Accountancy exam 2

Employee Fraud

Corruption, asset misappropriation, and financial statement fraud

Factors that exist when fraud occurs

Incentive, opportunity, and rationalization

Loan covenants

Requires a company to achieve financial targets, such as maintaining specific levels of assets or SE

Control Environment

the attitude people in the organization hold regarding internal control

Remittance advice

A note explaining what is being paid

Principles of internal control

Establish responsibility, Restrict access, Segregate duties, document procedures, independently verify info

Voucher system

The process for approving and documenting all purchases and payments on account

Components of a voucher system

Purchase requisition, Purchase order, receiving report, supplier invoice

Bank statement

The amount of cash at the bank

Risk assessment

The continuous assessment by management to assess the potential for fraud and other risks is referred to as

Merchandising company operating cycle

Buy inventory, sell inventory, collect cash, pay operating expenses

Cost of goods available for sale

beginning inventory plus purchases

2/10,n/30

if the purchaser pays by the 10th day of taking ownership of the goods, a 2% purchase discount can be deducted from the amount owed

Gross Profit Percentage

[(Net Sales-Cost of goods sold)/Net sales] x 100

Perpetual inventory system

Inventory system that records a change in the inventory account every time goods are bought, sold or returned.

Inventory

Total cost of acquired goods not sold

Sales Revenue

Selling Price that is sold to customer

Cost of goods sold

Total cost of good sold to customers

Periodic inventory system

Updates inventory records only at the end of the month

FOB shipping point

Sales recored when goods leave sellers shipping department

FOB destination

sale is recorded when goods reach destination

GAAP

requires that the inventory be written down to its lower market value

Specific Identification

Inventory method that is typically used when accounting for expensive and unique inventory items

Consignment inventory

Goods that a company holds on behalf of another company that are not reported on the company’s balance sheet

Periodic Update

Beginning inventory + Purchases - Ending Inventory = Cost of goods sold

Perpetual update

Beginning inventory + Purchases - Cost of goods sold = Ending Inventory

FIFO

Assumes that the costs of the first goods purchased are the cost of the first goods sold. Produces larger inventory less expenses

LIFO

Assumes that the most recently purchased goods are the first ones sold. produces less inventory more expenses

Inventory turnover

The process of buying and selling inventory

Weighted average cost

Cost of goods available for sale/ # of units available for sale

Note receivable

when customers are purchasing large dollar value items, in case where payment periods have been extended or when a business lends money to its customers.

Allowance method

Estimate bad debts in period credit sales occur, then write off specific customer balances when they are uncollectible.

Receivables turnover

The process of selling and collecting

Channel stuffing

When a company’s credit sales are increasing and its accounts receivable turnover is decreasing

Factoring

Receivables are sold to another company for immediate cash 

Internal Control Objectives

Operate, report, comply

Net method

Purchases initially recored net of the discount, adjustments made is discount is not taken

Gross method

Purchases are recorded at full amount

Better off companies

Receivable turnover ratio is high, days to collect is low