Then the financial statements are prepared from the

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Unformatted text preview: rsing entries may be used to eliminate the adjusting entries. 6-21 6-24 a. CYCLE BALANCE SHEET ACCOUNTS INCOME STATEMENT ACCOUNTS SALES AND COLLECTION Accounts receivable Cash Notes receivable—trade Allowance for doubtful accounts Interest receivable Sales Bad debt expense Interest income ACQUISITION AND PAYMENT Income tax payable Accounts payable Unexpired insurance Furniture and equipment Cash Accumulated depreciation of furniture and equipment Inventory Property tax payable Income tax expense Advertising expense Travel expense Purchases Property tax expense Depreciation expense— furniture and equipment Telephone and fax expense Insurance expense Rent expense PAYROLL AND PERSONNEL Cash Accrued sales salaries Sales salaries expense Salaries, office and general INVENTORY AND WAREHOUSING Inventory Purchases CAPITAL ACQUISITION AND REPAYMENT Bonds payable Common stock Cash Notes payable Retained earnings Prepaid interest expense Interest expense b. The general ledger accounts are not likely to differ much between a retail and a wholesale company unless there are departments for which there are various categories. There would be large differences for a hospital or governmental unit. A governmental unit would use the fund accounting system and would have entirely different titles. Hospitals are likely to have several different kinds of revenue accounts, rather than sales. They are also likely to have such things as drug expense, laboratory supplies, etc. At the same time, even a governmental unit or a hospital will have certain accounts such as cash, insurance expense, interest income, rent expense, and so forth. 6-22 6-25 a. Management assertions about transactions relate to transactions and other events that are reflected in the accounting records. In contrast, assertions about account balances relate to the ending account balances that are included in the financial statements, and assertions about presentation and disclosure relate to how those balances are reflected and disclosed in the financial statements. MANAGEMENT ASSERTION b. CATEGORY OF MANAGEMENT ASSERTION c. NAME OF ASSERTION a. All sales transactions have been recorded. Classes of transactions Completeness b. Receivables are appropriately classified as to trade and other receivables in the financial statements and are clearly described. Presentation and disclosure Classification and understandability c. Accounts receivable are recorded at the correct amounts. Account balances Valuation and allocation d. Sales transactions have been recorded in the proper period. Classes of transactions Cutoff e. Sales transactions have been recorded in the appropriate accounts. Classes of transactions Classification f. All required disclosures about sales and receivables have been made. Presentation and disclosure Completeness g. All accounts receivable have been recorded. Account balances Completeness h. There are no liens or other restrictions on accounts receivable. Account balances Rights and obligations i. Disclosures related to accounts receivable are at the correct amounts. Presentation and disclosure Accuracy and valuation j. Recorded sales transactions have occurred. Classes of transactions Occurrence k. Recorded accounts receivable exist. Account balances Existence l. Sales transactions have been recorded at the correct amounts. Classes of transactions Accuracy f. Disclosures related to sales and receivables relate to the entity. Presentation and disclosure Occurrence and rights and obligations 6-23 6-26 SPECIFIC BALANCERELATED AUDIT OBJECTIVE MANAGEMENT ASSERTION COMMENTS a. There are no unrecorded receivables. 2. Completeness Unrecorded transactions or amounts deal with the completeness objective. b. Receivables have not been sold or discounted. 4. Rights and obligations Receivables not being sold or discounted concerns the rights and obligations objective and assertion. c. Uncollectible accounts have been provided for. 3. Valuation or allocation Providing for uncollectible accounts concerns whether the allowance for uncollectible accounts is adequate. It is part of the realizable value objective and the valuation or allocation assertion. d. Receivables that have become uncollectible have been written off. 3. Valuation or allocation This is part of the realizable value objective and the valuation or allocation assertion. There may also be some argument that this is part of the existence objective and assertion. Accounts that are uncollectible are no longer valid assets. e. All accounts on the list are expected to be collected within one year. 3. Valuation or allocation Accounts that are not expected to be collected within a year should be classified as long-term receivables. It is therefore being included as part of the classification objective and consequently under the valuation or allocation assertion. f. The total of the amounts on the accounts receivable listing agrees with the general ledger balance for accounts receivable. 3. Valuation or allocation This is par...
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