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Explain to the class the revenue cycle.

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Explain that cash is considered the most susceptible asset to improper diversion and use
and thus adequate controls over cash should be in place. Typical controls used for cash
include:
1. Physically by protecting cash balances and cash‐related documents, cards, stamps . .
.etc and minimizing the amount of cash‐on‐hand by promptly depositing cash
collections in the company’s bank accounts.
2. Using bank accounts to minimize the maintenance and handling of cash balances and to
expedite the cash collection process by establishing accounts in strategic locations that
would shorten the time for collecting and depositing customer payments. Types of
bank accounts that could be used:
• General checking account is usually used to making most deposits and
disbursements from/to other accounts and/or operational sources/uses.
• Imprest bank account is used to make an amount of cash available for a limited
purpose. For example, this account could be used for payroll at the end of the
month. A transfer may be made from the general account at the end of each
month, allowing the payroll cashier to draw checks on the account to the
employees.
• Lockbox account is used by companies with distributed locations to expedite
collections in cities with the most customer billings. The company would rent a
special postbox and instruct its banks to empty the contents daily and deposit
them into the bank accounts.
3. Using petty cash systems to obtain reasonable control over small regular disbursements
by designating small cash balances to selected individuals that are regularly required to

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 spend on these small items.
4. Bank reconciliations will be discussed in the next slide.

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Explain that bank reconciliations should be prepared regularly to account for all differences
between the cash books and bank statements. Normal differences result from:
1. Deposits in transit – deposits made by the company (and thus recorded in the books of
account) but not credited in the bank accounts as of the bank statement date.
2. Outstanding checks – checks written and delivered by the company but not presented
to bank for collection as of the bank statement date. Therefore, they are accounted for
in the company’s books but not in the bank’s records.
3. Bank charges and commissions reduced from the bank’s records but not from the
company’s books.
4. Bank interest that is recorded in the bank statement but not in the company’s books.
5. Bank collections or deposits – are deposits in the company’s bank accounts by
customers that did not provide the company with bank deposit slips.
6. Errors in the cash accounts and/or in the bank records.

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Define inventories and explain as follows:
1. Inventories are asset items:
• Held for sale in the ordinary course of business, and/or
• Materials that will be used in the production or sale of other goods.
2. Types of Inventory
• Raw materials are inventory items that are processed further in a manufacturing
process and are traceable into the final product.
• Work‐in‐process is the manufacturing cost of material that was incomplete as of
year‐end.
• Finished goods are the completed manufactured units that are ready for sale in
the ordinary course of business. Finished goods may be held by the company at
its warehouses, or held on consignment with distributors.
• Materials and supplies are items used in the manufacturing process that cannot
be traced to the final product.

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Explain the two types of inventory management and controls systems as follows:
1. Perpetual Inventory System is an inventory management system whereby updated
inventory records are maintained for inventory on‐hand. Purchases and sales directly
update the inventory records, thus management always has an updated record of
inventory. Annually, a physical inventory is made, and results are compared to the
records. Significant differences are then investigated.
2. Periodic Inventory System is an inventory management system that accumulates all
purchases and related returns in a special “Purchases” account throughout the year. At
year end, a physical inventory is performed, ending inventory is valuated, and the cost
of goods sold is computed based on the formula presented.

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List the various inventory cost flow assumptions and explain each of them by using the
related illustration.

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Data for the comprehensive example that will be used in the following slides.

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Explain the specific identification method and when it can be used as follows:
Specific Identification is used to charge to cost of goods sold the historical cost of the
particular item sold. The method is used when it is practical to physically separate
inventory items.

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Explain the weighted average method as follows:
Weighted Average is used with a periodic inventory system whereby only one average for
each inventory item is calculated every year.

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Explain the moving average method as follows:
Moving Average is used with a perpetual inventory system whereby a new average is
calculated with each inventory purchase.

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Explain the FIFO method as follows:
First‐In First‐Out (FIFO) assumes that inventory sold is from the earliest inventory
purchases thus ending inventory is from the most recent inventory purchases.
1. Whether using a perpetual inventory system or a periodic inventory system, cost
of goods sold and ending inventory will always be the same.
2. During a period of rising inventory costs, using FIFO will result in the lowest cost
of goods sold and the highest net income.

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Explain the LIFO method as follows:
Last‐In First‐Out (LIFO) assumes that inventory sold is from the most recent inventory
purchases thus ending inventory is from the earliest inventory purchases.
1. Ending inventory and cost of goods sold may differ between using a periodic
inventory system and a perpetual inventory system.
2. During a period of rising inventory costs, using the LIFO method will result in the
highest cost of goods sold and thus the lowest net income.

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Answer (d) is correct.

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Answer (b) is correct.

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