Question

 

ACC101

Q1-

A company wants to implement good internal control. What are the policies and procedures you can suggest to minimize human frauds and errors?

Q2-

Assume that you have a company. And the management team estimates that 3% of sales will be uncollectible.

Give any amount of sales and prepare the journal entry using the percent of sales method.                                                                                              

Q3-

A company that uses a perpetual inventory system made the following cash purchases and sales. There was no beginning inventory.

January 1:	Purchased 30 units at SAR11 per unit
February 5:	Purchased 30 units at SAR 13 per unit
March 16:	Sold 50 Units for SAR 15 per unit

A. Prepare general journal entries to record the March 16 sale using the

1. FIFO inventory valuation method.
2. LIFO inventory valuation method.
3. Weighted average valuation method.

B. What is the cost of goods sold and the gross margin for each method?

Q4. What is the bank reconciliation? why is it important for companies to prepare bank reconciliation periodically?   

Answer 1

Q1. Following policies and procedures I would suggest for a company to implement good internal control to minimize human frauds and errors

1. Cash management:

The person who is approving the payments should not have the authority to make the payments. This reduces the risk of fraud with respect to Cash management

2. Bank balances:

Reconciliation of bank balances by independent person who doesn’t have book keeping or signing access

3. Maker Checker concept:

For every transaction there should be maker check concept eg. The person approving payments should be different from person making payments

4. Related party transactions:

The transactions with related parties should have approval of higher management as there are high changes of frauds

5. Automation

Certain activities can be automated and periodically reviewed to minimize risk of errors. Eg, inventory valuation of weighted average method can be automated in the system so that it reduces the risk of human errors

6. SOPs

Standard protocols to be maintained for every transaction and should periodically review whether there are compliances with respect to the same

Q2. Management estimates 3% of sales will be uncollectable. And management uses % of sales method

                Let 100 be sales made by the company

                Debtors uncollectible = 100*3% = 3

	Particulars	Debit	Credit
1	Debtors a/c Dr	100
	To Sales		100
	(being sales made)
2	Provision for doubtful debts a/c Dr	3
	To Debtors a/c (100*3%)		3
	(being provision made for 3% of sales as management estimates them to be uncollectible)

Q3. A. Journal entries

	Particulars	Debit	Credit
FIFO
Jan-01	Inventory a/c Dr	330
	To Cash		330
	(being purchases made)
Feb-05	Inventory a/c Dr	390
	To Cash		390
	(being purchases made)
Mar-15	Cash a/c Dr	750
	To Sales		750
	(being sales made)
Mar-15	Cost of goods sold a/c Dr	590
	To Inventory		590
	(being consumption charged to P/L) (30*11+20*13)
LIFO
Jan-01	Inventory a/c Dr	330
	To Cash		330
	(being purchases made)
Feb-05	Inventory a/c Dr	390
	To Cash		390
	(being purchases made)
Mar-15	Cash a/c Dr	750
	To Sales		750
	(being sales made)
Mar-15	Cost of goods sold a/c Dr	610
	To Inventory		610
	(being consumption charged to P/L) (30*13+20*11)
Weighted avg method
Jan-01	Inventory a/c Dr	330
	To Cash		330
	(being purchases made)
Feb-05	Inventory a/c Dr	390
	To Cash		390
	(being purchases made)
Mar-15	Cash a/c Dr	750
	To Sales		750
	(being sales made)
Mar-15	Cost of goods sold a/c Dr	600
	To Inventory		600
	(being consumption charged to P/L) [50*(330+390)/60]

B. Cost of goods sold and gross margin for each method

Method	Cost of Goods sold	Sales	Gross margin
FIFO	590 (30*11+20*13)	750 (50*15)	160
LIFO	610 (30*13+20*11)	750 (50*15)	140
Weighted avg method	600 [50*(30*11+20*13)/60]	750 (50*15)	150

Q4. Bank reconciliation:

                Bank balances as per company books might sometimes varies with actual bank balances. In such cases Bank reconciliation is done which gives out the reasons for such variances. The illustrative reasons for such differences are as follows.

1. Cheques issued by the company but the other party doesn’t submit to bank for realization

2. Cheques collected are submitted to bank for collection but bank is yet to collect such amount

3. Bank charges directly charged by the bank, yet to make entry in books

4. Customer directly deposited in bank not known to company

5. Bank interest directly credited in bank a/c

Importance of bank reconciliation for companies:

                Every company should periodically reconcile the bank balances so that they can identify the differences and accordingly take corrective steps. They can even prevent or identify the errors or frauds occurred through this process.