Financial Management

Today's worrying financial climate has made most of us more aware than ever of the need for good financial management in business. Businesses need to be competitive and fiscally strong in order to survive, and it is only through carefully considering several key areas of financial planning that any business can hope to achieve this. These critical areas of financial management may seem obvious when pointed out, but many business people still make silly mistakes in these areas or worse still overlook them entirely.
Cash flow Projections- Even the most inexperienced of business owners has probably understood the vital need for good cash flow long before starting their enterprise, but keeping cash flowing without the nightmare that a cash flow crisis can bring is nothing more than a matter of good planning. Every business should be making regular cash flow predictions that detail all cash expected in to the business from sales and other income and all anticipated outgoings of cash such as expenses and other payments.  Regular cash flow forecasts of this kind allow a business to stay ahead of the game by giving it the opportunity to arrange finance in advance of any looming crisis.
Payment Management- For most businesses invoicing for payment is standard practice; for every customer sent an invoice, one will probably be received from elsewhere for supplies etc. To get the best from your cash flow it is wise to make good use of any terms offered, paying an invoice immediately might seem honourable, but it will mean that the cash used to pay it will be helping the supplier's cash flow and not your own. When a supplier gives a business 30 days to pay, they are allowing 30 days to receive payment, so it is always good practice to use this time.
Debtor Management- Although when offering terms a business expects its customer to utilise the terms in full and will allow for this, there are always customers who push terms further than your business can stand. It is therefore crucial to have a workable system in place for dealing with bad payers well before the first bad debt occurs. It is important to know exactly what is owed to the business and when it is due at all times and so good record keeping in this area is essential; many accountancy software packages have debtors' listings built in, but a simple spread sheet will suffice. Chasing the money due in to your business can be a valuable exercise, as it is often the case that debtors have simply forgotten to make payment or are merely pushing terms as far as they can, waiting to be chased before they pay. Many invoices will be settled once chased, so it is important to do this regularly, clearly and uniformly; using a standard letter, followed by a call if the letter remains unanswered is a useful system. When it comes to persistent bad payers, it is probably prudent to drop them as customers and to put the chasing of any accrued debt into the hands of professionals.
Monthly Records- Plenty of business owners prefer not to get involved in what they consider to be the remit of their Bookkeeper or accountant, and will shy away from regular bookkeeping. However this is an area of financial management that it really will benefit the business owner to hang on to. Keeping monthly records of transactions will allow a business owner to keep a firm control of the businesses finances; it gives a far better indication of business performance than most other indicators and will highlight profits and losses well in advance of the annual reports. As with other records kept, it is not necessary to have complex software packages to keep monthly books, a spreadsheet will work just as well.
There is no real alternative for enlisting the help of a good accountant to give your business the solid financial advice it needs, but decent financial management must also happen on a regular basis at the core of every business; there is no substitute for knowing what is going on with your business' finances if you want to survive in today's difficult climate.

Payment Processing

As technology and the Internet continue to advance, payment processing has become more flexible and convenient for businesses and consumers alike. E-commerce capabilities, direct deposit payments and electronic business-to-business transactions help to streamline the payment process, saving time and money while improving overall business. ACH check payment processing is widely used among government, commercial and business sectors. Read on to learn more about ACH, including types of ACH payments and the benefits of ACH.
What Is ACH?:
ACH stands for Automated Clearing House, which refers to a federally regulated electronic network of U.S. financial transactions. Governed by the National Automated Clearing House Association (NACHA) and operated by the Federal Reserve and Electronic Payments Network, the system allows banks to send money back and forth electronically, processing large volumes of payments in batches. To make an ACH payment, account holders authorize the ACH, and the account is then identified by the bank's routing number and account number.
Types of ACH Check Payment Processing:
Direct deposit is a common form of ACH check payment processing that allows employers to electronically deposit paychecks directly into employees' bank accounts. This reduces the amount of paper checks issued and allows employees to deposit funds without making a trip to the bank.
Consumers can make ACH payments to pay mortgage bills, loans, utility bills, insurance premiums and more. ACH payments also offer a secure and efficient way for e-commerce businesses to accept payments without the need for credit or debit cards. Other types of ACH payments include federal, state, and local tax payments and business-to-business payments.
Benefits of ACH:
By electronically automating various types of payments, business can save a great deal of time and money regarding the payment process. ACH is low cost, allowing companies to reduce costs associated with check processing, paper mailing and lost payments. ACH is also a greener alternative to traditional paper check processing, as emissions and resources are greatly reduced.
With the ability to make payments directly from their bank accounts, consumers can enjoy security and convenience. Merchants and businesses save time and money, improving customer service and overall business operations while increasing profits.

