Note-Taking DayNovember 30, 2015

SLIDE ONEThe real world does not

evaluate your work the way educators do.

The “percentage correct” methodis used only rarely in the real world.

The Real World

• Pass/Fail

• The job is completely right or it isn’t.

• Sometimes, a 71% is as good as a 100%

• Sometimes, a 96% is as good as a 0%.

Ernie’s Electronics• Software• Management Letter

Accounting Software• User Needs Analysis• Software Selection• Compensatory Arrangements for Deficiencies• Setup and Configuration• Operations for Normal Routine Work• Special handlings for Exceptions

User Needs Analysis• Wholesale Operations, not retail• Corporation vs. Proprietorship• FIFO inventory costing• Short-Term, Long-Term, and Split Loans• Receivables and Payables• Sales Tax, Shipping (inbound and outbound)

User Needs Analysis• Customized Chart of Accounts• Income Statement, Balance Sheet, Cash Flow• Profitability Reports by Department• Profitability Reports by Customer• Trial Balance• Printing/Reprinting/Confirmation Copies

Other Requirements• Adjusting and Closing Entries, accruals, deferrals• “Period-Ending” flexibility• Financial Statements• Footnotes to Financial Statements• Management of Receivables and Payables

Purchasing Cycle• Inventory Management• Requisitioning (automatic or manual)• Purchase Order printing (various shipping and payment terms)• Receiving (merchandise)• Vendor backorders• Receiving Exceptions• Vendor Invoicing (3-way match)• Vendor Invoicing exceptions• Payables (recurring, accruals)• Check issuance, check register• Bank Reconciliation

Purchasing Cycle• Inventory Management• Requisitioning (automatic or manual)• Purchase Order printing (various shipping and payment terms)• Receiving (merchandise)• Vendor backorders• Receiving Exceptions• Vendor Invoicing (3-way match)• Vendor Invoicing exceptions• Payables (recurring, accruals)• Check issuance, check register• Bank Reconciliation

Sales Cycle• Price List• Credit Checks• Special Pricing• Order Acceptance (without immediate billing)• Order Acknowledgement• Order Filling – Packing Slips• Back Ordered (NIS) situations• Shipping (various shipping terms)• Invoicing• Cash Receipts• Credit Management and Collections• Bank Reconciliation

Sales Cycle• Price List• Credit Checks• Special Pricing• Order Acceptance (without immediate billing)• Order Acknowledgement• Order Filling – Packing Slips• Back Ordered (NIS) situations• Shipping (various shipping terms)• Invoicing• Cash Receipts• Credit Management and Collections• Bank Reconciliation

Financing Cycle• Initial Capital• Additional Paid-In Capital• Retained Earnings• Dividends

Financing Cycle• Initial Capital• Additional Paid-In Capital• Retained Earnings• Dividends• Long-Term Loans (with differing repayment arrangements)• Interest

Financing Cycle• Initial Capital• Additional Paid-In Capital• Retained Earnings• Dividends• Long-Term Loans (with differing repayment arrangements)• Interest

Asset Acquisition Cycle• ROI Analysis• Acquisition of Long-Term Assets• Depreciation of Long-Term Assets• Impairment of Long-Term Assets• Disposal of Long-Term Assets

Asset Acquisition Cycle• ROI Analysis• Acquisition of Long-Term Assets• Depreciation of Long-Term Assets• Impairment of Long-Term Assets• Disposal of Long-Term Assets

Compensate for Deficiencies

Ernie’s Electronics• Software and Operations• Management Letter

“Easter Eggs”Another name for “Risk Analysis”

Top-Down Approach• Financial Statement balances• Significant Accounts• Management Assertions on those accounts

• Existence/Occurrence• Completeness/Period• Valuation/Allocation• Rights/Obligations• Presentation/Disclosure

CASH• Should balance to the penny ($267,662.24)• Management Letter must mention:

• Need to watch cash flow, don’t order if you don’t have cash• Need to watch pricing (explanation of fixed costs)• Duplicate check number• Absolutely must perform a monthly bank reconciliation

Accounts Receivable• Valuation dependent on Sales Figure• Includes “Trade” receivables only• Must agree with A/R aging report• Management Letter must mention:

• Need to specify payment terms on sales• Need for advance credit checks• Need for collection efforts• Need for future consideration of bad debts

Other Receivables• Should be separate from “Accounts Receivable”• Must include Attorney refund• Might need to include insurance claim payment• Must be explained in footnotes• Management Letter must include explanation

Inventories• Supplies must be separate from Merchandise for Sale• Must only include inventory on-hand, should include freight-

in• Footnote must address Costing method.• Income Statement may include extraordinary loss• Footnote must disclose material casualty losses• Management letter must mention:

• Hart’s taking of inventory• Need to followup on insurance claim with exact amount• Discrepancy: shipping/billing non-existent inventory• Absolute need to conduct a periodic physical inventory count

Prepaids• Footnote must describe, including deposits• Write-downs must have been done• Management Letter must include:

• Explanation of difference between prepaids and deposits• Need to do monthly write-downs• Question insurance premium based on $1M inventory estimate

Long-Term Assets• Van was never used and might not be a legitimate

business expense

• Depreciation must be reported any time financials are prepared.

Short Term Liabilities• Accounts Payable should include only “Trade Payables”• A/P might include freight payable• Other Payables must include accruals:

• Water• Electricity• Fees/Fines/Penalties (burglar alarm fine)• State Property Tax Payable

• Should include short-term portion of car loan• Footnote should mention car loan split• Management letter must mention importance of

paying bills on time

Long-Term Loans• Vinnie’s loan• Interest should be for one month only• Must be included in Footnotes • Related party transaction should be in footnote• Management Letter must mention exorbitant

interest rate, possibly refinancing

Owner’s Equity• Corporations do not allow “draws” against capital• Capital Stock, Retained Earnings• Footnotes must show stock authorized, stock

issued, stock outstanding• Management Letter should mention Hart’s position

as stockholder

Sales• Sales figure does NOT include Sales Tax or freight• Invoices:

• Should not have charged sales tax• Must mention sales terms (FOB)• Must mention freight terms (collect, ppd, etc.)• Must include freight charges where appropriate (PPY and Add)• McDuff invoice date must be correct

• Management Letter must mention:• Explain FOB and shipping terms• Need to specify sales terms

NOTE• Insurance claim is NOT revenue!

Cost of Goods Sold• Can include shrinkage if immaterial

• Is the value of Hart’s merchandise and the theft loss material?

SG&A• Must have accrued for utilities expense

• Management letter must mention

EBIT or EBITDA• Must expense interest, depreciation, and income

tax separate from SG&A expenses, preferably reporting an EBIT figure.

OTHER• PO’s had to be marked “CONFIRMING”• PO’s had to show reseller number

Big Curve

No Class Meeting Wednesday• Office Hours Cancelled Tue/Wed/Thur• Wailing Wall open all week next week