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Chapter 6. Internal Control, Cash, and Merchandise Sales. PowerPoint Authors: Brandy Mackintosh Lindsay Heiser. Learning Objective 6-1. Distinguish among service, merchandising, and manufacturing operations. Operating Cycles. Make Products. Collect Cash. Incur Operating Expenses.

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Chapter 6

Chapter 6

Internal Control, Cash, and Merchandise Sales

PowerPoint Authors:

Brandy Mackintosh

Lindsay Heiser


Learning objective 6 1

Learning Objective 6-1

Distinguish among service, merchandising, and manufacturing

operations.


Operating cycles

Operating Cycles


Operating cycles1

MakeProducts

CollectCash

IncurOperatingExpenses

Buy RawMaterials

Operating Cycles

SellProducts

ManufacturingCompany


Learning objective 6 2

Learning Objective 6-2

Explain common principles and limitations of internal control.


Internal control

Internal Control

All companies include as part of their operating activities a variety of procedures and policies that are referred to as internal controls.

  • Internal control is important to all types and sizes of organizations, especially after the business failures and accounting scandals involving Enron and other companies in the early 2000s.

  • The Sarbanes-Oxley (SOX) Act requires all public companies to assess the effectiveness of internal controls over financial reporting.

  • Effective internal controls play an essential role in creating an ethical business environment, improving financial performance, and preventing fraud.


Common control principles

Common Control Principles


Control limitations

Control Limitations

Internal controls can never completely prevent and detect errors and fraud.

Benefits vs. Cost

Human Error or Fraud


Learning objective 6 3

Learning Objective 6-3

Apply internal control principles to cash receipts and payments.


Controlling and reporting cash

Controlling and Reporting Cash

Internal control of cash is important to any organization.

Volume of cash is enormous.

Cash is valuable and “owned” by person possessing it.


Cash received in person

Cash Received in Person

Segregate Duties

Cashier

Recording

Custody


Cash received in person1

Cash Received in Person


Cash received from a remote source

Cash Received from a Remote Source

Cash Received by Mail

Cash Received Electronically


Cash payments

Cash Payments

Cash Payments

Writing a Check

Electronic Funds Transfer

A voucher system is a process for approving and documenting all purchases and payments on account.

Most companies pay cash to their employees through EFTs, which are known by employees as direct deposits.


Learning objective 6 4

Learning Objective 6-4

Perform the key control of reconciling cash to bank statements.


Bank procedures and reconciliation

Bank Procedures and Reconciliation

Banks provide services that help businesses to control cash in several ways:

Restricting Access

Documenting Procedures

Independently Verifying

A bank reconciliation is an internal report prepared to verify the accuracy of both the bank statement and the cash accounts of a business or individual.


Bank statement

Bank Statement


Reconciling differences

Reconciling Differences


Bank reconciliation

Bank Reconciliation

To determine the appropriate cash balance, these balances need to be reconciled.


Bank reconciliation1

Bank Reconciliation

  • Bank Reconciliation Goals

  • Identify the deposits in transit.

  • Identify the outstanding checks.

  • Record other transactions on the bank statement.

  • Determine the impact of errors.


Bank reconciliation2

Bank Reconciliation


Reporting cash and cash equivalents

Reporting Cash and Cash Equivalents

Cash includes money or any instrument that banks will accept for deposit and immediate credit to a company’s account, such as a check, money order, or bank draft.

Cash equivalents are short-term, highly liquid investments purchased within three months of maturity.


Learning objective 6 5

Learning Objective 6-5

Explain the use of a perpetual inventory system as a control.


Controlling and reporting merchandise sales

Controlling and Reporting Merchandise Sales

Inventory Quantities

Inventory Costs

Financial Statements

Unsold Inventory

Balance Sheet

Sold Inventory

Income Statement


Perpetual inventory system

Perpetual Inventory System

In a perpetual inventory system, the inventory records are updated “perpetually,” that is, every time inventory is bought, sold, or returned. Perpetual systems often are combined with bar codes and optical scanners.


Periodic inventory system

Periodic Inventory System

In a periodic inventory system,

the inventory records are updated “periodically,” that is, at the end of the accounting period. To determine how much merchandise has been sold, periodic systems require that inventory be physically counted at the end of the period.


