Accounting Information Systems, 13e (Romney/Steinbart)

Accounting Information Systems, 13e (Romney/Steinbart)

Chapter 12 The Revenue Cycle: Sales to Cash Collections

12.1 Describe the basic business activities and related information processing operations performed in the revenue cycle.

1) Basic segregation of duties requires the credit manager reports to the ________ and the treasurer report to the ________. A) treasurer; controller B) treasurer; vice president of finance C) controller; vice president of finance D) marketing manager; vice president of finance Answer: BObjective: Learning Objective 1Difficulty: ModerateAACSB: Analytic

2) The ________ normally triggers the billing process in the revenue cycle.A) sales order received from the sales departmentB) picking ticket received from the sales departmentC) packing slip received from the shipping departmentD) journal voucher received from the shipping departmentAnswer: CObjective: Learning Objective 1Difficulty: EasyAACSB: Analytic

3) The ________ normally triggers the customer payment recording process.A) sales invoiceB) deposit slipC) remittance adviceD) customer monthly statementAnswer: CObjective: Learning Objective 1Difficulty: EasyAACSB: Analytic

4) The ________ should always be included with a merchandise shipment to a customer.A) picking ticketB) packing slipC) sales invoiceD) remittance adviceAnswer: BObjective: Learning Objective 1Difficulty: EasyAACSB: Analytic

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5) According to generally accepted accounting principles, a sale is recognized when A) cash is received from the customer.B) inventory is removed from the warehouse.C) inventory becomes the legal property of the customer.D) a sales order is approved by sales, inventory control, and credit departments.Answer: CObjective: Learning Objective 1Difficulty: ModerateAACSB: Analytic

6) ________ is not a basic activity of the revenue cycle.A) Sales order entry B) Shipping C) ReceivingD) BillingAnswer: CObjective: Learning Objective 1Difficulty: EasyAACSB: Analytic

7) When a customer places an order (on account) for a certain product, what should be done before the order is checked for inventory availability? A) The customer's available credit should be checked. B) The sales order should be created and written to a file. C) Shipping should be notified of an order in process. D) A picking list should be generated for the warehouse. Answer: AObjective: Learning Objective 1Difficulty: EasyAACSB: Analytic

8) How is credit approval generally handled for established customers with a documented payment history? A) A new credit application is requested. B) General authorization by a sales clerk C) Specific authorization by the credit manager D) A formal credit check should be made for each sale. Answer: BObjective: Learning Objective 1Difficulty: EasyAACSB: Analytic

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9) What is a typical procedure for processing sales orders from new customers or customers making a purchase that causes their credit limit to be exceeded? A) General authorization to approve the order is given to sales clerks. B) Specific authorization must be granted by the credit manager.C) The sale should be rejected. D) The sales clerk should order a report from a credit bureau before approving the order.Answer: BObjective: Learning Objective 1Difficulty: EasyAACSB: Analytic

10) Checking the quantity of inventory available before accepting a sales order is a good practicefor all of the reasons except toA) determine which items may need to be back ordered. B) verify the accuracy of the perpetual inventory records. C) inform the customer about availability and delivery times. D) update inventory records to reduce the quantity available by the number of items ordered.Answer: BObjective: Learning Objective 1Difficulty: ModerateAACSB: Analytic

11) Special software packages called ________ can help an organization manage customer service. A) EDI systemsB) CRM systemsC) POS systemsD) VMI systemsAnswer: BObjective: Learning Objective 1Difficulty: ModerateAACSB: Analytic

12) The ________ is a legal contract that defines responsibility for goods that are in transit. A) bill of lading B) packing slip C) back order D) picking listAnswer: AObjective: Learning Objective 1Difficulty: EasyAACSB: Analytic

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13) Two documents usually accompany goods shipped to a customer. What are the two documents? A) a bill of lading and an invoice B) a packing slip and a bill of lading C) an invoice and a packing slip D) an invoice and a sales order Answer: BObjective: Learning Objective 1Difficulty: EasyAACSB: Analytic

14) The basic document created in the billing process is call a ________.A) bill of lading B) sales invoice C) sales order D) packing list Answer: BObjective: Learning Objective 1Difficulty: EasyAACSB: Analytic

15) A company uses the method for tracking accounts receivable where customers pay according to individual sales invoices. This describes the ________ method. A) monthly statement B) open-invoice C) balance forward D) cycle billing Answer: BObjective: Learning Objective 1Difficulty: ModerateAACSB: Analytic

16) A method for tracking accounts receivable that matches specific invoices and payments from the customer is called a(n) ________ method. A) specific identificationB) balance forward C) cycle billing D) open-invoice Answer: DObjective: Learning Objective 1Difficulty: ModerateAACSB: Analytic

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17) The document a customer returns with their payment and that identifies the source and the amount of the payment is called a A) remittance advice. B) remittance list. C) credit memorandum. D) debit memorandum. Answer: AObjective: Learning Objective 1Difficulty: EasyAACSB: Analytic

18) In the ________ method of tracking accounts receivable, customers pay according to the amount showing on their monthly statement and payments are applied against the total account balance. A) specific identificationB) open-invoice C) balance forward D) remittance adviceAnswer: CObjective: Learning Objective 1Difficulty: ModerateAACSB: Analytic

19) When a customer pays off the balance on an invoice, the payment is credited to the ________ file. A) customer master B) sales transaction C) cash receipts masterD) All of the above are correct. Answer: AObjective: Learning Objective 1Difficulty: ModerateAACSB: Reflective Thinking

20) A type of business document in which part of the original document is returned to the source for further processing is called a ________ document. A) feedback B) returnable C) closed-loop D) turnaround Answer: DObjective: Learning Objective 1Difficulty: EasyAACSB: Analytic

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21) A document typically encountered in the revenue cycle that is both an output document and asource document is theA) sales invoice.B) customer purchase order.C) sales order.D) packing slip.Answer: AObjective: Learning Objective 1Difficulty: ModerateAACSB: Analytic

22) A(n) ________ system prepares and mails monthly statements to customers throughout the entire month, instead of just at the end of the month.A) continuous B) open-invoice C) cycle billing D) balance forward Answer: CObjective: Learning Objective 1Difficulty: EasyAACSB: Analytic

23) The activities involved in soliciting and processing customer orders within the revenue cycle are known as theA) sales order entry process. B) shipping order process. C) revenue process. D) marketing process. Answer: AObjective: Learning Objective 1Difficulty: EasyAACSB: Analytic

24) Laz Chance wears roller blades and headphones when he is at work at the Squishy Things Toy Company. He is a product packer. The headphones give him computer-generated instructionsso he knows the location of each item and quantity that should be included in the order. These instructions are the equivalent of aA) picking ticket.B) bill of lading.C) packing slip.D) sales order.Answer: AObjective: Learning Objective 1Difficulty: EasyAACSB: Analytic

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25) The shipping department at Eka Toys follows policies that determine which carrier will deliver orders according to the size, weight, and destination of the shipment. It maintains standing agreements with shippers that specify legal responsibility for the shipment while it is in transit. The terms of the shipping agreements are documented onA) picking tickets.B) packing slips.C) bills of lading.D) RFID tags.Answer: CObjective: Learning Objective 1Difficulty: EasyAACSB: Analytic

26) The accounts receivable management method typically used by credit card companies is A) balance forward.B) postbilling.C) monthly statement.D) open-invoice.Answer: AObjective: Learning Objective 1Difficulty: EasyAACSB: Analytic

27) Describe the basic revenue cycle activities.Answer: The revenue cycle is a recurring set of business activities and related information processing operations associated with providing goods and services to customers and collecting cash in payment for those sales. The basic activities in the revenue cycle are: order entry — soliciting and processing customer activities — filling customer orders and shipping merchandise — invoicing customers and maintaining customer accounts collections — the cashier handles remittances and deposits them in the bank; accounts receivable personnel credits customer accounts for the payments received.Objective: Learning Objective 1Difficulty: EasyAACSB: Analytic

28) Define and describe benefits of a CRM system. Answer: CRM stands for customer relationship management. Since customer service is so important today, special CRM software packages have been created that support this vital process. CRM systems help a company to organize detailed data about customers so that more personalized service can be given to them. A CRM system may retain customer preferences and customer transaction history, which can be used to suggest other products the customer may wishto purchase. The system could also take a pro-active marketing approach in contacting customersat certain re-order points. A well-implemented CRM system can help the business achieve the goal of turning satisfied customers into loyal customers.Objective: Learning Objective 1Difficulty: ModerateAACSB: Analytic

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29) How can Electronic Data Interchange (EDI) facilitate the billing and accounts receivable process? Answer: The basic document created in the billing process is the sales invoice. Many companiesstill print paper invoices and send them to customers in the mail. Batch processing of invoices may create cash flow problems because of the time it takes invoices to flow through the regular mail system. Companies that use EDI can create quicker turnaround for payment, and save costs by reducing paper handling and processing. Depending on the number of invoices processed per year, these savings can be significant.Objective: Learning Objective 1Difficulty: ModerateAACSB: Analytic

30) Describe typical credit approval procedures. Answer: Most business-to-business sales are made on credit. Key to revenue cycle success is theapproval of credit sales before they are processed and goods shipped. A part of good control in this area is to establish a credit limit for customers. With new customers, or when orders exceed a customer's credit limit, or the customer has a past due balance, specific authorization for the credit manager should specifically authorize and approve further credit. The system can also be programmed to do a limit check for each order processed to maintain further control in this area. Also, marketing personnel should not make credit decisions, as a potential conflict of interest is possible.Objective: Learning Objective 1Difficulty: ModerateAACSB: Analytic

31) Describe the two methods to manage accounts receivable. Answer: Open invoice system — customers pay the invoice by returning a remittance advice turnaround document and a check. Remittances are applied against specific open invoices. The open-invoice method can be used to offer discounts for prompt payments since invoices are individually tracked. However, such individual tracking adds complexity in maintaining information. Balance-forward method — customers pay according to the amount shown on a monthly statement and remittances are applied against the total outstanding balance; this method is used by department stores typically where customers make a large number of smaller dollar amount purchases.Objective: Learning Objective 1Difficulty: ModerateAACSB: Analytic

32) Describe cycle billing and identify how an organization might benefit by using cycle billing.Answer: Cycle billing is spreading out the customer base so that a portion of the billing is done each day to a group of customers. Credit card and utility companies use it extensively because of their large customer bases. The advantage of this method is that the billing load is dispersed and the cash flow of the company is evened out dramatically.Objective: Learning Objective 1Difficulty: ModerateAACSB: Analytic

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33) Discuss ways in which technology can be used to streamline cash collections. Answer: Answers may include the following points: A lockbox system can reduce delays due to processing and geographical distance between customer and company. Customers send remittances to a nearby P.O. bDifficulty :ox; a local bank picks up remittances, deposits cash and sends remittance advices and copies of all checks to the company. The main disadvantage is cost;the banks charge a service fee up to 1% of the cash processed through the system. Information technology can provide additional efficiencies in the use of lockboxes. An electronic lockbox sends electronic notification of remittances to the company. This method enables the company to begin applying remittances to customer accounts before the photocopies of the checks arrive. — An EFT system eliminates paper checks and uses electronic payments between banks. Integrating EFT and EDI, called the financial electronic data interchange, automates billing and cash collections. — Procurement cards or credit cards can be used. These cards eliminate the risks and costs associated with creating and maintaining accounts receivable, but cost between 2% to 4% of the gross sales price.Objective: Learning Objective 1Difficulty: DifficultAACSB: Analytic

34) If a firm does not use an ERP, the best way to mitigate the risk of the destruction of master data is toA) implement backup and disaster recovery procedures.B) use an ERP.C) proper segregation of duties.D) use of multiple master data files.Answer: AObjective: Learning Objective 1Difficulty: ModerateAACSB: Analytic

35) If a firm uses an ERP, the best way to mitigate the risk of the destruction of master data is toA) frequently update the ERP system.B) implement the ERP system in three separate instances.C) periodically audit the ERP system.D) integrate the ERP system with all IT functions.Answer: BObjective: Learning Objective 1Difficulty: DifficultAACSB: Analytic

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36) Identify a useful tool for monitoring accounts receivable.A) ERP exception reportB) accounts receivable aging reportC) accounts receivable tolerance reportD) customer credit limit reportAnswer: BObjective: Learning Objective 1Difficulty: EasyAACSB: Analytic

37) An accounts receivable aging report is useful for doing everything except

A) estimating bad debts.B) estimating future sales.C) projecting the timing of future cash flows.D) deciding whether to increase a specific customer's credit limit.Answer: BObjective: Learning Objective 1Difficulty: ModerateAACSB: Analytic

38) It costs ________ times as much to acquire a new customer as it does to make a sale to an existing customer.A) twoB) fiveC) eightD) tenAnswer: BObjective: Learning Objective 1Difficulty: ModerateAACSB: Analytic

39) Research suggests which of the following is key to improving total customer satisfaction?A) price of productB) speed of shippingC) quality and nature of customer contact after the saleD) quality and nature of customer contact before the saleAnswer: CObjective: Learning Objective 1Difficulty: DifficultAACSB: Analytic

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40) A picking ticket is generated by theA) shipping process.B) sales order entry process.C) packing process.D) billing process.Answer: BObjective: Learning Objective 1Difficulty: ModerateAACSB: Analytic

41) A picking ticket is generated by theA) shipping process.B) sales order entry process.C) packing process.D) billing process.Answer: BObjective: Learning Objective 1Difficulty: ModerateAACSB: Analytic

42) The packing slipA) lists the quantity, price, and description of each item included in the shipment.B) lists the price and description of each item included in the shipment.C) lists the quantity and description of each item included in the shipment.D) lists the quantity and price of each item included in the shipment.Answer: CObjective: Learning Objective 1Difficulty: ModerateAACSB: Analytic

12.2 Discuss the key decisions that need to be made in the revenue cycle, and identify the information needed to make those decisions.

