Marco facilities are located in a single warehouse and office building adjacent to a railroad siding and
Question:
Marco facilities are located in a single warehouse and office building adjacent to a railroad siding and a major highway. Warehouse personnel simply unload rail deliveries with the forklifts and flat trucks used to handle inventory inside the warehouse. Customers pickup all purchases in this location: thus, the company avoids maintenance expenses on its own vehicles, which would be incurred if Marco delivered to its customers. However, Marco has an arrangement with a trucking business next door to deliver goods to some customers on FOB shipping point basis. Sales are final when appliances leave the Marco loading dock for customer pickup orders and deliveries.
Marco is a privately held corporation incorporated in the same state in which its home office is located. It operates in its home state and three surrounding states. Stockholders include approximately 300 individuals and businesses. Currently, Marco top management holds over 50% of the stock. The Board of Directors wants to expand operations and is anticipating going public with an initial public offering (IPO) within the next year. Executing an IPO will require the Board to disclose historical financial information.
Marco currently provides audited financial statements to banks when requesting loans and, therefore, has had audits for each of the last five years from the same accounting firm. Because Marco is small, their local bank insisted on adding restrictive covenants to the firm's last loan agreement. These covenants include a provision that calls the loan immediately and in full, if Marco’s current and debt to equity ratios fall below specified levels. The covenants also set limits on the dollar amount of dividends the firm can pay.
To help stimulate sales and operating efficiency, Marco recently instituted a profit-sharing bonus agreement for its employees, including top management. Management negotiated the plan because employees have gone without raises for several years. The agreement bases employee bonuses on unaudited net income for the past year because of the need to adjust employees' salaries at the beginning of each year. However, management will adjust future bonuses for any audit adjustments made after the bonuses are set based on unaudited data. The firm sets a bonus pool based on five percent of operating income, which limits the total available to pay bonuses. Management bases individual bonuses on an employee's position, length of service, and certain specific negotiated terms with individual officers.
Marco’s Board of Directors includes its current president, secretary/treasurer, and controller. It also includes two shareholders, who each hold about a 5% interest in the firm, and one retired CPA, Montana Green. While there is no audit committee, the board as a whole takes an active role in hiring and monitoring the firm's outside auditor. It also relies on the leadership of Mr. Washington to determine the scope of the audit engagement. Mr. Washington was recruited to the Board last year because the prior president and controller retired during the year and, therefore, the current president and controller have been in their positions for less than one year. Management promoted the new controller from within, but they recruited the new president from outside the firm.
Marco selected a new auditor for this year's audit engagement because their previous auditor had been with the company for five years. The Board felt it was time to get new insights into their operations. In addition, they wanted to hire a larger auditing firm with a more established reputation to support their anticipated IPO.
Sales and Collection Processing
Sales Requisitions
Marco uses the PC network to manage inventory, sales requisitions, and sales orders. Sales clerks who can read the perpetual inventory records via their PCs take customer orders. Most orders originate from phone requests, but a few arrive on a walk-in basis and some occasionally come in the mail. Usually, building contractors or their representatives call to get current price quotes and find out if specific appliances are in stock. When goods are available and the price is satisfactory, a sales clerk originates a sales requisition and the process of approving and filling it begins if customers plan to pick up their order the same day. Orders received after 4:00 PM cannot be delivered the same day; buyers are so informed. In addition, sales clerks can immediately inform a caller about out-of-stock items and establish a back order for the customer. Back orders are processed early each day, but before they are filled, the buyers are called back to confirm that the orders are still valid.
To originate a sales requisition, the sales clerk types the appropriate information into his or her PC: customer number, the product(s) identification, and order quantity. The computer system enters the customer's name and address, and the date of the requisition automatically on all requisitions as originated. The computer keeps track of all customer requisition and order information and prints a requisition form with today's date on it for transmittal to the controller, Dakota Amalia.
Sales clerks cannot set up new customers in Marco’s computer system. If a new customer calls to place an order, they are referred to Ms. Amalia, the controller, who is the only person authorized to set up new customers in the system.
The computer updates the perpetual inventory records by flagging the items as on order as soon as the sales clerk enters the requisition into the system to avoid over-commitment of goods not available due to existing orders that are pending credit approval. However, this is the only way that a sales clerk can alter the perpetual inventory records (i.e., by initiating a sales requisition).
Billing
When Mr. Cooper Teal receives a delivery advice, he matches them with the open sales orders and reviews them for agreement in products and quantities ordered and delivered. If they match, Mr. Cooper Teal initials the delivery advice and enters the date of delivery into the open sales order file on the PC. The computer automatically prices the products, calculates product amounts, totals the invoice, and calculates the cash discount, which is 2/10 net 30. The computer then prints a sequentially numbered, four-part sales invoice and writes the specifics of the sale to a daily-computerized sales file. The bookkeeper records the gross sales, not net. Copies one and two of the invoice are mailed to the customer. Copy three is filed by the customer and copy four, along with the delivery advice, sales order, and approved sales requisition, are filed by invoice number.
In the afternoon, Mr. Cooper Teal uses the sales recording software to access the daily sales record, the accounts receivable subsidiary ledger file, and the sales journal file. Sales for the day are posted at their gross amounts to the individual customer's subsidiary accounts receivable and to the sales journal file. The latter file is accessed monthly by the software to summarize sales by product and to make monthly postings to the general ledger. The subsidiary ledger is used to review customer credit worthiness, to manage collections, and to determine write-offs.
