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Accounting 121
Chapter 6, 7, 8
| Term | Definition |
|---|---|
| internal control system | all policies and procedures used to protect assets, ensure reliable accounting, promote efficient operations, and urge adherence to company policies. |
| Sarbanes-Oxley Act (SOX) (part 1) | legislation that created the Public Company Accounting Oversight Board, regulates analyst conflicts, imposes corporate governance requirements, enhances accounting and control disclosures, |
| Sarbanes-Oxley Act (SOX) (part 2) | impacts insider transactions and executive loans, establishes new types of criminal conduct, and expands penalties for violations of federal securities laws |
| public companies | requires managers and auditors of companies whose stock is traded on an exchange to document and verify internal controls |
| PCAOB | Public Company Accounting Oversight Board |
| committee of sponsoring organizations (COSO) (part 1) | Committee of Sponsoring Organizations of the Treadway Commission (or COSO) is a joint initiative of five private sector organizations |
| committee of sponsoring organizations (COSO) (part 2) | dedicated to providing thought leadership through the development of frameworks and guidance on enterprise risk management, internal control, and fraud deterrence. |
| control environment | company structure ethics, and integrity for internal control |
| risk assessment | identify, analyze, and manage risk factors |
| control activities | policies and procedures to reduce risk of loss |
| information & communication | reports to internal and external parties |
| monitoring | regular review of internal control effectiveness |
| principles of internal control | establish responsibilities maintain adequate records insure assets and bond key employees separate recordkeeping from custody of assets divide responsibility for related transactions apply technological controls |
| bonding | against an employee when a company purchases an insurance policy, against theft by that employee |
| collude | two or more people agree in secret to commit fraud |
| separation of duties | job responsibility divided between two or more individuals or departments |
| three risks of e-commerce companies | (1) credit card number theft (2) computer viruses, and (3) impersonation or identity theft |
| limitations of internal controls | (1) human error or fraud and (2) the cost-benefit principle |
| human error | occurs from careless, misjudgment, or confusion |
| human fraud | intentionally defeating internal controls, such as management override, for personal gain |
| triple threat of fraud | opportunity, pressure, rationalization |
| opportunity | internal control weaknesses in a business financial, family, and societal stresses to succeed |
| rationalization | employees justifying fraudulent behavior |
| cost-benefit principle (internal controls) | says that the costs of internal controls must not exceed their benefits |
| pharming | viruses attached to emails and websites monitor keystrokes, when you sign on to financial websites, it steals your passwords |
| phishing | hackers send e-mails to you posing as banks; you are asked for information using fake websites where they steal your passwords and personal data |
| wi-phishing | cybercrooks set up wireless networks hoping you will use them to connect to the web; passwords and data are stolen when you connect |
| bot-networking | hackers send out spam and viruses from your PC |
| typo-squatting | hackers set up websites and addresses similar to legit business; when you make a typo and hit their sites, they infect your PC |
| guidelines for cash handling | (1) handling cash is separate from recordkeeping of cash (2) cash receipts are promptly deposited in a bank (3) cash payments are made by check or electronic funds transfer (EFT) |
| liquidity | refers to a company's ability to pay for its current liabilities |
| liquid assets | cash and similar assets, which can be readily used to pay for liabilities |
| purpose of internal control | policies and procedure managers use to: (1) protect assets (2) ensure reliable accounting (3) promote efficient operations (4) urge adherence to company policies |
| cash | includes currency coins and deposits in bank accounts; includes items that can be deposited in these accounts such as customer checks, cashiers checks, certified checks, and money orders |
| cash equivalents | short-term, highly liquid investment assets meeting two criteria: (1) readily convertible to a known cash amount and (2) close enough to their due date so that their market value will not greatly change |
| goals of cash management | (1) plan cash receipts to meet cash payments when due (2) keep a minimum level of cash necessary to operate |
| treasurer | responsible for cash management |
| cash management strategies | encourage collection of receivables delay payment of liabilities keep only necessary assets plan expenditures invest excess cash |
| cash over and short account (part 1) | also called short and order, an income statement account recording the income effects of cash overages and cash shortages; usually a debit balance and reflects an expense; amount is usually small, it is often reported as part of miscellaneous expenses |
| cash over and short account (part 2) | or as part of miscellaneous revenues if it has a credit balance |
| cash budget | a summary of cash receipts and cash payments; there is enough cash for operations, companies wish to minimize the cash they hold because of its risk of theft and its low return versus other assets |
| voucher system | a set of procedures and approvals designed to control cash payments and the acceptance of liabilities: verifying, approving, and recording liabilities for cash payment; issuing checks for payment of verified, approved, and recording liabilities |
| voucher | accumulated documents in an internal document (file) used to collect information to control cash payments and to ensure that a transaction is properly recorded |
