Finance function Flashcards
What is accounting ?Factors that affect accounting systems?
Definition:
Transactions are:
- Recorded in books of prime entry(every transaction has dual effect balances to 0)
- Analysed and posted to the ledgers
- Summarised in the financial statements
Aid mgt to planning ,control,decision-making and compliance with statutory regulations.
Factors:
- Size (smaller simpler,large comp more elaborate)
- Type of org: Service business-time employees take on,clien t basis
- Org structure
Users of financial st and accounting info
- Managers -day to day activities,manage business efficiently
- Shareholders of the company (stewardship function,how much profit they can withdraw ect)
- Trade contacts-suppliers ,customers
- Providers of finance to the company-bank overdraft ,loan
- Tax authorities
- Employees of the company
- Financial analysts and advisers (stockbrokers,credit agencies,journalists)
- Government and their agencies (national statistics)
- Public (contribution to local economyy,environment)
Qualities of accounting information:
- Relevance (satisfy needs of info users)
- Objectivity(many decisions maybe based on judgement rather than obj facts,mgt rosy pic to show impressive performance,auditors more prudent view)
- Comprehensibility(skimpy,incomplete,too many details)
- Timeliness-depends on circumstances eg cashflow frequent ,shareholders accounts annually
- Comparability
- Reliability(independently verified)
The structure of accounting functions:
- Financial controller:
- Routine accounting
- Account reports for other dpts
- Cashier s duties and cash control
- Mgt acc:
- Cost accounting
- Budgets and budgetary control
- Financial mgt of projects
- Treasurer:
- Raising funds by borrowing
- Investing surplus funds
- Cash flow control
- Internal auditors
- Checking compliance with int and ext regul
- prevention,detection,avoidance of fraud
Organogram of finance function
Finance director
Treasurer Financial Controller Mgt accountant
Cashier Financial accountant Cost accountants
Finacial accountants
- NCA register
- Purchase ledger
- Credit control
- Debt collerctors
- Receivables ledger
- Payroll
- Financial accounts
- Statutory accounts
- Sales tax returns
- Taxation
Cost accountants:
- Inv reporting and valuation
- Materials costing
- Labour costing /payroll
- Exp and overheads costing
- Process costing
- Budgetary control reports
Mgt accountant
- Budget coordination
- Analysis and investigation
- Project appraisal
Finacial accounting
Financial acc:
- Reporting results and financial position of a business
- users not involved in day to day running -produces reports for the shareholders
- Complies with Accounting standards
- Statutory report monitoring key variables of profitability-liquidity -gearing produces accountong ratios and absolute info
- Corrective actions by mgt if results not in line with the financial plan
- External reports (Statement of P&L,financial positio,cash flows)
Mgt accounting
Information for planning and controlling business-internal use
- Competitor s performance
- Cost/profit centre performance
- Desirability of investments
- Past cost info
- Product profitability
- Sensitivity analysis
Financial performance against plan-difference =variance,report in timely manner and identify reasons
Internal reports:
- Cost schedules
- Budgets
- Variance reports
- Working capital reports
Role of treasurer
- Corporate financial obj:
- Financial aims and strategies
- Financial and treasury policies
- Financial and treasury systems
- Liquidity mgt
- Working capital and money transmission mgt
- Banking relationships and arrangements
- Money arrangement
- Funding mgt
- Funding policies and procedures
- Sources of funds
- Types of funds
- Currency mgt
- Exposure policies and procedures
- Exchange dealings
- Intern monetary economics and exchange regulations
- Corporate finance:
- Rasing share capital and its form
- Obtain stock exchange listing,divid policy
- Financial info for mgt
- M&A
- Business sales
- Asset mgt
- If quality and quant meets orgs needs
- When replace NCA
- Most effective funding for new assets
- Maintain asset register and reg audir (if still exist and appropriate value)
- Related subjects
- Effective adm of corporate taxation
- Risk mgt and insurance
- Pension fund investment mgt
Internall auditors :
- Company’s empl
- Duties fixed by mgt
- Investigating accountig sub-systems
- Audit business operations(obj valid,control info reliable,efficency)
Causes of horizontal conflict:
- Difference in goals-mgt align personal goals with startegic plan
- Different business functions often differ in personality/culture
- Task interdependence;dependence of dpts -relationship mgt
- Scarcity of resources
- Power distribution
- Uncertainty
- Reward system
Horiz:between functions and groups
Causes of vertical conflict :
- Resource distribution(owners-workf )
- Power (lac of power-union ,trials of strength)
- Alianation(repetitive jobs -can t identify -attitude of managers )
- Politics (emp seeking security/managers control and operate as freely as possible)
Higher levels with those below them
How org politics reveal itself?
