Chapter 4—The Revenue Cycle

TRUE/FALSE
1. The packing slip is also known as the shipping notice.
2. The bill of lading is a legal contract between the buyer and the seller.
3. Another name for the stock release form is the picking ticket.
4. Warehouse stock records are the formal accounting records for inventory.
5. The purpose of the invoice is to bill the customer.
6. In most large organizations, the journal voucher file has replaced the formal general journal.
7. The cash receipts journal is a special journal.
8. In the revenue cycle, the internal control “limit access” applies to physical assets only.
9. In real-time processing systems, routine credit authorizations are automated.
10. In a computerized accounting system, segregation of functions refers to inventory control, accounts receivable, billing, and
general ledger tasks.
11. A written customer purchase order is required to trigger the sales order system.
12. Inventory control has physical custody of inventory.
13. The principal source document in the sales order system is the sales order.
14. Sales orders should be pre-numbered documents.
15. Integrated accounting systems automatically transfer data between modules.
16. If a customer submits a written purchase order, there is no need to prepare a sales order.
17. Sales return involves receiving, sales, credit, and billing departments, but not accounts receivable.
18. A remittance advice is a form of turn-around document.
19. A bill of lading is a request for payment for shipping charges.
20. In point of sale systems, authorization takes the form of validation of credit card charges.

MULTIPLE CHOICE
1. The revenue cycle consists of
a. one subsystem–order entry
b. two subsystems–sales order processing and cash receipts
c. two subsystems–order entry and inventory control
d. three subsystems–sales order processing, credit authorization, and cash receipts

2. The reconciliation that occurs in the shipping department is intended to ensure that
a. credit has been approved
b. the customer is billed for the exact quantity shipped
c. the goods shipped match the goods ordered
d. inventory records are reduced for the goods shipped

3. The adjustment to accounting records to reflect the decrease in inventory due to a sale occurs in the
a. warehouse
b. shipping department
c. billing department
d. inventory control department

4. Which document triggers the revenue cycle?

a. the sales order
b. the customer purchase order
c. the sales invoice
d. the journal voucher

5. Copies of the sales order can be used for all of the following except
a. purchase order
b. credit authorization
c. shipping notice
d. packing slip
6. The purpose of the sales invoice is to
a. record reduction of inventory
b. transfer goods from seller to shipper
c. bill the customer
d. select items from inventory for shipment

7. The customer open order file is used to

a. respond to customer queries
b. fill the customer order
c. ship the customer order
d. authorize customer credit

8. The stock release copy of the sales order is not used to

a. locate and pick the items from the warehouse shelves
b. record any out-of-stock items
c. authorize the warehouse clerk to release custody of the inventory to shipping
d. record the reduction of inventory

9. The shipping notice

a. is mailed to the customer
b. is a formal contract between the seller and the shipping company
c. is always prepared by the shipping clerk
d. informs the billing department of the quantities shipped

10. The billing department is not responsible for

a. updating the inventory subsidiary records
b. recording the sale in the sales journal
c. notifying accounts receivable of the sale
d. sending the invoice to the customer

11. Customers should be billed for backorders when

a. the customer purchase order is received
b. the backordered goods are shipped
c. the original goods are shipped
d. customers are not billed for backorders because a backorder is a lost sale

12. Usually specific authorization is required for all of the following except
a. sales on account which exceed the credit limit
b. sales of goods at the list price
c. a cash refund for goods returned without a receipt
d. write off of an uncollectible account receivable

13. Which of following functions should be segregated?

a. opening the mail and making the journal entry to record cash receipts
b. authorizing credit and determining reorder quantities
c. maintaining the subsidiary ledgers and handling customer queries
d. providing information on inventory levels and reconciling the bank statement

14. Which situation indicates a weak internal control structure?

a. the mailroom clerk authorizes credit memos
b. the record keeping clerk maintains both accounts receivable and accounts payable subsidiary ledgers
c. the warehouse clerk obtains a signature before releasing goods for shipment
d. the accounts receivable clerk prepares customer statements every month

15. The most effective internal control procedure to prevent or detect the creation of fictitious credit memoranda for sales
returns is to
a. supervise the accounts receivable department
b. limit access to credit memoranda
 c. prenumber and sequence check all credit memoranda
d. require management approval for all credit memoranda

16. The accounts receivable clerk destroys all invoices for sales made to members of her family and does not record the sale in
the accounts receivable subsidiary ledger. Which procedure will not detect this fraud?
a. prenumber and sequence check all invoices
b. reconcile the accounts receivable control to the accounts receivable subsidiary ledger
c. prepare monthly customer statements
d. reconcile total sales on account to the debits in the accounts receivable subsidiary ledger

17. Which department is least likely to be involved in the revenue cycle?

a. credit
b. accounts payable
c. billing
d. shipping

18. Which document is included with a shipment sent to a customer?

a. sales invoice
b. stock release form
c. packing slip
d. shipping notice

19. Good internal controls in the revenue cycle should ensure all of the following except
a. all sales are profitable
b. all sales are recorded
c. credit is authorized
d. inventory to be shipped is not stolen

20. Which control does not help to ensure that accurate records are kept of customer accounts and inventory?
a. reconcile accounts receivable control to accounts receivable subsidiary
b. authorize credit
c. segregate custody of inventory from record keeping
d. segregate record keeping duties of general ledger from accounts receivable

21. Internal controls for handling sales returns and allowances do not include
a. computing bad debt expense using the percentage of credit sales
b. verifying that the goods have been returned
c. authorizing the credit memo by management
d. using the original sales invoice to prepare the sales returns slip

22. The printer ran out of preprinted sales invoice forms and several sales invoices were not printed. The best internal control
to detect this error is
a. a batch total of sales invoices to be prepared compared to the actual number of sales invoices prepared
b. sequentially numbered sales invoices
c. visual verification that all sales invoices were prepared
d. none of the above will detect this error

23. Which department prepares the bill of lading?

a. sales
b. warehouse
c. shipping
d. credit

24. A remittance advice is

a. used to increase (debit) an account receivable by the cash received
b. is a turn-around document
c. is retained by the customer to show proof of payment
d. none of the above
25. A weekly reconciliation of cash receipts would include comparing
a. the cash prelist with bank deposit slips
b. the cash prelist with remittance advices
c. bank deposit slips with remittance advices
d. journal vouchers from accounts receivable and general ledger

