Warr22e_IM_TM_Ch07 - Transparency Master 7-1 INTERNAL...

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Unformatted text preview: Transparency Master 7-1 INTERNAL CONTROLS— INVENTORY The City of Milford Parks and Recreation operates three com- munity swimming pools. Each pool has a concession stand that sells candy. Each concession stand is staffed with two workers. To be eligible for volume discounts, the Parks and Recreation de- partment orders the candy for all three pools. Sandy Wells is re- sponsible for ordering the concession stand goodies. Sandy uses a locked closet down the hall from her office at the Parks and Recreation headquarters to store the candy. She checks the closet periodically, and, when supplies seem low, she orders more. Whenever a concession stand needs to restock inventory, a work- er goes to the Parks and Recreation headquarters to get the needed candy. Because Sandy knows all of the concession work- ers, she usually just hands the worker the key to the candy closet so the worker can get whatever is needed. Sandy has attached a chart to the closet door to keep track of candy withdrawals. On that chart, each worker records the number of boxes of candy that he or she is taking and the pool it is going to. By the end of the summer, Sandy becomes worried that someone else has a key to the candy closet. The candy seems to be disap- pearing quicker than it did at the beginning of the summer. For the last month or so, she hasn't found time to compare the with- drawals on her chart with candy purchases, but something just doesn't seem right. Requirement: Review the candy inventory procedures and sug- gest any modifications that might be needed. Transparency Master 7-2 ITEMS INCLUDED IN INVENTORY All inventory on hand when the physical in- ventory is taken + Merchandise in transit that was purchased FOB Shipping Point + Merchandise in transit that was sold FOB Destination + Merchandise on consignment in other loca- tions that is still owned by the company tak- ing the inventory count – Merchandise included in the inventory on hand that belongs to another company but is being held on consignment Inventory shown on the financial statements Transparency Master 7-3 EFFECT OF ERRORS IN REPORTING INVENTORY If ending inventory is reported inaccurately, the following financial statement data are in- correct. On the income statement: 1. Cost of merchandise sold 2. Gross profit 3. Net income On the balance sheet: 1. Ending inventory 2. Total current assets 3. Total assets 4. Owner's capital (due to the incor- rect net income being added to the capital account) Transparency Master 7-4 INVENTORY ERRORS Condensed financial statements for Jackson Company are shown below: Income Statement: Sales................................................................... $37,000 Cost of merchandise sold................................ 19,000 Gross profit on sales........................................ $18,000 Operating expenses......................................... 9,000 Net income......................................................... $ 9,000 Balance Sheet: Assets: Current assets............................................Current assets....
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This note was uploaded on 04/20/2010 for the course BUSINESS Accounting taught by Professor Ebiohuche during the Spring '10 term at DeVry Manhattan.

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Warr22e_IM_TM_Ch07 - Transparency Master 7-1 INTERNAL...

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