Collections Management and Write-offs
The controller, Ms. Amalia, whose secretary runs the software to produce an aged account receivable trial balance by customer, manages collections. A working trial balance is generated at least once a week and more frequently if collections lag. Ms. Amalia decides what to do about specific accounts. Menu-driven software permits the Secretary to look up individual customer accounts, to write off invoices or whole accounts, and to generate customer statements for invoices past due by any specified number of days. The software also permits the printing of pre-drafted letters to the customers to accompany any of these actions. It is normal practice for Ms. Amalia to consider write-offs only once at the end of the month. Marco’s general policy is to write off any invoice exceeding six months from the time of sale. However, Ms. Amalia is authorized to make all final write-off decisions. The bookkeeper credits the allowance account if write-offs are subsequently collected. The accounts receivable subsidiary ledger is reconciled to the general ledger monthly.
Once each month, another software routine is used to add interest to customers' accounts equal to 1% of all invoices past due by 30 or more days. This routine also lists the interest charges by invoice by account in an interest journal, summarizes transactions for the month, and posts the total to the interest revenue and accounts receivable accounts in the general ledger.
Cash Receipts
The receptionist opens the mail daily, restrictively endorses all checks received, and routes the other mail to appropriate personnel. She separates the checks from the remittance advice (copy two of Marco’s sales invoice) and sends the checks to the Secretary-treasurer, Harper Kim, who prepares the bank deposit slip and takes the deposit to the bank. The bank deposit form is a three-copy form. The first and second copies go to the bank with the checks and Mr. Violet, the accountant, receives the third copy.
The receptionist forwards the remittance advices to Mr. Violet, who first reviews them for appropriateness of any discounts taken and enters them into a daily cash receipts file on his PC. After printing a listing of the remittance file and reconciling it to the deposit slip copy provided by Ms. Kim, Mr. Violet runs software that posts the individual receipts, to include the amount of any cash discounts, to the customers' accounts receivable and the total to the cash receipts journal file. The day's remittance advices are filed by customer number and the copy of the deposit slip is filed by date.
Vouching and Recording Payables for Merchandise
On receipt of signed receiving advices from the warehouse, Mr. Violet enters the quantities received into the perpetual inventory file via a PC. As a byproduct, the computer purges the purchase order from the inventory-in-transit file and produces a message indicating any difference between the quantity ordered and the quantity received. A copy of the purchase order is then attached to copy five in the numerical unmatched purchase order file. It is matched with the vendor’s invoice when the latter arrives.
When the receptionist opens the mail, she forwards any vendor invoices to Mr. Violet who matches them with the unmatched purchase orders and receiving advices. If a receiving advice is not on file for the invoice, he places it in an unmatched invoice file pending receipt of goods. Mr. Violet attempts to match the open purchase orders and unmatched invoices on a daily basis.
When Mr. Violet matches an invoice with the corresponding receiving advice, he compares quantities and prices on the purchase order and receiving advice to the vendor’s invoice and tests the arithmetic accuracy of the invoice. Mr. Violet initials the invoice to indicate that this has been done and then keys the vendor, product quantity, price, date of receipt of goods, and discount information into an open voucher file on the computer. The terms are customarily 2/10 net 30. The information is automatically added to the voucher register file and a sequentially numbered voucher is printed to control subsequent disbursement and to serve as the control document for recording the liability and purchase.
The computer software summarizes the voucher register file monthly and posts the summary figures to the general ledger accounts. Other software produces a trial balance of the open voucher file any time, either by date due or by vendor. The vouchers (now with the vendor's invoice, receiving advices, and copy five of the purchase orders attached) are held in a physical open voucher file in due-date order. The discount date is used unless otherwise ordered by Ms. Kim.
Cash Disbursements
Each morning, Ms. Kim, the Secretary-treasurer, reviews Marco’s short-term cash situation. This process is aided by software that summarizes the vouchers due on that day. Ms. Kim compares the summarized amount due on that day to the available ready cash and a float factor based on the average daily disbursements and the average number of days it takes for checks to clear the bank. If the cash less float exceeds the amount of vouchers due by at least the minimum cash balance set by Ms. Kim, she authorizes the payment of all vouchers due on that day. Ms. Kim then transfers the excess cash from Marco’s demand account to a money market account that earns interest. If the difference is less than the minimum cash balance set by Ms. Kim and there is cash available above the minimum balance required in the money market account, Ms. Kim authorizes payment of the vouchers due that day and transfers funds from the money market account to Marco’s demand account.
If sufficient funds are not available in the combined demand and money market accounts, Ms. Kim considers borrowing from the bank on the prearranged line of credit. If the line of credit is also inadequate, which is rare, Ms. Kim confers with Mr. Zen. Ms. Kim and Mr. Zen generally meet at least once a month to plan for intermediate and long-term financing needs.
After Ms. Kim authorizes the day's payments, the approved voucher packages are forwarded to Ms. Amalia who compares the information to the supporting documents. If the voucher data are accurate, Ms. Amalia initials the face of the voucher and enters an authorization code via PC into the open voucher file. This triggers the printing of a pre-numbered check and detachable remittance advice based on the data in the open voucher file. The disbursement data are automatically transferred to the cash disbursements journal file and purged from the open voucher file. Ms. Amalia signs the checks and forwards them to Mr. Zen's Secretary.
Mr. Zen’s secretary cancels the voucher document packages, presents the checks to Mr. Zen for counter signature, mails the checks to the vendors, and returns the documents to Mr. Violet for filing in voucher number order.
Prepare a draft engagement letter for Marco. Your Draft Engagement Letter - Your engagement letter should be between one and two single-spaced pages using 1" margins and 12-point font.
Fundamentals of Thermal-Fluid Sciences
ISBN: 978-0078027680
5th edition
Authors: Yunus A. Cengel, Robert H. Turner, John M. Cimbala