Chap 7-4
:
Internal control :
* Internal control
Cash
Polocies
,
procedures to protect the
a
rules
accounting into
Promote accountability
, prevent fraud
who : Board
How
:
6
I
integrity of financial I
protect assets
of directors/management
fundamental Principles
1) Establish Responsibilities
2) Maintain accurate records
3) Insure assets
4) Separate duties Record keeping is
kept seperate from custody of assets
:
Apply tech controls
6) Review regularly & independently
5)
Internal control for cash
Must meet 3 basic
1)
Cash
guidelines
handling I
cash
recordkeeping are kept separate
2) Cash receipts are deposited in the bank immediatly (daily
3) Cash disbursements are made by
check
Bank Reconcilations
Purchase
Check
Approval
Signatures
Pre-numbered Cheques
Payment Approval
Daily Deposits
Bank reconciliation
:
process of comparing company's record to the bank's
-
-
making adjustment to compute the correct
...
identifu if there are any errors (numbers missing
,
,
-
-
internal control
:
ensure that cash
adjusted book balance
=
system is operating properly
adjusted bank balance
+
balanced end bal.
bank reconciliation
BOOK
BANR
Bank Reciepts
Deposits in transfer
ERRORS
Interest Revenue
EFT Collection
ERRORS
NSF Check
OIS Checks
InterestI bank expenses
ERRORS
ERRORS
NSF Checks :
OIS
Don sufficient
Checks :
Outstanding
funds check
checks
,
yet cashed by receiver
=
Errors ① Who's mistake ? Book or Bank ?
② ERRORS
=
(Actual)
-
CERROR)
=
add
New
journals
NSF Checks
:
DR Ar
CR Cash
A explai
+
X
/X
sub
bad debt expense & write offs
Both have to do with credit sales made on account (AIR)
Writte offs.
acknowledging losses occurred
Bad Debt Expense
AFDA
:
Allowance
Methods
:
:
estimates losses not
yet occurred
for Bad Debt Expense
① Dirrect write-offs
,
violates the
= include
matching principle
allowance for uncollectable account
falsifies the bad debt expense balance
&
② Allowance Method
Credit sales
balance sheet
Income statement
% of CREDIT sales
Aging of AR
% of AR
Net Accounts Receivables
:
accounts receivable
Amount of
money on account
that the comp
.
expects to Receive
Net Accounts Receivables
Direct
write-off method
Ending Bad Debts Expense
Ending AIR
=
:
1
step
,
writte offs
:
DR BDE
CR
Inc/Statement of
%
of
earnings method
CREDIT SALES
:
2 Steps -
AIR
1) Write off 2) BDE
1) DR
CR
2) DR
CR
Allowance
AIR
BDE
Allowance
Statement of Financial
%
of AR
Position/Balance Sheet Method
mu
:
Aging Method
:
Current Period
take
a
61-9090 +
31-60
from each period
%
AIR
Net Realizable
=
& sum
=
+
X
-
=
AFDA
AIR-AFDA
You = ever adjust the age of accounts but,
X
you can do beg bal AFDA-DR AFDA
T
:based on AIR
=
aging method final
balance
adjusting entry
accounts
A/R
beg bal
(1)
Credit
AFDA
(2)
beg bal
begbal
(4)
(2)
Sales
(1)
(3)
① Credit
Sales
②
③
writte aft
Cash collection
⑪
Adjustment for AFDA
write offs
Reinstate
Dr
:
:
adjustment
DR
:
AFDA
AIR
DR
,
,
BDE
CRAR
CR
BDE
AFDA ;
,
CR
DR
AFDA
Cash
,
CRAIR
BDE
beg bal
(4)
CHAP5
Analyzing Sales & Inventory
Contra-Accounts
·
Opposite balance than their partners account's
Used to subtract value
Credit Card discounts (bal ? )
Sales discount
(DR bal)
J diff.
Sales Returns & allowances (Dr bal)
ARA
Net Sales
R& A
Gross Sales
=
Contra Accounts
-
Credit Accounts , used to
I discounts
specify pay back dates
iscount - %, always out of 100
2/10
" discount term
if paid whin x days
-
=
N/30 s
obligated to pay win
"net 30 days"
EOM
days
of Month
End
:
x
"
Effective Annual Interest 28
=
discount
-
#otdaysx365
after
remaining
principle
discount period
example
:
3/15
,
n/45
(a3z)
(45 15)x365x100
-
=
=
37 63 %
.
45 days
I
now
is
$97
(100-3)
days
$100
x10
Accounting for sales sales returns & sales discounts
,
Perpetual Inventory System
Therefor
,
:
constantly updates inventory level
the book
inventory accuratly shows the Real stock in real
Starting w/ a baseline from a physical count a updates
with continuous estimates of
inventory based on electronicRecords
time
.
minimizes
consists
of
overstatement
understatements
(missing) inventory
steps
2
1) Customer
&
Sales
a) Inventory
Period
Inventory systems during the periods it solely records the customer/sales
,
interactions & inventory is
Consists of
the period
1
only calculated of the end of
step
D Customer-sales
ADJUSTMENTS
Accounts
Sales
Sales
AIR
R&A
Sales Discounts
Purchases
or
Cash
A/R or Cash
Cash
+
+
+
AR/Cash ↑
Sales
Sales RA
AR + Sales Dis
AIR or Cash
+
Inv /Sup
.