26. At which point is supervision most critical in the cash receipts system?
a. accounts receivable
b. general ledger
c. mail room
d. cash receipts

27. EDI trading partner agreements specify all of the following except
a. selling price
b. quantities to be sold
c. payment terms
d. person to authorize transactions

28. A cash prelist is

a. a document that records sales returns and allowances
b. a document returned by customers with their payments
c. the source of information used to prepare monthly statements
d. none of the above

29. An advantage of real-time processing of sales is

a. the cash cycle is lengthened
b. current inventory information is available
c. hard copy documents provide a permanent record of the transaction
d. data entry errors are corrected at the end of each batch

30. Commercial accounting systems have fully integrated modules. The word “integrated” means that
a. segregation of duties is not possible
b. transfer of information among modules occurs automatically
c. batch processing is not an option
d. separate entries are made in the general ledger accounts and the subsidiary ledgers

31. The data processing method that can shorten the cash cycle is
a. batch, sequential file processing
b. batch, direct access file processing
c. real-time file processing
d. none of the above

32. Which of the following is not a risk exposure in a microcomputer accounting system?
a. reliance on paper documentation is increased
b. functions that are segregated in a manual environment may be combined in a microcomputer accounting system
c. backup procedures require human intervention
d. data are easily accessible

33. Which journal is not used in the revenue cycle?

a. cash receipts journal
b. sales journal
c. purchases journal
d. general journal

34. Periodically, the general ledger department receives all of the following except
a. total increases to accounts receivable
b. total of all sales backorders
 c. total of all sales
d. total decreases in inventory

35. The credit department

a. prepares credit memos when goods are returned
b. approves credits to accounts receivable when payments are received
c. authorizes the granting of credit to customers
d. none of the above

36. Adjustments to accounts receivable for payments received from customers is based upon
a. the customer’s check
b. the cash prelist
c. the remittance advice that accompanies payment
d. a memo prepared in the mailroom

37. The revenue cycle utilizes all of the following files except
a. credit memo file
b. sales history file
c. shipping report file
d. cost data reference file

38. All of the following are advantages of real-time processing of sales except
a. The cash cycle is shortened
b. Paper work is reduced
c. Incorrect data entry is difficult to detect
d. Up-to-date information can provide a competitive advantage in the marketplace
ESSAY
1. Distinguish between a packing slip, shipping notice, and a bill of lading.
 The packing slip travels with the goods to the customer, and it describes the contents on the order. Upon filling the order,
the shipping department sends the shipping notice to the billing department to notify them that the order has been filled
and shipped. The shipping notice contains additional information that the packing slip may not contain, such as shipment
date, carrier and freight charges. The bill of lading is a formal contract between the seller and the transportation carrier; it
shows legal ownership and responsibility for assets in transit.

2. State two specific functions or jobs that should be segregated in the sales processing system.
 sales order processing and credit approval; inventory control (record keeping) from warehouse (custody); and general
ledger from accounts receivable subsidiary ledger

3. State two specific functions or jobs that should be segregated in the cash receipts system.
 cash receipts (custody) from accounts receivable (record keeping); and general ledger from accounts receivable subsidiary
ledger; mail room (receiving cash) and accounts receivable subsidiary ledger

4. List two points in the sales processing system when authorization is required.
 credit check, sales returns policy, preparation of cash prelist

5. For the revenue cycle, state two specific independent verifications that should be performed.
 shipping verifies that the goods sent from the warehouse are correct in type and quantity;
 billing reconciles the shipping notice with the sales order to ensure that customers are billed only for the quantities
shipped;
 general ledger reconciles journal vouchers submitted by the billing department (sales journal), inventory control (inventory
subsidiary ledger), and cash receipts (cash receipts journal)
 treasurer determines that all cash received got to the bank
6.What task can the accounts receivable department engage in to verify that all checks sent by the customers have been
appropriately deposited and recorded?
 The company should periodically, perhaps monthly, send an account summary to each customer listing invoices and
amounts paid by check number and date. This form allows the customer to verify the accuracy of the records. If any
payments are not recorded, they will notify the company of the discrepancy. These reports should not be handled by the
accounts receivable clerk or the cashier.

7. What specific internal control procedure would prevent the sale of goods on account to a fictitious customer?
 credit check

8.The clerk who opens the mail routinely steals remittances. Describe a specific internal control procedure that would
prevent or detect this fraud.
 supervision (two people) when opening the mail;
 customer complaints when monthly statements mailed

9.A customer payment of $247 was correctly posted in the general ledger but was recorded as $274 in the customer’s
account receivable. Describe a specific internal control procedure that would detect this error.
 reconcile the accounts receivable control account to the accounts receivable subsidiary ledger; compare control totals of
cash received with total credits to A/R subsidiary ledger

10. Goods are shipped to a customer, but the shipping department does not notify billing and the customer never receives an
invoice. Describe a specific internal control procedure that would detect this error.
 Billing department matches the stock release copy of the sales order (from shipping) to the invoice, ledger, and file copies
of the sales order (sent directly to billing), and then mails the invoice to the customer. After a certain amount of time has
passed, the billing department should investigate any unmatched invoice, ledger, and file copies of the sales order.

11. A clerk embezzles customer payments on account and covers up the theft by making an adjustment to the accounts
receivable ledger. Describe a specific internal control procedure that would prevent this fraud.
 segregation of duties; do not let one person have custody of payments and the ability to make adjustments to the records;
all adjustments to accounts receivable records must be authorized

12. A credit sale is made to a customer, even though the customer’s account is four months overdue. Describe a specific
internal control procedure that would prevent this from happening.
 perform a credit check and require management approval for all sales to accounts that are overdue

13. What specific internal control procedure would prevent a customer from being billed for all 50 items ordered although only
40 items were shipped?
 billing should reconcile the shipping report with the sales order

14. What specific internal control procedure would prevent the shipping clerk from taking goods from the storeroom and
sending them to someone who had not placed an order?
 shipping clerk should not have access to the storeroom

15. What specific internal control procedure would prevent an accounts receivable clerk from issuing a fictitious credit memo
to a customer (who is also a relative) for goods that were “supposedly” returned from previous sales?
 credit memo should be authorized after verifying the return of goods based on evidence from the person who received the
goods

16. What specific internal control procedure would prevent an increase in sales returns since salesmen were placed on
commission?
 customer credit should be verified by the credit department reduce commissions for sales returns

17. What specific internal control procedure would detect the misplacement of a sales invoice after preparation and not mailed
to the customer? The invoice was never found.
 all documents should be prenumbered

18. What function does the receiving department serve in the revenue cycle?
 The receiving department counts and inspects items which are returned by customers. The receiving department prepares
a return slip of which a copy goes to the warehouse for restocking, and a copy goes to the sales order department so that a
credit memo can be issued to the customer.

