Internal Controls and Financial Statements Review

These flashcards cover key concepts in internal controls, financial statements, and related accounting principles to assist in exam preparation.

Internal Controls

Processes designed to provide reasonable assurance regarding the achievement of objectives related to operations, reporting, and compliance.

Prevent fraud and errors

A primary objective of internal controls.

Physical control

A type of internal control that includes security measures such as locked storage cabinets.

Segregation of duties

An internal control principle that prevents unauthorized transactions by ensuring that no one person handles all aspects of a transaction.

Reconciliation

A control activity that involves comparing recorded amounts to actual assets to verify their accuracy.

Preventive control

A type of internal control designed to prevent errors or fraud before they occur, such as security cameras.

Cash equivalents

Short-term investments that are readily convertible to cash, excluding accounts receivable.

Bank service charges

Fees charged by the bank that are subtracted from the book balance during reconciliation.

Deposit in transit

A reason for the difference between the bank and book balance that represents deposits made but not yet cleared by the bank.

Cost of Goods Sold (COGS)

The direct costs attributable to the production of the goods sold by a company, reported on the income statement.

Beginning Inventory + Purchases – Ending Inventory

The formula used to calculate Cost of Goods Sold.

Gross profit

Sales revenue minus Cost of Goods Sold, displayed prominently on a multistep income statement.

Operating income

Gross profit minus operating expenses, indicating profitability from regular operations.

Non-operating items

Income or expenses not related to the core business operations, such as interest income.

Long-lived tangible asset

Physical assets that have a long useful life, such as equipment.

Depreciation

The systematic allocation of the cost of tangible assets over their useful lives.

Intangible asset

A non-physical asset that provides long-term value, such as patents or trademarks.

Amortization

The process of gradually writing off the initial cost of an intangible asset over its useful life.

Goodwill

An intangible asset that arises when a company acquires another for more than the fair value of its net identifiable assets.

Contra asset

An asset account with a normal credit balance, such as accumulated depreciation, that reduces the value of associated assets.