WEEK 4

Question 1

fraud

Answer 1

dishonest act by an employee that results in personal benefits to the employee at a cost to the employer.

Question 2

fraud triangle

Answer 2

opportunity: For an employee to commit fraud, the workplace environment must provide opportunities that an employee can take advantage of

financial pressure:Employees sometimes commit fraud because of personal financial problems caused by too much debt

rationalization:In order to justify their fraud, employees rationalize their dishonest actions.

Question 3

a company can focus on internal control to prevent fraud, what is internal control

Answer 3

process designed to provide reasonable assurance regarding the achievement of objectives related to operations, reporting and compliance.

Question 4

the internal control system has five primary components

Answer 4

1. a controlled environment
2. risk assessment
3. control activities
4. information and communication
5. monitoring

Question 5

the control activities
1. establishment of responsibility

Answer 5

Control is most effective when only one person is responsible for a given task

Question 6

the control activities
1. establishment of responsibility
2. segregation of duties

Answer 6

two applications of segregation of duties:

1. Different individuals should be responsible for related activities
2. The responsibility for recordkeeping for an asset should be separate from the physical custody of that asset.

Question 7

the control activities
1. establishment of responsibility
2. segregation of duties
3. Documentation

Answer 7

companies should use prenumbered documents, and all documents should be accounted for

Question 8

the control activities
1. establishment of responsibility
2. segregation of duties
3. Documentation
4. physical controls

Answer 8

the safeguarding of assets and enhance the accuracy and reliability of the accounting records

Question 9

the control activities
1. establishment of responsibility
2. segregation of duties
3. Documentation
4. physical controls
5. Independent internal verification

Answer 9

1. Companies should verify records periodically or on a surprise basis.
2. An employee who is independent of the personnel responsible for the information should make the verification.
3. Discrepancies and exceptions should be reported to a management level that can take appropriate corrective action.

Question 10

the control activities
1. establishment of responsibility
2. segregation of duties
3. Documentation
4. physical controls
5. Independent internal verification
6. Human resource controls

Answer 10

*Bond employees who handle cash.
*Rotate employees’ duties and require employees to take vacations.
*Conduct thorough background checks

Question 10

why is internal control needed?

Answer 10

to provide reasonable assurance of proper safeguarding of assets and reality of the accounting records.

Question 11

whats an important element in the internal control

Answer 11

the human element

Question 12

collusion

Answer 12

When two or more individuals work together to get around prescribed controls

Question 13

limitations on internal control may be imposed by?

Answer 13

size of the business

Question 14

whats the most susceptible asset to fraudulent activities

Answer 14

cash

Question 15

What payment methods improve internal control over cash disbursements?

Answer 15

Checks or Electronic Funds Transfer (EFT), instead of cash.

Question 16

What is one exception when using actual cash is acceptable?

Answer 16

For small/incidental expenses like taxi fares, postage, or office snacks — paid from petty cash.

Question 16

What are the key features of a voucher system?

Answer 16

1. Authorized by the right person
2. Independently reviewed
3. Based on valid reasons

Question 16

What is a voucher system?

Answer 16

A formal control method that ensures every payment is authorized, reviewed, and proper.

Question 17

Petty Cash Fund

Answer 17

A common way of handling small regular payments, while maintaining satisfactory control

Question 18

bank reconciliation

Answer 18

compares the bank’s balance with the company’s balance and explains any differences to make them agree

Question 19

Who should prepare the bank reconciliation?

Answer 19

An employee with no other cash responsibilities to ensure independence and accuracy.

Question 20

What are the two main causes for differences in bank and book balances?

Answer 20

Time lags
Errors

Question 21

What is the purpose of reconciling a bank account?

Answer 21

To make the book balance and bank balance agree with the true cash amount.

Question 22

What is Step 1 in bank reconciliation?

Answer 22

Compare deposits on the bank statement with deposits in transit and company records.

Question 23

What is Step 2 in bank reconciliation?

Answer 23

Compare paid checks on the bank statement with outstanding checks and check records.

Question 24

What is Step 3 in bank reconciliation?

Answer 24

Identify and list any errors discovered during the comparison.

Question 25

What is included in "cash" on financial reports?

Answer 25

Coins, currency, checks, money orders, and money in banks or similar institutions.

Question 26

What is Step 4 in bank reconciliation?

Answer 26

Match bank memoranda (like service charges or interest earned) with company records.

Question 27

What are cash equivalents?

Answer 27

Short-term, liquid investments that: Are easily converted to known cash amounts Are insensitive to interest rate changes due to short maturity

Question 28

3 kinds of receivables

Answer 28

1. accounts receivable: amounts customers owe on the account 2. notes receivable: written promise for amounts to be received 3. other receivables:nontrade receivables such as interest receivable, loans to company officers, advances to employees, and income taxes refundable

Question 28

Trade receivable

Answer 28

notes and accounts receivable that result from sales transactions

Question 29

Where are accounts receivable reported in the financial statements?

