exam 2

Question 1

errors

Answer 1

accidental errors in recording transactions or applying accounting
rules

Question 2

fraud

Answer 2

a person intentionally deceives another person for personal gain or
to damage that person

Question 3

occupational fraud

Answer 3

the use of one’s occupation for personal
enrichment through the deliberate misuse or misapplication of the
employer’s resources

Question 4

what are the 3 pillars of fraud

Answer 4

opportunity, motivation, rationalization

Question 5

internal controls

Answer 5

attempt to eliminate the opportunity element of
fraud

Question 6

components of internal controls

Answer 6

monitoring, control activities, risk assessment, control environment, information & communication

Question 7

preventative controls

Answer 7

separation of duties, physical controls, proper authorization, employee management, e-commerce controls

Question 8

detective controls

Answer 8

reconciliations, performance reviews, audits

Question 9

collusion

Answer 9

two or more people acting in coordination to
circumvent internal controls

Question 10

cash includes…

Answer 10

coins and currency, checks received, balances in savings/checking accounts, credit/debit card sales, cash equivalents

Question 11

cash equivalents

Answer 11

defined as investments that mature within three
months from the date of purchase

Question 12

bank reconciliation

Answer 12

matches the balance of cash in the bank with the balance
of cash in the company’s own records

Question 13

timing differences

Answer 13

for cash occur when the company records transactions before
or after the bank records the same transactions

Question 14

reconciling the bank account steps:

Answer 14

1. reconcile the banks cash balance 2. reconcile the company’s cash balance 3. update the company’s cash account by recording step 2

Question 15

deposits outstanding

Answer 15

cash receipts of the company that have
not been added to the bank’s record of the company’s balance

Question 16

checks outstanding

Answer 16

checks the company has written that
have not been subtracted from the bank’s record of the
company’s balance

Question 17

petty cash fund

Answer 17

small amount of cash kept to pay for minor purchases

Question 18

credit sales

Answer 18

transfer goods or services to a customer today while
bearing the risk of collecting payment from that customer in the future

Question 19

accounts receivable

Answer 19

amounts owed to a company by its customers from the sale of goods or services on account

Question 20

revenue

Answer 20

credit sale revenue is recorded immediately once goods or services are provided

Question 21

non-trade receivables

Answer 21

receivables that originate from sources other
than customers (tax refund claims, interest receivable and loans by the company to other entities)

Question 22

notes receivable

Answer 22

formal credit arrangements evidenced by written debt
instruments (or “notes”)

Question 23

net revenues

Answer 23

total revenue - amounts for returns, allowances & discounts

Question 24

trade discount

Answer 24

reduction in list price of a product or service to provide an incentive (sale is recorded at discounted rate)

Question 25

sales return

Answer 25

customer returns previously purchased goods, cash refund for cash sales or reduce balance of accounts receivable for sale on account

Question 26

sales allowance

Answer 26

customer does not return goods, refund cash or reduce balance of accounts

Question 27

contra revenue accounts

Answer 27

sales returns & sales allowances

Question 28

contra revenue

Answer 28

reduction of revenue

Question 29

allowance method GAAP

Answer 29

companies estimate future uncollectible accounts and report in the current year

Question 30

recording uncollectible accounts

Answer 30

report allowance in the asset section of balance sheet but it represents a reduction in the balance of accounts receivable

Question 31

net accounts receivable

Answer 31

difference between total accounts receivable and the allowance for uncollectible accounts

Question 32

uncollectible (write off)

Answer 32

reduces the balance of Accounts Receivable. reduces the balance of the contra account (Allowance for Uncollectible Accounts)

Question 33

aging method

Answer 33

the older the account, the less likely it is to be collected

Question 34

direct write-off method (not GAAP)

Answer 34

bad debts are written off only at the time they actually become uncollectible

Question 35

notes recievable

Answer 35

formal receivable note (current or noncurrent assets)

Question 36

inventory (current asset)

Answer 36

items a company intends for sale to customers in the ordinary course of business

Question 37

gross profit

Answer 37

net revenues - cost of goods sold

Question 38

operating income

Answer 38

gross profit - operating expenses

Question 39

income before income taxes

Answer 39

operating income + nonoperating revenues - nonoperating expenses

Question 40

net income

Answer 40

all revenues - all expenses

Question 41

specific identification

Answer 41

matches each unit of inventory with its actual cost

Question 42

FIFO

Answer 42

assumes first unit purchases are the first ones sold

Question 43

LIFO

Answer 43

assumes last units purchased are the first sold

Question 44

weighted-average cost

Answer 44

assumes each unit of inventory has a cost equal to the weighted-average unit cost of all inventory items

Question 45

weighted avg formula

Answer 45

cost of goods available for sale / number of units available for sale

Question 46

LIFO conformity rule

Answer 46

Companies that use LIFO for tax reporting must also use LIFO for financial reportingpe

Question 47

perpetual inventory system

Answer 47

Maintains a continual record of inventory on hand and inventory purchased and sold

Question 48

periodic inventory system

Answer 48

does not continually record inventory amounts, calculates balance of inventory at end of period based on physical count

Question 49

tangible assets

Answer 49

land, land improvements, buildings, equipment, natural resources

Question 50

intangible assets

Answer 50

patents, trademarks, copyrights franchises, goodwill

Question 51

basket price

Answer 51

purchase of more than one asset at the same time for one purchase price

Question 52

patent life

Answer 52

20 years

Question 53

copyright life

Answer 53

70 years

Question 54

trademark life

Answer 54

10 year periods

Question 55

goodwill

Answer 55

the portion of the purchase price that exceeds the fair value of identifiable net assets

Question 56

net assets

Answer 56

assets acquired - liabilities assumed

Question 57

capitalize

Answer 57

if it benefits future periods

Question 58

expense

Answer 58

if its benefits current period

Question 59

depreciation

Answer 59

allocation of an assets cost to expense over time

Question 60

service/useful life

Answer 60

the estimated use the company expects to receive from the asset before disposing of it.

Question 61

residual value/ salvage value

Answer 61

the amount the company expects to receive from selling the asset at the end of its service life

Question 62

straight line method

Answer 62

(asset cost - residual value) / service life

Question 63

double declining method

Answer 63

beginning book value x depreciation rate = depreciation expense (subtract from book value)

Question 64

activity based depreciation

Answer 64

depreciable cost / total units expected to be produced

Question 65

disposal of long-term assets

Answer 65

sale, retirement, exchange

Question 66

return on assets

Answer 66

net income - avg total assets

Question 67

profit margin

Answer 67

the earnings per dollar of sales

Question 68

asset turnover

Answer 68

measures the sales per dollar of assets invested