Essay on financial management

Question 1

DETAILS
DR.
CR.

$
$

Account receivable a/c

Sales a/c
GST a/c
16, 500

15, 000
1, 500

Sales returns a/c

GST a/c
Account receivable a/c
1, 500
150

1, 650

Cash a/c

Discount allowed
Account receivable a/c
14, 553
297

14, 850

Workings

GST per book = ($16. 5*10%)/110% = $ 1. 5
Total GST on sales = $1. 5*1000 = $1, 500
Cash discount = 2%* (16, 500-1, 650) = 297
Balance to be paid by debtors = 16, 500-1, 650-297 = 14553

b)

Net Profit = Net Sales – Purchases – other expenses

Net sales = Sales – Sales returns = 15, 000- 1, 500 = 13, 500
Net profit = 13, 500 – 8, 000 – 297 = 5, 203

Question 2
i. The cashier has stolen cash from the business. The cashier stole a total of $ 1, 000
ii. The cashier sealed the theft by understating the total by $ 1, 000. The sum of 6502, 1260 and 200 is $7, 962 and not $6, 952 as stated by the cashier.
iii. Bank reconciliation statement
$
Balance per books, 30 September 6, 502

Add: Outstanding cheques 1, 260

Bank collection 200
7, 902

Less: Stolen cash 1, 000

Deposits in transit 3794
Service charge 8
Dishonored cheques 36 (4838)
Balance at bank as at 30 September 3, 124

iv. Gilbraith can improve the internal controls of Diamond hotel through the following measures;

Segregation of duties

The cashier should only record transactions and a different person be mandated to prepare the bank reconciliation statement. It will be harder to commit fraud because it will require several people colluding and naturally, most people may be hesitant to ask other people to assist them in committing wrongful acts.

Timely deposits

Deposits should be made within twenty four hours unless they are insignificant. This reduces exposure to loss of funds and fraud.

Spot checks

Supervisors should conduct spot checks to ensure that all transactions are accurately recorded and on a timely manner. They can also check whether the accounts reconcile. Spot checks reduce fraud because cashiers will always be up to date and conscious since spot checks are random and they do not want to be caught off guard.

Question 3

a.
Stock refers to the ownership of financial assets like shares in a company. Stocks could also be inventories in other cases. Stock is, therefore, tangible or intangible while stores refer to the amount of inventory that a business has kept. Stores are always tangible goods.
b.
FIFO is a way of valuing and managing assets. Assets that are brought in first are the ones that are sold out first. The cost of the first goods to be brought in is matched with the cost of the goods that will be sold first and the revenue. The newest inventory will be matched with the price of the ending inventory.
c.
Usually, market value is not relevant in reporting inventories. In reporting inventory, value is ignored because it is a subjective figure. This is because the company has no guarantee of selling the goods at the market value. Accounting principles do not permit inflation of inventory figures that are only based on anticipation of profits in the future. Therefore, inventory is recorded at a cost lower than the expected value. This will help in ensuring that in case the inventory is cheaper compared to the market value, the firm can still make profits. An example is if the market value of a tractor is $ 5000, the firm will record its value at $ 4500 so that incase the tractor is sold at less than $ 5000, the accounting records will not be affected negatively.
d.

Provision for losses, when reporting for inventories at a lower cost is very effective. This is because it ensures that there are no deficits, assuming the inventory is sold at a price lower than the market value, in the accounting records after the inventory has been sold. Using this policy, if the inventory is sold at prices higher than the market value, the firm will record profits basing on the earlier records on inventory.
e.

Current ratio is a liquidity ratio measurement used to measure a company’s capability to cater for its short term obligations. It is found by dividing the value of current assets by the value of current liabilities. The ratio can be used in determining the company’s ability to pay for its debts in the short term. The valuation of the inventory is included in calculating current ratio as part of the assets.

A lower current ratio implies that the company is not in a strong position to pay its short term needs and debts. Current ratio at cost is the total assets valued at their cost divided by the total value of liabilities. Current ratio at net realizable value is the total net cost of the assets divided by the value of liabilities.

References

Ehrhardt, M. C., & Brigham, E. F. (2008). Corporate Finance: A Focused Approach (3, illustrated ed.). London: Cengage Learning.
Eisen, P. (2005). Accounting (revised ed.). New York: Barron’s Educational Series.
Elliott, B., & Elliott, J. (2007). Financial accounting and reporting (12, revised ed.). Financial Times Prentice Hall.
Gibson, C. H. (2010). Financial Reporting & Analysis: Using Financial Accounting Information (12 ed.). London: Cengage Learning.
Hilton, R. W. (2010). Managerial Accounting (9, illustrated ed.). New York: McGraw-Hill Companies, Inc.