Question 3
The techniques and policies a company employs to safeguard its assets internally are referred to
as Internal Controls. A strong internal control system is made to protect assets and guarantee the
correctness and dependability of accounting records. Internal control encourages operational
effectiveness and assures adherence to rules and laws.
Money, coins, cheques made payable to the company, money orders, and amounts deposited in
banks and other financial organizations are all examples of cash, in contrast. It is typically
regarded as the most valuable asset and is easily taken if unprotected.
Number 1 Control: Separation of Duties (Custody, Authorization, Recording).
You need to separate the person who is responsible for cash custody (treasurer) and the
one who authorizes for receipts and disbursements.
You also need to separate these two from the one who records the receipts and
disbursements.
Number 2 Control: Bank Reconciliation. This ensures that all transactions were accounted for
accurately. This is done monthly. What we do here is we compare receipts from the books vs.
bank deposits and disbursements from books vs. bank debits.
Number 3 Control: Physical security of cash. This is to ensure that your cash is secured
properly. Examples for this are as follows:
Using a vault with secured password.
Daily deposits of cash to the bank to avoid holding large amount of cash.
Providing proper security in the office.
Only keep a limited sum of money in hand for quick and small purchases.
Number 4 Control: Documentation and Verification
To demonstrate as evidence the amount of money received, all cash register tapes, summaries of
checks received, etc., should be retained.
Cashiers independently verify the cash registers, supervisors count the daily cash receipts, and
the corporate treasurer verifies the cash receipts to the bank deposits.
Question 4
Defining for Ownership of Goods:
The precise moment that ownership of goods moves from the provider to the buyer in a
transaction including a sale is crucial since it has various legal ramifications. This is because, in a
number of uncommon situations, ownership of the goods determines the legal strategy. Another
type of document that purports to demonstrate legal ownership of things or resources is a title. A
title might indicate ownership of a tangible resource, like a car, or an elusive asset or resource,
like a brand name. A title can also attest to the holder's possession of property rights, which
include all assets, whether tangible (of a material character) or intangible.
1. In transit (FOB) Shipping Point
The phrase "FOB shipping point," which stands for "free on board," is used to describe the sale
of products that occurs when the vendor or provider of those goods ships out a product. In
essence, the transaction is complete as soon as the merchandise is picked up by the shipping
company and delivered to the customer. This ultimately means that the buyer is liable for both
the cost of transportation and any additional obligations associated with the commodities being
transported. It is significant to mention that, in this case, the transit inventory is part of the
buyer’s inventory stock and not the seller’s.
Example of FOB Shipping Point
In this illustration, we'll assume that True Fit Fitness, the vendor, has set a price of $625.75 as
the FOB shipping point for the sale of workout equipment. In addition, we'll assume that the item
is labeled for delivery on May 5 specifically. Up to its arrival at the buyer's location on May 10,
the product or piece of equipment can still be in transit. In this instance, the seller would mark
the transaction as a sale on May 5 and track the sale as an increase in account receivable and a
decrease in inventory.
Additionally, the purchaser would also document the acquisition of the equipment, the account
payable, and the expansion of their inventory as of May 5, the date of the initial acquisition. The
products belong to the buyer because the sale was completed at the time of shipping; as a result,
the buyer would be liable for the shipping fees. These expenses could be in addition to the price
of the item.
2. In transit (FOB) Destination
The sale of goods that would happen after a product arrives at a buyer's destination is referred to
as the FOB (free on board) destination point in the shipping industry. In contrast to the FOB
shipping point, the seller may be liable for the expenses of shipment and any associated
obligations for as long as the goods are in transit.
When items are sold FOB destination, the title of ownership cannot be transferred to the buyer
until they arrive at their final destination, which could be a loading dock, mailbox, house, or
office. The seller is legally responsible for the goods during shipping, up until the time they
reach the buyer, and then the title of ownership passes from the seller to the buyer once the
products are at the buyer's location.
Example of FOB Destination
A gym equipment distributor in Europe buys equipment in bulk from a U.S. company called
True Fit Fitness. The equipment's $3,300 purchase price can be contingent upon it arriving at the
buyer's destination, according to a FOB destination agreement that the seller may impose. We
could also surmise that the goods were never delivered to their intended location in Europe.
Since a FOB destination contract was made, the seller may assume complete liability for the lost
items even if the buyer and seller are still under contract.
In this situation, the seller has two options: either reship the things or pay the European company
back for the equipment's cost. Due to the expenditures associated in preparing the goods for sale,
this type of shipping term may have an impact on the buyer's inventory cost. The buyer cannot
immediately outlay the charges because they would then have to be added to their inventory. The
buyer's net profits, not the seller's, may ultimately be impacted by this delay in recording the
expenditures as an expense.
3. On Consignment
Goods obtained on a consignment basis are not part of the consignee's inventory since the
ownership is still in the consigner's end. When the consignor ships goods to the consignee, he
only transfers possession of the goods and not ownership. Goods dispatched on consignments are
all still part of the inventory of the consigner.
Question 1
Number of units in ending inventory:
Ending inventory = Beginning inventory + Purchases made during the month – Units
sold during the month
= 500 units + 1,500 units (800 units + 700 units) – 1,400 units
= 600 units
(1) First in, first out (FIFO) method:
a. Computation of inventory on July 31, 2016 (ending inventory) under FIFO:
b. Computation of cost of goods sold (COGS) for July 31, 2016 under FIFO:
(2) Last in, first out (LIFO) method:
a. Computation of inventory on July 31, 2016 (ending inventory) under LIFO:
b. Computation of cost of goods sold (COGS) for July 31, 2016 under LIFO:
(3) If average cost method is used:
[(500 units × $20) + (800 units × $24) + (700 units × $26)]/500 units + 800 units +
700 units
= $47,400/2,000 units
= $23.70
a. Computation of inventory on July 31, 2016 (closing inventory) under
average cost method:
Ending inventory = 600 units × $23.70
= $14,220
b. Computation of cost of goods sold (COGS) for July 31, 2016 under average
cost method:
Cost of goods sold (COGS) = 1,400 × $23.70
= $33,180
Question 2
(a)
(b)
Bank A/c $167
To Interest Income $167
Debtor a/c (NSF Funds) $700
Bank Service Charges A/c $14
To Bank a/c $714
