Inventory Systems Overview

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Questions and Answers

What is a primary consequence of failing to implement effective fraud prevention measures?

Improved employee morale

Enhanced customer trust

Increased operational efficiency

Significant losses and potential legal consequences (correct)

Why is it critical to safeguard assets and records in an organization?

To comply with technological advancements

To allow for easier access to financial information

To prevent resource wastage and ensure accuracy (correct)

To increase employee productivity

What role does accurate and reliable information play in a business?

It supports transparency and ethical standards (correct)

It promotes internal competition among departments

It facilitates uninformed decision-making

It reduces the cost of operations

Which principle of internal control emphasizes the importance of an organization's attitude and behavior?

Control environment Signup and view all the answers

What is the main distinction between preventative and detective controls within an internal control system?

Preventative controls notify of issues before they occur, detective controls are reactive Signup and view all the answers

During which process do businesses identify and evaluate various risks they may encounter?

Risk assessment process Signup and view all the answers

What is a crucial element in the control procedures of internal control systems?

Effective implementation of management's instructions Signup and view all the answers

What happens during times of financial insolvency that is critical for businesses?

It is important for businesses to make ethical decisions Signup and view all the answers

Which type of business is likely to utilize a periodic inventory system?

Stores selling bulk candy Signup and view all the answers

What is the role of the 'purchases' account in the periodic inventory system?

It serves as a temporary expense account for new items purchased. Signup and view all the answers

How is the cost of merchandise determined at the end of a period in a periodic inventory system?

Through detailed records of each item's original cost. Signup and view all the answers

What is a major drawback of using a periodic inventory system?

Tracking items in real-time is impractical. Signup and view all the answers

In the perpetual inventory system, what does continuous inventory tracking provide?

Real-time records of merchandise inventory. Signup and view all the answers

Why is it still essential for companies using perpetual systems to perform physical inventory counts?

To ensure their records align with the physical stock. Signup and view all the answers

What technology is typically utilized to support continuous inventory tracking?

Bar codes. Signup and view all the answers

What does accurate COGS management depend on in the context of inventory systems?

Actual sales of items based on the sold items' costs. Signup and view all the answers

What is a primary advantage of using POS machines during cash transactions?

They display transaction amounts publicly for transparency. Signup and view all the answers

What is the primary purpose of segregating duties in cash payment processes?

To ensure that one individual does not have control over all aspects of cash management. Signup and view all the answers

Why is it important for cashiers to issue receipts for debit and credit card sales?

To provide customers with a record of their transactions. Signup and view all the answers

Which method of payment is generally considered stronger in terms of internal control over cash disbursements?

Cheques or Electronic Funds Transfer (EFT) Signup and view all the answers

What is a common practice for handling incoming cheques by mail in a business?

Two individuals are involved to ensure accuracy and accountability. Signup and view all the answers

What type of technology allows for the electronic exchange of money between accounts?

Electronic Funds Transfer (EFT) Signup and view all the answers

Why are pre-numbered cheques utilized in business transactions?

To prevent unauthorized duplicate payments. Signup and view all the answers

Which of the following is NOT a reason bonded employees are used for cash management?

They can approve any financial transaction without restrictions. Signup and view all the answers

What is the primary effect of revenue expenditures?

It is exhausted within the current accounting year. Signup and view all the answers

Which of the following best describes capital expenditures?

They result in the acquisition of new assets. Signup and view all the answers

How are revenue expenses treated in financial statements?

They are deducted from the firm's earned income. Signup and view all the answers

Which of the following is an example of a revenue expenditure?

Repairing existing plant equipment. Signup and view all the answers

What characterizes capital expenditures in comparison to revenue expenditures?

They are tied to the acquisition of long-term physical assets. Signup and view all the answers

What is a key characteristic of revenue expenditures?

They are intended to maintain day-to-day operations. Signup and view all the answers

In what way is capital expenditure reflected in financial statements?

A portion is shown as depreciation in the profit and loss account. Signup and view all the answers

Which of the following statements is true regarding the effects of capital expenditures?

They gradually reduce in value over time. Signup and view all the answers

What is an important consideration when choosing an amortization method for an asset?

The method must reflect asset usage and revenue generation. Signup and view all the answers

Which amortization method is most suitable for assets that generate revenue evenly over time?

Straight Line Method Signup and view all the answers

What characterizes the Unit-of-production (UOP) Method of amortization?

Depreciation varies based on actual usage. Signup and view all the answers

Why is the Double Declining (DDB) Method favored for certain assets?

It maximizes depreciation in the asset's early years. Signup and view all the answers

What effect does amortization have on a company's balance sheet?

It reduces the value of intangible assets. Signup and view all the answers

How does the Canada Revenue Agency define the preferred depreciation method for tax returns?

Businesses must use the single diminishing-balance method. Signup and view all the answers

When is the cost of an intangible asset recorded on the balance sheet?

When purchased from another party with a finite life. Signup and view all the answers

What is a common characteristic of assets suitable for the Unit-of-production (UOP) Method?

They wear out due to physical use. Signup and view all the answers

Study Notes

Periodic Inventory System

Businesses utilizing this system sell large quantities of relatively low-priced merchandise, such as bulk candy stores and hardware stores.
Items purchased are recorded in a temporary expense account named "purchases."
Revenue from sales is recorded, but the cost of goods sold (COGS) is not immediately recorded.
A physical count of inventory is conducted at the end of the period to determine the cost of the merchandise in stock by referring to records detailing each item's original cost.
Periodic systems were historically used due to the impracticality of real-time tracking for low-priced items.