19. What are the three rules that ensure that no single employee or department processes a transaction in its entirety.
 The three rules that ensure segregation of functions are:
a. Transaction authorization should be separate from transaction processing
b. Asset custody should be separate from asset record keeping.
c. The organization structure should be such that the perpetration of a fraud requires collusion between 2 or more
individuals.

20. What is automation and why is it used?

 Automation involves using technology to improve the efficiency and effectiveness of a task. Automation of the revenue
cycle is typically used to reduce overhead costs, make better credit granting decisions, and better collect outstanding
accounts receivable.

21. What is the objective of re-engineering?

 The objective of re-engineering is to greatly reduce costs by identifying and eliminating non value-added tasks and also by
streamlining necessary existing processes.

22. What are the key segregation of duties related to computer programs that process accounting transactions.
 Response: The tasks of design, maintenance, and operation of computer programs need to be segregated. The
programmers who write the original computer programs should not also be responsible for making program changes. Both
of these functions must also be separate from the daily task of operating the system.

23. How is EDI more than technology? What unique control problems may it pose?
 EDI represents a unique business arrangement between the buyer and seller in which they agree, in advance, to the terms
of their relationship on such items as selling price, quantities, delivery times, payment terms and methods of handling
disputes. The terms of agreement are binding. One problem is ensuring that only valid transactions are processed. Another
risk is that a non-trading partner will masquerade as a trading partner and access the firm's processing systems.

24. What makes point-of-sales systems different from revenue cycles of manufacturing firms?
 In point-of-sale systems, the customer literally has possession of the items purchased, thus the inventory is in hand.
Typically, for manufacturing firms, the order is placed and the good is shipped to the customer at some later time period.
Thus, updating inventory at the time of sale is necessary in point-of-sale systems since the inventory is changing hands,
while it is not necessary in manufacturing firms until the goods are actually shipped to the customer.

25. Give three examples of Access Control in a Point-of-Sale (POS) system.

 Lock on the cash drawer
 Internal cash register tape that can be accessed only by the manager
 Physical security over the inventory. The following are examples: Steel cables to secure expensive leather coats to the
clothing rack. Locked showcases to display jewelry and costly electronic equipment. Magnetic tags attached to
merchandise, which will sound an alarm when removed from the store.
Note to Instructor: Some physical security devices could also be classified as supervision

26. When Clipper Mail Order Co. receives telephone and fax orders, the billing department prepares an invoice. The invoice is
mailed immediately. A copy of the invoice serves as a shipping notice. The shipping department removes inventory from
the warehouse and prepares the shipment. When the order is complete, the goods are shipped. The clerk checks the
customer’s credit before recording the sale in the general journal and the account receivable subsidiary ledger.
The receptionist opens the mail and lists all payments. The receptionist also handles all customer complaints and prepares
sales return forms for defective merchandise. The cashier records all cash receipts in the general journal and makes the
appropriate entry in the accounts receivable subsidiary ledger. The cashier prepares the daily bank deposit.
Describe at least four internal control weaknesses at Clipper Mail Order Co.
 no sales order is prepared; credit should be checked before shipping the items; invoices are mailed before the goods are
shipped; shipping has access to the warehouse; record keeping duties are not segregated (general ledger from subsidiary
ledger); only one person opens the mail; sales return forms are not authorized by management; custody and record
keeping duties are not separated; the cashier has custody of cash, makes journal entries, and maintains A/R ledger; Cashier
has custody of cash and handles customer complaints (e.g., about unrecorded payments).

27. How may an employee embezzle funds by issuing an unauthorized sales credit memo if the appropriate segregation of
functions and authorization controls were not in place?
 An employee who has access to incoming payments, either cash or check, as well as the authorization to issue credit
memos may pocket the cash or check of a payment for goods received. This employee could then issue a credit memo to
this person’s account so that the customer does not show a balance due.

28. For each of the following documents, describe its purpose, the functional area preparing it, and the key data included: sales
order, bill of lading, credit memo.
 A sales order is used to collect information needed to initiate the sales process. It can be a copy of the customer’s purchase
order prepared by the customer or a document prepared by a member of the sales staff in response to mail, phone or
personal contact with the customer. It contains information about the customer, the type and quantity of merchandise
being requested, price information, shipping information, etc.
 The bill of lading is prepared by the shipping clerk. It is a formal contract between the seller and the carrier who will
transport the goods to the customer. It contains information about the carrier, the customer, descriptions of the package(s)
being shipped, declared value of the goods, and information on freight charges, including how much and who will pay.
 A credit memo is a document authorizing issuance of credit to a customer for returned goods. It is prepared in the sales
department after receipt of a return slip from receiving. It shows the customer’s name, reason for the return, a list of items
and prices, and the total amount of credit. Many credit memos require additional authorization.

29. What features of a reengineered cash receipts system contribute to improved control and reduced costs? What complicates
the process?
 A reengineered cash receipts system can include automated mail processing that opens envelopes and separates checks
and remittance advices in a manner that limits access of the mail room clerk to the checks. Software can be used to read
the amount of payment and compare to the amount due, verify that the check has been signed, etc. “Good” transactions
continue through processing, exceptions are handled separately. Checks are sent to the cash receipts department for
deposit, listings of transactions are sent to accounts receivable, cash receipts, and general ledger departments. This process
is complicated when the organization receives many partial payments, single payments covering multiple invoices, or
encounters many clerical errors on the part of customers.

