Download approaches concerning the control techniques` utilization for

APPROACHES CONCERNING THE CONTROL TECHNIQUES’
UTILIZATION FOR ELEMENTS THAT DESCRIBE THE FINANCIAL
POSITION AND PERFORMANCE OF SMES
ALIN –ELIODOR TANASE
Financial Manager
Everet Romania Distribution
Bucharest
ROMANIA
[email protected]
TRAIAN-OVIDIU CALOTĂ
Department of Accounting and Managerial Information System
Titu Maiorescu University
Bucharest
ROMANIA
[email protected]
Abstract:
Article includes controlling techniques for items of income statements (revenue and expenses)
and components of financial position (current assets, non – current assets, liabilities and
equity). Article emphasizes the importance of controlling operations. It is presented the
importance of different types of analyses of turnover and distribution cost (e.g. by product,
customer, method of sale, distribution channel). It is presented the classification of expenses by
nature and also by function. It’s presented also the importance of a informatics system for
inventory record (Just – in time manufacturing system and materials planning system).
Keywords: controlling, revenue, cost of sales, distribution costs, general and administrative
expenses, depreciation method, account receivables/payables, non – current assets, cash and
cash equivalents.
Jell classification: H32; L20; L21; M41; Q28.
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1.
Introduction
The development of this theme starts from the role of determinant variable of quality in
the accounting process of economic-financial trades, both from the perspective of freedoms and
conformities provided by regulations, and good accountancy practices. For this reason, our
approach focuses on the judicial law checking methods of the items of profit and loss account
(sales and expenses) and balance sheet (current assets, non – current assets, short term debts,
long term debts and equity). We took into account the accounting provisions of Romania,
regarding the registration of expenses by their nature, passing from the amounts of expenses
registered by their nature at the amounts by destination etc., as well as conclusion of statements
and reports necessary to the decisional management.
2.
Literature review
We are taking into consideration the main accounting regulations, Accounting Law
no.82 / 1991, republished (main landmark on the legal concept of accounting of all transactions
in any field) and Order nr.1802 / 2014 – Romanian GAAP. We also mention revenue
recognition criteria included in IAS – Revenue. There were also studied more specialized papers
such as:
a) regarding the GAAP: we mention some of analysed works:
- Belverde E. Needles Jr., Henry R.Anderson, James C.Caldwell, Basic Principles of
Accounting - it was the main benchmark of accounting information system
- Bruce Mackenzie, Danie Coetsee, Tapiwa Njikizana, Raymond Chamboko, Blaise
Colyvas, Brandon Hanekom and Edwin Selbst, 2013 Interpretation and application
of International Financial Reporting Standards – used for understanding IFRS
application and comparation with US GAAP
b) regarding the controlling techniques: we mention the following papers:
- Steven M. Bragg, Controller’s Guide To Planning and controlling Operations and
Accounting Control Best Practices - it was the main benchmark of controlling
techniques and control procedures
- Frank J. Fabozzi, Pamela Peterson Drake and Ralph S. Polimeni, The Complete
CFO Handbook From Accounting to Accountability and Steven M. Bragg, The new
CFO Financial Leadership Manual – we used them for budgeting.
3. Scientific content
The use of control techniques of items regarding the financial position and performance
is a component of the wider control process within a SME, as one of the main functions of
management. This intercession may be achieved within the in-house control procedures,
established by the quality system of entity or in a wider magnitude and by interconnection to
the planning function, within the controlling activity.
Analyzing the current controlling activities of development from the accounting point
of view of trades, we setup a version of the logic diagram of such a process, usable in both cases
above mentioned. Details are presented in Figure 1.
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Thereof, we will further synthetically show some particular features, which are
important, on our opinion, for the procurement of probatory data upon the control of items
regarding the position and financial performance of SME.
Fig. 1: Logic diagram (version) of controlling process
STAR
T
Control team
Data and information request
Financial
accountancy
Managerial
accountancy
Goals and terms
Previous
control
reports
Agreements,
statements of
works,
accounting
policies etc.
Data and information
Processing and assessment of results
Reports
Request of
additional
items
Monitoring
continuance
MANAGEMEN
T
Report analysis
NO
YES
Are these
probative?
Decision
s
Operating structures
STOP
3.1. Control of sales and other revenues
On our view, the efficient control of sales and other revenues must be achieved by three
sides:
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1. Sale of goods – this case, three aspects will be mainly analyzed:
a)
it shall be established whether the recognition conditions of revenues
from the sale of goods included in the Romanian accounting regulations are met
or not. These are similar to those of IFRS. IAS 18 – Revenue establishes - based
on IASB’s Framework - several conditions for recognition, whereof observance
is essential to the achievement of accounting process. Therefore, ”revenue from
the sale of goods should be recognized if all of the five conditions mentioned
below are met.
