believes the financial statements are in compliance with GAAP without qualification, reservation or exception.

Identify the areas of the fraud triangle and explain each area

1. Opportunity (Top)- Opportunity is shown at the head to the triangle because without opportunity, fraud could not exist.

2. Pressure (Left)- The second element of the fraud triangle recognizes pressure as a key ingredient of misconduct

3. Rationalization (Right)- The third and final element of the fraud triangle is Rationalization