question

fraud

answer

dishonest act by an employee that results in personal benefit to the employee at a cost to the employer

question

Ethics & Integrity

answer

1. discerning what is right and what is wrong 2. acting on what you have discerned, even at personal cost 3. don't hide the fact that you're doing the right thing

question

fraud triangle

answer

1. opportunity 2. financial pressure 3. rationalization

question

Sarbones-Oxley Act of 2002 (SOX)

answer

Law that requires companies to maintain adequate systems of internal control

question

Internal Control

answer

consists of all related methods and measures adopted within an organization to safeguard its assets, enhance the reliability of its accounting records, increasing efficiency of operations, and ensure compliance with laws and regulations

question

Control Enviroment

answer

responsibility of top management to make it clear that the organization values integrity & that unethical activity will not be tolerated

question

Risk Assesment

answer

Companies must identify and analyze the various factors that create risk for the business and must determine how to manage these risks.

question

Control Activities

answer

to reduce the occurrence of fraud, management must design policies and procedures to address the specific risks faced by the company.

question

Information & Communication

answer

the internal control system must capture and communicate all pertinent information both down and up the organization, as well as communicate information to appropriate external parties.

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Monitoring

answer

Internal control systems must be monitored periodically for their adequacy. Significant deficiencies need to be reported to top management and/or the board of directors

question

Principles of Internal Control Activities

answer

1. establishment of responsibility 2. segregation of duties 3. documentation procedures 4. physical controls 5. independent internal verification 6. human resource controls

question

Establishment of Responsbility

answer

Control is most effective when only one person is responsible for a given task

question

Segregation of Duties

answer

1. different individuals should be responsible for related activities 2. the responsibility for record-keeping for an asset should be separate from the physical custody of that asset

question

Segregation of Record-Keeping From Physical Custody

answer

the custodian of the asset is not likely to convert the asset to personal use when one employee maintains the record of the asset, and a different employee has physical custody of the asset

question

Documentation Procedures

answer

written evidence to support that a transaction has taken place

question

Physical, Mechanical, & Electronic Controls

answer

safeguarding of assets and enhance the accuracy and reliability of the accounting records

question

Independent Internal Verification

answer

1. companies should verify records periodically or on a surprise basis 2. an employee who is independent of the personnel responsible for the information should make the verification 3. discrepancies and exceptions should be reported to a management level that can be appropriate corrective action

question

Internal auditors

answer

company employees who continuously evaluate the effectiveness of the company's internal control systems

question

Other Controls

answer

1. bond employees who handle cash 2. rotate employees' duties and require employees to take vacations 3. conduct through background checks

question

Limitations of Internal Control

answer

1. reasonable assurance 2. human element 3. collusion

question

Reasonable Assurance

answer

rests on the premise that the costs of establishing control procedures should not exceed their expected benefit.

question

Human Element

answer

good system can become ineffective as a result of employee fatigue, carelessness, or indifference

question

Collusion

answer

2 or more individuals acting together to circumvent the internal control

question

Voucher System

answer

network of approvals by authorized individuals, acting independently, to ensure that all disbursements by check are proper

question

Petty Cash Fund

answer

cash fund used to pay relatively small amounts

question

Bank Reconciliation

answer

process of comparing the bank's balance with the company's balance

question

Basic Principles of Cash Management

answer

1. increase the speed of receivables collection 2. keep inventory levels low 3. monitor payment of liabilities 4. plan the timing of major expenditures 5. invest idle cash

question

Explain the applications of internal control principles to cash receipts

answer

Internal controls over cash receipts include: a. designating only personnel such as cashiers to handle cash b. assigning the duties of receiving cash, recording cash, and having custody of cash to different individuals c. obtaining remittance advices for mail receipts; cash register tapes for over-the-counter receipts, and deposit slips for bank deposits d. using company safes and bank vaults to store cash with access limited to authorized personnel, and using cash registers in executing over-the-counter receipts e. making independent daily counts of register receipts and daily comparisons of total receipts with total deposits f. conducing background checks and bonding personnel who handle ash, as well as requiring them to take vacations

question

Cash Budget

answer

1. cash receipts 2. cash disbursements 3. financing

question

Explain the applications of internal control principle to cash disbursements

answer

a. having only specified individuals such as the treasurer authorized to sign checks b. assigning the duties of approving items for payment; paying the items; and recording the payment to different individuals c. using pre-numbered checks and accounting for all checks; with each check supported by an approved invoice; after payment, stamping each approved invoice d. storing blank checks in a safe or vault with access restricted to authorized personnel, and using a machine with indelible ink to imprint amounts on checks e. comparing each check with approved invoice before using the check; and making monthly reconciliations of bank and book balances f. bonding personnel who handle cash, requiring employees to take vacations, and conducing background checks

question

What's the basis principles of cash management?

