1 Chapter 5 Merchandise Accounting & Internal Control.
-
Upload
tariq-berisford -
Category
Documents
-
view
223 -
download
0
Transcript of 1 Chapter 5 Merchandise Accounting & Internal Control.
![Page 1: 1 Chapter 5 Merchandise Accounting & Internal Control.](https://reader035.fdocuments.in/reader035/viewer/2022081513/551691c3550346f6208b46e0/html5/thumbnails/1.jpg)
1
Chapter 5
Merchandise Accounting&
Internal Control
![Page 2: 1 Chapter 5 Merchandise Accounting & Internal Control.](https://reader035.fdocuments.in/reader035/viewer/2022081513/551691c3550346f6208b46e0/html5/thumbnails/2.jpg)
2
Key Concepts & Objectives
Sales Adjustments Net Sales– Discounts: Trade, Quantity & Prompt Pymt.
– Returns & Allowances Inventory Recording Systems
– Perpetual vs. Periodic Inventory Systems Cost of Goods Sold model Cost of Goods Purchased model Internal Control Systems Safeguard Assets
![Page 3: 1 Chapter 5 Merchandise Accounting & Internal Control.](https://reader035.fdocuments.in/reader035/viewer/2022081513/551691c3550346f6208b46e0/html5/thumbnails/3.jpg)
3
Sales of Merchandise – Review effect on the Accounting Equation
-----------Balance Sheet------------- --Income Statement-- Assets = Liabilities + OE + Revenues - Expenses
GAAP:GAAP: Revenue is recognized when Revenue is recognized when earnedearned. . Example:Example: In this case (merchandise sale) when the In this case (merchandise sale) when the exchangeexchange takes place. takes place.
+ Cash or+ A/R
+Sales Revenue
![Page 4: 1 Chapter 5 Merchandise Accounting & Internal Control.](https://reader035.fdocuments.in/reader035/viewer/2022081513/551691c3550346f6208b46e0/html5/thumbnails/4.jpg)
4
Internal Income Statement for a Merchandising company
Cash sales $ 350,000Credit sales 124,000
Total 474,000Less: Sales returns &
allowances* ( 12,400) Sales discounts* ( 34,600)
Net Sales (on I/S) $ 427,000
*Contra-accounts used for control and analysis purposes. What information do they provide? Why is that useful? To whom?
A Contra-Account must be used along with another account.Above are examples of Contra-Revenue accounts.
![Page 5: 1 Chapter 5 Merchandise Accounting & Internal Control.](https://reader035.fdocuments.in/reader035/viewer/2022081513/551691c3550346f6208b46e0/html5/thumbnails/5.jpg)
5
Sales Returns and Allowances - effect on the Accounting Equation
Decreases Sales Revenue, this is a Contra-Revenue account.
Sales Revenue xxxLess: Sales R&A xx Sales Dis. xxNet Sales xx
-----------Balance Sheet------------- --Income Statement-- Assets = Liabilities + OE + Revenues - Expenses
(Cash) or (A/R)
(Sales Returns andAllowances)
![Page 6: 1 Chapter 5 Merchandise Accounting & Internal Control.](https://reader035.fdocuments.in/reader035/viewer/2022081513/551691c3550346f6208b46e0/html5/thumbnails/6.jpg)
6
Trade & Quantity Discounts
Not always recorded separately in company’s accounting records; Should they? Why?
