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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


Balance Sheet Methods

% of Account Receivable (this is the most likely one)

Aging Method

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.


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.


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

Prepaid Tax

Tax Expense
Prepaid Taxes


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.

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