Internal Control

Internal Control—Integrated Framework is the standard by which companies design, analyze, and evaluate internal control.4 In this section, the objectives of internal con­trol are described, followed by a discussion of how these objectives can be achieved through the Integrated Framework’s five elements of internal control. 1. Objectives of Internal Control The objectives of internal

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Cash Controls Over Receipts and Payments

Cash includes coins, currency (paper money), checks, and money orders. Money on deposit with a bank or other financial institution that is available for withdrawal is also considered cash. Normally, you can think of cash as anything that a bank would accept for deposit in your account. For example, a check made payable to

Bank Accounts

A major reason that companies use bank accounts is for internal control. Some of the control advantages of using bank accounts are as follows: Bank accounts reduce the amount of cash on hand. Bank accounts provide an independent recording of cash transactions. Reconciling the balance of the cash account in the company’s records with

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Bank Reconciliation

A bank reconciliation is an analysis of the items and amounts that result in the cash balance reported in the bank statement to differ from the balance of the cash account in the ledger. The adjusted cash balance determined in the bank reconcili­ation is reported on the balance sheet. A bank reconciliation is usually

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Special-Purpose Cash Funds

A company often has to pay small amounts for such items as postage, office supplies, fu>ndisal-purp°se or minor repairs. Although small, such payments may occur often enough to total a significant amount. Thus, it is desirable to control such payments. However, writing a check for each small payment is not practical. Instead, a special

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Financial Statement Reporting of Cash

Cash is normally listed as the first asset in the Current Assets section of the balance sheet. Most companies present only a single cash amount on the balance sheet by combining all their bank and cash fund accounts. A company may temporarily have excess cash. In such cases, the company nor­mally invests in highly

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Financial Analysis and Interpretation: Ratio of Cash to Monthly Cash Expenses

For startup companies or companies in financial distress, cash is critical for survival. In their first few years, startup companies often report losses and negative net cash flows from operations. Moreover, companies in financial distress can also report losses and negative cash flows from operations. In such cases, the ratio of cash to monthly

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Classification of Receivables

The receivables that result from sales on account are normally accounts receivable or notes receivable. The term receivables includes all money claims against other enti­ties, including people, companies, and other organizations. Receivables are usually a significant portion of the total current assets. 1. Accounts Receivable The most common transaction creating a receivable is selling

Uncollectible Receivables

In prior chapters, the accounting for sales of merchandise or services on account (on unco||ectib|e rereraWes credit) was described and illustrated. A major issue that has not yet been discussed is that some customers will not pay their accounts. That is, some accounts receivable will be uncollectible. Companies may shift the risk of uncollectible

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Direct Write-Off Method for Uncollectible Accounts

Under the direct write-off method, Bad Debt Expense is not recorded until the cus­tomer’s account is determined to be worthless. At that time, the customer’s account receivable is written off. To illustrate, assume that on May 10 a $4,200 account receivable from D. L. Ross has been determined to be uncollectible. The entry to

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Allowance Method for Uncollectible Accounts

The allowance method estimates the uncollectible accounts receivable at the end of the accounting period. Based on this estimate, Bad Debt Expense is recorded by an adjusting entry. To illustrate, assume that ExTone Company began operations August 1. As of the end of its accounting period on December 31, 2013, ExTone has an accounts

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Comparing Direct Write-Off and Allowance Methods

Journal entries for the direct write-off and allowance methods are illustrated and compared in this section. As a basis for illustration, the following transactions, taken from the records of Hobbs Co. for the year ending December 31, 2013, are used: Mar. 1. Wrote off account of C. York, $3,650. Apr. 12. Received $2,250 as

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Notes Receivable

A note has some advantages over an account receivable. By signing a note, the notes receivable. debtor recognizes the debt and agrees to pay it according to its terms. Thus, a note is a stronger legal claim. 1. Characteristics of Notes Receivable A promissory note is a written promise to pay the face amount,

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Reporting Receivables on the Balance Sheet

All receivables that are expected to be realized in cash within a year are reported in the Current assets section of the balance sheet. Current assets are normally reported in the order of their liquidity, beginning with cash and cash equivalents. The balance sheet presentation for receivables for Mornin’ Joe is shown below. In

Financial Analysis and Interpretation: Accounts Receivable Turnover and Number of Days’ Sales in Receivables

Two financial measures that are especially useful in evaluating efficiency in collect­ing receivables are (1) the accounts receivable turnover and (2) the number of days’ sales in receivables. The accounts receivable turnover measures how frequently during the year the accounts receivable are being converted to cash. For example, with credit terms of n/30, the

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Nature of Fixed Assets

Fixed assets are long-term or relatively permanent assets such as equipment, machinery, buildings, and land. Other descriptive titles for fixed assets are plant assets or property, plant, and equipment. Fixed assets have the following char­acteristics: They exist physically and, thus, are tangible They are owned and used by the company in its normal operations.

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Accounting for Depreciation

Over time, fixed assets, with the exception of land, lose their ability to provide services. Thus, the costs of fixed assets such as equipment and buildings should be recorded as an expense over their useful lives. This periodic recording of the cost of fixed assets as an expense is called depreciation. Because land has

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Disposal of Fixed Assets

Fixed assets that are no longer useful may be discarded or sold.6 In such cases, the disposal of fixed assets– fixed asset is removed from the accounts. Just because a fixed asset is fully depreci­ated, however, does not mean that it should be removed from the accounts. If a fixed asset is still being

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Natural Resources

The fixed assets of some companies include timber, metal ores, minerals, or other natural resources. As these resources are harvested or mined and then sold, a portion of their cost is debited to an expense account. This process of transferring the cost of natural resources to an expense account is called depletion. Depletion is

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Intangible Assets

Patents, copyrights, trademarks, and goodwill are long-lived assets that are used in the operations of a business and are not held for sale. These assets are called intangible assets because they do not exist physically. The accounting for intangible assets is similar to that for fixed assets. The major issues are: Determining the initial

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