Question

Essay Questions

1. Briefly describe internal control and how can it be used to protect assets. How can petty cash funds be used for internal control purposes? Why are bank accounts used? What is bank reconciliation, and why should a business use it? Why is it necessary to record journal entries after the bank reconciliation has been prepared?
2. Calculate and compare your selected Target corporation's cash to its biggest competitor for the two years preceding the current year. What does the cash ratio help to determine? Explain your reasoning and support your answer. Show your calculations.
3. On which financial statement would you find Accounts Receivable (A/R)? Explain common types of receivables. What was the amount of A/R for your selected corporation for the two years preceding the current year? What does this tell you? Give your reasoning and support your assertions with your research.
4. Explain unearned revenues and how unearned revenues arise.
5. Explain what a warranty is and when businesses record warranty expense, and why.
6. Explain contingent liabilities. How should a company handle contingent liabilities that are reasonable, possible, or probable but cannot be estimated?

Answer 1

Any organization, normally follow effective internal control system which help to achieve entity’s mission , strategy and related business objective :

1. Control Environment , Integrity
2. Risk assessment
3. Control objective
4. Monitoring
5. Information and communication

Every company should follow or rather establish efficient and effective operations. Internal control provide an environment

Internal control on petty cash – Internal control procedure for the receipt of cash help company prevent from loss due to employee fraud and accounting errors. Internal control are intended to limit access to cash to specified employees and verify taht all receipts , refund or transfer are documented correctly in a timely manner

Bank Reconciliation - process performed by Company to ensure that its records ( check register , general ledger, account balance , ) are correct , This is done by comparing the company’s recorded amounts with the amount shown on the bank Statement . Any difference must be justified . when there are no unexplained difference , accountant state that bank statement has been reconciled .

The bank reconciliation is an important part of company’s internal control over its assets . With help of this control , company can preventing and detecting fraud

Internal control consist of methods and procedures that an organization adopted to protect its facilities , assets and property . Most important part under Internal control system is determined fraud and spot/ identified errors in the financial information and records

After completion of Bank Reconciliation , Accountant has to pass necessary journal entries with supporting documents . Couple of example of journal entries are as follows :

1. Bank Interest earned – most important – Interest accrued and due and Interest accrued but not due etc
2. Loan payments
3. Any bank charges , Guarantee charges etc
4. Customer balance check

Answer d -

Unearned revenue – It must part of liability side of the Balance Sheet . A liability account that reports amount received in advance providing goods and services . As and when good and services are provided , this account balance is decreased and a revenue account is increased . Under this method , seller has a liability equal to the revenue earned until the goods or service is delivered . Unearned revenue also called as deferred revenue and advance payments

According SEC . there must be collection probability or the ability to make a reasonable estimate of an amount for the allowance for doubtful account . completed delivery or ownership shifted to the buyer

Answer e)

Warranty expenses accounting and why they account – Warranty expenses is the cost that a business expect to or has already incurred for the repair or replacement of goods that has sold .

Warranty expenses is recognised in the same period as the sales for products that were sold.

We need to follow certain path to calculate and record warranty expenses:

1. Determine past percentage of warranty expenses to sales
2. Apply the same percentage to the sales for the current year accounting period to derive warranty expenses to be accrued
3. Accrue the warranty expenses

In the financial statement is impacted by the full amount of warranty expense where a sale record . it si very unlikely that actuak warranty claims will exactly match the historical warranty percentage , so some adjustment of the warranty liability account to actual result will be justified from time to time .

As per IND AS 115 ( revenue recognition ) defined two types of warranty clause – Service base warranty and Assurance base warranty . Service base warranty represents . In case of service based warranty – an entity allocate the transaction price between the related product /service and the warranty service using the allocation base . However in respect of assurance type , company still follow accrual basis of accounting

Answer F -

Contingent Liability – Contingent liability is a potential Liability that may occur , depending on the outcome of an uncertain future event . Common case of contingent liability would be pending lawsuits or hnonoring product warranty

If the liability is likely to occur and the amount can be reasonable estimate , the liability should be recorded in the accounting records of a firm

Contingent liability are recorded to ensure that the financial statement are accurate and disclose under GAAP + IFRS requirement

Answer c

On which financial statement would you find Accounts Receivable (A/R)? Explain common types of receivables. What was the amount of A/R for your selected corporation for the two years preceding the current year? What does this tell you? Give your reasoning and support your assertions with your research.

Account receivable is most important part of any company balance sheet . Account receivable connected with sales and determined collection trend , which impact cash flow in a positive way .

For example purpose , selected one company – Unilever company Audited financial report and look into last 3 year Account receivable movement

As per Audited financial statement of 2018 – Unilever , we noticed following account receivable :

Yea r 2018 – 4,350 ( Euro Million)

Year 2017 – 3,439 ( Euro Million )

As per above number movement , we can noticed that Account receivable balance increased in 2918 as compared with 2017 mean this create blockage in working capital and bad impact on Cash flow from Operating activity.

While doing more deep dive of account receivable , we need to look into Age wise details of Account receivable :

Details –

Age wise Trade receivable	Trade receivable	Euro Mio 2018	Euro Mio 2017
	Trade receivable	4538	3599
	Less – Impairment provision of trade receivable	(188)	(160)	Impairment we need to calculate as per ECL ( Expected credit loss as per IFRS 9)
	Net Trade Receivable	4350	3439
Age wise breakdown
Nit	Not overdue	3440	2714
	Past due less than 3 months	747	621
	Pass due more than 3 months and less than 6 month	132	95
	Pass due more than 6 months and less than 12 months	74	59
	Pass due more than 12 months	145	110

Calculate and compare your selected Target corporation's cash to its biggest competitor for the two years preceding the current year. What does the cash ratio help to determine? Explain your reasoning and support your answer. Show your calculations.

Example purpose , opted unilever cash balance represents 2018 Euro Mio 3,090 , 2017 – Euro Mio 3169 , 2016 – Euro Mio 3198 . In relates to Unilever , they always maintain almost same range of cash and cash equivalent – year on year basis .( approx Euro Mio 3 000+) . Also positive part , company every year paying good amount of dividend . + Company keep on flowing money in relates to acquisition of business etc.

In comparison of Unilever , example purpose , select Colgate Palmolive audited financial statement . As per Audited balance sheet of Colgate Palmolive ( CP) , noticed that cash balance is 2018 $ 726 Mio , which is quite low as compared with Unilever ( 2018 cash balance Euro Mio 3090 ( in $ term = $ 3460 Mio) . CP also paying dividend on yearly basis but amount is quite low as compared with Unilever