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BUSS1030 > Module 7 > Flashcards

Module 7 Flashcards

1
Q

What is a bank statement?

A

Statement that summarises a business’s banking activities during the month

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2
Q

What is working capital?

A

the excess of a business’s current assets over its current liabilities. That is, working capital is current assets minus current liabilities.

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3
Q

What are current assets?

A

current assets section of a business’s balance sheet includes assets that the business expects to convert into cash, to sell or to use up within one year

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4
Q

What are current liabilities?

A

The current liabilities section includes liabilities that it expects to pay within one year by using current assets.

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5
Q

What is working capital management?

A

the decisions managers make regarding any of the items (accounts payable, cash accounts receivable, inventory)

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6
Q

What is an appropriate amount of working capital for a business?

A
  1. Having enough working capital to operate and to handle unexpected needs for cash, inventory or short-term credit; and
  2. Having so much excess cash, inventory or available credit that profitability is reduced.
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7
Q

What are factors that affect working capital?

A
  1. Customers freedom to make payments

2. Business payment of obligations

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8
Q

What is liquidity?

A

A company’s ability to raise cash when it needs to

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9
Q

What are cash controls?

A

For businesses of all sizes, the best way to prevent both intentional and unintentional losses is to hire competent and trustworthy personnel, and to establish cash controls.

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10
Q

What are the types of cash controls?

A
  1. Cash register
  2. Cheque or voucher
  3. Comparison
  4. Big Notes
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11
Q

What is the cash register control?

A

Managers should make sure that a pre-numbered sales receipt is completed for every sale, and that the salespeople ring up each sale on the register.
• Receipt from register is chronological and contains all of them
• Important as it’s the first place sales entered into the accounting system

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12
Q

What is a cheque or voucher cash control?

A

Second, if a cheque or voucher is accepted for payment, the salesperson should make sure that the customer has proper identification in order to minimise the likelihood that the bank might not accept it. Even this procedure is not always adequate.

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13
Q

What is a comparison cash control?

A

Third, at the end of each salesperson’s work shift, the employee should match the total of the amounts collected (cash plus credit card sales) against the total of the cash register tape and report any difference between the two totals to a supervisor.

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14
Q

What are big notes controls?

A

Companies remove the ‘big notes’ from cash registers during a single employee’s shift.

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15
Q

What are control procedures to safeguard cash from accounts receivable?

A
  1. Separation of duties
  2. List details
  3. Endorsement
  4. Deposit all cash receipts intact daily
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16
Q

What is separation of duties control procedure?

A

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.

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17
Q

What is list details control procedure?

A

Immediately after opening the mail or receiving cash, the employee should list or input all of the details of the money received. Later, if a customer claims to have previously paid a bill, the business can review documentation.

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18
Q

What is endorsement control procedure?

A

Employees should ensure each incoming amount is registered at the cash register.

19
Q

What are deposit cash receipts intact daily control procedure?

A

This means that at the end of each day, the business should take all of its cash (i.e. everything included in our definition of cash), fill out a deposit slip and make a bank deposit.

a. Unnecessary risk of theft
b. Bank deposit can show daily bank deposits

20
Q

What are controls over cash payments?

A
  1. proper documents

2. Stamp

21
Q

What are bank reconciliation methods for the bank statement?

A

+ deposits in transit
- outstanding
+/- errors

22
Q

What are bank reconciliation methods for the business cash account?

A

+deposits made directly by the bank
- charges made directly by the bank
+/- errors

23
Q

What is deposit in transit?

A

a cash receipt that the business has added to its ‘Cash’ account but that the bank has not included in the cash balance reported on the bank statement.

24
Q

What are outstanding payments/cheques?

A

A period of time is necessary for a cheque to be received by the payee, deposited in the payee’s bank and forwarded to the business’s bank (physically or electronically) for subtraction from the business’s bank balance.

25
Q

What are deposits made directly by the bank?

A

Many bank accounts earn interest on the balance in the account. For these accounts, the bank increases the business’s cash balance in the bank’s records by the amount of interest the business earned on its account

26
Q

What are charges made directly by the bank?

A

There are two main charges made directly by the bank

a. Service charge
b. NSF (not sufficient funds)

27
Q

What is a petty cash fund?

A

a specified amount of money under the control of one employee that is used for making small cash payments for the business

28
Q

Why does a business use a petty cash fund?

A
  1. A business uses a petty cash fund because some payments can be made only with ‘currency’, or
  2. Because use of a card to pay electronically is restricted to amounts over a certain value or writing a cheque would be cumbersome.
29
Q

Why do businesses make sales on credit?

A
  1. Selling on credit may be more convenient than selling for cash
  2. Managers believe offering credit will encourage customers to buy items they might not otherwise purchase  insufficient funds
  3. Signal product quality
30
Q

Why do businesses not grant all customers credit?

A
  1. Having accounts receivable requires significant management effort
  2. There is always the chance that the purchaser will not pay
31
Q

What are controls over accounts receivable?

A
  1. Before extending credit, a business should determine that a customer is likely to pay.
  2. Business should monitor the account receivable balances of its customers
  3. A business should monitor its total accounts receivable balance
32
Q

How does a business determine that a customer is likely to pay?

A
  • The business will contact the applicant’s employer, bank and credit card business to verify the application information and to ask questions about the applicant’s credit history
  • A business asks each potential credit customer to complete a credit application providing eg. employer name
33
Q

How do businesses monitor account receivable balances of its customers?

A

To monitor customer credit effectively, a business needs to have an accounting system that is capable of keeping track of each customer’s credit activity.

34
Q

How does a business monitor its total accounts receivable balance?

A

If the balance increases, the business should investigate the reasons for the increase

35
Q

What is an accounts receivable balance?

A

The amount of accounts receivable that a business reports on its balance sheet is the amount of cash it expects to receive from customers as payments for previous credit sales.

36
Q

What is inventory?

A

Merchandise being held for resale

37
Q

Why is inventory control important?

A
  1. Inventory gets cash from operating activities
  2. Turn over its inventory
  3. Storing inventory is expensive
  4. Inventory can be stolen or become obsolete
38
Q

What are simple inventory controls?

A
  1. It should control the ordering and acceptance of inventory deliveries.
  2. Establish physical controls over inventory while the inventory is being held for sale.
  3. To make sure inventory records are accurate, a business should periodically take a physical count of its inventory
39
Q

What are different ways of recording inventory?

A

a. Specific identification
b. First in, first out (FIFO)
c. Last in, first out (LIFO)
d. Weighted average

40
Q

What is specific identification?

A

o Allocates costs to cost of goods sold and ending inventory by assigning to each unit sold and each unit in ending inventory the cost to the business of purchasing that particular unit.
o Under this method, a business keeps track of the cost of each inventory item separately

41
Q

What is first in first out (FIFO)

A

o The FIFO method means that when valuing inventory that is sold and on hand at the end, goods or stock that is purchased first is sold first.
o This means that the cost of inventory on hand at the end is valued at the last price paid as inventory that was purchased at earlier prices would have been sold and recorded as part of cost of goods sold.

42
Q

What is weighted averagE?

A

The weighted average method requires the unit price of inventory to be calculated and updated after each transaction. The value is determined by recalculating the average price.

43
Q

What are concerns over controls of accounts payable?

A
  1. Ability of employees to make the business responsible for an account payable
  2. 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.
  3. Managers, investors and creditors are concerned about a business’s total dollar amount of accounts payable because, in the very near future, the business will need to use its cash to pay these liabilities

BUSS1030 (10 decks)

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