Inventory Costing

After companies determine the quantity of units of inventory, they apply unit costs to the quantities to compute the total cost of the inventory and cost of goods sold. If companies can particularly identify which particular units are sold and which are still in ending inventory, they can use the specific Identification Method of inventory costing. Using this method, companies can accurately determine ending inventory and cost of goods sold. It requires that companies keep records of the original cost of each individual inventory item. Traditionally specific identification was used to keep records of products such as cars, pianos or other expensive items from the time of purchase until the time of sale much like bar codes used today. This practice nowadays is somewhat rare with most companies engaging into cost flow assumptions.
Cost flow assumptions differ from specific identification in that they assume flows of costs that may be unrelated to the physical flow of goods. There are three assumed methods including (FIFO), (LIFO), and (Average-Cost). Company management usually selects the most appropriate cost flow method.
The (FIFO) first in, first out method assumes the earliest goods purchased are the first to be sold. It often parallels the physical flow of merchandise. Therefore the costs of the earliest goods purchased are the first to be recognized in determining cost of goods sold. Ending inventory is based on the prices of the most recent units purchased. Companies obtain the cost of the ending inventory by taking the unit cost of the most recent purchase and working backward until all units of inventory cost. To management, higher net income is an advantage. It causes external users to view the company more favorably. In addition, management bonuses, if based on net income, will be higher. Therefore, when prices are rising, companies tend to prefer to use FIFO because it results in higher net income. A major advantage of the FIFO method is that it in a period of inflation, the costs allocated to ending inventory will approximate their current cost.
The (LIFO) last in, first out method assumes the latest goods purchased are the first to be sold. LIFO never coincides with the actual physical flow of inventory. The costs of the latest goods purchased are the first to be recognized in determining costs of goods sold. Ending inventory is based on prices of the oldest units purchased. Companies obtain the cost of the ending inventory by taking the unit cost of the earliest goods available for sale and working forward until all units of inventory cost.
The average cost method allocates the cost of goods available for sale on the basis of the weighted average unit cost incurred; it also assumes that goods are similar in nature. The company applies the weighted average unit cost to the units on hand to determine the cost of the ending inventory. You can verify the cost of goods sold under this method by multiplying the units sold by the weighted average unit cost.
Each of the three assumed cost flow methods is acceptable for use. 44 % of major U.S companies use the FIFO method. They include companies like Reebok International Ltd. and Wendy's International. 33% use the LIFO method including companies such as Campbell Soup Company, Kroger's, and Walgreen Drugs. 19% use the Average Cost method including Starbucks and Motorola. Some companies may use more than one. Black and Decker Manufacturing Company use LIFO for domestic inventories and FIFO for foreign inventories. The reason companies use adopt different inventory cost flow methods are varied but they usually involve three factors. First the income statement effects second the balance sheet effects and last the tax effects.
Whatever cost flow method a company chooses to use, they should use it consistently from one accounting principle to another. This approach is often referred to as the consistency principle, which means that a company uses the same accounting principle and methods from year to year. Consistency enhances the comparability of financial statements over time periods. Using the FIFO one year and LIFO the next would make it difficult to compare the net incomes of the two years.

