Question

 

Q1-

A company wants to implement good internal control. What are the policies and procedures you can suggest to minimize human frauds and errors? (1Mark)

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.                                                                                              (1Mark)

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? (2Marks)

Q4. What is the bank reconciliation? why is it important for companies to prepare bank reconciliation periodically?                                                                (1Mark)

Answer 1

Q1

Internal controls are the plans and/or programs implemented to safeguard company’s assets, ensure the integrity of its accounting records, and detect fraud and errors.

Policies and Procedures to implement good Internal Control System to minimize fraud & errors:

1. No single person should have an independent control over any aspect of business.

2. Persons having physical custody of assets must not be permitted to have access to the books of account.

3. Procedures should be laid down for periodical verification and testing of different sections of accounting records to ensure they are accurate.

4. To prevent loss or misappropriation of cash, mechanical devices, such as the automatic cash register, should be employed.

Q2

Percentage of sales method involves determining what percentage of net credit sales or total credit

sales is uncollectible.

Assuming XYZ Company has total credit sales of $100,000 during the year. It is estimated that 3% of sales will be uncollectible.

Journal Entry

S.no.	Particulars	Debit $	Credit $
1.	Bad Debt Expense	3,000
	Allowance For Doubtful Accounts		3,000
	( To record estimate of doubtful accounts )

Q3

Item	FIFO	LIFO	Weighted Avg
Sales – 50 units @ SAR 15/-	750	750	750
Cost of Goods Sold	(590) ( 30x11 + 20x13)	(610) ( 30x13 + 20x11)	(600) ( 50x 12 )
Gross Margin ( Sales – COGS )	160	140	150

Journal Entry

		FIFO	LIFO	Weighted Avg
	Particulars	Debit	Credit	Debit	Credit	Debit	Credit
1.	Cash	750		750		750
	Sales		750		750		750
	( Being sales recorded )
2.	COGS	590		610		600
	Inventory		590		610		600
	( Being COGS recorded )

Q4

For reconciling the balances as shown in the Cash Book and passbook a reconciliation statement is prepared known as Bank Reconciliation Statement or BRS.

In other words, BRS is a statement which is prepared for reconciling the difference between balances as per cash book’s bank column and passbook on a given date.

Benefits of preparing a BRS

Detecting errors: A bank reconciliation helps you in spotting accounting errors which are common to every business. These mistakes include errors such as addition and subtraction, missed payments and double payments.

Tracking Interest and Fee: Banks might add interest payments, fees or penalties on your account. Monthly bank reconciliation allows you to add or subtract such amounts in your books.

Detecting Fraud: Bank reconciliations statement helps you in detecting and spotting fraudulent transactions.

Tracking Receivables: BRS allows you to confirm all your receipts, assisting you to avoid awkward situations and also identifying entries for receipts which you didn’t deposit.