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Internal Controls Ramona’s Clothing is a retail store specializing in women’s clothing. The store has established a liberal return policy for the holiday season in order to encourage gift purchases. Any item purchased during November and December may be returned through January 31, with a receipt, for cash or exchange. If the customer does not have a receipt, cash will still be refunded for any item under $75. If the item is more than $75, a check is mailed to the customer. Whenever an item is returned, a store clerk completes a return slip, which the customer signs. The return slip is placed in a special box. The store manager visits the return counter approximately once every two hours to authorize the return slips. Clerks are instructed to place the returned merchandise on the proper rack on the selling floor as soon as possible. This year, returns at Ramona’s have reached an all-time high. There are a large number of returns under $75 without receipts. A. How can sales clerks employed at Ramona’s Clothing use the store’s return policy to steal money from the cash register? B. What internal control weaknesses do you see in the return policy that make cash thefts easier? C. Would issuing a store credit in place of a cash refund for all merchandise returned without a receipt reduce the possibility of theft? List some advantages and disadvantages of issuing a store credit in place of a cash refund. D. Assume that Ramona’s Clothing is committed to the current policy of issuing cash refunds without a receipt. What changes could be made in the store’s procedures regarding customer refunds in order to improve internal control?

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Corporate Financial Accounting

14th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781305653535

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Section
BuyFindarrow_forward

Corporate Financial Accounting

14th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781305653535
Chapter 7, Problem 7.3EX
Textbook Problem
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Internal Controls

Ramona’s Clothing is a retail store specializing in women’s clothing. The store has established a liberal return policy for the holiday season in order to encourage gift purchases. Any item purchased during November and December may be returned through January 31, with a receipt, for cash or exchange. If the customer does not have a receipt, cash will still be refunded for any item under $75. If the item is more than $75, a check is mailed to the customer.

Whenever an item is returned, a store clerk completes a return slip, which the customer signs. The return slip is placed in a special box. The store manager visits the return counter approximately once every two hours to authorize the return slips. Clerks are instructed to place the returned merchandise on the proper rack on the selling floor as soon as possible.

This year, returns at Ramona’s have reached an all-time high. There are a large number of returns under $75 without receipts.

A. How can sales clerks employed at Ramona’s Clothing use the store’s return policy to steal money from the cash register?

B. What internal control weaknesses do you see in the return policy that make cash thefts easier?

C. Would issuing a store credit in place of a cash refund for all merchandise returned without a receipt reduce the possibility of theft? List some advantages and disadvantages of issuing a store credit in place of a cash refund.

D. Assume that Ramona’s Clothing is committed to the current policy of issuing cash refunds without a receipt. What changes could be made in the store’s procedures regarding customer refunds in order to improve internal control?

To determine

Internal Control: Internal control refers to the policies, and plans of the business organization along with other measures with a view to safeguard its assets, encourage the employees to adhere to the plans, to improve on the operational efficiency, and to ensure correct and reliable accounting information. Internal control is a process which ensures continuous reliability of accomplishment of a company’s objectives, related to operations, financial reporting, and in conformity with laws and regulations.

The following are the some of the internal control procedures:

  • Competent personnel, rotating duties, and mandatory vacations
  • Separating responsibilities for related operations
  • Separating operations, custody of assets, and accounting
  • Proofs and security measures

To state: Whether F’s handling of internal control situations are acceptable or not.

Explanation of Solution

  1. a. The sales department clerk will steal the money by writing phony refunds and pocketing of cash that are being refunded to the fictitious customers.
  2. b. R Clothing faces inadequate separation of responsibilities. Here, the clerks issue refund and makes restock of all the merchandise. Here, proofs lack and all the merchandise are being restocked. Supervisor authorizes returns two hours after issuing. Thus, there are chances for lack of proofs and security measures.
  3. c. A store credit for any return on merchandise without any receipt. This reduces the possibility of cash theft. Here, clerk issues phony stores credit. Here, sales clerk uses very less store credits inorder to make purchase of merchandise by the management being mistrustful. Issue of store credit for returns without a receipt is an advantage and thus, it reduces stealing of cash. The store loses less of revenue when customer choose other store merchandise instead of getting refund of cash. The overall level of returns /exchanges reduces and thus, customers don’t return acceptable gifts...

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Chapter 7 Solutions

Corporate Financial Accounting
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Ch. 7 - Internal control elements Identify each of the...Ch. 7 - Items on companys bank statement The following...Ch. 7 - Bank reconciliation The following data were...Ch. 7 - Petty cash fund Prepare journal entries for each...Ch. 7 - Sarbanes-Oxley internal control report Using...Ch. 7 - Internal Controls Faith Cassen has recently been...Ch. 7 - Internal Controls Ramonas Clothing is a retail...Ch. 7 - Internal Controls for bank lending Pacific Bank...Ch. 7 - Internal Controls One of the largest losses in...Ch. 7 - Internal controls An employee of JHT Holdings,...Ch. 7 - Internal controls All-Around Sound Co. discovered...Ch. 7 - Financial statement fraud A former chairman, CFO,...Ch. 7 - Internal control of cash receipts The procedures...Ch. 7 - Internal control of cash receipts Sergio Flores...Ch. 7 - Internal control of cash receipts The mailroom...Ch. 7 - Entry for cash sales; cash short The actual cash...Ch. 7 - Entry for cash sales; cash over The actual cash...Ch. 7 - Internal control of cash payments Abbe Co. is a...Ch. 7 - Internal control of cash payments Paragon Tech...Ch. 7 - Bank reconciliation Identify each of the following...Ch. 7 - Entries based on bank reconciliation Which of the...Ch. 7 - Bank reconciliation The following data were...Ch. 7 - Entries for bank reconciliation Using the data...Ch. 7 - Entries for note collected by bank Accompanying a...Ch. 7 - Bank reconciliation An accounting clerk for...Ch. 7 - Bank reconciliation The following bank...Ch. 7 - Using bank reconciliation to determine cash...Ch. 7 - Petty cash fund entries Journalize the entries to...Ch. 7 - Evaluating internal control of cash T he following...Ch. 7 - Transactions for petty cash, cash short and over...Ch. 7 - Bank reconciliation and entries The cash account...Ch. 7 - Bank reconciliation and entries The cash account...Ch. 7 - Bank reconciliation and entries Beeler Furniture...Ch. 7 - Evaluating internal control of cash The following...Ch. 7 - Transactions for petty cash, cash short and over...Ch. 7 - Bank reconciliation and entries The cash account...Ch. 7 - Bank reconciliation and entries The cash account...Ch. 7 - Bank reconciliation and entries Sunshine Interiors...Ch. 7 - Continuing Company AnalysisAmazon: Days cash on...Ch. 7 - Apache: Days cash on hand Apache Corporation is an...Ch. 7 - Krispy Kreme and Dunkin: Days cash on hand Krispy...Ch. 7 - Nike, lululemon, and Under Armour: Days cash on...Ch. 7 - Ethics in Action Tehra Dactyl is an accountant for...Ch. 7 - Communication Wholesome and Happy Foods is a...

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