...
,
Sales
AR/Cash ↓
Sales RA *
Cash ↑ ,
ARK , Sales
AR/Cash +,
Disc *
Inventory ↑
Perceptual Inventory System
ADJUSTMENTS
Accounts
1) customer
AIR or Cash
Sales
make a
so
you're gaining s
+
Sales
2) inventory
sale
you
DR
but
loosing inventory
incuring expenses
Inventory
COGS
+
CR
AR/Cash 1 , Sales
Inventory ↓ , COGs ↑
CR
DR
CR
Sales R & A
A/R or
Cash
+
AR/Cash ↓
contra account
(Returns & Allocations)
Returns
- opposit of
Sales R& A
Inventory
+
COGS
Cit Resellable)
sales
Inventory ↑
DR
Sales t
,
COGSV
S
CR
DR
DR
Sales Discounts
Cash
+
AR
+
Sales
sale discounts consist
Discounts
of payments made
contra account
on account before
of the
discount period
.
the end
No
Inventory or
Cash +,
DR
+
Sales Disc 4
.
,
COGS
the sale is previously
Recorded as a sale
using AIR so inr.
is
.
alr. handeled
now
you must adj
AR Cash & Sales
,
Discount Account
Purchase
just
like before
AR/Cash
+
Invent/Supplies
AR/Cash t
CR
,
Inventory
DR
Period
Inventory system
Accounts
Sales
Sales
11
AIR
R&A
Sales Discounts
Purchases
or
Cash
A/R or Cash
Cash
+
+
+
Sales
SalesRA
AR + Sales Dis
AIR or Cash
+
Inv /Sup
.
...
ADJUSTMENTS
AR/Cash 1
,
Sales
ARICash
Sales RA *
Cash ↑,
AR↓ , Sales
AR/Cash +,
Disc *
Inventory ↑
Calculate COGS
3
methods to calculate
D FIFO
First
:
in
costs of
inventory AKA COGS
First out
-
inventory firstI newest inventory last
& match to cost of each batch with it's
inventory
.
Sell oldest
Example
Dec I
:
bought
30
for $10 each
more
for $20 each
100
cans
bought 100
a) sold 60 cans
COGS
b) sold
COGS
=
60 x 10
=
$60
120 cans
=
100 x 10)
+
(20 x 20)
2) Weighted Average (WA)
:
1000 + 400
=
COGS is calculated by multiplying each
item sold by
cost
Example
Q
A
:
$1400
=
"predetermined" average
a
.
for $1000
30 bought 100 more
for $2000
Dec I
bought
100
cans
Sold 60 cans
:
:
1000
=
100
=
2000-100
$10/each
$20 each
=
<
wa
COGS
3) Specific Identification
:
:
=
Calculates COGS
item in
Example
40 + 20)
=
=
60 x 15
=
$15
$900
by keeping track of each specific
inventory I assigning individual costs.
, sold 60
for $10
sold 70
30 bought 100 more
for $20
Dec I
bought
100
cans
,
COGS
=
(60 x 10)
+
(70x20)
=
600
+
1400
=
$2000
impact of ↑ or t inventory wi FIFOus wa on financial
Rising Costs of Inventory
:
FlFo
has a
statements
COGS El4
FIFO
WA
COGS
↓
↑
Beg Inventory
↑
↓
Gross Profit
↑
↓
Net Income
↑
↓
-
-
- FO
.
WA
LOGS
El
trend
Decreasing costs of Inventory
:
:
GOGSt
Wa has
,
BI Gross
,
COGs
WA
FIFO
El
WA
COGS
↑
↓
Beg Inventory
t
↑
Gross Profit
↓
↑
Net Income
↓
↑
-
COGS
El
Companies have the choice blu
FIFO WA but once they've chosen ,
Reminder :↓ prices wa weights it down &
,
.
FIFO
.
-
Prof &Net Inc
GOGS ↓
they must stick to it
4
InventoryStar
beginning
purchases
+
costs
Inventory
cost of
purchases
goods
costs
sold
L
goods
available
for sale
costs of
sold
goods
GAS
ending
invent
ory
+
BI
BE
Goods Available
for sale
for sale
Beginning Inventory (previously left over
:
:
Ending Inventory
Cost of Purchases
Inventory
Y
goods available
:
ending
beginning
Inventor
*
↑
=
+
+
=
+
=
Purchases
Purchase R & A
Purchase Discounts
Gross Purchases
Costs
Transportation
Net total cost of purchases
-
goods available
for sale