Accounting Principles - 2
|What are the control activities?|| 1. Segregation of Duties|
2. Proper Procedures for Authorizations
3. Physical control over assets and records
4. Adequate documents and records
5. Independent checks on performance
|Why would earnings management be important?||It's managers way of creatively moving around finances to save money and make things look better, but can only go so far until it becomes fraud.|
|Sarbannes-Oxley: SOX|| 1. Public company accounting oversight board: passed year after enron.|
2. Contraints on auditors: MEMORIZE LIST PG 194
3. Constraints on management: CEO and CFO have to personally signoff on the financial statement.
|What's the difference between internal and external auditors?||Internal auditors are with the company itself, they regulate the financial statements. External auditors are private companies that complete audits, have to be hired to check internal auditors work.|
|1933 Securities Act||Deals more heavily with the IPO of a stock.|
|1934 Securities Exchange Act||Deals with the annual reports, and fraud in the sale of securities|
|"special" price reductions||Show up on journal as final price, are not recorded, essentially if you just give someone a discount because you like them, dont record a discount, just the price they paid.|
|Separation of duties||Make sure that you're separating the people who handle the cash and who records the cash.|
|Prompt Deposits||The deposits are made every day at the end of the day. The prompt responsibility helps make sure that a large amount of cash does not build up and tempt the employees.|
|Pre numbered checks and other documentations||Renumbered checks are much easier to record and keep track of, helps to keep people honest and avoid mistakes.|
|Allowance Method|| It's basically creating an account that allows for bad debt expense and uncollectible. You must make a journal entry to write off an account.|
Making an accurate estimation of what you'll need to have the allowance write-off be.
|Income Statement Methods|| % of Total Sales|
% of Credit sales
VERY SELF EXPLANATORY
|Balance Sheet Methods|| % of Account Receivable (this is the most likely one)|
|Accounts Receivable Turnover Ratio|| Sales Revenue/Average Accounts Receivable|
How fast a company collects its receivables
|Average Collection Period Ratio||365/Accounts Receivable Turnover Ratio|
|Bank Reconciliation: Bank Side||Deposits in transit and Outstanding Checks|
|Bank Reconciliation: Book Side||Bank Service Charge, Interest Paid by Bank, and Errors in check recording|
|Define COGS||Beginning Inventory + Purchases - Ending Inventory = COGS|
|What is Inventory?||A manufacturing firm would list inventory as raw materials, works in process, and then obviously finished goods.|
|Define Work in Process||Raw materials + Production labor + share of overhead|
|Who owns inventory?|| Defined by FOB shipping point or FOB destination|
FOB Shipping Point means that once the materials is out of the hands of the seller and on a shipper, the buyer owns them.
FOB destination is where the seller owns the material until it arrives where its supposed to be.
|Define COGA||Beginning Inventory + Inventory Purchased (or manufactured)|
|Perpetual Inventory System||A system of accounting for inventory in which detailed records of the number of units and the cost of each purchase and sales transaction are prepared throughout the accounting period.|
|Periodic Inventory System||A system of accounting for inventory in which cost of goods sold is determined and inventory is adjusted at the end of the accounting period, not when merchan- dise is purchased or sold.|
|What's the effect of an error in counting ending inventory?|| If inventory is understated then you are overstating COGS and understanding income.|
If inventory is overstated then you are understating COGS and overstating income.
|FIFO|| First In First Out|
Produces the most accurate balance sheet.
GAAP permits either FIFO or LIFO.
FIFO is not changed with either a perpetual or periodic system.
|LIFO|| Last In First Out|
Produces the most accurate income statement.
In periods of rising prices, LIFO produces a higher COGS, it will save on income taxes.
In the perpetual system, only LIFO
|Inventory Turnover Ratio|| COGS/Average Inventory|
If average inventory is not available, use ending inventory.
|Number of day's sales Inventory Ratio||365/Inventory turnover Ratio|
|Lower or Cost of Market|| When using the lower or cost of market and making the inventory journal entry for loss, you use the lower or cost of market of each individual item added up.|
Debit "Loss on write down of inventory" and Credit Inventory for the price difference between the "Total Per Unit Cost" and the "LCM".
|Employee Compensation Journal Entires|| 1. Payroll|
2. Compensated Absences
3. Post Employment Benefits
|Taxes Journal Entries: Sales Tax|| Debit full cash amount received, Credit sales amount thats received, and credit the tax amount|
Sales Tax Payable
|Taxes Journal Entries: PropertyTax|| If paid in advance debit prepaid tax, and credit cash. Then for adjusting entry debit tax expense and credit prepaid taxes|
|Contingencies|| Two conditions must be met for a business to show a loss.|
1. If the loss is probable.
2. If the loss can be estimated at a high level of certainty.
|Other revenues and expenses||Items incurred or earned from activities that are outside of, or peripheral to, the normal operations of a firm.|
|Extraordinary Items||Nonoperating gains and losses that are unusual in nature, infrequent in occurrence, and material in amount.|
|Earnings per share||Income/Shares Outstanding|
|What is a capitalized Expenditure?|| A capitalized expenditure shows as an increase in asset on the balance sheet.|
Expense is reflected on income statement.
R&D: R&D is expended in current year
Advertising: Advertising is expended in current year.
|What is 2/10 n/30?||That means that if the full balance is paid within 10 days, there is a 2% discount, and the full net balance is due within 30 days. No discount if after 10 days.|