Chapter 20 Financial Systems and Procedures

Chapter 20 Financial Systems and Procedures

Part 1 Terminology

System

• a group of independent but interrelated elements comprising a unified whole.
• a process for obtaining an objective.

Policy

• a guiding principle

Procedure

• a series of acts
• a set sequence of steps

Guideline

• a recommended approach for conducting a task

Part 2 Advantages of Having a Formal Procedure

• all transaction will be recorded in the same way, and the required information will be recorded in the correct places.
• The best practice, the most efficient way of recording transactions
• staff can refer to the written procedures
• new staff can be trained more quickly
• auditors can follow transaction more easily
• staff can record transactions more quickly and efficiently
• transactions which have not followed the procedure, which could be errors or frauds, may be identified more easily.

Part 3 Designing Financial Procedures

Sales systems

• objective - to record the value of sales to each customer and the amount outstanding to be collected.
• outputs - an analysis of sales by data and product type. a report showing amounts owing from receivables and how long outstanding.
• inputs - customers place orders by fax and by telephone
• sequence of events : oder received --> goods despatched --> invoice sent to customer --> invoice sent to customer --> sale recorded in accounts --> payment received from customer --> outstanding amounts followed up

odering state of the system

• objective - to receive and process orders quickly and accurately, to ensure that goods are only despatched where the amount charged will be collectable.
• outputs - instruction to despatch department to despatch goods, instruction to accounting department to invoice (charge for) goods.
• inputs - note of telephone call, fax
• what could go wrong - details of orders may be lost, details of orders may not be passed on to despatch and/or invoicing, order may be processed from customer who is unwilling/unable to pay

Part 4 Procedures Manuals

• companies will collate the formal procedures within each system into a procedure manual.
• a good procedure manual will contain sufficient detail to enable staff to understand the procedures they should carry out with minimal supervision and verbal instruction
• manual will normally contain a flowchart of each system. It enables an overview of the system to be easily gained.
• the diagram will be accompanined by detailed narrative notes, explaining in words the docment flows and the checks to be performed at early stage.
• procedure manual should be very specific as to who should perform each task, when and how frequently - this helps to ensure that staff fulfil their tasks on a timely basis and the controls performed by appropriate people
• manual should included specimens of each document referred to.

Part 5 The Purchasing Cycle

Part 6 The Sales Cycle

Part 7 The Wages Cycle

Part 8 The Cash System

8.1 The Receipts System

-Cheques are received from credit customers. (recorded in the cash book and customer's personal account)

-Cashier pays the cheques into the company's bank account

-Controls must be in place to ensure that the cheque cannot be misappropriated before it is paid into the bank.

-Some Customers may pay money directly into the company's bank account.

8.2 The Payments System

-Companies pay their suppliers (usually monthly by cheque)

-A cheque requisition is prepared for each payment.

-Cheques for a large amount of money will usually require two signatories.

8.3 The Petty Cash System

-Companies will need to keep a certain amount of cash on hand to pay for small expenses. (Postage stamps, biscuits)

-A cheque will be made out to cash, to generate the initial cash for the system.

-As staff claim against the petty cash system, they complete vouchers.

-At regular intervals a further cheque is made out to cash to replenish the petty cash which has been spent. Supervisor then inspects.

Part 9 The Inventory System

-The production decides on the required inventory purchases.

-The goods are received and are stored in the raw materials store.

-When goods are required for production, a Materials Requisition Form is completed by the production manager.

-The goods are then made into 'Work in Progress' (Partially complete goods)

-Record is made of the quantity removed from inventory upon goods sold.

-Year-end - All inventory will be counted and valued.

Part 10 The Purpose of Organisational Control

Part 11 Why Controls in Systems are Important

Part 12 Automated Systems

-Computerised systems used by most of the organisation.
-Have following features:
a)Uniform processing of transactions
b)Lack of segregation of functions
c)Potential for data to be corrupted easily
d)Potential for increased management supervision

Part 13 A Comparison of Manual and Automated Systems

Manual System:
Advantages
-Low capital cost
-No computer experience required
-Easy to correct errors
-Ledgers are portable
-Can review transactions
Disadvantages
-Slower at performing calculations
-More calculation errors
-Analysis of information is more time-consuming
-Less easy to audit

Automated Systems:
Advantages
-Quicker
-Can perform complex calculation
-Few errors
-More security
-Easier to sort and analyse data
Disadvantages
-Capital cost
-Training cost
-Less easy to correct errors
-Systems can crash

Chapter 18 The Accounting Profession

Chapter 18 The Accounting Profession

1. The history of accounting

• Accounting records were used by ancient traders, farmers to control their assets, monitor their costs, collect payments and calculate earnings.
• In 1494, Luca Pacioli (Italian Monk), codified existing bookkeeping practice.
• Accounting increased in importance as the predominant form of business entity.
• Due to separation of ownership and management, accountants were required to produce and interpret financial information to enable shareholders to make decisions.
• Accounting standard were developed to make the comparison between different companies become easier.
• The growth in computerisation saw a reduction in traditional bookkeeping work, and globalisation required advice on many areas in addition to accounting.
• Today the accounting profession is a multimillion dollar industry, and gives clients advice on wide range of business issues.

