Chapter 13

Accounting Information Systems, 12e (Romney/Steinbart) Chapter 13 The Expenditure Cycle: Purchasing to Cash Disbursements 1) The Squishy Things Toy Company was established in 1948. It recently signed a large contract with a chain of retail toy stores. As a condition of the contract, the Squishy will be required to track and forecast product sales by linking in to the chain's sales database. Squishy will then be responsible for shipping products to the chain's regional warehouses as needed. The relationship between Squishy and the chain is an example of A) vendor-managed inventory. B) sales force automation. C) electronic data interchange. D) optical character recognition. Answer: A Page Ref: 382 Objective: Learning Objective 1 Difficulty : Easy AACSB: Analytic 2) Requiring all packing slips be reconciled to purchase orders before accepting a delivery of inventory would be most likely to prevent which of the following situations? A) A supplier delivers more inventory than ordered at the end of the year and sends an invoice for the total quantity delivered. B) An employee mails a fake invoice to the company, which is then paid. C) The inventory records are incorrectly updated when a receiving department employee enters the wrong product number on the receiving report. D) Receiving department employees steal inventory and then claim the inventory was received and delivered to the warehouse. Answer: A Page Ref: 386 Objective: Learning Objective 3 Difficulty : Moderate AACSB: Reflective Thinking 3) Comparing quantities on a vendor invoice to quantities on the receiving report would not prevent or detect which of the following situations? A) Receiving and accepting inventory not ordered B) Theft of inventory by receiving department employees C) Update of wrong inventory items due to data entry error D) Order for an excessive quantity of inventory Answer: A Page Ref: 386 Objective: Learning Objective 3 Difficulty : Moderate AACSB: Reflective Thinking

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4) Which of the following would probably be the least effective control to mitigate the risk of paying an invoice payable to a phony vendor for inventory purchases, mailed to the company by an employee attempting to commit fraud? A) Only pay from original invoices. B) Cancel all invoices and supporting documentation when paid. C) Strict access and authorization controls for the approved vendor master file. D) Require three-way match for all inventory purchase invoices. Answer: A Page Ref: 387 Objective: Learning Objective 3 Difficulty : Moderate AACSB: Reflective Thinking 5) Which of the following would be the least effective control to prevent paying the same vendor invoice twice? A) Allow only the accounts payable department to authorize payment for vendor invoices and allow only the cash disbursements department to cut and mail checks to vendors. B) Only pay from original invoices. C) Cancel each document in the voucher package once the check is prepared and mailed. D) Only pay vendor invoices that have been matched and reconciled to a purchase order and a receiving report. Answer: A Page Ref: 391 Objective: Learning Objective 3 Difficulty : Moderate AACSB: Reflective Thinking 6) To accomplish the objectives set forth in the expenditure cycle, a number of key management decisions must be addressed. Which of the decisions below is not ordinarily found as part of the expenditure cycle? A) How can cash payments to vendors be managed to maximize cash flow? B) What is the optimal level of inventory and supplies to carry on hand? C) Where should inventories and supplies be held? D) What are the optimal prices for each product or service? Answer: D Page Ref: 372 Objective: Learning Objective 2 Difficulty : Easy AACSB: Analytic

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7) One of the basic activities in the expenditure cycle is the receiving and storage of goods, supplies, and services. What is the counterpart of this activity in the revenue cycle? A) sales order entry process B) shipping function C) cash collection activity D) cash payments activity Answer: B Page Ref: 373 Objective: Learning Objective 1 Difficulty : Moderate AACSB: Reflective Thinking 8) The traditional approach to inventory management to ensure sufficient quantity on hand to maintain production is known as A) safety stock. B) just-in-time production. C) economic order quantity. D) optimal inventory quantity. Answer: C Page Ref: 378 Objective: Learning Objective 1 Difficulty : Easy AACSB: Analytic 9) Economic Order Quantity (EOQ) includes several variables that must be taken into consideration when calculating the optimal order size. One variable, the costs associated with holding inventory, is referred to as A) ordering costs. B) carrying costs. C) the reorder point. D) stockout costs. Answer: B Page Ref: 378 Objective: Learning Objective 1 Difficulty : Easy AACSB: Analytic 10) The need to place an order for inventory is specified by the A) company inventory policies. B) economic order quantity. C) stockout point. D) reorder point. Answer: D Page Ref: 378 Objective: Learning Objective 1 Difficulty : Easy AACSB: Analytic

