Question

You are a member of Arrow Company’s internal audit staff. A review of office practices indicates that an accounting assistant routinely makes arrangements with the bank for short-term notes payable and signs the notes.
Evaluate this practice. Would you recommend any changes?

Answer 1

When the company makes arrangement with bank for new short term notes payable ,it increases the notes payable account on the Balance sheet.This boosts it's cash flow because it received money from loan.Short term notes payable is actually a current liability of the company.The current liability section of Balance sheet shows the debt a company owes that must be paid within one year

It is very essential to evaluate that whether the company is borrowing money wisely or recklessly.If total of notes payable is less than amount of cash and cash equivalent ,then the company is wisely borrowing money and is not showing any sign of financial weaknesses.On the other hand,if notes payable has a higher value than cash and cash equivalent then it will be a matter of great concern and will point at financial weakness of the company.In consideration to this fact recommendation of any changes can be made as using borrowed funds is not necessarily a sign of financial weakness of the company.