| purchase requisition | a request to purchase merchandise |
| petty cash | a system that avoids writing checks for small amounts of cash or payments for items such as shipping fees, minor repairs, and low cost supplies |
| petty cashier or petty cash custodian | cashes the check |
| petty cashbox | a safe place for the petty cash fund |
| petty cash receipt | payment is made, this document is issued, also called petty cash ticket |
| bank account | used to deposit money for safekeeping and helps control withdrawals |
| signature card | a method of verification by signature to allow persons authorized to write checks on the account |
| deposit ticket | a bank deposit that lists items such as currency, coins, and checks deposited along with the amounts, a receipt is given to the customer |
| check | used to withdrawal money, a document telling the bank to pay a specified amount to a designated recipient |
| payee | the recipient |
| banker (payer) | where the check is drawn; the bank; provides the depositor the checks |
| remittance advice | explaining the payment |
| memo | line for an explanation |
| electronic funds transfer | the electronic transfer of cash from one party to another |
| forged signatures | legitimate checks with fake payer signature |
| forged endorsements | stolen check that is endorsed and cashed by someone other than the payee |
| counterfeit checks | fraudulent checks with fake payer signature |
| altered checks | legitimate check altered (such as changed payee or amount to benefit perpetrator) |
| check kitting | deposit check from one bank account (without sufficient funds) into a second bank account |
| bank statement | bank report on the depositor’s beginning and ending cash balances, and a listing of its changes, for a period |
| canceled checks | checks that the bank has paid and deducted from the depositor’s account |
| other usual deductions | (1) bank service fees (2) check deposited that are uncollectible (3) corrections of previous errors (4) withdrawals through automated teller machines (ATMs) (5) payments arranged in advance by a depositor |
| debit memorandum | notification that the issuer (sender) has debited the recipient’s account in the sender’s records |
| credit memorandum | notification that the issuer (sender) has credited the recipient’s account in the sender’s records. |
| bank reconciliation | report that explains the difference between the book (company) balance of cash and the cash balance reported on the bank statement, for purposes of computing the adjusted cash balance |
| deposits in transit (outstanding deposits) | deposits recorded by the company but not yet recorded by its bank |
| outstanding checks | checks written and recorded by the depositor but not yet paid by the bank at the bank statement date |
| nonsufficient funds (NSF) check | a check that is uncollectible |
| books (balance) | the balance of the (company's) accounting records |
| days' sales uncollected | one measure of how quickly a company can convert its account's receivable into cash; called days' sales in receivables |
| days' sales uncollected (equation) | days' sales uncollected = accounts receivable / net sales x 365 |
| purchase requisition | document listing merchandise needed by a department and requesting it be purchased |
| purchase order | document used by the purchasing department to place an order with a seller (vendor) |
| vendor | seller of goods or services |
| invoice | itemized record of goods prepared by the vendor that lists the customer’s name, items sold, sales prices, and terms of sale |
| vendee | the buyer |
| receiving report | form used to report that ordered goods were received and to describe their quantity and condition |
| invoice approval | document containing a checklist of steps necessary for approving the recording and payment of an invoice; also called check authorization |
| final invoice approval steps (part 1) | requisition check: items on invoice are requested per purchase requisition purchase order check: items on invoice are ordered per purchase order |
| final invoice approval steps (part 2) | receiving report check: items on invoice are received per receiving report invoice check: price: invoice prices are as agreed with the vendor calculations: invoice has no mathematical errors terms: terms are as agreed with the vendor |
| voucher register | journal (referred to as book of original entry) in which all vouchers are recorded after they have been approved |
| check register | another name for a cash payments journal when the journal has a column for check numbers |
| receivable | an amount due from another party |
| accounts receivable | accounts due from customers for credit sales |
| accounts receivable control account | a single accounts receivable account on the general ledger |
| accounts receivable subsidiary ledger | a supplementary record of separate accounts for each customer |
| schedule of accounts receivable | shows the relation of accounts receivable on the accounts receivable general ledger |
| installment accounts/finance receivable | assets the seller reports are amounts owed by customers from credit sales for which payment is required in periodic amounts often require interest, either be current or noncurrent assets, depending on the time of repayment |
| bad debts | uncollectible amounts as an expense account of selling on credit |
| two methods for uncollectible accounts | (1) direct write-off method (2) allowance method |
| direct write-off method | records the loss from an uncollectible amount receivable |
| allowance method | procedure that (a) estimates and matches bad debts expense with its sales for the period and/or (b) reports accounts receivable at estimated realizable value |
| allowance for doubtful accounts | a contra asset account, normal credit balance; increase a Cr., thus decrease a Dr; BS, permanent account |
| realizable value | expected proceeds from converting an asset into cash |