1) Which of the decisions below is not ordinarily found as part of the revenue cycle? A) What credit terms should be offered? B) How often should accounts receivable be subjected to audit? C) How can customer payments be processed to maximize cash flows? D) What are the optimal prices for each product or service? Answer: BObjective: Learning Objective 2Difficulty: EasyAACSB: Analytic

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2) Key differences exist when an integrated Enterprise Resource Planning system (ERP) replacesan existing AIS or legacy system. For example, ________ are more accurate and timely, enablingsales order entry staff to provide customers more accurate information about delivery dates. A) inventory records B) cash receipts C) credit approval decisions D) exception reports Answer: AObjective: Learning Objective 2Difficulty: EasyAACSB: Analytic

3) Which of the following is not a key decision that needs to be made in the revenue cycle?A) How should merchandise be delivered to customers?B) Should credit be extended to customers?C) How can customer payments be processed to maximize cash flow?D) Which vendor should inventory be purchased from?Answer: DObjective: Learning Objective 2Difficulty: ModerateAACSB: Analytic

4) Regularly reviewing an accounts receivable aging report can help management do what?A) spot firms who are falling behind in their paymentsB) identify customers who have not purchased anything latelyC) improve the speed which customers make paymentsD) determine whether the firm's pricing policy is effectiveAnswer: AObjective: Learning Objective 2Difficulty: ModerateAACSB: Analytic

5) Regularly reviewing an accounts receivable aging report can help management do what?A) identify customers who have not purchased anything latelyB) determine whether changes are needed in the firm's credit policiesC) improve the speed which customers make paymentsD) determine whether the firm's pricing policy is effectiveAnswer: BObjective: Learning Objective 2Difficulty: ModerateAACSB: Analytic

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6) By using an ERP to merge the billing, sales, and marketing functions, the firm may be able to A) bill the customer right after the sale occurs.B) market products and services on bills sent to customers.C) use customer's past purchase history to send information about related products and services the customer may be interested in.D) eliminate the need for a firm to have a billing, sales, and marketing department.Answer: CObjective: Learning Objective 2Difficulty: ModerateAACSB: Analytic

7) Suppose management wanted to increase the speed of processing customer payments. One way to speed up payment transaction processing is to A) use a FEDI.B) use JEDI analysis software.C) eliminate credit sales.D) extend the amount of credit offered to customers.Answer: AObjective: Learning Objective 2Difficulty: ModerateAACSB: Analytic

8) True or False: Shipping efficiency can often be improved by replacing RFID tags with bar codes.Answer: FALSEObjective: Learning Objective 2Difficulty: EasyAACSB: Analytic

12.3 Identify major threats in the revenue cycle, and evaluate the adequacy of various control procedures for dealing with those threats.

1) Before a shipping notice is prepared during the revenue cycle, shipping department personnel should match the inventory received from the warehouse to theA) sales order.B) picking tickets.C) picking ticket and sales order.D) sales order and bill of lading.Answer: CObjective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

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2) Which is the best control to prevent invoicing customers for more than the actual quantity shipped?A) Use the information from the sales order to prepare the sales invoice.B) Use the information from the packing slip to prepare the sales invoice.C) Use the information from the bill of lading to prepare the sales invoice.D) Use the information from the picking ticket to prepare the sales invoice.Answer: BObjective: Learning Objective 3Difficulty: EasyAACSB: Reflective Thinking

3) The cashier deposits checks for Benedek Incorporated and also prepares payments to vendors. Of the following, who is best able to reconcile the bank statement to Benedek's records on a regular basis?A) cashierB) internal audit departmentC) treasurerD) external auditorAnswer: BObjective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

4) A monthly statement sent to customers serves a control purpose byA) providing an opportunity for customers to verify the balance owed and activity on the account.B) triggering the process to record a customer payment.C) summarizing invoices and amounts due for customers.D) reminding customers of the balance due and due date.Answer: AObjective: Learning Objective 3Difficulty: ModerateAACSB: Reflective Thinking

5) Which of the following is not one of the controls when customer payments are commingled with other mail?A) preparing a remittance list as mail is openedB) restrictively endorsing checks when receivedC) requiring two mail room clerks to open mail togetherD) requiring the controller to be personally present when mail is received and openedAnswer: DObjective: Learning Objective 3Difficulty: EasyAACSB: Analytic

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6) Matching customer account numbers and inventory item numbers to the numbers in the customer and inventory master files is an example of a A) completeness test. B) field check. C) reasonableness test. D) validity check.Answer: DObjective: Learning Objective 3Difficulty: EasyAACSB: Analytic

7) During the sales order entry process, a ________ is performed to compare the quantity ordered with the standard amounts normally ordered. A) completeness test B) redundant data check C) field check D) reasonableness test Answer: DObjective: Learning Objective 3Difficulty: EasyAACSB: Analytic

8) During the sales order entry process, a ________ is performed to verify that each transaction record contains all appropriate data items. A) completeness test B) redundant data check C) field check D) reasonableness test Answer: AObjective: Learning Objective 3Difficulty: EasyAACSB: Analytic

9) The best solution for maintaining accurate automated perpetual inventory system is to useA) closed-loop verification when inventory is received from vendors and recorded.B) point of sale devices integrated with inventory records.C) periodic physical counts to reconcile with perpetual inventory records.D) RFID tags.Answer: DObjective: Learning Objective 3Difficulty: EasyAACSB: Analytic

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10) Segregation of duties controls dictates that the collection and recording functions be kept separate from each other. However, the accounts receivable department needs to know when customers pay their invoices. What is a solution to this potential internal control problem? A) Establish a lockbox arrangement with a bank.B) Have customers send a remittance advice with their payment. C) Have mailroom personnel prepare a remittance list which can be forwarded to accounts receivable. D) all of the above Answer: DObjective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

11) The benefits of a lockbox arrangement with a bank are maximized when A) the bank is located nearby to the company, so remittance advices can be delivered to the company every day. B) several banks around the country are used, in order to minimize the time payments spend in the mail.C) an arrangement is made with only one bank, so all remittance advices can be batched for processing.D) the bank deposits the payments and accesses the customer's information system to record the payments.Answer: BObjective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

12) An ________ is an arrangement where a bank receives customer payments and transmits payment data to the organization.A) e-commerce.B) electronic funds transfer (EFT). C) electronic lockbox. D) electronic data interchange (EDI). Answer: CObjective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

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13) Customers that send their payments electronically directly to the billing company's bank are usingA) electronic funds transfer (EFT). B) electronic data interchange (EDI). C) procurement cards. D) an electronic lockbox. Answer: AObjective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

14) A way to incorporate the advantages of Electronic Data Interchange with the Electronic Funds Transfer is A) Financial Electronic Data Interchange. B) e-commerce. C) to use procurement cards. D) an electronic lockbox. Answer: AObjective: Learning Objective 3Difficulty: EasyAACSB: Analytic

15) To ensure proper segregation of duties, only the ________ has authority to issue credit memos. A) accounts receivable supervisor B) controllerC) credit manager D) cashier Answer: CObjective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

16) It has been discovered that credit sales have been made to customers with a poor credit rating. If this continues, the company will face increasing uncollectible receivables and losses due to bad debts. Separation of duties between ________ and ________ should help resolve the problem.A) shipping; billing duties B) credit approval; marketingC) billing; credit approvalD) marketing; accounts receivableAnswer: BObjective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

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17) Consider the following revenue cycle scenario: The company has been exposed to customer dissatisfaction and the suggested control procedure to be implemented is to install and use bar-code scanners. What is the threat? A) The company may be shipping the wrong merchandise. B) The company may be shipping the wrong quantities of merchandise. C) The company may be shipping orders to the wrong address. D) All of the above threats may apply to this scenario. Answer: AObjective: Learning Objective 3Difficulty: ModerateAACSB: Reflective Thinking

18) Separating the shipping and billing functions is designed to reduce the threat of A) failure to bill customers. B) billing customers for wrong quantities. C) billing customers before merchandise has been shipped.D) shipping the wrong merchandise. Answer: AObjective: Learning Objective 3Difficulty: ModerateAACSB: Reflective Thinking

19) All of the following edit checks for online editing of accounts receivable transactions would probably be included except A) validity checks on customer ID and invoice numbers. B) check digit verification on the amount of the sale. C) closed loop verification on the customer ID. D) field checks on the values in dollar fields. Answer: BObjective: Learning Objective 3Difficulty: ModerateAACSB: Reflective Thinking

20) When a proper segregation of duties exists in the area of handling cash receipts, the ________, who reports to the ________, actually handles the cash and is not the same person who posts cash receipts to customer accounts. A) cashier; treasurer B) cashier; controller C) accountant; treasurer D) accountant; controller Answer: AObjective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

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21) In a revenue cycle with proper controls, the ________ who reports to the ________, is not involved in any cash handling activities. A) accounts receivable clerk; treasurer B) accounts receivable clerk; controller C) cashier; controller D) cashier; treasurer Answer: BObjective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

22) A serious exposure in the revenue cycle is loss of assets. What is the related threat and applicable control procedure that address this exposure? A) shipping errors; reconciliation of sales order with picking ticket and packing slip B) theft of cash; segregation of duties and minimization of cash handling C) making sales that turn out to be uncollectible; force sales people to make collection calls on customers with past due balances D) poor performance; preparation and review of performance reports Answer: BObjective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

23) Which of the following duties could be performed by the same individual and not violate segregation of duty controls? A) handling cash and posting to customer accounts B) issuing credit memos and maintaining customer accounts C) handling cash and authorizing credit memos D) handling cash receipts and mailing vendor payments Answer: DObjective: Learning Objective 3Difficulty: ModerateAACSB: Reflective Thinking

24) Internal file labels can be used to prevent the loss of data in the revenue cycle since they A) record off-site storage locations. B) keep competitors from accessing files. C) organize the on-site physical storage site. D) reduce the possibility of erasing important files. Answer: DObjective: Learning Objective 3Difficulty: EasyAACSB: Analytic

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25) The manager of Callow Youth Clothing was entering an order online from Sad Clown Pajamas. He ordered 100 one-size fits all pajama bottoms, but when he ordered 1000 one-size fits all pajama tops, the following error message popped up: "Did you mean to enter a quantity of1000 for your order?" This message is the result of aA) reasonableness test.B) validity check.C) limit check.D) closed-loop verification.Answer: AObjective: Learning Objective 3Difficulty: EasyAACSB: Reflective Thinking

26) The manager of Cezary Foods was purchasing inventory from Bogumil Distributors online. The manager entered the items and quantities, completed the checkout and payment process, but received the following error message before the order could be processed: "Please enter your phone number." This message is likely the result of aA) validity check.B) completeness test.C) closed-loop verification.D) customer relationship management software application.Answer: BObjective: Learning Objective 3Difficulty: EasyAACSB: Reflective Thinking

27) Bogumil Distributors is an Internet-based wholesaler. Customers enter their orders online. The manager of Cezary Foods was entering an order when the following error message popped up: "Your order exceeds your available credit. You will be contacted within 8 hours." This message is the result of aA) sign check.B) validity check.C) reasonableness test.D) limit check.Answer: DObjective: Learning Objective 3Difficulty: ModerateAACSB: Reflective Thinking

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28) Because it is the most fungible of all assets, the management of cash has always been the most difficult of all control issues. The most important of cash controls isA) minimization of cash handling.B) lockbox arrangements.C) segregation of duties.D) frequent reconciliation of records.Answer: CObjective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

29) A clerk at a grocery store scanned the bar code for a low cost bag of frozen chicken wings then gave his friend an expensive brand-name bag of frozen chicken wings.Which of the following controls would best prevent the clerk from getting away with doing this?A) physical inventory countB) segregation of dutiesC) limited physical access to bar codesD) use of RFID tagsAnswer: DObjective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

30) The accounts receivable clerk destroys all invoices for sales made to family and friends and does not record the sales in the accounts receivable subsidiary ledgers. The family and friends usually give the clerk cash as a "thank you." Which procedure will not prevent or detect this fraud?A) Send monthly statements to all customers with balances owed.B) Reconcile sales invoices in the billing department to the total debits to accounts receivable subsidiary ledgers.C) Sequentially prenumber all invoices and prepare a sequence check at the end of each day.D) Reconcile the accounts receivable control account to the accounts receivable subsidiary ledger.Answer: AObjective: Learning Objective 3Difficulty: ModerateAACSB: Reflective Thinking

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31) Which of the following poses an internal control problem?A) Physical inspection of inventory quantity and condition is outsourced to a firm that specializes in this service.B) Products are released from inventory after a warehouse employee and a shipping clerk both sign the pick list.C) Sales representatives have authority to increase customers' credit limits in $1,000 increments.D) When customer payments are received in the mail, checks are sent to the cashier's office and remittance advices are sent to the accounts receivable department. Answer: CObjective: Learning Objective 3Difficulty: EasyAACSB: Analytic

32) The least effective control for preventing an organization from processing fraudulent credit memo is to A) match each credit memo with a receiving report.B) require approval for each credit memo by the credit manager.C) reconcile total of credit memos to total debits posted to customers' subsidiary ledgers.D) sequentially prenumber all credit memos and perform a sequence check at the end of each day.Answer: CObjective: Learning Objective 3Difficulty: ModerateAACSB: Reflective Thinking