- Individuals wish to experience victory /avoid defeat -own obj
- Disparities of power and influence-events decided by dominant indiv and coalitions
- Constant compromise ,reconciling differences
- Territory analogy for jealousies and rivalries over boundaries of authorities
- Political behavioyr -charact of informal org
Mintzberg-political games:
- Games to resist authority
- Games to counter this resistance
- Games to build power bases
- Games to defeat rivals
- Games to change the org
Cost schedules:
- Wages and salaries
- Dpt costs
- Cost of sales
- Selling exp
- Adm costs
6.
Budgets and forecasts:
- Costs involved in generating sales,overheads,projected profits
- cash flow budget -potential issues to arrange overdraft facilities/loans
Working capital controls
- Inv reports
- Receivables
- Payables
- Cash reports
Which areas of business a head office of a business may cover?
- Purchasing
- HR
- Finance
- Sales and mkt
- General admin
Effective systems and procedures should ensure that:
- Relationships with customers are effectively managed
- Relationships with suppliers are effectively managed
- Office functions interelate effectevely and are not duplicated
Weeknesses in office procedures may be signalled by:
- Arguments over job functions
- Missing paperwork
- Disputes with customers/suppliers
- Goods not delivered
Sales:
- Sales and mkt function :market the orgs products and take orders from customers.
- If new client :more senior level involved if the sale is to be made by credit
- Once the goods are despatched the responsibility passes to the accounting dpt-ensure pmt is received
Purchases:
- Started by purchasing dpt/stores dpt
- Inventory running low
- Purchase requisition-authorised then the purchasing dpt will choose the most approprate supplier
- After responsibility to the acc dpt-arrival of inv-pmt
Control over transactions/Financial control procedures:
The mgt has to have control over the following areas
- Sales on credit to new customers
- Purchase of NCA and pmts for exp
- Payroll
Financial control procedures ensure that
- Financial transactions are properly carried out
- The assets of the businesses are safeguarded
- Accurate and timely mgt info is provided
Examples of financial control procedures/signal of weekness:
Examples:
- Checks over certain amount-2 sign
- Authorisation limits in PO
- Authorisation for petty cash and expenses
- Effective credit control procedures
- Comp security procedures/access levels
Weeknesses:
- Cheques going missing
- Excessive bad debts
- Customers not paying within cr terms
- Suppliers not getting POT
- Failure to produce accounts or other reports at the specified time.
Key controls over payroll
- Documentation and authorisation of staff changes
- Calculation of wages and salaries
- Payment of wages and salaries
- Authorisation of deductions
Data held on a payroll file
Individual records per employee:
- Standing data :
- Personal details
- Rate of pay
- Deductions
- Holidays
- Variable
- Gross pay to date
- Tax to date
- Pension contributions
Payroll inputs/outputs:
Inputs
- Timesheets/bonus(wages based)
- Overtime,bonuses ect(salary based)
Outputs:
- Payslips
- Payroll
- Payroll analysis and details for costing purposes
- Forms for income tax purp
- Coin analysis,cheques,credit transfer forms
- Storage media with pmt details for despatch.
Aims of the control system related to payroll:
- Setting of wages and salaries(only worked hours paid,authorised)
- Recording of wages and salaries(correct recording of salary,deduction)
- Payment-(correct empl paid)
- Deductions(authorised,paid to tax author)
Payroll control analysis:
- Setting of wages and salaries
- Staffing and SOD
- Maint of personal controls
- Authorisation(overtime,engagement,discharge,nnon-statutort deductions,advances of pay)
- Recording in changes of personel and pay rates
- Rec hours worked by time sheets
- Review of hours worked
- Holiday pay
- Answering queries
- Review of wages against budget
- Recording of wages and salar:
- Bases for compilation of payroll
- Preparation,checking and approval of payroll
- Dealing with non routine matters
- Pmt of cash wages:
- SOD
- Authorisation of wage cheque
- Custody of cash
- Verification of ID
- Recording of distribution
- PMT of salaries
- Preparation and signing of cheques,bank transfer
- Compare them with payroll
- Maintain and reconcile with bank acc
- Deductions from pay
- Main of separate empl records
- Reconciliation of total pay and deduction between on pay day and the next
- Surprise cash counts
- Comparison against budget
- Agreement of gross earn and total tax with income tax returns to HMRC
Most import aims of the control system relating to payables and purchases:
- Ordering-authorised ,received,for the comp,authorised suppliers,comp prices
- Receipts and invoices:not for pivate purpose,accepted only if ordered and authorised,accurately recorded,credits claimed,GR necessary to establish liability
- Accounting:exp authorised and recorded properly,goods received,cr notes received,cut off applied correctly
AP controls
- Ordering: certain suppliers,obtain authorisation,prenumbered forms
- GR:Compare with PO,condition,check inv,record goods returned
- Accounting recording: SOD,Record purchases/returns promptly,Compare SOA,pmt authorised
Controlling sales cycle:
- Selling: S OD of credit control,invoic,dispatch-author of credit terms,prenumbered forms
- Goods outwards-Author of goods despatched,Condition of goods returned,Signature of deliv notes,Match sales inv-despatch-deliv notes-sales ord
- Account/recording-Sod accounting-checking,record sales,receivables stms,customer remittance,review and follow up overdue accounts
Bank reconciliation -differences
- Timing difference due to unpresented cheques
- Tim diff due to uncredited lodgements(not appear in the bank stm)
- Standing orders and direct debits not entered in cash book
- Bank charges not entered in cash book
- Funds received by transfer and not recorded in cash book.
