7 - Internal Control - Managing and reporting working capital Flashcards
What is working capital?
A business’s current assets minus its current liabilities
What is internal control structure?
Set of policies and procedures that directs how employees should perform a business’s activities
What is cash?
Money on hand, deposits in bank accounts, and cheque and credit card invoices that a business has received from its customers but not yet deposited.
What are simple cash controls over cash receipts?
Managers can control cash receipts by:
- Requiring the proper use of a cash register
- Separating the duties of receiving and processing collections of accounts receivable
- Depositing receipts every day
Why use cash controls for cash receipts?
A business uses internal control procedures for cash receipts to ensure that it properly records the amounts of all cash receipts in the accounting system, and to protect these from being lost or stolen.
Cash receipts from a business’s operating activities result from cash sales and from collections of accounts receivable from its customers.
What are the control procedures to safeguard cash from accounts receivable?
- Separation of duties: - Separating duties that involve handling accounting records from activities that involve receiving cash, such as opening the mail or taking cash at point of sale, prevents an employee from stealing undeposited amounts of cash and covering up the theft by making a fictitious entry in the accounting records.
- List details: - Immediately after opening the mail or receiving cash, the employee should list or input all of the details of the money received. This allows for documentation review. Review of documentation may help the business discover that its employee is stealing money.
- Endorsement: - Employees should ensure each incoming amount is registered at the cash register.
What are simple cash controls over cash payments?
The basic rule for good internal control over cash payments is to have all payments authorised before they are made. Managers can control cash payments by:
- Paying all bills by cheque
- Paying only for approved purchases supported by source documents
- Immediately stamping ‘Paid’ on the supporting documents after payment
What is a bank statement?
Statement that summarises a business’s banking activities during the month
What is bank reconciliation?
Schedule used to analyse the difference between the ending cash balance in a business’s accounting records and the ending cash balance reported by the bank on the business’s bank statement
What are the causes of differences in cash balances?
- Deposits in transit
- Outstanding or pending payments
- Deposits made directly by the bank
- Charges made directly by the bank
- Errors
What are deposits in transit?
A cash receipt that a business has added to its cash account but that the bank has not deducted from the cash balance reported on the bank statement because the cheque has not yet ‘cleared’ the bank
What is NSF (Not Sufficient Funds)?
A customer’s cheque that has ‘bounced’ (the business’s bank is unable to collect because the customer’s bank account has insufficient funds to cover the cheque)
What are the steps in preparing a bank reconciliation?
- Set up the proper form for the bank reconciliation
- Look for deposits in transit
- Look for outstanding, transfer payments or cheques
- Identify any deposits that were made directly by the bank but that are not included as increases in the business’s ‘Cash’ accounts
- Identify any charges that were made directly by the bank but that are not included as decreases in cash on the business’s records
- Determine the effect of any errors
- Complete the bank reconciliation
- Journalise and post entries for amounts adjusted in the books of the business
What is the petty cash fund?
A specified amount of money that is under the control of one employee and that is used for making small cash payments for a business.
What are accounts receivable?
Amounts owed by customers to the business
Why do businesses make sales on credit?
- Selling on credit may be more convenient than selling for cash
- Offering credits will encourage customers to buy items they might not otherwise purchases
- Signals product quality
What are the disadvantages of accounts receivable?
- Accounts receivable requires significant management efforts
- There is always the chance that the purchaser will not pay
What controls are there over accounts receivable?
- Evaluating a customer’s ability to pay before extending credit
- Monitoring the accounts receivable balance of each customer
- Monitoring the total accounts receivable balance
What is inventory?
Merchandise a retail business is holding for resale
Why is it important to control and report inventory?
- Selling inventory is the primary way a retail or manufacturing business gets cash from operating activities
- A business usually expects to turn over its inventory several times during the year
- Storing inventory is expensive, due to storage space, utilities, and insurance costs.
- Inventory can be stolen and/or become obsolete
What is a purchase order?
Document authorising a supplier to ship the items listed on the document at a specific price.
What are simple inventory controls?
- Control the ordering and acceptance of inventory deliveries
- Establish physical controls over inventory while the inventory is being held for sale
- Periodically take a physical count of its inventory
What is the specific identification method?
Allocates costs to cost of goods sold and to ending inventory by assigning to each unit sold and to each unit in ending inventory the cost to the business of purchasing that particular unit.
What are accounts payable?
Amounts owed to suppliers for credit purchases.
What are the benefits of purchasing on credit?
- More convenient than purchasing with cash
2. Can delay paying for purchases and, by doing so, obtain a short-term ‘loan’ from the supplier
What are the concerns that controls of accounts payable address?
- Ability of employees to make the business responsible for an account payable.
- Once a business incurs an account payable, the business is concerned that it makes each payment at the appropriate time and that the supplier records each payment properly
- Business’s total dollar amount of accounts payable
