Exam 2 Review - RW

Exam 2 Review Notes

Internal Controls

• Separation of Duties: A strong internal control system requires the separation of certain key duties.

  • Duty to separate from cash handling: Record Keeping and Transaction Approval (Both A and C).

• Importance of Cash Controls:

  • Cash requires special controls due to its:

    • High risk of theft

    • Ease of conversion to other forms of wealth

    • Impact on most transactions (All of the above).

Types of Fraud

• Fictitious Accounting Entries: Classified under Fraudulent Financial Reporting.

• Internal controls serve several objectives:

  • Safeguarding assets

  • Promoting operational efficiency

  • Complying with legal requirements

  • Not aimed at maximizing profits.

Example of Internal Controls

• Requiring that an employee with no access to cash handles accounting is an example of Separation of Duties.

• A weak internal controls system represents the Opportunity element of the fraud triangle.

Bank Reconciliation

• Outstanding Checks:

  • Outstanding Check is subtracted from the book balance in a bank reconciliation.

• EFT cash payments:

  • An EFT payment is subtracted from the book balance in reconciliation.

• Interest Revenue:

  • Interest revenue is added to the book balance.

Adjusted Cash Balance Calculation

• Given a cash balance according to trial balance and bank statement, calculate adjusted cash balance considering:

  • EFT payments, outstanding checks, deposits in transit, bank collections, service charges, NSF checks.

  • An example adjustment: Adjusted Cash Balance is $17,540.

Journal Entries in Reconciliation

• For NSF check: Debit Accounts Receivable, Credit Cash.

• For outstanding check: None of the above entries qualify.

Revenue Recognition

• Revenue is recognized at different times based on events (e.g., billing vs receipt).

  • Example event: Revenue recognized when goods are shipped under FOB Shipping Point (Dec 30).

• Under FOB Destination, revenue is recognized upon receipt (Jan 2).

Accounts Receivable Management

• Credit sales impact receivables positively, while Collections decrease them. Write-offs also decrease receivables.

• Uncollectible accounts calculated as a percentage of credit sales (2% of $20,000) leads to a debit entry of $400.

Sales Discounts and Collections

• Sales discounts must be documented correctly (e.g., 3/7, net 21).

• Cash collections can determine the cash reserve through changes in accounts receivable.

Quick Ratio/Acid Test Calculation

• Quick ratio includes Cash and Accounts Receivable (option C).

Notes Receivable

• The initial entry to record a note receivable involves entries of Debit Note Receivable and credits to cash or accounts.

• Interest revenue can be accrued based on percentage calculations (e.g., 8% on $30,000 for 6 months).

Inventory and COGS

• Cost of Goods Sold (COGS) is calculated from inventory evaluations, taking into account purchases and sales.

• Methods for inventory costing include FIFO, LIFO, and Average Cost Method, affecting financial reporting.

Interest Revenue Calculation

• Calculate total interest revenue on notes receivable based on percentage and time, adjusting where necessary based on company practices.