30. What role does each of the following departments play in the sales order processing subsystem: sales, credit, and shipping?
Be complete.
 The sales department receives the order information from the customer, either by mail, phone, or in person. Information is
captured on a sales order form which includes customer name, account number, name, number and description of items
 ordered, quantities and unit prices plus taxes, shipping info, discounts, freight terms. This form is usually prepared in
multiple copies that are used for credit approval, packing, stock release, shipping, and billing.
 The credit department provides transaction authorization by approving the customer for a credit sale and returns and
allowances.
 The shipping department receives information from the sales department in the form of packing slip and shipping notice.
When the goods arrive from the warehouse, the documents are reconciled with the stock release papers. The goods are
packed and labeled. The packing slip is included. The shipping notice is sent to billing. A bill of lading is prepared to
accompany the shipment.

31. With regard to segregation of duties, rule one is that transaction authorization and transaction processing should be
separated. What does this require in the revenue cycle?
 Within the revenue cycle, the credit department is separate from the rest of the process. Hence, the authorization of the
transaction (granting of credit) is independent. If other people, e.g., sales staff, were able to authorize credit sales, there
would be the temptation to approve sales to any customer, even those known to not be credit worthy.

32. With regard to segregation of duties, rule two is that asset custody and record keeping should be separated. What does this
require in the revenue cycle?
 In the revenue cycle, the warehouse has custody of physical assets while accounting (especially general ledger and
inventory control) maintains the records. Also, in the cash receipts subsystem, cash receipts has custody of the asset (cash)
while general ledger and accounts receivable keep the records.

33. What role does each of the following departments play in the cash receipts subsystem: mail room, cash receipts, accounts
receivable, and general ledger? Be complete.
 The mail room receives the customer’s payment–usually a check accompanied by a document called a remittance advice
(which may be a copy of the invoice sent to the customer). Mail clerks separate the two, prepare a cash prelist or
remittance list which lists all the payments received and sends the checks to the cashier and remittance advices to accounts
receivable.
 In cash receipts someone (e.g., cashier) restrictively endorses the checks and records the payments in the cash receipts
journal. A deposit slip is prepared which accompanies the checks to the bank.
 The accounts receivable department posts from the remittance advices to the customer accounts in the AR subsidiary
ledger.
 The general ledger department records cash receipts to the cash and AR control accounts based on the list from the
mailroom and the summary report of posting from A/R.

34. For each of the following documents, describe its purpose, the functional area preparing it, and the key data included:
remittance advice, remittance list, deposit slip.
 A remittance advice is sent by the customer to accompany payment. However, it is often part of or a copy of the invoice
sent by the billing department after the goods were shipped.
 A remittance list is often called a cash prelist and is prepared by the mail room clerk to record all cash received. It
accompanies the checks to the cashier.
 A deposit slip is prepared by the cashier to accompany the checks to the bank. This is usually a preprinted bank form.

35. How is independent verification carried out in a manual revenue system?

 Independent verification occurs in several departments as part of the sales order processing system. The shipping
department verifies that the goods released by the warehouse for shipment, as shown on the stock release document,
match the packing slip. Billing compares the shipping notice with the invoice to be sure customers are billed only for goods
shipped. And general ledger reconciles the journal vouchers prepared by billing, inventory control, cash receipts, and
accounts receivable. This reconciliation focuses on a match between what was ordered, what was removed from the
stockroom, what was shipped, what was billed, cash received, and credit to the customer account.
Chapter 5—The Expenditure Cycle Part I: Purchases and Cash Disbursements Procedures

TRUE/FALSE
1. Purchasing decisions are authorized by inventory control.
2. The blind copy of the purchase order that goes to the receiving department contains no item descriptions.
3. Firms that wish to improve control over cash disbursements use a voucher system.
4. In a voucher system, the sum of all unpaid vouchers in the voucher register equals the firm’s total voucher payable balance.
5. The accounts payable department reconciles the accounts payable subsidiary ledger to the control account.
6. The use of inventory reorder points suggests the need to obtain specific authorization.
7. Proper segregation of duties requires that the responsibility approving a payment be separated from posting to the cash
disbursements journal.
8. A major risk exposure in the expenditure cycle is that accounts payable may be overstated at the end of the accounting
year.
9. When a trading partner agreement is in place, the traditional three way match may be eliminated.
10. Authorization of purchases in a merchandising firm occurs in the inventory control department.
11. A three way match involves a purchase order, a purchase requisition, and an invoice.
12. Authorization for a cash disbursement occurs in the cash disbursement department upon receipt of the supplier’s invoice.
13. 13. An automated cash disbursements system can yield better cash management since payments are made on time.
14. Permitting warehouse staff to maintain the only inventory records violates separation of duties.
15. A purchasing system that employs electronic data interchange does not use a purchase order.
16. Inventory control should be located in the warehouse.
17. Inspection of shipments in the receiving department would be improved if the documentation showed
18. the value of the inventory.
19. One reason for authorizing purchases is to enable efficient inventory management.
20. If accounts payable receives an invoice directly from the supplier it needs to be reconciled with the
21. purchase order and receiving report.
22. Supervision in receiving is intended to reduce the theft of assets.

MULTIPLE CHOICE

1. The purpose of the purchase requisition is to

a. order goods from vendors
b. record receipt of goods from vendors
c. authorize the purchasing department to order goods
d. bill for goods delivered

2. The purpose of the receiving report is to

a. order goods from vendors
b. record receipt of goods from vendors
c. authorize the purchasing department to order goods
d. bill for goods delivered

3. All of the following departments have a copy of the purchase order except
a. the purchasing department
b. the receiving department
c. accounts payable
d. general ledger

4. The purpose of the purchase order is to

a. order goods from vendors
b. record receipt of goods from vendors
c. authorize the purchasing department to order goods
d. approve payment for goods received

5. The open purchase order file in the purchasing department is used to determine
a. the quality of items a vendor ships
b. the best vendor for a specific item
c. the orders that have not been received
 d. the quantity of items received

6. The purchase order

a. is the source document to make an entry into the accounting records
b. indicates item description, quantity, and price
c. is prepared by the inventory control department
d. is approved by the end-user department