answer

a. increase the speed of receivables collection b. keep inventory levels low c. monitor the timing of payment of liabilities d. plan timing of major expenditures e. invest idle cash

question

Receivables

answer

amounts due from individuals and companies

question

Accounts Receivable

answer

amounts customers own on account; result from the sale of goods and services

question

Notes Receivable

answer

represent claims for which formal instruments of credit are issued as evidence of the debt

question

Other Receivables

answer

include nontrade receivables such as interest receivable, loans to company officers, advances to employees, and income taxes refundable

question

Accounts Receivable

answer

1. Recognizing accounts receivable 2. valuing accounts receivable

question

Bad Debts Expense

answer

cost associated w/ debts that may be not repaid "uncollectible accounts expense"

question

What impact does bad debt expense have on the Income Statement and Assets?

answer

Income Statement: expenses are increasing, net income goes down Assets: allowances DA is increasing; assets decrease

question

Direct Write-Off Method

answer

when a company determines receivables from a particular company to be uncollectible, it charges the loss to Bad Debts Expense

question

Allowance Method

answer

method by which bad debts are estimated and subsequently recorded as expenses

question

Allowance for Doubtful Accounts

answer

- contra asset to Accounts/notes receivable - normal balance is a "credit"

question

Cash (net) realizable value

answer

net amount a company expects to receive in cash from receivables

question

Allowance Method

answer

1. companies estimate uncollectible accounts receivable and match them against revenues in the same accounting period in which the revenues are recorded 2. Companies record estimated uncollectibles as an increase (a debit) to Bad Debts Expense and an increase (a credit) to Allowance for Doubtful Accounts through an adjusting entry at the end of each period. Allowance for Doubtful Accounts is a contra account to Accounts Receivable 3. Companies debit actual uncollectibles to Allowance for Doubtful Accounts and credit them to Accounts Receivable at the time the specific account is written off as uncollectible

question

Computing Interest

answer

Face Value of Note x Annual Interest Rate x Time In Terms of One Year = Interest

question

Cash Realizable Value

answer

Accounts receivable - allowance for Doubtful Accounts = Cash Realizable Value

question

Bad Debt Expense

answer

cost associated with debts that may not be repaid; uncollective accounts expense

question

Managing accounts receivable involves 5 Steps

answer

1. Determine to whom to extend credit 2. establish a payment period 3. monitor collections 4. evaluate the liquidity of receivables 5. accelerate cash receipts from receivables when necessary

question

Describe the entries to record the disposition of notes receivable?

answer

Notes can be held to maturity, at which time the borrower (maker) pays the face value plus accrued interest and the payee removes the note from the accounts. In many cases, the holder of the note speeds up the conversion by selling the receivable to another party

question

How are Accounts Receivable recognized in accounts?

answer

Accounts receivable are recorded at invoice price. They are reduced by sales returns and allowances. Cash discounts reduce the amount received on accounts receivable

question

Describe the methods used to account for bad debts

answer

the two methods of accounting for uncollectible accounts are the allowance method and the direct writeoff method. Under the allowance method, companies estimate uncollectible accounts as a percentage of receivables. It emphasizes the cash realizable value of the accounts receivable.

question

What are companies concerned with regarding Receivables?

answer

1. recognizing 2. valuing 3. collecting

question

Describe the entries to record the disposition of notes receivable

answer

notes can be held in maturity, at which time the borrower (maker) pays the face value plus accrued interest and the payee removes the note from the accounts. In many cases, however, similar to accounts receivable, the holder of the note speeds up the conversion by selling the receivable to another party. in some situations, the maker of the note dishonors the note (defaults), and the note is written off.

question

Explain the statement presentation of receivables?

answer

Companies should identify each major type of receivable in the balance sheet or in the financial statements. Short-term receivables are considered current assets. Companies report the gross amount of receivables and allowance for doubtful accounts. They report bad debts and service charge expenses in the income statement as operating (selling) expenses, and interest revenue as other revenue and gains in the non-operating section of the statement

question

What are the principles of sound accounts receivable management?

answer

To properly manage receivables, management must: a) determine to whom to extend credit b) establish a payment period c) monitor collections d) evaluate the liquidity of receivables e) accelerate cash receipts from receivables when necessary

question

Identify ratios to analyze a company's receivables

answer

The receivables turnover ratio and the average collection period both are useful in analyzing management's effectiveness in managing receivables. The accounts receivable aging schedule also provides useful information.

question

Describe methods to accelerate the receipt of cash from receivables

answer

If the company needs additional cash, management can accelerate the collection of cash from receivables by selling (factoring) its receivables or by allowing customers to pay with bank credit cards.

