TCO 1) Suppose your company sold $60,000 in merchandise to a customer for cash. How does this transaction impact the accounting equation?
Solution:
Accounting Entry:
Cash Dr.$60,000
Sales Cr.$ 60,000
Accounting equation =Assets = Liabilities
In this accounting equation, cash will increase by $ 60,000 and inventory will be decreased by $ 60,000. These entries will impact on assets side.
(TCO 1) Suppose your company paid $18,000 in cash for its rent. How does this transaction impact the accounting equation?
Solution:
Accounting Entry:
Rent Dr.$18,000
Cash Cr.$ 18000
Accounting equation =Assets = Liabilities
In this accounting equation, cash will decrease by $ 18000 and liabilities also decreased by $ 18000.
(TCO 1) Suppose your company sold $22,000 in merchandise to a customer for cash. How does this transaction impact the accounting equation?
Solution:
Accounting Entry:
Cash Dr.$22,000
Sales Cr.$ 22,000
Accounting equation =Assets = Liabilities
In this accounting equation, cash will increase by $ 60,000 and inventory will be decreased by $ 60,000. These entries will impact on assets side.
(TCO 2) Suppose your company purchased $50,000 in merchandise from a seller for cash. How does this transaction impact the accounting equation?
Solution:
Accounting Entry:
Purchase Dr.$50,000
Cash Cr.$ 50,000
Accounting equation =Assets = Liabilities
In this accounting equation, cash will decrease by $ 50,000 and inventory will be increased by $ 50,000. These entries will impact on assets side.
(TCO 2) Suppose your company paid $10,000 in cash for its advertising. How does this transaction impact the accounting equation?
Solution:
Accounting Entry:
Advertisement Dr.$10,000
Cash Cr.$ 10000
Accounting equation =Assets = Liabilities
In this accounting equation, cash will decrease by $ 10000 and liabilities also decreased by $ 10000.
(TCO 2) Suppose your company sold $25,000 in merchandise to a customer for credit. How does this transaction impact the accounting equation?
Solution:
Accounting Entry:
Accounts Receivable Dr.$25,000
Sales Cr.$ 25,000
Accounting equation =Assets = Liabilities
In this accounting equation, Accounts Receivable will increase by $ 25,000 and inventory will be decreased by $ 25,000. These entries will impact on assets side.
(TCO 3) Opportunity is one of the components of the fraud triangle. How can a company reduce opportunity as a fraud risk? Give an example of how someone could use opportunity to commit fraud and how the company could reduce this risk.
Solution:
A Company can reduce fraud through internal control. Example: Cashier can give cash to an employee without proper authorisation in voucher. This fraud can be reduced through internal control. Internal control can be used in following ways:
It should be such that no individual can override the internal control system.
It should provide segregation of responsibility, so that no misstatements can be committed easily.
Specifying Authority to authorised voucher.
Preparation of periodical reports on timely basis.
(TCO 3) Pressure is one of the components of the fraud triangle. What types of pressures do people face that could lead to fraud? Give an example of how pressure could lead to fraud.
Solution:
Pressure is also leading components of fraud. Performance pressure is a major cause of this. If a company paying wages on piece rate basis, in that case if an employee is not producing up to the standard production, then company will deduct the salary. To avoid this situation, worker will reject material and stop the production.
TCO 3) Rationalization is one of the components of the fraud triangle. What types of rationalization could a person use to justify misconduct? How can a company protect itself from rationalization as a part of fraud?
Solution:
Rationalization is one the components of fraud. If an worker does any mistake due to negligence or lack of system knowledge, then they start justifying the misconduct. Company can protect through internal control in following ways:
Specifying authority to enter into transactions.
Safeguarding of assets.
Recording of transactions in the account correctly.
Fixing responsibility for work done.
(TCO 4) What is horizontal analysis of financial statements? How does horizontal analysis differ from vertical analysis?
Solution: Horizontal analysis looks at amounts on the financial statements over the past years. The same analysis will be done for each item on the balance sheet and for each item on the income statement. This allows you to see how each item has changed in relationship to the changes in other items. Horizontal analysis is also referred to as trend analysis.