33) Explain how validity checks, completeness tests and reasonableness tests can be implemented to ensure accuracy of customer orders.Answer: Validity checks can be used to compare the customer and inventory information on the customer order with the information in the customer and inventory master files. A completeness test can ensure that all the necessary information is present on the customer order. A reasonableness test can compare the quantity ordered with the customer's past order history for that item.Objective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

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34) Failure to collect cash on credit sales is a threat in the revenue cycle. What controls can be used to help neutralize this threat? Answer: Both accounts receivable and cash flows should be monitored. Segregation of duty controls should always be implemented and monitored for compliance. Also, a control used to deal with accounts receivable (which directly impacts cash flow) is to use an accounts receivableaging schedule. This schedule lists customer account balances by length of time outstanding and provides information for estimating bad debts. It can also assist in evaluating credit policies and specific customer credit limits. Also, a cash budget can be used to provide a more precise estimate of cash inflows (cash collected from sales) and cash outflow (outstanding payables). An organization can be alerted to a pending cash flow shortage, thus enabling it to secure short-term financing at competitive rates to deal with the problem in a timely manner.Objective: Learning Objective 3Difficulty: DifficultAACSB: Analytic

35) Describe four threats in the revenue cycle and identify appropriate controls for each threat. Answer: Answers can include the following information:Threat 1: Sales to customers with poor credit — Controls: Having an independent credit approvalfunction and maintaining good customer accounting can help to prevent problems. Threat 2: Shipping errors — Controls: Reconciling shipping notices with picking tickets; bar-code scanners; and data entry application controls will help to catch these errors. Threat 3: Theft of inventory — Controls: Secure the location of inventory and document transfers; release only with valid shipping orders; have good accountability for picking and shipping; and finally, periodically reconcile records with a physical count. Threat 4: Failure to bill customers — Controls: Separating shipping and billing and pre-numbering of shipping documents helps along with reconciliation of all sales documents. Threat 5: Billing errors — Controls: Reconciliation of picking tickets and bills of lading with sales orders; data entry edit controls; and price lists may prevent billing errors. Threat 6: Theft of cash — Controls: Segregation of duties is essential to prevent this serious problem (the following duties should be separate: handling cash and posting to customer accounts; handling cash and authorizing credit memos and adjustments; issuing credit memos and maintaining customer accounts); use of lockboxes for receipts and EFT for disbursements; mailing customer statements monthly; use cash registers in retail operations where cash payments are received; deposit cash daily in the bank; and have the bank reconciliation function performed by independent third parties. Threat 7: Posting errors in updating accounts receivable — Controls: Use of editing and batch totals is essential here. Threat 8: Loss of data — Controls: Regular backups are essential with one copy stored off-site; and logical and physical access controls to prevent leakage to competitors and irregularities. Threat 9: Poor performance — Controls: Use sales and profitability analyses; accounts receivable aging; and cash budgets to track operations.Objective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

23


36) Discuss the general control issue of the loss of data, as it relates to the revenue cycle. Answer: One of the two general objectives that pertain to all revenue cycle activities is the loss of data. The primary threats related to the data availability objective are the loss of data and access controls. It is imperative that accurate customer account and inventory records be maintained for external and internal reporting purposes and for customer inquiries. Such records must be protected from loss and damage by using backup files. One backup file should be kept on-site, while a second should be kept off-site. Backup files of the most recent transactions should also be maintained. Also, all disks and tapes should have both external and internal file labels to reduce the possibility of accidental erasure of important files. Access controls are also important as a general control. Unauthorized access to information may cause leaks of the information to competitors and the risk of damage to sensitive and important data files. Employees should have certain access restrictions to help prevent this threat from occurring. Passwords and user IDs will help to limit access to files and the operations allowed to be performed on files. For example, the sales staff should not be allowed write-access to customers' credit limit and approval information. Individual terminals should also have access controls in place. An example of this control would be to prevent someone at a shipping dock terminal from entering a sales transaction order. Another control that should be put in place is to require activitylogs of any management approved transaction. Such a log should be maintained for audit trail purposes.Objective: Learning Objective 3Difficulty: DifficultAACSB: Analytic

37) Explain how to effectively segregate duties in the sales order activity. Answer: Sales orders should be recorded by sales personnel. Credit decisions should be made bythe credit manager, not sales personnel. Also, sales orders authorize release of goods to shipping. Warehouse and shipping should be separate from sales. Because a computer does recording and authorization, it is important to ensure integrity of the programs and to perform edit checks on any online entries.Objective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

24


38) Discuss the revenue cycle threat of stockouts, carrying costs, and markdowns. Answer: Stockouts, carrying costs, and markdowns are a threat in the sales order entry process. The problem with stockouts is that when goods are not available to ship to customers, the business risks losing the sale to a competitor that can provide the goods in a timely manner. The opposite problem can also occur where excess inventory increases carrying costs, with the result that markdowns may be necessary in order to sell the inventory. Two controls can be implemented to cope with this threat. One control that can be put into place is to establish accurate inventory control. An AIS with real-time online capabilities can be programmed to use the perpetual inventory method. This will ensure that accurate records are maintained about the quantity of inventory for sale. This will eliminate mistakes in placing orders for goods when a sufficient inventory amount is on hand. Periodic physical counts of inventory will also verify the perpetual amounts recorded by the AIS. Another important control in this situation is that of accurate sales forecasting. Proper marketing efforts should be made in conjunction with regularlyreviewing sales forecasts for accuracy. Such forecasts should be revised as necessary. Sales forcemarketing efforts should be commensurate with inventory levels as well.Objective: Learning Objective 3Difficulty: DifficultAACSB: Analytic

25


39) You have been hired by a catalog company to computerize its sales order entry process. Approximately 70% of all orders are received over the telephone by a sales person. The other 30% of orders are received by a sales person through mail or fax. The catalog company wants thephone orders processed real-time. The mail and fax orders will be processed in batches of 50 orders. The following attributes are collected for every sales order:

Customer number (if the order is from a new customer, a new number needs to be assigned)Customer nameAddressPayment method (credit card for phone and fax orders and check for mailed orders)Credit card number and expiration dateItems ordered and quantity of eachUnit price of each item ordered

Identify and describe at least ten specific control policies and procedures you will implement for the sales order process. Be very specific describing the controls and number each new control you suggest.Answer: 1. Validity check on customer number2. Authorization controls to set up new customer records3. Check digit on customer number4. Modules 11 on customer number5. Closed-loop verification on customer number6. Credit approval before accepting orders7. Credit check and credit limit establishment for new customers, before accepting orders8. Preformatting of customer state, zip code and phone number9. On-line real-time authorization of credit card charges10. Field check on credit card number and expiration date11. Validity check on item number12. Check digit on item number13. Modules 11 on item number14. Closed-loop verification on item number15. Auto fill of unit price, based on item number16. Field check on quantity ordered17. Batch control totals for mail and fax orders18. Encryption of credit card data19. Completeness check Objective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

26


40) Which of the following is not a threat to the revenue cycle sales order entry process?A) incomplete ordersB) invalid ordersC) cash flow problemsD) uncollectible accountsAnswer: CObjective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

41) Which of the following is not a threat to the revenue cycle shipping process?A) incomplete ordersB) inventory theftC) picking the wrong itemsD) wrong shipping addressAnswer: AObjective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

42) Which of the following is not a threat to the revenue cycle billing process?A) accounts receivable errorsB) loss of customersC) failure to billD) inaccurate credit memosAnswer: BObjective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

43) Which of the following is not a general threat to the revenue cycle?A) inaccurate master dataB) loss of customersC) poor performanceD) unauthorized disclosure of sensitive informationAnswer: BObjective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

27


44) Which of the following is not a general threat to the revenue cycle?A) inaccurate master dataB) loss of customersC) poor performanceD) unauthorized disclosure of sensitive informationAnswer: BObjective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

45) The legitimacy of customer orders is established by ________ in paper-based customer orders.A) the customer's signatureB) the customer's pin numberC) the customer's verbal authorizationD) prior experience with the customerAnswer: AObjective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

46) The legitimacy of customer orders is established by ________ in Internet-based customer orders.A) digital signaturesB) the customer's pin numberC) the customer's credit card numberD) prior experience with the customerAnswer: AObjective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

47) For strongest segregation of duties, the credit manager should never report to A) the marketing department.B) the accounting department.C) the credit department.D) the IT department.Answer: AObjective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

28


48) For strongest segregation of duties, a sales representative should never be allowed to A) discuss the company's products.B) negotiate the sales price.C) approve a sale on credit.D) send a customer a gift.Answer: CObjective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

49) True or False: A credit sale should always be denied if it exceeds the customer's credit limit.Answer: FALSEObjective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

50) True or False: A credit sale should always be reviewed by a credit manager if it exceeds the customer's credit limit.Answer: TRUEObjective: Learning Objective 3Difficulty: EasyAACSB: Analytic

29



Chapter 13 The Expenditure Cycle: Purchasing to Cash Disbursements

13.1 Explain the basic business activities and related information processing operations

performed in the expenditure cycle.

1) The Gwallter Reece Chihuahua Sweater Co. (GRCCo) was established in 2013. It recently

signed a large contract with PetCo pet stores. GRCCo will be required to track and forecast

sweater sales by linking in to PetCo's sales database. GRCCo will then be responsible for

shipping products to PetCo as needed. The relationship between GRCCo and PetCo is an

example of

A) sales force automation.

B) electronic data interchange.

C) optical character recognition.

D) vendor-managed inventory.

Answer: D

Objective: Learning Objective 1

Difficulty: Easy

AACSB: Analytic

2) 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


Difficulty: Moderate

AACSB: Reflective Thinking

3) 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


Difficulty: Easy

AACSB: Analytic

1


4) 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


Difficulty: Easy

AACSB: Analytic

5) The ________ specifies the point at which inventory is needed.

A) company inventory policies

B) reorder point

C) economic order quantity

D) stockout point

Answer: B


Difficulty: Easy

AACSB: Analytic

6) Which electronic files are either read or updated when goods are ordered from a vendor?

A) inventory, vendors, and accounts payable

B) vendors and accounts payable

C) inventory, vendors, and open purchase orders

D) open purchase orders and accounts payable

Answer: C



AACSB: Analytic

7) 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


Difficulty: Easy

AACSB: Analytic

2


8) 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 is correct.

Answer: A



AACSB: Analytic

9) ________ attempts to minimize or eliminate carrying and stockout costs.

A) Just-in-time inventory

B) Materials requirements planning

C) Economic order quantity

D) Evaluated receipt settlement

Answer: A


Difficulty: Difficult

AACSB: Analytic

10) Just-In-Time (JIT) inventory is best characterized by

A) frequent deliveries of large quantities to be held at the work centers.

B) frequent deliveries of smaller quantities of items to 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: B


Difficulty: Easy

AACSB: Analytic

11) 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



AACSB: Analytic

3


12) When would an MRP inventory approach be a preferred to a JIT inventory approach?

A) when a product has a short life cycle

B) when demand for inventory is fairly predictable

C) when demand for inventory is very unpredictable

D) MRP is always a preferred method over JIT.

Answer: B



AACSB: Analytic

13) Which of the following is least likely to be a major criterion in vendor selection?

A) prices of goods

B) credit rating of the vendor

C) quality of goods

D) ability to deliver on time

Answer: B


Difficulty: Easy

AACSB: Analytic

14) 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



AACSB: Analytic

15) Duc An Incorporated provides free coffee to employees. Starbucks delivers coffee packages,

sugar, creamer, and filters each week. Every month, Starbucks sends Duc An an invoice. This

arrangement is best described as a

A) set purchase order.

B) fixed purchase order.

C) blanket purchase order.

D) standard purchase order.

Answer: C


Difficulty: Easy

AACSB: Analytic

4


16) 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. The name of this technique is

A) an EDI auction.

B) a trading exchange.

C) a reverse auction.

D) a supplier consortium.

Answer: C



AACSB: Analytic

17) 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


Difficulty: Easy

AACSB: Analytic

18) 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



AACSB: Analytic

19) 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



AACSB: Analytic

5


20) 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



AACSB: Analytic

21) 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



AACSB: Analytic

22) 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


Difficulty: Easy

AACSB: Analytic

23) 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


Difficulty: Easy

AACSB: Analytic

6


24) 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


Difficulty: Easy

AACSB: Analytic

25) 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



AACSB: Analytic

26) 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


Difficulty: Easy

AACSB: Analytic

27) 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



AACSB: Analytic

7


28) 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



AACSB: Analytic

29) 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


Difficulty: Easy

AACSB: Analytic

30) 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



AACSB: Analytic

31) 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




8


32) The Gwallter Reece Chihuahua Sweater Co. (GRCCo) was established in 2013. It recently

signed a large contract with PetCo pet stores. GRCCo will be required to track and forecast

sweater sales. The technology that is used for communication between GRCCo and PetCo is

A) electronic data interchange.

B) vendor-managed inventory.

C) sales force automation.

D) optical character recognition.

Answer: A



AACSB: Analytic

33) Ngai Nhung is the sales manager at Hung Technologies. At lunch with the company CEO,

Ngai proudly announced that he had negotiated a(n) ________ with a client that represented the

customer's long-term commitment to buy components from Hung.

A) purchase order

B) evaluated receipt settlement

C) voucher

D) blanket purchase order

Answer: D


Difficulty: Easy

AACSB: Analytic


Ngai proudly announced that he had received a ________ from a client. The client had just

requested a large quantity of components from Hung.