question

Aging the accounts receivable

answer

A schedule of customer balances classified by the length of time they have been unpaid.

question

Average Collection Period

answer

The average amount of time that a receivable is outstanding, calculated by dividing 365 days by the receivables turnover ratio.

question

Cash Realizable value

answer

the net amount a company expects to receive in cash from receivables

question

Concentration of credit risk

answer

The threat of nonpayment from a single large customer or class of customers that could adversely affect the financial health of the company.

question

Direct write-off method

answer

A method of account- ing for bad debts that involves charging receivable balances to Bed Debts Expense at the time receivables from a particular company are determined to be uncollectible.

question

Dishonored note

answer

a note that is not paid in full at maturity

question

Factor

answer

a finance company or bank that buys receivables from business for a fee and then collects the payments directly from the customers

question

Maker

answer

the party in a promissory note who is making the promise to pay

question

Payee

answer

the party to whom payment of a promissory note is to be made

question

Promissory note

answer

a written promise to pay a specified amount of money on demand or at a definite time

question

Receivables turnover ratio

answer

a measure of the liquidity of receivables, computed by dividing net credit sales by average net accounts receivables

question

Trade receivables

answer

notes and accounts receivable that result from sales transactions`

question

How does the cost principle apply to plant assets?

answer

The cost of plant assets includes all expenditures necessary to acquire the asset and make it ready for its intended use. Cost is measured by the cash or cash equivalent price paid

question

Depreciation

answer

the process of allocating the cost of plant, property, and equipment to an expense on the income statement in a systematic manner over the life of the asset

question

Plant Assets

answer

resources that have physical substance are used in operations of a business, and are not intended for sale to customers

question

It's important for companies to keep assets

answer

1. in good operating conditions 2. replace worn-out or outdated assets 3. expand its productive assets as needed

question

cost principle

answer

consists of all expenditures necessary to acquire an asset and make it ready for its intended use

question

The cost of land includes:

answer

1. the cash purchase price 2. closing costs such as title and attorney's fees 3. real estate brokers' commissions 4. accrued property taxes and other liens on the land assumed by the purchaser

question

Some advantages of leasing are:

answer

1. reduced risk of obsolescence 2. little or no down payment 3. shared taxed advantages 4. assets and liabilities not reported

question

Depreciation applies to 3 classes of plant assets:

answer

land improvements, buildings, and equipment

question

Depreciation Expense

answer

the expense account use to show the cost of the plant property and equipment being used

question

Obsolescence

answer

process by which an asset becomes out of date before it physically wears out

question

Computing Depreciation

answer

1. cost 2. useful life 3. salvage life

question

Straight-line method

answer

companies expense an equal amount of depreciation each year of the asset's useful life

question

Declining-balance method

answer

computes periodic depreciation using a declining book value

question

Units-of-Activity

answer

useful life is expressed in terms of the total units of production or the use expected from the asset

question

Accelerated-depreciation method

answer

a depreciation method that produces higher depreciation expense in the early years than the straight-line approach

question

Additions ; Improvements

answer

costs incurred to increase the operating efficiency, productive capacity, or expected useful life of a plant asset

question

Amortization

answer

the process of allocating to expense the cost of an intangible asset

question

impairment

answer

a permanent decline in the fair value of an asset

question

franchise

answer

a contractual arrangement under which the franchisor grants the franchise the right to sell certain products, to provide specific services, or to use certain trademarks to trade names, usually within a designated geographic area

question

Intangible Assets

answer

rights, privileges, and competitive advantages that result from the ownership of long-lived assets that do not possess physical substance

question

Licences

answer

operating rights to use public property, granted by a governmental agency to a business

question

Operating Lease

answer

a contractual agreement allowing one party to use the asset of another party; accounted for as a rental by the lessee

question

Ordinary repairs

answer

expenditures to maintain the operating efficiency and expected productive life of the asset

question

Patent

answer

an exclusive right issued by the US Patent Office that enables the recipient to manufacture, sell, or otherwise control an invention for a period of 20 years from the date of the grant

question

Research ; Development costs

answer

expenditures that may lead to patents, copyrights, new processes, and new products; must be expensed as incurred

question

Trademark

answer

a word, phrase, jingle, or symbol that distinguishes or identifies a particular enterprise or product

question

Accumulated Depreciation

answer

contra asset used to show the past and current year depreciation expense accounted for on the plant, property, and equipment

question

Salvage Value

answer

assumed value of an asset at the end of its useful life

question

What are some Intangible Assets?

answer

patents, copyrights, trademarks, tradenames, franchises, licenses, ; goodwill

question

What are the major characteristics of a corporation?