Trade DiscountsOffered to special class of customers
Quantity DiscountsOffered to
customers willing to buy in larger
quantities
![Page 7: 1 Chapter 5 Merchandise Accounting & Internal Control.](https://reader035.fdocuments.in/reader035/viewer/2022081513/551691c3550346f6208b46e0/html5/thumbnails/7.jpg)
7
n/30n/30 Payment due 30 days from invoice date
1/10, n/301/10, n/30 Deduct 1% of invoice amount if paid within 10 days; otherwise gross amount is due in 30 days
2/10, n/302/10, n/30 Deduct 2% of invoice amount if paid within 10 days; otherwise
total invoice amount is due in 30 days
Credit Terms and Sales Discounts(used B2B in certain industries to encourage prompt payment)
![Page 8: 1 Chapter 5 Merchandise Accounting & Internal Control.](https://reader035.fdocuments.in/reader035/viewer/2022081513/551691c3550346f6208b46e0/html5/thumbnails/8.jpg)
8
Credit Terms and Sales Discounts(used B2B in certain industries to encourage prompt payment)
n/30 Payment due 30 days from invoice date
1/10, n/30 Deduct 1% of invoice amount if paid within 10 days; otherwise gross amount is due in 30 days
2/10, n/30 Deduct 2% of invoice amount if paid within 10 days; otherwise
total invoice amount is due in 30 days
Does “n” (for “net”) make sense? Wouldn’t a better symbol be “g” (“gross”) or “t” (total). But this is a term that’s been used for many years and it has become accepted in practice over time!
![Page 9: 1 Chapter 5 Merchandise Accounting & Internal Control.](https://reader035.fdocuments.in/reader035/viewer/2022081513/551691c3550346f6208b46e0/html5/thumbnails/9.jpg)
9
Recording Sales Discounts: ExampleAssume a credit sale of $5,000 with payment terms of “1/10, net 30.” Effect on the B/S Equation?
Using the Gross Sales Method, Sales Discount is not recordednot recorded unlessthe discount is taken.
Sales Revenue xxxLess: Sales R&A xx Sales Dis. xxNet Sales (on I/S) xxIt might mean Net Sales are OVERSTATED.
-----------Balance Sheet------------- --Income Statement-- Assets = Liabilities + OE + Revenues - Expenses
Accounts SalesReceivable $5,000 Revenue $5,000
What could this mean about the Net SalesNet Sales reported on the I/SI/S fora company using the Gross MethodGross Method?
![Page 10: 1 Chapter 5 Merchandise Accounting & Internal Control.](https://reader035.fdocuments.in/reader035/viewer/2022081513/551691c3550346f6208b46e0/html5/thumbnails/10.jpg)
Recording Sales Discounts: ExampleIf customer pays withinwithin the discount period, they receive a 1% discount. What is the effect on the B/S Equation?
A: A/R R: Sales
$5,000
CR: Sales Discounts
$5,000 $5,000 $50
A: Cash
$4,950
FORMULA: Sales Discount = Gross Sales x Discount % $50 = $5,000 x 1 %
Cash Received = Gross Sales - Sales Discount $4,950 = $5,000 - $50
$0 Customer’s Balance after payment.
How would this event be recordedrecorded?
![Page 11: 1 Chapter 5 Merchandise Accounting & Internal Control.](https://reader035.fdocuments.in/reader035/viewer/2022081513/551691c3550346f6208b46e0/html5/thumbnails/11.jpg)
11
Recording Sales Discounts: ExampleIf customer pays within the discount period, they receive a 1% discount. What is the effect on the B/S Equation?
A: A/R R: Sales
$5,000
CR: Sales Discounts
$5,000 $5,000 $50
A: Cash
$4,950
-----------Balance Sheet------------- --Income Statement-- Assets = Liabilities + OE + Revenues - Expenses
$0
Accounts SalesReceivable ($5,000) DiscountsCash $4,950 ($50) Notice the net increase in assets and equity (revenues) is $4,950$4,950 from SaleSale and CollectionCollection
$4,950 $4,950
![Page 12: 1 Chapter 5 Merchandise Accounting & Internal Control.](https://reader035.fdocuments.in/reader035/viewer/2022081513/551691c3550346f6208b46e0/html5/thumbnails/12.jpg)
12
Inventory Recording Systems:Two Alternate Approaches
Concept: Different approaches are used to update accounting records for key inventory transactions
Transactions:– Purchases of goods from vendors (increase inventory)– Sales of goods to customers (decrease inventory)
Approaches: When to update?1. Perpetual inventory system Constant updates2. Periodic inventory system End-of-period updates
![Page 13: 1 Chapter 5 Merchandise Accounting & Internal Control.](https://reader035.fdocuments.in/reader035/viewer/2022081513/551691c3550346f6208b46e0/html5/thumbnails/13.jpg)
13
Perpetual Inventory Systems
Traditionally used for low-volume, high-priced inventory items (e.g., autos or jewelers)
Recently, Point of Sale (POS) terminals have improved ability of mass merchandisers (like grocery stores) to utilize perpetual inventory systems
Why do some stores (e.g., Jewel) use scanners, while others (e.g., 7-11’s) don’t? Impact on customers?
