Created by DarkHiggsBoson

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authorization

The approval of certain transactions and activities.

bonding

The process of carefully checking an employee's

background and insuring the company against theft by that
person. Bonding does not guarantee against theft, but it
does prevent or reduce loss if theft occurs.

check authorization

A form completed by the accounting department and

attached to the supporting documents (invoice, purchase
order, and receiving report) if they match up.

control activities

The policies and procedures management puts in place to

see that its directions are carried out.

control environment

Created by management's overall attitude, awareness, and

actions. It encompasses a company's ethics, philosophy and
operating style, organizational structure, method of assigning
authority and responsibility, and personnel policies and
practices.

imprest system

A way of controlling a cash fund and cash advances. A

petty cash fund is established for a fixed amount. A voucher
documents each cash payment made from the fund. The
fund is periodically reimbursed, based on the vouchers, by
the exact amount necessary to restore its original cash
balance.

Alphabetical

information and communication

Pertains to the accounting system established by

management - to the way the system gathers and treats
information about the company's transactions and how it
communicates individual responsibilities within the system.
Employees must understand exactly what their functions are.

internal control

A process designed by a company to establish the reliability

of the accounting records and financial statements in
accordance with generally accepted accounting principles
(GAAP) and to ensure that the company's assets are
protected.

invoice

A document that shows the quantity of goods delivered,

describes what they are, and lists the price and terms of
payment. If all goods cannot be shipped immediately, the
invoice indicates the estimated date of shipment for the
remainder.

monitoring

Management's regular assessment of the quality of internal

control, including periodic review of compliance with all
policies and procedures.

periodic independent verification

Someone other than the persons responsible for the

accounting records and assets should periodically check the
records against the assets.

petty cash fund

A fund maintained to pay for small, miscellaneous

expenditures.

petty cash voucher

A written authorization for each expenditure. On each petty

cash voucher, the custodian enters the date, amount, and
purpose of the expenditure. The person who receives the
payment signs the voucher.

physical controls

Controls that limit access to assets.

physical inventory

This process involves an actual count of all merchandise on

hand. It can be a difficult task because it is easy to
accidentally omit items or count them twice. A physical
inventory must be taken under both the periodic and
perpetual inventory systems.

purchase order

An order that is prepared by the purchasing department and

sent to the vendor.

purchase requisition

A formal request for a purchase that is approved by the

head of the requesting department and forwarded to the
purchasing department.

receiving report

When goods reach a company's receiving department, an

employee notes the quantity, type of goods, and their
condition on a receiving report.

risk assessment

Involves identifying areas in which risks of loss of assets or

inaccuracies in accounting records are high so that adequate
controls can be implemented.

separation of duties

No one person should authorize transactions, handle assets,

or keep records of assets.

average-cost method

Inventory is priced at the average cost of the goods

available for sale during the accounting period. Average cost
is computed by dividing the total cost of goods available for
sale by the total units available for sale.

consignment

Merchandise that the owner (the consignor) places on the

premises of another company (the consignee) with the
understanding that payment is expected only when the
merchandise is sold and that unsold items may be returned
to the consignor.

cost flow

the association of costs with their assumed flow in the

operations of a company. The assumed cost flow may or
may not be the same as the actual goods flow.

first-in, first-out (FIFO) method

The costs of the first items acquired should be assigned to

the first items sold. The costs of the goods on hand at the
end of the period are assumed to be from the most recent
purchases, and the costs assigned to goods that have been
sold are assumed to be from the earliest purchases.

goods flow

The actual physical movement of goods in the operations of

a company.

gross profit method

Assumes that the ratio of gross margin for a business

remains relatively stable from year to year. The gross profit
method is used in place of the retail method when records of
the retail prices of beginning inventory are not available.

inventory cost

The price paid to acquire an asset. It includes invoice price

less purchase discounts, freight-in, including insurance in
transit, applicable taxes, and tariffs.

just-in-time operating environment

An environment in which goods arrive just at the time they

are needed.

last-in, first-out (LIFO) method

The costs of the last items purchased should be assigned to

the first items sold and that the cost of ending inventory
should reflect the cost of the goods purchased earliest.