| percent of sales method (equation) | sales x rate = Bad debts expense |
| percentage of receivables method (equation) | accounts receivable x rate = allowance for doubtful accounts |
| aging of receivables method (equation) | accounts receivable (by age) x rates (by age) = allowance for doubtful accounts |
| adjusting entry amount (equation) | = percent (or aging) of receivables - unadj. bal. Cr. or + unadj. bal. Dr. |
| promissory note | a written promise to pay a specified amount, usually with interest, either on demand or at stated future date |
| principal of a note | a specified amount |
| maker of the note | the one who signed the note and promised to pay it |
| payee of the note | the person to whom the note is payable |
| note payable | a liability that a future payment is owed |
| note receivable | an asset with a future payment received |
| interest | the charge for using the money until its due date; to a borrower, interest, interest is an expense; to a lender, it is revenue |
| annual rate | the rate charged for the use of principal for one year |
| computation of interest formula | principal x annual interest rate x time expressed in fraction of year = interest |
| bankers rule | a year treated as having 360 days to simplify interest computations |
| terms of note (period) | a note is the time from the note's (contract) date to its maturity date |
| maturity date of a note | the day the note must be repaid |
| 2 methods of disposing receivables | (1) selling them (2) using them as security for a loan |
| factor | the buyer, acquires ownership of the receivables and receives cash when they come due |
| factoring fee | seller is charged this fee; the seller gets cash quicker and can pass the risks of bad debts to the factor; avoids cost of billing and accounting for receivables |
| pledging | when a company can borrow money with its receivables functioning as security for the loan |
| quality of receivables | the likelihood of collection without loss |
| liquidity of receivables | the speed of collection |
| accounts receivable turnover | measures how often, on average, receivables are collected during the period |
| accounts receivable turnover equation | accounts receivable turnover = net sales / average accounts receivable, net |
| average accounts receivable | beginning balance + ending balance / 2 |
| plant assets | tangible assets used in a company's operations that have a useful life of more than one accounting period; also called plant and equipment; property, plant and equipment (PP&E); or fixed assets |
| four issues in accounting for plant assets | (1) computing the costs of plant assets (2) allocating the costs of plant assets (3) accounting for subsequent expenditures to plant assets (4) recording the disposal of plant assets |
| cost | includes all expenditures necessary to get an asset in place and ready for use |
| land improvements | additions to land and have limited useful lives; include parking lots, driveways, walkways, fences, and lighting systems, and improvements, include costs necessary to make those improvements ready for their intended use |
| lump sum purchase; group, bulk, or basket purchase | plant assets purchased as a group in a single transaction for a lump-sum price |
| relative market (appraised values) | the allocation of cost to the assets acquired in a lump sum purchase |
| depreciation | the process of allocating the cost of a plant asset to expense while it is in use |
| factors in computing depreciation | (1) cost (2) salvage value (3) useful life |
| salvage value | called residual value or scrap value, an estimate of the asset's value at the end of its useful life |
| useful life | a plant asset is the length of time it is used in a company's operations; service life; might not be as long as the assets productive life |
| inadequacy | the inability of a plant asset to meet its demands |
| obsolescence | the process of becoming outdated and no longer used |
| straight line depreciation | charges the same amount to each period of the asset's useful life |
| depreciable cost | also called cost to be depreciated; computed as asset total cost minus salvage value |
| straight-line depreciation equation | cost - salvage value /useful life |
| asset book value, book value | the net balance sheet amount computed as the asset's total cost minus accumulated depreciation |
| straight-line depreciation rate | 100% divided by the number of periods in the asset's useful life |
| straight-line depreciation schedule | (1) straight-line depreciation is the same each period (2) accumulated depreciation is the total of current and prior periods' depreciation expense (3) book value declines each period until it equals salvage value |
| units of production depreciation | charges a varying amount for each period depending on an assets usage |
| depreciation per unit | as the assets total cost minus salvage value and then divide by the total units expected to be produced during its useful life |
| units-of-production depreciation equation | Step 1: Depreciation per unit = cost - salvage value / total units Step 2: Depreciation expense = Depreciation per unit x units produced in period |
| units of production depreciation schedule | (1) depreciation expense depends on unit output (2) accumulated depreciation is the total of current and prior periods' depreciation expense (3) book value declines each period until it equals salvage value |
| accelerated depreciation method | has more depreciation in the early years and less depreciation in later years |
| declining balance method | most common accelerated method; uses a depreciation rate that is a multiple of the straight-line rate |
| double declining balance (DDB) | a common depreciation rate is double the straight-line rate |
| double declining balance (DDB) computation | (1) compute the asset's straight line depreciation rate (2) double the straight-line rate (3) compute depreciation by multiplying this rate by the asset's beginning-period book value |
