 and welcome to this session in which we will discuss the financing reporting and the general ledger cycle. These two cycles of two of the six cycles that you need to learn about if you're a CPA candidate which are the revenue cycle expenditure financing this is what we will cover today production HRN payroll reporting and general ledger. So from a from an overall perspective these two cycles deals with financial management which is the financing cycle specifically cash management cash is the most important asset cash is the oxygen of the company and usually the treasurer deals with cash and the creation of the financial statements which are the end product what we do at the end of each cycle is prepare is produce financial reports and to put things into perspective the financing cycle gets money from cash from revenue gets cash from revenue also gets money from equity when they issue stocks and gets money from debt bonds and loans which is just gonna call it debt and the financing cycle provides money to payroll provides money to the production and finance the expenditure and all the cycles provides data to the general ledger and reporting cycles they all provide data because when we prepare the financial statements we want to have all sorts of data in other words data from all cycles in order to have a complete financial statements before we proceed any further I have a public announcement about my company forehead lectures dot com forehead accounting lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses my CPA material is aligned with your CPA review course such as becker roger wiley gleam miles my accounting courses are aligned with your accounting courses broken down by chapter and topics my resources consist of lectures multiple choice questions true false questions as well as exercises go ahead start your free trial today no obligation no credit card required starting with the financing cycle how do we finance ourselves well let's think of it from a journal entry perspective what does that mean well how do we finance ourselves well we need cash so think about every time you debit an account called cash when do you debit cash well when do you debit cash well okay I can think of few examples well I can bring cash from revenue that's one source of that's one source of financing revenue and we covered revenue in the revenue cycle so we covered all about revenue where else do we bring cash from well let's think about it when I debit cash what can I credit I can credit common stock or equity well another source of cash is equity when the company issue stocks sells equity to the public and the third source of cash I debit cash and I credit some sort of a debt well here I am borrowing it could be loans it could be bonds and this is how I finance myself and if you notice now this is going to take you back to accounting 101 but I I hope you are going to notice that these are the accounts that we credit so I'm pretty sure no one mentioned this when you studied debits and credits but basically every time you bring money to the company the account is credited the corresponding account is credited so every time you those are credited cash is debited and those are the three form of finance revenue equity and bonds what are the risks well for revenue again we talked about the revenue cycle and the revenue cycle when it comes to the equity and bonds the risk is when you have a complicated or problematic financing method well if you're showing stocks clear cut transaction but sometime what happened is or when you're issuing debt companies might participate or might be involved in off-balance sheet financing what is off-balance sheet financing basically borrowing money and keeping that money hitting so you are financing yourselves through usually loans not bonds loans you are bringing loans but somehow you are keeping those loans off the books a prime example was Enron which is they used special purpose entities to keep loans off the books so when you're financing the company that could be a risk where you are not a record in it related party borrowing you are borrowing money from related parties or you are issuing stocks to related parties and at favorable terms which is also that could be problematic to the financing and transaction with owners as I said selling equity to the owners that's that also could be problematic sometime those are the risks involved in the financing section and those are really kind of from a from a controlled perspective we're looking at the big picture here what are the controls that we can do well strong governance structure well we should have strong board of directors independent board of directors why because think about it every time the company needs to borrow money or need to issue stocks those are major important transaction so they are not done without the approval of the board and if the board is independent if you have an audit an audit committee that's also independent from the board you have good controls because those transactions they need approval they need someone's signature they need to be discussed not some low level or mid level manager undertake those decisions so as long as we have a good control environment in other words the people on the top are ethical we should we should minimize our risk or have no risks because these major events need approval they need to be documented and they need to be in compliance with company's bylaws so it's very easy to follow to make sure we are following the rules and we are not taking any risks that's the financing cycle the reporting and the general ledger cycle this is where we are when we are generating financial reports what what type of financial reports we can generate there are two types of financial reports that we can generate one is for external users for investors and creditors which are the balance sheet the income statement the statement of cash flows the statements of stockholders equity and we need to generate reports internally to run the company those could be budget variance reports cost of goods manufacturers a job order costing so on and so forth what are the risks in this cycle well failing to record or post transaction simply put you did not record the transaction and if you did record it in one place you did not post it in the proper account incorrect recording you recorded it but the amount or account or both are wrong so it's either or or is is wrong and you did not properly posted you prepare journal entries without any proper authorization basically simply put you're just journalizing entries to for your