© Prentice-Hall of India Private Limited, All rights reserved.1 Financial Accounting: A Managerial Perspective Second Edition Prepared by R. Narayanaswamy Indian Institute of Management Bangalore

© Prentice-Hall of India Private Limited, All rights reserved.2 Internal Control Systems, Cash, and Receivables Chapter 6

© Prentice-Hall of India Private Limited, All rights reserved.3 Internal Control Systems  What is internal control?  Accounting controls  Administrative controls  Features of a good internal control system  Separation of duties  Authorising and recording transactions  Sound administrative practices  Sound personnel policies  Internal audit  Internal control in a computer environment  Internal control and the external auditor Chapter 6

© Prentice-Hall of India Private Limited, All rights reserved.4 Internal Control for Cash  Importance of internal control for cash  Control over cash receipts  Control cash disbursements  The voucher system  How payments are made in organisations?  Need for liquidity  Classification of cash in balance sheet Chapter 6

© Prentice-Hall of India Private Limited, All rights reserved.5 Bank Reconciliation  What is bank reconciliation?  Why is it important?  Common reasons for differences between bank statement and company’s books  Outstanding cheques  Cheques under collection  Amounts added or deducted in the bank statement only  Errors by the bank or by the company Chapter 6

© Prentice-Hall of India Private Limited, All rights reserved.6 Steps in Bank Reconciliation  Adjusted balance per bank statement = Balance per bank statement + Deposits not recorded by bank – Cheques issued, but not presented to bank  Adjusted balance per company’s books = Balance per company’s books – Debit advices for service charges, returned cheques, etc. + Credit advices for collection of bills receivable, interest, etc. Chapter 6

© Prentice-Hall of India Private Limited, All rights reserved.7 Trade Debtors  Importance of credit sales  Uncollectible accounts  Estimating and providing for bad debts  Percentage-of-sales method  Percentage-of-receivables method  Which method?  Writing off uncollectible accounts  Recovery of accounts written off  The direct write-off method Chapter 6

© Prentice-Hall of India Private Limited, All rights reserved.8 Bills Receivable  What is a bill receivable?  Computing interest  Determining maturity date  Receipt and collection of a bill  Dishonouring a bill  Discounting a bill  Contingent liability  Dishonour of a discounted bill  End-of-period adjustment for interest revenue Chapter 6

© Prentice-Hall of India Private Limited, All rights reserved.9 More on Revenue Recognition  Construction contracts  Percentage-of-completion method  Completed-contract method  Franchises  Leases  Operating lease  Finance lease  Instalment sales  Conditional sales  Sale-and-repurchase agreements Chapter 6

© Prentice-Hall of India Private Limited, All rights reserved.10 Factoring  What is factoring?  Types of factoring arrangements  With recourse  Without recourse  Recording factoring transactions Chapter 6

© Prentice-Hall of India Private Limited, All rights reserved.11 Financial Analysis of Debtors  Financial ratios  Average debt collection period  Interpreting the average debt collection period in financial analysis Chapter 6