Accounting Techniques

Many accounting principles are taught, but there is no reason specified for why you are supposed to account this way. It is the method you are taught and you go along with it. In my personal experience, inventory accounting techniques were one of these principles that was taught but never explained. Throughout the course of this paper, I will explain why inventory count and techniques are important, explain three inventory techniques, and describe how to use them.
When you own a business, knowing how much inventory you have is crucial. How else are you supposed to know if you have a surplus or shortage of goods. What is even more crucial is the way that you account for this inventory as it leaves your possession. Especially in today's market, prices fluctuate rapidly. The item that came into your store a month ago probably does not cost the same as the identical product that came in yesterday. With a warehouse full of the same item, how do you differentiate between the products cost? How do you calculate what your profit off an item is if you do not know the original cost? Which numbers do you report to the IRS if you have several different costs of goods sold? This is all where inventory counts come in. That is why there is a system and regulations to follow when regarding inventory.
The first technique is FIFO, short for "first in, first out". In this technique, the oldest good in inventory is the next one to be sold. When referring to a good being sold, I'm not talking about a specific good being sold, but instead the monetary value attached to that good. The second technique is, LIFO, short for "last in, first out". This is the opposite of FIFO, with the last item checked into inventory being the first item to be sold. The third technique is weighted average. This technique does not give each individual good a price, but the good as a whole a price. In weighted average, each good, on paper, cost the company the same.
Now I will describe how to use each technique, starting with FIFO. Consider that at the beginning of the month you have 10 items purchased for $2.00 each. Then you get another shipment of 10 items at $2.50 each. To keep things simple, imagine these 20 items are the only ones you have in inventory. At the end of the month, you have sold 12 items. Using the FIFO technique, all 10 items purchased for $2.00 are sold because those were the oldest items in inventory. Then the two extra goods sold are accounted from the inventory received next. This would make the cost of goods sold $25.00. Now you would have eight items in inventory costing $2.50 each, for a total inventory of $20.00.
Using the same example, I will show LIFO used. At the end of the month, you again sell 12 items. This time, however, the ten items purchased this month will be the first ones sold. The remaining two items will come from the beginning inventory. Now the cost of goods sold is $29.00. The remaining inventory costs $16.00 on the books. Using this technique, as long as your inventory never gets to zero, the first items you bought will always be accounted in inventory.
The final technique I will discuss is Weighted Average. Using this technique, each good is assigned the same value, the average cost of good. To get the weighted average, the simplest way is to multiply the unit cost by the amount of units purchased for that amount. Do this for all different unit costs in the inventory. This will give you the amount you paid for all inventory in stock. Then divide this number by the amount of units in inventory. This is the weighted average. Now at the end of the month when you are calculating cost of goods sold, each good sold is recorded at this price. Using the previous example, the weighted average of the inventory would be $2.25 ( (10 x $2.00 + 10 x $2.50) / 20). Each of the twelve items sold would be marked as costing the company $2.25, totaling $27.00. The remaining inventory is equal to $18.00.
As you can see, the three different techniques used have brought different totals for cost of goods sold and inventory remaining, but if all the inventory was sold, the outcome would be equal among the different techniques.

Internal Controls

In this day and age, it is mandatory that organizations have effective internal control policies and procedures. After taking Accounting 201 and being in the work force, I've learned about the Sarbanes-Oxley Act which was passed in 2002. This piece of federal legislation requires that management and auditors adhere to or perform specific tasks in order for organizations to maintain their internal control responsibilities. This legislation was a result of the Enron Corporation and Arthur Anderson accounting firm to close down and go out of business due to weak internal controls. These "scandals" were highly publicized.
The basics of internal controls are to protect the company's assets; ensure reliable accounting; promote efficient operations; and establish adherence to company policies. This is accomplished by an organization establishing principles of internal controls. Essentially, these principles appear to be practical to most individuals, however it is necessary to have policies and procedures in writing so that all employees are aware of these procedures, particularly those who handle cash, checks and credit card payments. When this law went into effect, the first piece of information requested by the independent auditors that year was to provide the documentation of the Internal Controls.
There are several principles for internal controls as stated in Financial Accounting Fundamentals, 2009 Edition by John J. Wild:
1) establish responsibilities and create specific policies and procedures;
2) maintain adequate records;
3) insure assets, bond key employees and separate recordkeeping from custody of assets;
4) divide responsibility for related transactions;
5) apply technological controls;
6) perform regular and independent reviews. A summary of each of the principles is provided below.
1) Establish responsibilities and create specific policies and procedures - It is important to establish clear responsibilities and duties to individual employees, in particular those that work in a finance departments. For example, the person that handles petty cash should not be the one writing the check to replenish the funds. Another example is the person placing an order for material, supplies; office equipment should not be the one approving the purchase order. Proper authorization for the above transactions is necessary. So there is clear separation of duties throughout the various areas in a finance department.
2) Maintain adequate records - It is necessary for organizations to maintain proper documentation. This is to provide evidence that financial statements are accurate. To insure the records are adequate, the use of prenumbered, consecutive documents is adequate.
3) Insure assets, bond key employees and separate recordkeeping from custody of assets - Assets are anything of value a company owns including cash. To insure physical assets, the individual responsible for asset recordkeeping should not be the individual that is responsible for the physical control of that asset. Having different individuals separate these functions creates a system of checks and balances, also known as segregation of duties. The bonding of key employees is accomplished by purchasing insurance on that employee and will cover the organization if a loss were to occur.
4) Divide responsibility for related translations - This is also known as segregation of duties. This item requires that different individuals are assigned responsibility for different parts of related transactions, in particular those involving authorization, custody or recordkeeping. For example the individual approving a purchase order should not be the individual cutting the physical check.
5) Apply technological controls - Technology is a valuable tool for internal controls. Many computer systems are designed for individuals to have specific privileges which are necessary to complete their own job tasks. For example, the employee enter a purchase order into the computer software will not have menu access to prepare a check to the vendor. Another part of technology controls would be mechanical controls, where an employee will need an ID card or will have specific privileges to enter a building or certain parts of a building.
6) Perform regular and independent reviews - This can be accomplished when a manager will evaluate an employee based on performance. It is carried out by the manager who did not do the work being checked. This will help insure the reliability of accounting information and the efficiency of the operations. For example, the supervisor verifies the accuracy of a retail clerk's cash drawer at the end of their shift. This may be reviewed by an internal auditor to be sure the manager is doing his/her job as well.
Finally, there are some limitations on internal controls. Effective internal controls can provide reasonable assurance that the objectives of the organization are met. Reasonable assurance implies that the costs of internal controls must not exceed their benefits.

