JC Penney is the largest retailer of men's shirts in North America. In order to reduce inventory and order time, and to better anticipate market trends, JC Penney has established a sole sourcing contract with TAL Industries of Hong Kong and has signed a long-term purchase contract with TAL regarding the quality of shirts, prices, shipping requirements, and inventory levels.
TAL downloads information on sales from all JC Penney stores each evening. It has a responsibility to predict market demand and to increase the sales of its shirts in each store. Having the advantage of analyzing diverse trends across the United States, TAL has been known to rush-order the manufacturing of new shirts in specific styles and air-freight them directly to some stores-not at JC Penney's request, but because of its own market analysis.
In a sense, JC Penney does not know the exact quantities of shirts that will be shipped to each store. Nor does JC Penney have a formal receiving function at each store that logs in the items received. However, it does have a receiving function if the shirts go to one of its twelve distribution centers. But if TAL labels and prices all the goods and ships directly to the stores, it saves time and effort for JC Penney.
TAL bills JC Penney electronically every week, and JC Penney transfers the authorized amount electronically to TAL's bank account on the 16th and 30th of each month.
Required
a. What information does JC Penney need to know about TAL Industries before entering into a contract such as the one described?
b. Identify the controls that JC Penney should have in place to assure that only goods that were received were billed and that the billing is at the authorized prices.
c. What kind of reconciling procedure would tell JC Penney whether or not it paid TAL for more shirts than actually received?
d. From TAL's viewpoint, what controls should JC Penney have on hand at the store level to assure that shirts are not taken off the receiving dock before they reach the shopping floor and that there is no shoplifting or other theft of the product? Why are these controls important to TAL?