Accounting Controllership Concepts

This accounting controllership assignment delves into key concepts like receivable and payable float, strategies for shortening the receivables cycle, common receivables fraud examples, and inventory valuation methods (FIFO and LIFO). It also explores capital expenditure planning and evaluation techniques such as NPV and IRR.

ACCOUNTING CONTROLLSHIP
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ACCOUNTING CONTROLLSHIP
Question 1
The receivable float refers to the time elapsed between the receipt issued by the bank
regarding the payment of the customer and the application of this payment to the accounts
receivables. The receivable float is commonly observed in relation to lockbox services
offered by the bank for collection of accounts receivables.
Question 2
Payable float refers to the time gap between the payment to the creditor and the actual receipt
of the payment by the creditor. There is always this time gap which needs to be considered in
cash management.
Question 3
Three ways to shorten the receivables cycle are indicated below.
Provide incentives to the customers who tend to make early payments so that the cash is
received early and thereby the receivable cycle is reduced. Strict penalties in terms of late
payment and lower credit period on future transactions need to be levied on those accounts
which tend to delay their period beyond the credit period provided. Automation in the release
of invoice and follow up also tends to reduce the receivables cycle as there are times when
there is unnecessary delay in the invoice being released.
Question 4
One example of a receivables fraud is through lapping. Lapping involves stealing of proceeds
extended by a particular client (say ABC) towards receivable payment and instead diverting
the payment of another client (say XYZ) to the account receivables balance. Additionally,
fraud through write offs and discounts can also be used particularly where there are
intentional delays in receivable payment.
Question 5
1) FIFO (First in First Out) – The ending inventory is computed based on the latest (last)
inventory purchased while the inventory purchased at the beginning would be reflected in
cost of goods sold.
Advantages

ACCOUNTING CONTROLLSHIP
The inventory at hand is representative of the current market value. It is a preferred method
when there is a downward trend in inventory price. It is an easy and convenient method to
use.
Disadvantage
It is not appropriate to use this when inventory price is increasing.
2) LIFO (Last in First Out) – The ending inventory is computed based on the inventory
purchased at the beginning while the inventory purchased at the last would be reflected in
cost of goods sold.
Advantages
It is a preferred method when there is a upward trend in inventory price. It tends to match the
latest cost with the revenue.
Disadvantage
There is understatement of inventory considering the cost at the beginning is used.
Question 6
Planning in terms of capital expenditure is imperative as the cash outflow associated is
typically huge and the expected benefits of this would typically be realised over a long period
of time. Hence, prudence is expected. Further, capital expenditure has long term requirement
of fund which typically is difficult to be met through working capital and hence separate
planning of the same is desirable.
Two useful methods to evaluate capital expenditures are NPV and IRR.
NPV (Net Present Value)
One of the advantages of NPV is that it recognises the time value of money. Further, it
considers the complete cash flows over the entire project duration. Also, it is immensely
helpful in determining the preferred project for mutually exclusive projects. A disadvantage
of this method is the sensitivity to discount rate and difficulty is selecting the same.
IRR (Internal Rate of Return)
One of the advantages of NPV is that it recognises the time value of money. Further, it
considers the complete cash flows over the entire project duration. Also, it is immensely
helpful in determining the preferred project for mutually exclusive projects. A disadvantage
of this method is the tedious nature of calculations along with the inconsistent results when
there is net cash outflow during the project implementation.