Resolutions Software

Never before in history have so many people owed the IRS such staggering amounts of taxes. They need help now and are willing to pay sizeable fees to alleviate their pain! If you are a CPA, Enrolled Agent or a Tax Attorney you can represent clients before the IRS and help them settle their liabilities by means of different instruments, such as an OIC (Offer in Compromise), Installment Agreement, Innocent or Injured Spouse Defense, Collection Appeal, CDP (Collection Due Process) etc.
The most attractive instrument of it all is an Offer in Compromise, because it is sometimes possible to wipe your client's tax slate clean at an enormous discount. It does have few pros and cons though. A chance of writing off tax liability from let's say $50,000 to a few hundreds of dollars is there, however it also involves a risk of disclosing all your assets information to the IRS. And let me tell you, IRS machine does not sleep. If you submit an offer and it is rejected, make sure you let your client know to expect a knock on the door real soon. Another pitfall of an OIC is that only about 15-20% of the submitted offers are getting accepted by the IRS. So what do you do to get into these 15-20%? You use not only your brain cells, but also engage a software that provides analysis, diagnoses IRS tax problem of your client, evaluates if your client is a candidate for an offer and then helps you in preparing all necessary forms.
Recent survey shows that most representatives in the United States still prepare OIC and other resolution cases manually, that is, literally, using brain, pencil and calculator. It takes a lot of time to prepare a successful case and back up your rationale with all necessary documentation. So why not to use a cloud computing software which lets you automate the process and save you tons of time and money? Well, until just recently there was no such software developed for tax resolution representatives. Fortunately enough it was just until recently.
This new software was developed specifically for CPAs, EAs and Tax Attorneys, i.e. for privileged group of professionals authorized to represent clients before the IRS. This software has tools to evaluate your client's eligibility for an offer in compromise, analyze the case and find the best resolution approach, estimate how much to charge for a resolution case. Besides the software prepares all necessary resolution forms, like 433-A, 433-B, 656 and 20 other forms. The calculation process is automated completely, all formulas are built-in and results updated on-the-fly once you change values. Throughout the whole process you can find tips, suggestions and advices on how to better answer questions on the IRS Forms. There is no need to create supplementary schedules any more, the software does it for you. Besides, you can annex any additional notes to every single line on the IRS Form and these notes will be printed and attached to your case. There are much more to discover about this cutting-edge revolutionary software.

