merchandising operations & internal control
TRANSCRIPT
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Chapter 6 - Objectives Merchandising Operations &
Internal Control• Identify Management issues in a
Merchandising businesses
• Understand terms of sale
• Do JEs for a Perpetual Inventory system; prepare an Income Statement
• Do JEs for a Periodic Inventory system; prepare an Income Statement
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Chapter 6 - Objectives Merchandising Operations &
Internal Control• Define Internal Control
• Describe limitations of IC• Apply IC to Merchandising
transactions
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Management Issues
• Cash Flow Management
• Profitability Management – are you on budget?
• Choice of Inventory System –– Perpetual?
– Periodic?
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Perpetual Inventory System
• Continuous “perpetual” accounting records are kept to track the Sales transaction AND the Cost of the Goods Sold.
Better tracking of item availability, on hand, on order
• 2 journal entries for a sale
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Periodic Inventory System
• No tracking
• Inventory just counted “periodically” to see what is on hand.
• 1 journal entry for sale
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Sales Revenues -Under a Periodic System
• ONLY 1 entry is made for each sale
–one to record sale
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What is the Sales Returns and Allowances Account?
• Contra Revenue Account to sales
• Used to show how much came in on returns and allowances
Excessive returns and allowances suggest:inferior merchandiseinefficiencies in filing orderserrors in billing customersmistakes in delivery or shipment of goods
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What Is the Sales Discount Account?
• Contra Revenue Account to sales• Used to disclose amount of cash discounts
taken by customers
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Key difference between periodic and perpetual
inventory…
is the point at which the costs of goods sold is
computed.
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No attempt is made on date of sale to record the cost of merchandise sold...
Periodic Inventory
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Companies that use periodic inventory take a physical count
to...
determine ending inventorycompute cost of goods sold
Companies that use perpetual inventory must take a physical inventory to check accuracy of “book inventory” to actual inventory.
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Taking a Physical Inventory
• Determining inventory quantities by counting, weighting or measuring each type of inventory.
• Determining ownership of goods, including goods in transit,consigned goods.
• Quantity of each kind of inventory is listed on inventory summary sheets where unit costs are applied.
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Questions Concerning Ownership
• Do all the goods included in the count belong to the company?
• Does the company own any goods not included in the count?
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Goods in Transit
These are goods on board a truck, train, ship, or plane at the end of the period.
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36
Goods in Transit
Who includes these in inventory?Buyer?Seller?
The Company
with Legal Title
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Shipping Terms
• FOB (free on board) shipping point- ownership of goods passes to buyer when public carrier accepts the goods
• FOB (free on board) destination- ownership of goods remains with the seller until the goods reach the buyer
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Ownership passes to
owner here
Ownership passes to
buyer here
PublicCarrierCo
PublicCarrierCo
Seller
Seller
Buyer
Buyer
FOB Shipping Point
FOB Destination Point
Illustration 6-4
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Consigned Goods
Goods in your store that you don’t pay for until they sell…
the company does not take ownership.
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Example: Perpetual vs. Periodic
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Income Statement Presentation
The income statement for a merchandising company is the same whether a periodic or perpetual inventory system is used, except for the
cost of goods sold section.
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Sales revenuesSales $ 480,000Less: Sales returns and allowance $12,000
Sales discounts 8,000 20,000Net sales 460,000Cost of goods sold 316,000Gross profit $ 144,000Operating expenses Selling expenses:
Store salaries expense $45,000 Advertising expense 16,000 Depreciation expense 8,000 Freight-out 7,000
Total selling expenses $76,000 Administrative expenses Salaries expense $19,000
Utilities expense 17,000 Insurance Expense 2,000
Total administrative expenses 38,000 Total operating expenses 114,000 Income from operations $ 30,000
Select Buy, INC.Income Statement (Perpetual)
For the Year Ended December 31, 2001
Illustration 5-3
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Sales revenuesSale $ 480,000Less: Sales returns and allowance $12,000
Sales discounts 8,000 20,000Net sales 460,000Cost of goods sold
Inventory, January 36,000Purchases $ 325,000
Less: Purchase returns and allowances $10,400
Purchase discounts 6,800 17,200Net Purchases 307,800
Add: Freight-in 12,200 Cost of goods purchased 320,000 Cost of goods available for sale 356,000 Inventory, December 31 40,000 Cost of goods sold 316,000Gross profit 144,000Operating expenses 114,000Net Income $
30,000
Income Statement (Periodic) Illustration 6-6
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Prepare an Income Statement – Periodic Invent.
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INTERNAL CONTROL
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“Scrap” is inventory that is broken, either in the warehouse or on the production floor. Rather than discard it, the company has a policy of filling a box up with scrap (metal fitting, clamps, sheet metal). When the box is full, one employee hauls it to the Scrap Dealer, who weighs it, and issues the company a check for the items. Depending upon the weight of the box (determined at the scrap dealer’s), the check amounts vary.
• Is there an Internal Control Issue?
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A small landscaping company buys rocks and lumber. One of the project managers is responsible for ordering the lumber, which he does by calling up the lumber dealer and ordering a shipment over the phone. No purchase order is used. The lumber dealer delivers lumber directly to the job site and invoices the company once a month, on one bill.
• Is there an Internal Control Issue?
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A retail store has been experiencing higher than expected Cost of Goods Sold. You use the periodic inventory system.
• Is there an Internal Control Issue?
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Should a retail store always give the customer a receipt? Do you check your receipt?
• Is there an Internal Control Issue?
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INTERNAL CONTROL- components
• Control Environment
• Risk Assessment
• Information/communication
• Control activities
• Monitoring
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Internal Control • Doesn’t save you from:
Collusion or Embezzlement
Reasonable Assurance: Assets are safeguarded Financial Statements are Reliable
Free from Errors and Irregularities
Follow the 7 Control Activities
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Control Activities (7) of IC1. Authorization2. Recording Transactions3. Documents & Records4. Physical, Mechanical, Electronic Controls 5. Periodic Checks – (Independent Internal Verification) 6. Separation (Segregation) of duties7. Sound Personnel Procedures
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Balancing act for a Merchandising business. . ..
• Key goals– Prevent losses of cash or inventory– To provide accurate records
• Broader goals– Keep the RIGHT balance of inventory– Keep $$$ on hand to pay, on time, with
discounts– Extend credit only to creditworthy customers
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Internal Control for Merchandising
• Control of Cash Sales Receipts
• Control of Cash Purchases and Disbursements– Use a PO!
• (purchase requisitionpurhcase orderinvoicereceiving reportcheck authorizationcheck
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THINGS YOU NEED TO KNOW
• The Best ICs are PREVENTIVE
• Put an experienced person in charge of the plan
• Get Management BUY-IN
• Accounting Systems CAN help
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CONCLUSIONS. . . .
• All companies need Internal Controls. . .
• Fraud may happen, but don’t tempt them