own end journal entries that don't balance now this is not an issue if you have an automated system but if you don't have an automated system and who knows maybe your automated system don't block you from having unbalanced journal entries and what happened is the risk here is overall is producing wrong financial reports whether those reports are external or internal what are the controls for the risks that we mentioned in this cycle well strong internal control segregation of duties approval process documentation you cannot process a journal entry unless you have the approval of someone else therefore someone's is looking over is approving the process document and why are you why are you processing this journal entry give me the reasons because three six months nine months down the road i see a journal entry a adjusting journal entry and i'm not going to remember why just let's document the process and segregation of duties is important to automated accounting information system and to solve many problems because usually the computer don't commit fraud that's not their purpose and if they compute if the accounting information system is properly programmed which it should it should avoid arithmetic errors calculation errors as long as it's working properly so it will solve a lot of the problems that we have here and the automated system the automated system would automatically post to the appropriate general ledger it will automatically post and update the financial statements so there is no reason to have for example uh incorrect recording and posting as long as the system is programmed is its system is programmed and as long as our transaction are automated you know we're not going to forget to record them because the computer system don't forget also what could solve our risks is competent well trained staff well that we can avoid all these issues and also what we need to do we need to reconcile our sub ledgers the general ledgers on a regular basis simply put we have a general ledgers which is going to talk about next which is the for example account receivable general ledger we could have 1.5 million in there well this general ledger is composed of many accounts well what we need to do we need to add up all the accounts on a regular basis and make sure all the accounts in the sub ledger account receivable add up to the main account the general ledger reconciliation process is a form of control and the account ledger i'm sorry the general ledger which is the account receivable that's what gets published in the financial statements so as long as we are going through this reconciliation process our financial figures should be correct now let's talk about documents and files involved in this process first we have a general journal in a general journal we book non-routine transactions non-routine transaction they could involve adjusting entries adjusting journal entries they could involve closing if we made an error or if somebody wants to commit fraud the computer don't do it what happened is the someone will does it someone will process this journal entry and usually they process it in a general journal so the general journal is a place where you journalize entries usually non-routine because the routine entries are processed through the computer system and the routine entries they could be all a part of a special journals which we'll talk about shortly from a general journal let's talk about the general ledger the general ledger a list of all the accounts with their balances for example account receivable accounts payable inventory sales those are the big accounts list of all the account with their balances the financial statements we should be all familiar with the financial statements which are the output the final results income statement balance sheet cash flow statements of stockholders equity we could also have managerial accounting reports which is internal financial statements cost of goods manufacture job order costing reports budget variances so on and so forth other files involved in this cycle board minutes which is basically what the board talked about during their meetings and this is important to determine the financing the financing activity of the company because the financing happens on that level those major decision are on the board's meeting compliance reports compliance reports are important because you are producing those reports to the government they are audited they might give you important information about what's going on from a financial investing and an investing perspective sub ledgers again the sub ledgers is the breakdown of the general ledger and we have what's called special journals special journals in contrast to general journals general journals is where you have non-routine transaction but if you have routine transaction what could be a routine transaction sales on credit when you have sales on credit and company might have the hundreds of thousands or millions of transaction of sales they're not going to post this in the general journal what they do if they have a special journal and they post these routine transaction in the special journals this way it's easy you'll have debit account receivable credit sales and you'll have a lot of them millions and millions of them okay those are the special journals you can have a sales journal a purchases journal cash receipts journal cash disbursement journals those are special journals where routine transactions are recorded so it's easy to look at easier to add up easier to reconcile and you need to be familiar with the special journals i do have i do have one whole session one whole session i mean one whole lecture about special journals so if you are not familiar with special journals make sure you are familiar with them because they get tested on the exam and special journals is what they used on the CPA exam simulations because what they do rather than giving you an account balance what they do they'll give you either a general journal a general ledger or a special journal where the transaction are repeated and you have to kind of figure out the balance anyhow i do have a recording about this make sure to view it so this way you are comfortable and familiar with the special journals what should you do now go to far hat lectures look at additional resources work mcq's invest in yourself this topic is fairly new on the exam but it's important also this topic is important because it also it's also covered in the audit exam so simply put you need to know your cycles good luck study hard the CPA exam is worth it and stay safe