 The reporting entity has transferred significant risks and rewards of ownership of the
goods to the buyer;
 The entity does not retain either continuing managerial involvement (akin to that
usually associated with ownership) or effective control over the goods sold;
 The amount of revenue to be recognized can be measured reliably;
 The probability that economic benefits related to the transaction will flow to the entity
exists; and
 The costs incurred or to be incurred in respect of the transaction can be measured
reliably.
The determination of the point in time when a reporting entity is considered to have
transferred the significant risks and rewards of ownership in goods to the buyer is critical to
the recognition of revenue from the sale of goods. If upon examination of the circumstances of
the transfer of risks and rewards of ownership by the entity it is determined that the entity could
still be considered as having retained significant risks and rewards of ownership, the
transaction could not be regarded as a sale“ [1]
b) it shall be checked if the registered amounts are correct, according to the price
lists and trading conditions (e.g. trading discounts granted according to the
agreement) agreed between the company and the customers. This aspect must
express the items that feature the entity, by the specific of trades.
c) If there are amounts that were not registered in the accountancy, specifying the
causes and consequences over the accountancy, from the legal point of view.
2. Rendering of services – this case, the quantum of revenues, according to accounting
regulations of our country must be established based on stage of completion. The invoices
are issued based on reception minutes or other documents certifying the stage of
achievement and reception of provided services. In such situations, it must be taken into
account that the Order 1802/2014 clearly specifies that “in case of building works, the
recognition of revenues is made based on the reception document, signed by the
beneficiary, whereby the fact that the performer accomplished his liabilities in accordance
with the provisions of the agreement and of the performance documentation, is certified.”
It shall also be checked whether the invoiced amounts are according to the trading prices
and conditions, agreed with the customers and if there were amounts that have not been
registered in the accountancy. This approach manner is essential to the prevention of tax
evasion situations, even involuntary.
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3. Other revenues generated by the use of business assets by other entities, like the
royalties, interests and dividends. This case, it is important to check whether the amounts
are or not in accordance with supporting documents (trading agreements, Board decisions
etc.)
We consider that it is essential to check any amount deduced by sales, like the trading
discounts, because it impacts the values registered in the accountancy, as well as on the tax on
profit and VAT paid-up by the company. These inspections also impact the analysis of sales,
because in “any analysis of sales the importance of sales deductions should not be overlooked.
Although reviews may relate to net sales, the clue to substandard profits may lie in the
deductions—high freight cost, special allowances, or discounts. These factors may reveal why
unit prices appear low. Useful analyses and reports on sales deductions can be prepared. For
example, an informative summary may be compiled to indicate the general types and amounts
of sales deductions, namely, returns, freight allowances, price adjustments, or customer sales
policy adjustments. It may be helpful, also, to prepare an analysis of deductions by
responsibility— the manufacturing division for defective product, the traffic department for
erroneous freight allowances, the sales division for allowances to retain customer goodwill.”
[2]
Once the amount of turnover, generated by the sale of goods and/or rendering of service,
is computed, the reports and statements may be concluded to the management, which allows
the analysis of this important indicator on several directions, like analysis by products, by
customers, by method of sale, sales per agent, per point of sale, per geographic areas and the
type of distribution channel. This is an essential indicator of the quality of decisions regarding
the further development of trades (continuance of activity).
3.2. Control of expenditure
The efficient inspection of expenditure supposes that the following items that are
probatory to a complete image is mainly established, as follows: (i) if the recognition conditions
are met; (ii) if they were correctly registered, by their kind and in accordance with the economic
content of trade and (iii) whether the amounts are in accordance with vouchers.
Once these inspections were achieved, we recommend to pass to another stage, namely
of data analysis and conclusion of reports to the management, a stage whereby the amounts,
registered by their kind, shall be assigned per destination: distribution costs, expenditure
capitalized in the production cost of assets/provided services and general and administration
expenditure. We show below the matrix used whereof:
Account
no.
641
6811
6023
…….
Account name
Salaries
Depreciation of non
- current assets
Packaging
materials
Amou
nt
Distributi
on costs
X1
X2
A1
A2
X3
A3
Destination
Cost of
General and
goods
administration
sold
expenses
B1
C1
B2
C2
-
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-
Amount
X1=A1+B1+C1
X2=A2+B2+C2
X3=A3
We make the specification whereby the distribution costs refer to those costs related to
all the activities directly or indirectly made with respect to the sales of goods between the
following two times:
a)
The time wherefrom the goods produced or bought from the suppliers are brought to the
desired present location and condition to be traded to customers.
b)
The time when the assets are transferred to the customers, in accordance with the trading
conditions agreed with them.
