4. Method of taking inventory.—All merchandise sent to the branch will be billed at sales prices; the branch manager will not, therefore, be aware of the cost price of the goods, and it follows that he cannot know the amount of the gross profit made by the branch. The inventory of the branch will be taken at irregular intervals by auditors from the home office, who will report to the home office the quantity and kind of merchandise on hand. The home office will then price and extend the inventory, usually on both the cost and the sales price basis.
When the home office carries records of, the goods shipped to branches at sales prices, a verification of the inventory is an easy matter. For example, it is clear that if branch A had on hand at the last in ventory a stock valued at $1,000 (sales price basis), and has received from the main office (during the in terim) deliveries amounting to $10,000 (sales price basis), and has reported sales amounting to $7,000, the present stock on hand at the branch, estimated at sales prices, should amount to $4,000. If the ac tual physical inventory exceeds this amount, and no errors have been made, there must have been a gain in the inventory. This may be brought about in sev eral ways—for example, in the cigar business, when cigars of a certain brand sell "three-for-a-quarter," and three individual cigars of this particular brand are sold for ten cents each.
In practice, this difficulty is frequently overcome by putting out a brand that is worth ten cents at re tail to be sold to a customer who desires one cigar for ten cents. It may also happen that the inventory will reveal a loss—for example, (1) when sales are made and not recorded; (2) where thefts have been com mitted, either by customers or by employes; (3) when breakage or shrinkage has occurred. Any un usual gain or loss in the inventory should be care fully investigated.
5. Accounts kept by branch offices.—Under this system each branch will have upon the home office books a merchandise account, an analytical expense account, and possibly a branch profit-and-loss ac count. The merchandise account will probably be specially devised to provide for the record of the in ventory on hand at the beginning of the period, and for deliveries to the branch, upon both a cost and a sales price basis. Form 20 shows how the gross profit on sales is determined when a method similar to that outlined above is employed. An analytical branch expense account, for expenses paid by the home office, as well as for expenses paid out of the petty cash fund of the branch, is shown in Form 21. The
branch profit-and-loss account illustrated in Form 22 shows how the net profit from the operation of the branch is ascertained by this method.
6. Relation between the home office and the branch off ees.—The shipments to the branch are charged to the branch merchandise account at both the cost and the sales price, and are • credited to the main office stock account, or purchase account, at cost price only. In the cash book of the main office a current analysis is kept of the cash receipts, by branches; or if it is not convenient to keep this detailed record in the general cash book, a special summary record is provided, in which will be entered the daily or weekly receipts, by branches. Each remittance from a branch will be credited to the branch merchandise account as received, and the entry in the cash book will consti tute the debit corresponding to this credit.
At the end of each fiscal period the total cash re ceipts from branch A, for example, as shown in the analysis of the cash book, will be posted to the credit of branch A's profit-and-loss account. The balance of the cost-price columns in the merchandise account at this point, will represent the cost of the goods sold by the branch, and will be transferred by a journal entry. The branch A profit-and-loss account will be debited for the amount of the difference, and this same amount will be credited to the merchandise account of the particular branch in the cost-price column only . By this method it is possible to determine from inspec tion the total sales, to date, of each branch, either by referring to the branch merchandise account or to the cash book analysis. The total amount of the ship ments to each branch may be readily determined from the branch merchandise account. In the case illus trated it has been assumed that all merchandise was billed to the branch at 50 per cent above cost price. But even if varying rates of profit on the shipments to the branch were used, no difficulty would be en countered in determining the cost of the goods sold by the branch during the period, because it necessarily follows that the difference between the debit and credit columns of the cost-price columns in the merchandise account, after the inventories at the beginning and at the end of the period have been taken into considera tion, must represent the cost of goods sold.