Unit 4

The purpose of Unit 4 is to apply basic financial and accounting data to the control of business activities.

Inventory/Cost of Merchandise Sold

Internal Control

Notes Payable

To calculate Cost of Goods Sold, you can use the following formula:

Beginning Inventory+Net Purchases=Cost of Merchandise Available for Sale-Ending Inventory=Cost of Merchandise Sold

When merchandise is sold, the revenue is reported as sales, and its cost is recognized as an expense called cost of merchandise sold.

The cost of merchandise sold is subtracted from sales to arrive at gross profit. It is the profit before deducting operating expenses.

GrossProfit(continued)

The cost of merchandise sold is the cost of the merchandise sold to customers. Merchandise costs consist of all the costs of acquiring the merchandise and readying it for sale, such as purchase and freight costs.

A single figure for cost of merchandise sold is shown on the multiple-step income statement.

Merchandise on hand (not sold) at the end of an accounting period is called merchandise inventory. Merchandise inventory is reported on the balance sheet.

Merchandising businesses may experience some loss of inventory due to shoplifting, employee theft, obsolescence or errors in recording or counting inventory.

At the end of the accounting period, inventory shrinkage is recorded by the following adjusting entry:

Sarbanes-Oxley requires companies to maintain strong and effective internal controls over the recording of transactions and the preparing of financial statements.

Internal control is broadly defined as the procedures and processes used by a company to:

◦ Safeguard its assets.◦ Process information accurately.◦ Ensure compliance with laws and

regulations.

Control procedures provide reasonable assurance that business goals will be achieved. Control procedures include:◦ Competent personnel, rotating duties, and

mandatory vacations◦ Separating responsibilities for related

operations◦ Separating operations, custody of assets,

and accounting◦ Proofs and security measures

An installment note is a debt that requires the borrower to make equal periodic payments to the lender for the term of the note. Unlike bonds, a note payment includes the following:◦Payment of a portion of the amount initially

borrowed, called the principal◦Payment of interest on the outstanding

balance

LO 4LO 4

Address all six of the Red Flags and apply them

to the task given to you to see if you can

improve the bottom line. Tell why each red flag

presents a potential problem for the gift shop

and tell how the red flag could be causing the

gift shop to loose money. Also propose some

measures you would take to help the gift shop

improve net income. Your answer should be at

least 100 words per Red Flag.

Calculate each red flag’s impact on either

revenues or expenses

Calculate each red flag’s impact on

profitability

Show a potential remedy or solution to

address each red flag

http://www.accountingaisle.com/knowledge/accounting-control.php

http://www.moneyinstructor.com/doc/internalcontrol.asp

http://www.ehow.com/info_7765445_red-flags-auditing-financial-statements.html

http://eclkc.ohs.acf.hhs.gov/hslc/tta-system/operations/Fiscal/Financial%20Management/Audits%20and%20Auditing%20Requirements/Howdoweinterpr.htm