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1
Chapter 6
Merchandising Operations
and
Internal Control
Adapted from Financial Accounting 4e by Porter and Norton
2
Income Statement of a Merchandiser
Cash sales $ 350,000Credit sales 124,000
Total 474,000Less: Sales returns &
allowances ( 12,400) Sales discounts ( 34,600)
Net sales $ 427,000
Contra-accounts used for control and analysis purposes
3
Sales Contra-Accounts
Sales
normalcredit
balance
Sales Discounts
Sales AllowancesSales Returns
normaldebit
balance
normaldebit
balance
normaldebit
balance
4
Trade & Quantity Discounts
Trade DiscountsOffered to special class of customers
Quantity DiscountsOffered to
customers willing to buy in large
quantities
Not recorded in accounting records – actual selling price is net amount, not list price
5
Credit Terms and Sales Discounts
n/30 Payment due 30 days from invoice date
1/10, n/30 Deduct 1% of invoice amount if paid within 10 days; otherwise full invoice amount is due in 30
days2/10, n/30 Deduct 2% of invoice amount if
paid within 10 days; otherwise full invoice amount is due in 30 days
6
Recording Sales Discounts
Cash 980Sales Discounts 20
Accounts Receivable 1,000
($1,000 x 2% = $20 discount)
To record collection on account of customer who has taken 2% sales discount.
7
Newpurchases
Beginninginventory
The Cost of Goods Sold Model
Cost of goods
sold
Inventory not sold - appears on
balancesheet Inventory sold -
appears onincome statement
Ending inventory
8
An increase in ending inventory means more was bought than sold
The Cost of Goods Sold Model
Beginning inventory $ 15,000
Plus: Cost of goods purchased 63,000
= Cost of goods available for sale 78,000
Less: Ending inventory ( 18,000)
= Cost of goods sold $ 60,000
“Pool” of goodsavailable to sell
during the period
9
Perpetual Inventory Systems
Point of sale terminals have improved ability of mass merchandisers to maintain perpetual systems
Inventory records are updated after each purchase or sale
10
Periodic Inventory Systems
Reduces record-keeping but also decreases ability to track theft, breakage, etc. and prepare interim financial statements
Inventory records are updated periodically
based on physical inventory counts
11
Cost of Goods Purchased
Includes invoice price:
Less:
Purchase returns and allowances
Purchase discounts
Plus:
Transportation-in
12
Recording Purchase Discounts
Accounts Payable 500Cash 495
Purchase Discounts 5
($ 500 x 1% = $5 discount)
To record payment within discount period to supplier who offers 1% purchase discount.
13
FOB Destination Point
No sale or purchase until inventory reaches its destination
Seller responsible for inventory while in transit
Seller Buyer
TitlePasses at
Destination
14
FOB Shipping Point
Both sale and purchase recorded upon shipment Buyer responsible for inventory while in transit
Seller Buyer
TitlePasses when
Shipped
15
Responsibility for Internal Control
Management
External Auditors Audit
Committee of Board of
Directors
InternalAuditors
16
Internal Control
Control Environment
AccountingSystem
InternalControl
Procedures
17
The Control Environment
Management’s competence and operating style
Personnel policies and practices
Influence of board of directors
18
The Accounting System
Can be manual or automated systems or a combination of both
Use of journals is an integral part of any system
Methods and records used to report transactions and maintain financial
information
Internal Control Procedures
Segregationof Duties
SafeguardingAssets and
Records
ProperAuthorizations
IndependentVerification
Design & Use of BusinessDocuments
19
IndependentReview andAppraisal
20
Proper Authorizations
Authority and responsibility go hand in hand
LOANAPPROVED
21
Segregation of duties
Separate physical custody from the accounting for assets
22
Independent Verification
One individual or department acts as a check on the work of another
23
Safeguarding Assets and Records
Protect assets and accounting records from loss, theft, unauthorized use, etc.
24
Independent Review and Appraisal
Provide for periodic review and appraisal of the accounting system and the people operating it.
AuditReport
25
Design and Use of Business Documents
Capture all relevant information about a transaction and assist in proper recording and classification.
Are properly controlled
26
Limitations on Internal Control
No system is entirely foolproof– Employees in collusion can override the best
controls– Cost vs. benefit tradeoff
27
Appendix
Internal Control for a Merchandising Company
28
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
29
Controls Over Cash Received Over the Counter
Cash registers
Prenumbered customer receipts
Investigation of recurring discrepancies
30
Controls Over Cash Received in the Mail
Two employees open mail
Prelist prepared Monthly customer
statements
31
Document Flow for Merchandise
Checkprepared
PurchaseRequisition
Receiving Report
Purchase Order
Invoice Approval
Purchase Invoice