The distribution costs usually include market research expenditure, storage and handling
expenditure, commercial, advertisement and promotion expenditure, direct sale expenditure,
transport cost and others, not previously mentioned, but which – related to the activity of
business – are related to the distribution activity. These may be analyzed by different
perspectives, such as analysis by products, by customers, by point of sale, etc.
The analysis of capitalization of expenditure in the cost of inventory is recommended
to include all the costs related to the acquisition, manufacture, processing, as well as other costs
incurred in bringing the inventories, work in process and services in their present condition and
location. It is also important that in the case of service providers, the cost of inventories refers
to the manufacturing cost, which consists in the manual labor and other costs related to the
directly employed staff in the rendering of services, including the staff in charge with
supervisory, as well as in overhead. For this purpose, the control of manufacture cost will
consist in the inspection of direct and indirect costs, respectively the variable overhead expense
(it takes an integral part to the manufacturing cost) and fixed overhead, which is partially
included in the manufacturing cost, the allocation being achieved depending on the normal
manufacturing capacity. Those costs that cannot be directly related to the manufacturing
process or the sale and distribution activity of assets must be taken into account within the
general and administration expenditure. All the costs generated by the management structure
(administrator, president, vice-president, general manager etc.) and the accounting department,
internal audit, legal, controlling and IT department of a business are usually included herein. In
other words, it must be understood that these expenditure include “the fixed expenses related to
administration and support staff salaries, as well as depreciation, insurance, and other
expenses related to administrative functions. The expenses in this category should be classified
so that those individuals in the organization responsible for incurrence and control of
particular expenses can be held accountable”. [3]
3.3. Control of cash and cash equivalents
We must begin in this activity from the fact that the maintenance of an optimum level
of liquidity is vital for the business. Therefore, there may be situations whereby the business is
profitable, but it does not have cash for the payment of debts to suppliers, employees or
creditors. This case, the control on the two following directions is recommended:
a) receipts in cash and by banking accounts from the customers, cashment from the employees
as consequence of the reimburse of advance payments to reimbursement, from the employees
assigned to withdraw money from the bank accounts and submit it to the cash office, from the
delegates of courier companies that gather money on behalf of the company, as well as
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cashments made by the main cash office, as consequence of the transfer from other cash offices,
reception and registration of cash equivalent reimbursement instruments (CECs, other similar
operations etc.)
b) payments in cash and by banking accounts to suppliers, the payments to the employees, as
advance payments to reimburse, to the employees who were assigned to pay those amounts to
the bank or pay invoices received from the suppliers, by paying the amounts directly in the
supplier’s account, at his bank or pay different local fees and interests by paying the amounts
at the relevant institutions, to the employees as wages, payments as dividends, transfers to other
cash offices, payments to the delegates of courier companies that gather money on behalf of
business suppliers, like CECs and other similar operations.
The reconciliation of registrations of the cash register and account statements with
registrations of general ledger, as well as the observance of in-house procedures regarding the
approval of payments in cash and by banking accounts must not lack from the control goal. It
is mandatory that the businesses conclude procedures regarding the cash and cash equivalent
handling, because “Cash handling is an area that has attracted a great deal of control attention
over the years, since it is one of the easiest areas from which to remove assets from a company”
[4]
3.4. Control of inventories
On our opinion, the control of stocks in a business represents an important operation,
because they may have important values, especially in the case of manufacturing business or
which trade goods. It was always the problem of establishment of an optimum level of
inventories,, therefore the activity of the business is not affected. For this purpose, we consider
as mandatory the approach of this activity on three sides (acquisition of materials 
manufacture  delivery). The efficacy of this very complex activity must be achieved by the
implementation, on the whole activity, of an informatics system, able to correlate the following
operations:
(i) asset delivery, where the system will correlate the stock level to the level of received orders
from the customer;
(ii) acquisition of raw materials, materials or merchandise, situations where the system will
calculate the level of necessary stock for the manufacture intended to obtain. Such a system is
called materials planning system and “will allow a company to determine exactly what material
it needs, and by what date. These systems typically result in massive drops in inventory levels
and the elimination of over purchases”.[5]
(iii) processing and procurement of end products, when the system shall operate by JIT
manufacturing methods, which suppose fast orders, low times of mounting and minimum
manufacturing. Such a stock administration method “requires a company to issue a request for
the immediate delivery of parts to a supplier as soon as it needs the parts in the production
process, with the supplier immediately delivering the exact amount required to the production
line. Although this appears to be an elegantly simple approach, it actually requires great
attention to the accuracy of bills of material, as well as the selection of suppliers and the quality
of incoming goods. It results in almost no on-hand inventory (with the exception of work-in254
process), and is therefore the best reordering system from the perspective of reducing a
company’s investment in inventory.” [6]
3.5. Control of trade receivables and trade liabilities
This kind of receivable control must aim two directions, the invoices issued to the
customers during the month and cashments received from them during the month, respectively,
for the establishment of the current situation. Actually, these two directions have already been
checked by the previous control operations, too, which insure an additional confirmation of the
correct information:
- inspection of net revenues resulted in the establishment of the quantum of sales/service
provisions, returns, trading discounts per customer. These sales are affected, when applicable,
by their related VAT, taking into account the advance payment invoices and the advance
registered revenues.
