1. Certified General Accountants
Module 1
Certified General Accountants
Financial Accounting Fundamentals (FA1) Module 6 Internal control and accounting for cash, investments held for the short term and receivables
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Learning Objectives
State the purposes and broad principles of internal control. (Level 2)
Explain the concept of liquidity and distinguish between cash and cash equivalents. (Level 1)
Explain the operation of a petty cash fund and prepare journal entries to record petty cash transactions. (Level 1)
Explain the ethical issues related to the operation of a petty cash fund. (Level 1)
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Learning Objectives
Prepare a bank reconciliation and explain its purpose. (Level 1)
Calculate the acid-test ratio and interpret and apply this ratio in decision-making scenarios. (Level 2)
Describe and identify debt and equity investments and their classification. (Level 1)
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Learning Objectives
8. Journalize entries to account for held-for-trading investments, including their purchase, the collection of interest and/or dividends, the sale and resulting gain/loss and appropriate valuation adjustment on the balance sheet date. (Level 1)
9. Prepare entries to account for transactions with credit customers including accounting for bad debts under the allowance method and the direct write-off method. (Level 1)
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Learning Objectives
10. Calculate the interest on promissory notes and prepare entries to record the receipt of promissory notes and their payment or dishonor, along with the end-of-period adjustments. (Level 1)
11. Explain how receivables can be converted to cash before maturity. (Level 2)
12. Calculate the accounts receivable turnover and days’ sales uncollected ratios and interpret and apply these ratios in decision-making scenarios. (Level 1)
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Internal Control and Cash
C H A P T E R 9
Slides Content
1-3 Learning objectives
4-12 Internal controls
13-16 Petty cash
17-20 Banking activities
21-38 Bank reconciliations
39-40 Review
Acid test ratio-Appendix
43 End of chapter
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Internal Control System
All policies and procedures used to :
Protect assets against theft or misuse
Ensure reliable accounting
Promote efficient operations
Encourage adherence to company policies
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Principles of Internal Control
Ensure transactions and activities are authorized.
Maintain adequate records.
Insure assets.
Separate recordkeeping and custody of assets.
Establish a separation of duties
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Principles of Internal Control
Apply technological controls.
Perform internal and external audits.
Internal controls will vary based on the nature and size of the organization.
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Limitations of Internal Control
Human Error
Negligence
Fatigue
Misjudgment
Confusion
Human Fraud
Intent to defeat internal controls for personal gain.
Costs vs. Benefits
The costs of internal control must not exceed their benefits.
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Cash
Is an important asset for every company.
Control of cash on hand and access to it is critical.
Cash includes:
Currency
Coins
Deposits in bank accounts
Other items acceptable for deposit
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Internal Control for Cash
Guidelines:
Separate handling of cash from recordkeeping of cash.
Deposit cash receipts daily.
Make cash disbursements by cheque.
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Control of Cash Disbursements
All expenditures should be made by cheque. The only exception is for small payments from petty cash.
Separate authorization, cheque signing, and recordkeeping duties.
Apply a voucher system.
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Petty Cash System of Internal Control
Good internal control procedures require cash disbursements be made by cheque.
The exception:
Small payments required in most companies for items such as postage, courier fees, repairs, and supplies.
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Operating a Petty Cash Fund
Prepares cheque to establish petty cash fund.
Cashier’s
Office
Petty Cashier
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Operating a Petty Cash Fund
The petty cashier makes payments from this fund for small disbursements.
… and ensures a petty cash receipt is signed by the person receiving the money to easily identify the expenses paid from petty cash.
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Operating a Petty Cash Fund
A cheque is issued and the fund is replenished when the amount of cash on hand becomes low.
A cash over and short account is used if needed.
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Banking Activities as Controls
Basic Bank Services
Bank account
Bank deposits and cheques
Electronic funds transfer
Bank credit card transactions
Debit card transactions
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Bank Reconciliations
Bank reconciliations are:
Prepared periodically to explain the difference between cash reported on the bank statement and the cash balance on company’s books.