Concept: Inventory records are perpetually perpetually updatedupdated – i.e., with each purchase or sale.
![Page 14: 1 Chapter 5 Merchandise Accounting & Internal Control.](https://reader035.fdocuments.in/reader035/viewer/2022081513/551691c3550346f6208b46e0/html5/thumbnails/14.jpg)
14
Periodic Inventory Systems
Reduces record-keeping (and costs), but Decreases ability to:
– track theft, breakage, etc., – provide high service levels to customers, and– prepare interim financial statements.
Predominant method used for financial financial reportingreporting! (Cost vs. Benefit)
Concept: Inventory records are periodicallyperiodically updatedupdated – only after physical inventory counts.
![Page 15: 1 Chapter 5 Merchandise Accounting & Internal Control.](https://reader035.fdocuments.in/reader035/viewer/2022081513/551691c3550346f6208b46e0/html5/thumbnails/15.jpg)
15
Beginning Inventory (B/S) $ 10,000
+ Cost of Goods PurchasedCost of Goods Purchased 40,000
Cost of Goods Available for Sale 50,000
- Ending Inventory (B/S) (20,000)
Cost of Goods Sold (I/S) $ 30,000
The Cost of Goods Sold ModelPeriodic InventoryPeriodic Inventory
Determined by physical count & shown on B/S’s
“Pool” of goodsavailable to be soldduring the period
Let’s see how Cost of Goods PurchasedCost of Goods Purchased is calculated
![Page 16: 1 Chapter 5 Merchandise Accounting & Internal Control.](https://reader035.fdocuments.in/reader035/viewer/2022081513/551691c3550346f6208b46e0/html5/thumbnails/16.jpg)
16
The Cost of Goods Purchased ModelPeriodic Inventory
Less:
Purchase Returns Purchase Returns
& Allowances& Allowances
Purchase DiscountsPurchase Discounts
Plus: Transportation-inTransportation-in
Cost of Goods PurchasedCost of Goods Purchased
PurchasesPurchasesGross invoice price
Shipping cost to buyer, if any
Opposite of Sales R&A
Opposite of Sales Discounts
Internal calculation; not an account nor reported in F/S’s
![Page 17: 1 Chapter 5 Merchandise Accounting & Internal Control.](https://reader035.fdocuments.in/reader035/viewer/2022081513/551691c3550346f6208b46e0/html5/thumbnails/17.jpg)
17
Cost of Goods Purchased: Periodic Inventory
What type of What type of ACCOUNTSACCOUNTS would these be in the B/S Equation? would these be in the B/S Equation?
Less:
Purchase Returns Purchase Returns
& Allowances& Allowances
Purchase DiscountsPurchase Discounts
Plus: Transportation-inTransportation-in
Cost of Goods PurchasedCost of Goods Purchased
PurchasesPurchases??Expense AccountExpense Account………. ………..but WhyWhy?
1.1. Periodic InvPeriodic Inv. assumes all inventory is SOLDSOLD!
2. So PURCHASESPURCHASES are really the same as COGS i.e., an EXPENSEEXPENSE in I/SI/S.
3. (COGS COGS is not an account in the G/LG/L but it is a
calculated amountcalculated amount for I/SI/S.)
4. So at end of periodend of period COGS COGS & & INVINV must be updated to proper balances for F/S purposesF/S purposes.
