Importance of Internal Control- Free-Samples-Myassignmenthlep

Question: Discuss about the Importance of Internal Control, Earnings Management, Concept on Valuation of Inventories and recording of Non-Current assets etc. Answer: Introduction This report will address to the concerns shown by the partners about the business including brief discussion on the importance of internal control, earnings management, concept on valuation of inventories and recording of non-current assets etc. This report will further include the explanation of current ratio, gross profit margin and inventory ratio. Importance Of Internal Control Internal control is the method for affirming the attainment of the entitys goals in operational efficiency and effectiveness, recording of financial reports in reliable manner and ensuring the compliance with rules, laws and regulations. In simple terms, internal control means everything that reduces the risks to an entity. Further it can be said that it improves the quality of recognising of financial records and also the chances of fraud, error, mismanagement etc. are reduced to minimum because transactions recorded by one individual supposed to be verified by another individual. No individual has full control on any transactions (Doyle, Ge and McVay, 2007). E Ferguson (partner) concerned about the preparation of bank reconciliation every month. It can be said that statement of bank reconciliation is prepared so that continuous cash flow movements is observed and also to detect the mistakes in the financial records of the entity because cash is most susceptible asset. Hence, incorporating Internal control system in accounting department (in this case, preparation of BRS) helps in minimising frauds and errors to the entity. Thus, the concern shown by the partner is not correct. Earnings Management It means using of practices to generate accounting records that presents overlay view of the companys financial performance to the stakeholders. Earnings management takes the benefit of how accounting rules are applied and reports the financial statements that bloat assets or revenues (Bergstresser and Philippon, 2006). Valuation Of Inventories Inventories are also called as stock and it means the quantity of goods held by the company at the end of the reporting period. Inventories are the major current assets of the company and therefore proper valuation of inventories are necessary to declare the correct financial reports. If the inventory valuation is not correctly done, then the revenues and expenses are not equal and thus the company could not make wise decisions. The 2 methods for valuation for inventory are: Perpetual inventory system: This system records every sale and also makes an entry in account of inventory. Further this system also records reduced inventory as and when sale takes place and adds the inventory as and when the buyer returns the goods. In simple terms, every transaction is recorded. Thus using of this method to value inventory, the company knows the clear picture of their investment in inventories. Periodic inventory system: This method is totally opposite to perpetual inventory system because in this system entry for COGS is not recorded only the selling of inventory is recorded in revenue account. Thus, daily tracking of inventory is not possible in this case. E Ferguson (partner) concerned about that the perpetual inventory system does not depict financial statements in positive light. Thus, I would suggest to E Ferguson that inventory valuation based on perpetual system is very good because it clearly depicts the true picture about the flow of the inventory and also financial statements is accurately prepared which is beneficial for the users of the financial statements. Accounting Standard Guidelines For Recording Non-Current Assets Non-current assets are those assets which will bring economic benefits to the company and their cost is also measured reliably (AASB, 2010). The accounting treatment of Non-Current Assets are given under AASB-116 of Property, plant and Equipment. As per paragraph 15, An asset shall be recognised at its cost. In paragraph 16, cost of non-current assets composed of the following items: Purchase cost including rates and taxes after subtracting rebates and discounts. Costs which will incurred to bringing the asset into working condition such as: initial handling and delivery charges including training and testing charges, freights, installation cost and cost to reorganise inventory department. Thus, in this case, E Ferguson (partner) concerned about the costs which will be capitalised in the machinery costs and the costs which will be expensed. According to question, the cost of the machinery comprises of: Total Cost of the machinery: Particulars Amount ($) Purchase Price 20, 000 less: trade Discount 3, 000 17, 000 Add: Freight 2, 200 Installation costs 650 Initial training costs 570 Initial testing costs 500 Cost to reorganise inventory department 6, 000 Machinery Costs to be capitalised 26, 920 Interpretation Of Current Ratio Current ratio is a part of liquidity ratio in which liquidity performance of the company is identified. This ratio is computed just to evaluate the current obligations met by company when they fall outstanding. Ideally this ratio must be 2:1 which denotes that current assets must be twice the current liabilities. The formula for current ratio is: Current assets/Current Liabilities (Saleem and Rehman, 2011). In this question, current ratio is equal to $ 17.39 which depicts that the liquidity performance of the company is sound as compare to their competitors who reported $1.60. Interpretation Of Gross Profit Percentage This ratio determines the percentage of return available on revenue from day to day operations. Higher GP ratio depicts better business performance. It is expressed in percentage terms and it is computed as follows: GP/revenues (Gill, Biger and Mathur, 2010). In this question, GP ratio is equal to 61.44% which depicts that the business performance of the company is sound as compare to their competitors who reported 48%. Interpretation Of Inventory Ratio This ratio depicts the rapidity of the inventory to convert into revenues. Higher ratio denotes the inventory is retailing very swiftly. In simple terms it can be said as higher ratio implies the efficiently usage of the inventory by the company (Koumanakos, 2008). In this question, inventory ratio is equal to 144.5 days which depicts that the inventory of the company is effectively utilised as compare to their competitors References Bergstresser, D. and Philippon, T., 2006, CEO incentives and earnings management, Journal of financial economics, vol.80, no.3, pp.511-529. Doyle, J., Ge, W. and McVay, S., 2007, Determinants of weaknesses in internal control over financial reporting, Journal of accounting and Economics, vol.44, no.1, pp.193-223. Saleem, Q. and Rehman, R.U., 2011, Impacts of liquidity ratios on profitability, Interdisciplinary Journal of Research in Business, vol.1, no.7, pp.95-98. Gill, A., Biger, N. and Mathur, N., 2010, The relationship between working capital management and profitability: Evidence from the United States, Business and economics journal, vol.10, no.1, pp.1-9. Koumanakos, D.P., 2008, The effect of inventory management on firm performance, International journal of productivity and performance management, vol.57, no.5, pp.355-369. AASB, 2010, AASB 116: Property, Plant and Equipment, viewed on 13 June 2017 from https://www.aasb.gov.au/admin/file/content102/c3/AASB116_07-04_ERDRjun10_07-09.pdf.