Podcast
Questions and Answers
Which scenario exemplifies a limitation of internal controls related to collusion?
Which scenario exemplifies a limitation of internal controls related to collusion?
- A well-trained employee consistently makes errors due to fatigue.
- Management overrides a control to expedite a critical business transaction.
- A new type of fraud emerges that the existing controls were not designed to detect.
- Two employees conspire to embezzle funds by falsifying records. (correct)
Why is segregation of duties particularly important in the handling of cash?
Why is segregation of duties particularly important in the handling of cash?
- To ensure compliance with all tax regulations.
- To simplify the process of bank reconciliations.
- To reduce the cost associated with audits.
- To minimize the risk of errors and fraud. (correct)
Which of the following actions is an example of management overriding internal controls?
Which of the following actions is an example of management overriding internal controls?
- Approving all invoices before payment.
- Requiring two signatures on all checks.
- Implementing a daily cash deposit policy.
- Authorizing a payment without proper documentation to meet a deadline. (correct)
A company's internal controls require two signatures on each check. Which limitation of internal controls does this procedure PRIMARILY address?
A company's internal controls require two signatures on each check. Which limitation of internal controls does this procedure PRIMARILY address?
Which scenario BEST illustrates a timing difference in a bank reconciliation?
Which scenario BEST illustrates a timing difference in a bank reconciliation?
How does the daily depositing of cash and checks act as an internal control measure?
How does the daily depositing of cash and checks act as an internal control measure?
When is the verification of cash balances BEST performed to enhance internal control?
When is the verification of cash balances BEST performed to enhance internal control?
A company implements strong internal controls over cash disbursements but does not update them to address new electronic payment methods. Which limitation of internal controls is MOST evident in this situation?
A company implements strong internal controls over cash disbursements but does not update them to address new electronic payment methods. Which limitation of internal controls is MOST evident in this situation?
Which of the following best describes the cash-to-cash cycle?
Which of the following best describes the cash-to-cash cycle?
What is the primary goal regarding the cash-to-cash cycle?
What is the primary goal regarding the cash-to-cash cycle?
Which type of business is most likely to have a shorter cash-to-cash cycle?
Which type of business is most likely to have a shorter cash-to-cash cycle?
What is the role of the Board of Directors in relation to financial information?
What is the role of the Board of Directors in relation to financial information?
Which of the following is NOT typically considered an objective of internal controls?
Which of the following is NOT typically considered an objective of internal controls?
Which internal control principle is violated when one person has the ability to initiate, process, account for, and pay a transaction?
Which internal control principle is violated when one person has the ability to initiate, process, account for, and pay a transaction?
An effective internal control system includes independent verification of transactions. What does this entail?
An effective internal control system includes independent verification of transactions. What does this entail?
Why is documentation important for internal control?
Why is documentation important for internal control?
Which of the following describes an outstanding deposit in the context of bank reconciliation?
Which of the following describes an outstanding deposit in the context of bank reconciliation?
Which type of error requires the bank to amend its records?
Which type of error requires the bank to amend its records?
Which item would require a journal entry on the entity's books?
Which item would require a journal entry on the entity's books?
What is the primary reason why NSF cheques require adjustment in a bank reconciliation?
What is the primary reason why NSF cheques require adjustment in a bank reconciliation?
What do outstanding cheques and outstanding deposits have in common?
What do outstanding cheques and outstanding deposits have in common?
An entity's cash balance per its accounting records is $15,000. There are outstanding checks totaling $2,000 and an outstanding deposit of $1,500. The bank statement shows a balance of $14,700. What is the adjusted bank balance after considering the outstanding items?
An entity's cash balance per its accounting records is $15,000. There are outstanding checks totaling $2,000 and an outstanding deposit of $1,500. The bank statement shows a balance of $14,700. What is the adjusted bank balance after considering the outstanding items?
An entity erroneously recorded a cheque written for $75 as $57 in its records. What adjustment is required during bank reconciliation?
An entity erroneously recorded a cheque written for $75 as $57 in its records. What adjustment is required during bank reconciliation?
Which of the following errors would require a journal entry to correct the company's book balance?
Which of the following errors would require a journal entry to correct the company's book balance?
Which of the following describes the primary goal of performing a bank reconciliation?
Which of the following describes the primary goal of performing a bank reconciliation?
To maintain strong internal controls, who should ideally prepare the bank reconciliation?
To maintain strong internal controls, who should ideally prepare the bank reconciliation?
In a bank reconciliation, what is the treatment of outstanding cheques?
In a bank reconciliation, what is the treatment of outstanding cheques?
Which of the following items would require a journal entry after completing a bank reconciliation?
Which of the following items would require a journal entry after completing a bank reconciliation?
A company's bank reconciliation shows a deposit in transit of $5000. How will this item affect the reconciliation?