A) blanket purchase order

B) voucher

C) purchase order

D) purchase requisition

Answer: C


Difficulty: Easy

AACSB: Analytic


Ngai complained that a recent shipment from a vendor had been unsatisfactory and was returned.

As a result, Hung's purchasing manager needed to send a ________ to the supplier.

A) debit memo

B) purchase order

C) blanket purchase order

D) receiving report

Answer: A


Difficulty: Easy

AACSB: Analytic

9


36) To minimize the number of checks that need to be written to pay vendor invoices, a company

should use

A) a voucher system.

B) a just-in-time inventory system.

C) a nonvoucher system.

D) an evaluated receipt settlement system.

Answer: A



AACSB: Analytic

37) 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


Difficulty: Easy

AACSB: Analytic

38) 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


Difficulty: Easy

AACSB: Analytic

39) 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



AACSB: Analytic

10


40) 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.



AACSB: Analytic

41) 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.



AACSB: Analytic

42) 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.



AACSB: Analytic

11


43) 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.




44) 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.



AACSB: Analytic

45) 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.



AACSB: Analytic

12


46) Identify the department below that should not be able to submit a purchase requisition.

A) Marketing

B) Production

C) Inventory Control

D) None of the above

Answer: D



AACSB: Analytic

47) Once a purchase request is approved, what is the next step?

A) The system creates a purchase order.

B) The accounts payable department approves the purchase request, creating a purchase order.

C) The inventory master file is accessed to find the preferred supplier(s).

D) The department that created the purchase request may buy the requested item(s).

Answer: C



AACSB: Analytic

48) EFT payments are generally performed by

A) the treasurer.

B) a cashier.

C) an accounts payable clerk.

D) a credit manager.

Answer: B



AACSB: Analytic

49) Which of the following is not an activity performed in the expenditure cycle?

A) ordering

B) receiving

C) cash disbursement

D) shipping

Answer: D



AACSB: Analytic

13


50) The first major business activity in the expenditure cycle is

A) ordering inventory, supplies, or services.

B) a customer sale.

C) shipping goods to customers.

D) receiving goods from vendors.

Answer: A



AACSB: Analytic

51) The traditional approach to inventory management generally involves

A) high stockout costs.

B) minimizing item cost.

C) receiving goods or services just prior to the time they are needed.

D) maintaining inventory levels so that production can continue even if inventory use is greater

than expected.

Answer: D



AACSB: Analytic

52) True or False: Under the EOQ inventory approach, carrying costs are usually ignored for

low-cost/low-usage items.

Answer: TRUE


Difficulty: Easy

AACSB: Analytic

53) True or False: The EOQ approach to managing inventory has been gaining popularity in

recent years.

Answer: FALSE


Difficulty: Easy

AACSB: Analytic

54) Although there are some similarities between JIT and MRP, identify one major difference

below.

A) production scheduling

B) reducing the opportunity for inventory theft

C) reducing inventory carrying costs

D) requires more analysis than EOQ

Answer: A



AACSB: Analytic

14


55) Ideally, inventory purchases occur in response to ________ in a JIT inventory system.

A) customer demand

B) optimal demand

C) forecast demand

D) supplier demand

Answer: A



AACSB: Analytic

56) A JIT inventory system would be especially useful for a company that manufactures

A) toys associated with new movie releases.

B) toothpaste.

C) alarm clocks.

D) motor oil.

Answer: A



AACSB: Analytic

57) Which of the following factors is not of key importance when selecting inventory suppliers?

A) product price

B) vendor corporate structure

C) product quality

D) vendor delivery dependability

Answer: B



AACSB: Analytic

58) MacDougalKids is a mid-sized manufacturer of organic baby food. MacDougalKids uses the

EOQ inventory management approach. Which of the following factors would likely be least

important when selecting inventory suppliers?

A) product price

B) product quality

C) vendor delivery dependability

D) All would be equally important.

Answer: C



AACSB: Analytic

15


59) MacDougalKids is a mid-sized manufacturer of organic baby food. MacDougalKids uses a

JIT inventory management approach. Which of the following factors would likely be least

important when selecting inventory suppliers?

A) product price

B) product quality

C) vendor delivery dependability

D) All would be equally important

Answer: A



AACSB: Analytic

13.2 Discuss the key decisions to be made in the expenditure cycle, and identify the information

needed to make those decisions.

1) 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


Difficulty: Easy

AACSB: Analytic

2) 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.



AACSB: Analytic

16


13.3 Identify major threats in the expenditure cycle, and evaluate the adequacy of various

control procedures for dealing with those threats.

1) 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




2) 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




3) Which of the following would probably be the least effective control to mitigate the risk of

paying a phony invoice payable for inventory purchases that were never made?

A) Only pay from original invoices.

B) Require three-way match for all inventory purchase invoices.

C) Cancel all invoices and supporting documentation when paid.

D) Establish strict access and authorization controls for the approved vendor master file.

Answer: A




17


4) Which of the following controls would be the least effective in preventing paying the same

invoice twice?

A) Only pay from original invoices.

B) Cancel each document in the voucher package once the check is prepared and mailed.

C) Only pay vendor invoices that have been matched and reconciled to a purchase order and a

receiving report.

D) 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.

Answer: D




5) If duties are properly segregated, 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



AACSB: Analytic

6) Evaluated receipt settlement approves payment of vendor invoices after reconciling the

purchase order and the

A) receiving report.

B) vendor invoice.

C) sales invoice.

D) disbursement voucher.

Answer: A


Difficulty: Easy

AACSB: Analytic

7) 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



AACSB: Analytic

18


8) What is the best way to prevent the acceptance of goods that were never ordered?

A) Order only from approved vendors.

B) Enforce an appropriate conflict of interest policy in place.

C) Match the packing slip to a purchase order before accepting delivery.

D) Require specific authorization from the purchasing manager before accepting any goods.

Answer: C


Difficulty: Easy

AACSB: Analytic

9) 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



AACSB: Analytic

10) What control would best mitigate the threat of paying an invoice twice?

A) never authorizing payment of a photocopy of an invoice

B) double-checking mathematical accuracy of invoices

C) approval of purchase orders

D) maintaining adequate perpetual inventory records

Answer: A


Difficulty: Easy

AACSB: Analytic

11) 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



AACSB: Analytic

19


12) 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


Difficulty: Easy

AACSB: Analytic

13) 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


Difficulty: Easy

AACSB: Analytic

14) 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



AACSB: Analytic

15) 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



AACSB: Analytic

20


16) The management at Barks-a-Million is considering a new inventory control system. The

current system is inadequate because it frequently causes stockouts that interrupt production and

lead to excess stock of other materials — resulting in markdowns and high carrying costs. The

new system will focus on ensuring that these costs are minimized. The new inventory control

system will likely employ

A) a reorder point.

B) a just-in-time inventory system.

C) the economic order quantity.

D) materials requirements planning.

Answer: C







new system will focus on ensuring that orders are placed with sufficient lead time to prevent

stockouts by using

A) a just-in-time inventory system.

B) the economic order quantity.

C) materials requirements planning.

D) a reorder point.

Answer: D







new system, which will focus on forecasting demand for Sad Clown's products, will likely

employ


B) the economic order quantity.


D) a reorder point.

Answer: C




21





new system will focus on reducing or completely eliminating carrying costs, most likely

employing


B) a reorder point.


D) the economic order quantity.

Answer: A




20) Anong Mali is the purchasing manager at Wattana Technologies. She has responsibility for

reviewing and authorizing purchase orders. She also reviews receiving reports, approves or

corrects them, and authorizes the cashier to pay vendor invoices. Which of the following would

correct control weaknesses related to these activities?

A) Controls are adequate under the current system.

B) Vendor invoices should be reviewed by accounts receivable and then cancelled when paid.

C) Vendor invoices should be reviewed by the purchasing manager to ensure that they are

correct.

D) Accounts payable should reconcile purchase orders, receiving reports, and invoices.

Answer: D



AACSB: Analytic

21) Anong Mali is the purchasing manager at Wattana Technologies. She 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 related to these activities?


B) Accounts payable should authorize purchase orders.

C) Receiving reports should be reviewed and corrected by the purchasing manager.

D) Vendor invoices should be reviewed by the purchasing manager to ensure that they are

correct.

Answer: A



AACSB: Analytic

22


22) The receiving clerk at Wattana 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 related to these activities?

A) Accounts payable should reconcile the purchase order and the receiving report.

B) The invoice should be approved for payment by the shipping clerk after the purchase order

and receiving report are reconciled.

C) Invoices, purchase orders, and receiving reports should be reconciled by the receiving clerk.

D) Controls are adequate under the current system.

Answer: A



AACSB: Analytic

23) The receiving clerk at Wattana 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 related to the clerk's activities?


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) Vendor invoices should be approved for payment by the shipping clerk after the purchase

order and receiving report are reconciled.

Answer: A



AACSB: Analytic

24) Which of the controls below would be least effective at preventing a company from ordering

goods at a price higher than market?

A) Only place orders with vendors on an approved vendor list.

B) Variance analysis of actual expenses to budgeted expenses

C) For high-dollar goods, solicit competitive bids from possible vendors.

D) Frequent review of, and update to, vendor price lists stored in the AIS

Answer: B




23


25) 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




26) 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.



AACSB: Analytic

27) 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.



AACSB: Analytic

24


28) 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



25


AACSB: Analytic

29) 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-the-minute 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.



AACSB: Analytic

30) Identify one way to improve the accuracy of inventory records that use a perpetual inventory

approach

A) use of an ERP system

B) require the accounting department to calculate cost of goods sold periodically

C) use IT to eliminate the need for manual data entry

D) use of an MRP inventory system

Answer: C



AACSB: Analytic

31) Why would a firm perform ABC cost analysis?

A) to identify the best inventory supplier

B) to reconcile accounts payable

C) to prioritize physical inventory counts

D) to verify production quality

Answer: C



AACSB: Analytic

32) True or False: It is important to physically count inventory, at least periodically, even in a

perpetual inventory system.

Answer: TRUE


Difficulty: Easy

AACSB: Analytic

26


33) What is the main reason a list of potential alternative suppliers be maintained?

A) in case the primary supplier is out of stock

B) so the firm can sample different suppliers

C) in case the primary supplier is more expensive

D) to segregate purchasing suppliers

Answer: A



AACSB: Analytic

34) Identify the most accurate statement below.

A) Several purchase requisitions are often created to fill one purchase order.

B) Several purchase orders are often created to fill one purchase requisition.

C) Every purchase requisition should lead to the creation of one purchase order.

D) Every purchase order should lead to the creation of one purchase requisition.

Answer: B



AACSB: Analytic

35) Identify item below that is the biggest purchasing function cost driver.

A) the number of purchase requisitions processed

B) the number of suppliers used

C) the number of purchase orders processed

D) the quantity of items ordered

Answer: C



AACSB: Analytic

36) A reverse auction would likely be best suited to the purchase of

A) central processing units (CPUs).

B) soybeans.

C) designer clothing.

D) automobiles.

Answer: B



AACSB: Analytic

27


37) One way a firm could reduce the risk of problems with supplier dependability is to

A) purchase inventory from only U.S.-based suppliers.

B) use an ERP system for purchases.

C) require suppliers to be ISO 9000 certified.

D) automate the purchasing function.

Answer: C



AACSB: Analytic

38) An important control that can be used to reduce the risk of employee kickbacks is

A) surveillance cameras.

B) job rotation.

C) off-site restrooms.

D) use of ID badges.

Answer: B



AACSB: Analytic

39) Restricting access to the approved supplier list can

A) help reduce the risk of fraudulent disbursements.

B) cause purchase order approval delays.

C) eliminate the risk of duplicate payment.

D) improve the efficiency of the expenditure cycle.

Answer: A



AACSB: Analytic

28



Chapter 14 The Production Cycle

14.1 Describe the major business activities and related information processing operations performed in the production cycle.

