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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Internal Control for Sales

Johnson Tires has three stores. Each store manager is paid a salary plus a bonus on the sales made by his or her store. On January 5, 2020, Kevin Sampson, manager of one of the stores, resigned. Kevin’s store had doubled its expected December 2019 sales, producing a bonus for Kevin of $7,000 in December alone. Jason Jones, an assistant manager at another store, was assigned as manager of Kevin’s store. Upon examination of the store’s accounting records, Jason reports that the store’s records indicated sales returns and allowances of $124,000 in the first 4 days of January 2020, an amount equal to about half of December 2019 sales.

Required:

1. CONCEPTUAL CONNECTION Explain what the large amount of sales returns and allowances suggest that Kevin might have done.

2. CONCEPTUAL CONNECTION Determine how Johnson could protect itself from a manager who behaved as Kevin likely did.

To determine

(a)

Internal Control procedures:

The internal control procedures are the one which is necessary for controlling the sales transaction and it helps in detecting the defects or mistakes in the recording of the sales. It helps in measuring and obtaining the goals of business with effectiveness and efficiency.

To calculate:

The indication from large returns and allowances of sales.

Explanation

The sale returns and the allowances of $1,24,000 in the month in which the manager resigned indicates that the manager Kevin records the transactions of sales in a fraudulent manner in the December month which makes the company to incentive him with $

To determine

(b)

Internal Control procedures:

The internal control procedures are the one which is necessary for controlling the sales transaction and it helps in detecting the defects or mistakes in the recording of the sales. It helps in measuring and obtaining the goals of business with effectiveness and efficiency.

To calculate:

The procedure to protect the company Johnson Tires from the manager like Kevin.

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