A company's bank reconciliation shows a deposit in transit of $5000. How will this item affect the reconciliation?
Which of the following errors would require a journal entry to correct the company's cash balance after preparing a bank reconciliation?
Which of the following errors would require a journal entry to correct the company's cash balance after preparing a bank reconciliation?
A bank reconciliation includes a $200 bank service charge. What impact does this have on the journal entries?
A bank reconciliation includes a $200 bank service charge. What impact does this have on the journal entries?
Upon reviewing the bank statement, a company discovers a direct deposit from a customer of $750 that they were not previously aware of. What journal entry is required?
Upon reviewing the bank statement, a company discovers a direct deposit from a customer of $750 that they were not previously aware of. What journal entry is required?
Under the allowance method, what journal entry is required when a specific account receivable is known to be uncollectible?
Under the allowance method, what journal entry is required when a specific account receivable is known to be uncollectible?
If an account previously written off is later deemed collectible, what is the journal entry to reinstate the account?
If an account previously written off is later deemed collectible, what is the journal entry to reinstate the account?
Which of the following statements is true regarding the balance of the Allowance for Doubtful Accounts?
Which of the following statements is true regarding the balance of the Allowance for Doubtful Accounts?
Which of the following best explains the underlying principle of the aging of accounts receivable method?
Which of the following best explains the underlying principle of the aging of accounts receivable method?
Under the aging of accounts receivable method, what is the first step in determining bad debt expense?
Under the aging of accounts receivable method, what is the first step in determining bad debt expense?
What is the primary basis for the uncollectible factor applied to each category of accounts receivable when using the aging method?
What is the primary basis for the uncollectible factor applied to each category of accounts receivable when using the aging method?
After determining the required ending balance in the Allowance for Doubtful Accounts using the aging method, what does the difference between this balance and the current balance represent?
After determining the required ending balance in the Allowance for Doubtful Accounts using the aging method, what does the difference between this balance and the current balance represent?
What might excessive write-offs of accounts receivable indicate?
What might excessive write-offs of accounts receivable indicate?
A company's management team has a bias towards understating the Allowance for Doubtful Accounts. What is the likely impact of this bias on the company's financial statements?
A company's management team has a bias towards understating the Allowance for Doubtful Accounts. What is the likely impact of this bias on the company's financial statements?
What does a high Accounts Receivable Turnover ratio generally indicate about a company's credit and collection policies?
What does a high Accounts Receivable Turnover ratio generally indicate about a company's credit and collection policies?
What does a higher Average Collection Period indicate?
What does a higher Average Collection Period indicate?
What is the primary purpose of assessing a company's liquidity?
What is the primary purpose of assessing a company's liquidity?
Which of the following would not be included in the numerator when calculating the Quick Ratio?
Which of the following would not be included in the numerator when calculating the Quick Ratio?
A bank loan covenant requires a minimum current ratio of 1.5. If a company's current assets are $300,000, what is the maximum amount of current liabilities they can have without violating the covenant?
A bank loan covenant requires a minimum current ratio of 1.5. If a company's current assets are $300,000, what is the maximum amount of current liabilities they can have without violating the covenant?
A company has a decreasing current ratio trend over the past three years. What could this indicate?
A company has a decreasing current ratio trend over the past three years. What could this indicate?
Company A has an Accounts Receivable Turnover of 8, while Company B, in the same industry, has a turnover of 6. What can be inferred about the two companies?
Company A has an Accounts Receivable Turnover of 8, while Company B, in the same industry, has a turnover of 6. What can be inferred about the two companies?
Flashcards
Cash-to-Cash Cycle
Cash-to-Cash Cycle
The time between paying suppliers and receiving cash from customers.
Goal of Cash-to-Cash Cycle
Goal of Cash-to-Cash Cycle
To minimize the duration of the cash-to-cash cycle.
Factors Affecting Cycle Length
Factors Affecting Cycle Length
Different businesses have varying cash-to-cash cycle lengths.
