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Question: What is internal control? Why should a


What is internal control? Why should a company establish an internal control system?


> What is inventory? Where in the financial statements is inventory reported?

> What are the financial statement effects of establishing an allowance for uncollectible accounts?

> How does accounting for uncollectible accounts affect the amount reported for net accounts receivable?

> What two purposes do firms achieve by estimating future uncollectible accounts?

> Explain the correct way companies should account for uncollectible accounts receivable (bad debts).

> Revenue can be recognized at one point or over a period. Provide an example of each.

> Briefly explain the accounting treatment for sales returns and allowances. Where are these accounts reported in the income statement?

> Explain the difference between a trade discount and a sales discount. Where are sales discounts reported in the income statement?

> At the beginning of the year, Mitchum Enterprises allows for estimated uncollectible accounts of $15,000. By the end of the year, actual bad debts total $17,000. Record the write- off to uncollectible accounts. Following the write-off, what is the balanc

> Explain why the percentage-of-receivables method is referred to as the balance sheet method and the percentage-of-credit-sales method is referred to as the income statement method.

> What is the difference between a trade receivable and a nontrade receivable?

> Which method, the percentage-of-receivables method or the percentage-of-credit-sales method, is typically used in practice? Why?

> How can effectively managing receivables benefit a company?

> How is the average collection period of receivables measured? What does this ratio indicate? Is a higher or lower average collection period preferable?

> How is the receivables turnover ratio measured? What does this ratio indicate? Is a higher or lower receivables turnover preferable?

> Interest on a note receivable typically is due along with the face value at the note’s maturity date. If the end of the accounting period occurs before the maturity date, how do we record interest earned but not yet collected?

> What will be the total interest earned on a 6%, $2,000 note receivable that is due in nine months?

> With respect to notes receivable, explain what each of these represent: (a) face value, (b) annual interest rate, and (c) fraction of the year.

> Notes receivable differ from accounts receivable in that notes receivable represent written debt instruments. What is one other common difference between notes receivable and accounts receivable?

> At the end of the first year of operations, Mayberry Advertising had accounts receivable of $20,000. Management of the company estimates that 10% of the accounts will not be collected. What adjustment would Mayberry Advertising record to establish Allowa

> Discuss the differences between the allowance method and the direct write-off method for recording uncollectible accounts. Which of the two is acceptable under financial accounting rules?

> Describe the year-end adjustment to the allowance for uncollectible accounts in the year subsequent to establishing it.

> What does the age of accounts receivable refer to? How can we use an aging method to estimate uncollectible accounts receivable?

> If at the end of the year Allowance for Uncollectible Accounts has a credit balance before any adjustment, what might that tell us about last year’s ending balance of the account?

> Allowance for Uncollectible Accounts is a contra asset account, which means that its normal balance is a credit. However, it is possible for the account to have a debit balance before year-end adjustments are recorded. Explain how this could happen.

> When we have established an allowance for uncollectible accounts, how do we write off an account receivable as uncollectible? What effect does this write-off have on the reported amount of total assets and net income at the time of the write-off?

> We report accounts receivable in the balance sheet at the amount expected to be collected. Explain what this term means.

> When recording a credit sale, what account do we debit? Describe where this account is reported in the financial statements.

> What is meant by separation of duties?

> Describe the difference between preventive controls and detective controls. What are examples of each?

> Kelly’s Jewelry has the following transactions during the year: total jewelry sales = $750,000; sales discounts = $20,000; sales returns = $50,000; sales allowances = $30,000. In addition, at the end of the year the company estimates the following transa

> Briefly describe the five components of internal control outlined by the Committee of Sponsoring Organizations (COSO).

> What are some of the major provisions of the Sarbanes-Oxley Act?

> What is meant by the fraud triangle, and what can companies do to help prevent fraud?

> Why are some managers motivated to manipulate amounts reported in the financial statements?

> We compared Regal Entertainment and Cinemark at the end of this chapter. What reasons were given for the differences in their cash balances?

> “Managers are stewards of the company’s assets.” Discuss what this means.

> Why is an analysis of the company’s cash balance important?

> Describe the operating, investing, and financing sections of the statement of cash flows.

> The change in cash for the year can be calculated by comparing the balance of cash reported in this year’s and last year’s balance sheet. Why is the statement of cash flows needed?

> Describe how management maintains control over employee purchases with credit cards and the petty cash fund.

> Match each of the following terms with its definition.

> Financial information for American Eagle is presented in Appendix A at the end of the book, and financial information for Buckle is presented in Appendix B at the end of the book. Required: 1. Determine which company maintains a higher ratio of current a

> What are purchase cards and a petty cash fund?

> After preparing a bank reconciliation, what adjustments does the company need to make to its records?

> Give some examples of timing differences in cash transactions that firms need to account for in a bank reconciliation.

> What are two primary reasons that the company’s balance of cash will differ between its own records and those of the bank?

> What is a bank reconciliation? How can it help in determining whether proper control of cash has been maintained?

> How are credit card purchases reported?

> Discuss basic controls for cash disbursements.

> What is a debit card? How are debit card sales reported?

> What is a credit card? How are credit card sales reported?

> Refer to the information in BE5–17, but now assume that the balance of Allowance for Uncollectible Accounts before adjustment is $4,000 (debit). The company still estimates future uncollectible accounts to be 3% of credit sales for the year. What adjustm

> Discuss basic controls for cash receipts.

> Describe how the purchase of items with a check is recorded.

> Define cash and cash equivalents.

> Is fraud more likely to occur when it is being committed by top-level employees? Explain.

> To what does collusion refer?

> What are some limitations of internal control?