Inventory control

Inventory Control

Perpetual Inventory System

Periodic Inventory System

Continuous Tracking

No Up-to-Date Records

Can Estimate Shrinkage

Can’t Estimate Shrinkage


Learning objective 6 6

Learning Objective 6-6

Analyze sales transactions under a perpetual inventory system.


Sales transactions

Sales Transactions

Merchandisers earn revenues by transferring ownership of merchandise to a customer, either for cash or on credit.

For a merchandiser who is shipping goods to a customer, the transfer of ownership occurs at one of two possible times:

FOB shipping point —the sale is recorded when the goods leave the seller’s shipping department.

FOB destination —the sale is recorded when the goods reach their destination (the customer).


Sales transactions1

Sales Transactions

Every merchandise sale has two components, each of which requires an entry in a perpetual inventory system.

Selling Price

Cost


Sales transactions2

Stockholders’ Equity

+

Sales Revenue (+R) +$400

Cost of Goods Sold (+E) -$350

Cash +$400

Inventory -$350

Sales Transactions

Assume Wal-Mart sells two Schwinn mountain bikes for $400 cash. The bikes had previously been recorded in Wal-Mart’s Inventory at a total cost of $350.

400

350

400

350

dr Cash (+A)

cr Sales Revenue (+R, +SE)

dr Cost of Goods Sold (+E, -SE)

cr Inventory (-A)

Record

Analyze

Liabilities

Assets

=

1

2


Sales returns and allowances

Sales Returns and Allowances

When goods sold to a customer arrive in damaged condition or are otherwise unsatisfactory, the customer can (1) return them for a full refund or (2) keep them and ask for a reduction in the selling price, called an allowance.


Sales returns and allowances1

Stockholders’ Equity

+

Cash -$200

Inventory +$175

Sales Returns and

Allowances (+xR) -$200

Cost of Goods Sold (-E) +$175

Sales Returns and Allowances

Suppose that after Wal-Mart sold the two Schwinn mountain bikes, the customer returned one to Wal-Mart. Assuming that the bike is still like new, Wal-Mart would refund the $200 selling price to the customer and take the bike back into inventory.

200

175

200

175

dr Sales Returns & Allowances (+xR, -SE)

cr Cash (-A)

dr Inventory (+A)

cr Cost of Goods Sold (-E, +SE)

Record

Analyze

Liabilities

Assets

=

1

2


Sales on account and sales discounts

Sales on Account and Sales Discounts

A sales discount is a sales price reduction given to customers for prompt payment of their account balance.


Sales on account and sales discounts1

Stockholders’ Equity

+

Accounts Receivable+$1,000

Inventory -$700

Sales Revenue (+R) +$1,000

Cost of Goods Sold (+E) -$700

Sales on Account and Sales Discounts

Suppose Wal-Mart’s warehouse store (Sam’s Club) sells printer paper on account to a local business for $1,000 with payment terms of 2/10, n/30. The paper cost Sam’s Club $700.

1,000

700

1,000

700

dr Accounts Receivable (+A)

cr Sales Revenue (+R, +SE)

dr Cost of Goods Sold (+E, -SE)

cr Inventory (-A)

Record

Analyze

Liabilities

Assets

=

1

2


Sales on account and sales discounts2

Stockholders’ Equity

+

Cash +$980

Accounts Receivable -$1,000

Sales Discounts (+xR) -$20

Sales on Account and Sales Discounts

To take advantage of this 2% discount, the customer must pay Wal-Mart within 10 days. If the customer does so, it will deduct the $20 discount (2% $1,000) from the total owed ($1,000), and then pay $980 to Wal-Mart.

980

20

1,000

dr Cash (+A)

dr Sales Discounts (+xR, -SE)

cr Accounts Receivable (-A)

Record

Analyze

Liabilities

Assets

=

1

2

(2% × $1,000)


Summary of sales related transactions

Summary of Sales-Related Transactions

The sales returns and allowances and sales discounts introduced in this section were recorded using contra-revenue accounts.


Learning objective 6 7

Learning Objective 6-7

Analyze a merchandiser’s multistep income statement.


