Question

Q1)Case 4-78
Internal Controls Relating to Inventory

Recall our discussion relating to internal controls and the safeguarding of assets of the organization. Inventory is normally one of the largest balances on the statement of financial position.

Required:

Identify and discuss internal controls relating to inventory.

The input in the box below will not be automatically graded, but may be reviewed and considered by your instructor.

Q2)Exercise 4-52
Operating Cycle

Business activity is often described as being cyclical in nature.

Required:

Conceptual Connection: Describe the cyclical nature of business activity.

The input in the box below will not be automatically graded, but may be reviewed and considered by your instructor.

Answer 1

1. Internal controls relating to inventory:

Inventory is considered to be a major concern for a business. Hence maintaining its control is considered to be a challenging task because they tend to get lost or stolen.

Internal controls are essential procedures for managing inventory & also accounting for revenues & expenses.

• Tracking: this is considered to be the most basic step in inventory control. Many businesses rely on electronic control where they use bar codes & RFID tags to keep close track of the items. All inventory locations must be numbered & inventory items must be identified with those numbers.
• Security: the inventory must be kept in central location in order to be secure. Having locks & security codes can ensure only trusted personnel access the inventory. There must be periodic count of inventory to identify any discrepancies.
• Review: the company needs to maintain up to date inventory. The items must not be allowed to sit too long in the shelves. They can be sold even at a loss rather than sitting idle. The storage space occupied by outdated inventory is considered to be a loss for the company.
• Audits: periodic audit of bill of materials, scrap inventory can offset inventory location errors misallocation of raw materials, over purchasing etc.

1. Cyclical nature of business activity:

• The financing & operating cycle of the business starts when the business receives its financial resources from its owners & creditors.
• The resources would be used to buy various assets including goods that would be held in inventory until sold to customers.
• When a business sells goods on credit to its customers, creating accounts receivable, cash is not replenished until the receivables are collected which completes the operating cycle.
• Dividends are paid to stockholders at regular intervals & interest to creditors which completes the financing cycle.
• The amount is ultimately repaid to the stockholders & creditors. But in case of stockholders, only on dissolution of the business.