Accounting Test 2
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What are Internal Controls?
the methods that a company uses to protect against theft of assets, to enhance the reliability of accounting information, to promote efficient and effective operations, and to ensure compliance with laws and regulations.
What is an Unqualified Audit Opinion?
The Financial statements are presented in accordance with GAAP
What are Qualified Audit Opinion?
the Finicial statements FAIL to follow GAAP or not able to complete needed tests
What is the Form 10-K?
the ANNUAL filing of financial information
What is the Form 10-Q?
the QUARTERLY filing of financial information
What is the Form 8-K?
it reports significant business events
What are the 4 elements of a business?
- 1. Obtain Financing
- 2. Invest in assets
- 3. Generate revenues
- 4. Produce net income
Total Liabilities/Total Assets
- -The % of assets financed by debt
- -A higher ratio means greater financing risk
Asset turnover ratio=?
Sales Revenue/Average Total Assets
-How well assets are used to generate revenues
- -A higher ratio means greater efficieny
Net profit margin ratio=?
Net Income/Sales Revenue
-How well expenses are controlled
- -A higher ratio means better performance
Common Control Principles?
Establish responsibility= assign each task to one one person
Segregate duties= do not make one employee responsible for all parts of a process
Restrict access= do not probide access to assets or info unless it's need to fulfill assigned responsibilities
Document procedures= Prepare documents to show activities that have occured
Idepenedently verify= Check others' work
The bank may not know about..
- 1. Errors made by the bank
- 2. Time lags: A. Deposits that you made recently. B. Checks that you wrote recently
You may not know about..
- 1. Interest the bank has put into your account
- 2. Electronic funds transfer (EFT)
- 3. Service charges taken out of your account
- 4. Customer checks you deposited but that bounced
- 5. Errors made by you
Where does Unsold Inventory go?
- Balance Sheet
- As an asset for what the COMPANY paid for it
Where does Sold Inventory go?
- Income Statement
- Cost of Goods Sold (expense)
What is the Perpetual Inventory System?
Every time inventory is bought, sold, or retured it is updated instantly.
Continous Tracking- CAN estimate shrinkage
What is the Periodic Inventory System?
The inventory records are updated at the end of the accounting period.
No-up-to-date Records- CAN'T estimate shrinkage.
What does 2/10, n/30 mean?
2- Discount % offered
10- Number of day in discount period
n- "Net" sale (after returns and allowance)
30- Maximum credit period (# of days to pay it all)
Gross Profit % =
Gross Profit / Net Sales X 100
Net Sales - Cost of Goods Sold
What are the Contra Revenue Accounts?
Sales Returns and Allowances Sales Discounts
How do you get Ending Inventory?
- Beg. Inventory
- -Goods Sold
- =Ending Inventory
LIFO, FIFO, Weighted Average
Inventory Turnover Ratio=
Cost of Goods Sold / Average Inventory
High Ratio is a faster turnover
Days to Sell=
365 / Inventory Turnover Ratio
High # means longer time to sell
What do you debit and credit when you record sales on account?
- Dr- Accounts Receivable
- Cr- Sales Revenue
Record estimate of bad debts..
- Dr. Bad Debt Expense
- Cr- Allowance for Doubtful Accounts
Methods for Estimating Bad Debts..
Percentage of Credit Sales Method- Simper to Apply
Aging of Accounts Receivable- More Accurate
Precentage of Credit Sales Method
- Net credit sales for the period
- X Historical bad debt loss rate
- = Bad debt expense of the period
Total estimated cost DOESN'T get recorded (uncollectiable cost)
DO record the # that gets you from where you are to where you need to be (AJE)
What do you debit and credit in a "write-off"?
Interest= Principal X Interest Rate X Time
Receivable Turnover Ratio=
Net Sales Revenue / Average Net Receivables
Most useful in analyzing a company's ability to control expenses?
Net profit margin ratio
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