Accounting ISU #1

Accounting Controls for Cash:

Internal Control: is the set of accounting procedures established to protect the assets from theft and waste, ensure accurate accounting data, encourage efficiency, and adhere to company policies.

Embezzlement: secretly stolen.

Collusion: a secret understanding between two or more persons to gain something illegally.

Six Fundamental Rules of Good Internal Control

Where possible, two different people should be processing and preparing accounting docume 17417n1318r nts independently of each other, and their work must agree.

The person who records transactions or prepares accounting records should not also control or handle physical assets.

All assets should be kept in a safe place. Two authorizes persons should be present when negotiable assets are dealt with.

Only a few key employees should be allowed to approve and authorized transactions.

An independent public accountant should periodically carry out an audit to ensure that the accounting system is being followed correctly. If weaknesses are found, the system should be improved.

Responsibilities should be clearly established. It should be easy to tell who is responsible for errors or missing assets.

Eight Internal Control Measures to Protect the Cash of a Business

Separate Duties

Deposit Funds Daily

Deposit Funds Intact

Make All Payments by Cheque or Electronic Transfer of Funds

Endorse Cheques "For Deposit Only"

Prepare Deposit Slips in Duplicate

Reconcile Bank Accounts Monthly

Review Questions

Internal Control: defined in the first section

Internal control is unnecessary with an one-person business because you only have to trust yourself.

Internal control becomes necessary when the business expands and grows thus having more people and more chances for theft.

Separation of duties means that one person should not have two responsibilities which are connected which each other making theft easier for them.

The purpose of an independent audit is to ensure that the accounting system is being followed correctly.

Responsibilities should be firmly established so when theft occurs, finding the person who stole the asset is easy.

Cash control is very important because the money cannot be traced and it can be easily exchanged for other assets or services.

Deposit funds intact means that cash earned that day should not be used to make payments or for loan but instead it should be put straight into the bank.

Bank Reconciliation: is a routine procedure to determine why the balance on deposit in the bank does not agree with the balance of cash shown by the books of the company.

RATIO AND PERCENTAGE ANALYSIS FOR CORPORATIONS

CURRENT RATIO: measures a business's ability to pay its debts in the normal course of business operation.

The formula: current ratio = total current assets
total current liabilities

QUICK RATIO: measures a business's ability to pay its debts within a short period of time.

The formula: quick ratio= total current assets

(less inventory and prepaid expenses)

total current liabilities

DEBT/EQUITY PERCENTAGES: shows what proportions of the total assets are financed with borrowed money/ shows what the proportions of the total assets are financed with shareholders' money.

The formula: debt ratio = total liabilities

total assets

The formula: equity ratio= total equity

total assets

RATE OF RETURN ON: NET SALE /OWNER'S EQUITY: measures the dollars that remain after all expenses are deducted from the net sales/ measures how well the business is doing when compared with other investments the shareholders might make using the capital from the business.

The formula: rate of return on net sales = net income x 100

net sales

The formula: return on = net income _ _ x 100

shareholders' equity owner's avg. equity

COLLECTION PERIOD: figure gives an indication of how many days' sales are represented by the accounting receivable.

The formula: collection period = __accounts receivable__

avg. charge sales per day

INVENTIRY TURNOVER: figures represents the number of times a business has be able to sell and replace its inventory in one year.

The formula: inventory turnover = _ _cost of goods sold_ _

avg. merchandise inventory

TIMES INTEREST EARNED RATIO: measures the company's ability to cover its interest expense.

The formula: times interest earned =__net income__

interest expense

EARNINGS PER SHARE: used to measure the percentage performance of a corporation and its executive officers.

The formula: EPS =_______net income (after tax)_______

number of common shares outstanding

PRICE EARNINGS RATIO: tells how outside investors feel about the company

The formula: P/E ratio = market price per share

earnings per share

Exercises

1) Current ratio = total current assets
total current liabilities
= $63 870
$42 970
= 1.49:1
Therefore the fair current ratio is 1.49:1.

Quick ratio = total current assets
total current liabilities
= $63 870 - $27 400
$42 970
= 0.85:1
Therefore the fair/poor quick ratio is 0.85:1.

Collection period = __accounts receivable__
avg. charge sales per day
= $33 070
$343 342 / 365
= 35.2 days
Therefore this fair collection period is 36 days.
Inventory turnover = _ _cost of goods sold_ _
avg. merchandise inventory
= $225 600
($26 500+$27 400) / 2
= 8.4
Therefore the good inventory turnover is 8.4.

Rate of return on net sales = net income x 100
net sales
= $30 805 x 100
$343 342
= 9.0
Therefore the fairly good rate of return on net sales is 9%.

Return on = net income _ _ x 100
shareholders' equity owner's avg. equity
= $30 805 x 100
$200 700
= 15.3%
Therefore the decent return on shareholders' equity is 15.3%.

Debt ratio = total liabilities
total assets
= $108 670 x 100
$309 370
= 35%
Therefore the poor debt ratio is 35%.

Gross Profit - $41 000
Operating Expenses - $19 750
Net Income - $21 250
Accounts Receivable - $17 000
Total Current Assets - $31 200
Buildings and Equipment - $93 800
Total Plant and Equipment - $128 800
Total Assets - $160 000
Accounts Payable - $9 000
Total Current Liabilities - $24 000
Total Shareholders' Equity - $136 000
Total Liabilities and Shareholders' Equity - $160 000