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11) When goods are being ordered from a vendor, which electronic files are either read or updated? A) inventory, vendors, and accounts payable B) vendors and accounts payable C) open purchase orders and accounts payable D) inventory, vendors, and open purchase orders Answer: D Page Ref: 374 Objective: Learning Objective 1 Difficulty : Moderate AACSB: Analytic 12) What is a key feature of materials requirements planning (MRP)? A) minimize or entirely eliminate carrying and stockout costs B) reduce required inventory levels by scheduling production rather than estimating needs C) determine the optimal reorder point D) determine the optimal order size Answer: B Page Ref: 378 Objective: Learning Objective 1 Difficulty : Easy AACSB: Analytic 13) Materials requirements planning (MRP) A) reduces the uncertainty about when materials are needed, thereby reducing the need to carry large levels of inventory. B) is able to compute exactly the cost of purchasing by taking into account all costs associated with inventory carrying. C) requires vendors to deliver inventory to the production site exactly when needed and in the correct quantities. D) None of the above are correct. Answer: A Page Ref: 378 Objective: Learning Objective 1 Difficulty : Moderate AACSB: Analytic 14) The inventory management approach that attempts to minimize, if not eliminate, carrying and stockout costs is A) materials requirements planning. B) economic order quantity. C) just-in-time inventory. D) evaluated receipt settlement. Answer: C Page Ref: 378 Objective: Learning Objective 1 Difficulty : Difficult AACSB: Analytic

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15) What aspect below best characterizes a Just-In-Time (JIT) inventory system? A) frequent deliveries of smaller quantities of items to the work centers B) frequent deliveries of large quantities to be held at the work centers C) less frequent deliveries of large quantities of goods to central receiving D) infrequent bulk deliveries of items directly to work centers Answer: A Page Ref: 378-379 Objective: Learning Objective 1 Difficulty : Easy AACSB: Analytic 16) What is the key difference between the MRP and JIT inventory management approaches? A) Only JIT reduces costs and improves efficiency. B) MRP is especially useful for products such as fashion apparel. C) JIT is more effectively used with products that have predictable patterns of demand. D) MRP schedules production to meet estimated sales needs; JIT schedules production to meet customer demands. Answer: D Page Ref: 379 Objective: Learning Objective 1 Difficulty : Moderate AACSB: Analytic 17) MRP will be a preferred method over JIT when the A) demand for inventory is fairly predictable. B) demand for inventory is mostly unpredictable. C) product has a short life cycle. D) MRP is always a preferred method over JIT. Answer: A Page Ref: 379 Objective: Learning Objective 1 Difficulty : Moderate AACSB: Analytic 18) A key decision in ordering is selecting a suitable vendor. Which of the following would not be a major criterion in vendor selection? A) prices of goods B) quality of goods C) credit rating of the vendor D) ability to deliver on time Answer: C Page Ref: 380 Objective: Learning Objective 1 Difficulty : Easy AACSB: Analytic

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19) Once a vendor is selected for a product, the vendor's identity is recorded in the A) purchase requisition transaction file. B) purchase requisition master file. C) inventory transaction file. D) inventory master file. Answer: D Page Ref: 381 Objective: Learning Objective 1 Difficulty : Moderate AACSB: Analytic 20) A purchase order is A) a document formally requesting a vendor to sell a certain product at a certain price. B) a request for delivery of certain items and quantities. C) a contract between the buyer and vendor once accepted by the vendor. D) All of the above are true. Answer: D Page Ref: 381 Objective: Learning Objective 1 Difficulty : Easy AACSB: Analytic 21) Stepanek Sales and Service provides free coffee to employees. Stepanek arranged with Ingebrigtson's Joe to deliver as many coffee packages, sugar, creamer, and filters as needed each week. Ingebrigtson's sends a monthly invoice for Stepanek to pay. This arrangement is best described as a A) blanket purchase order. B) set purchase order. C) fixed purchase order. D) standard purchase order. Answer: A Page Ref: 381 Objective: Learning Objective 1 Difficulty : Easy AACSB: Analytic 22) A major cost in the purchasing function is the number of purchase orders processed. One technique that may reduce purchasing-related expenses is to have suppliers compete with each other to meet demand at the lowest price. This name of this technique is A) an EDI auction. B) a trading exchange. C) a reverse auction. D) a supplier consortium. Answer: C Page Ref: 382 Objective: Learning Objective 1 Difficulty : Moderate AACSB: Analytic

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23) One of the major responsibilities of the receiving department is A) deciding if the delivery should be accepted. B) verifying any purchase discounts for the delivery. C) deciding on the location where the delivery will be stored until used. D) updating inventory subsidiary ledgers. Answer: A Page Ref: 384 Objective: Learning Objective 1 Difficulty : Easy AACSB: Analytic 24) Which of the following is generally not shown on a receiving report? A) price of the items B) quantity of the items C) purchase order number D) counted and inspected by Answer: A Page Ref: 384 Objective: Learning Objective 1 Difficulty : Easy AACSB: Analytic 25) A receiving clerk notes that a delivery of 10 units has been received, but the purchase order specified 12 units. A debit memo will need to be prepared to adjust for the difference between the quantity ordered and received. Who should prepare this document? A) the receiving clerk B) the controller C) the vendor D) the purchasing department manager Answer: D Page Ref: 385 Objective: Learning Objective 1 Difficulty : Moderate AACSB: Analytic 26) Identify in which of the following scenarios a company could adjust the balance due the vendor by issuing a debit memo. A) quantity different from that ordered B) damage to the goods C) goods that fail inspection for quality D) All of the above are possible scenarios. Answer: D Page Ref: 385 Objective: Learning Objective 1 Difficulty : Moderate AACSB: Analytic