LIFO liquidation

When sales have reduced inventories below the levels set in

prior years, it is called a LIFO liquidation - that is, units sold
exceed units purchased for the period.

lower-of-cost-or-market (LCM) rule

A rule that requires that the inventory be written down to the

lower value and that a loss be recorded.

to market

Another way of saying "to its current replacement cost".

retail method

Estimates the cost of inventory by using the ratio of cost to

retail price.

specific identification method

Identifies the cost of each item in ending inventory. It can be

used only when it is possible to identify the units in ending
inventory as coming from specific purchases.

supply-chain management

A company uses the internet to order and track goods that it

needs immediately.

days' inventory on hand

Average number of days taken to sell inventory on hand.

[Days in Year]/[Inventory Turnovers]

inventory turnover

Number of times a company's average inventory is sold

during an accounting period.
[Costs of Goods Sold]/[Average Inventory]

What happens to Cost of Goods Sold and Income before

taxes in year 1 of overstating the ending inventory?

The Cost of Goods Sold is understated and the Income

before taxes is overstated.

What happens to Cost of Goods Sold and Income before

taxes in year 2 of overstating the ending inventory?

The Cost of Goods Sold is overstated and the Income

before taxes is understated.

What happens to Cost of Goods Sold and Income before

taxes in year 1 of understating the ending inventory?

The Cost of Goods Sold is overstated and the Income

before taxes is understated.

What happens to Cost of Goods Sold and Income before

taxes in year 2 of understating the ending inventory?

The Cost of Goods Sold is understated and the Income

before taxes is overstated.

In periods of rising prices, this inventory costing method

results in the highest cost of goods sold

Last-in, first out (LIFO)

In periods of rising prices, this inventory costing method

results in the highest income.

First-in, first out (FIFO)

In periods of rising prices, this method results in the lowest

ending inventory cost.

Last-in, first out (LIFO)

In periods of decreasing prices, this method results in neither

the highest inventory cost nor the lowest income.

Average cost

In periods of decreasing prices, this method results in the

lowest income.

First-in, first out (FIFO)

In periods oof decreasing prices, this method results in the

highest cost of goods sold.

First-in, first out (FIFO)

Which inventory costing method matches recent costs with

recent revenues?

Last-in, first out (LIFO)

Which inventory costing method assumes that each item of

inventory is identifiable?

Specific identification

Which inventory costing method results in the most realistic

balance sheet evaluation?

First-in, first out (FIFO)

Which inventory costing method results in the lowest net

income in periods of deflation?

First-in, first out (FIFO)

Which inventory costing method results in the lowest net

income in periods of inflation?

Last-in, first-out (LIFO)

Which inventory costing method matches the oldest costs

with recent revenues?

First-in, first-out (FIFO)

Which inventory costing method results in the highest net

income in periods of inflation?

First-in, first-out (FIFO)

Which inventory costing method results in the highest net

income in periods of deflation?

Last-in, first-out (LIFO)

Which inventory costing method tends to level out the

effects of inflation?

Average-cost

Which inventory costing method is unpredictable as to the

effects of inflation?

Specific identification

Is it good or bad for a retail store to have a large inventory?

It is both good and bad for a retail store to have a large

inventory. It is good from the standpoint that customers
want a large selection and they want the items to be
available. It is bad from the standpoint that it is more costly
to have a large inventory than a small inventory. In addition
to storage and insurance costs, there is the cost of interest
on money borrowed to finance the inventory.

Which is more important from the standpoint of inventory

costing: the flow of goods or the flow of costs?

The flow of costs is more important because inventory

costing ignores the actual flow of goods and assumes a flow
of costs.

Why is a misstatement of inventory one of the most common

means of financial statement fraud?

