Test2 Flashcards
Working Captial
It is the excess of Current Assets over Current Liabilities
Represent net resources managers have to work with in day-to-day operations
Not enough working capital = not enough liquidity
Too much working capital = not putting resources to best use
Working Capital Formula
Working Capital = Current Assets - Current Liabilities
Working Capital Cycle
Cash
Suppliers
Inventory
Customers
A Business’ Cash Includes
Money on hand
Deposits in cheque and savings accounts
Cheques and credit card invoices from customers not yet deposited
Controls over cash receipts
Businesses use internal control procedures for cash receipts to ensure that it properly records the amounts of all cash receipts in the accounting system
Why do Business’ use internal control procedures?
Used for cash receipts to ensure that it properly records the amounts of all cash receipts in the accounting system.
Three control procedures for cash sales
- Proper use of a cash register
- Confirming the identity of the customer
- Matching the total amounts collected against the totally cash register tape at the end of each employee shift.
Basic rule for internal control over payments
To have all payments authorised before being made
Petty cash fund
A petty cash fund is a specified amount of money under the control of one employee. Used for making small cash payments for the business
Accounts receivable
Are the amounts owed to a business by a customer from a previous credit sale
Accounts receivable - an allowance for doubtful debts
Internal controls over accounts receivable
Determining that a customer is likely to pay before allowing them to buy on credit.
Monitor the accounts receivable balances of its customers, monitoring its total accounts receivable balances of its customers, monitoring its total accounts receivable balance.
Inventory internal controls
Merchandise being held for resale. Internal controls:
Controlling the ordering and acceptance of inventory deliveries
Establishing physical controls over inventory while the inventory is being held for sale
Periodically taking a physical count of its inventory to ensure its accurate inventory records
Specific identification method
Allocates costs to cost of goods sold and to ending inventory.
It assign to a each unit sold and to each unit in ending inventory the cost to the business of purchasing that particular unit
Other methods include FIFO and Average cost
Accounts payable
Are the amounts a business owes its suppliers for credit purchases of inventory and supplies
Accounts payable controls
Establishing control over who can obligate the business
Establishing controls over payments
Monitoring the total amount of accounts payable
Current Ratio Formula
Current Assets / Current liabilities
Shoes the ability fo the firm to meet obligations in the ordinary course of business
Working Capital Ratios
Need to examine within context asn also make up of working capital
Based on unlikely scenario of liquidation of company
Need to have comparative data
Why is the income statement important?
A business’ income statement plays a key role in the decision making process of the users by communicating the business revenues, expenses and net income (or net loss) for a specific time period
Sales revenue
Whether a customer buys goods on cash or on credit, retail business’ use a Sales Revenue (or sales) account to record the transaction
Sales policies
Business may have serval policies related to the sales of their goods or services:
Discount policies
Sales return policies
Sales allowance policies
Discounts
A quantity (or trade) discount is a reduction in the sales price of a good or service. Given at the point of sale. A sales discount is a percentage reduction of the invoice price if the customer pays the invoice within a specific time period
Sales Returns
A sales return occurs when a customer returns previously purchased merchandise
Sales Allowance
Occurs when a customer agrees to keep the merchandise and the business refunds a portion of the original sales price. This may be granted because of quality issues
Credit Memo
Is a business document that list the information for a sales return or allowance
Cost of Goods Sold
One of the major expenses for a retail business. Classified income statement shows this expense as the COGS
How a retail business calculates the amount depends on the type of inventory system it uses.
Perpetual Inventory system
A perpetual inventory system keeps a continuous record of the cost of inventory on hand and the cost of inventory sold.
Periodic Inventory System
Doesn’t keep a perpetual record of the inventory on hand or sold, but determines the inventory at the end of each accounting period by physically counting it and then putting value on it
Measuring Inventory
Net realisable Value (NRV) is defined as the estimated selling price in the ordinary course of the business less the estimated cost of completion and the estimated cost necessary to make the sale
Operating Expenses
Are the expenses that a business incurs in its day to day operations
Uses of the income statement for evaluation for investors
Investors use the income statement to help judge their return on a investment
Uses of the income statement for evaluation for creditors
Use the income statement to help make a loan decision.
Evaluate business risk, operating capability and financial flexibility