1) The AIS compiles and feeds information among the business cycles. What is the relationship between the revenue and production cycles regarding the exchange of information? A) The revenue cycle provides sales forecast and customer order information to the production cycle, but the production cycle sends information back to revenue about finished goods production. B) The revenue cycle receives information from the production cycle about raw materials needs. C) The production cycle sends cost of goods manufactured information back to the revenue cycle. D) The production cycle does not exchange information with the revenue cycle. Answer: AObjective: Learning Objective 1Difficulty: ModerateAACSB: Analytic

2) Identify a key feature associated with materials requirements planning.A) determining economic order quantity for all materialsB) minimizing or eliminating carrying and stockout costsC) determining the optimal reorder points for all materialsD) reducing required inventory levels by scheduling production, rather than estimating needsAnswer: DObjective: Learning Objective 1Difficulty: EasyAACSB: Analytic

3) The production cycle differs from the revenue and expenditure cycles for all the following reasons except

A) cost accounting is involved in all activities.B) not all organizations have a production cycle.C) there are no direct external data sources or destinations.D) very little technology exists to make activities more efficient.Answer: CObjective: Learning Objective 1Difficulty: ModerateAACSB: Reflective Thinking

1


4) How does an MRP inventory system reduces inventory levels?A) by reducing the uncertainty regarding when materials are neededB) by receiving materials exactly when needed and in exact quantitiesC) by computing the exact costs of purchasing and carrying inventoryD) none of the aboveAnswer: AObjective: Learning Objective 1Difficulty: EasyAACSB: Analytic

5) Which of the following is not a product design objective? A) Design a product that meets customer requirements.B) Design a quality product.C) Minimize production costs.D) Make the design easy to track for cost accounting purposes.Answer: DObjective: Learning Objective 1Difficulty: EasyAACSB: Analytic

6) The operations list shows A) the labor and machine requirements. B) the steps and operations in the production cycle. C) the time expected to complete each step or operation. D) all of the above Answer: DObjective: Learning Objective 1Difficulty: EasyAACSB: Analytic

7) "Push manufacturing" is also known as A) manufacturing resource planning (MRP).B) just-in-time manufacturing system (JIT). C) the economic order quantity (EOQ) system. D) ahead-of-time production implementation (ATPI). Answer: AObjective: Learning Objective 1Difficulty: EasyAACSB: Analytic

2


8) "Pull manufacturing" is also known as A) manufacturing resource planning (MRP). B) just-in-time manufacturing system (JIT). C) the economic order quantity (EOQ) system. D) ahead-of-time production implementation (ATPI). Answer: BObjective: Learning Objective 1Difficulty: EasyAACSB: Analytic

9) What is the main difference between MRP-II and JIT manufacturing systems?A) The length of the planning horizonB) JIT uses long-term customer demand for planning purposes, but MRP-II uses short-term customer demand for planning purposes.C) MRP-II relies on EDI, but JIT does not.D) There are no significant differences between MRP-II and JIT.Answer: AObjective: Learning Objective 1Difficulty: ModerateAACSB: Analytic

10) A master production schedule is used to develop detailedA) timetables of daily production and determine raw material needs. B) reports on daily production and material usage. C) daily reports on direct labor needs. D) inventory charts. Answer: AObjective: Learning Objective 1Difficulty: ModerateAACSB: Analytic

11) The ________ is the production cycle document that specifies the quantity of each product tobe produced and when production should begin. A) receiving reportB) bill of ladingC) master production scheduleD) operations listAnswer: CObjective: Learning Objective 1Difficulty: EasyAACSB: Analytic

3


12) What information is necessary to create the master production schedule? A) engineering department specifications and inventory levels B) engineering department specifications and sales forecasts C) special orders information and engineering department specifications D) sales forecasts, special orders information, and inventory levels Answer: DObjective: Learning Objective 1Difficulty: EasyAACSB: Analytic

13) The ________ authorizes the transfer of raw materials from the storeroom to the production floor.A) bill of materials B) production order C) materials requisitionD) move ticketAnswer: CObjective: Learning Objective 1Difficulty: ModerateAACSB: Analytic

14) ________ is an efficient way to track and process information about raw materials used in production.A) A just-in-time inventory system B) Identifying materials with bar codes or RFID tags C) A materials resources planning inventory system D) Job-order costing Answer: BObjective: Learning Objective 1Difficulty: EasyAACSB: Analytic

15) The use of various forms of information technology in the production process is referred to as A) computerized investments and machines. B) computerized integration of machines. C) computer-integrated manufacturing. D) computer intense manufacturing. Answer: CObjective: Learning Objective 1Difficulty: EasyAACSB: Analytic

4


16) Using technology such as robots and computer-controlled machinery to shift from mass production to custom order manufacturing is referred to asA) computer integrated manufacturing (CIM).B) lean manufacturing.C) Six Sigma.D) computer-aided design (CAD).Answer: AObjective: Learning Objective 1Difficulty: ModerateAACSB: Analytic

17) Direct labor must be tracked and accounted for as part of the production process. Traditionally, direct labor was tracked using ________ but an AIS enhancement is to use ________ to record and track direct labor costs. A) job-time tickets; coded identification cards B) move tickets; coded identification cards C) employee earnings records; job-time tickets D) time cards; electronic time entry terminals Answer: AObjective: Learning Objective 1Difficulty: ModerateAACSB: Analytic

18) Yasamin Roshni owns and operates a small deli in Miami, Florida. She maintains a file that contains the ingredients used to make each of her famous subs. The ingredients needed to make aspecific sub are most similar to a(n)A) operations list.B) production order.C) bill of materials.D) materials requisition.Answer: CObjective: Learning Objective 1Difficulty: EasyAACSB: Analytic

19) Yasamin Roshni owns and operates a small deli in Miami, Florida.. She maintains a file that lists the steps required to make each of her famous subs. These step-by-step instructions are examples of a(n)A) operations list.B) bill of materials.C) production order.D) materials requisition.Answer: AObjective: Learning Objective 1Difficulty: EasyAACSB: Analytic

5


20) Yasamin Roshni owns and operates a small deli in Miami, Florida. Each morning she prepares a list that describes the quantity and variety subs that will be prepared during the day. This list is an example of a(n)A) bill of materials.B) operations list.C) materials requisition.D) production order.Answer: DObjective: Learning Objective 1Difficulty: ModerateAACSB: Analytic

21) Yasamin Roshni owns and operates a small deli in Miami, Florida. Each afternoon, she prepares a shopping list that describes the quantity and variety of ingredients that she will purchase in the evening from her wholesaler. The shopping list is an example of a(n)A) bill of materials.B) materials requisition.C) operations list.D) production order.Answer: BObjective: Learning Objective 1Difficulty: ModerateAACSB: Reflective Thinking

22) Labor productivity is measured by the quantity produced divided by the labor time required to produce it. All other things held constant, an increase in labor productivity will increase throughput byA) increasing productive capacity.B) increasing productive processing time.C) increasing yield.D) increasing all components of throughput.Answer: AObjective: Learning Objective 1Difficulty: ModerateAACSB: Analytic

23) Sule Technologies installed a new production monitoring system that will reduce system breakdowns by 35%. The new system will increase throughput byA) increasing productive capacity.B) increasing yield.C) increasing productive processing time.D) increasing all components of throughput.Answer: CObjective: Learning Objective 1Difficulty: ModerateAACSB: Analytic

6


24) Gulshan Parvana operates a machine shop in Istanbul, Turkey. She places bids on small projects in the metropolitan area. Which of the following is most likely to be a cost driver that should be considered when determining how to allocate utility costs?A) number of projects completedB) number of units producedC) number of labor hoursD) sales revenueAnswer: AObjective: Learning Objective 1Difficulty: DifficultAACSB: Reflective Thinking

25) Sule Technologies initiated a just-in-time inventory system in 2013. Now the production manager, Chan Ziaou, wants to apply the same principles to the entire production process. His recommendation is that Sule adopt a A) master production scheduling system.B) lean manufacturing system.C) manufacturing resource planning system.D) computer-integrated manufacturing system.Answer: BObjective: Learning Objective 1Difficulty: ModerateAACSB: Analytic

26) This document appears to be a

A) Materials Requisition.B) Production Order.C) Bill of Materials.D) Move Ticket between production and warehouse functions.Answer: AObjective: Learning Objective 1Difficulty: ModerateAACSB: Reflective Thinking

7


27) How many side panels should the company budget for use in week two?

Bill of Materials

Finished Product: DVD Player

Part Number105125148155173195199

DescriptionControl UnitBack PanelSide PanelTop/Bottom PanelTimerFront PanelScrew

Quantity1122116

Operations List for: Create Side Panel

Operation Number105106124142155

DescriptionCut to shapeCorner cutTurn and shapeFinishPaint

Machine NumberML15-12ML15-9S28-17F54-5P89-1

Standard Time (m:s)2:003:154:007:109:30

Answer: 600 (2 per finished unit × 300 units scheduled to be produced)Objective: Learning Objective 1Difficulty: ModerateAACSB: Analytic

8


28) How many labor hours should the company budget in week three to produce all side panels needed? Round to the nearest hour, if necessary.

Bill of Materials

Finished Product: DVD Player

Part Number105125148155173195199

DescriptionControl UnitBack PanelSide PanelTop/Bottom PanelTimerFront PanelScrew

Quantity1122116

Operations List for: Create Side Panel

Operation Number105106124142155

DescriptionCut to shapeCorner cutTurn and shapeFinishPaint

Machine NumberML15-12ML15-9S28-17F54-5P89-1

Standard Time (m:s)2:003:154:007:109:30

Answer: 213 hours ((25.55 minutes per finished unit × 2 panels per finished unit × 250 units scheduled to be produced)/60 minutes per hour )Objective: Learning Objective 1Difficulty: ModerateAACSB: Analytic

9


29) Identify and discuss the two documents that are the result of product design activities. Answer: The two documents that are the result of product design activity are the bill of materialsand the operations list. The bill of materials specifies the part number, description, and quantity of each component used in a finished product. The operations list specifies the labor and machinerequirements needed to manufacture the product. The operations list is sometimes also called a routing sheet, since it indicates how a product moves through the factory.Objective: Learning Objective 1Difficulty: ModerateAACSB: Analytic

30) Explain what CIM means and its benefits. Answer: CIM is the acronym that stands for computer integrated manufacturing. It incorporates various forms of information technology in the production process such as the use of robots and computer-controlled machinery. The benefit of CIM is that it can significantly reduce production costs.Objective: Learning Objective 1Difficulty: EasyAACSB: Analytic

31) Identify and discuss the two common methods of production planning. Answer: The two common methods of production planning are manufacturing resource planning(MRP-II) and just-in-time (JIT,) or lean, manufacturing.

MRP-II seeks to balance the existing production capacity and raw materials required to meet forecasted sales demand. MRP-II systems are referred to as push manufacturing, since products are made in expectation of customer demand.

JIT manufacturing seeks to minimize or eliminate inventories of raw materials, work in process, and finished goods. A JIT manufacturing system only produces a product in response to customerdemands. JIT systems are called pull manufacturing systems, since goods are produced only in response to customer demands.Objective: Learning Objective 1Difficulty: ModerateAACSB: Analytic

32) How can CAD software help improve the efficiency and effectiveness of the product design process?A) It can eliminate the costs associated with creating and destroying physical prototypes.B) It can simulate how new products will be manufactured.C) It can store all the data associated with all products.D) All of the above Answer: AObjective: Learning Objective 1Difficulty: ModerateAACSB: Analytic

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33) How can PLM software improve the efficiency and effectiveness of the product design process?A) It can eliminate the costs associated with creating and destroying physical prototypes.B) It can simulate how new products will be manufactured.C) It can store all the data associated with all products.D) All of the above Answer: AObjective: Learning Objective 1Difficulty: ModerateAACSB: Analytic

34) What issue did Airbus encounter when using CAD software to help design the A380 Superjumbo airliner?A) The actual A380 was heavier than the CAD model.B) The actual A380 was not able to carry as much weight as the CAD model.C) Design teams used different versions of the same CAD software, resulting in key information loss.D) The CAD software was not advanced enough to help design the A380.Answer: BObjective: Learning Objective 1Difficulty: DifficultAACSB: Analytic

35) MRP-II is to MRP, as lean manufacturing is to A) EOQ.B) JIT.C) push manufacturing.D) reorder point.Answer: BObjective: Learning Objective 1Difficulty: DifficultAACSB: Analytic

14.2 Identify major threats in the production cycle and evaluate the adequacy of various control procedures for dealing with those threats.

1) For replacement of inventories and assets destroyed by fire or other disasters, an organization needs A) stand-by facilities. B) adequate insurance coverage. C) source data automation. D) All of the above are correct. Answer: BObjective: Learning Objective 2Difficulty: ModerateAACSB: Reflective Thinking

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2) Which process or activity relates to overproduction? A) product design B) planning and scheduling C) production operationsD) cost accounting Answer: BObjective: Learning Objective 2Difficulty: EasyAACSB: Analytic

3) What specific control can help restrict the rights of authorized users to only the portion of a database needed to complete their specific job duties?A) an access control matrixB) passwords and user IDsC) closed-loop verificationD) specific authorizationAnswer: AObjective: Learning Objective 2Difficulty: ModerateAACSB: Analytic

4) An organization can implement which of the following controls to reduce the threat of inventory theft or damage? A) review and approval of fixed asset acquisitions B) improved and more timely reporting C) better production and planning systems D) document all movement of inventory through the production process Answer: DObjective: Learning Objective 2Difficulty: ModerateAACSB: Analytic

5) The best control procedure for accurate data entry is A) the use of on-line terminals. B) an access control matrix. C) passwords and user IDs. D) automation of data collection. Answer: DObjective: Learning Objective 2Difficulty: ModerateAACSB: Analytic

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6) Which of the following organization controls should be implemented and maintained to counteract the general threat that the loss of production data will greatly slow or halt production activity? A) Store key master inventory and production order files on-site only to prevent their theft.B) Back up data files only after a production run has been physically completed.C) Access controls should apply to all terminals within the organization.D) Allow access to inventory records from any terminal within the organization to provide efficient data entry.Answer: CObjective: Learning Objective 2Difficulty: ModerateAACSB: Analytic

7) The threat of loss of data exposes the company to A) the loss of assets. B) ineffective decision making. C) inefficient manufacturing. D) All of the above are correct. Answer: DObjective: Learning Objective 2Difficulty: EasyAACSB: Analytic

8) The expenses associated with a product recall are ________ costs.A) preventionB) inspectionC) internal failureD) external failureAnswer: DObjective: Learning Objective 2Difficulty: EasyAACSB: Analytic

9) ________ costs are expenses associated with quality assurance activities.A) PreventionB) InspectionC) Internal failureD) External failureAnswer: BObjective: Learning Objective 2Difficulty: EasyAACSB: Analytic

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10) The expenses associated with the use of clean rooms in the production of computer hard drives are ________ costs.A) preventionB) inspectionC) internal failureD) external failureAnswer: AObjective: Learning Objective 2Difficulty: EasyAACSB: Analytic