7. The reason that a blind copy of the purchase order is sent to receiving is to
a. inform receiving when a shipment is due
b. force a count of the items delivered
c. inform receiving of the type, quantity, and price of items to be delivered
d. require that the goods delivered are inspected

8. The receiving report is used to

a. accompany physical inventories to the storeroom or warehouse
b. advise the purchasing department of the dollar value of the goods delivered
c. advise general ledger of the accounting entry to be made
d. advise the vendor that the goods arrived safely

9. When a copy of the receiving report arrives in the purchasing department, it is used to
recognize the purchase order as closed
ANS: D

10. The financial value of a purchase is determined by reviewing the

a. packing slip
b. purchase requisition
c. receiving report
d. supplier’s invoice

11. Which document is least important in determining the financial value of a purchase?
a. purchase requisition
b. purchase order
c. receiving report
d. supplier’s invoice

12. In a merchandising firm, authorization for the payment of inventory is the responsibility of
a. inventory control
b. purchasing
c. accounts payable
d. cash disbursements

13. In a merchandising firm, authorization for the purchase of inventory is the responsibility of
a. inventory control
b. purchasing
c. accounts payable
d. cash disbursements

14. When purchasing inventory, which document usually triggers the recording of a liability?
a. purchase requisition
b. purchase order
c. receiving report
d. supplier’s invoice

15. Because of time delays between receiving inventory and making the journal entry
a. liabilities are usually understated
b. liabilities are usually overstated
c. liabilities are usually correctly stated
 d. none of the above

16. Usually the open voucher payable file is organized by

transaction date

17. Which of the following statements is not correct?

a. the voucher system is used to improve control over cash disbursements
b. the sum of the paid vouchers represents the voucher payable liability of the firm
c. the voucher system permits the firm to consolidate payments of several invoices on one voucher
d. many firms replace accounts payable with a voucher payable system

18. In the expenditure cycle, general ledger does not

a. post the journal voucher from the accounts payable department
b. post the account summary from inventory control
c. post the journal voucher from the purchasing department
d. reconcile the inventory control account with the inventory subsidiary summary

19. The documents in a voucher packet include all of the following except
a. a check
b. a purchase order
c. a receiving report
d. a supplier’s invoice

20. To maintain a good credit rating and to optimize cash management, cash disbursements should arrive at the vendor’s place
of business
a. as soon as possible
b. on the due date
c. on the discount date
d. by the end of the month

21. The cash disbursement clerk performs all of the following tasks except
a. reviews the supporting documents for completeness and accuracy
b. prepares checks
c. signs checks
d. marks the supporting documents paid

22. When a cash disbursement in payment of an accounts payable is recorded

a. the liability account is increased
b. the income statement is changed
c. the cash account is unchanged
d. the liability account is decreased
Chapter 6—The Expenditure Cycle Part II: Payroll Processing and Fixed Asset Procedures
TRUE/FALSE
1. Time cards are used by cost accounting to allocate direct labor charges to work in process.
2. The personnel department authorizes changes in employee pay rates.
3. Most payroll systems for mid-size firms use real-time data processing.
4. To improve internal control, paychecks should be distributed by the employee's supervisor.
5. Employee paychecks should be drawn against a special checking account.
6. Because a time clock is used, no supervision is required when employees enter and leave the work place.
7. Inventory control performs the formal record keeping function for fixed assets.
8. The depreciation schedule shows when assets are fully depreciated.
9. Authorization to dispose of fixed assets should be issued by the user of the asset.
10. Work-in-process records are updated by payroll personnel.
11. Ideally, payroll checks are written on a special bank account used only for payroll.
12. The supervisor is the best person to determine the existence of a “phantom employee” and should distribute paychecks.
13. Payroll processing can be automated easily because accounting for payroll is very simple.
14. Timekeeping is part of the personnel function.
15. Fixed asset accounting systems include cost allocation and matching procedures that are not part of routine expenditure
systems.
16. Asset maintenance involves only the recording of depreciation charges. Physical improvements are always expensed.
17. Fixed Asset Systems must keep track of the physical location of each asset to promote accountability.
18. Time cards capture the total time an individual worker spends on each production job.
19. Accounting conventions and IRS rules sometime specify the depreciation parameters to be used.
20. The fixed asset disposal report authorizes the user department to dispose of a fixed asset.
MULTIPLE CHOICE
1. The document that captures the total amount of time that individual workers spend on each production job is called a
a. time card
b. job ticket
c. personnel action form
d. labor distribution form

2. An important reconciliation in the payroll system is

a. general ledger compares the labor distribution summary from cost accounting to the disbursement voucher from
accounts payable
b. personnel compares the number of employees authorized to receive a paycheck to the number of paychecks prepared
c. production compares the number of hours reported on job tickets to the number of hours reported on time cards
d. payroll compares the labor distribution summary to the hours reported on time cards

3. Which internal control is not an important part of the payroll system?

a. Supervisors verify the accuracy of employee time cards.
b. Paychecks are distributed by an independent paymaster.
c. Accounts payable verifies the accuracy of the payroll register before transferring payroll funds to the general checking
accounting.
d. General ledger reconciles the labor distribution summary and the payroll disbursement voucher.

4. Which transaction is not processed in the Fixed Asset System?

a. purchase of building
b. improvement of equipment
c. purchase of raw materials
d. sale of company van

a. Depreciation
a. is calculated by the department that uses the fixed asset
b. allocates the cost of the asset over its useful life
c. is recorded weekly
d. results in book value approximating fair market value

5. Depreciation records include all of the following information about fixed assets except
 a. the economic benefit of purchasing the asset
b. the cost of the asset
c. the depreciation method being used
d. the location of the asset

6. Which control is not a part of the Fixed Asset System?

a. formal analysis of the purchase request
b. review of the assumptions used in the capital budgeting model
c. development of an economic order quantity model
d. estimates of anticipated cost savings

7. Objectives of the Fixed Asset System do not include

a. authorizing the acquisition of fixed assets
b. recording depreciation expense
c. computing gain and/or loss on disposal of fixed assets
d. maintaining a record of the fair market value of all fixed assets

8. Which of the following is not a characteristic of the Fixed Asset System?

a. Acquisitions are routine transactions requiring general authorization.
b. Retirements are reported on an authorized disposal report form.
c. Acquisition cost is allocated over the expected life of the asset.
d. Transfer of fixed assets among departments is recorded in the fixed asset subsidiary ledger.

