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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Internal controls

Ramona’s Clod1ing 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 Clothing have reached an all-time high. There are a large number of returns under $75 without receipts.

  1. a. How can salesclerks employed at Ramona’s Clothing use the store’s return policy to steal money from the cash register?
  2. b. What internal control weaknesses do you see in the return policy that make cash thefts easier?
  3. 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.
  4. 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 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 R’s handling of internal control situations are acceptable or not.

Explanation

  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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