Gross profit percentage

GrossProfit %

Gross ProfitNet Sales

=

×

100

Gross Profit Percentage


Comparing operating results across companies and industries

Comparing Operating Results Across Companies and Industries


Chapter 6 solved exercises

Chapter 6Solved Exercises

M6-10, M6-19, E6-5, E6-7, E6-10, E6-17


Chapter 6

M6-10 Calculating Shrinkage in a Perpetual Inventory System

Corey’s Campus Store has $4,000 of inventory on hand at the beginning of the month. During the month, the company buys $41,000 of merchandise and sells merchandise that had cost $30,000. At the end of the month, $13,000 of inventory is on hand. How much shrinkage occurred during the month?

Beginning inventory

Purchases

Cost of Goods Sold

Ending balance

Inventory count

Shrinkage

$ 4,000

+41,000

-30,000

15,000

-13,000

$ 2,000


Chapter 6

M6-19 Calculating the Impact of Changes in Gross Profit Percentage on Operating Income

Luxottica Group, the Italian company that sells Ray Ban and Killer Loop sunglasses, reported a gross profit percentage of 66.4 percent in 2008 and 65.4 percent in 2009. In each of these two years, the company’s net sales was fairly steady at approximately 5 million euro. Assuming that Luxottica’s operating expenses were 2.6 million euro in each year, how much more (or less) income from operations did Luxottica report in 2009 than in 2008?

Sales

Gross profit percentage

Gross Profit

Operating Expenses

Income from Operations

Luxottica earned € 50,000 less in 2009 than 2008.

2008

€5,000,000

x 0.664

3,320,000

2,600,000

€ 720,000

2009

€5,000,000

x 0.654

3,270,000

2,600,000

€ 670,000


Chapter 6

E6-5 Preparing a Bank Reconciliation and Journal Entries, and Reporting Cash

Hills Company’s June 30, 2013, bank statement and the June ledger account for cash are summarized here:

Required:

1. Prepare a bank reconciliation. A comparison of the checks written with the checks that have cleared the bank shows outstanding checks of $700. Some of the checks that cleared in June were written prior to June. No deposits in transit were noted in May, but a deposit is in transit at the end of June.


Chapter 6

E6-5 Preparing a Bank Reconciliation and Journal Entries, and Reporting Cash

HILLS COMPANY

Bank Reconciliation

June 30, 2013

Bank Statement

Ending balance per bank

statement………………..

Additions:

Deposit in transit…………….

Deductions:

Outstanding checks………...

Up-to-date cash balance…...

*$19,000 - $18,000 = $1,000.

$ 6,070

*1,000

7,070

700

$6,370

Company’s Books

Ending balance per Cash

account ………………..

Additions:

None

Deductions:

Bank service charge...……...

Up-to-date cash balance…...

$ 6,400

6,400

30

$6,370


Chapter 6

E6-5 Preparing a Bank Reconciliation and Journal Entries, and Reporting Cash

Give any journal entries that should be made as a result of the bank reconciliation.

What is the balance in the Cash account after the reconciliation entries?

In addition to the balance in its bank account, Hills Company also has $300 cash on hand. This amount is recorded in a separate T-account called Cash on Hand. What is the total amount of cash that should be reported on the balance sheet at June 30?

dr Office Expenses (+E, -SE)

cr Cash (-A)

To record bank service charges.

Balance sheet (June 30, 2013):

Current assets:

Cash ($6,370 + $300)

$6,670

30

30

$6,370 ($6,400 - $30)


Chapter 6

E6-7 Identifying Shrinkage and Other Missing Inventory Information

Calculate the missing information for each of the following independent cases:

Case

Beg. Inventory

Purchases

Cost of Goods Sold

Ending Inventory (perpetual)

Ending Inventory

(As Counted)

Shrinkage

?

?

?

?

A

B

C

D

$100

200

150

260

$700

800

500

600

$300

850

200

650

$80

0

10

10

$420

150

440

200

$500

150

450

210

?

?

?


Chapter 6

E6-10 Recording Journal Entries for Net Sales with Credit Sales and Sales Discounts

Using the information in E6-9, prepare journal entries to record the transactions, assuming Solitare uses a perpetual inventory system.

Jan. 6 Sold goods for $100 to Wizard Inc. with terms 2/10, n/30. The

goods cost Solitare $70.

6 Sold goods to SpyderCorp for $80 with terms 2/10, n/30. The

goods cost Solitare $60.

