Question

500 WORDS REQUIREMENT!!!

Describe the internal controls companies undertake during the purchase and sales process for their merchandise inventory.

Answer 1

Answer : -

The merchandise inventory are those inventory which are ready to be sold out. The finished product is the merchandise inventory.

Internal control on purchases : - Placing control over purchases decreases the purchase cost of the company. The purchase are mostly on credit basis, the purchase control also consist of the payables in the company. a) The first to do for control over purchase is to hire or assign someone for the process as purchase manager some like finance manager or accountant of the company. b) Start the process by creating different standards for different purchases of material. To manager should make sure the purchases are of good quality, he should not make purchase of low quality materials. The purchase can be of material or office supplies. c) the company should have a specific vendor from whom the company purchases the material. If the company will buy from same vendor again and again it will help in getting low prices, better service and more credit period. d) The company should develop a new process for the purchase where employee will list their purchase request and it will be approved in terms of quantity by the purchase manager. This will decrease the fraud in purchases. The company should make official form including information such as name, department,etc and other information company will need to keep tracks on the purchases. The above steps will help the company to reduce purchases and it will help in reducing the inventory of the company or will reduce the stock. The control over purchase will not result in stocking up the inventory which in turn will increase the cost of the company and will lower the profits. The necessary documents for kepping control are i) Purchase requisition written by employee ii) Purchase order iii) invoice iv) Receiving report. The company should also consider the opening inventory, work in process if any before making any purchases. These will help the company to lower their purchase and payables which will result in less liabilities.

Internal control over supply : - sales are of two types cash sales and credit sales. The credit sales are mostly the choice of the buyers. The control over sales will have control over Receivables. a) The customer when making order should be given a credit period and to examine whether the period should be extended due to more order. All the products should be examined before dispatch. If a new customer makes an order do an enquiry about the customers credit ability. The documents should be used for proof of the dispatch. b) The company should keep an track in the dispatched products. Regularly check whether the dispatches have been invoiced. c) The sales invoice should be checked by a official and crosscheck by order and dispatch note. All the invoices should be recorded in the books, ledgers and balancing should be done. d) If any, goods are returned from the customers, the authority person or official should ask for the reason and should check for any damaged goods and should ask for a documents. e) The company should sent out letters to the debtors on the payment date if the payment is not received. The company should ask for the payments after the maturity of the credit period and if any bad debts occur, the company have to make account for that.

The sales should be make according to the inventory. The inventory level should not be increased due to sales or any fraud in sales. The return goods may increase the inventory. The company should always make a check on the debtors before making sales or more sales, extending the credit period of the debtors. The purchases or sales should be make in accordance to the inventory level of the company. The company should control its purchases or it will result in increasing the level of the merchandise inventory. The company should lower its purchases if it have opening inventory, the demand of the particular product is less,etc. The control over purchases helps in reducing theft or fraud in inventory too. The sales helps in having control over merchandise inventory. Internal control over sales helps the company to reduce the theft or fraud in sales or return goods or inventory. The internal control in the company is important as the company should not keep on increasing the merchandise inventory and should not ignore the theft or fraud, the company should avoid theft or fraud or stocking up the merchandise inventory by having internal control and some systems.