For one thing, the value put on inventory has direct dollarfor-dollar effect on net income. For another, it is relatively
easy to falsify the value placed on the ending inventory and
to cover up the falsification.

Given that the LCM rule is an application of the

conservatism convention in the current accounting period, is
the effect of this application also conservative in the next
period?

It is probably not. A reduction in the current period ending

inventory amount, which results in a lower income, will
cause the beginning inventory in the next period to be
smaller and will thus increase income in that period.

Under what condition would all four methods of inventory

pricing produce exactly the same results?

The four methods would produce the same results if all the
units of a product had an identical cost.

Under the perpetual inventory system, why is the cost of

goods sold not determined by deducting the ending
inventory from goods available for sale, as it is under the
periodic method?

Under the perpetual inventory method, the cost of goods

sold and the inventory balance are determined after every
transaction.

Which of the following methods do not require a physical

inventory system, perpetual inventory method, retail retail
method, or gross profit method?

In theory, the perpetual inventory method does not require

physical inventory because the amount of inventory is
adjusted after each transaction.In practice, a good control is
to periodically take physical inventory to verify the balance
in the records. The gross profit method does not require a
physical inventory to match against the estimated inventory
to determine the amount or loss which a physical inventory
is not possible. Both the periodic and the retail methods
require physical inventories.

accounts receivable

The short-term financial assets of a wholesaler or retailer

that arise form sales on credit.

accounts receivable aging method

The ending balance of Allowance for Uncollectible accounts

is determined directly through an analysis of accounts
receivable. The difference between the account determined
to be uncollectible and the actual balance of Allowance for
Uncollectible Accounts is the expense for the period.

aging of accounts receivable

The process of listing each customer's receivable account

according to the due date of the account. If the customer's
account is past due, there is a possibility that the account
will not be paid. The possibility increases as the account
extends beyond the due date.

Allowance for Uncollectible Accounts

A contra account that is deducted from accounts receivable.

allowance method

Losses form bad debts are matched against the sales they
help to produce. It relies on an estimate of uncollectible
accounts, but unlike the direct-charge-off method, it is in
accord with the matching rule.

bank reconciliation

The process of accounting for the difference between the

balance on a company's bank statement and the balance in
its Cash account. The process involves making additions to
and subtractions from both balances to arrive at the
adjusted cash balance.

cash

Currency and coins on hand, checks, and money orders

from customers, and deposits in checking and savings
accounts. Cash is the most liquid of all assets and the most
readily available to pay debts.

cash equivalents

Investments that have a term of 90 days or less when they

are purchased. The funds revert to cash quickly they are
treated as cash on the balance sheet.

compensating balance

A minimum account that a bank requires a company to keep

in its bank account as part of a credit-granting arrangement.

contingent liability

A potential liability that can develop into a real liability if a

particular event occurs.

direct charge-off method

A method of recognizing a loss required in computing

taxable income. It involves recognizing a loss at the time
when it is determined that the account is uncollectible by
reducing Accounts Receivable and increasing Uncollectible
Accounts Expense. It is not in accord with the matching
rule.

discounting

A method of financing receivables involving selling

promissory notes, held as notes receivable, to a financial
lender, usually a bank.

dishonored note

A note that the maker has not paid at the maturity of the
note.

duration of a note

The time between a promissory note's issue date and its

maturity date.

electronic funds transfer (EFT)

A method of conducting business transactions that does not

involve the actual transfer of cash. A company electronically
transfer's cash from its bank to another company's bank.

factor

Another entity in which accounts receivable are sold or

transferred to in order for a company to raise funds.

factoring

The sale of accounts receivable.

installment accounts receivable

Allows the buyer to make a series of time payments.

