1. Accrual basis 2. Cash-basis The accrual basis is required by GAAP. What is an example of a long-term liability? The ______ a perpetrator has worked for an organization, the ______ the fraud losses tend to be. How long is the basic accounting period? What two methods may be used in accounting? Which one is required by Generally Accepted Accounting Principles (GAAP)?

What two methods may be used in accounting? Which one is required by Generally Accepted Accounting Principles (GAAP)?

earned; incurred What is the formula to calculate the current ratio? What does the current ratio measure? What are the two basic formats of the income statement? What are the two basic formats of the balance sheet? Under accrual accounting, a business records revenue when ______ and expenses when ________.

Under accrual accounting, a business records revenue when ______ and expenses when ________.

● Collecting cash from customers ● Receiving cash from interest earned ● Paying salaries, rent and other expenses ● Borrowing money ● Paying off loans ● Issuing stock Describe the controls in place during a typical over the counter cash purchase. Describe the purpose of a bank statement and the information that is included on one. Book Balance - Always (rules) What cash transactions does accrual accounting record?

What cash transactions does accrual accounting record?

E What accounts would be debited and credited to record the prepayment of three months' rent? What is typically a company's final adjusting entry of the period? Describe the controls in place during a typical over the counter cash purchase. Which of the following noncash transactions does accrual accounting record? A. Sales and purchases on account B. Usage of prepaid rent, insurance, and supplies C. Earning of revenue prior to cash collection D. Accrual of expenses incurred but not yet paid E. All of the above

Which of the following noncash transactions does accrual accounting record? A. Sales and purchases on account B. Usage of prepaid rent, insurance, and supplies C. Earning of revenue prior to cash collection D. Accrual of expenses incurred but not yet paid E. All of the above

One Year Depreciation How long is the basic accounting period? What is an example of a long-term liability? What is a fidelity bond?

How long is the basic accounting period?

Month, quarter (three months) or a semiannual period (six months) Virtually all companies prepare annual financial statements. At what other interim periods do companies often prepare financial statements for? What is the purpose of creating a bank reconciliation? What is petty cash used for? How long is the basic accounting period?

Virtually all companies prepare annual financial statements. At what other interim periods do companies often prepare financial statements for?

1. When to record (recognize) revenue 2. What amount of revenue to record What is the definition of a deferral? What is the definition of fraud? What would the journal entry to record $500 worth of depreciation be? What two issues does the revenue principle deal with?

What two issues does the revenue principle deal with?

Revenue should be recognized after it has been earned - when the business transfers the promised goods or services to the customer. Time-Period Concept How long is the basic accounting period? What order must the financial statements be prepared in? Explain why the statements must be prepared in this order. What is the general rule for when revenue should be recognized?

What is the general rule for when revenue should be recognized?

The amount of cash or its equivalent that is transferred from the customer to the seller What amount of revenue should be recorded? List five examples of current assets. ‼️‼️‼️‼️‼️‼️ What two methods may be used in accounting? Which one is required by Generally Accepted Accounting Principles (GAAP)? Expense Recognition Principle

What amount of revenue should be recorded?

Accounting Chapter 3-4

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Accounting - Financial Accounting

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1. Accrual basis 2. Cash-basis The accrual basis is required by GAAP.

earned; incurred

● Collecting cash from customers ● Receiving cash from interest earned ● Paying salaries, rent and other expenses ● Borrowing money ● Paying off loans ● Issuing stock

The time-period concept ensures that accounting information is reported at regular intervals. The time-period concept is necessary because business's need regular progress reports. They certainly cannot wait until liquidation to measure income; therefore, the time-period concept must be utilized.

One Year

Month, quarter (three months) or a semiannual period (six months)

1. When to record (recognize) revenue 2. What amount of revenue to record

Revenue should be recognized after it has been earned - when the business transfers the promised goods or services to the customer.

The amount of cash or its equivalent that is transferred from the customer to the seller

The expense recognition principle is the basis for recording expenses. Expenses are costs incurred during the process of creating revenue that provide no future benefit to the company. Expenses should be recognized against the related revenues of that period.

1. Identify all the expenses incurred during the accounting period. 2. Measure the expenses and recognize them in the same period in which any related revenues are earned.

matching principle

1. Deferrals 2. Depreciation 3. Accruals

A deferral is an adjustment for payment of an item or receipt of cash in advance.

Depreciation allocates the cost of a plant asset to expense over the asset's useful life.

An accrual is the opposite of a deferral. It is an expense or a revenue that occurs before the business pays or receives cash.

Prepaid rent is debited, and Cash is credited

Rent expense is debited and Prepaid rent is credited

Depreciation Expense 500 Accumulated Depreciation 500

Accumulated depreciation is a contra asset account with a normal credit balance.