11) The expenses associated with disposal of defective products are ________ costs.A) preventionB) inspectionC) internal failureD) external failureAnswer: CObjective: Learning Objective 2Difficulty: EasyAACSB: Analytic

12) In addition to identifying and dealing with defective products before they reach customers, quality management is concerned with initiating process changes that will reduce the number of defective units produced. All other things held constant, a decrease in the number of defective units will increase throughput byA) increasing productive capacity.B) increasing productive processing time.C) increasing yield.D) increasing all components of throughput.Answer: CObjective: Learning Objective 2Difficulty: ModerateAACSB: Analytic

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13) Describe five threats in the production cycle and the applicable control procedures used to mitigate each threat. Answer: Threat 1: Unauthorized transactions — Controls: Accurate sales forecasts, maintaining accurate inventory records; authorizing production; restricting access to the production planning program;and review and approval of capital expendituresThreat 2: Theft or destruction of inventories and fixed assets — Controls: Restrict physical access to inventories; document internal physical flow of assets; proper segregation of duties; periodic physical count and reconciliation of inventory; document and authorize materials requests and disposal of fixed assets; and have adequate insuranceThreat 3: Recording and posting errors — Controls: Automate data collection procedures; online data entry edit controls; and conduct periodic physical inventory and fixed asset countsThreat 4: Loss of data — Controls: Regularly back up files; keep additional master files; use internal and external file labels; restrict access; and keep logs of all activitiesThreat 5: Inefficiencies and quality control problems — Controls: Prepare regular performance reports; highlight exception reports and variances; compare actual performance to budgeted performance; measure throughput; and measure the cost of quality controlObjective: Learning Objective 2Difficulty: ModerateAACSB: Analytic

14) Discuss two measures that can address the threats of inefficiencies and quality controls problems. Answer: Throughput represents the number of good (nondefective) units produced in a given period of time. It consists of three factors, (productive capacity, productive processing time, and yield), each of which can be separately controlled as shown in the formula: Throughput = (total units produced/processing time) x (processing time/total time) x (good units/total units). Knowing about quality costs can help companies determine the effects of actions taken to improve yield and identify areas for further improvement. The main objective of quality control is to minimize the sum of the four types of costs recognizing the trade-offs between costs. These costs are: prevention costs, inspection costs, internal failure costs, and external failure costs.Objective: Learning Objective 2Difficulty: ModerateAACSB: Analytic

15) Identify one control that can be used to mitigate the threat of poor product design that results in excess costs.A) production planning systemsB) analysis of warranty and repair costsC) encryptionD) insuranceAnswer: BObjective: Learning Objective 2Difficulty: ModerateAACSB: Analytic

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16) Identify one control that can be used to mitigate the threat of under-production.A) production planning systemsB) analysis of warranty and repair costsC) encryptionD) insuranceAnswer: AObjective: Learning Objective 2Difficulty: ModerateAACSB: Analytic

17) The risks associated with over-production are likely of greatest concern to which company below?A) a cereal manufacturerB) a manufacturer that produces designer clothingC) a manufacturer of printer paperD) a mailbox manufacturerAnswer: BObjective: Learning Objective 2Difficulty: ModerateAACSB: Analytic

18) To control for risks associated with the threat of inventory loss, who should have primary responsibility for work-in-process inventories?A) a factory supervisorB) the inventory stores departmentC) purchasingD) the receiving departmentAnswer: AObjective: Learning Objective 2Difficulty: ModerateAACSB: Analytic

19) The acronym "RFP" stands for what?A) Request for ProjectB) Request for ProcessingC) Request for ProposalD) Request for PurchaseAnswer: CObjective: Learning Objective 2Difficulty: ModerateAACSB: Analytic

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20) The VP of Manufacturing at Roshanak Incorporated wants to buy a new die cast machine for production. The die cast machine is expected to cost around $1,000,000. Which document will most likely be used to solicit bids from suppliers?A) RFPB) eVoiceC) RFJD) RFBAnswer: AObjective: Learning Objective 2Difficulty: ModerateAACSB: Analytic

14.3 Explain how a company's cost accounting system can help it achieve its manufacturing goals.

1) Which objective listed below is not a cost accounting objective for the production cycle? A) Provide information for planning, controlling, and evaluating the performance of production operations. B) Provide cost data about products used in pricing and product mix decisions. C) Collect and process the information used to calculate inventory and cost of goods sold amounts that appear in the financial statements. D) Provide tests of audit control functions as part of the AIS. Answer: DObjective: Learning Objective 3Difficulty: EasyAACSB: Analytic

2) Which type of information below should not be maintained by the AIS in accounting for fixed assets? A) identification/serial number B) cost C) improvements D) market value Answer: DObjective: Learning Objective 3Difficulty: EasyAACSB: Analytic

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3) Detailed data about reasons for warranty and repair costs is considered an applicable control used to mitigate the threat of A) underproduction. B) overproduction. C) poor product design. D) suboptimal investment of fixed assets. Answer: CObjective: Learning Objective 3Difficulty: EasyAACSB: Analytic

4) What is the primary drawback to using a volume-driven base, such as direct labor or machine hours, to apply overhead to products in a traditional cost accounting system? A) The cost accountant may not fully understand how to track direct labor or machine hours. B) It is difficult for an AIS to incorporate such a measurement into its system. C) It is difficult for an ERP to incorporate such a measurement into its integrated system. D) Many overhead costs are incorrectly allocated to products since they do not vary with production volume. Answer: DObjective: Learning Objective 3Difficulty: EasyAACSB: Analytic

5) ________ identifies costs with the corporation's strategy for production of goods and services.A) Activity-based costing B) Job-order costing C) Process costing D) Manufacturing costing Answer: AObjective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

6) In an Activity-Based Costing (ABC) system, a cause-and-effect relationship is known as a A) cost stimulator. B) overhead stimulator. C) cost driver. D) cost catalyst. Answer: CObjective: Learning Objective 3Difficulty: EasyAACSB: Analytic

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7) What does the first term in the throughput formula, productive capacity, represent? A) the maximum number of units that can be produced given current technology B) the percentage of total production time used to manufacture a product C) the percentage of "good" units produced given current technology D) the percentage of "bad" units produced given current technology Answer: AObjective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

8) ________ are incurred to ensure that products are created without defects the first time. A) External failure costs B) Inspection costs C) Internal failure costs D) Prevention costs Answer: DObjective: Learning Objective 3Difficulty: EasyAACSB: Analytic

9) ________ are associated with testing to ensure that products meet quality standards. A) External failure costs B) Inspection costs C) Internal failure costs D) Prevention costs Answer: BObjective: Learning Objective 3Difficulty: EasyAACSB: Analytic

10) The cost of a product liability claim can be classified as a(n)A) prevention cost. B) inspection cost. C) internal failure cost. D) external failure cost. Answer: DObjective: Learning Objective 3Difficulty: EasyAACSB: Analytic

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11) Elif Package Delivery determines the cost per delivery by summing the average cost of loading, unloading, transporting, and maintenance. What costing approach does Elif Package Delivery use?A) job-orderB) unit-basedC) processD) activity-basedAnswer: CObjective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

12) Elif Package Delivery determines the cost per delivery by averaging total cost over the number of deliveries. What costing approach does Elif Package Delivery use?A) unit-basedB) job-orderC) processD) activity-basedAnswer: BObjective: Learning Objective 3Difficulty: EasyAACSB: Analytic

13) Elif Package Delivery calculates the cost per delivery by identifying variables as cost drivers,and allocating overhead accordingly. What costing approach does Elif Package Delivery use?A) job-orderB) activity-basedC) unit-basedD) processAnswer: BObjective: Learning Objective 3Difficulty: EasyAACSB: Analytic

14) In activity-based costing, expenses associated with the purchase of health care insurance for employees are ________ overhead.A) batch-relatedB) product-relatedC) company wideD) expenditure-basedAnswer: CObjective: Learning Objective 3Difficulty: EasyAACSB: Analytic

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15) In activity-based costing, the expenses associated with planning and design of new products are ________ overhead.A) batch-relatedB) product-relatedC) company wideD) expenditure-basedAnswer: BObjective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

16) At the end of each production run, preventive maintenance is done on the assembly line. The expenses associated with this maintenance are ________ overhead.A) batch-relatedB) product-relatedC) company wideD) department-basedAnswer: AObjective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

17) Which of the following is not a benefit of activity-based costing?A) lower costB) better decisionsC) improved cost managementD) identification of cost driversAnswer: AObjective: Learning Objective 3Difficulty: EasyAACSB: Analytic

18) What types of data are accumulated by cost accounting? What is the accountant's role in cost accounting? Answer: There are four types of cost data accumulated in a cost accounting system: raw materials; direct labor; machinery and equipment; and, manufacturing overhead. The role of the accountant is to control costs by assessing how product mix changes affect total manufacturing overhead and by identifying factors that drive changes in costs.Objective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

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19) What role does the AIS play in the production cycle? Answer: A company's AIS plays a vital role in the production cycle. Accurate and timely cost accounting information is essential input to decisions about the following: Product mix (what to produce), Product pricing, Resource allocation and planning (e.g., whether to make or buy a product, relative profitability of different products), Cost management (planning and controlling manufacturing costs, evaluating performance). These decisions require much more detailed information about costs than the data needed to prepare financial statements in accordance with generally accepted accounting principles (GAAP). Thus, the design of a company's production cycle AIS must go beyond merely meeting external financial reporting requirements.Objective: Learning Objective 3Difficulty: DifficultAACSB: Analytic

20) What are the two major types of cost accounting systems and what are the differences between the two? Answer: Most companies will use either job-order or process costing to assign production costs in the production of products. Job-order costing is designed to assign costs to specific productionbatches, or jobs (hence the name "job-order"). It is used in a production process where a product is specifically, discreetly identifiable (such as a custom-built home or office building). It should be noted that job-order costing can also be successfully used in the service sector by law or accounting firms to calculate and track the costs incurred in legal cases and audits, respectively. Process costing differs in that it assigns costs to each process, or work center, in the production cycle, and then averages these costs across the number of units produced. Process costing is useful whenever similar or homogeneous goods are produced in mass quantities, such as laundry detergent, some types of food items, or soft drinks. Costs can be assigned at each stage in the production process for these items, and then an average total unit cost for the product can be calculated based on output. Process costing has also been incorporated by mutual funds to find the average cost of handling customer deposits and withdrawals.Objective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

21) Discuss the criticisms of traditional cost accounting methods. Answer: There can be an inappropriate allocation of overhead costs. The factors contributing to this problem are: A volume-driven form used for activity-driven overhead costs assigned to products. Overhead cost is either over- or understated due to allocation method used. The system may distort costs across products, especially if manufacturing is highly automated and performance measures do not accurately reflect the effects of factory automation: Measures collected are not integrated with performance measures. Lack of information about standard costs, variance, and functioning of production process. Lack of information about defect rates, breakdown frequency, percentage for finished goods completed without rework, etc.Objective: Learning Objective 3Difficulty: DifficultAACSB: Reflective Thinking

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22) What is activity-based costing (ABC)? How does it compare with the traditional costing methods? What are the benefits of activity-based costing? Answer: Activity-based costing (ABC) traces costs to the activities that created them and then allocates those costs to products or shipments thereby linking the costs to a corporate strategy. ABC versus traditional cost systems: ABC attempts to directly trace most costs to products, ABCuses more cost pools to accumulate manufacturing overhead instead of lumping all overhead costs together as in the traditional approach. For example: 1) Batch-related overhead results in larger quantities having lower batch-related costs than smaller quantities; 2) Product-related overhead results in costs being allocated to only the product(s) that are linked to the cost; and 3) Company-wide overhead results in such overhead costs (e.g., rent) being allocated based on department or plant rates. ABC uses cost drivers that have a cause-and-effect relationship on the products in order to allocate the costs instead of using the traditional financial variables. Advantages of ABC systems: Better decisions because can be made with an ABC system becauseproduct cost data is more accurate and data is used to improve product design. Improved cost management is seen due to four reasons: 1) There are clearer measures of managerial actions on profitability. 2) The consumption of resources is measured in addition to the amount spent on acquiring resources. 3) The cost of activity capability = Cost of activity used + Cost of unused capacity. 4) Performance reports help direct managerial attention to the effect of policy decision on all costs.Objective: Learning Objective 3Difficulty: DifficultAACSB: Analytic

23) Traditionally, what did manufacturing firms use to track the amount of time a worker spends on each specific task?A) job-time ticketB) barcoded ID cardC) clock punchcardD) RFID chipsAnswer: AObjective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

24) Manufacturing overhead is best described as A) costs that cannot be traced directly to specific jobs or processes.B) costs that are economically feasible to trace directly to specific jobs or processes.C) costs that are not economically feasible to trace directly to specific jobs or processes.D) costs that management has decided not to trace directly to specific jobs or processes.Answer: CObjective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

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25) Identify the cost below most likely to be classified as manufacturing overhead.A) production workers' payB) raw materials used in productionC) insuranceD) none of the aboveAnswer: CObjective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

26) True or False: ERP systems make it easier for an organization to implement an activity based costing approach.Answer: TRUEObjective: Learning Objective 3Difficulty: EasyAACSB: Analytic

27) Which of the following is not proposed to be an advantage of activity-based costing?A) better product mix decisionsB) better product pricing decisionsC) less complex than traditional cost systemsD) none of the aboveAnswer: CObjective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

28) True or False: Implementing a modern costing approach often results in short-term declines in profitability.Answer: TRUEObjective: Learning Objective 3Difficulty: EasyAACSB: Analytic

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14.4 Discuss the key decisions that must be made in the production cycle and identify the information required to make those decisions.