The main difference between Horizontal and Vertical financial statement is in vertical financial statement every items converted into percentage whereas in Horizontal financial statement, it will compare with previous year.
(TCO 4) What is vertical analysis of financial statements? How does vertical analysis differ from horizontal analysis?
Solution:
Vertical analysis reports each amount on a HYPERLINK “http://www.accountingcoach.com/blog/what-is-a-financial-statement” o “What is a financial statement?” financial statement as a percentage of another item. For example, the vertical analysis of the HYPERLINK “http://www.accountingcoach.com/blog/balance-sheet” o “What is a balance sheet and why is it prepared?” balance sheet means every amount on the balance sheet is restated to be a percentage of total assets and in Vertical analysis of an income statement results in every income statement amount being presented as a percentage of sales.
The main difference between Horizontal and Vertical financial statement is in vertical financial statement every items converted into percentage whereas in Horizontal financial statement, it will compare with previous year.
(TCO 4) How does vertical analysis of financial statements differ from horizontal analysis? Which method do you think is a better analysis tool?
Solution:
The main difference between Horizontal and Vertical financial statement is in vertical financial statement every items converted into percentage whereas in Horizontal financial statement, it will compare with previous year.
As per my opinion, Horizontal analysis is better than Vertical analysis of financial statements between it provides previous year data for comparison.
TCO 3) Physical control is a key feature in an internal control system. Why is physical control such an important internal control? Example of physical control as an internal control.
Solution:
Physical control is very important for internal control. There are number of tools which are using for review the Internal Control System:
Complete and exhaustive detail of system. Example: For inventory control evaluation, it contains documents prepared, employees discharging various duties, various stages of stock movements etc.
Complete audit checklist is made and verify by senior professional.
(TCO 3) Prenumbered documents are a key feature in an internal control system. Why are prenumbered documents such an important internal control? Example of prenumbered documents as an internal control.
Solution:
Prenumbered documents are very important for internal control. Prenumbered stationery is used in places where numbers of transactions are more. Example: Invoices. In every organisation, Prenumbered bill book is maintained for sale of goods to remove transfer of goods without invoices.
(TCO 3) Separation of duties is a key feature in an internal control system. Why is separation of duties such an important internal control? Example of separation of duties as an internal control.
Solution:
Seperation of duties means one person cannot complete one transaction. This means, establishing procedures in such a way so that single person cannot have complete control over a transaction from starting to end. Example: work of one person to be reviewed by another person.
(TCO 1) Describe the balance sheet. Why is this statement important to the company, creditors, and investors?
Solution:
A Balance Sheet is a statement which set out the assets and liabilities of a firm or an institution as at a certain date. It is a statement which reports the property owned by the enterprise and the claims of the creditors and owners against these properties.
This statement is useful for the Company, creditors and investors. Its advantages are as follows:
It is a useful device which shows the financial position of a business in a systematic and standard form.
Balance sheet shows solvency position of the Company.
It may serve as the basis for determining purchase consideration of the business.
(TCO 1) Describe the income statement. Why is this statement important to the company, creditors, and investors?
Solution:
Income statement shows how much profit earned by the Company for a given period of time. Generally, this period starts from 1st January to 31st December.
This statement is useful for the Company, creditors and investors. Its advantages are as follows:
Investors of the business are interested in knowing the income statement, earning capacity and growth prospects of the business.
Creditors are also interested in knowing about the solvency of the business. Creditors are likely to be interested in an enterprise over a shorter period than lenders unless they are dependent on the enterprise as a major lender.
(TCO 1) Describe the statement of cash flows. Why is this statement important to the company, creditors, and investors?
Solution:
A cash flow statement is a statement which discloses the changes in cash position between the two periods.
This statement is useful for the Company, creditors and investors. Its advantages are as follows:
This helps to provide information about the liquidity and solvency information of an enterprise.
It helps in understanding and analysis of what are the sources and application of the cash for a company.
It is also useful in examining the relationship between profitability and net cash flow.
It helps in determining how efficiently the cash is being managed by the management of the business.