![Page 18: 1 Chapter 5 Merchandise Accounting & Internal Control.](https://reader035.fdocuments.in/reader035/viewer/2022081513/551691c3550346f6208b46e0/html5/thumbnails/18.jpg)
18
Cost of Goods Purchased: Periodic Inventory
What type of What type of ACCOUNTSACCOUNTS would these be in the B/S Equation? would these be in the B/S Equation?
Less:
Purchase Returns Purchase Returns
& Allowances& Allowances
Purchase DiscountsPurchase Discounts
Plus: Transportation-in?Transportation-in?
Cost of Goods PurchasedCost of Goods Purchased
PurchasesExpenseExpense account; it is part of COGS
![Page 19: 1 Chapter 5 Merchandise Accounting & Internal Control.](https://reader035.fdocuments.in/reader035/viewer/2022081513/551691c3550346f6208b46e0/html5/thumbnails/19.jpg)
19
Cost of Goods Purchased: Periodic Inventory
What type of What type of ACCOUNTSACCOUNTS would these be in the B/S Equation? would these be in the B/S Equation?
Less:
Purchase Returns Purchase Returns
& Allowances& Allowances
Purchase DiscountsPurchase Discounts
Plus: Transportation-in
Cost of Goods PurchasedCost of Goods Purchased
Purchases
Contra-Expense account to Purchases
Contra-Expense account to Purchases
![Page 20: 1 Chapter 5 Merchandise Accounting & Internal Control.](https://reader035.fdocuments.in/reader035/viewer/2022081513/551691c3550346f6208b46e0/html5/thumbnails/20.jpg)
20
Assume a credit purchasecredit purchase of $1,000$1,000 with payment terms of 2/10, net 30. Record effecteffect on B/S equation
E: Purchases L: Accounts Payable
$1,000 $1,000
-----------Balance Sheet------------- --Income Statement-- Assets = Liabilities + OE + Revenues - Expenses
RECORDING PURCHASE DISCOUNTS:
PERIODIC INVENTORY SYSTEMPERIODIC INVENTORY SYSTEM
Accts. Purchases Payable ($1,000)
$1,000
![Page 21: 1 Chapter 5 Merchandise Accounting & Internal Control.](https://reader035.fdocuments.in/reader035/viewer/2022081513/551691c3550346f6208b46e0/html5/thumbnails/21.jpg)
21
If company pays pays within discount perioddiscount period, they can deducta 2% discount2% discount. Determine the effect on the B/S equation.
E: PurchasesL: Accts Payable
1,0001,000
A: Cash
Formula: Purchase Discount = Purchase Price x Discount % $20$20 = $1,000 x .02
Cash Paid = Gross Purchase - Purchase Discount $980$980 = $1,000 - $20
CE: Pur. Discount
$1,000$1,000 $20$20$980$980
$0
RECORDING PURCHASE DISCOUNTS:
PERIODIC INVENTORY SYSTEMPERIODIC INVENTORY SYSTEM
A/P is fully paid!
![Page 22: 1 Chapter 5 Merchandise Accounting & Internal Control.](https://reader035.fdocuments.in/reader035/viewer/2022081513/551691c3550346f6208b46e0/html5/thumbnails/22.jpg)
22
E: PurchasesL: Accts Payable
$1,000$1,000
A: Cash CE: Pur. Discount
$1,000$1,000 $20$20$980$980
$0
Cash Accts. Purchase ($980) Payable Discounts
($1,000) $20
RECORDING PURCHASE DISCOUNTS:PERIODIC INVENTORY SYSTEM
If company pays pays within discount perioddiscount period, they can deducta 2% discount2% discount. Determine the effect on the B/S equation.
-----------Balance Sheet------------- --Income Statement-- Assets = Liabilities + OE + Revenues - Expenses
![Page 23: 1 Chapter 5 Merchandise Accounting & Internal Control.](https://reader035.fdocuments.in/reader035/viewer/2022081513/551691c3550346f6208b46e0/html5/thumbnails/23.jpg)
23
FOB Destination Point(Freight On Board)
Sale or purchase is not recordednot recorded until inventory reaches its destination pointdestination point.