Cash Management

Business cash management concerns cash collections, controlling disbursements, covering shortfalls forecasting cash needs, investing idle funds and compensating the banks that support these activities.
Since overall cash flow involve tax and finance it is best for staff in tax and accounting department work closely together. Cash flow management require close coordination between the treasury and operations. Use of technology that captures accurate information on cash flow management is important in effectively managing today's volatile market.
Effective cash flow management ensures every coin is at work either covering payment of cheques or producing income. The following are some of the best practices to manage cash flow:
1.Keep few bank partners
Leading companies consolidated their financial accounts, using fewer banks. Through this they can depend on a few banks for the services and not a single bank so that should one bank have problems their operations are not affected.
Consolidating bank accounts may bring in process efficiency. The company treasurer is able to keep tab line by line of banks transactions and can negotiate bank fees and procure preferential services. When shopping for bank keep cash management needs at heart by gathering inputs from all departments that will be affected by the choice of bank selected.
Leading companies appoint a team of financial experts including bank relationship manager to determine how best a bank meets the company's needs and create detailed service level agreements with chosen banks.
2.Develop accurate cash forecasting methods
Cash flows are uncertain and companies use forecasts to predict it by comparing receipts and disbursements. Best practice companies use models that give accurate figures.
Sources of available quantitative and qualitative business intelligence range from shipping data and sales orders to buying patterns.
Forecasts are based on seasonal, monthly, daily and cyclic patterns and trends. Forecasts can be explained as short term, medium term and long-term. Short term can track how a business unit fares, medium term aid in managing trends and seasonal price fluctuations, long-term forecasts help a company reach far reaching goals.
Integrating information into the forecast as soon as it is available and using a rolling format helps the company to time disbursements to be funded by incoming receipts. Further, use of a rolling forecast, simulation techniques, and web-based treasury software can improve forecasting accuracy and see the company through cash-critical periods.
3.Increase investment yield at lowest risk and cost
Companies develop investment guidelines on what is considered acceptable investments. A common understanding should be kept by the top managers on a portfolio of investment opportunities which can be exploited when opportunities become available.
Alternatively a company may outsource an investment manager to carry out this exercise. Some companies find this more cost effective especially for a small portfolio.
In addition leading companies avoid funds sitting idle in non-interesting bearing accounts by making use of sweep account and zero balance accounts. Sweep accounts allow companies to move idle cash into overnight investments at the end of each end of business day.
4.Evaluate cash management structure regularly
Frequent review routine management structure need to be conducted to identify process that require to be improved, provide a tracking measure and provides assurance that the company data is reliable. Reviews check how bank manage the bank cash, their charges and yields on investment.
To gather this information the company puts together a combine questionnaire and visit on site the bank partner. It is best to prepare the questionnaires before site visit.
5.Create a centralized cash management structure that serves global needs.
Cash flow management is made complex for entities with operations n more than one country. Overall cash management operates on two levels. To begin with each country's cash management system, addressing standard treasury functions like collections within national borders.
The second is a network that connects the domestic systems and various currencies while integrating cash management with functions such as purchasing, sales and accounting.
Centralizing cross-border treasury operations activities is best done gradually. Companies can centralize within each country before centralizing cross-border activities or vice versa, again, based on the specific needs of each company. Physical cross-border transfers of funds are kept to a minimum to reduce funds movement.
Instead, many companies use multicurrency accounts, netting, and pooling.
Traditionally, companies purchase international cash netting services from banks to lower transaction fees and reduce foreign exchange expenses. Netting reduces the transfer of funds between subsidiaries to a net amount.
Leading companies also establish in-house payment factories to manage accounts payable for their subsidiaries. Payment factories allow companies to net and bundle payments, lowering the number of transactions and transaction costs.
6.Automate financial reporting to drive efficiencies
Companies are quickly realizing the benefits of automating financial reporting processes. Reasons include process efficiencies that are integral to many treasury systems, and the high risk involved with spreadsheet accounting--both of which contribute to a lack of internal financial controls.
These problems can invite budget shortfalls, audit exposure, loss of stakeholder trust, and even government intervention. The innovative technological alternatives now available to generate accurate, complex financial deliverables include web-enabled treasury systems for global cash management and international reporting taxonomies such as extensible business reporting language (XBRL).
XBRL is a standards-based method that allows users to exchange and compile financial information across all technologies. These solutions can facilitate collaboration and data sharing, resulting in faster and more accurate financial reporting, more effective reporting controls, and cost savings in every area of cash management.
Financial managers are better able to focus on relationships with banks, trading partners and customers, and users have real-time access to accurate business unit transaction activity. These benefits promote better overall financial decision making and help a company gain or maintain a competitive edge.

