Chapter 4
2002 federal legislation was passed following major corporate accounting scandals like Enron and WorldCom
What is Sarbanes-Oxley Act (SOX)
Classify transactions involving the net income, current assets, and current liabilities
What is operating activities
Type of accounts for sales return, sales allowance, and sales discount
What is contra-revenue
What type of account is Allowance for Uncollectible Accounts?
Contra-asset
Classify cash inflows and outflows resulting from long-term liabilities and stockholders' equity transactions
Financing Activities
Which element of the Fraud Triangle do internal controls attempt to eliminate?
Opportunity fraud
Classify transactions involving the purchase and sale of long-term assets and investments
What are Investing Activities
On March 1, PAL Technology sold $2,500 of computers on account, terms 2/10, n/30. Provide the journal entry to record the credit sale
Debit: Accounts Receivable $2,500
Credit: Sales Revenue $2,500
What is the formula for Net Accounts Receivable?
Accounts receivables - Allowance for Uncollectible Accounts
What is the difference between indirect method and direct method?
indirect method starts with net income, direct method doesn't
Requiring different employees to authorize transactions, record transactions, and maintain custody of the related assets is an example of this fundamental preventive control activity
What is Separation of Duties (or Segregation of Duties)
A company sold old equipment for $7,000 cash. Which section does this transactions reported in statement of cash flows and is cash inflow or outflow?
Investing Activity, cash inflow
On April 12, the customer returns $300 of merchandise. Record the journal entry.
Debit Sales Return $300
Credit Accounts Receivable $300
At year-end, PAL Corp has $30,000,000 in Accounts Receivable and estimates that 4% will be uncollectible. Provide the year-end adjusting journal entry
Debit: Bad Debt Expense $1,200,000
Credit: Allowance for Uncollectible Accounts $1,200,000
What makes it less likely to collected the money from accounts receivable
The older the accounts, the less likely it is to be collected
Even a well-designed internal control system can fail when two or more employees work together to bypass controls. What is this action called?
What is Collusion
A company borrowed $5,000 cash from the bank. Which section does this transactions reported in statement of cash flows and is cash inflow or outflow?
Financing activity, cash inflow
On April 14, PAL grants a $100 price allowance due to minor defects. Provide the journal entries.
Debit Sales Allowance $100
Credit Accounts Receivable $100
On July 15, PAL Corp confirms that a customer owing $5,000 cannot pay and writes off the account. Provide the journal entry.
Debit: Allowance for Uncollectible Accounts $5,000
Credit: Accounts Receivable $5,000
How do you calculate net revenue?
Total revenue - sales return - sales allowance - sales discounts
Name the five key components of an internal control system designed to safeguard assets and ensure accurate financial reporting
What are control environment, risk assessment, control activities, monitoring, and information and communication
A company receives $15,000 in cash dividends from its investment in another firm's stock, and later pays $50,000 in cash dividends to its own stockholders. How are these transactions reported in statement of cash flows and is cash inflow or outflow?
Dividends Received ($15,000): Operating Activity, Cash Inflow
Dividends Paid ($50,000): Financing Activity, Cash Outflow
On May 1, PAL Corp sells $8,000 of goods on account with terms 3/10, n/30. On May 3, the customer receives a $1,000 sales allowance. On May 9, the customer pays the remaining balance in full. Provide the journal entry on May 9.
Debit: Cash $6,790
Debit: Sales Discounts $210
Credit: Accounts Receivable $7,000
(Remaining A/R = $8,000 - $1,000 = $7,000; Discount = $7,000 × 3% = $210)
On December 31 before adjusting entries, PAL Corp has accounts receivables of $120,000. PAL estimates bad debts should be 20% of accounts receivable. Unadjusted Allowance of uncollectible accounts has a $2,000 debit balance. Provide the adjusting entries.
Debit Bad Debt Expense $26,000; Credit Allowance for Uncollectible Accounts $26,000
$120,000 * 20% = $24,000
$24,000 + $2,000 = $26,000
On March 1, PAL Logistics provides $2,500 of consulting services to a client on account. The client later pays the $2,500 by March 31. What is the journal entry for March 31?
Debit: Cash $2,500
Credit: Accounts receivable $2,500