Constitutes a significant portion of accounts receivable.

interest

The cost of borrowing money or the return on lending

money, depending on which one is the borrower or lender.
The cost of using money for a specific period.

maturity date

The date on which the promissory note must be paid. This

date must be stated on the note or be determinable from the
facts stated on the notes.

maturity value

The total proceeds of a promissory note - face value plus

interest - at the maturity date.

notes payable

An account in the current liabilities section of the balance

sheet in which a maker includes all the promissory notes it
owes that are due in less than one year.

notes receivable

An account in the current assets section of the balance sheet

in which a payee includes all the promissory notes it holds
that are due in less than one year.

percentage of net sales method

Determines the amount of uncollectible accounts expense

for the year by using the percentage losses from
uncollectible accounts from previous years. Unlike the direct
charge-off method, the percentage of net sales method
matches revenues with expenses.

promissory note

An unconditional promise to pay a definite sum of money in

demand or at a future date. The person or company that
signs the note and thereby promises to pay is the maker of
the note. The entity to whom payment is made is the payee.

securitization

A company groups its receivables in batches and sells them

at a discount to companies and investors. When the
receivables are paid, the buyers get the full amount; their
profit depends on the amount of the discount.

short-term financial assets

Receivables that result from extending credit to individual

customers or to other companies. Major types include cash,
accounts receivable, and notes receivable.

trade credit

Another phrase for accounts receivable.

uncollectible accounts

Accounts of customers who cannot or will not pay. Also

called bad debts.

days' sales uncollected

Average number of days a company must wait to receive

payment for credit sales or to collect accounts receivable.
[Days in Year]/[Receivable Turnover]

receivable turnover

Average number of times receivables are turned into cash

during an accounting period.
[Net Sales]/[Average Accounts Receivable]

commercial paper

Unsecured loans that are sold to the public by companies

with excellent credit ratings as a way of borrowing shortterm funds.

commitment

A legal obligation that does not meet the technical

requirements for recognition as a liability and so is not
recorded. The most common examples are purchase
agreements and leases.

compound interest

The interest cost for two or more periods when after each
period, the interest earned in that period is added to the
amount on which interest is computed in future periods.

Is tax dispute with the IRS a contingent liability or a

commitment?

contingent liability

Is a long-term lease agreement a contingent liability or a

commitment?

commitment

Is an agreement to purchase goods in the future a contingent

liability or a commitment?

commitment

Is a potential lawsuit over a defective product a contingent

liability or a commitment?

contingent liability

contingent liability

Not an existing obligation, but rather a potential liability

because it depends on a future event arising out of a past
transaction. Contingent liabilities often include lawsuits,
income tax disputes, discounted notes receivable,
guarantees of debt, and failure to follow government
regulations.

current liabilities

Debts and obligations that a company expects to satisfy

within one year of its normal operating cycle, whichever is
longer. These liabilities are normally paid out of current
assets or with cash generated by operations.

Is a Bank Loan a definitely determinable liability or an

estimated liability?

definitely determinable liability

Is Dividends Payable a definitely determinable liability or an

estimated liability?

definitely determinable liability

Is Product warranty liabilities a definitely determinable

liability or an estimated liability?

estimated liability

Is Interest payable a definitely determinable liability or an

estimated liability?

definitely determinable liability

Is Income taxes payable a definitely determinable liability or

an estimated liability?

estimated liability

Is Vacation pay liability a definitely determinable liability or

an estimated liability?

estimated liability

Is Notes payable a definitely determinable liability or an

estimated liability?

definitely determinable liability

Is Property taxes payable a definitely determinable liability

or an estimated liability?

estimated liability

Is Commercial paper a definitely determinable liability or an

estimated liability?

definitely determinable liability

Is Gift certificate liability a definitely determinable liability or

an estimated liability?

definitely determinable liability

most common definitely determinable liabilities

Accounts Payable, Bank Loans and Commercial Paper,

Notes Payable, Accrued Liabilities, Dividends Payable,
Sales and Excise Taxes Payable, Current Portion of LongTerm Debt, Payroll Liabilities, and Unearned Revenues.

