Question

1. What is a receivables float?

2. What is a payables float?

3. Name three ways to shorten the receivables cycle.

4. GIve one example of receivables fraud.

5. Name at least two different types of inventory valuation methods. Discuss the advantages and disadvantages of each method.

6. A controller must consider the many factors to assist in the determination of capital asset expenditures. Why is this planning important? Name two different account methods that might be used in the valuation of the expenditure. Discuss the advantages and disadvantages of both methods.

Answer 1

1.) Receivables float is the time gap between the time when the payment was sent by the customer and the time when the payment was received by the creditor and was usable by the creditor.

2.) Payables float is the time gap between the time when the payment was made to the creditor and cash balance was reducedby theamount of payment and the time when the payment is actually received by the creditor.

3.) Attempts should be made to reduce the time gap between the payment of the invoice and the time when bills or invoices are raised.

Bills or invoice should be raised immediately after the dispatch of material or rendering the service.

Credit period offered to the customers should be kept as low as possible.

4.) The most prevalent type of internal fraud scheme is lapping of account receivable is the recording of payment on a customer's account sometime after the payment has been received. The basic lapping scheme operate as follow: the employee has misappropriated company funds through customers A's account,by diverting a cash payment or issuing a refund payable to the employee.In order to conceal the misappropriation,the employee now records payment made by customer B to customer's A's account,payment made to customer C to customers B's account and so on.

5) Two different types of inventory valuation metods are:

1. FIFO Method called as First In First Out Method.

In this method the ending inventory is calculated on the goods which are last purchased and cost of goods sold is calculated on the goods purchased first.

2. LIFO Method called as Last In First Out Method.

In this method the ending inventory is calculated on the goods which are first purchased and cost of goods sold is calculated on the goods purchased last.

FIFO Advantages:

1. Easy to Understand and operate.

2. usfeul when prices of goods are reducing.

3. Closing stock value reflects the current market price.

FIFO Disadvantages

1. Inappropriate when prices are rising rapidly.

2. Improper when many lots are purchased at different prices.

LIFO Advantages:

1. Matches most recent cost against revenue.

2. useful when prices of goods are increasing.

LIFO Disadvantages

1. Inventory is understated as balance is based on old value.

6.) The planning for capital expenditure is very critical for business for below:

1. This involves big funds outflow and this impacts liquid position of the company. So the capital expenditure should provide adequate return with adequate cost for proper period.

2. Depreciation will be levied on capital asset which is an expenses for company and as a result can able to save tax. So it is critical depreciation tax saving should have benefited company.

3. Life of the asset is very critical to replace the asset after its useful life. As longer the useful life with better usability of the asset as much asset will be preferred to purchase.

4. Borrowing cost is also very critical since capital assets are purchased with loan and loan have a cost of borrowing.

5. Running and maintenance expenses for the capital asset is also very significant.

6. Salvage value of the asset after the useful life is also a factor to determine the asset to purchase or not. However salvage value need to be brought back to current price with discounting with time value of money.

Two important methods for valuation of capital asset are:

1. Net present Value method

2. Profitability Index method

Merits of Net present value method:

(i) It considers that the future dollar is less worthy than current dollar. The cashflows of all periods are discounted and brought to cashflow of current period.

(ii) If the present value of cashflow is more than present of outflows then the capital asset need to be accepted. NPV will support us by providing the exact value of profit on the capital asset by which it will be easy to take decisions

(iii) This considers the cost of capital and risk inherent in the project. This will help us providing accurate NPV

Demerits of Net present value method:

(i) It involves Guess Work.

(ii) It will not suitable to compare different projects with different sizes.

Merits of Profitability Index method:

(i) This method considers the time value of money factor.

(ii) It analysis all cash flows of entire life.

(iii) This provides the exact rate of return of the project.

Demerits of Profitability Index method:

(i) This is tough to understand interest rate or discount rate.

(ii) This is complex to compute profitability index if two projects having different useful life.