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27) What is one of the best ways to improve the overall efficiency and effectiveness of the receipt and storage of ordered items? A) requiring all suppliers to have the carrier verify quantities and item numbers before shipment B) requiring all suppliers to include RFID tags on their items C) requiring all suppliers to use EDI to expedite the receiving department function D) requiring all delivery trucks to have satellite data terminals to expedite the receiving department function Answer: B Page Ref: 385 Objective: Learning Objective 1 Difficulty : Moderate AACSB: Analytic 28) Vendor invoices are approved by the ________, which reports to the ________. A) purchasing department; controller B) accounts payable department; treasurer C) purchasing department; treasurer D) accounts payable department; controller Answer: D Page Ref: 387 Objective: Learning Objective 1 Difficulty : Moderate AACSB: Analytic 29) The disbursement voucher and supporting documents are sent to the ________ for payment prior to the due date. A) cashier B) treasurer C) controller D) accounts payable department Answer: A Page Ref: 390 Objective: Learning Objective 1 Difficulty : Easy AACSB: Analytic 30) A(n) ________ system posts an approved invoice to the vendor account and stores it in an open invoice file until payment is made by check. A) nonvoucher B) voucher C) cycle D) evaluated receipt settlement Answer: A Page Ref: 387 Objective: Learning Objective 1 Difficulty : Easy AACSB: Analytic

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31) A disbursement voucher contains A) a list of outstanding invoices. B) the net payment amount after deducting applicable discounts and allowances. C) the general ledger accounts to be debited. D) All of the above are correct. Answer: D Page Ref: 387 Objective: Learning Objective 1 Difficulty : Easy AACSB: Analytic 32) One objective of accounts payable is to authorize payment only for goods or services actually ordered and received. The best way to process supplier invoices is to use A) electronic funds transfer for small, occasional purchases from suppliers. B) a nonvoucher system. C) EDI for all small, occasional purchases from suppliers. D) a disbursement voucher system. Answer: D Page Ref: 387 Objective: Learning Objective 1 Difficulty : Moderate AACSB: Analytic 33) What is not an advantage of using disbursement vouchers? A) Disbursement vouchers reduce the number of checks written. B) Disbursement vouchers can be prenumbered which simplifies the tracking of all payables. C) Disbursement vouchers facilitate separating the time of invoice approval from the time of invoice payment. D) There are no disadvantages to using disbursement vouchers. Answer: D Page Ref: 387 Objective: Learning Objective 1 Difficulty : Easy AACSB: Analytic 34) Which of the following is not an advantage of a voucher system? A) Several invoices may be included on one voucher, reducing the number of checks. B) Disbursement vouchers may be pre-numbered and tracked through the system. C) The time of voucher approval and payment can be kept separate. D) It is a less expensive and easier system to administer than other systems. Answer: D Page Ref: 387 Objective: Learning Objective 1 Difficulty : Moderate AACSB: Analytic

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35) Duties in the expenditure cycle should be properly segregated to promote internal control. This means that the authorization function is performed by ________, the recording function is performed by ________, and cash handling is performed by the ________. A) accounts payable; purchasing; cashier B) purchasing; accounts payable; cashier C) purchasing; cashier; accounts payable D) purchasing; accounts payable; treasurer Answer: B Page Ref: 375 Objective: Learning Objective 3 Difficulty : Moderate AACSB: Analytic 36) A voucher package should include A) a purchase requisition, vendor invoice, and receiving report. B) a purchase order, vendor invoice, and receiving report. C) a purchase requisition, purchase order, and receiving report. D) a bill of lading and vendor invoice. Answer: B Page Ref: 387 Objective: Learning Objective 1 Difficulty : Moderate AACSB: Analytic 37) Evaluated receipt settlement (ERS) approves payment of vendor invoices after reconciling the purchase order and the A) vendor invoice. B) sales invoice. C) receiving report. D) disbursement voucher. Answer: C Page Ref: 388 Objective: Learning Objective 3 Difficulty : Easy AACSB: Analytic 38) All of the following are opportunities to improve efficiency of the accounts payable function except A) use blanket purchase orders. B) convert a manual AIS system to EDI and EFT. C) streamline noninventory purchases. D) use evaluated receipt settlement. Answer: A Page Ref: 387-388 Objective: Learning Objective 1 Difficulty : Easy AACSB: Analytic

