Question

A company has a December year end and creates checks to pay their vendors towards the end of the month. The company creates all the proper journal entries at the time of creating the checks, but they do not mail the checks until January. Explain which, if any financial ratios are affected by this decision. Explain why this decision would be made.

Answer 1

I will give a direct answer without again and again repeating the same case.

This is situation of bank reconciliation. Although the company is incurring expenses they are paying only after year end. This is clearly a case of bank reconciliation which will not have any impact on financial ratios because at the time of creation of checks proper journal entries are passed. So it won't impact any assets or liabilities but the balance actually in bank will be more than what should be which will reconciled through a bank reconciliation statement.