Bookkeeping Business

If you are thinking of setting up a bookkeeping business then this article will explain what you will need to do to get started and become successful.
With more and more small businesses starting up, fuelled largely by the recession and loss of jobs, there many opportunities to be successful providing bookkeeping services for small business owners. You could even opt to work for a firm of accountants on a self employed basis, preparing books and accounts for their clients.
Assuming you have the knowledge, qualifications or experience to undertake this type of work, then there are a few things you will need to get started.
Office Space.
This can either be at home or rented elsewhere. Ideally you will find a quiet area where you can work without interruptions. Do not underestimate the amount of storage space you will need! Each client will require a few files and possibly large amounts of files, documents etc so it may be worthwhile renting some storage space to avoid cluttering your home or office.
Start-up Costs if operating from home should be minimal but you should seek and obtain suitable professional indemnity insurance for your business. In some countries it is against the law to operate without this.
You will also need a computer, suitable accounting software and an excellent, secure backup system in case of theft or fire etc. A trip to the stationery shop will be worthwhile to stock up on paper, envelopes, storage facilities (such as files, folders and cabinets), paper clips, hole punch, stapler etc.
You should also consider your communication channels such as telephone, fax, email, messaging services, answerfone etc before you have your business cards and stationery produced.
When all of this is in place you are nearly ready to start. You will need business cards and a letterhead.
Now your marketing process should begin. Getting a steady flow of customers can be the hardest part of running any business, so the more nets you set, the more clients you will catch!
Here are some of the many ways in which you can find clients for your business:
- Word of mouth. Tell your family and friends you have started a business
- Advertise in local newspapers, business magazine etc
- Go to networking events
- Have a website created - make sure the designer know how to design it so that your potential clients will find you when looking
- Add yourself to local business directories, both online and offline.
- Join local business forums and associations
- Join the local Chamber of Commerce or any organisation that deals with start up businesses.
- Have a discount scheme to attract your first clients
- Have a referral program and reward those who bring you clients
A mixture of the above techniques will bring you clients but you must be proactive in this area, especially at the outset. Don't expect customers to come to you - you must find them!

Inventory Methods

Inventories are items that a company holds for sale, or items that will be used to manufacture products that will be sold. The method that a company uses to account for its inventory determines the amount of expense recognized for cost of goods sold on the financial statement as well as the value of inventory recognized on the balance sheet. There are a few different ways to measure inventory in financial accounting. First, there is the method First-in, First-out, better known as FIFO. Next, there is Last-in, Last-out, or LIFO. The last two techniques are Weighted Average and Specific Identification. All four of these methods are equally efficient and can be used in measuring any inventory in financial accounting. It is equally important to know that there are two different inventory systems. The first is periodic; the Inventory account is updated or adjusted only once-at the end of the year. During the year the Inventory account will likely show only the cost of inventory at the end of the previous year. The second type of inventory system is perpetual. With perpetual inventory system, the Inventory account is continuously updated. The Inventory account is increased with the cost of merchandise purchased from suppliers and it is reduced by the cost of merchandise that has been sold to customers.
FIFO assumes that the first items placed in inventory are sold first. This means the inventory at the end of a year consists of the goods most recently placed in inventory. FIFO is one method used to determine Cost of Goods Sold (COGS) for a business. For example, let's say that a bakery produces 200 loaves of bread on Monday at a cost of $1 each, and 200 more on Tuesday at $1.25 each. FIFO states that if the bakery sold 200 loaves on Wednesday, the COGS is $1 per loaf, recorded on the income statement, because that was the cost of each of the first loaves in inventory. The $1.25 loaves would be billed to ending inventory which appears on the balance sheet.
LIFO assumes that the last items placed in inventory are the first sold during an accounting year. This means the inventory at the end of a year consists of the goods placed in inventory at the beginning of the year, rather than at the end. LIFO is one method used to determine Cost of Goods Sold for a business. The older inventory, therefore, is left over at the end of the accounting period. For the 200 loaves sold on Wednesday, the same bakery would assign $1.25 per loaf to COGS, while the remaining $1 loaves would be used to calculate the value of inventory at the end of the period.
Weighted Average is a method in calculation in which the weighted average cost per unit for the period is the cost of the goods available for sale divided by the number of units available for sale. It takes the weighted average of all units available for sale during the accounting period and then uses that average cost to determine the value of COGS and ending inventory. In our bakery example, the average cost for inventory would be $1.125 per unit, calculated as [(200 x $1) + (200 x $1.25)]/400.
Specific Identification is a method of tracking discovering ending inventory cost. Specific identification is usually used for large, easily traceable items, such as vehicles or furniture. It requires a very detailed physical count, so that the company knows exactly how many of each goods brought on specific dates remained at year-end inventory. When this information is found, the amounts of goods are multiplied by their purchase cost at their purchase date, to get a number for the ending inventory cost. Specific identification requires tedious record keeping and is typically only used for inventories of uniquely identifiable goods that have a fairly high per-unit cost (e.g., automobiles, fine jewelry, and so forth).
If prices were constant during the period, all three methods would produce the exact same result since each unit would have been purchased for an identical amount. But, since prices usually change, each method will produce different results. During periods of inflation, LIFO will generate a lower amount of gross profit and a lower inventory value. The FIFO method will produce a higher gross profit and a higher ending inventory balance. During periods of inflation, LIFO offers substantial tax savings due to lower profits and lower inventories. However, in periods of deflation, the effects are just the opposite.

