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$ 350,000 Credit sales 124,000 Total 474,000 Less: 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 normal credit balance Sales Discounts Sales AllowancesSales Returns normal debit balance normal debit balance normal debit balance

4 Trade & Quantity Discounts Trade Discounts Offered to special class of customers Quantity Discounts Offered 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 days 2/10, 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 980 Sales Discounts 20 Accounts Receivable1,000 ($1,000 x 2% = $20 discount) To record collection on account of customer who has taken 2% sales discount.

7 New purchases Beginning inventory The Cost of Goods Sold Model Cost of goods sold Inventory not sold - appears on balance sheet Inventory sold - appears on income 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 goods available to sell during the period

9 Perpetual Inventory Systems u 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 u 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 u Includes invoice price: Less: Purchase returns and allowances Purchase discounts Plus: Transportation-in

12 Recording Purchase Discounts Accounts Payable 500 Cash 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 u No sale or purchase until inventory reaches its destination u Seller responsible for inventory while in transit Seller Buyer Title Passes at Destination

14 FOB Shipping Point u Both sale and purchase recorded upon shipment u Buyer responsible for inventory while in transit Seller Buyer Title Passes when Shipped

15 Responsibility for Internal Control Management External Auditors Audit Committee of Board of Directors Internal Auditors

16 Internal Control Control Environment Accounting System Internal Control Procedures

17 The Control Environment u Management’s competence and operating style u Personnel policies and practices u Influence of board of directors

18 The Accounting System u Can be manual or automated systems or a combination of both u Use of journals is an integral part of any system Methods and records used to report transactions and maintain financial information

Internal Control Procedures Segregation of Duties Safeguarding Assets and Records Proper Authorizations Independent Verification Design & Use of Business Documents 19 Independent Review and Appraisal

20 Proper Authorizations u Authority and responsibility go hand in hand LOAN APPROVED

21 Segregation of duties u Separate physical custody from the accounting for assets

22 Independent Verification u One individual or department acts as a check on the work of another

23 Safeguarding Assets and Records u Protect assets and accounting records from loss, theft, unauthorized use, etc.

24 Independent Review and Appraisal u Provide for periodic review and appraisal of the accounting system and the people operating it. Audit Report

25 Design and Use of Business Documents u Capture all relevant information about a transaction and assist in proper recording and classification. u Are properly controlled

26 Limitations on Internal Control u 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 u All cash receipts deposited intact daily u All cash disbursements made by check Paycheck for Dept. of Treasurer John Doe Paycheck for Date Dept. of Treasurer Jane Doe Date

29 Controls Over Cash Received Over the Counter u Cash registers u Prenumbered customer receipts u Investigation of recurring discrepancies

30 Controls Over Cash Received in the Mail u Two employees open mail u Prelist prepared u Monthly customer statements

31 Document Flow for Merchandise Check prepared Purchase Requisition Receiving Report Purchase Order Invoice Approval Purchase Invoice