Question

Assignment Question(s):                                                     

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: Policies & Procedures to Minimize Human Errors & Frauds:-

Human errors and frauds can be of various types. Errors are occurred unintentionally frauds are performed intentionally. Human errors can be classified into various categories:- e.g. Error of Ommission. Error of Commission. Posting errors in books of accounts, Compensating errors etc. Similarly, frauds can also be classified into 3 main parts:- Asset Misappropriation,Corruption, Financial Statements Fraud.

The policies and procedures to be implemented in minimizing human errors and frauds by implementing good internal controls:-

1. Know Your Employees:- Fraud perpetrators often display behavioral traits that can indicate the intention to commit fraud. Observing and listening to employees can help an organisation to identify potential fraud risk. It is important for managers to be involved with their employees and take time to get to know them.
2. Make Employees Aware/Set up Reporting System:- Awareness affects all employees. Everyone in organisation should be aware of the organisation policies whether it is about fraud or for financial reporting purposes.
3. Hire Professionals Within Organisations:- Internal control systems should be reviewed and monitored on a consistent basis to ensure they are effective and current with technological and othet advances. If the internal controls are to be implemented with more accuracy, then an expert should be hired who will analyze company's policies & procedures, recommend appropriate programs & assist with implementation.
4. Monitor Vacation Balances:- It is a good technique to rotate the employees to various work of a company wherever it is possible.This may also reveal fradulent activities or errors as it allows a second employee to review the activities of the first.
5. Live the Corporate Culture:- A positive work environment can prevent employee fraud or theft. There should be a clear organizational structure, written policies and procedures and fair employment practices.

Q2:-Journal Entry

Let assume that company had $200000 credit sales. Thus, 3% of sales i.e. $200000*3% = $6000 will be uncollectable. The jouranl entry using the percentage of sales method:-

Bad Debt Expense A/c Dr.          $6000

       To Allowance for Doubtful Accounts                      $6000

Q3:-

Journal Entries (Using FIFO Method)

Closing Stock A/c     Dr.         SAR 130      

         To Trading A/c                               SAR 130

Note:-

Sale:- Sale 50 units@SAR 15       SAR 750

Less:- Purchase 30units @SAR 11       SAR 330

Less:- Purchase 20units @SAR 13             SAR 260

Thus, Closing Stock:-10Units @SAR 13            SAR 130

FIFO Rate = SAR 13 per unit

Journal Entries (Using LIFO Method)

Closing Stock A/c     Dr.         SAR 110      

         To Trading A/c                               SAR 110

Note:-

Sale:- Sale 50 units@SAR 15       SAR 750

Less:- Purchase 30units @SAR 13       SAR 390

Less:- Purchase 20units @SAR 11             SAR 220

Thus, Closing Stock:-10Units @SAR 11            SAR 110

LIFO Rate:- SAR 11 per unit

Journal Entries (Using Weighted Average Method)

Closing Stock A/c     Dr.         SAR 122     

         To Trading A/c                               SAR 122

Note:-

Sale:- Sale 50 units@SAR 15       SAR 750

Less:- Purchase 30units @SAR 13       SAR 390

Less:- Purchase 20units @SAR 11             SAR 220

Thus, Closing Stock:-10Units @SAR 12.20      SAR 122

Weighted Average Cost - SAR 390+SAR220/30units+20units

                                     SAR610/50units

                                     SAR 12.20

Q4:-

                                         FIFO Method       LIFO Method    Weighted Average Method

Cost of Goods Sold             SAR 590              SAR 610               SAR 598

Gross Margin                      SAR 160              SAR 140               SAR 152

Note:- Cost of Goods Sold:- Inventory at Beginning + Purchases - Closing Stock

where, Purchases = 30 units @ SAR13 + 30units @ SAR 11

                = SAR390+SAR330

                  = SAR 720

FIFO :- 0 + SAR 720 - SAR 130

   :- SAR 590     

LIFO :- 0 + SAR 720 - SAR 110

   :- SAR 610

Weighted Average Method:-0 + SAR 720 - SAR 122

      :- SAR 598

Note :- Gross Margin = Sales + Closing Stock - Inventory at Beginning - Purchases

            FIFO = SAR 750 + SAR 130 - 0 - SAR 720

                    = SAR 160

           LIFO = SAR 750 + SAR 110 - 0 - SAR 720

                    = SAR 140

Weighted Average Method:- SAR 750 + SAR 122 - 0 - SAR 720

                    = SAR 152

Q5:-

Bank Reconciliation:-

Bank Reconciliation is a statement/ document that matches the cash balance on the company's books to the corresponding amount on its bank statement. Any difference between the two figures needs to be examined and, if appropriate,rectified.

Importance :-

It is necessary to prepare bank reconciliation to detect any discrepencies between the accounting records and the bank besides those due to normal timing differences. This differences might be exist due to an error on the part of the company or the bank.