9. In the payroll subsystem, which function should distribute paychecks?

a. personnel
b. timekeeping
c. paymaster
d. payroll

10. Where does the responsibility lie for reconciling the labor distribution summary and the payroll disbursement voucher?
a. cash disbursements
b. cost accounting
c. personnel
d. general ledger

11. Which of the following statements is not true?

a. Routine payroll processing begins with the submission of time cards.
b. Payroll clerks must verify the hours reported on the time cards.
c. Payroll reconciles personnel action forms with time cards and prepares paychecks.
d. Cash disbursements signs paychecks and forwards them to the paymaster for distribution.

12. In a manufacturing firm, employees use time cards and job tickets. Which of the following statements is not correct?
a. Job tickets are prepared by employees for each job worked on, so an employee may have more that one job ticket on a
given day.
b. An individual employee will have only one time card.
c. The time reported on job tickets should reconcile with the time reported on time cards.
d. Paychecks should be prepared from the job tickets.

13. Which department is responsible for approving changes in pay rates for employees?
a. payroll
b. treasurer
c. personnel
d. cash disbursements

14. Which of the following situations represents a serious control weakness?

a. Timekeeping is independent of the payroll department.
b. Paychecks are distributed by the employees immediate supervisor.
c. Time cards are reconciled with job tickets.
 d. Personnel is responsible for updating employee records, including creation of records for new hires.

15. Why would an organization require the paymaster to deliver all unclaimed paychecks to the internal audit department?
a. to detect a “phantom employee” for whom a check was produced
b. to prevent an absent employee’s check from being lost
c. to avoid paying absent employees for payday
d. to prevent the paymaster from cashing unclaimed checks

16. Which of the following is not a reasonable control for fixed assets?
a. Proper authorization is required for acquisition and disposal of fixed assets.
b. Fixed asset records show the location of each asset.
c. Fully depreciated assets are immediately disposed of.
d. Depreciation policies are in writing.

17. Cost accounting updates work-in-process accounts from

a. time cards
b. the labor distribution summary
c. job tickets
d. personnel action forms

18. Payroll uses time card data to do all of the following except
a. prepare the payroll register
b. update employee payroll records
c. prepare the labor distribution summary
d. prepare paychecks

19. Payroll checks are typically drawn on

a. the regular checking account
b. a payroll imprest account
c. a wages payable account
d. petty cash

20. The personnel action form provides authorization control by

a. preventing paychecks for terminated employees
b. verifying pay rates for employees
c. informing payroll of new hires
d. all of the above

21. Accounting records that provide the audit trail for payroll include all of the following except
a. time cards
b. job tickets
c. payroll register
d. accounts payable register

22. Personnel actions forms are used to do all of the following except
a. activate new employees
b. terminate employees
c. record hours worked
d. change pay rates

23. The payroll department performs all of the following except

a. prepares the payroll register
b. distributes paychecks
c. updates employee payroll records
d. prepares paychecks

24. The document that records the total amount of time spent on a production job is the
a. time card
 b. job ticket
c. labor distribution summary
d. personnel action form

25. A control technique that can reduce the risk of a terminated employee being paid is
a. a security camera viewing the time clock
b. the supervisor taking role during the shift
c. paychecks being distributed by an independent paymaster
d. reconciliation of time cards and job tickets

26. Accounts payable

a. signs paychecks
b. prepares the payroll voucher
c. reconciles time cards and employee records
d. distributes paychecks to employees

27. All of the following are processed by the Fixed Asset System except
a. sale of unneeded equipment
b. purchase of raw materials
c. repair of production equipment
d. purchase of a new plant

28. The Fixed Asset System performs all of the following except
a. determines the need for new assets
b. maintains depreciation records
c. records retirement and disposal of assets
d. tracks the physical location of fixed assets

29. The payroll department performs all of the following except

a. prepares paychecks
b. transfers adequate funds to the payroll imprest account
c. updates employee payroll records
d. prepares the payroll register

30. Depreciation
a. assures that assets are reported at fair market value
b. is discretionary for many firms
c. allocates the cost of an asset over its useful life
d. is the responsibility of the department using the asset

31. The Fixed Asset System is similar to the expenditure cycle except
a. fixed asset transactions are non-routine and require special authorization and controls
b. fixed assets are capitalized, not expensed
c. both a and b
d. none of the above

32. Asset maintenance involves

a. the recording of periodic depreciation
b. adjusting the asset records to reflect the cost of physical improvements
c. keeping track of the physical location of the assets
d. all of the above

33. The Fixed Asset Systems does all of the following except
a. records acquisition of assets
b. records improvements to assets
c. estimates the fair market value of assets in service
d. records the disposal of assets
34. Asset disposal
 a. occurs as soon as an asset is fully depreciated
b. requires no special authorization
c. automatically initiates the purchase of a replacement asset
d. must follow formal authorization procedures

ESSAY

1.Describe an internal control procedure that would prevent an employee from punching the time clock for another, absent
employee.
 supervision of the time clock at the start of the shift

2. Why should the employee’s supervisor not distribute paychecks?

 A form of payroll fraud involves a supervisor submitting fraudulent time cards for nonexistent employees. The resulting
paychecks, when returned to the supervisor are then cashed by the supervisor.

3.Describe an internal control procedure that would prevent a supervisor from stealing the unclaimed paychecks of
employees who have been terminated.
 This type of fraud can be reduced or eliminated by using a paymaster to distribute paychecks to employees in person. Any
uncollected paychecks are then returned to payroll. Also, mail final paychecks to terminated employees.

4. Why should employee paychecks be drawn against a special checking account?

 A separate imprest account is established for the exact amount of the payroll based on the payroll summary. When the
paychecks are cashed, this account should clear leaving a zero balance. Any errors in checks (additional checks or abnormal
amounts) would result in a non-zero balance in the imprest account and/or some paycheck would not clear. This will alert
management to the problem so corrective action can be taken.

