chapter summaries for accounting

8/10/2019 Chapter Summaries for Accounting

1/7

University of San Carlos

Nasipit, Talamban, Cebu City, Philippines

Chapter Summariesand Exerciseson

Chapters 8 9 10 11 and 16

IE 310 Financial Accounting

Submitted by:

Neelesh Vasnani

BSIE 3

Submitted to:

Mrs. Lorafe Lozano

IE 310 Instructor

Submitted on:

October 10 2014


2/7

CHAPTER 8 SUMMARY CASH AND INTERNAL CONTROL

When a business is no longer small, the use of internal control is needed for business activities.

Internal Control System- is used to monitor and control business activities. An internal control system consists of the policies

and procedures managers use to protect assets, ensure reliable accounting, promote efficient operations, and urge

observance of company policies.

The Principles of Internal Control: 1. Establish responsibilities. 2.Maintain adequate records. 3. Insure assets and

bond key employees. 4. Separate recordkeeping from custody of assets. 5. Divide responsibility for related

transactions. 6. Apply technological controls. 7. Perform regular and independent reviews. Technology, when used properly, is very useful in maintaining internal control. Its useful in reducing errors and

increasing recordkeeping capabilities, but the tricky or dangerous part here is assigning the right separation o

duties to employees.

Limitations of Internal Control: Human error and cost benefit principle(costs of controls mustnt exceed its benefits)

Control of Cashcash is a very valuable asset for every company. A good system of internal control should meet these rules:

1. Handling cash is separate from recordkeeping of cash.

2. Cash receipts are promptly deposited in a bank.

3. Cash disbursements are made by check.

Control of Cash Receipts - Internal control of cash receipts ensures that cash received is properly recorded and deposited.

Over-the-counter Cash Receipts -over-the-counter cash receipts from sales should be recorded on a cash register at

the time of each sale.Cash over and short is an income statement account that reports differences in cash in the cash register and receipts

If a cash registers record shows $550 but the count of cash in the register is $555, the entry to record cash sales and its

overage is:

Cash Receipts by email - Control of cash receipts that arrive through the mail starts with the person who opens the mail

Preferably, two people are assigned the task of, and are present for, opening the mail. In this case, theft of cash receipts

by mail requires collusion between these two employees. Control of Cash Disbursements- is especially important as most large thefts occur from payment of fictitious invoices.

Voucher system of control upon getting a bill, the company verifies the charges, prepares a voucher, and inserts the

bill. This transaction is then recorded in the journal entry. If the amount is due, check is issued; if not, voucher is filed for

due payment.

Petty Cash System of control utilized for small payments required for items such as postage, courier fees, mino

repairs, and low-cost supplies. To avoid the time and cost of writing checks for small amounts, a company sets up a

petty cash fund to make small payments.

Banking Activities as Controls

Bank Account Deposit and Check setting up a bank account, being supported by deposit slips, and utilization of

checks for payment can be useful for cash control.

Bank Statement shows the activity in the bank account from checks, deposits, until the ending balance.

Days

sales uncollected - One measure of how quickly a company can convert its accounts receivable into cash.

Days sales uncollected =

x 365


3/7

CHAPTER 9 SUMMARY ACCOUNTING FOR RECEIVABLES

A receivable is an amount due from another party. The two most common receivables are accounts receivable and note

receivable. Other receivables include interest receivable, rent receivable, tax refund receivable , and receivables from

employees.

Recognizing accounts receivable accounts receivable occur from credit sales to customers.

Sales on Credit - an old school way wherecredit sales are recorded by increasing Accounts Receivable. A company mus

have a separate accountthat tracks how much that customer purchases, has already paid, and still owes for each buyer.

Credit Card Sales- Many companies allow their customers to pay using 3rd-party credit cardssuch as Visa, MasterCard

or American Express, and debit cards. The advantages are: no separate accounts, no risk of not being paid, earlie

collection of cash, and lastly, variety of pay options (increases sales). However, the seller pays charges for the card

company.

Installment sales and receivables - companies allow their credit customers to make periodic payments over severa

months.

Bad Debts also called uncollectible accounts, are accounts that some customers dont pay what they promisedTwo methods to account bad debts:

Direct Write-Off Method records the loss from an uncollectible account the moment it is known to be uncollectible

Two accounting principles must be applied when using this: matching principle(bad debts should be reported in the

same period as the sales), and the materiality principle (bad debts with tiny effect on financial statements should be

ignored).

Allowance Method - matches the estimated loss from uncollectible accounts receivable against the sales they produce.

2 common methods to estimate bad debts:

1.

Percent of Sales method / Income St. method estimates a certain percent of uncollectibles from credit

sales

2.