Internal Controls
Internal Controls
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Principles of Internal Control
Principles of Internal Control
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Segregating Duties
Segregating Duties
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Independent Verification
Independent Verification
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Consequences of Weak Controls
Consequences of Weak Controls
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Limitations of Internal Controls
Limitations of Internal Controls
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Cost Efficiency
Cost Efficiency
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Human Error
Human Error
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Management Override
Management Override
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Collusion
Collusion
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Cash Monitoring
Cash Monitoring
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Segregation of Duties
Segregation of Duties
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Bank Reconciliation
Bank Reconciliation
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Deposits in Transit
Deposits in Transit
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Outstanding Cheques
Outstanding Cheques
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Adjusted Bank Balance
Adjusted Bank Balance
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Adjusted Accounting Records
Adjusted Accounting Records
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NSF Cheque
NSF Cheque
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Journal Entries
Journal Entries
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Monthly Bank Review
Monthly Bank Review
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Outstanding Deposit
Outstanding Deposit
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Bank Error
Bank Error
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Entity Errors
Entity Errors
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Timing Difference
Timing Difference
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Uncollectible Account Entry
Uncollectible Account Entry
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Reinstating an Account
Reinstating an Account
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Allowance for Doubtful Accounts Balance
Allowance for Doubtful Accounts Balance
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Aging of Accounts Receivable
Aging of Accounts Receivable
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Uncollectible Factor
Uncollectible Factor
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Bad Debt Expense Calculation
Bad Debt Expense Calculation
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Credit Sales vs Aging Method
Credit Sales vs Aging Method
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Judgment in Estimates
Judgment in Estimates
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Allowance for Doubtful Accounts
Allowance for Doubtful Accounts
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Net Accounts Receivable
Net Accounts Receivable
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Accounts Receivable Turnover Ratio
Accounts Receivable Turnover Ratio
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Average Collection Period
Average Collection Period
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Current Ratio
Current Ratio
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Quick Ratio
Quick Ratio
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Liquidity
Liquidity
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Trends in Financial Ratios
Trends in Financial Ratios
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Study Notes
Cash and Accounts Receivable (Part 1)
- The cash-to-cash cycle is the duration from paying suppliers for inventory to receiving cash from customers.
- Its goal is minimizing the cash cycle time.
- Cycle duration depends on the type of business; a fruit stand has a shorter cash cycle than a winery.
- Management is responsible for timely, reliable financial reporting, ensuring accounting system integrity.
- Internal controls aim at efficient asset usage and compliance with laws and regulations.
- The importance of internal controls increases as the organization's size grows.
Internal Controls
- Effective internal controls include adequate physical controls, assignments of responsibilities, separation of incompatible duties, independent verification of transactions, and proper documentation.
- Inadequate internal controls lead to fraud opportunities.
- Internal controls are not foolproof but need to be cost-effective.
- Internal controls can fail because of human errors or management override.
- Internal controls can be circumvented by collusion among employees.
- Internal controls may prove ineffective for unfamiliar transactions.
Cash
- Businesses require sufficient cash for daily operations.
- Daily activities must include depositing all cash & cheques, restricting cash access, management approval of invoices, payment by checks and double signatures.
- Cash is frequently verified across the company's records and its bank balance.
- Bank reconciliations are crucial to compare cash records with bank records.
Bank Reconciliation
- Time-sensitive and precise.
- Matching entity records to bank statement entries.
- Identifying timing differences (lag between recording event and date the bank processes it).
- Detecting errors (incorrect recording of deposits or checks).
- Significant timing differences should be investigated.
- Types of differences to note are: outstanding deposits, outstanding checks, bank errors and entity errors.
Items affecting Cash per Entity's Records
- Bank statements record things the entity hasn't yet processed, such as deposits, electronic payments, and bank charges.
- NSF cheques (non-sufficient funds) are customer checks that are determined to be worthless.
- Entity errors refer to incorrect handling of entity transactions, like deposits or cheques.
- Ensure that all recorded transactions are reflected in the books.
Bank Reconciliation Template
- Bank reconciliations are essential for comparing entity records versus bank records.
- Entity records should be matched against bank statements.
- Reconciliation should be performed regularly and ideally by a staff member not involved in day-to-day record keeping.
Cash and Accounts Receivable (Part 2)
- Companies often grant credit to customers, hoping to increase sales and revenue.
- Credit policies should evaluate credit histories, grant credit judiciously, and follow up on late payments.
- Uncollectible accounts—inability of a customer to pay—must be dealt with.
Allowance Method
- The allowance method, used for matching principles, forecasts bad debt expense.
- Credit sales percentage and aging of accounts (trade) receivables methods are used for forecasting.
- Bad debt expense is determined by multiplying credit sales by estimates of uncollectible amounts.
Aging of Accounts (Trade) Receivables Method
- The aging method analyzes account age to estimate the likelihood of uncollectability.
- Older accounts are more likely to be uncollectible.
- The balance in Allowance needs calculation and comparison to prior balances for expense determination.
Financial Statement Analysis
- Analyzing Accounts Receivable includes calculating turnover ratios. (Net credit sales / Average net receivables, or net revenue from income statement if credit sales are not available).
- Analyzing trends in financial ratios is crucial to evaluating company performance and comparing to competitors.
- Assessing liquidity is another key element of financial analysis; measuring short-term solvency.
- The current ratio (current assets/current liabilities) and quick ratios [(current assets - inventory- prepaid expenses)/ current liabilities] are relevant metrics.
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Description
This lesson covers the cash-to-cash cycle, emphasizing the importance of minimizing its duration. It also addresses Internal controls, which are crucial for ensuring accounting system integrity and compliance. Effective internal controls include physical measures, duty assignments, and transaction verification.