An important element of internal control.
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The bank statement provides information about everything that has gone through the bank account for a given period of time.
CM – Credit Memo
DM – Debit Memo
EC – Error Correction
IN – Interest Earned
NSF – Non-sufficient Funds
OD – Overdraft
SC – Service Charge
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The general ledger, cash receipts, and cash disbursements journals provide information about everything that has gone through our accounting records for a given period of time.
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22. Bank Reconciliation - Example
Why are the balances different?
Some items are reflected on the bank statement but not in the accounting records and vice versa. *
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Reconciling Items
Bank Statement
Outstanding cheques.
Deposits in transit.
Bank errors.
General Ledger
Non-sufficient funds cheque (NSF).
Bank service charges.
Interest earned on bank account.
Collections made by the bank.
Book errors.
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Using the Information-Appendix 9A
Acid-Test Ratio
A measure of a company’s liquidity.
Similar to current ratio but excludes less liquid assets.
Ratio will vary from industry to industry.
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Using the Information-Appendix 9A
Acid-Test Ratio =
Quick assets*
Current liabilities
* cash, short-term investments, and receivables
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Accounting for Debt and Share Investments
C H A P T E R 18
Slides Content
1-3 Learning objectives
4-16 Classification of investments
17-22 Accounting for Held-for-Trading investments
Accounting for Held-to-Maturity investments
29-33 Accounting for Associates
Accounting for business combinations
36 Accounting for joint ventures
Summary
Accounting for Available-for-Sale investments
End of chapter
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27. Debt and Share Investments
Debt Investment
Represents an amount owed and arises when one company lends money to another.
Share Investment (or equity security)
Represents one company’s purchase of shares in another company.
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28. Classification of Investments
Passive Investment
Investor cannot significantly influence or control the operations of the investee company.
Strategic Investment
Investee is controlled by, significantly influenced by, or is in a joint venture with the investor.
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29. Debt and Share Investments
Companies may make passive investments in other companies for the following reasons:
To earn dividend or interest income on available excess cash.
To earn a gain over the original purchase price on the eventual sale of purchased shares.
To earn interest on long-term debt.
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30. Debt and Share Investments
Companies may make strategic investments in other companies for the following reasons:
To participate in new markets or technologies.
To build a favourable business relationship with a major customer or supplier.
To acquire a controlling interest in an investee.
To achieve non-controlling interest with the investee by acquiring enough shares to influence the investee’s decisions.
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Passive Investments
May be classified as one of:
Held-for-trading
Held-to-maturity
Loans and receivables
Available-for-sale
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32. Held-for-Trading Investments
Are the shares or debt of another corporation purchased by the investor for the short-term.
Are actively traded.
Profits are realized through short-term price changes or through the receipt of dividend or interest revenue.
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33. Accounting for Held-for-Trading Investments
Purchase price of investment is at cost excluding brokerage fees and commissions.
Brokerage fees and commissions are expensed when incurred.
Realized and unrealized gains and losses are recognized in income.
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Illustration: Held-for-Trading Investments
On September 1, 2011,TechCom Company paid $29,500 plus a brokerage fee of $75 to buy Power Corp. 7% bonds payable with a $30,000 par value. Interest is paid semi-annually on August 31 and February 28. The bonds will mature on February 28, 2015.
The entry to record the purchase would be:
Held-for-Trading Investment-Power Corp. 29,500
Brokerage fee expense
Cash ,575
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Illustration: Held-for-Trading Investments-cont.
On December 31, 2011, the end of TechCom’s accounting period, two adjustments are needed.
1. Interest earned is accrued on the bonds.
Interest receivable
Interest revenue
$30,000 x 7% x 4/12
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Illustration: Held-for-Trading Investments-cont.
The investment is adjusted to fair value and any unrealized gain or loss is reflected on the income statement.
