Question

Refer to the Why It Matters feature "Risks Associated with Sales Returns: The Case of Medicis and Ernst & Young." What problems can occur if controls related to sales returns and allowances are not designed and operating effectively?

Answer 1

Check the explanation

Step-by-step explanation:

In the case involving Medicis and Ernst & Young, Medicis utilized the value sales returns at replacement cost rather than gross sales price. Which resulted into:,

—.Sales return reserve was materially understated and —.Revenue was materially overstated

The significance of controls involving sales returns and valuation allowances: a) Sales returns represent an essential aspect of sales and profit/ loss account. If the sales returns are not valued appropriately, income could be understated or overstated since sales are net of sales returns.

b) In the same way, if the returns on sales are not valued appropriately then accounts receivables could also be understated or overstated. Valuation of the allowance needed to be provided for the difference in valuation of sales and sales returns.

For this reason, appropriate controls ought to be kept in place for sales returns and also for their valuation and they should be operating effectively throughout the period.

Answer 2

In the Medicis and Ernst and Young case Medicis used to esteem deals returns at substitution cost as opposed to net deals cost. Therefore,

• Deals return hold was physically downplayed and
• Income was tangibly exaggerated.

Significance of controls identifying with deals returns and valuation stipends:

1. Deals returns establish a significant piece of deals and benefit and misfortune account. In the event that business returns are not esteemed effectively income could be exaggerated or downplayed as deals are net of deals returns.
2. Thus, on the off chance that business returns are not esteemed effectively, at that point accounts receivables could likewise be exaggerated or downplayed. Valuation recompense should be accommodated the distinction in valuation of deals and deals returns.

Hence, legitimate controls ought to be kept set up for deals returns and furthermore for their valuation and they ought to be working viably all through the period.