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39) When purchasing miscellaneous supplies, companies can reduce costs, improve efficiency, and combat employee fraud by A) using procurement cards. B) implementing a JIT inventory system. C) requiring employees to personally purchase items then reimbursing employees at the end of each month. D) paying amounts out of petty cash. Answer: A Page Ref: 389 Objective: Learning Objective 1 Difficulty : Easy AACSB: Analytic 40) If available, a 1% discount for payment within 10 days instead of 30 days represents an approximate savings of ________ % annually. A) 1 B) 12 C) 18 D) 36 Answer: C Page Ref: 390 Objective: Learning Objective 1 Difficulty : Moderate AACSB: Analytic 41) What is the best control to mitigate the threat of paying prices that are too high for goods ordered? A) require the receiving department to verify the existence of a valid purchase order B) use only approved suppliers and solicit competitive bids C) only pay invoices that are supported by the original voucher package D) use bar-code technology to eliminate data entry errors Answer: B Page Ref: 382 Objective: Learning Objective 3 Difficulty : Moderate AACSB: Analytic 42) What is probably the most effective control for the prevention of kickbacks to purchasing agents? A) purchasing from approved vendors B) diligent supervision in the purchasing department C) a corporate policy to prohibit purchasing agents from accepting kickbacks D) reviews of vendor performance Answer: C Page Ref: 383 Objective: Learning Objective 3 Difficulty : Moderate AACSB: Analytic

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43) One of the threats associated with the process and activity of receiving and storing goods is A) errors in counting. B) kickbacks. C) requests for unnecessary items. D) errors in vendor invoices. Answer: A Page Ref: 385 Objective: Learning Objective 3 Difficulty : Easy AACSB: Analytic 44) What is the best way to prevent the acceptance of unordered goods? A) Order only from approved vendors. B) Match the packing slip to a purchase order before accepting delivery. C) Enforce an appropriate conflict of interest policy in place. D) Require specific authorization from the purchasing manager before accepting any goods. Answer: B Page Ref: 386 Objective: Learning Objective 3 Difficulty : Easy AACSB: Analytic 45) Which of the following is not a common control for ensuring inventory is secure and inventory counts are accurate? A) control of physical access to the inventory storage areas B) transfers of inventory with proper documentation C) sending "blind" copies of purchase orders to inventory control for data entry D) making physical counts of inventory at least once per year Answer: C Page Ref: 376 Objective: Learning Objective 3 Difficulty : Moderate AACSB: Analytic 46) Double-checking the accuracy of an invoice is a control that can help to neutralize a threat in the expenditure cycle. What activity would specifically be associated with this control? A) ordering goods B) receiving and storing goods C) paying for goods and services D) requesting goods be ordered Answer: C Page Ref: 389 Objective: Learning Objective 3 Difficulty : Easy AACSB: Analytic

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47) What control would best mitigate the threat of paying an invoice twice? A) never authorize payment of a photocopy of an invoice B) double-check mathematical accuracy of invoices C) approval of purchase orders D) maintaining adequate perpetual inventory records Answer: A Page Ref: 391 Objective: Learning Objective 3 Difficulty : Easy AACSB: Analytic 48) Which control would best prevent payments made to fictitious vendors? A) Allow payments only to approved vendors. B) Restrict access to any payment or approval documents. C) Have an independent bank reconciliation. D) Make sure all documents are in order before approving payments. Answer: A Page Ref: 392 Objective: Learning Objective 3 Difficulty : Moderate AACSB: Analytic 49) In the expenditure cycle, good control dictates that expenditures should be paid by check. This may not be feasible when minor purchases are made. To facilitate quick payment for minor purchases, a(n) ________ should be set up and maintained using ________. A) special bank account; disbursement vouchers B) imprest fund; vouchers C) cash box; small denomination bills D) petty cash fund; procurement cards Answer: B Page Ref: 392 Objective: Learning Objective 3 Difficulty : Easy AACSB: Analytic 50) A surprise count of an imprest petty cash fund should find the total of ________ equal to the amount authorized for the fund. A) cash and credit memos B) cash and vouchers C) cash D) cash and checks Answer: B Page Ref: 392 Objective: Learning Objective 3 Difficulty : Easy AACSB: Analytic

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51) What control should be put in place that assigns responsibility for EFT payments made to vendors? A) Encrypt all EFT transmissions. B) Time stamp all EFT transactions. C) Establish a control group to monitor EFT transactions for validity and accuracy. D) Number all EFT transactions. Answer: C Page Ref: 391 Objective: Learning Objective 3 Difficulty : Moderate AACSB: Analytic 52) Which of the following threats is not specific to the purchase requisition process of the expenditure cycle? A) stockouts B) purchasing from unauthorized vendors C) requisitioning goods not needed D) All of the above are threats in the purchase requisition process. Answer: B Page Ref: 380 Objective: Learning Objective 3 Difficulty : Moderate AACSB: Analytic 53) There is a symmetrical interdependence between a firm's expenditure cycle and its suppliers' A) production cycle. B) revenue cycle. C) expenditure cycle. D) general ledger and reporting system. Answer: B Page Ref: 372 Objective: Learning Objective 1 Difficulty : Moderate AACSB: Reflective Thinking 54) The Squishy Things Toy Company was established in 1948. It recently signed a large contract with a chain of retail toy stores. As a condition of the contract, the Squishy will be required to track and forecast product sales by linking in to the chain's sales database. Squishy will then be responsible for shipping products to the chain's regional warehouses as needed. The technology that is used for communication between Squishy and the chain is A) vendor-managed inventory. B) sales force automation. C) electronic data interchange. D) optical character recognition. Answer: C Page Ref: 372 Objective: Learning Objective 1 Difficulty : Moderate AACSB: Analytic

