Flashcards in Chapter 7 Deck (15):
What is the purpose of internal control?
1. To encourage adherence to company policies and procedures
2. To promote operational efficiency
3. To minimize errors and theft
4. To enhance the reliability and accuracy of accounting data
What is the objective of cash disbursements internal control?
1. To prevent unauthorized payments
2. To ensure that disbursements are recorded properly
What are important elements of internal control for cash disbursements?
1. All disbursements should be made by check
2. All expenditures should be authorized
3. Checks should be signed only by authorized individuals
What is restricted cash?
Cash that is restricted in some way and not available for current use
What is a compensating balance?
An amount that compensates the bank for granting the loan or extending the line of credit
What is a trade discount?
A percentage reduction from the list price or quantity discount to large customers
What are cash discounts?
A reduction in the amount to be paid by a credit customer if paid within a specified period of time. It is intended to provide incentive for quick payment.
What are the two methods of cash discounts?
The gross and net method
What is the gross method?
Records a discount not taking by a customer as part of sales revenue. Sales revenue is only reduced if seller takes the discount
What is the net method?
Records a discount not taking by a customer as part of interest revenue. Sales revenue is only reduced if seller takes the discount
Special price reduction that incentives customers to keep a product rather than returning it is called what?
What is the income statement approach to estimating bad debt?
Estimates bad debt expense as a percentage of each period's net credit sales
What is the balance sheet approach to estimating bad debt?
Estimates bad debt expense by estimating the net realizable value of accounts receivable
What is secured borrowing?
Pledges accounts receivable as collateral for a loan