Part B: Inventory Management System and Internal Control Process Cool and Cute (C&C) carries four ranges of stock as shown in the table below.

The company uses perpetual inventory system and adopts FIFO (first in and first out) method to estimate the inventory cost. Inventory level is managed and monitored by FlowRight, an inventory management system. There are two central warehouses. One is located in Auckland, New Zealand and the other is in Melbourne, Australia. The warehouses dispatch clothes to all retailing stores within the country. In addition, the Australia warehouse dispatches stock to stores in Ireland. On the balance date, the two central warehouses hold 20% of total inventory and all retailing stores hold 80% of total inventory.

FLOWRIGHT - INVENTORY MANAGEMENT SYSTEM

FlowRight, the companys inventory management system has a central server. It records information on inventory item code, item description, cost price per item, selling price per item, and the available quantities. It also tracks the available quantities of inventory in each warehouse and store. Reorder point was not set up in FlowRight because the designs of 2 clothes are changing for each season. Instead, the order quantities are based on anticipated sales level. Since some designs sell quicker than others, C&C has a policy of providing 30% discounts for inventories that have been on the shop floor for more than 4 weeks and 50% discount after 7 weeks. New inventory normally arrives in the store every 4 weeks. The discounts are automatically applied to the inventories based on their arrival dates in the stores, by using a Sales Register System AccurateSale

ACCURATESALE THE SALES REGISTER SYSTEM

AccurateSale links to FlowRight (the companys inventory management system); and the terminals for the sales system are located in each store. AccurateSale records cash and credit card sales, calculate discounts, sales tax and produces Daily Sales Report (DSR) for each store. The DSR records the items and quantities sold on that day, and the sales and cost prices of those items. The AccurateSale system automatically updates inventory levels in FlowRight at midnight daily, after which it also exports information on the DSR to the general accounting system (a separate software) for the recording of sales.

SUPPLIERS

Cool & Cute designs the clothes carried in their stores. The completed designs are assigned a pre-numbered Purchase Order (PO) which records inventory item code, item description, and quantities ordered. The PO together with the completed designs are then sent to their Chinese suppliers for production. The Chinese suppliers source the different fabrics used for manufacturing the clothes from their local Chinese markets. The payment arrangement agreed between C&C and the Chinese suppliers is as follows: (1) 40% of total costs as a deposit at the time when the completed design and the PO are sent to the suppliers. (2) Once the completed garments are made and shipped, C&C has 30 days to pay the remaining balance 60%. The suppliers provide a Bill of Lading as proof that the garments are shipped, its ownership transfers to C&C at the time of shipment. When the inventory are shipped (C&C receives a copy of the Bill of Lading via email), the accounting department records a journal entry to recognise both inventory-in-transit and account payable, but the actual inventory level in FlowRight is not updated until the inventory arrived at the warehouse. The journal entry made by accounting department is: DR: Inventory in transit CR: Accounting payable CR: Prepaid Deposit

RECEIVING INVENTORY

The shipment of garment arrives at the central warehouses packed in cartons. The barcodes and the quantities of inventory items shipped are printed on the outside of the cartons. A Packing Slip is attached to each shipment. Each barcode printed on the carton contains information on the inventory item code and item description. 3 For each shipment that arrives, the warehouse assistant prints off the relevant pre-numbered PO. The warehouse assistant using a scanning device reads each barcode printed on the outside the cartons and compares it with the information on the PO. When the information agrees, the warehouse assistant ticks and signs the PO. He then logs into the FlowRight system to click on the received box on the PO filed in the system, after which the FlowRight system updates the inventory levels and also prints out a Receiving Report (RR). At this point, FlowRight also sends a copy of Receiving Report to the accounting department regarding the arrival of the inventory. The accounting department then initiates a journal entry to reverse inventory-in-transit and to increase inventory. The warehouse assistant is authorised to alter the quantities received in FlowRight to reflect the actual received quantities when there is a discrepancy in the information between the PO and the barcodes printed on the cartons. The Receiving Report and suppliers Packing Slip are filed in the warehouse. The signed PO and a copy of Receiving Report are handed to the inventory manager for inventory distribution.

DISTRIBUTING INVENTORY TO RETAIL STORES

The inventory manager is responsible for distributing inventory to the retail stores. The inventory distribution is usually based on the size and turnover of the retail store. When the new inventories arrive, the inventory manager uses FlowRight to allocate inventory to each retail store. FlowRight generates and prints a pre-numbered Distribution Report which displays the inventory item code, item description and quantities and the location of the store. Two copies of the Distribution Report go to the warehouse for packing and then shipping via an external carrier. The warehouse files one copy of the Distribution Report and the other copy goes with the inventory to a retail store. When the inventories arrive at the retail store, the shop manager logs into the FlowRight system. She identifies the relevant shipment by checking its reference number on the Distribution Report and then confirms receipt of the inventories by clicking the arrived in store box, after which the shop manager and/or assistants unpack the inventory. C&C carried out an annual inventory count on the 31 December 2016 at 6pm local time. During the inventory counts, the stores were shut. Each store manager has access to FlowRight. They can read and print out inventory reports, but they cannot edit the inventory levels in FlowRight. For the inventory counts, the store manager prints out a list of inventories held in the store, which shows the item code, description and quantities. Two staff members and the manager count the stock and write down the numbers counted next to each inventory item on the list. They take note of any differences. At end of the inventory count, the store manager prepares an Inventory Count Report which notes the differences using AccurateSale. AccurateSale adjusts the inventory level in FlowRight at midnight to reflect the results from the inventory count. A copy of the Inventory Count Report from each individual store are sent to the accounting department, at where all reports are aggregated based on item codes. The accounting department then adjust the inventory level accordingly in the accounting system.

INVENTORY AT YEAR END Nature of the Value Age $000 Label range Infants 8,431 Cuties 0-2 Cool Young children monkeys 2-5 18,654 School-aged children Fun kids 5-12 10,765 Maternity wear Comfort Adults 4,473 Total 42,323 Closing balance of inventory 41,230 1,093 Provision for inventory write-offs INVENTORY AT YEAR END Nature of the Value Age $000 Label range Infants 8,431 Cuties 0-2 Cool Young children monkeys 2-5 18,654 School-aged children Fun kids 5-12 10,765 Maternity wear Comfort Adults 4,473 Total 42,323 Closing balance of inventory 41,230 1,093 Provision for inventory write-offs