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55) The management at Sad Clown Pajamas, an Internet-based wholesaler, is considering a new inventory control system. The current system is inadequate because it results in stockouts that interrupt production and excess stocks of some materials that result in markdowns and high carrying costs. The new system, which will focus on ensuring that the amounts purchased minimize these costs, will employ A) a just-in-time inventory system. B) the economic order quantity. C) a reorder point. D) materials requirements planning. Answer: B Page Ref: 378 Objective: Learning Objective 3 Difficulty : Moderate AACSB: Reflective Thinking 56) The management at Sad Clown Pajamas, an Internet-based wholesaler, is considering a new inventory control system. The current system is inadequate because it results in stockouts that interrupt production and excess stocks of some materials that result in markdowns and high carrying costs. The new system, which will focus on ensuring that orders are placed with sufficient lead time to prevent stockouts, will employ A) a just-in-time inventory system. B) the economic order quantity. C) a reorder point. D) materials requirements planning. Answer: C Page Ref: 378 Objective: Learning Objective 3 Difficulty : Moderate AACSB: Reflective Thinking 57) The management at Sad Clown Pajamas, an Internet-based wholesaler, is considering a new inventory control system. The current system is inadequate because it results in stockouts that interrupt production and excess stocks of some materials that result in markdowns and high carrying costs. The new system, which will focus on forecasting demand for Sad Clown's products, will employ A) a just-in-time inventory system. B) the economic order quantity. C) a reorder point. D) materials requirements planning. Answer: D Page Ref: 378 Objective: Learning Objective 3 Difficulty : Moderate AACSB: Reflective Thinking

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58) The management at Sad Clown Pajamas, an Internet-based wholesaler, is considering a new inventory control system. The current system is inadequate because it results in stockouts that interrupt production and excess stocks of some materials that result in markdowns and high carrying costs. The new system, which will focus on reducing or completely eliminating carrying costs, will employ A) a just-in-time inventory system. B) the economic order quantity. C) a reorder point. D) materials requirements planning. Answer: A Page Ref: 378 Objective: Learning Objective 3 Difficulty : Moderate AACSB: Reflective Thinking 59) Bob Chum is the sales manager at Folding Squid Technologies. At lunch with the company CEO, he proudly announced that he had negotiated a(n) ________ with a client that defined a long-term commitment to buy components from Folding Squid. A) purchase order B) blanket purchase order C) evaluated receipt settlement D) voucher Answer: B Page Ref: 381 Objective: Learning Objective 1 Difficulty : Easy AACSB: Analytic 60) Bob Chum is the sales manager at Folding Squid Technologies. At lunch with the company CEO, he proudly announced that he had received a ________ from a client to buy a large quantity of components from Folding Squid. A) purchase order B) blanket purchase order C) voucher D) purchase requisition Answer: A Page Ref: 381 Objective: Learning Objective 1 Difficulty : Easy AACSB: Analytic

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61) Bob Chum is the sales manager at Folding Squid Technologies. At lunch with the company CEO, he complained that a recent shipment from a vendor had been unsatisfactory and so had to be returned. That required the purchasing manager to send a ________ to the supplier. A) purchase order B) blanket purchase order C) receiving report D) debit memo Answer: D Page Ref: 385 Objective: Learning Objective 1 Difficulty : Easy AACSB: Analytic 62) To minimize the number of checks that need to be written to pay vendor invoices a company should use a A) voucher system. B) just-in-time inventory system. C) nonvoucher system. D) evaluated receipt settlement system. Answer: A Page Ref: 387 Objective: Learning Objective 1 Difficulty : Moderate AACSB: Analytic 63) Evaluated receipt settlement increases efficiency by A) eliminating the need for receiving reports. B) eliminating the need for vendor invoices. C) eliminating the need for purchase orders. D) eliminating the need to prepare and mail checks. Answer: B Page Ref: 388 Objective: Learning Objective 1 Difficulty : Easy AACSB: Analytic 64) In the expenditure cycle, Financial Electronic Data Interchange (FEDI) increases efficiency by A) eliminating the need for receiving reports. B) eliminating the need for vendor invoices. C) eliminating the need for purchase orders. D) eliminating the need to prepare and mail checks. Answer: D Page Ref: 390 Objective: Learning Objective 1 Difficulty : Easy AACSB: Analytic

