INVESTING & FINANCING ACTIVITIES IN
PRODUCTION CYCLE
Investingacquisition
of
long-term
assets/investments
Financing- bonds payable, long term notes
payable, SHE
ACTIVITIES
1.) Financial Planning- the Board of Directors will
approve capital budget, long term finance,
evidenced by the minutes of the meeting.
 The purpose of financial planning is to
ensure the entity has sufficient cash to
operate the business.
 Entities can fund capital needs through their
operations or additional funding through
financing activities (debt and equity
financing).
 An approved cash flow plan and capital
budget constitute authorization and
important controls over management
decisions.
2.) Actual Raising of Capital- issuance of new
shares, debt financing, equity financing. This is
done through proper authorization and
evidenced by the minutes of the meeting with
documents that are signed by the CEO, etc.
 The board of directors usually authorizes
sales of capital stock and debt financing
transactions.
 The auditor must determine whether the
debt agreements bear the signatures of the
CEO, CFO, treasurer, chairman of the board
of directors, and other high-ranking officers.
 Most companies rely on external entities to
process their debt and equity transactions
called transfer agents.
o External Equity Financing- issuance of
addtl. shares and sale of new shares
o Internal Equity Financing- accumulated
profits and retained earning usage
3.) Investing Transactions- actual purchase of
long-term assets.
a) Authorization
- Major investment transactions require
approval from the board of directors or
the investment committee. The auditor
must understand the approval process
and vouch for major acquisitions to the
appropriate documented approval.
b) Custody
- Stock certificates, bond certificates, and
real estate titles may be kept in a
brokerage account or the entity may
actually keep them. If the entity keeps
them, only authorized high-ranking
officers should have access to them in a
safe or a bank safety deposit box.
Entities may keep in their possession
contracts and other documents related
to intangible assets however these
assets must be protected.
Valuation of Investments
 Investment in Subsidiary- Cost, you are the
parent (51% control)
 Investment in Associate- equity method (20%
control, voting rights, outstanding shares)
 Associate Income- increase in asset account
Investment in Associate
xx
Investment Income
xx
Cash
xx
Investment Income
xx
Financial Investment
Entity can invest in:
 Intangible Assets
 Property, Plant and Equipment
SIGNIFICANT
ACCOUNTS
Investments
Long-Term Debt
Capital Stock
Retained Earnings

RELEVANT ASSERTIONS
Existence/occurrence,
Completeness,
Valuation, Presentation,
and Disclosure
Existence/occurrence,
Completeness,
Valuation, Presentation,
and Disclosure
Completeness,
Presentation,
and
Disclosure
Completeness
Retained Earnings- another name for
Accumulated Profit or Loss
Retained Earnings, Beg. xx
Add: Net Income
xx
Less: Net Loss
(xx)
Dividends paid
(xx)
RE, end
xx
Internal Control
1.) Segregation of duties
o Custody (transfer agent, banks)
 Stock certificates, bond certificates, and
real estate titles may be kept in a
brokerage account or the entity may
actually keep them.


o
o

If the entity keeps them, only authorized
high-ranking officers should have access
to them in a safe or a bank safety deposit
box.
Entities may keep in their possession
contracts and other documents related
to intangible assets however these
assets must be protected.
Recording
Authorization (approval BOD- minutes of
the meeting)
Major investment transactions require
approval from the board of directors or
the investment committee. The auditor
must understand the approval process
and vouch for major acquisitions to the
appropriate documented approval.
Substantive Analytical Procedures and Test of
Details in the Financing and Investing Cycle
1.) Fair Value Measurement
2.) Internal Expense is properly recorded
- Classification of liability
3.) SHE, inspect minutes of the meeting
- Trace cash proceeds to bank account
- Confirmation- send confirmation
letter to transfer agent
4.) Stock based compensation plan
- High-ranking officers share salaries
(may be through shares)
- Copy of compensation plan approved
by the BOD; mins. Of the meeting
- Vesting Period: 3 years
 The auditor normally relies on
substantive tests of details in the
financing and investing cycle because
the transactions involved are nonroutinary and involve large amounts.
 Investment costs should be vouched
to the broker’s confirmations,
monthly statements, or other
documentary evidence of cost.
 The auditor may determine evidence
about value impairment of trading
securities
securities




available-for-sale
sale
INVENTORIES
Measures at the lower of cost and Net
Realizable Value
Raw Materials, Work in Process, Finished
Goods
Assets sold in the ordinary course of business.
Inventory varies in the nature of the business.
Legal Test- to test if it is part of the entity’s
inventory.
Items that you own, but not in physical possession
 Purchases in transit; FOB Shipping Point
 Sales in Transit; FOB Destination
 Goods out on consignment
o Not “on”, “to”, “for”- excluded
o “with”-included
 Goods in the hands of the salesmen
 Goods left by customers for approval
Inventories include:
- Merchandise
- Raw materials
- Work in process
- Finished goods inventory
- Allowance
for
obsolescence
(spoilage)
Periodic- with purchases accounts, requires
physical count
Perpetual- merchandise, physical count at least
once, if effective, can be none
Trade Discount- not recorded
Cash Discount- recorded
TD
Invoice= 700,000
Trade Discount= 10%, 15%
Inventory
535,500
A/P
535,500
CD
Credit Term: 1/15,n/30
A/P
535,500
Purchase Discount
5,355
Cash
530,145
Inventories
1.) Cost of Purchase
- Initial acquisition price + cost of
acquisition, import duties (customes
will hold goods, til paid, then
released) & other costs.
2.) Manufacturing Costs
- Conversion cost (DM, DL, Manuf.
OH), Variable and Fixed Costs
Inventory Cost Flow
1.) First in, First Out (FIFO)
2.) Weighted Average Method
3.) Specific Identification
4.) Relative Sales Price Method