Exam 3 Reinking

The Fraud Triangle

opportunity , motivation, and rationalization

preventative controls

designed to keep errors or fraud from occuring

detective controls

designed to discover errors or fraud that has already accrued

Net Sales Formula

Total Sales Revenue - (Sales Discounts + Sales Returns + Sales Allowances)

Sales Discounts

reduction to price given if payment is made in a specific period

Sales Returns

recorded when a customer returns a product

Bad Debt Expense

Estimated cost of a future bad debt charged to the current period

Allowance for Uncollectible Accounts

Contra asset account representing the portion of accounts receivable not expected to be collected

Direct write off

the journal entry to remove a specific account balance after the sale when it is confirmed uncollected

Net Accounts Receivable Formula

A/R current balance - allowance for uncollectible accounts

Inventory Purchases

Recording journal entries for inventory at cost, purchase returns, and purchase discounts

Inventory Sales

Record revenue and record the reduction of inventory

FIFO

lower cogs, higher net income

LIFO

higher cogs, lower net income

Weighted Average

Calculation of a new average cost per unit after purchases

Economic Environments

Comparison of COGS, gross profit, and ending inventory increasing and decreasing price environments using FIFO and LIFO

Profitability Formula

Sales Revenue - COGS

Tangible Asset Purchases

Includes Land, Land improvements and equipment

Lump Sum Purchases

Allocation of cost based on fair markets values of assets purchased together

Allocated cost formula

(fair market value of a specific asset/total fair market value of all assets) x purchase price

Straight line depreciation

equal allocation over service life

Activity Based Depreciation

based on actual usage rather than time

Depreciation expense formula (straight line)

(cost -residual value) / service life

Depreciation per unit formula (Activity based)

(cost - residual value)/ total estimated activity

Double Declining Balance

Requires calculation for only the first two years, reduces net income and tax payments, increases cash flows.

Intangible Assets

Lack physical substance, based on legal contracts

Amortization

allocation of cost over service life for Patents or Copyright

Internal Controls

Plan to safeguard assets to improve accuracy/ reliability of accounting information

separation of duties

Splitting transaction and authorization, recording, and asset maintenance among different employees

Multi Step income Statement

reports multiple levels of profitability

Residual Value

esitmated amount to be received at the end of an assets service life

Book Value Formula

Cost - Accumulated Depreciation