EX 7-2 Control of inventories
Lincoln Luggage Shop is a small retail establishment located in a large shopping mall.
This shop has implemented the following procedures regarding inventory items:
a. Since the shop carries mostly high-quality, designer luggage, all inventory items are tagged
with a control device that activates an alarm if a tagged item is removed from the store.
b. Since the display area of the store is limited, only a sample of each piece of luggage
is kept on the selling floor. Whenever a customer selects a piece of luggage, the
salesclerk gets the appropriate piece from the store’s stockroom. Since all salesclerks
need access to the stockroom, it is not locked. The stockroom is adjacent to the break
room used by all mall employees.
c. Whenever Lincoln receives a shipment of new inventory, the items are taken directly
to the stockroom. Lincoln’s accountant uses the vendor’s invoice to record the amount
of inventory received.
State whether each of these procedures is appropriate or inappropriate. If it is
inappropriate, state why.
Answer:
a. Appropriate. The inventory tags will protect the inventory from customer theft.
b. Inappropriate. The control of using security measures to protect the inventory is violated if the stockroom is not locked.
c. Inappropriate. Good controls include a receiving report, prepared after all inventory items received have been counted and inspected. Inventory purchased should only be recorded and paid for after reconciling the receiving report, the initial purchase order, and the vendor’s invoice.
This shop has implemented the following procedures regarding inventory items:
a. Since the shop carries mostly high-quality, designer luggage, all inventory items are tagged
with a control device that activates an alarm if a tagged item is removed from the store.
b. Since the display area of the store is limited, only a sample of each piece of luggage
is kept on the selling floor. Whenever a customer selects a piece of luggage, the
salesclerk gets the appropriate piece from the store’s stockroom. Since all salesclerks
need access to the stockroom, it is not locked. The stockroom is adjacent to the break
room used by all mall employees.
c. Whenever Lincoln receives a shipment of new inventory, the items are taken directly
to the stockroom. Lincoln’s accountant uses the vendor’s invoice to record the amount
of inventory received.
State whether each of these procedures is appropriate or inappropriate. If it is
inappropriate, state why.
Answer:
a. Appropriate. The inventory tags will protect the inventory from customer theft.
b. Inappropriate. The control of using security measures to protect the inventory is violated if the stockroom is not locked.
c. Inappropriate. Good controls include a receiving report, prepared after all inventory items received have been counted and inspected. Inventory purchased should only be recorded and paid for after reconciling the receiving report, the initial purchase order, and the vendor’s invoice.