Answer 29

On the balance sheet as an asset.

Question 30

Why is it sometimes hard to determine the amount of receivables to report?

Answer 30

Because some receivables may not be collected (they become uncollectible).

Question 31

What is it called when a receivable is not expected to be collected?

Answer 31

A credit loss or bad debt.

Question 32

How do companies record uncollectible accounts?

Answer 32

As Bad Debt Expense (also called Uncollectible Accounts Expense).

Question 33

Is bad debt an unusual event?

Answer 33

No — it's a normal and necessary risk of doing business on credit.

Question 34

What are the two methods for accounting for uncollectible accounts?

Answer 34

Direct Write-Off Method Allowance Method

Question 35

Is the Direct Write-Off Method acceptable under GAAP?

Answer 35

No, unless bad debts are insignificant, because it does not match expenses with revenues properly. You sell something in January. The customer doesn't pay, and you find out in July. You record the Bad Debt Expense in July, but the sale was in January. That’s a problem because the expense and income are in different months — they don’t match.

Question 35

What is a key feature of the Direct Write-Off Method?

Answer 35

It shows actual losses only, and does not estimate bad debts in advance.

Question 36

What is the Direct Write-Off Method?

Answer 36

A method where Bad Debt Expense is recorded only when a specific account is determined to be uncollectible.

Question 37

What is the Allowance Method?

Answer 37

A method where a company estimates bad debts at the end of each period and records Bad Debt Expense in advance.

Question 38

Why is the Allowance Method preferred?

Answer 38

Because it provides better matching on the income statement and shows receivables at net realizable value.

Question 39

What is Net Realizable Value?

Answer 39

The cash amount the company expects to actually collect from its accounts receivable.

Question 39

What happens when a company writes off an uncollectible account?

Answer 39

It removes the amount from Accounts Receivable and reduces the Allowance for Doubtful Accounts.

Question 40

Does a write-off affect the income statement?

Answer 40

No. The Bad Debt Expense was already recorded earlier when estimated.

Question 41

Which financial statement is affected by a write-off?

Answer 41

Only the balance sheet is affected — not the income statement.

Question 41

Does the cash realizable value change when an account is written off?

Answer 41

No. Cash realizable value stays the same because both receivables and allowance decrease equally.

Question 42

What does the Allowance Method require companies to estimate?

Answer 42

The amount of uncollectible accounts at the end of the period.

Question 43

What journal entry is made to record estimated bad debts?

Answer 43

Debit: Bad Debts Expense Credit: Allowance for Doubtful Accounts

Question 44

When using the allowance method, do companies wait until a specific account is uncollectible to record bad debt expense?

Answer 44

No. They estimate in advance at the end of the period.

Question 45

What are the two main bases for estimating uncollectibles?

Answer 45

Percentage of Sales Percentage of Receivables

Question 46

What is the focus of the percentage-of-sales method?

Answer 46

It emphasizes matching bad debt expense to sales revenue. The expense is based on current year credit sales.

Question 47

Does the percentage-of-sales method consider the existing balance in the Allowance account?

Answer 47

No. It disregards the existing balance when making the adjusting entry.

Question 48

What tool is often used with the percentage-of-receivables method?

Answer 48

An ageing schedule that sorts receivables by how long they’ve been unpaid.

Question 48

What is the focus of the percentage-of-receivables method?

Answer 48

It focuses on estimating how much of current receivables won’t be collected.

Question 49

Which method focuses more on the balance sheet?

Answer 49

The percentage-of-receivables method — it adjusts the Allowance account to reflect expected losses.

Question 50

What happens when a company receives payment through a credit card?

Answer 50

It treats it like a cash sale, but must pay a service fee (usually to the bank or credit card company).

Question 51

What is the typical service fee for credit card sales?

Answer 51

Usually around 2% of the sale amount.

Question 52

How does the service fee affect Accounts Receivable?

Answer 52

It reduces the amount the company actually collects from the customer.

Question 53

How are credit card slips recorded by the retailer?

Answer 53

Like cash deposits, because credit card sales are treated as cash sales.

Question 54

Who pays the service fee in credit card transactions?

Answer 54

The retailer (seller), not the customer.

Question 55

You sell $1,000 and the bank charges a 2% service fee. What do you record?

Answer 55

Cash: $980 Service Charge Expense: $20 Sales Revenue or Accounts Receivable: $1,000

Question 56

What is the formula to compute interest on a note?

Answer 56

Interest = Face Value × Annual Interest Rate × Time (as part of a year)

Question 57

What is special about the interest rate in a note?

Answer 57

It is always an annual rate, even for shorter-term notes.

Question 58

How are short-term notes receivable reported?

Answer 58

At cash (net) realizable value, just like accounts receivable.

Question 59

What does it mean when a note is honoured?

Answer 59

It is paid in full (face value + interest) at maturity.

Question 60

What is a dishonoured (defaulted) note?

Answer 60

A note not paid at maturity; it becomes non-negotiable and is usually transferred to Accounts Receivable.