Accounts Payable

After payroll, the largest disbursement of a firm's funds is typically related to Accounts Payable. Accounts Payable is often the single largest cost in the accounting function. Yet its' often the least accurately tracked process due to the highly manual and transaction intensive nature of the process. This study lists the common issues and errors related to accounts payable processing that are found in most organizations.
Common issues/errors
Data Entry Errors
Data entry errors can occur on any invoice field and account for most of the errors in accounts payable processing. According to a research report, data entry errors average 1.6% of the total AP transactions. While the proportion may seem small, the absolute number of errors increases in companies with hundreds of AP transactions. This also increases the probability of the error causing a large dollar amount impact on financials and disbursements! The other source of risk is that these errors are not readily measurable and/or visible in most accounting departments. This 'hidden' nature makes it difficult to develop rules or actions to reduce the impact of these errors.
Matching Errors
Matching of invoices to purchase orders and goods receipts/packing slips is complex and prone to errors as business rules for matching are frequently not documented or followed by AP staff. In most companies, the lack of sufficiently detailed documentation for matching business rules makes automation of this process difficult. This forces accounts payable staff to apply rules manually thereby increasing the possibility of errors.
Excessive Use of PO-Receipt-Invoice Matching Tolerances
Many accounts payable departments use matching tolerances to reduce the effort to resolve unmatched items, but these tolerances are often set too loosely (to reduce effort), allowing dollars to be lost.
Duplicate or Incorrect Invoices
Vendors frequently generate duplicate invoices when an invoice has not been paid in a timely manner. Most companies can only track such invoices if a proper matching of invoices with POs is done.
Improper Account Coding
Account coding is judgmental and rules for coding are not well documented or otherwise established in most companies; this may lead to inconsistent coding across departments or manipulation for budgetary or for other purposes. This lack of consistency in coding can also make trend comparison for different expenses or revenues difficult or inaccurate.
Disappearing Invoices and Unapproved Invoices
Invoices that come directly from the vendor to a business unit manager or location other than accounting tend to get delayed (sometimes on purpose) or lost due to the unorganized paper work or filing systems, decentralized operations and multiple touch points for invoices. As a result, the exact quantum of invoices may not be known to accounting and therefore company liabilities may not be truly known or reflected on the balance sheet. This also leads to late charges and poor credit from vendors.
Approval of New Vendors or Update of Key Vendor Information
Careful controls should be placed on who can approve the establishment or revision of vendors to prevent fraud.
Difficult to Find Invoices and Checks after Processing and Document Storage is Expensive Paper
Documents are difficult to locate after accounts payable processing due to filling errors and are expensive to store and locate. Many companies store the invoice, a copy of the check and purchase order together for ease of retrieval, but this is extremely expensive. The lack of a proper electronic document management system also exacerbates the problem.
The findings of a recent study highlight the common errors and issues faced by the accounts payable department. They also stress on the manual, inefficient and error-prone nature of most accounts payable processes. The key findings of the study are:
• Errors: The average accounts payables department has a 1.6% error rate
• High Cost: The average cost to process an invoice is $16.54
• Lack of Controls: Clerical staff has broad discretion on how to apply management rules around PO/receipt/invoice matching and payment and invoice authorization rules are not always followed
• Poor Visibility: Financial managers accrue outstanding payables monthly; many of the individual transactions are paper invoices sitting in manager inboxes waiting for approval that financial managers have not seen
• Poor Documentation: The paper-intensity of the process leads to difficulty in locating manually-filed invoice and check documents
• Management Time: All of the above contribute to an excessive amount of management time, attention and resources being spent on a non value-added function