Question

Imagine that you are the new department manager of a corporation within your chosen field: You discover that your predecessor had been using the cash basis of accounting, which has resulted in many errors and misinformation. What measures would you take to remediate the issue? Propose a high-level plan to implement a proper accounting system for your department using specific principles discussed in the course. For example, which financial statements would you investigate first? What sort of internal controls would you implement?

Answer 1

Since the cash basis accounting system has been used by the predecessor, there will be issues related to matching of revenues to expenses. To remediate this , I woul take the following measures:

- Check the periodicity of the revenue recorded and move any revenue which unearned to unearned revenue account.

- Check the periodicity of the expenses recorded and move any expense which has not been incurred to prepaid expenses account.

To implement a high level plan, the first component of financial statements which shall be investigated is the income statement. I would perform a trend analysis and review the internal policies of the company to ensure that revenue recognition has been done correctly. The internal controls which I would implement is to ensure that adjusting entries are passed at the end of the accounting period.