definitely determinable liabilities

Current liabilities that are set by contract or statute and that

can be measured exactly. The problems in accounting for
these liabilities are to determine their existence and amount
and to see that they are recorded properly.

estimated liabilities

Definite debts or obligations whose exact dollar amount

cannot be known until a later date. Because there is no
doubt that a legal obligation exists, the primary accounting
problem is to estimate and record the amount of the liability.

most common estimated liabilities

Income Taxes Payable, Property Taxes Payable,

Promotional Costs, Product Warranty Liability, Vacation
Pay Liability.

future value

The amount an investment will be worth at a future date if

invested at compound interest.

line of credit

An arrangement with a bank that allows a company to

borrow funds when they are needed to finance current
operations.

long-term liabilities

Liabilities due beyond one year or beyond the normal

operating cycle.

ordinary annuity

A series of receipts or payments equally spaced over time.

present value

The amount that must be invested today at a given rate of

interest to produce a given future value.

salaries

Compensation for employees at a monthly or yearly rate.

simple interest

The interest cost for one or more periods when the principal
sum - the amount on which interest is computed - stays the
same from period to period.

time value of money

Refers to the costs or benefits derived from holding or not

holding money over time.

unearned revenues

Advance payments for goods and services that a company

must provide in a future accounting period. It then
recognizes the revenue over the period in which it provides
the products or services.

wages

Compensation for employees at an hourly rate.

days' payable

Average number of days a company takes to pay accounts

payable.
[Days in Year]/[Payables Turnover]

payables turnover

Average number of times a company pays its accounts

payable in an accounting period.
[Cost of Goods Sold +/- Change in Inventory]/[Average
Accounts Payable]

bonus

The excess of payment over the interest purchased by a

new investor. The original partners receive a bonus because
the entity is worth more as a going concern than the fair
market value of the net assets would otherwise indicate.

dissolution

Occurs whenever there is a change in the original

association of partners. When a partnership is dissolved, the
partners lose their authority to continue the business as a
going concern. The business operation is not necessarily
ended or interrupted. It does mean - from a legal and
accounting standpoint - that the separate entity ceases to
exist.

joint venture

An association of two or more entities for the purpose of

achieving a specific goal, such as the manufacture of a
product in a new market.

limited life

A partnership may be dissolved when a new partner is

admitted; when a partner withdraws, goes bankrupt, is
incapacitated, retires, or dies; or when the term of the
partnership agreement are met.

limited partnership

A special type of partnership that confines the partner's

potential loss to the amount of his or her investment.

liquidation

The process of ending the business - of selling enough assets

to pay the partnership's liabilities and distributing any
remaining assets among the partners.

mutual agency

Each partner is an agent of the partnership within the scope

of the business. Any partner can bind the partnership to a
business agreement as long as he or she acts within the
scope of the company's normal operations.

partners' equity

The Owner's Equity in a partnership. In accounting for

partner's equity, it is necessary to maintain separate Capital
and Withdrawals accounts for each partner and to divide
the income and losses of the company among the partner.

partnership

"an association of two or more persons to carry on as coowners of a business for profit." as defined by the Uniform
Partnership Act.

partnership agreement

Two or more competent people simply agree to be partners

in a common business purpose. The agreement need not
necessarily be in writing.

unlimited liability

Each partner is personally liable for all the debts of the

partnership.

What is the correct treatment of interest income in a bank

reconciliation?

Add to balance per books.

What is the correct treatment of outstanding checks in a

bank reconciliation?

Deduct from balance per bank.

What is the correct treatment of a check written for $89,

but recorded as $98 in the books in a bank reconciliation?

Add to balance per books.

What is the correct treatment of a customer's NSF check in

a bank reconciliation?

Deduct form balance per books.

What is the correct treatment of a note receivable collected

by the bank in a bank reconciliation?

Add to balance per books.

What is the correct treatment of a deposit made for $70,

but recorded as $700 in the books in a bank reconciliation?