2. The role of accounting within the business

Function- Business development
Financial information required- Past setup costs, expenses, revenues, in order to estimate for new project. Mix of fixed/ variable costs, in order to determine breakeven point.

Function- Sales
Financial information required- Credit history of, and types of, customers to establish whether a new customer is creditworthy. Price charged in the past and impact on quantity sold

Function- Production
Financial information required- Cost of labour, materials and overheads. COst of buying rather than making components.

Function- Marketing
Financial information required- Prices charged in past and by competitiors. Available budget. Costs of production,

Funtion- Human resources
Financial information required- Salaries, pay rises, training budget

Funtion- Strategy
Financial information required- Cash flow forecasts, budget, past information, profitability by product, trends in sales and profits.

3. The purpose of the accounting function

sales invoices

• external and internal users
• accounting department- recording in ledger
• customers- recording in customers' ledger, paying for goods.

Ledgers

• internal users
• accounting department- preparing financial statements at the year end.

Financial statements

• external users
• shareholders- deciding whether to buy/ sell/ hold shares
• lenders- deciding whether to lend
• employees- assessing likelihood of redundancy, considering whether pay rise is reasonable.

Cost information

• internal users
• accounting department- calculating production costs, making decisons as to whether to make or buy components, determining prices.

Chapter 19 Accounting and Finance Functions

Chapter 19 Accounting and Finance Functions

Part 1 The Formulation, Implementation and Control of Policy and Performance

The accounting function has an important role to play in helping management to:

-Formulate policy

-Implement policy

-Control performance

Planning is the establishment of objectives, and the formulation, evaluation and selection of the policies,

strategies, tactics and action required to achieve them.

A Budget is a plan expressed in quantitative (normally financial) terms for either the whole of a business or

for the various parts of a business for a specified period of time in the future.

Budgetary Control is the establishment of budgets relating the responsibilities of managers to the requirements of a policy, and the continuous comparison of actual with budgeted results.

Part 2 The accounting and reporting functions in business

The sequence of steps taken :
Transaction--->Day Books--->Ledger accounts--->Financial statements

main books of prime entry:
-Purchases Day Book
-Sales Day Book
-Cash Book
-Petty cash book
-Journal

The main financial statements produced each year are:
-Balance sheet : Showing assets owned and liabilities owed and how net seetes are financed
-Income statement : Showing revenues earned and costs incurred,leading to the net profit or loss for the year
-Cash flow statement : Summarising the cash receipts for the year and cash payments paid out to help readers of the accounts to understand the liquidity of the business

Part 3 The Management Accounting and Performance Management Functions

Management Accounting
- for internal use
- to aid planning, comtrolling and decision making
- no legal requirements
- management decide on the information that they require and the most useful way of presenting it
- financial and non-financial information
- time period is historical and forward-looking

Financial Accounting
- for external use
- to record the financial performance in a period and the financial position at the end of the period
- limited companies must produce financial accounts
- format and content of financial accounts must follow accounting standards and company law
- mostly financial information
- mainly a historical record

Examples of decision making that management accountants can help management with are:
- breakeven analysis
- key factor analysis
- pricing decisions
- investment appraisal

Budgetary control involves two elements:
~ Planning - setting of various budgets for the appropriate future period
~ Conrol - comparison of the plan in the form of the budget with the actual results achieved for the budget period

Part 6 Investment appraisal and financing viable investments

Investment appraisal : long-term investment decisions

Advantages of issuing new ordinary shares:

• dividens can be suspended if profits are low, whereas interest payments have to be paid each year.
• bank will typically require security on the company's assets before it will advance a loan

Advantages of raising loan finance:

• Interest payments are allowable against tax, whereas dividend payment are not an allowable deduction against tax.
• No charge is required in the ownership of the company, which is governed by who owns the shares of the company.

Part 7 Management of working capital

Company must also decide on the appropriate level of investment in short term net assests, i.e.

Inventory

• advantage of large balance - customers are happy since they can be immediately provided with good
• advantage of small balance - low holding costs. Less risk of obsolescence costs

Trade receivables

• advantage of large balance - customers are happy since they like credit.
• advantage of small balance - less risk of bad debts. good for cash flow.

Cash

• advantage of large balance - creditors are happy since bills can be paid promptly.
• advantage of small balance - more can be invested elsewhere to earn profits.

Trade payables

• advantage of large balance - perserves your own cash
• advantage of small balance - suppliers are happy and may offer discounts