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Accounting and Financial Controls

The Controlling Function

Joseph Basa

on 16 October 2012

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Transcript of Accounting and Financial Controls

Accounting and Financial Controls Managers use accounting and financial controls to improve company-wide performance Profitability Goals Cost of Capital Increasing Efficiencies of Company Operations Ratios Budgets Audits Liquidity Ratios - Measure the company's ability to meet its short-term obligations by paying its debts on time - Designed to make sure the company has enough money on hand Two types of Liquidity Ratios Current Ratio = Quick Ratio = (current Assets - inventory) current liabilities = 1:1 Activity Ratios - Measure efficiencies in company operations - Assist managers in understanding how well certain company activities are being carried out Two Common Activity Ratios Inventory Turnover Inventory ratio = total annual sales average inventory = 7 times Average Collection Period Average Collection Period = sales per day average accounts receivable = 23 days current assets current liabilities = 2:1 Leverage Ratios - Measure company debt and company risk; the greater the amount of borrowed money, the greater the risk There are many formulas available to assess leverage Here is one simple version, a debt to equity ratio: Debt to Equity Ratio = total debt total assets = 45% Profitability Ratios - Measure company financial success One common ratio used for that purpose is Profit Margin: Profit Margin = net income after taxes total annual sales = 12% Analyzing Ratios - The Income Summary or P&L (Profit & Loss) Statement is the most common instrument used to assess profitability goals Here's an example: - The minimum return that investors expect to see in a company in which they invest A Balance Sheet reports on investing and other business activities of the organization $ $ $ $ INCOME SUMMARY Total Sales
Cost of Goods
Gross Profit
Operating Expenses
Gross Operating Income
Net Operating Income
Other Expenses
Unusual Income
Net Income Before Taxes
$ 70,000.00
$ 55,000.00
$ 50,000.00
$ 45,000.00
$ 20,000.00 Other Profitability Standards calculated may include: Return On Investment (ROI) Earnings Per Share of common stock (EPS) Dividends Per Share (DPS) Paid to Shareholders lists amounts for assets, liabilities, and equity at a specified point in time using the accounting balance sheet equation Assets Cash Short Term Securities Accounts Receivable Inventory Real Estate/Land = Liabilities (Short Term) Trade Credit Bank Loans Commercial Paper (Long Term) Bonds Payable Notes Payable + Equity Common Stock Paid in Surplus Retained Earnings - Conducting the types of financial analyses and annual financial planning that will lead to the efficient use of company operating funds Three Primary Methods: Ratios Budgets Audits Step Four: Step Three: Step Two: Step One: Executive Management initiates the Budgeting Process. Each Operating Unit/Department prepares a preliminary Budget. Executive Management (CEO/CFO/Budget Committee) reviews, modifies, and improves the preliminary budget. Budget performance is evaluated during the budget period to assess compliance. Typical Stages of the Budgeting Process: Forms of Budgets: Organizational Level Pro-form Income Summary - Explains expected revenue and expenses during the course of the year -Departmental Budgets are generated at this point Departmental Level Incremental Zero-Based Rolling Budgeting Problems -Issues can arise on both the planning and controlling side of the budgeting program Planning Poor Staff Politics over-asking
horse trading Controlling Overemphasis on the Short Term Manipulating Outcomes Use as Policing Device Creating Quality Budget Programs involves the managers taking proactive steps to make sure the process works properly. Three areas of Activity: Control, Planning, and BOTH Planning and Control Planning Effective Forecasting Reduce Politics Control Correct Problems Long-Term View BOTH (Planning & Control) Participation Future Orientated Systematic Approach QUALITY mangers take the time to make sure a budgeting system works as it should. A budget is an annual financial plan. The Budgeting Process offers the potential to establish links between a company's planning and controlling systems At the end of the budgeting process, hopefully you'll have a quality BUDGET. Now, what is a BUDGET? Auditing Takes Many Forms: Internal Auditing
External Auditing
Tax Auditing
Software Auditing
Risk-Based Auditing
Fraud Auditing
Quality Auditing (QA) Auditing Systems exist to REASONABLY assure... ...financial statements are free from material error ...accounts reflect their actual balances ...systems procedures are sufficient to provide accurate and reliable data An AUDIT is an assessment of a person, organization, system, process, operation, project, or product. - most commonly used to reconcile financial statements and accounting systems Three common goals are established for every department within an organization Profitability Goals Cost of Capital Increasing Efficiencies in Company Operations Applies to ENTIRE Organization } { Departmental Activities Now, here's a quick video...
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