SellerSeller responsible for inventory while in transit. Importance: Year-end “cut-off” or Damage claim
Seller Buyer
TitlePasses at
Destination
![Page 24: 1 Chapter 5 Merchandise Accounting & Internal Control.](https://reader035.fdocuments.in/reader035/viewer/2022081513/551691c3550346f6208b46e0/html5/thumbnails/24.jpg)
24
FOB Shipping Point
Sale and purchaseSale and purchase are both recorded upon shipmentshipment – when “truck leaves the dock”
BuyerBuyer responsible for inventory while in transittransit Importance: F/S Cut-offs and Damage claims
Seller Buyer
TitlePasses when
Shipped
![Page 25: 1 Chapter 5 Merchandise Accounting & Internal Control.](https://reader035.fdocuments.in/reader035/viewer/2022081513/551691c3550346f6208b46e0/html5/thumbnails/25.jpg)
25
Internal Control Systems(require 3 components)
Control Environment
AccountingSystem
InternalControl
Procedures
CONCEPT: Techniques used to safeguard & protect assets of company
![Page 26: 1 Chapter 5 Merchandise Accounting & Internal Control.](https://reader035.fdocuments.in/reader035/viewer/2022081513/551691c3550346f6208b46e0/html5/thumbnails/26.jpg)
26
Responsibilities for Internal Control
External Auditors
CPA’sInternal Auditors
Audit Committee of Board of
Directors
Managementhas the
primaryresponsibility
Management: Sets and enforces policies
Internal Auditors: Test for compliance
CPA’s: Verifies and reports to Audit Comm.
![Page 27: 1 Chapter 5 Merchandise Accounting & Internal Control.](https://reader035.fdocuments.in/reader035/viewer/2022081513/551691c3550346f6208b46e0/html5/thumbnails/27.jpg)
27
The Control Environment:An Attitude
Reflect management’s understanding of controls, competence and operating style
Necessitate certain control policies and practices
Require influence and support of Board of Directors
![Page 28: 1 Chapter 5 Merchandise Accounting & Internal Control.](https://reader035.fdocuments.in/reader035/viewer/2022081513/551691c3550346f6208b46e0/html5/thumbnails/28.jpg)
28
The Accounting System:A Necessity
Systems can be manual, automated or a combination of both
Use of documentation (audit trail) is integral part of any system and internal controls
DEFN: Methods, records and systems used to record transactions and report
financial information
![Page 29: 1 Chapter 5 Merchandise Accounting & Internal Control.](https://reader035.fdocuments.in/reader035/viewer/2022081513/551691c3550346f6208b46e0/html5/thumbnails/29.jpg)
29
Internal Control Procedures:Key Safeguards used in Practice
SafeguardingAssets and
Records
ProperAuthorizations
IndependentVerification
Design& Use of Business
Documents
IndependentReview andAppraisal
EstablishingAudit Trail
Segregationof Duties
![Page 30: 1 Chapter 5 Merchandise Accounting & Internal Control.](https://reader035.fdocuments.in/reader035/viewer/2022081513/551691c3550346f6208b46e0/html5/thumbnails/30.jpg)
30
Proper Authorizations
Concept: Authorizations are required before assets are transferred, used or exchanged
LOANAPPROVED
![Page 31: 1 Chapter 5 Merchandise Accounting & Internal Control.](https://reader035.fdocuments.in/reader035/viewer/2022081513/551691c3550346f6208b46e0/html5/thumbnails/31.jpg)
31
Segregation of duties
Concept: Separate the physical custody of assets from the accounting for assets
![Page 32: 1 Chapter 5 Merchandise Accounting & Internal Control.](https://reader035.fdocuments.in/reader035/viewer/2022081513/551691c3550346f6208b46e0/html5/thumbnails/32.jpg)
32
Independent Verification
Concept: Another individual or department (e.g., Internal Auditors) serve to verify or double-check the work of another
![Page 33: 1 Chapter 5 Merchandise Accounting & Internal Control.](https://reader035.fdocuments.in/reader035/viewer/2022081513/551691c3550346f6208b46e0/html5/thumbnails/33.jpg)
33
Protecting Assets and Records
Concept: Protect assets and accounting records from loss, theft, unauthorized use, etc.