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65) Procurement cards differ from corporate credit cards in which of the following ways? A) Credit limits can be set for procurement cards, but not corporate credit cards. B) Credit cards can be used to make purchases without an explicit sign off by supervisors, but procurement cards require a sign off. C) Procurement cards can only be used with approved vendors, but credit cards can be used anywhere. D) Procurement card invoices are sent separately for each card, whereas corporate credit cards are consolidated into a single invoice. Answer: C Page Ref: 389 Objective: Learning Objective 1 Difficulty : Moderate AACSB: Analytic 66) The purchasing manager at Folding Squid Technologies has responsibility for reviewing and authorizing purchase orders. He also reviews receiving reports, approves or corrects them, and authorizes the cashier to pay vendor invoices. Which of the following would correct control weaknesses, if any, related to these activities? A) Vendor invoices should be reviewed by the purchasing manager to ensure that they are correct. B) Accounts payable should reconcile purchase orders, receiving reports, and invoices. C) Vendor invoices should be reviewed by accounts receivable and then cancelled when paid. D) Controls are adequate under the current system. Answer: B Page Ref: 387 Objective: Learning Objective 3 Difficulty : Moderate AACSB: Analytic 67) The purchasing manager at Folding Squid Technologies has responsibility for reviewing and authorizing purchase orders. Receiving reports are prepared by shipping and receiving based on the relevant purchase order(s). Purchase orders, receiving reports, and vendor invoices are reconciled by accounts payable, which authorizes payment. Which of the following would correct control weaknesses, if any, related to these activities? A) Vendor invoices should be reviewed by the purchasing manager to ensure that they are correct. B) Accounts payable should authorize purchase orders. C) Receiving reports should be reviewed and corrected by the purchasing manager. D) Controls are adequate under the current system. Answer: D Page Ref: 387 Objective: Learning Objective 3 Difficulty : Moderate AACSB: Analytic

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68) The receiving clerk at Folding Squid Technologies examines incoming shipments and reconciles their contents with the relevant purchase orders. A receiving report is then sent to accounts receivable and the vendor's invoice is approved for payment. Which of the following would correct control weaknesses, if any, related to these activities? A) The invoice should be approved for payment by the shipping clerk after the purchase order and receiving report are reconciled. B) Accounts payable should reconcile the purchase order and the receiving report. C) Invoices, purchase orders, and receiving reports should be reconciled by the receiving clerk. D) Controls are adequate under the current system. Answer: B Page Ref: 387 Objective: Learning Objective 3 Difficulty : Moderate AACSB: Analytic 69) The receiving clerk at Folding Squid Technologies examines incoming shipments and checks their purchase order numbers. A receiving report is then sent to accounts payable, where it is reconciled with the relevant purchase orders and invoices and payment is authorized. Which of the following would correct control weaknesses, if any, related to these activities? A) Vendor invoices should be approved for payment by the shipping clerk after the purchase order and receiving report are reconciled. B) Vendor invoices should be approved for payment by the purchasing manager. C) Purchase orders and receiving reports should be reconciled by the purchasing manager. D) Controls are adequate under the current system. Answer: D Page Ref: 387 Objective: Learning Objective 3 Difficulty : Moderate AACSB: Analytic 70) Which of the controls below would be least effective to prevent ordering goods at higher than market prices? A) Variance analysis of actual expenses to budgeted expenses B) For high-dollar goods, solicit competitive bids from possible vendors C) Only place orders with vendors on an approved vendor list D) Frequent review of, and update to, vendor price lists stored in the AIS Answer: A Page Ref: 382 Objective: Learning Objective 3 Difficulty : Moderate AACSB: Reflective Thinking

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71) The document below would be known as what by Alpha Omega Electronics?

A) Receiving report B) Purchase order C) Purchase requisition D) Packing slip Answer: A Page Ref: 384 Objective: Learning Objective 1 Difficulty : Moderate AACSB: Reflective Thinking 72) Which of the following would be the best control to prevent receiving department employees from stealing inventory and claiming the ordered quantity wasn't received from the vendor? A) Reconcile quantity on packing slip to physical count when accepting delivery. B) Restrict physical access to the receiving area. C) Require all deliveries be made at the receiving area. D) Require dual signatures on the move ticket when receiving delivers the inventory to the warehouse. Answer: A Page Ref: 386 Objective: Learning Objective 3 Difficulty : Moderate AACSB: Reflective Thinking

