Accounting and Internal Controls Practice

Flashcards covering internal controls, bank reconciliation, multi-step income statements, merchandising terms, inventory cost flows, and relevant computational formulas.

Invalid Objective of Internal Controls

To overstate expenses to minimize taxes, which is not an objective of a system of internal controls.

Sarbanes-Oxley Act

An act that applies to publicly held companies.

Deposits in transit

Items added to the balance per bank statement on a bank reconciliation.

Bank service charges

Items that require a deduction from the balance per books on a bank reconciliation.

Inventory Internal Control Documents

Key documents include purchase orders, receiving reports, and vendor invoices, but do not include a customer's tax return.

Gross profit

On a multi-step income statement, the excess of net revenue from sales over the cost of goods sold.

$2$ in credit terms $2/10, n/35$

The percentage of the cash discount allowed for early payment.

FOB destination

Shipping terms where the seller pays the freight costs.

FOB shipping point

Shipping terms where the buyer bears the freight costs.

Selling expenses

Expenses incurred directly in the selling of merchandise, such as sales salaries.

Administrative expenses

Expenses incurred in the administration or general operations of the business, such as office salaries.

Other income and expense

Revenue and expenses that are not related to the primary operations of a business.

Income from operations

On a multi-step income statement, the excess of gross profit over total operating expenses.

Accounts receivable

Classified as a current asset on the balance sheet.

Last-in, first-out (LIFO)

An inventory cost flow assumption that assigns the oldest costs to ending inventory.

First-in, first-out (FIFO)

An inventory cost flow assumption that assigns the newest costs to ending inventory.

Perpetual Weighted Average

A system where a new weighted average unit cost is calculated each time a purchase is made.

Lower-of-cost-or-market (LCM)

The valuation method used when inventory value drops below its original cost due to obsolescence or deterioration.

High inventory turnover ratio

An indicator that a company is efficient in managing and moving its inventory.

LIFO Cost of Goods Sold (June 17 Sale)

Calculated as $"4,000"$ (20 \text{ units} \times $200) when selling $20$ units using the last batch in.

Weighted average unit cost (Problem 2)

Calculated as $"10"$ by dividing total cost ($"100 + 200 + 300 = 600"$) by $60$ total units.