> Who has responsibility for internal control in an organization? According to guidelines set forth in Section 404 of the Sarbanes-Oxley Act, what role does the auditor play in internal control?

> Define occupational fraud. Describe two common means of occupational fraud.

> Why are adjusting entries necessary under accrual-basis accounting?

> Consider the information in Question 7. Using cash-basis accounting, on which date would Peterson Law record the $100 expense for each scenario?

> At the end of the year, Brinkley Incorporated’s balance of Allowance for Uncollectible Accounts is $4,000 (credit) before adjustment. The company estimates future uncollectible accounts to be 3% of credit sales for the year. Credit sales for the year tot

> Peterson Law asks Executive Lawn to provide $100 of landscape maintenance. Executive Lawn provides the service on April 10. Consider three scenarios: a. Peterson pays for the lawn service in advance on March 28. b. Peterson pays for the lawn service on A

> Consider the information in Question 5. Using cash-basis accounting, on which date would Executive Lawn record the $100 revenue for each scenario?

> Executive Lawn provides $100 of landscape maintenance to Peterson Law on April 10. Consider three scenarios: a. Peterson pays for the lawn service in advance on March 28. b. Peterson pays for the lawn service on April 10, the day of service. c. Peterson

> Describe when revenues and expenses are recognized using cash-basis accounting. How does this differ from accrual-basis accounting?

> Samantha is a first-year accounting student. She doesn’t think it matters that expenses are reported in the same period’s income statement with the related revenues. She feels that “as long as revenues and expenses are recorded in any period, that’s good

> How do the adjusted trial balance and the post-closing trial balance differ? Which accounts are shown in the adjusted trial balance but not in the post-closing trial balance? Which account is shown in both trial balances but with a different balance on e

> Matt has been told by his instructor that dividends reduce retained earnings (and therefore stockholders’ equity). However, since he knows that stockholders are receiving the dividends, Matt doesn’t understand how paying dividends would decrease stockhol

> In its first four years of operations, Chance Communications reports net income of $300, $900, $1,500, and $2,400, respectively, and pays dividends of $200 per year. What would be the balance of Retained Earnings at the end of the fourth year?

> Describe the debits and credits for the three closing entries required at the end of a reporting period.

> What does it mean to close temporary accounts? Which of the following account types are closed: assets, liabilities, dividends, revenues, and expenses?

> On October 1, 2021, Oberley Corporation loans one of its employees $40,000 and accepts a 12-month, 9% note receivable. Calculate the amount of interest revenue Oberley will recognize in 2021 and 2022.

> What are the two purposes of preparing closing entries?

> At the end of the period, Sanders Company reports the following amounts: Assets = $12,000; Liabilities = $8,000; Revenues = $5,000; Expenses = $3,000. Calculate stockholders’ equity.

> Explain what is meant by the term classified when referring to a balance sheet.

> What is the purpose of the adjusted trial balance? How do the adjusted trial balance and the (unadjusted) trial balance differ?

> Discuss the major principle that describes recording expenses.

> Fill in the blank associated with each adjusting entry:

> At the end of May, Robertson Corporation has provided services to customers, but it has not yet billed these customers nor have any of them paid for those services. If Robertson makes no adjusting entry associated with these unpaid services provided, wil

> Global Printing publishes several types of magazines. Customers are required to pay for magazines in advance. On November 5, Global receives cash of $120,000 for prepaid subscriptions. By the end of November, Global has distributed $20,000 of magazines t

> Jackson Rental receives its September utility bill of $320 on September 30 but does not pay the bill until October 10. Jackson’s accountant records the utility expense of $320 on October 10 at the time of payment. Will this cause any of Jackson’s account

> Sequoya Printing purchases office supplies for $75 on October 2. The staff uses the office supplies continually on a daily basis throughout the month. By the end of the month, office supplies of $25 remain. Record the month-end adjusting entry for office

> Calculate the missing amount for each of the following notes receivable.

> Provide an example of an accrued revenue. Describe the adjusting entry associated with an accrued revenue.

> Provide an example of an accrued expense. Describe the adjusting entry associated with an accrued expense.

> Provide an example of a deferred revenue. Describe the adjusting entry associated with a deferred revenue.

> Provide an example of a prepaid expense. Describe the adjusting entry associated with a prepaid expense.

> There are two basic types of adjusting entries—prepayments and accruals. Describe each in terms of the timing of revenue and expense recognition versus the flow of cash.

> Discuss the major principle that describes recording revenues.

> For each of the following accounts, indicate whether we use a debit or a credit to decrease the balance of the account. (Compare your answers to those for Question 8.) a. Cash. b. Salaries Payable. c. Utilities Expense. d. Service Revenue.

> For each of the following accounts, indicate whether we use a debit or a credit to increase the balance of the account. a. Cash. b. Salaries Payable. c. Utilities Expense. d. Service Revenue.

> Jenny has learned that assets have debit balances, while liabilities have credit balances. Based on this, she believes that asset accounts can only be debited and liabilities can only be credited. Is Jenny correct? When would we credit an asset and when

> What is the normal balance (debit or credit) of assets, liabilities, stockholders’ equity, revenues, and expenses?

> Brady is hired in 2021 to be the accountant for Anderson Manufacturing, a private company. At the end of 2021, the balance of Accounts Receivable is $29,000. In the past, Anderson has used only the direct write-off method to account for bad debts. Based

> Jerry believes that “dual effect” indicates that, for all transactions, one account will increase and one account will decrease. Is Jerry correct? Explain.

> Describe the impact of each of these external transactions on the accounting equation. a. Receive a loan from the bank. b. Pay employee salaries for the current period. c. Receive cash from customers for services provided in the current period. d. Purcha

> Each external transaction will have a dual effect on the accounting equation. Explain what this means.

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