ACCT 102 1st Edition Exam 2 Study Guide Lectures 9 17 Lecture 9 February 13th Paying with checks only certain people have the authority to sign the check and checks are ordered by specific check numbers making it easy to tie the transaction to the payment Petty Cash Fund Small dollar amounts put into a fund to reimburse employees who have receipts for items they ve bought with their own money Bank Accounts a secure place to keep cash and backed by the federal Government Bank Reconciliation serves as a control function by identifying errors Differences between cash account balance and bank statement o Transactions recorded by business but not by the bank Deposit in transit amount recorded by the business but has not been recorded by the bank Happens at the end of the month Outstanding checks check is issued by the business and has not been cashed yet o Transactions recorded by the bank but not yet recorded by the business Interest on bank accounts Band service charges NSF check a check that has been returned to the company because there wasn t enough money in their account o Errors in recording transactions Preforming a bank Reconciliation o Start with unadjusted bank balance o Add deposits in transit and deduct outstanding checks o Then go to unadjusted book balance o Add collections and interest and deduct bank service charges and NSF checks o Resulting in True cash balance Fraud Triangle Opportunity most control over don t give someone the opportunity to commit fraud Rationalization justify their fraud protect family underpaid going to pay it back etc Pressure someone pushed them to commit fraud usually by a corrupt manager or other employee Lecture 10 February 18th Uncollectable accounts expense Direct Write off Method writes off bad debts when they can be specifically identified o Not permitted under GAAP Allowance Method contra asset account allowance for doubtful accounts is created to offset accounts receivable o Accounts receivable allowance for doubtful accounts net realizable value of receivables Percent of Revenue Method credit sales x estimated bad debt percentage bad debt expense Percent of receivables method calculates an estimated allowance for doubtful accounts based on accounts receivables Estimated alliance for doubtful accounts allowance for doubtful accounts bad debt expense Factoring Sell your receivables Lecture 11 February 20th Notes Receivable involves a formal written agreement to pay and gives creditor a stronger legal claim Usually used for big receivables Maker party issuing the note and promising to pay Payee party loaning the money and receiving the payments Principal original amount borrowed Issuance Date date note began Maturity Date date note must be paid Term amount of time between the issuance date and maturity date Interest Rate annual rate of interest that must be paid on the principal Maturity Value amount to be paid each due date principal plus interest Calculating Interest Interest Face Amount x Interest Rate x Fraction of a year Credit Cards pays the seller the amount of each sale and charges a service fee The back then collects the full amount of the sale from the buyer Advantages to the seller o Receives the money in a few days o Avoid bad debt o Reduce costs for employees o Believed that it will increase sales Small Businesses service fees for using credit cards will eat up any profit a small business makes making it harder for small businesses to use credit cards Advantages for consumer o Extra transaction security o Ability to delay payments o Good way to build credit Disadvantages for consumer o Charge high interest rates o Make it easy to overspend o Quickly create debt that hurts credit score Debit Cards authorizes a bank to make an immediate electronic withdrawal from holder s bank account Advantages for consumer o Convenience of being accepted at many retailers o No interest or finance charges o No debt to pay later Disadvantages for consumer o Provides less support in case your card is stolen o Overdraft your bank account o Fail to contribute to your credit history Lecture 12 February 23rd Merchandise Inventory product available for sale at the end of the year Beginning inventory Inventory Purchases Costs of Goods sold Ending Inventory Inventory Cost flow Good in inventory may be acquired at different costs First in First Out FIFO older lower priced items are sold first Last in First Out LIFO newer higher priced items are sold first for tax reasons Average Cost average prices so there is consistent per item prices within a particular sale Lecture 13 February 25th Fixed Asset an asset that physically exists and used during normal business operations Cost of Fixed assets doesn t just cost what it is worth but you also pay for shipping installation etc Costs after Acquisition Revenue Expenditures ordinary repairs and maitance everyday small repairs Recorded as expenses when they incur Capital Expenditures improvements to an asset that affect its long term value Increases the assets useful life Depreciation Cost of the fixed assets recorded over the life of the asset reflects the reduction in value Annual depreciation Expense Asset Cost Salvage Value useful life Recording Depreciation book value of fixed asset cost Accumulated depreciation Lecture 14 February 27th Discarding a fixed asset when a business disposes of an asset but receives nothing in return When an asset with no book value is discarded an entry is made to remove it from the companies books When an asset that is not fully depreciated is discarded depreciation for the current period through the date of discard must first be recorded Selling a fixed Asset if the asset isn t fully depreciated then the current period through the date of sale must be recorded Sale proceeds book value of fixed asset Gain loss on sale Lecture 15 March 2nd Depletion allocation of cost for fixed assets such as timber ore etc Cost of Resource estimated total units of resource Depletion Charge unit depletion charge x number of units extracted Intangible Assets long lived assets that are non physical goods Amortization has a useful life Patents a right to items Copyright reserves to the right to make money off books music etc amortization of a copyright is the author s life plus a little Financial operations businesses must finance operations through one of two ways Debt financing includes all liabilities owed by a business Regular interest and principle payments required Equity Financing