Chapter #4

Question 1

segregation of duty

Answer 1

different people for physical custody and record keeping of an asset

Question 2

bank reconciliation

Answer 2

comparisons between a firm´s bank accounting records and bank statement provided by bank
identify reasons for differences

Question 3

diiferent steps of bank reconciliation

Answer 3

make adjustments on banks statement for transactions on firm´s statement
make adjustments on firm´s statement for transactions on bank´s statement

Question 4

what does a bank reconciliation enable a firm to do

Answer 4

detect errors

make adjustments to firm´s books for transactions the bank has recorded

Question 5

adjustments that need to be made in the banks statement for bank reconciliation

Answer 5

deposits in transit are added to balance per bank
outstanding checks are deducted
errors made by bank may require additions or deductions

Question 6

adjustments that need to be made in a firm´s statement for bank reconciliation

Answer 6

collections made by bank for the firm -> added to balance per books
service charges by the bank -> deducted from balance per books
customer´s non-sufficient-funds check -> deducted
interest earned on checking account ->added
errors made by firm -> adduction or deduction

Question 7

what are a firms accounting records for reconciliation called

Answer 7

balance per books

Question 8

what are a bank´s statements for reconciliation called

Answer 8

balance per bank

Question 9

outstanding check

Answer 9

check that has been written but not cleared the bank, yet

Question 10

cash equivalent

Answer 10

highly liquid investment
maturity of 3 months or less
firm can easily convert into a known amount of cash

Question 11

what is accounts receivable

Answer 11

an current asset recorded when a sale is made on account

total amount customer owes to a firm

Question 12

problem with accounts receivable

Answer 12

some amounts are uncollected and costly for the firm

Question 13

net realizable value

Answer 13

amount of accounts receivable that company expects to collect
total - amount that is expected to be uncollectible

Question 14

allowance method

Answer 14

method to estimate amount of uncollectible accounts

Question 15

what are accounts receivable called that cannot be collected and what are theey recorded as

Answer 15

bad debts
bad debt expense (R/E)
allowance for uncollectible accounts (assets)

Question 16

usind the allowance method there are 2 ways of estimating uncollectible accounts expense

Answer 16

percentage of sales method

accounts receivable method

Question 17

on which financil statement does the percentage of sales method rely on

Answer 17

income statement and amount of current period´s credit sale that is unlikely to be collected

Question 18

on which financial statement does the accounts receivable method rely on

Answer 18

balance sheet

Question 19

what is an aging schedule in relation to the accounts receivable method

Answer 19

analysis of the amount owed to a firm by length of time they have been outstanding

Question 20

what kind of expense is the bad debt expense on an income statement

Answer 20

operating expense

Question 21

what is recorded on a balance sheet when a specific account is written off

Answer 21

decrease in accounts receivable (asset)
same increase in allowance for uncollectible accounts (asset)
no recording of bad debt expense

Question 22

what happens if we record more bad debts than estimated

Answer 22

shortage in allowance for uncollectible accounts

Question 23

what happens when we record fewer bad debts than estimated

Answer 23

extra in allowance for uncollectible accounts

Question 24

why is the balance in allowance for uncollectible accounts and bad debts only in the 1st year equal

Answer 24

because of differences in estimated bad debts of previous year and accounts identified as uncollectible in following year

Question 25

direct write off method

Answer 25

method in which bad debts are recorded in same period as identified as uncollectible no estimates are made regarding bad debts not considered GAAP

Question 26

when is direct write off method used

Answer 26

only if firm has so few bad debts that accounts receivable are almost fully collected

Question 27

how are bad debts recorded with the direct write off method

Answer 27

deduct directly from accounts receivable (assets) | as bad debt expense (R/E)

Question 28

how does a retailer avoid the risk of extending credit to their customer

Answer 28

accepting credit cards

Question 29

how do credit cards payment work

Answer 29

retailer submits credit card receipts to credit card company amount retailer receives is not gross amount of sale credit card company deducts % for service it provides

Question 30

what is fee withheld by a credit card company classified as

Answer 30

operating expense

Question 31

promissory note

Answer 31

same as notes receivable | written promise to pay specific amount at specific time

Question 32

maker

Answer 32

maker or firm making promise to pay | responsible for note receivable

Question 33

payee

Answer 33

person or firm receiving money | receiver of note receivable

Question 34

difference between note receivable and accounts receivable

Answer 34

time and interest rate for notes receivable

Question 35

formula for interest rate

Answer 35

interest = principal x rate x time

Question 36

equation of current ratio

Answer 36

current assets/current liabilities

Question 37

what does the accounts receivable turnover ratio tell

Answer 37

how quickly a firm collects its accounts receivable

Question 38

equation for accounts receivable turnover ratio

Answer 38

net credit sales/averge net accounts receivable

Question 39

what are key control to guard assets

Answer 39

segregation of duty clear assignment of responsibilities specific procedure for documentation independent internal verification of data