LE 2

Question 1

Principles of Internal Control

Answer 1

1. Establishment of Authority
2. Segregation of Duties
3. Document procedures.
4. Physical control
5. Human resource control

Question 2

Limitations of internal control

Answer 2

1. Human aspect
2. size of business

Question 3

Entry to establish a petty cash account

Answer 3

DR Petty cash
CR Cash

Question 4

Entry to replenish account (established with $50, petty cash receipts presented adding up to expenses spent $39, end of the month the balance remaining is $12)

Answer 4

DR Expenses 39
CR Cash over and short 1
CR Cash 38

Question 5

gross profit ratio formula

Answer 5

net sales - cogs / net sales

Question 6

inventory turnover formula

Answer 6

COGS / Average inventory
avg inventory = (beg. inv + clos. inv)/2

(measures amt of times inventory is sold during the period, the more the better)

Question 7

days in inventory

Answer 7

days in year (365) / inventory turnover

(how many days worth of inventory you have before you run out of stock)

Question 8

COGS formula

Answer 8

net sales - gross profit

Question 9

Estimating inventory steps Gross profit method

Answer 9

GP Method:
1. net sales - estimated gp = COGS
2. COGAS - COGS = Cost of ending inventory

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Question 10

How to calculate COGS through income statement

Answer 10

Opening inventory + net purchases + freight in - closing inventory

Question 11

Steps of bank reconcilliation

Answer 11

Reconciling items per bank:
1. add: Deposits in transit
2. less: Outstanding checks
3. bank errors

Reconciling items per book:
1. add: Other deposits (like eft)
2. less: Other payments (like charges and nsf check)
3. book errors

Question 12

Is FIFO or Average cost more expensive to maintain during inflationary period?

Answer 12

FIFO (First-In, First-Out):
Assumes the earliest (usually cheaper) inventory costs are sold first.
Higher COGS in years with price decreases: If prices decrease throughout the year, FIFO will lead to higher COGS since the earliest (higher-priced) items are sold first.

Average Cost:
COGS is based on an average of all inventory costs throughout the period, smoothing out price fluctuations.
Higher COGS when prices are rising: If prices rise, the Average Cost method will generally lead to higher COGS than FIFO, as it averages both lower and higher costs, often resulting in a figure higher than FIFO’s.