Financial transaction recording and internal control procedures

Financial Analysis

Compilation Report

I (We) have compiled an accompanying Statement of Financial Performance and Statement of Financial Position as of (at) June 30, XXXX, in accordance with the Statements of Standards (Putra, 2012) and Review Services issued by the American Institute of Certified Public Accountants. A compilation is limited to presenting in the form of financial statement information that is the representation of management (owners). I (We) have not audited or reviewed the accompanying financial statements and, accordingly, do not express an opinion or other form of assurance on them (Putra, 2009).

The sale of the appliance is recorded by transaction date in the general ledger, cash receipts journal, sales journal, and have a dated cash register receipt and sales receipt. The general ledger has a debit of cash for $800 and a credit to sales for $800. Transactions are recorded by the Accounts Receivable Clerk and verified and checked for accuracy by an Accountant. The payment to the sales employee has a bank cancelled check and is recorded on the employee earnings card, the payroll journal, cash payment journal, and the general ledger has a debit to payroll expense for $400 and a credit to cash for $400. The transaction is recorded by the Accounts Payable Clerk and verified for accuracy by an Accountant. The depreciation expense is figured by an Accountant, recorded in the general ledger with a debit to Equipment for $200 and a credit to Accumulated Depreciation for $200. The transaction is verified by the CPA. The purchase of the second hand plant is recorded by the Accounts Payable Clerk in the general journal, accounts payable journal, and the general asset journal. The general ledger is debited to Plant & Equipment for $6,000 and credited to Accounts Payable for $6,000. The transaction is verified for accuracy by an Accountant. The purchase of appliance spare parts is general ledger with a debit to Stock for $500 and a credit to Accounts Payable for $500. The transaction is verified by an Accountant for accuracy. All transactions of the corresponding entries are recorded in the General Ledger and the individual account ledgers.

5-217 Travel

To be responsible for cash received from sales, good internal control procedures would include verifying sales receipts to cash register totals and the balance of cash in the register against the register totals. To hold employees responsible it is important to keep track of who operated a register and when. Designating employees to certain registers and keeping logs helps to determine who was responsible and when. "For instance, managers may implement a policy of segregation of duties in the accounting department and require that separate individuals oversee accounts receivable and accounts payable transactions" (Codija, n.d.). The same thing can be implemented in the sales department.

Variances

Budget

Actual

Variance

Significant

Sales

500,000

501,325

1,325

0.30F%

no

Cost of Sales

308,000

328,619

-20,619

6.69U%

yes

Gross Profit

192,000

172,706

-19,294

10.05U

yes

Expenses

119,000

109,360

-9,640

8.10F

no

Net Profit

73,000

63,348

-9,652

13.22U

yes

Opening Stock

72,000

72,000

0

0

Purchases

325,000

333,919

8,919

2.74U

no

Closing Stock

89,000

77,300

-11,700

13.15U

yes

Cost of Sales

308,000

328,619

20,619

6.69U

yes

"Making a clear distinction between controllables and uncontrollables in the budget is critical to administrators" (Penner, 2004). Cost of sales could be from trends in the market that have caused purchases to be higher and could be uncontrollable, which would affect the gross profit and the net profit. Reviewing the purchases journal for discrepancies could uncover some transaction recording errors that would affect the cost of sales. If discrepancies are present in the Stock Control Journal, it would affect the cost of sales. There could be discrepancies in the ending stock count that would also throw the figures off. If the purchases were not checked in according to policy, there could have been stock shortages caused by charges when the product was not delivered. Making sure that purchases are checked when they are delivered is important to ensure that product is delivered that is charged for. Making sure that sales of stock are handled according to policy ensures that sales are recorded properly.

Performance Ratios

Actual

Benchmark

Working Capital

3.39:1.00

3.35:1.00

Stock Turnover

4.4 times

4.2 times

Average Accounts Receivable Turnover

22 days

16 days

Gross Profit

34%

40%

Net Profit

13%

15%

The variance analysis is important for sales revenue and sales costs (Schmidt, 2012). The working capital ratio is lower than the benchmark, which could have resulted from the cost of sales being higher. The stock turnover ratio is higher than the benchmark, which can be a result of increased sales. The average accounts receivable turnover is six days longer than the benchmark, which could be a result of timing in the transactions. The gross profit ratio is 6% lower and the net profit ratio is 2% lower than the benchmarks, resulting because of increased cost of sales. Revenues and cost of sales are difficult to predict accurately. Two alternatives exist; to adjust the budget to bring revenues and expenses closer to the budgeted figures or take action to impact the future spending and revenues to bring forecasted and actual figures closer together. Discount incentives could be given to customers if they pay their bills by a certain date to encourage bills being paid sooner. Making sure that employees are following the check in policy on purchase deliveries would ensure that purchases are delivered as ordered and charged. Checking for market trends that may have caused the cost to rise and looking for alternative markets for purchases could help reduce costs. Considering raising the retail prices if market conditions have caused costs increase would help the profit margins.