Question

You are the financial officer of Music Plus, a retailer that sells goods for home entertainment needs. The business owner recently reviewed the annual financial statements that you prepared. He sent you an email stating that he thinks he overstated net income. He explains that although this has invested a great deal of security systems, he is sure that shoplifting and other forms of inventory shrinkage (damages, loss, etc.) have occurred, but he does not see any deduction for shrinkage on the income statement. The store uses a perpetual inventory system.

Required: Prepare a brief memo that responds to the owner's concerns.

2. Arrange an interview with the manager of a local retail store. Explain that you are a student studying merchandising activities and the accounting for sales returns and allowances. Ask the manager what the store policy is regarding returns. Also, find out if sales allowance are negotiated with customers before given. Inquire whether management perceives that customers are abusing return policies and what actions management takes to counter the potential abuses.

Answer 1

Answer to Question No. 1: MEMO Responding to Owner's concerns

MEMO

MUSIC PLUS

To: Music Plus Store Owner

From: Financial Officer of Music Plus

Date: 15/02/2019

Re: Clarification regarding deduction for shrinkage on the income statement of Music Plus.

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With reference to the subject above, it is submitted that since we maintain our inventory by following Perpetual Inventory System i.e. by making an entry into the computer system on Online Real Time Basis, we not only update the financial statements (i.e. the income statement), but also update the inventory in the store over time. Also, following processes are followed for ensuring that inventory in the store is maintained adequately:

1. Physical Inventory verification is done in every 15 days of time.

2. Any shortage/ damage/ loss/ theft caused comes into notice when the above verification is done.

As far as Income statement is concerned, any shortage of material in the store gets recorded every time when the stock is updated into the system. To refer the deduction on account of shoplifting, damage/ loss of material from store, it is kindly requested to refer the Physical verification records (for the purpose of ensuring the deduction) and inventory records maintained in the computer system on the date on which physical verification is done. To ensure that the deduction has impacted the income statement, please refer the inventory valuation report generated from computer system and match it with the income statement. Any type of shortage in material due to any reason, the shortage gets booked under the Goods Damaged Account appearing in the income statement.

In case of any further queries regarding the income statement, please contact the below.

Regards

FInancial Officer

(Music Plus)

Answer to Question No. 2: Arranging an Interview with Local Retail store

MEMO

LOCAL RETAIL STORE

To: Retail Store Manager

From: Student of ABC University

Date: 15/02/2019

Re: To arrange an interview with the manager of the Local Retail Store.

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It is submitted that i am a student of ABC University and am studying about merchandising activities. It is to inform you that i want inform you that i want to hold an interview for the following purposes, as it is a part of my University project and moreover would help in my studies:

1. What are the main products do you deal in?

2. How do you advertise the products so as to increase you sales volume?

3. What are your policies in case of return done by the customer?

4. Do you accept any products which were sold by you last month?

5. If yes, then how do you account for the same?  

6. Whether any negotiations are held before selling your products to the customer?

7. Whether the customer abuses the return policies made by you? How do you counter the same?

It is kindly requested to accept my request of holding an interview. It will br very nice on your part.

Regards

Richards

(Student from ABC University)