![Page 34: 1 Chapter 5 Merchandise Accounting & Internal Control.](https://reader035.fdocuments.in/reader035/viewer/2022081513/551691c3550346f6208b46e0/html5/thumbnails/34.jpg)
34
Independent Review and Appraisal
Concept: Conduct periodic review of internal controls and appraisal of the accounting system as well as the people operating it.
CPA’s AuditReport
![Page 35: 1 Chapter 5 Merchandise Accounting & Internal Control.](https://reader035.fdocuments.in/reader035/viewer/2022081513/551691c3550346f6208b46e0/html5/thumbnails/35.jpg)
35
Design and Use of Business Documents
Concept: Capture all relevant information about a transaction in order to properly record and classify financial effects.
Requires: “Audit trail” capabilities
![Page 36: 1 Chapter 5 Merchandise Accounting & Internal Control.](https://reader035.fdocuments.in/reader035/viewer/2022081513/551691c3550346f6208b46e0/html5/thumbnails/36.jpg)
36
Limitations on Internal Control
No system can be entirely foolproof; breakdowns can occur– Employee collusion can override
the best controls
– Cost vs. benefit tradeoff’s exist
![Page 37: 1 Chapter 5 Merchandise Accounting & Internal Control.](https://reader035.fdocuments.in/reader035/viewer/2022081513/551691c3550346f6208b46e0/html5/thumbnails/37.jpg)
37
Summary: Key Concepts & Objectives
Adjustments to Sales Net Sales– Discounts: Trade, Quantity & Prompt Pymt.
– Returns & Allowances Inventory Recording Systems
– Perpetual vs. Periodic Inventory Systems Cost of Goods Sold model Cost of Goods Purchased model Internal Control Systems Safeguard Assets
![Page 38: 1 Chapter 5 Merchandise Accounting & Internal Control.](https://reader035.fdocuments.in/reader035/viewer/2022081513/551691c3550346f6208b46e0/html5/thumbnails/38.jpg)
38
Appendix 5A
Internal Control for a Merchandising Company
![Page 39: 1 Chapter 5 Merchandise Accounting & Internal Control.](https://reader035.fdocuments.in/reader035/viewer/2022081513/551691c3550346f6208b46e0/html5/thumbnails/39.jpg)
39
Controls Over Cash
All cash receipts deposited intact daily
All cash disbursements made by check
Paycheck for
Dept. of Treasurer
John Doe
Payche
ck for
Date
Dept.
of Tre
asurer
Jane D
oeDate
![Page 40: 1 Chapter 5 Merchandise Accounting & Internal Control.](https://reader035.fdocuments.in/reader035/viewer/2022081513/551691c3550346f6208b46e0/html5/thumbnails/40.jpg)
40
Controls Over Cash Received Over the Counter
Cash registers
Prenumbered customer receipts
![Page 41: 1 Chapter 5 Merchandise Accounting & Internal Control.](https://reader035.fdocuments.in/reader035/viewer/2022081513/551691c3550346f6208b46e0/html5/thumbnails/41.jpg)
41
Controls Over Cash Received in the Mail
Two employees open mail
Prelist prepared Customer statements Investigation of
recurring discrepancies
![Page 42: 1 Chapter 5 Merchandise Accounting & Internal Control.](https://reader035.fdocuments.in/reader035/viewer/2022081513/551691c3550346f6208b46e0/html5/thumbnails/42.jpg)
42
Document Flow for Merchandise
Checkprepared
PurchaseRequisition
Receiving Report
Purchase Order
Invoice Approval
Purchase Invoice