5. Why should employees clocking on and off the job be supervised?

 A form of payroll fraud involves employees clocking the time cards of absent employees. By supervising the clocking in and
out process, this fraud can be reduced or eliminated.

6. What is a personnel action form?

 The personnel action form provides the payroll department with a list of currently active employees, so that any submission
of time cards by supervisors for fictitious or ex-employees will not be processed.

7.In a manufacturing firm, employees typically fill out two different documents regarding their time worked. What are they?
Why are there two?
 The two documents are the time card and the job ticket. Two are required because the time card records all the time
worked by an employee during the period while the job ticket details the time by project.

8. List two types of authorization required in the Fixed Asset System.

 authorization to purchase the asset and to dispose of the asset

9. List four types of data that appear on a depreciation schedule.

 item description, depreciation method, useful life, date acquired, cost, salvage value, accumulated depreciation,
depreciation expense per period, book value

10. Which documents prompt the fixed asset department to create a fixed asset record?
 the receiving report and the disbursement voucher

11. Describe an internal control that would prevent an employee from stealing a computer and then reporting it as scrapped.
 Supervisors must authorize the disposal of the computer. Unless so authorized, the record will continue to show that the
employee is responsible for the computer.

12. Describe an internal control that would prevent the payment of insurance premiums on an automobile that is no longer
owned by the company.
 Perform an annual physical inventory of fixed assets and adjust the records to reflect assets no longer on hand. Prepare
reports about the disposal of assets.
13. Describe an internal control that would prevent the charging of depreciation expense to the maintenance department for a
sweeper that is now located in and used by the engineering department.
 Prepare reports about the transfer of fixed assets. Perform an annual physical inventory and note the location of assets.
Budget and then hold each department accountable for depreciation expense for assets located in each department.

14. Describe an internal control that would prevent the acquisition of office equipment which is not needed by the firm.
 A higher organizational level or other appropriate person authorizes fixed asset acquisitions; part of the authorization is
showing that a need for the asset exists.

15. What negative consequences result when fixed asset records include assets that are no longer owned by the firm?
 On the financial statements, assets will be overstated and depreciation expense could be overstated. Assets on property tax
returns will be overstated and too much tax will be paid. Insurance premiums will be paid on nonexistent assets.

16. Explain the purpose of each of the following documents used in the payroll system: the personnel action form, the job
ticket, the time card.
 The personnel action form is a document which identifies employees who should receive a paycheck; reflects changes in
pay rates, payroll deductions, and job classifications.
 The job ticket collects information on the time individual workers spend on each production job.
 The time card captures the total time that an employee is at work.

17. How do fixed asset systems differ from the expenditure cycle?
 The fixed asset system processes nonroutine transactions for a wider group of users in the organization than the
expenditure cycle. Further, the expenditure cycle processes routine acquisitions of raw materials inventories for the
production function and finished goods inventories for the sales function. The expenditure cycle transactions are
oftentimes automatically approved by the system, while fixed asset transaction approvals typically demand individual
attention due to the uniqueness of the transactions.

18. What is recorded by the asset maintenance part of the Fixed Asset System?
 periodic depreciation following an approved depreciation schedule and physical improvements to the asset to increase the
subsidiary account and to adjust the depreciation schedule

19. How are the following carried out in the Fixed Asset System: authorization, supervision, independent verification?
 Independent authorization is required to acquire an asset and to formalize the depreciation schedule.
 Supervision must be exercised over the physical assets.
 Independent verification must confirm the location, existence, and condition of the assets.

20. Which department authorizes changes to employee pay rates?

 The personnel department via the personnel action form

21. The Golf Club Company makes custom golf clubs. The manufacturing supervisor interviews people who have specialized
manufacturing skills, and he informs payroll when an employee is hired. The employees use a time clock to record the hours
they work. The employees are also required to keep a record of the time they spend working on each order. The supervisor
approves all time cards.
The accountant analyzes the job tickets and prepares a labor distribution summary. Payroll prepares the payroll register and
paychecks. The supervisor distributes the paychecks to the employees. Payroll informs cash disbursement of the funds
required to cover the entire payroll amount. The cash disbursements clerk ensures that there are adequate funds in the
company's regular checking account to cover the payroll.
Describe at least three internal control weaknesses; for each weakness suggest an improvement to internal control.
 WEAKNESS: The supervisor could be creating fictitious employees. The supervisor has too many incompatible duties; he
hires workers, approves the time cards, and distributes the paychecks.
IMPROVEMENT: Segregate duties. Personnel should hire employees and a paymaster should distribute paychecks.
 WEAKNESS: Employees could be paid for time they do not work; a co-worker could record an absent worker as present
(punch the time clock).
IMPROVEMENT: Supervise the time clock. Reconcile time cards and job time tickets.
 WEAKNESS: Payroll has authorization and transaction processing responsibilities. Payroll is authorizing the disbursement to
fund the entire payroll. Accounts payable is not part of the system.
IMPROVEMENT: Segregate duties; accounts payable should verify the accuracy of the payroll register and create a
disbursement voucher.
 WEAKNESS: Payroll is funded through the general checking account.
IMPROVEMENT: Paychecks should be written on a separate payroll account.

22. Describe how the Fixed Asset System differs from the expenditure cycle.
 The Fixed Asset System processes nonroutine transactions which are recorded as capital assets. The receiving department
delivers fixed assets to the user/manager. The fixed asset department performs the record keeping function.
 The expenditure cycle processes routine transactions which are often debited to inventory or expensed. The receiving
department delivers routine purchases to a central store or warehouse. Inventory Control performs the record keeping
function for inventory purchases.

23. Three major tasks are handled by the Fixed Asset System. What is the purpose of each? What special control issues affect
each?
 Asset acquisition handles the steps leading to the acquisition of new fixed assets: recognition of need, authorization and
approval, possible capital investment analysis, and selection of supplier. Because of the value of fixed assets, special
approvals are needed.
 Asset maintenance involves adjusting the subsidiary account balances for depreciation, and improvements and tracking
location. Control involves accountability by keeping track of the physical location of each asset.
 Asset disposal handles the removal of assets from the subsidiary ledger when the asset is taken out of service. This requires
special approval and preparation of a disposal report.