Deduct form balance per books.

What is the correct treatment of a bank check-printing

charge in a bank reconciliation?

Deduct form balance per books.

What is the correct treatment of a check written for $52,

but recorded as $25 in the books in a bank reconciliation?

Deduct form balance per books.

What is the correct treatment of deposits in transit in a bank

reconciliation?

Add to balance per bank.

What is the correct treatment of a bank fee for collection on

a note receivable in a bank reconciliation?

Deduct form balance per books.

When is a physical inventory usually taken?

At the end of the fiscal year.

What internal control activity would a very small company

have the most difficulty in implementing?

Separation of duties

Goods held on consignment are what?

...

Who prepares the check when a company makes a

payment for goods or services?

the company's treasurer

Which is an example of a commitment? Revenue received in

advance, lease, a dividend payable, or a note payable?

Lease

Which account would not appear as an asset on a

manufacturer's balance sheet? Finished goods, raw
materials, factory overhead, or work in process?

Factory overhead

Which of the following documents would not originate with

the purchasing company? Purchasing report, purchase
order, check, or invoice?

Invoice

Which of the following attributes of internal control would

be violated if the chief accounting clerk wrote checks to pay
accounts payable? Separation of duties, sound personnel
procedures, adequate design of documents, or periodic
independent verification?

Separation of duties

Which of the following most likely is an estimated liability?

Unearned revenues, current portion of long-term debt,
payroll, liabilities, or liability for vacation pay?

Liability for vacation pay

Which of the following documents remains with the

originating company in a purchase transaction? Invoice,
purchase order, check, or purchase requisition?

Purchase requisition

What should a partnership agreement include? Each

partner's duties, the method of allocating profits and losses,
the purpose of the business, or all of these?

All of these.

Before a check authorization is issued, the following

documents must be in agreement except for what?
Remittance advice, purchase order, receiving report, or
invoice?

Remittance report

Applying the lower-of-cost-or-market rule follows which

accounting convention?

Conservatism

A good system of internal control is designed to achieve

each of the following, except what? Efficiency of operations,
compliance with relevant laws and regulations, attainment of
target sales, or reliability of financial reporting?

...

A fur dealer would probably use what inventory method?

Specific identification

What makes a limited partnership different from a regular

one?

All but the general partners have limited liability

The ability of a partner to enter into a contract on behalf of

all partners is called what?

mutual agency

Where is the most appropriate place to look for

relationships among partners?

In the partnership agreement

The Sarbanes-Oxley Act of 2002 requires all of the

following to certify a public company's system of internal
control, except for what? The CEO, the stockholders, the
CFO, or the auditors?

the stockholders

Which of the following is not a primary concern of internal

control? Accuracy of accounting records, fairness of
financial statements, efficiency of company operations, or
safeguarding assets?

...

Which of the following is a contingent liability? Disputed

additional tax assessment, property tax liability, note
payable with interest included in face amount, or excise tax
payable?

Disputed additional tax assessment

A partner will not bind the partnership to an outside

purchase contract when what happens?

The item purchased is not within the normal scope of the

business.

Heidi wishes to deposit an amount into her savings account

that will enable her to withdraw $800 per year for the next
four years. She should deposit $800, multiplied by what?

The present value of an ordinary annuity factor.

A contingent liability is best described as what? A current

liability, a potential liability, a probable liability, or an
estimated liability?

Potential liability

When a partner invests assets other than cash into a

partnership, those assets should be listed on the balance
sheet at what?

...

You have just received notice that Agnes Fischer, a

customer of yours with an Accounts Receivable balance of
$200, has gone bankrupt and will not be making any future
payments.Assuming you use the allowance method, what
journal entry should be made?

debit Allowance for uncollectible Accounts and credit

Accounts Receivable.

Which of the following documents would be prepared (by a

buyer of goods) after the others? the purchase order,
receiving report, check, or purchase requisition?

...