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

Solution 1 -

Policies and procedures to minimize for human errors and frauds are : -

1. Segregation of duties - company should not hand over both, custody and records to the same person of the organisation.That means record keeper and custodian of assets should be different people.Example - cashier who creates cash voucher in the system must not have authority to to make payments.Also person who authorize payments must not be the asset keeper.

2. Using prenumbered documents - source documents used in a company should be pre-numbered and in sequence.Also there should be adequate physical security over source document inventory.

3. Establishment of responsibilty - This is about making a person accountable for his/her responsibility.This is about giving limited access to company's assets to few authorized people and then identifying those people.

4. Physical monitoring - Enough number of security things should be employed in the company such as cameras, security guards, alarms, biometric doors, password protected systems and vaults, etc

Solution 2 -

Lets assume the amount of sales be $ 1,000,000.It is mentioned that estimates say 3 % of sales are uncollectible.This uncollectible amount has to be provided by creating a allowance or provision with the name as "Allowance for Doubtful Accounts".

Allowance for doubtful accounts = 3% of $ 1,000,000 = $ 30,000

Since allowance for doubtful accounts is allowance or provision it will be credited (All provisions and liabilities are credited ) and bad debt expense will be debited (as all expenses are debited).

Journal entry  

   Debit Credit

Bad debt expense $ 30,000

Allowance for doubtful debt $ 30,000

Solution 3 -

FIFO Method

Debit Credit

1. Accounts receivable SAR 750

Sales SAR 750

2. Cost of goods sold SAR 590

Inventory SAR 590

Notes- sales = 50 units * SAR 15 = SAR 750 and cost of goods sold under FIFO Method = (30 units * SAR 11 ) + ( 20 units * SAR 13) = SAR 590

LIFO Method

calculation of cost of goods sold under LIFO method = ( 30 units * SAR 13 ) + ( 20 units * SAR 11) = SAR 610

Debit Credit

1. Accounts receivable SAR 750

Sales SAR 750

2. Cost of goods sold SAR 610

Inventory SAR 610

Weighted average method

cost per unit of inventory as per weighted average method = ( 30 units * SAR 11 ) + ( 30 units * SAR 13 ) divided by ( 30 units + 30 units )

Hence cost per unit = SAR 720 / 60 = SAR 12

cost of goods sold as per weighted average method - 50 units * SAR 12 = SAR 600

journal entry

Debit Credit

1. Accounts receivable SAR 750

sales SAR 750

2. Cost of goods sold SAR 600

Inventory SAR 600

Solution 3 B - cost of goods sold for each method has been calculated above while specifying the journal entries for each method. Gross margin for each method is as follows :

Gross margin = sales - cost of goods sold

FIFO method

Gross margin = SAR 750 - SAR 590 = SAR 160 (calcultion of cost of goods sold of SAR 590 has been shown above in journal entry place )

Gross margin (%) = Gross margin amount / sales = SAR 160 / SAR 750 = 21.33 %

LIFO Method

Gross margin = SAR 750 - SAR 610 = SAR 140

Gross margin (% ) = SAR 140 / SAR 750 = 18.67 %

Weighted average method -

Gross margin = SAR 750 - SAR 600 = SAR 150

Gross margin (% ) = SAR 150 / SAR 750 = 20 %

Solution 4

Bank reconciliation statement is statement prepared by the company to reconcile the cash book or financial data specifying deposits, payments, etc with bank statement of bank acounts of company.

Importance of bank reconciliation statement : -

1. It helps in knowing the mismatches between bank transactions recorded by company in its financial records and transactions reflecting in bank statement as per bank records .These mismatches or discrepancies can be due to timing difference between recording of transaction in company and actual happening of it at bank's place.

2. It helps to detect frauds and errors, if any.

3. It help in rectification of errors related to bank accounts which might have took place while passing journal entry or recording it into ledgers. So, it helps in maintaining accuracy.