What are the 3 main steps in controlling pmts:
- Documentation/evidence of amt ad reason
- Authorisation
- Restricting the autority to make the pmt to specified individ
Contemporary dvts in the finance function:
- Traditional finance function;process driven bureaucracy
- Trend:Market orientation-focus on cust needs
- Eg inv appraisal-provides service to other parts of the business wish to buy new asset,mgt reports to operational mgrs.
- Cost of finance function might be split equally across dpts or charged each time serv provided
Offshoring-Outsurcing-facilitating factors:
Offshoring: relocation of some part of the business to another country.
Outsourcing:Sub contracting business activities to external providers(same country or oversees)
- Dvts in technology
- Communication devices (smartphones ect)
Offshoring :challenges
- Currency exchange -economic/polit stability
- Loss of skills and jobs
- Control from distance and security of sensit info
- Cost savings/efficiency improvement slow to accrue/not realised
- Cultural,time zones,language
Cox :competences groups
- Core :result in comp adv,not outsourced
- Complementary; Connected or essential to core comp.;outsourced only to key suppliers with strategic relationship(eg IT)
- Residual: not core in any way,can be outsourced(payroll)
also threshold: activities an org must posses to be a realistic competitor in the market
Quinn and Hilmer:test to identify core competences
- Does it allow entry on a number of markets?
- Substaintial contribution to customer s perceived benefits of a product?
- Difficult for a competitor to copy?
yes-core
Advantages of outsourcing:
- Remove uncertainty about cost-long term contract,fixed price
- Long term contract -allow future planning ,focus on core competencies
- Savings-supplier economies of scale,reduced headcount,r&D,capital spending
- Access to pecialist knowledge and innovations in tech
- Increase effectiveness and quality of output (expertise)
- Flexibility (demand,switch suppl)
Disadvantages of outsourcing:
- Difficulties in negotiating and managing SLA
- Cost implications(supplier profit,transaction costs)
- Loss of control over quality,continuity of supply
- Area of threshold competence;difficult to reacquire,out of touch with new dvts
- Risk of confidential info leaked,share with othe r competitors
- Damage to empl morale,impact on corporate culture
Shared servicing:
- Consolidation of transactional activities within a company
Advantages
- Reduced headcount (economies of scale)
- Reduction of premices and other overhead
- Improvement in quality-knowledge shared
- Standard approaches -more consistent mgt of business data
Business process re-enginiring (BPR)
- Fundamental rethinking
- Radical redesign of business processes
- to achieve dramatic improvements
- in critical contemp measures of performance(cost ,quality,service,speed)
The application of BPR :what work and how s best done-processes developed from scratch and deconstructed.
Four themes of BPR and limitations:
Hammer and Champy:
- Process orientation(focus on resources,tasks,limits)
- Creative use of IT
- Ambition
- Challenge and break rules
Limitations:
Initiative requires
- sustainable mgt commitment
- Realistic scope and expectations
- Willingness to change
Much harder task of org process redesign -better use of people (neither redudancies or IT investment)
Finance function as business partner:
- Adoption of a more commercial action -oriented approach
Areas where finance funct role has deeloped:
- Info on business units projects, products,customers
- Business cases for new investments
- Helping opetational mgrs to understand info provided
- Collaborating in business planningg and budgeting
- Designing IS to support oper mgrs.
Problems with business partner mode and Independent bus partner
- Questioned identification with operational viewpoibts
- Loss of independence as they report to oper mgrs as well
- Too greatly diverted from delivering basic controls and safeguards fail to protect shareholder and public interest
Independent:
Co-operation with oper mgrs but also
- strict controls
- safeguarding of assets
- effective reporting
Add value not create,assess and validate ideas related to strategy -commercial view
Review actual performance -challenge it to minimise understatements