1. Contra accounts always have a companion account. 2. Their normal balance is opposite that of their companion account.

cost - accumulated depreciation

Accrued revenue

Receivable; revenue

A company would record unearned revenue when it collects cash from a customer prior to earning the revenue - before it delivers the goods and/or service.

measure income update the balance sheet Revenue or expense (to measure income) Asset or liability (to update the balance sheet)

The accrual of income tax expense

The adjusted trial balance

The income statement, The statement of retained earnings, Balance sheet, Statement of cash flows. The statements must be prepared in this order because net income is calculated on the income statement. Net income then flows through to the statement of retained earnings and is used to calculate ending retained earnings. Ending retained earnings is carried forward to the balance sheet to calculate total liabilities and stockholders' equity.

1. Revenue 2. Expense 3. Dividend

temporary

1. Assets 2. Liabilities 3. Stockholders' equity

B C A

arent

cash

Current

1. Cash 2. Short-term investments 3. Accounts receivable 4. Merchandise inventory 5. Prepaid expenses

1. Property, Plant, and Equipment 2. Land 3. Buildings 4. Furniture and Fixtures 5. Equipment

Current liabilities are debts that must be paid within one year after the balance sheet date or within the business's operating cycle if longer than one year.

Note payable (portion not due within one year)

1. Report format 2. Account format

1. Single-step income statement 2. Multi-step income statement

Total current assets / Total current liabilities. The current ratio measures the company's ability to pay current liabilities with current assets.

1.50

Total liabilities / Total assets

The debt ratio indicates the proportion of a company's assets that is financed with debt. It measures a business's ability to pay both current and long-term debts.

Fraud is the intentional misrepresentation of facts, designed to persuade another party to act in a way that causes injury or damage to that party.

longer; higher

1. Misappropriation of assets 2. Fraudulent financial reporting

1. Motive 2. Opportunity 3. Rationalization

unethical act

Internal control is a plan of organization and a system of procedures implemented by company management and the board of directors to prevent, detect and/or correct fraud.

1. Safeguard assets. 2. Encourage employees to follow company policies. 3. Promote operational efficiency. 4. Ensure accurate, reliable accounting records. 5. Comply with legal requirements.

True

1. Control environment 2. Risk assessment 3. Information system 4. Control procedures 5. Monitoring of controls

Control environment

Monitoring of controls

1. Asset handling 2. Record keeping 3. Transaction approval

Internal auditors are employees of the business. They ensure that employees are following company policies and determine whether the company is following legal requirements. External auditors are usually CPAs who are completely independent of the business. They are hired to determine whether the company's financial statements are prepared in accordance with U.S. GAAP. Auditors examine the client's financial statements and underlying transactions to form a professional opinion on the accuracy and reliability of the company's financial statements.

1. Smart hiring practices and Separation of duties 2. Comparisons and Compliance monitoring 3. Adequate records 4. Limited access to both assets and records 5. Proper approvals (either general or specific) for each class of transaction

A fidelity bond is an insurance policy that reimburses the company for any losses due to employee theft.

1. Stolen credit card numbers 2. Malware 3. Phishing expeditions

rearranges messages by mathematical process to protect confidential information.

limit access into a local network. Usually several are built into the system.

The point-of-sale terminal provides control of the cash receipt, while also recording the sale and reducing inventory for the cost of the goods sold. For each transaction, the customer receives a receipt as proof of purchase. The cash drawer opens, and the machine electronically records the sale as each transaction occurs. At the end of each shift, the cash drawer is delivered to the main office, where it is combined with the rest of the cash and then delivered to a bank for deposit via an armored car. A separate employee in accounting will then reconcile the electronic record with the cash turned in.

The controller compares the bank deposit amount from the treasurer and the debit to Cash from the accounting department to ensure they balance.

do not

1. Purchasing goods 2. Receiving goods 3. Preparing check or EFT for payment 4. Approval of the payment

Receiving report, invoice, and purchase order

Petty cash is used by a single employee for making on-the-spot minor purchases. It is necessary because it would be wasteful to write separate checks for each small purchase that a company makes. An example of a purchase that may be made with petty cash is a taxi fare.

1. Signature card 2. Deposit ticket 3. Check 4. Bank statement 5. Bank reconciliation

1. The maker, who signs the check 2. The payee, to whom the check is paid 3. The bank, on which the check is drawn

A bank statement reports what the bank did with the customer's cash. The statement shows the account's beginning and ending balances, cash receipts, and payments.

A bank reconciliation is prepared to explain the differences between a company's cash records and the bank balance. Preparing a bank reconciliation regularly is important to ensure accurate cash records.

time deposits, CDs, and government securities.

i. Add deposits in transit. ii. Subtract outstanding checks. iii. Add or subtract corrections of bank errors.

i. Add bank collections, interest revenue, and EFT receipts. ii. Subtract service charges, NSF checks, and EFT payments. iii. Add or Subtract corrections of book errors.

normal

debit

1. Expenses are understated 2. Net Income overstated (due to expenses being understated) 3. Retained earnings is overstated (due to net income being overstated) 4. Assets are overstated

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Accounting Chapter 3-4

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