The fair value at this date is $29,100 resulting in an unrealized loss of $400 ( $29,500 - $29,100).
The required adjustment would be:
Unrealized holding loss
Held-for-Trading investment-Power Corp
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Illustration: Held-for-Trading Investments-cont.
On the December 31, 2011 balance sheet date, the trading investment account would show as:
Current Assets:
Held-for-Trading investments, at fair value….. $29,100
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Illustration: Held-for-Trading Investments-cont.
Any realized gain or loss is recorded on the income statement when the bonds are sold.
The brokerage fees or commissions are expensed.
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Receivables
C H A P T E R 10
Slides Content
1-3 Learning objectives
4-8 Accounts receivable transactions
9-10 Valuing accounts receivable
11-17 Allowance method
18-21 Estimating bad debts-percentage of sales method
22-20 Estimating bad debts-accounts receivable approach
Direct write-off method
32-33 Mini-quiz
34-38 Notes receivable
39-40 Review
41-42 Appendix 10A-Converting receivables to cash
43-44 Appendix 10B-A/R turnover and Days’ Sales Uncollected
45 End of chapter
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Accounts Receivable
Arise from credit sales to customers.
Often referred to as Trade Receivables.
Other receivables include interest receivable, rent receivable, tax refund receivable.
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41. Valuing Accounts Receivable
Some customers who are granted credit do not pay what they promised.
The accounts of these customers are called uncollectible accounts or bad debts.
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42. Valuing Accounts Receivable
Methods for accounting for uncollectible accounts:
Allowance method (satisfies GAAP)
Direct method (does not satisfy GAAP)
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43. Estimating Bad Debts Expense
Acceptable Methods:
Percent of Sales Approach
Accounts Receivable Approach
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44. Short-Term Notes Receivable
Promissory Note
A written promise to pay a specified amount of money either on demand or at a definite future date.
Short-Term Note Receivable
A promissory note that becomes due within 12 months or within the firm’s operating cycle.
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45. Short-Term Notes Receivable
Usually interest bearing.
Interest rates are stated on an annual basis.
Interest is calculated as follows:
Principal of the note
Annual interest rate
Time expressed in years
Interest = X X
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46. Short-Term Notes Receivable
Example: TechCom receives a $1,000, 90-day, 12% promissory note at the time of a sale.
The entry to record the transaction would be:
Notes Receivable ,000
Sales ,000
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47. Short-Term Notes Receivable
Example: On December 16, TechCom receives a $3,000, 60-day, 12% promissory note and $1,000 cash to settle a $4,000 past due account.
The entry to record the transaction would be:
Cash ,000
Notes Receivable ,000
Accounts Receivable ,000
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48. Short-Term Notes Receivable
On December 31, 15 days after the note is issued, an accrual for interest earned on the note is made.
The entry to record the accrual would be:
Interest Receivable
Interest Revenue
(3,000 x 12% x 15/365)
On February 14, the 60-day note matures.
The entry to record the honouring of the note would be:
Cash ,059.18
Interest Revenue
Interest Receivable
Notes Receivable ,000.00
(3,000 x 12% x 60/365)= 59.18
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49. Converting Receivables to Cash Before Maturity- Appendix 10A
Receivables are sometimes converted into cash before maturity since:
Companies may need the cash.
Companies do not want to be involved in the collection activities.
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50. Converting Receivables to Cash Before Maturity- Appendix 10A
Conversion of receivables into cash is accomplished by either:
Selling them to a factor
Pledging them as loan security.
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Using the Information
Appendix 10B
The quality (likelihood of collection) and liquidity (speed of collection) of a company’s receivables may be assessed by calculating:
Accounts receivable turnover ratio
Days’ sales uncollected
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52. © 2010 McGraw-Hill Ryerson Limited.
Using the Information
Appendix 10B
Net Sales
Average accounts receivable
Accounts receivable turnover =
Days’ sales
Uncollected
Accounts receivable
Net sales
x 365 =
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End of Module 6
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