- inspection of payments by bank or by the cash office resulted in the establishment of payments
made by the customers.
A probative control in case of debts is recommended to be issued by three directions,
too: the invoices issued by suppliers for the service provisions, the invoices received for the
inventories entries and the payments made to them during the month, for the establishment of
the current situation. Like the trading receivables, the results were confirmed by the previous
control operations, too, regarding expenses, inventories entries and payments. The inspection
of other receivables and debts is made by taking into account the specific of items of the credit
agreements, reimbursement diagrams etc).
3.6. Control of non - current assets
This activity is mostly important to the assessment of the status of an economic entity.
It is first recommended to check whether the fixed asset acquisitions correspond to the approved
ones. It must also be checked the stage of investments, compared to the approved diagram, as
well as the characteristics of tangible/intangible assets: acquisition date, commissioning date,
commissioning minutes, amortization period, amortization method, revision and maintenance
schedule, list of technical interventions, etc.
3.7. Control of share capital changes
The base of this control is the compliance with Board decisions. Any un-authorized
change must be treated according to legal provisions.
4. Conclusions
For the control, quantity and quality of information, as well as the selection of the most
adequate control techniques have a decisive role. Therefore, it is important to understand the
role of control operation and its limits. The control helps the business management to reach its
proposed goals, provided that it is professionally issued, and by the correct use of all the
provisions of regulations in force. The control underlines the use method of resources by the
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business, granting – at the same time – solutions for an improvement of this method. The
accomplishment and application of in-house procedures are also essential to the prevention of
a significant number of errors and results in the assurance of order and discipline within all the
processes developed by the business. However, the control application method has to be
appropriate, so that the employees don’t feel harmed by the application method.
Acknowledgement: This paper has been financially supported within the project entitled “Horizon 2020
- Doctoral and Postdoctoral Studies: Promoting the National Interest through Excellence, Competitiveness and
Responsibility in the Field of Romanian Fundamental and Applied Scientific Research”, contract number
POSDRU/159/1.5/S/140106.
This project is co-financed by European Social Fund through Sectoral
Operational Programme for Human Resources Development 2007-2013. Investing in people!
References:
[7] 1. Bruce Mackenzie, Danie Coetsee, Tapiwa Njikizana, Raymond Chamboko, Blaise Colyvas,
Brandon Hanekom and Edwin Selbst, 2013 Interpretation and application of International
Financial Reporting Standards, Chapter 20 Revenue recognition, including
construction contracts, page. 561, Published by John Wiley & Sons, Inc., Hoboken, New Jersey,
2013
[8] 2. Steven M. Bragg, Controller’s Guide To Planning and controlling Operations, Chapter 2
Planning and Control of Sales, Published by John Wiley & Sons, Inc., Hoboken, New Jersey, 2013
[9] 3. Frank J. Fabozzi, Pamela Peterson Drake and Ralph S. Polimeni, The Complete CFO Handbook
From Accounting to Accountability, Chapter 23 Master Budget, page 736, Published by John Wiley
& Sons, Inc., Hoboken, New Jersey, 2008.
[10] 4. Steven M. Bragg, Accounting Control Best Practices, Chapter 6 Controls for Cash – Handling
Best Practices, page. 161, Published by John Wiley & Sons, Inc., Hoboken, New Jersey, 2006.
[11] 5. Steven M. Bragg, The new CFO Financial Leadership Manual, Chapter 2 Financial strategy,
page. 18, Second Edition, Published by John Wiley & Sons, Inc., Hoboken, New Jersey, 2007.
[12] 6. Steven M. Bragg, Controller’s Guide To Planning and controlling Operations, Chapter 10
Planning and Control of Inventory, page. 261, Published by John Wiley & Sons, Inc., Hoboken,
New Jersey, 2013
[13] 7. Accounting Law no.82 / 1991, republished, with all subsequent amendments;
[14] 8. Order no. 1802/2014 for the Approval of Accounting Regulations on the Financial
Statements, Individual Annual and Consolidated Financial Statements, with subsequent
amendments.
Acknowledgement:
This paper is financially supported within the project entitled “Horizon 2020 - Doctoral
and Postdoctoral Studies: Promoting the National Interest through Excellence,
Competitiveness and Responsibility in the Field of Romanian Fundamental and Applied
Scientific Research”, contract number POSDRU/159/1.5/S/140106. This project is cofinanced by European Social Fund through Sectorial Operational Program for Human
Resources Development 2007-2013. Investing in people!
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