1) Discuss the role the accountant can play in the production cycle. Answer: The accountant can play a role and provide meaningful input into each area of the production cycle. Accountants should participate in product design since 65 to 80% of product costs are determined at this stage of the production process. Accountant analysis of cost behaviorand variations in product design can prove invaluable to the organization in this stage of production. In the planning and scheduling stage, accountants can help a company choose whether MRP-II or JIT is more appropriate for planning and scheduling. The accountant also should verify that the AIS collects and reports costs in a manner consistent with the production planning techniques it has chosen to use. In production operations, the accountant should develop a working knowledge of CIM in order to understand its effect on the AIS. The accountant will also be integrally involved with the cost accounting system, whether it is a traditional cost accounting system or an activity-based cost accounting system. Accountants can provide excellent insight into the cost aspect of the production process, which is key to the profitability and success of the organization.Objective: Learning Objective 4Difficulty: DifficultAACSB: Analytic

2) Identify the role below that accountants can play in the production cycle.A) participate in product designB) perform cost analysisC) help an organization choose an inventory control systemD) all of the aboveAnswer: DObjective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

3) Why might an organization find it most beneficial to involve accountants in product design?A) because generally at least 65% of product costs are determined in the design stage and accountants can help minimize product costsB) because accountants are generally able to improve the quality of new productsC) because involving accountants in product design boosts firm moraleD) because accountants are generally able to identify what consumers want in a new productAnswer: AObjective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

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Chapter 15 The Human Resources Management and Payroll Cycle

15.1 Describe the major business activities and related information processing operations performed in the human resources management (HRM)/payroll cycle.

1) Which activity below is not performed by Human Resources management (HRM)?A) compensation B) training C) discharge D) recruitment and hiring Answer: AObjective: Learning Objective 1Difficulty: EasyAACSB: Analytic

2) Which department should have the sole ability to provide information to the AIS about hiring, terminations, and pay rate changes? A) payroll B) timekeeping C) production D) HRM Answer: DObjective: Learning Objective 1Difficulty: EasyAACSB: Analytic

3) Which of the following is generally not a major sourceDifficulty : of input to a payroll system? A) payroll rate changesB) time and attendance dataC) checks to insurance and benefits providers D) withholdings and deduction requests from employees Answer: CObjective: Learning Objective 1Difficulty: EasyAACSB: Analytic

4) Who does the payroll system issue checks to?A) employees and to banks participating in direct deposit B) a company payroll bank account C) government agenciesD) All of the above are correct. Answer: DObjective: Learning Objective 1Difficulty: EasyAACSB: Analytic

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5) Experts estimate that, on average, the costs associated with replacing an employee are about ________ the employee's annual salary. A) one-quarter ofB) one-half of C) one and one-half times D) twice Answer: CObjective: Learning Objective 1Difficulty: ModerateAACSB: Analytic

6) For recording time spent on specific work projects, manufacturing companies usually use a A) job time ticket. B) time card. C) time clock. D) labor time card. Answer: AObjective: Learning Objective 1Difficulty: EasyAACSB: Analytic

7) Which of the following statements is false regarding the use of incentives, commissions and bonuses in the payroll system?A) Using incentives, commissions, and bonuses requires linking the payroll system and the information systems of sales and other cycles in order to collect the data used to calculate bonuses.B) Bonus/incentive schemes must be properly designed with realistic, attainable goals that can beobjectively measured.C) Incentive schemes can result in undesirable behavior.D) All of the above are true.Answer: DObjective: Learning Objective 1Difficulty: ModerateAACSB: Analytic

8) Identify the item below that is not a desired result of an employee bonus systems. A) Employees may recommend unnecessary services to customers in order to exceed set sales quotas and earn a bonus.B) Employees may look for ways to improve service.C) Employees may analyze their work environment and find ways to cut costs.D) Employees may work harder and may be more motivated to exceed target goals to earn a bonus.Answer: AObjective: Learning Objective 1Difficulty: EasyAACSB: Analytic

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9) ________ are used to transmit time and attendance data directly to the payroll processing system.A) Badge readersB) Electronic time clocksC) Magnetic cardsD) none of the aboveAnswer: BObjective: Learning Objective 1Difficulty: EasyAACSB: Analytic

10) Payroll deductions fall into the broad categories of ________ and ________. A) payroll tax withholdings; voluntary deductions B) unemployment; social security taxes C) unemployment taxes; income taxes D) voluntary deductions; income taxes Answer: AObjective: Learning Objective 1Difficulty: EasyAACSB: Analytic

11) Which of the following is not classified as a voluntary deduction? A) pension plan contributions B) social security withholdings C) insurance premiums D) deductions for a charity organization Answer: BObjective: Learning Objective 1Difficulty: EasyAACSB: Analytic

12) Which type of payroll report contains information such as the employees' gross pay, payroll deductions, and net pay in a multicolumn format? A) payroll register B) deduction register C) employee earnings statement D) federal W-4 form Answer: AObjective: Learning Objective 1Difficulty: EasyAACSB: Analytic

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13) Which type of payroll report lists the voluntary deductions for each employee?A) payroll register B) deduction register C) earnings statement D) federal W-4 form Answer: BObjective: Learning Objective 1Difficulty: EasyAACSB: Analytic

14) Which type of payroll report includes the details of the current paycheck and deductions as well as year-to-date totals?A) payroll register B) deduction register C) earnings statement D) federal W-4 form Answer: CObjective: Learning Objective 1Difficulty: EasyAACSB: Analytic

15) An effective way an organization can eliminate paper paychecks while maintaining adequate accounting records is to A) pay in cash only. B) pay with money orders. C) use direct deposit. D) use Electronic Funds Transfer. Answer: CObjective: Learning Objective 1Difficulty: EasyAACSB: Analytic

16) Companies that specialize in processing payroll are known asA) paycheck distribution companies.B) payroll service bureaus.C) professional employer organizations.D) semi-governmental organizations.Answer: BObjective: Learning Objective 1Difficulty: EasyAACSB: Analytic

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17) Which organization provides payroll processing as well as other HRM services, like employee benefit design and administration?A) title companiesB) payroll service bureauC) professional employer organizationD) paycheck distribution companiesAnswer: CObjective: Learning Objective 1Difficulty: EasyAACSB: Analytic

18) Which of the following isfnot a benefit of using a payroll service bureau or a professional employer organization?A) freeing up of computer resourcesB) increased internal controlC) reduced costsD) wider range of benefitsAnswer: BObjective: Learning Objective 1Difficulty: EasyAACSB: Analytic

19) Many companies offer their employees a "cafeteria" approach to voluntary benefits in which employees can pick and choose the benefits they want. This plan is normally called a(n) A) elective plan. B) menu options benefit plan. C) flexible benefit plan. D) buffet plan. Answer: CObjective: Learning Objective 1Difficulty: EasyAACSB: Analytic

20) Pay rate information should be stored in A) employees' personnel files. B) employee subsidiary ledgers. C) the payroll master file. D) electronic time cards. Answer: CObjective: Learning Objective 1Difficulty: ModerateAACSB: Analytic

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21) The payroll transaction file should contain A) entries to add new hires. B) time card data. C) changes in tax rates. D) All of the above are correct. Answer: BObjective: Learning Objective 1Difficulty: ModerateAACSB: Analytic

22) The document that lists each employee's gross pay, payroll deductions, and net pay in a multicolumn format is called A) an employee earnings statement. B) the payroll register. C) a deduction register. D) an employee time sheet summary. Answer: BObjective: Learning Objective 1Difficulty: EasyAACSB: Analytic

23) As each payroll transaction is processed, the system should also A) allocate labor costs to appropriate general ledger accounts B) use cumulative totals generated from a payroll to create a summary journal entry to be posted to the general ledger C) both A and B above D) The HRM system should not perform either activity A or B. Answer: CObjective: Learning Objective 1Difficulty: ModerateAACSB: Analytic

24) Direct deposit of employee paychecks is one way an organization can improve efficiency andreduce payroll-processing costs. Which statement regarding direct deposit isffalse? A) The cashier does not authorize the transfer of funds from the organization's checking account to a payroll checking account. B) The cashier does not have to sign employee paychecks. C) Employees who are part of a direct deposit program receive a copy of their paycheck indicating the amount deposited. D) Employees who are part of a direct deposit program receive an earnings statement on payday rather than a paper check. Answer: AObjective: Learning Objective 1Difficulty: ModerateAACSB: Analytic

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25) The employer pays a portion of some payroll taxes and employee benefits. Both the employee and employer pay which benefit or tax listed below? A) social security taxes B) federal income taxes C) state income taxesD) none of the above Answer: AObjective: Learning Objective 1Difficulty: EasyAACSB: Analytic

26) Identify the following item that should contribute to the efficiency of a payroll system.A) segregation of check distribution from payroll dutiesB) prompt redeposit of unclaimed paychecksC) a separate payroll bank accountD) direct deposit of checksAnswer: DObjective: Learning Objective 1Difficulty: EasyAACSB: Analytic

27) Which of the following documents would be likely to yield the greatest cost saving by converting from paper to electronic?A) payroll registerB) earnings statementC) deduction registerD) time cardAnswer: DObjective: Learning Objective 1Difficulty: EasyAACSB: Analytic

28) Describe the basic activities in an HRM/payroll cycle.Answer: The HRM/payroll cycle is a recurring set of business activities and related data processing operations associated with effectively managing the employee work force. Important activities in the HRM/payroll cycle include the following tasks: Recruitment and hiring of new employees. Training. Job assignment. Compensation (payroll). Performance evaluation. Discharge.Objective: Learning Objective 1Difficulty: EasyAACSB: Analytic

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29) Identify the two types of payroll deductions and give two examples of each type.Answer: Payroll deductions include: Payroll tax withholdings such as federal, state, and local income taxes, social security taxes, unemployment taxes; Voluntary deductions such as contributions to a pension plan, premium for group life, etc.Objective: Learning Objective 1Difficulty: EasyAACSB: Analytic

30) Why are accurate cumulative earnings records important? Answer: Accurate records of cumulative earnings are necessary because social security and other deductions have maximum earnings amounts upon which taxes are paid; and the appropriate amount of income and payroll taxes should be remitted to the government agencies. At the end of each calendar year, businesses must prepare and mail summary earnings statementsto every employee with earnings that year.Objective: Learning Objective 1Difficulty: ModerateAACSB: Analytic

31) Explain the functions of the payroll register, deduction register, and earnings statement. Answer: The payroll register is a report that lists each employee's gross pay, payroll deductions, and net pay for each pay period. The deduction register lists the voluntary deductions for each employee. The earnings statement lists the amount of gross pay, deductions, and net pay for the current period, as well as providing year-to-date totals.Objective: Learning Objective 1Difficulty: EasyAACSB: Analytic

32) What is the difference between a payroll service bureau and a professional employer organization?Answer: A payroll service bureau is a company that can be hired as an independent contractor tomaintain the payroll master file and perform the payroll processing activities for an organization. A professional employer organization is a company that provides not only full payroll services but also provides HRM services such as employee benefit design and administration.Objective: Learning Objective 1Difficulty: EasyAACSB: Analytic

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33) Discuss the various types and sources of input into the HRM/payroll cycle. Answer: An HRM/payroll system relies on input from various sources. Employees provide inputwhen they make changes in their discretionary deductions (contributions to charities or retirement plans); various departments provide data about the actual hours employees work. The HRM department provides information about employees who have been hired or terminated, pay-rate changes, and promotions. Government agencies provide tax rates and various instructions for meeting regulatory requirements. Insurance companies and other organizations provide instructions for calculating and remitting various withholding amounts.Objective: Learning Objective 1Difficulty: DifficultAACSB: Analytic

34) A growing number of companies require some of their upper level executives to spend time performing job duties of rank-and-file employees. When the CEO of Loews Hotels assumed the role of bellman, he discoveredA) that the company's polyester uniform caused him to sweat a great deal.B) evidence of fraud in several hotel locations.C) instances where company employees fell asleep on the job.D) situations where employees were not treating customers properly.Answer: AObjective: Learning Objective 1Difficulty: DifficultAACSB: Analytic

35) Executive immersion experiences are important because A) CEOs often have no idea what rank-and-file employees do on a daily basis.B) employees who have positive attitudes contribute to increasing company profits.C) many employees feel upper management is out of touch.D) it is important for organizations to take social responsibility seriously.Answer: BObjective: Learning Objective 1Difficulty: DifficultAACSB: Analytic

36) True or False: The HRM department should immediately delete records of employees who quit to prevent other employees from assuming their identities.Answer: FALSEObjective: Learning Objective 1Difficulty: EasyAACSB: Analytic

9


37) Involving accountants in executive compensation plans is often especially helpful A) in keeping track of the executive compensation plan.B) in identifying the appropriate metrics to use when linking compensation to performance.C) in reducing the total amount of compensation paid to executives.D) in suggesting the appropriate amount of compensation executives should be paid.Answer: BObjective: Learning Objective 1Difficulty: ModerateAACSB: Analytic

38) Accountants can help executive compensation plan boards A) comply with legal and regulatory requirements.B) by identifying the best ways to keep the details of compensation plans out of the hands of external parties.C) avoid paying excessive amounts of "perks" to executives.D) distribute information regarding how well each executive is performing their job.Answer: AObjective: Learning Objective 1Difficulty: ModerateAACSB: Analytic

39) Form 941A) is filed each quarter to reconcile monthly tax payments with total tax liability for the quarter.B) is used in preparing labor-related reports for government agencies.C) is used for employee information and annual payroll reports.D) is used to document compliance with applicable regulations.Answer: AObjective: Learning Objective 1Difficulty: DifficultAACSB: Analytic

40) A workforlefinventory report A) is filed each quarter to reconcile monthly tax payments with total tax liability for the quarter.B) is used in preparing labor-related reports for government agencies.C) is used for employee information and annual payroll reports.D) is used to document compliance with applicable regulations.Answer: BObjective: Learning Objective 1Difficulty: DifficultAACSB: Analytic

10


41) Professional employer organizations (PEOs) are especially attractive to small and mid-sized businesses for all of the following reasons exleptA) reduced costs.B) wider range of benefits.C) freeing up computer resources.D) improved service quality.Answer: DObjective: Learning Objective 1Difficulty: ModerateAACSB: Analytic

15.2 Discuss the key decisions to be made in the HRM/payroll cycle and identify the information needed to make those decisions.