Modern Inventory Practices

Periodic physical inventory counts remain important to reconcile recorded inventory with physical stock on hand.
Adjustments are made to account for spoilage, theft, obsolescence, or miscalculations.

Perpetual Inventory System

Offers ongoing tracking of inventory levels and costs, providing real-time data.
Detailed records are kept to continuously track the quantity and cost of inventory available, purchased, and sold.
Companies should still perform physical inventory counts to verify records and adjust for discrepancies.

Perpetual Inventory System: Continuous Inventory Tracking

Maintains a real-time record of merchandise inventory.
Utilizes technology like barcodes to track purchases, availability, and sales daily.
Tracks the net cost of merchandise purchased and updates the inventory account accordingly.

Perpetual Inventory System: COGS Management

Sold item = Cost of Goods (COG) in inventory → COG accounts.
Ensures accurate calculation of COGS based on actual sales.
Uses fraud prevention measures and vigilant oversight within the organization to prevent significant losses and potential legal consequences.

Internal Control

A system of internal control is essential for safeguarding assets, providing accurate information, and ensuring compliance.
It should be preventative and detective, with preventative measures being more important to prevent issues before they arise.

Five Internal Control Principles (Important for Tests and Exams)

Control Environment:
- Influenced by management's attitude and behavior.
- Organizational structure defines roles and responsibilities, creating accountability.
- Policies regarding hiring, training, evaluation, compensation, and promotion ensure ethical employee conduct.
Risk Assessment Process:
- Businesses identify and evaluate various risks they encounter.
- Companies are exposed to the risk of financial insolvency, requiring ethical decisions during such times.
Control Procedures:
- Guidelines ensure that management's instructions are effectively implemented.
- Competent personnel are hired, duties are rotated, and mandatory vacations are taken.
Information and Communication:
- Relevant information is communicated effectively within the organization, and employees are aware of their responsibilities.
- This ensures everyone understands their role and adheres to internal controls.
Monitoring Activities:
- Systems are in place to monitor the effectiveness of internal controls over time.
- This involves regular reviews, audits, and adjustments based on feedback and changing circumstances.

Internal Control Over Cash Receipts

Over the Counter Cash Receipts:
- POS machines display transaction amounts publicly, ensuring transparency.
- Cash registers lock in transaction records, preventing unauthorized changes and integrating transactions into accounting records.
- Cashiers issue receipts for debit and credit card sales to match recorded payment amounts.
Cash Receipts by Mail:
- Two individuals open mail and receive cheques.
- The person opening the cheque records the details.
- Another person compares the bank's deposit record with accounting records.
Electronic Funds Transfer:
- Electronic exchange or transfer of money between accounts.
- Can occur within a single financial institution or across multiple institutions.

Internal Control Over Cash Disbursements

Control over cash payments is typically stronger when made via cheque or Electronic Funds Transfer (EFT) rather than physical cash.

Control Activities Over Cash Payments

Signing Responsibility: Only authorized personnel can sign cheques or approve electronic payments.
Human Resources: Bonded employees manage cash, oversee vacation schedules, and undergo background checks.
Duty Segregation: Different individuals handle approval and payment processes, ensuring those signing cheques do not record payments.
Physical and IT Controls: Cash is secured in safes, and access to blank cheques and signing machines is restricted. Electronic payments are preferred over cash for business-to-business transactions.
Document Procedures: Pre-numbered cheques are used for business transactions, ensuring each cheque corresponds to an approved invoice.

Capital Expenditures vs. Revenue (Operating) Expenditures

Capital Expenditures:
- Long-term effect, benefits extend beyond the current accounting year.
- Asset is acquired or its value increased through this expenditure.
- Tangible object with physical existence.
- Improves the company's position and is not a recurring expense.
- A portion of this expenditure may be shown as depreciation in the financial statements.
Revenue Expenditures:
- Temporary effect, exhausted within the current accounting year.
- Does not acquire or increase the value of any asset.
- Not a tangible object.
- Maintains the company's operations and is a recurring expense.
- The whole amount of this expenditure is shown in the financial statements.

Amortization Methods

The chosen depreciation method should align an asset's expense with the revenue it generates.
The company must disclose the chosen method in its annual reports.
Straight Line Method: Used for assets generating revenue evenly over time, like major appliances or office furniture.
Unit-of-Production (UOP) Method: Used for assets that wear out due to physical use, not obsolescence. Depreciation varies based on actual usage and is recorded only when the asset is used.
Double Declining Balance (DDB) Method: Used for assets that generate higher revenue in their initial years.

Amortizing Intangible Assets

Amortization reduces the value of intangible assets and decreases stockholders' equity on the balance sheet.
The cost of an intangible asset with a finite life is recorded on the balance sheet when purchased or developed.
The asset's cost is spread out as an expense over successive accounting periods.

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Description

Explore the differences between periodic and perpetual inventory systems. This quiz highlights the methods used for inventory tracking, including how businesses maintain and reconcile their stock, with an emphasis on physical counts and adjustments. Test your understanding of these essential practices in inventory management.