Question number one asks from the standpoint of an individual concerned with accounting controls, discuss and evaluate Johnson Toy Company's present polices for handling returned items. Johnson Toy Company's return policy does not give accurate financial records of the toys in distribution. They can only estimate how many have not sold at retail locations since they do not have a good idea of how many might be returned because they do not have strict return policies in place to limit returns. They estimate that between 1.5 million and 2 million Jungle Jim the Jogger dolls are unsold in retail stores, so any number of this amount could possibly be returned. They have several informal return policies, but none are in writing, none are consistent, and none give a definite idea of what can be returned back to Johnson Toy Company. One such policy allows defective items to be returned which is prudent as defective toys could cause a lawsuit if a child was harmed. However, this informal policy does not define what is defective, nor place limits on what can be returned. The company also does not have a policy for who pays the shipping costs of returning the items. Some retailers are covering the costs themselves to just get rid of the items, whereas others are billing shipping expense back to Johnson Toy Company. The only fairly straight forward policy that Johnson Toy Company has for returns is to wholesalers. They deduct a straight two percent off the wholesale price for defective items. However, even this policy is not set in writing and large wholesalers are now claiming special circumstances as they want to return the Jungle Jim dolls. Such costs for defective items and return shipping fees should be accrued as a potential liabilities and expense. Since there is no such liability or expense being accrued Johnson Toy Company is understating income and overstating stockholder equity.
Another control issue surrounds inventory. Items are coming in at...
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