answer

1) separate legal existence 2) limited liability of shareholders 3) transferable ownership rights 4) ability to acquire capital 5) continuous life 6) corporate management 7) government regulations 8) additional taxes

question

Explain the accounting for the purchase of treasury stock

answer

Companies generally use the cost method in accounting for treasury stock. Under this approach, a company debits Treasury Stock at the price paid to reacquire the shares

question

Differentiate preferred stock from common stock?

answer

Preferred stock has contractual provisions that give it priority over common stock in certain areas. Typically, preferred stockholders have a preference as to 1) dividends 2) assets in the event of liquidation

question

Prepare the entries for cash dividends and understand the effect of stock dividends ; stock splits

answer

Companies make entries for dividends at the declaration date and the payment date. At the declaration date the entries for a cash dividend are: debit Cash Dividends and credit Dividends Payable.

question

Identify the items that affect retained earnings?

answer

additions to retained earnings consist of net income. Deductions consist of net loss and cash and stock dividends. In some instances, portions of retained earnings are restricted, making that portion unavailable for the payment of dividends

question

Whats in a comprehensive stockholders' equity section?

answer

In a stockholders' equity section of the balance sheet, companies report paid-in capital and retained earnings ; identify specific sources of paid-in capital. Within paid-in capital, companies show two classifications: capital stock and addition paid-in capital. If a corporation has treasury stock, it deducts the cost of treasury stock from total paid-in capital and retained earnings to determine total stockholders' equity

question

Evaluate a corporation's dividend and earnings performance from a stockholder's perspective?

answer

a company's dividend record can be evaluated by looking at what percentage of net income it chooses to pay out in dividends, as measured by the dividend payout ratio. Earnings performance is measured with the return on common stockholders' equity ratio

question

Charter

answer

a document that describes a corporation's name and purpose, types of stock and number of shares authorized, names of individuals involved in the formation, and the number of shares each individual has agreed to purchase

question

Corporation

answer

a company organized as a separate legal entity, with most of the rights and privileges of a person

question

Cumulative dividend

answer

a feature of preferred stock entitling the stockholder to receive current and unpaid prior-year dividends before common stockholders receive any dividends

question

Declaration Date

answer

the date the board of directors formally authorizes the dividend and announces it to stockholders

question

Dividend

answer

a distribution by a corporation to its stockholders on a pro rata (proportional to ownership) basis

question

Dividends in arrears

answer

preferred dividends that were suppose to be declared but were not declared during a given period

question

Legal capital

answer

the amount of capital that must be retained in the business for the protection of corporate creditors

question

No-par value stock

answer

capital stock that has not be assigned a value in the corporate charter

question

Paid-in capital

answer

the amount stockholders paid in the corporation in exchange for shares of ownership

question

Par value stock

answer

capital stock that has been assigned a value per share in the corporate charter

question

Payout ratio

answer

a measure of the percentage of earnings a company distributes in the form of cash dividends to common stockholders

question

Record Date

answer

the date when the company determines ownership of outstanding shares for dividend purposes

question

Retained Earnings

answer

net income that a company retains in the business

question

Return on common stockholders' equity ratio

answer

a measure of profitability from the stockholders' point of view; computed by dividing net income minus preferred stock dividends by average common stockholder's equity

question

Treasury Stock

answer

a corporation's own stock that has been reacquired by the corporation and is behind held for future use

question

Purpose of Corporations

answer

1) purpose: for profit; not for profit 2) ownership: publicly held; privately held

question

Type of Corporations

answer

C Corporations, S Corporations, LLC, LLP, LP

question

Stockholder Rights

answer

1) Vote: board of directors 2) proportionate dividends: right to proportionate dividends 3) preemptive right: before they bring in new investors, they must discuss with current shareholders to keep their portion of their share 4) residual claim: the company liquidates and you get what your percentage is before all the fees and debts

question

Corporate Stock Categories

answer

1) authorized shares: really big number of shares, you can never increase the amount 2) issued shares: once issued, always issued 3) treasury share: when the company wants to buy back from issued shares 4) outstanding shares: issued - treasury = outstanding shares; shares that aren't owned by the company

question

Why do companies buy back their own stock?

answer

1) give it to the employees 2) purchase other companies/buy large items 3) stock is undervalued 4) increase earnings per share ratio 5) prevent hostile takeover

question

Sections of Stockholders' Equity

answer

1) paid in capital: APIC 2) retained earnings

question

Par Value

answer

lowest amount the company can sell their share for

question

Stated Value

answer

par value except the first word is stated and not par

question

Paid in Capital in Excess of Par Value

answer

"APIC" additional paid in capital

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