14 Collected cash due from Wizard Inc.

Feb. 2 Collected cash due from SpyderCorp.

28 Sold goods for $50 to Bridges with terms 2/10, n/45. The

goods cost Solitare $30.

Jan. 6

dr Accounts Receivable (+A)

cr Sales Revenue (+R, +SE)

dr Cost of Goods Sold (+E, -SE)

cr Inventory (-A)

100

70

100

70


Chapter 6

E6-10 Recording Journal Entries for Net Sales with Credit Sales and Sales Discounts

Using the information in E6-9, prepare journal entries to record the transactions, assuming Solitare uses a perpetual inventory system.

Jan. 6 Sold goods for $100 to Wizard Inc. with terms 2/10, n/30. The

goods cost Solitare $70.

6 Sold goods to SpyderCorp for $80 with terms 2/10, n/30. The

goods cost Solitare $60.

14 Collected cash due from Wizard Inc.

Feb. 2 Collected cash due from SpyderCorp.

28 Sold goods for $50 to Bridges with terms 2/10, n/45. The

goods cost Solitare $30.

Jan. 6

dr Accounts Receivable (+A)

cr Sales Revenue (+R, +SE)

dr Cost of Goods Sold (+E, -SE)

cr Inventory (-A)

80

60

80

60


Chapter 6

E6-10 Recording Journal Entries for Net Sales with Credit Sales and Sales Discounts

Using the information in E6-9, prepare journal entries to record the transactions, assuming Solitare uses a perpetual inventory system.

Jan. 6 Sold goods for $100 to Wizard Inc. with terms 2/10, n/30. The

goods cost Solitare $70.

6 Sold goods to SpyderCorp for $80 with terms 2/10, n/30. The

goods cost Solitare $60.

14 Collected cash due from Wizard Inc.

Feb. 2 Collected cash due from SpyderCorp.

28 Sold goods for $50 to Bridges with terms 2/10, n/45. The

goods cost Solitare $30.

Jan. 14

dr Cash (+A) ($100 x 98%)

dr Sales Discounts (+xR, -SE) ($100 x 2%)

cr Accounts Receivable (-A)

98

2

100


Chapter 6

E6-10 Recording Journal Entries for Net Sales with Credit Sales and Sales Discounts

Using the information in E6-9, prepare journal entries to record the transactions, assuming Solitare uses a perpetual inventory system.

Jan. 6 Sold goods for $100 to Wizard Inc. with terms 2/10, n/30. The

goods cost Solitare $70.

6 Sold goods to SpyderCorp for $80 with terms 2/10, n/30. The

goods cost Solitare $60.

14 Collected cash due from Wizard Inc.

Feb. 2 Collected cash due from SpyderCorp.

28 Sold goods for $50 to Bridges with terms 2/10, n/45. The

goods cost Solitare $30.

Feb. 2

dr Cash (+A)

cr Accounts Receivable (-A)

80

80


Chapter 6

E6-10 Recording Journal Entries for Net Sales with Credit Sales and Sales Discounts

Using the information in E6-9, prepare journal entries to record the transactions, assuming Solitare uses a perpetual inventory system.

Jan. 6 Sold goods for $100 to Wizard Inc. with terms 2/10, n/30. The

goods cost Solitare $70.

6 Sold goods to SpyderCorp for $80 with terms 2/10, n/30. The

goods cost Solitare $60.

14 Collected cash due from Wizard Inc.

Feb. 2 Collected cash due from SpyderCorp.

28 Sold goods for $50 to Bridges with terms 2/10, n/45. The

goods cost Solitare $30.

Feb. 28

dr Accounts Receivable (+A)

cr Sales Revenue (+R, +SE)

dr Cost of Goods Sold (+E, -SE)

cr Inventory (-A)

50

30

50

30


Chapter 6

E6-17 Inferring Missing Amounts Based on Income Statement Relationships

Supply the missing dollar amounts for the income statement of Williamson Company for each of the following independent cases:

Sales Revenue

Sales Returns and Allowances

Net Sales

Cost of Goods Sold

Gross Profit

Case A

$ 8,000

150

7,850

5,750

$ 2,100

Case B

$ 6,000

500

5,500

4,050

$ 1,450

Case C

$ 6,195

275

5,920

5,400

$ 520


End of chapter 6

End of Chapter 6


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