| double declining balance equation | Step 1: Straight-line rate = 100% / useful life Step 2: Double-declining balance rate = 2 x straight-line rate Step 3: Depreciation expense = Double-declining balance rate x Beginning-period book value |
| modified accelerated cost recovery system (MACRS) | allows straight-line depreciation for some assets but requires accelerated depreciation for most kinds of assets |
| partial depreciation equation | c - sv / estimated life x n / 12 n = number of months the asset is used |
| change in an accounting estimate | revising an estimate of the useful life or salvage value of a plant asset that results from new information, subsequent developments, or improved judgment that impacts current and future periods and financial statement |
| revised straight-line depreciation equation | Book value - revised salvage value / revised remaining useful life |
| impairment | permanent diminishment of an asset’s value; when a permanent decline occurs in the fair value of an asset relative to its book value, the asset is written down to this fair value |
| capitalize | to increase the asset account |
| revenue expenditures | income statement expenditures; costs that do not materially increase the plant asset's life or capabilities; recorded as expenses on the current-period income statement; include ordinary repairs |
| capital expenditures | balance sheet expenditures; costs of plant assets that provide benefits for longer than the current period; they increase the asset on the balance sheet; include betterments |
| ordinary repairs | expenditures to keep an asset in good condition; do not extend an asset's useful life or increase its productivity beyond original expectations |
| betterments or improvements | expenditures that make a plant asset more efficient or productive |
| addition | a special type of betterment |
| extraordinary repairs | expenditures that extend the asset's useful life beyond its original estimate; their costs are debited to the asset account |
| methods to dispose plant assets | (1) discarding (2) sale (3) exchange |
| Accounting for Disposals of Plant Assets (part 1) | 1. Record depreciation up to the date of disposal - this also updates Accumulated Depreciation 2. Record the removal of the disposed asset's account balances - including its accumulated depreciation |
| Accounting for Disposals of Plant Assets (part 2) | 3. Record any cash (and/or other assets) received or paid in the disposal 4. Record any gain or loss - equal to the value of any assets received minus the disposed assets book value |
| discarded plant asset | no longer useful to the company and it has no market value |
| fully depreciated | when accumulated depreciation equals the asset's cost |
| Gain on disposal of equipment | normal credit balance; increase a Cr., thus decrease a Dr.; revenue account; IS; temporary account |
| Loss on Disposal of Equipment | normal debit balance; increase a Dr., thus decrease a Cr.; expense account; IS temporary account |
| natural resources | assets that are physically consumed when used |
| depletion | the process of allocating the cost of a natural resource to the period when it is consumed |
| accumulated depletion | contra asset account; normal credit balance; increase a Cr., thus decrease a Dr.; BS; permanent account |
| depletion equation | Step 1: Depletion per unit = Cost - Salvage value / Total units at capacity Step 2: Depletion expense = depletion per unit x units extracted and sold in period |
| intangible assets | nonphysical assets used in operations that give companies long-term rights or competitive advantages |
| limited life | length of time an asset will be productively used in the operations of a business; also called service life or useful life |
| amortization | process of allocating the cost of an intangible asset to expense over its estimated useful life |
| indefinite life | asset life that is not limited by legal, regulatory, contractual, competitive, economic, or other factors |
| accumulated amortization | contra asset; normal credit balance; increase a Cr., thus decrease a Dr.; BS; permanent account |
| patent | exclusive right granted to its owner to produce and sell an item or to use a process for 20 years |
| copyright | right giving the owner the exclusive privilege to publish and sell a musical, literary, or artistic work during the creator’s life plus 70 years |
| franchises & licenses | rights or privileges that a company or government grants an entity to sell a product or service under specified conditions |
| trademark or trade (brand) name | symbol, name, phrase, or jingle identified with a company, product, or service |
| goodwill | amount by which a company’s (or a segment’s) value exceeds the value of its individual assets less its liabilities |
| lease | property related under contract |
| lessor | property's owner, who grants the lease |
| lessee | one who secures the right to possess and use the property |
| leasehold | the rights the lessor grants to the lessee under the terms of the lease |
| leasehold improvements | rights the lessor grants to the lessee under the terms of a lease |
| research and development costs | processes and innovative products and services requires research and development costs; costs are expensed when incurred; GAAP does not include them with intangible |
| total asset turnover | a measure of a company's ability to use its assets efficiently and effectively |
| total asset turnover equation | total asset turnover = net sales / average total assets |
| average total assets | (current period-end assets + prior period-end total assets)/2 |
| gain on exchange of assets | normal credit balance account; increase a Cr., thus decrease a Dr.; revenue account; temporary account; IS |
| loss on exchange of assets | normal debit balance account; increase a Dr.; decrease a Cr.; revenue account; temporary account; IS |
Created by:
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