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Unformatted text preview: Chapter 06 - Internal Control and Financial Reporting for Cash and Merchandise Sales Chapter 6 Internal Control and Financial Reporting for Cash and Merchandise Sales ANSWERS TO QUESTIONS 1. Service companies sell services and merchandising companies sell physical products. Merchandising companies sell physical products that are purchased from a supplier and manufacturing companies sell physical products that they made from raw goods that they bought from suppliers. Retail merchandising companies sell directly to consumers and wholesale merchandising companies sell to the retailers rather than end consumers. 2. From the perspective of a CEO or CFO, internal control is a broad concept that includes setting strategic objectives for the company, identifying risks facing the company, hiring good employees and motivating them to achieve the company’s objectives, and providing the resources and information they need to fulfill those objectives. 3. Five common internal control principles are: 1) Establish responsibility . This means assigning each task to only one employee. 2) Segregate duties . Do not make one employee responsible for all parts of a transaction. 3) Restrict access . Do not provide access to assets or information unless it is needed to fulfill assigned responsibilities. 4) Document procedures. Prepare documents to show activities that have occurred. 5) Independently verify. Check others’ work. 4. Assigning each task to only one employee enables a manager to determine who is responsible for any errors or thefts regarding the task. 6-1 Chapter 06 - Internal Control and Financial Reporting for Cash and Merchandise Sales 5. Cash-handling and cash-recording activities should be separated to remove the opportunity for theft of cash and cover-up by altering the records. This separation is accomplished best by assigning the responsibility for cash handling to individuals other than those who have the responsibility for record-keeping. In fact, it usually is desirable that these two functions be performed in different departments of the business. A control commonly called segregation of duties involves assigning responsibilities so that one employee can’t make a mistake or commit a dishonest act without someone else knowing it. 6. Physically locking up valuable assets and electronically securing access to other assets and information are good methods of restricting access. 7. Documentation allows companies to keep track of whether goods have been shipped, customers billed, or cash received. This allows them to determine which transactions have or have not been entered into the accounting system. 8. One way that independent verification can occur is to hire an independent auditor to check the work of employees. Independent verification can also be made part of a person’s job process, such as verifying that the items on a receipt are the items actually received....
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This note was uploaded on 03/18/2012 for the course ACC 111 taught by Professor Sobeiski during the Spring '12 term at Post.
- Spring '12
- Financial Accounting