24. The Baccus Corp. manufactures medical equipment. This is a capital intensive industry and investments in fixed assets
exceed $5 million a year. The minimum cost for production equipment is $75,000. When supervisors want new production
machinery, they contact the plant manager. The plant manager approves or denies the request based on discussions with
the production supervisor, the repair and maintenance supervisor, and the quality control supervisor.
A purchase order is prepared by the purchasing department and sent to one of the three major suppliers of production
machinery for medical equipment. The equipment is delivered immediately to the production floor and put into service. At
the end of the month, the production supervisor informs the general ledger clerk about the receipt of the machinery. The
general ledger clerk establishes an asset record for the machine. At the end of the year, the general ledger clerk computes
straight-line depreciation based on a 10-year life with a 10 percent salvage value. Depreciation expense is recorded as a
direct reduction of the asset cost.
The repair department performs routine maintenance on all of the production equipment. Occasionally the repair
department rebuilds a machine to extend its useful life. All of the costs associated with the repair department are charged
to manufacturing overhead. When a machine becomes obsolete, production employees move it to a corner of the factory
floor and break it down so that parts can be used in other machines. Production employees routinely remove parts for
personal use. Some smaller machines have disappeared completely from the factory floor.
The general ledger clerk takes a physical inventory every three years. About 75 percent of the fixed assets can be located
and identified. Other assets have serial numbers that are inaccessible, so the item cannot be matched to a fixed asset
record. Some fixed asset records cannot be traced to an actual item. Several machines that have been scrapped and are
being used for spare parts were matched to fixed asset records. At the last inventory, the general ledger clerk did not make
any adjustments to the fixed asset records explaining that 75 percent accuracy in the fixed asset physical inventory was
excellent.
Describe five internal control weaknesses and explain how to correct them.
 WEAKNESS: There is no written documentation of the approval for purchase.
IMPROVEMENT: A formal capital investment analysis should be performed for purchases of fixed assets; the analysis
should evaluate cost and benefits of the request.
 WEAKNESS: There is no process for obtaining competitive bids.
IMPROVEMENT: Price bids should be obtained from the three suppliers before a purchase order is issued.
 WEAKNESS: Fixed assets are delivered directly to the factory floor.
IMPROVEMENT: All purchases should go through the receiving department; the equipment should be inspected and a
receiving report should be prepared.
 WEAKNESS: The production supervisor notifies the general ledger clerk about the receipt of fixed assets.
IMPROVEMENT: The receiving department should send a copy of the receiving report to the fixed asset department so that
fixed asset records can be updated and accountability for the asset established.
 WEAKNESS: The general ledger clerk is maintaining fixed asset records.
IMPROVEMENT: The fixed asset department should maintain fixed asset records.
 WEAKNESS: Depreciation is computed using a standard method, asset life, and salvage value.
IMPROVEMENT: Management should ensure that the depreciation method is appropriate. The asset life and salvage value
should be determined individually for each fixed asset acquisition.
 WEAKNESS: Depreciation is recorded as a direct reduction of the asset cost.
IMPROVEMENT: Depreciation should be recorded in an Accumulated Depreciation account for each asset.
 WEAKNESS: Costs to rebuild a machine is charged to manufacturing overhead.
IMPROVEMENT: Costs to rebuild machines should be recorded as an increase to the cost of the asset.
 WEAKNESS: There is no authorization to scrap an obsolete machine.
IMPROVEMENT: Obtain written authorization from management before a machine is scrapped.
 WEAKNESS: Employees remove equipment and equipment parts from the premises without authorization.
IMPROVEMENT: Employees should receive written authorization before removing parts or equipment from the factory.
 WEAKNESS: The general ledger clerk is conducting the physical inventory and maintaining the record keeping.
IMPROVEMENT: The general ledger clerk should not be taking the physical inventory count. Also, the physical count should
occur more frequently.
 WEAKNESS: Fixed assets cannot be matched with records.
IMPROVEMENT: Apply easily accessible labels to identify fixed assets.
 WEAKNESS: Fixed assets cannot be located and are not removed from the books.
IMPROVEMENT: Fixed assets that cannot be located must be removed from the fixed asset records.
 WEAKNESS: Fixed assets that are scrapped remain on the books.
IMPROVEMENT: Assets that are scrapped should be removed from the fixed asset records.
 WEAKNESS: The clerk regards 75% accuracy as excellent.
IMPROVEMENT: Acceptance of 75% accuracy is poor. Any variation should be investigated and records updated.

25. Why does the payroll process lend itself to batch processing?
 Payroll lends itself to batch computerization because it is processed at fixed time intervals which permits some time lag.
Processing the payroll file usually involves most employees each time it is processed, which is an efficient use of computer
resources and can be accomplished with a single pass through the file.

26. Discuss the fundamental risk and control issues associated with fixed assets that are different from raw materials and
finished goods.
 AUTHORIZATION CONTROLS. Because fixed assets are requested and employed by end-users asset acquisitions should be
formal and explicitly authorized. Each material transaction should be initiated by a written request from the user or
department. In the case of high-value items, there should be an independent approval process that evaluates the merits of
the request on a cost-benefit basis.
 SUPERVISION CONTROLS. Because capital assets are widely distributed around the organization, they are more susceptible
to theft and misappropriation than inventories that are secured in a warehouse. Therefore, management supervision is an
important element in the physical security of fixed assets. Supervisors must ensure that fixed assets are being used in
accordance with the organization’s policies and business practices.
 INDEPENDENT VERIFICATION CONTROLS.
a. Periodically, the internal auditor should review the asset acquisition and approval procedures to determine the
reasonableness of key factors including: the useful life of the asset, the original financial cost, proposed cost
savings as a result of acquiring the asset, the discount rate used, and the capital budgeting method used in
justifying decisions to buy or dispose of assets.
b. The internal auditor should verify the location, condition, and fair value of the organization’s fixed assets against
the fixed asset records in the subsidiary ledger.
c. The automatic depreciation charges calculated by the fixed asset system should be reviewed and verified for
accuracy and completeness. System errors that miscalculate depreciation can result in the material misstatement
of operating expenses, reported earnings, and asset values.