3. (TCO 5) Internal Control Procedures are required to safeguard company assets

Question

3. (TCO 5) Internal Control Procedures are required to safeguard company assets and to ensure ethical operation of the business. (1) Explain how smart hiring practices can satisfy the purpose of internal control (10 points) and (2) provide an example of how this control could be implemented

4. (TCO 4) Inventory valuation methods determine the cost of goods sold and the inventory balance. (1) Explain how the Last in First out (LIFO) method is applied (10 points) and (2) provide an example of the impact that this method of inventory valuation will have on Gross Profit.

5. (TCO 1) To evaluate the financial operation and health of a business ratio analysis is used. (1) Provide the formula for the Current Ratio and explain how it is computed (10 points) and (2) provide an example of how this ratio can be used in decision-making in business. (10 points)

Explanation / Answer

3)

Comparisons and compliance monitoring can satisfy the purpose of internal control by notifying the proper channels in the company if there is an issue. You could implement this control by having an independent audit function audit compliance.

Example Facebook used this control in 2008   

4)

LIFO is applied by expensing inventory in the order it was added. It has nothing to do with the physical flow of inventory. This creates what's known as "lifo layers" of inventory that is undervalued and that must be reoved. LIFO will create generally a higher COGS than other methods of inventory accounting.

5)

Average Receivables/net income is the receivables turnover. It is computed by taking the beginning and ending AR value and dividing that by 2 to get the average receivables then taking that amount and dividing it by the net income. This will show you how many times receivables are collected during the year. This information can be used to assess the credit policy of the company.

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