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Chapter 5 Comments 8th ed

Chapter 5 Comments 8th ed - Instructor Comments Chapter...

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Instructor Comments Chapter Five Hope everyone did well on the Exam!!! It’s off to a new start in Chapter five. This chapter begins with a discussion on the operating cycle and internal control. The operating cycle is the time involved to convert cash into inventory, convert inventory into accounts receivable, and then convert receivables back to cash. The definition is important because current assets are basically defined as cash, and those items that can be converted into cash, used up, or consumed within the operating cycle. Cash and Internal Control The concept of internal control (preventing FRAUD and/or manipulation of financial data) is important for good management. For our purposes, we need to think about internal control as the system which safeguards the assets and provides for the accuracy and reliability of the financial statements . An important internal control concept involves a proper separation of responsibilities. For example, in the cash area, the following three responsibilities should always be kept separate in order to provide reasonable internal control: - custodianship, - accounting or record keeping, and - operations. Two good examples of the operations function are authorization of transactions and the bank reconciliation. For example, a check should be signed by one individual (authorization or operations), cash should be kept by someone else (custodianship), and the books indicating how much cash we have should be kept by a third individual (accounting). In this type of system, the accountant should be able to detect any shortage of assets caused by the custodian of the asset.
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