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73) Define and describe the EOQ approach to inventory management. Answer: EOQ (economic order quantity) is the traditional inventory control method to maintain sufficient inventory levels so production can continue without interruption. EOQ should take into account a situation where inventory use is greater than expected. EOQ calculates the optimal order size to minimize the sum of ordering, carrying, and stockout costs. Ordering costs  all expenses associated with processing purchasing transactions. Carrying costs  costs associated with holding inventory. Stockout costs  costs from inventory shortages, such as lost sales or production costs. Page Ref: 378 Objective: Learning Objective 1 Difficulty : Moderate AACSB: Analytic 74) Discuss the differences between EOQ, MRP, and JIT. Answer: Economic Order Quantity (EOQ) is the traditional approach to managing inventory. EOQ is used to find the optimal order size. Ordering costs, carrying costs, and stockout costs are considered in finding the EOQ. The MRP (Materials Requirements Planning) inventory method seeks to reduce inventory levels by scheduling production, based on estimated sales, rather than by estimating needs (which EOQ does). A just-in-time inventory system (or JIT) attempts to minimize, if not totally eliminate, both carrying and stockout costs through the frequent delivery of small amounts of materials, parts, and supplies when they are needed. JIT does not attempt to estimate needs or schedule production based on estimated sales, as it is based on customer demand at a given time. A JIT system almost eliminates finished goods inventory. Page Ref: 378 Objective: Learning Objective 1 Difficulty : Difficult AACSB: Analytic 75) a) What is the major cost driver in the purchasing function? b) Describe how information technology can be used to control this cost driver. Answer: a) The major cost driver in the purchasing function is the number of purchase orders processed. b) The number of purchase orders can be reduced or streamlined by: Electronic data interchange (EDI) for transmitting purchase orders to vendors. Use procurement cards for small dollar and small quantity purchases of non-inventory items. Reduce clerical costs by using the Internet to perform certain purchasing functions. Use vendor-managed inventory programs to reduce purchasing and inventory costs. Implement reverse auctions and pre-award audits. Page Ref: 382, 389 Objective: Learning Objective 1 Difficulty : Moderate AACSB: Analytic

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76) Explain what is meant by the expenditure cycle as a "mirror image" of the revenue cycle. Answer: The expenditure cycle has been called a "mirror image" of the revenue cycle because the activities of the expenditure cycle are the opposite, or "reflection" of several activities found in the revenue cycle. For example, the order goods activity generates a purchase order, which serves as customer input to the sales order entry process. The receive goods activity handles the goods sent via the supplier's shipping function. The pay for goods activity generates the payments that are processed by the supplier's cash collection activity. This mirror image also means that major technological improvements in the expenditure cycle may bring about complementary improvements in suppliers' revenue cycle as well. Page Ref: 372-373 Objective: Learning Objective 1 Difficulty : Difficult AACSB: Reflective Thinking 77) Identify possible problems associated with receiving goods and appropriate actions in response to the problems. Answer: When a shipment of goods arrives, the quantity of goods received may not be the same as the quantity ordered; the goods may have been damaged in shipment and therefore are not suitable for use; and, goods may be received that are inferior in quality and fail an inspection. Whenever any of these problems occur, the purchasing department should deal with the vendor and issue a debit memo to record an adjustment to the order. The vendor should then issue a credit memo in acknowledgment of the problem and the pending adjustment. Page Ref: 385 Objective: Learning Objective 3 Difficulty : Moderate AACSB: Analytic 78) How can information technology be used to improve the vendor invoice approval process? Answer: EDI eliminates the need to enter invoice data and the matching of payment documents  all of this can be done using computers and network technologies. Technology can eliminate the need for vendor invoices by approving payment upon receipt of the goods. Imaging systems can eliminate paper flow, and universal languages such as XML can provide a paperless means of receiving and storing vendor invoices. Use of procurement cards, credit cards, and electronic expense forms can improve the efficiency of non-inventory purchases. ERS, which is invoiceless, is a means to replace the traditional three-matching process (vendor invoice, receiving report and purchase order) with a two-way match of the purchase order and receiving report. Page Ref: 387-389 Objective: Learning Objective 1 Difficulty : Moderate AACSB: Analytic

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79) Under what conditions is MRP more suitable than JIT and vice versa? Answer: MRP systems schedule production based on estimated sales, and JIT systems schedule production based on customer demand. The choice between these two systems is based on the types of products a company sells. For example, products that have predictable patterns of demand and a long life cycle are more suitable for MRP systems. In this case, sales can be forecast with greater accuracy. Conversely, if the product has an unpredictable pattern of demand and a shorter life cycle, then a JIT system is more suitable. JIT is able to adapt better to continuously changing production levels. Page Ref: 379 Objective: Learning Objective 1 Difficulty : Moderate AACSB: Analytic 80) In the expenditure cycle, the majority of payments made are by check. What are some control issues related to payment of vendors by check? Answer: Key control problems in the area of payment by check can give rise to fraudulent activity. Fraudulent disbursements made by check to fictitious suppliers are one of the most common types of fraud. Control over checks can be strengthened in a number of ways. First, all checks should be sequentially pre-numbered and kept under lock and key until use. The internal auditor should randomly audit the supply of unused checks and verify that none are missing. Use of the voucher system will also provide control over paying a "phantom" supplier, since several supporting documents must be present in the voucher packet in order to have a check issued. The cashier and/or treasurer should be the only parties authorized to sign checks. Two signatures should be required on all checks in excess of a predetermined dollar amount to provide independent review of large expenditures. Also, signed checks should not be returned to accounts payable, but should be mailed by the cashier or treasurer. When a check is issued, all documents in the voucher package should be cancelled so that the voucher cannot be resubmitted for payment. To provide another independent review of checking account activity, someone not connected with either accounts payable or the treasurer's office should reconcile all bank accounts. To help circumvent check alteration and forgery, check protection machines should be used to write the dollar amount of the check as well as the date. The paper the check is printed on should have some special watermark or identifying mark that is readable at a certain angle as well. Page Ref: 392 Objective: Learning Objective 3 Difficulty : Moderate AACSB: Analytic