Accounts Receivable method / Balance sheet method

assumes that a given percent of a companys

receivables is uncollectible. This percent is based on past experience and is impacted by current conditions.

Recognizing notes receivable a promissory note is a written promise to pay a specified amount of money. Notes receivable

are usually recorded in a single Notes Receivable account to simplify recordkeeping.

Valuing and Setting notes

Recording an honored note - the principal and interest of a note are due on its maturity date. The maker of the noteusually honors the note and pays it in full.

Recording a dishonored note when a note maker is unable to pay at maturity, the note is dishonored.

Recording end-of-period Interest adjustment when notes receivable are unsettled at the end of a period, any accrued

interest earned is computed and recorded.

Disposing of Receivables - companies can convert receivables to cash before they are due.

Selling Receivables - A company can sell all or a portion of its receivables to a finance company or bank. The buyer,

called a factor, charges the seller a factoring fee and then the buyer takes ownership of the receivables and receives cash

when they come due.


4/7


5/7

Total Asset Turnover measures the companys ability to generate sales and incomes from assets.

Total Asset turnover =

CHAPTER 11 SUMMARY CURRENT LIABILITIES AND PAYROLL ACCOUNTING

Liability a probable future payment of assets or services that a company is presently obligated to make.

Current Liabilities also called short term liabilities, are obligations due within one year of the companys operating cycle.

Long term Liabilities a companys obligations not expected to be paid within the longer of one year or the companys

operating cycle.

Uncertainty in Liabilities it is a must to answer these three questions: Whom to pay? When to pay? How much to pay?

Determinable Liabilities

are set by contracts, laws, or agreements and are measurable.

Accounts Payable are amounts owed to suppliers for products purchased on credit.

Sales Tax Payable are stated as a percent of selling prices.

Unearned revenues are amounts received in advance from customers; also called prepayment

Short term notes payable is a written promise to pay a specified amount on a definite future date within one year.

Payroll Liabilities the liabilities incurred by an employer from having employees. These expenses are usually large.

Employee Payroll deductions a deduction from an employees gross pay. It can be classified into the following:

Employee income tax

Employee voluntary deductions

Recording employee payroll deductions employers must accrue payroll liabilities at the end of each period.

Employer Payroll taxes employers must pay payroll taxes in addition to those required for employees. Employer

taxes include FICA and unemployment taxes.

Estimated Liabilities such as employee benefits like pensions health care vacation pay andwarrantiesoffered by seller.

Example of Vacation benefits:

Multi period Liabilities liabilities that extend over multiple periods. These often include unearned revenues and notes

payable. Multi period liabilities can also be estimated liabilities.

Contingent Liabilities a potential obligation that depends on a future event arising from a past transaction or event, an

example is a pending lawsuit.

Potential Legal Claims many companies are at the risk of being sued. A potential claim is recorded in the accounts

only if payment for damages is probable and the amount can be reasonably estimated.

Debt Guarantees when a company guarantees the payment of debt owed by a supplier or customer.

Other Contingencies other examples of contingencies are environmental damages tax assessments insurance

losses and government investigations.


6/7

Uncertaintiesall organizations face this: events like natural disasters and development of new competing products

THESE HOWEVER ARE NOT PART OF CONTINGENT LIABILITIES.

Time interest earned ratio a company incurs interest expense on many of its current and long term liabilities.

Time interest earned =

CHAPTER 16 SUMMARY REPORTING THE STATEMENT OF CASH FLOWS

Statement of Cash Flows used to report all cash receipts ( inflows) and payments (outflows) during a period.

Classification of Cash Flows

Operating activities include transactions that determine net income, like purchase of merchandise and sale of goods.

Investing activities include transactions that affect long term assets, namely, the purchase and sale of long term assets

Financing activities include transactions that affect long term liabilities and equity.

Preparing the Statement of Cash Flows

2 alternative approaches

Analyzing the cash accountInflows and outflows are recorded in the cash account, thus its natural to look into here.

Analyzing non cash accountsaside from debits and credits showing up in the cash account, they obviously show up

in the respective partner accounts.

Information to prepare the statement: balance sheet, income statement, additional information

Methods of Reporting the net cash is the same for both methods

Direct methodseparately lists each major item of cash receipts and each major item of cash payments.

Indirect method reports net income, then adjusts it for items needing net cash provided by operating activities. It

does not report individual items of cash inflows and outflows, but reconciles net income with adjustments instead.

Summary of Adjustments in Indirect method:


7/7

Cash Flow on Assets ratio helps in decision making of the amount and timing of cash flows.

Cash flow on total assets =

chapter summaries for accounting

Documents