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81) Identify ten threats and applicable control procedures in the expenditure cycle. Answer: Answers can include the following information: 1: Stock-outs  Controls: Inventory control system; accurate perpetual inventory; and vendor performance analysis is needed to prevent this problem 2: Requesting goods not needed  Controls: Review and approval by supervisors; use of pre-numbered requisition forms; and restricted access to blank purchase orders 3: Purchasing goods at inflated prices  Controls: Competitive bidding and proper supervision; approved purchase orders; and price list consultations are needed to prevent this problem 4: Purchasing goods of inferior quality  Controls: Use experienced buyers who know good vendors; review purchase orders; and incorporate approved vendor list into formal procedures 5: Purchasing from unauthorized vendors  Control: Pre-numbered purchase orders should be approved; restrict access to approved vendor list and have procedures in place for any change to the list 6: Kickbacks paid to buyers to influence their decisions  Controls: Clear conflict of interest policy prohibiting the acceptance of any gift from vendors; disclosure of financial interest policy for purchasing agents; and vendor audits 7: Receiving unordered goods  Controls: Receiving department must reject any goods for which there is no approved purchase order 8: Errors in counting goods received  Controls: Use "blind" P.O. copies to force receiving personnel to actually count goods; provide incentives for counting goods 9: Theft of inventory  Controls: Secure inventory storage locations; make transfers of inventory with proper approval and documentation; do periodic physical count and reconciliation with recorded amounts 10: Errors in vendor invoices  Controls: Invoice accuracy should be verified and compared to P.O.s and receiving report data 11: Paying for goods not received  Controls: Voucher package and original invoice should be necessary for payments 12: Failure to take available purchase discounts  Controls: File approved invoices by due date; track invoices by due date; use a cash budget to plan for cash needs 13: Paying same invoice twice  Controls: Invoices should be approved only with a full voucher package and paid ones should be canceled so they cannot be used again; do not pay invoices marked "Duplicate" or "Copy" 14: Recording and posting errors for purchases and payments  Controls: Data entry controls, and periodic reconciliation of subsidiary ledger with general ledger control account 15: Misappropriation of cash by paying fictitious vendors and alteration of checks  Controls: Restrict access to cash, blank checks, and check signing machine; use check protection, pre-numbered checks, and imprinted amounts on checks to cut down on forgery and fraud; use petty cash fund for small expenditures only; have proper segregation of duties and independent bank reconciliation function 16: Theft associated with EFT use  Controls: Access controls to the system; encryption of transmissions; time-stamp and number transmissions; control group should monitor all EFT activity 17: Loss of data  Controls: Use file labels, back up of all data files regularly; and, use access controls 18: Poor performance  Controls: Preparation and review of performance reports Page Ref: 376-377 Objective: Learning Objective 3 Difficulty : Moderate AACSB: Analytic

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82) What types of decision-making and strategic information should the AIS provide in the expenditure cycle? Answer: The AIS should provide decision making information to: Determine when and how much additional inventory to order. Select the appropriate vendors from whom to order. Verify the accuracy of vendor invoices. Decide whether purchase discounts should be taken. Monitor cash flow needs to pay outstanding obligations. AIS should also provide the following strategic and performance evaluation information on: Efficiency and effectiveness of the purchasing department. Analysis of vendor performance such as on-time delivery, quality, etc. Time taken to move goods from the receiving dock into production. Percentage of purchase discounts taken. Page Ref: 372 Objective: Learning Objective 2 Difficulty : Moderate AACSB: Analytic 83) How can using RFID tags or bar codes on goods or products provide significant benefit in the expenditure cycle? Answer: RFID tags and bar codes can significantly improve the process of receiving goods from suppliers for several reasons. First, they can easily be scanned electronically. Electronically capturing the unique number of a product not only provides identification and quantity data about the product; it can also provide specific production information such as date and time of manufacture, production run information, etc. Electronically encoding such information into an integrated AIS provides up-to-theminute inventory counts, as well as counts of units sold, and returns for use in a perpetual inventory system. Also, both vendor and customers can read tags and bar codes, and certain formats are universal in nature. This allows goods to be sold virtually anywhere in the world, allowing for easier global marketing efforts to be made by businesses. It also eliminates the need for human data entry and reduces the risk of stockouts. Page Ref: 374 Objective: Learning Objective 3 Difficulty : Moderate AACSB: Analytic

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