1) The sales department administrative assistant has been assigning phone order sales to her brother-in-law, a company sales person. Company policy is to pay commissions only on orders directly received by sales people, not on orders received over the phone. The resulting fraudulentcommission payments might best have been prevented by requiring thatA) sales commission statements be supported by sales order forms signed by the customer and approved by the sales manager.B) sales order forms be prenumbered and accounted for by the sales department manager.C) sales orders and commission statements be approved by the accounting department.D) disbursement vouchers for commission payments be reviewed by the internal audit department and compared to sales commission statements and sales orders.Answer: AObjective: Learning Objective 2Difficulty: ModerateAACSB: Analytic

2) Because many HRM / payroll master databases typically contain only descriptive information (such as which employees possess which skills), many firms have deployed ________ to more effectively leverage employees knowledge and skills.A) relational databasesB) knowledge management systemsC) Resources, Events, and Agents (REA) databasesD) cardinality systemsAnswer: BObjective: Learning Objective 2Difficulty: ModerateAACSB: Analytic

11


3) Identify the firm below where employees' knowledge is likely to be more valuable than the value of a company's tangible assets.A) international airlineB) law firmC) automobile manufacturerD) railroadAnswer: BObjective: Learning Objective 2Difficulty: ModerateAACSB: Analytic

4) True or False: Batch processing continues to be widely used to process payroll transactions.Answer: TRUEObjective: Learning Objective 2Difficulty: EasyAACSB: Analytic

5) Knowledge management systems (KMS) permit organizations to A) store employee solutions to specific problems in a shared database.B) learn from individuals external to the organization.C) perform background checks on potential employees.D) gain competitive business intelligence on competitors.Answer: AObjective: Learning Objective 2Difficulty: ModerateAACSB: Analytic

15.3 Identify the major threats in the HRM/payroll cycle and evaluate the adequacy of various internal control procedures for dealing with them.

1) Why is a separate payroll account used to clear payroll checks? A) for internal control purposes, to help limit any exposure to loss by the company B) to make bank reconciliation easier C) Banks don't like to commingle payroll and expense checks. D) All of the above are correct. Answer: AObjective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

12


2) The following control can reduce the distribution of fraudulent paychecks.A) Have internal audit investigate unclaimed paychecks. B) Allow department managers to investigate unclaimed paychecks. C) Immediately mark "void" across all unclaimed paychecks. D) Match up all paychecks with time cards. Answer: AObjective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

3) When using electronic documents, ________ increase(s) the accuracy of data entry. A) access controls B) separation of duties C) general controls D) application controls Answer: DObjective: Learning Objective 3Difficulty: EasyAACSB: Analytic

4) The most vital control in preventing unauthorized changes to the payroll master file is A) hiring totally honest people to access and make changes to this file. B) segregation of duties between the preparation of paychecks and their distribution. C) segregation of duties between the authorization of changes and the physical handling of paychecks. D) having the controller closely review and then approve any changes to the master file. Answer: CObjective: Learning Objective 3Difficulty: DifficultAACSB: Analytic

5) Which of the following is not a potential effect of inaccurate data on employee time cards? A) increased labor expenses B) erroneous labor expense reports C) damaged employee morale D) inaccurate calculation of overhead costs Answer: DObjective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

13


6) Which control would be most appropriate to address the problem of inaccurate payroll processing? A) encryption B) direct deposit C) cross-footing of the payroll register D) an imprest payroll checking account Answer: CObjective: Learning Objective 3Difficulty: DifficultAACSB: Reflective Thinking

7) The purpose of a general ledger payroll clearing account is A) to check the accuracy and completeness of payroll recording and its allocation to cost centers.B) to make the bank reconciliation easier. C) to make sure that all employees are paid correctly each week. D) to prevent the cashier from having complete control of the payroll cycle. Answer: AObjective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

8) A "zero balance check" refers to which of the following control procedures? A) a type of batch totalB) cross-footing the payroll register C) the payroll clearing account shows a zero balance once all entries are postedD) trial balance showing that debits equal credits Answer: CObjective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

9) All of the following are controls that should be implemented in a payroll process, exleptA) supervisors distribute paychecks since they should know all employees in their department.B) someone independent of the payroll process should reconcile the payroll bank account.C) sequential numbering of paychecks and accounting for the numbers.D) restrict access to blank payroll checks and documents.Answer: AObjective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

14


10) What is the best control to reduce the risk of losing payroll data? A) passwords B) physical security controls C) backup and disaster recovery procedures D) encryption Answer: CObjective: Learning Objective 3Difficulty: EasyAACSB: Analytic

11) The threat of violation of employment laws relates directly to which activity?A) payroll processingB) collecting employee time dataC) hiring and recruiting D) all of the above Answer: CObjective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

12) What is a potential threat to the specific activity of payroll processing? A) hiring unqualified employees B) poor system performance C) violations of employment laws D) unauthorized changes to the payroll master file Answer: DObjective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

13) The results of an internal audit finds that there is a problem with inaccurate time data being entered into the payroll system. What is an applicable control that can help prevent this event from occurring in the future? A) proper segregation of duties B) automation of data collection C) sound hiring procedures D) review of appropriate performance metrics Answer: BObjective: Learning Objective 3Difficulty: EasyAACSB: Analytic

15


14) Which of the following is a control that can be implemented to help prevent paychecks beingissued to a "phantom" or "ghost" employee? A) The cashier should sign all payroll checks.B) Sequentially prenumber all payroll checks.C) Use an imprest account to clear payroll checks.D) Paychecks should be physically distributed by someone who does not authorize time data or record payroll.Answer: DObjective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

15) The average annual management salary at Iyov Management is $80,000. If the average turnover rate for employees is ten per year, what is the approximate average annual cost of turnover? A) $80,000B) $400,000C) $800,000D) $1,200,000Answer: DObjective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

16) Which of the following will limit a firm's potential loss exposure from paycheck forgery?A) segregation of check distribution from payroll dutiesB) prompt redeposit of unclaimed paychecksC) a separate payroll bank accountD) direct deposit of checksAnswer: CObjective: Learning Objective 3Difficulty: EasyAACSB: Analytic

17) Which of the following is a control that addresses the threat of unauthorized changes to the payroll master file?A) field checksB) batch totalsC) segregation of dutiesD) sound hiring proceduresAnswer: CObjective: Learning Objective 3Difficulty: EasyAACSB: Analytic

16


18) For the payroll register below, all the following data entry controls would be useful exlept

A) validity check on Fed. TaxB) sequence check on Employee No.C) limit check on HoursD) field check on Pay RateAnswer: AObjective: Learning Objective 3Difficulty: EasyAACSB: Analytic

19) For the payroll register below, all the following processing controls would be useful exlept

A) concurrent update controlB) cross-footing balance testC) mathematical accuracy testD) hash total on Employee No.Answer: AObjective: Learning Objective 3Difficulty: EasyAACSB: Analytic

17


20) Describe benefits and threats of incentive and bonus programs.Answer: Sales staffs are often paid either on a straight commission basis or a combination of a salary plus commissions. This is done to keep sales at a certain level or to increase sales. The HRM/payroll system will need input from the sales and other cycles to properly calculate commissions and bonuses for such employees. It is important that an incentive and bonus systemsets realistic, attainable goals that are congruent with corporate objectives. It is also important that managers monitor incentive and bonus goals and ensure that the attainment of such goals is appropriate for the organization and does not lead to undesirable behavior, which can result from poorly designed incentive schemes.Objective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

21) Explain benefits to companies and to employees of using electronic direct deposit for payroll. Answer: Direct deposit of paychecks provide a savings to employers because the costs of purchasing, processing, and distributing paper checks is eliminated. Using direct deposit also reduces postage and bank fees. The cashier's time can be better spent because paychecks do not have to be signed. Employees save time as well as they do not have to make a physical trip to thebank to cash their checks. Direct deposit is safer as it eliminates misplaced paychecks and reduces the possibility of the theft of checks.Objective: Learning Objective 3Difficulty: ModerateAACSB: Reflective Thinking

22) What factors should be considered in outsourcing payroll to a payroll service bureau? Discuss the advantages and disadvantages of using a payroll service bureau to process a payroll. Answer: The following questions should be considered: How much does the service cost? How would the data be submitted—online or hand carried? What kind of reports and documents couldbe obtained from the service bureau? How would the service interface with the existing general ledger system? What resources are now being devoted to payroll and how could these resources be re-deployed into other areas? Could security and control be improved by the outsourcing? What would be the time length of a contract for outsourcing services? Could the service bureau system be integrated so that an online query could be made by the organization? What kind of track record does the service bureau have with other clients? Are there new technologies and approaches that would become available to the company via the service bureau? Advantages: No need to deal with complexity and changes in tax codes. No need to worry about what to do if equipment crashes. Less chance of employees accessing the payroll files (confidentiality). Possible efficiency and cost reductions. Wider range of benefits. Freed-up computer resources. Disadvantages: Less control over the payroll files because they are stored off-site. Extra costs forany special reports. Slower response to ad hoc queries.Objective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

18


23) Discuss the threat of unauthorized changes to the payroll master file and its consequences. Answer: Many problems may result when there are unauthorized changes to the payroll master file. Unauthorized changes may be made to employee pay rates, resulting in the company paying too much in wages. "Ghost" or "phantom" employees may be added to the payroll master to divert funds to dishonest employees through the issuance of paychecks to such "employees." Likewise, terminated employees may still be paid, resulting in the fraudulent diversion of payrollfunds. Two controls that should be implemented and maintained to provide overall control of the payroll master file: proper segregation of duties and controlling access to the file. Good internal control dictates that only authorized HRM personnel be allowed to update the payroll master file for any hiring, termination, pay raise, and promotion. HRM personnel, who have such access to the payroll master file, should never be allowed to directly participate in actual payroll processing or paycheck distribution. This way an adequate control is created to match actual paychecks (or earnings statements when direct deposit is in place) with employees when a manager, supervisor, or other third party hand out the checks (or earnings statements). Also, a different individual should approve all changes to the payroll master file in writing other than theindividual who recommends or initiates the changes. User IDs and passwords should always be used to control access to the payroll master file, and an access control matrix should be established to define what actions each authorized employee is allowed to make and confirms thefiles the employee may access.Objective: Learning Objective 3Difficulty: DifficultAACSB: Analytic

24) What controls are available to address the threat of payroll errors? Answer: Three types of controls can be used to circumvent payroll errors in an HRM/payroll system. Batch totals are used to verify totals entered into the system both at the time of data entryand at each stage in the processing. Hash totals are particularly useful in this regard, since hash totals calculated at the time of original data entry and again at each stage in the process can be compared. When the comparisons match throughout the process, three conclusions can be made: 1) all payroll records have been processed; 2) the data input was accurate; and 3) no bogus time cards were entered at any point after initial input. Upon completion of a payroll, the payroll register should be cross-footed to verify that the totals of the net pay column and other deductioncolumns equal the total of the gross pay column. A third control is the use of a payroll clearing account. This is a general ledger account that can be used as part of a two-step accuracy and completeness process. First, the payroll control account will be debited for the amount of the gross pay for the pay period; cash and other various withholding liability accounts are credited. Second, the cost accounting process distributes labor costs to various expense categories and credits the payroll control account for the total amount of the debits made to the other accounts. The result is that the payroll control account will have a zero balance. This becomes an internal check known as a zero balance check, indicating that the proper postings have been made to all of the accounts associated with payroll for a given pay period.Objective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

19


25) Using financial incentives requires organizations to A) pay employees less than they would have to if pay was a fixed salary.B) better monitor employee attendance.C) link the payroll system to other cycles to calculate incentive payments.D) better monitor employee effort.Answer: CObjective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

26) Source data automation is often effective in reducingA) unintentional errors.B) intentional errors.C) accuracy.D) theft.Answer: CObjective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

27) A payrollfllearingfallount is used to A) check the accuracy of payroll costs.B) speed up payroll transaction processing.C) reduce the transaction costs associated with payroll transaction processing.D) eliminate the need to manually record payroll transactions.Answer: AObjective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

28) All of the following regarding payrollflhelksfis correct exleptA) access to payroll checks should be restricted.B) payroll checks should be sequentially pre-numbered.C) payroll checks should be drawn on the organization's regular bank account(s).D) the cashier should sign payroll checks.Answer: CObjective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

20


29) Falk Noam is the internal auditor for Matan Incorporated. Before investigating the HRM / payroll cycle at Matan, Falk decided to read up on the proper segregation of duties regarding payroll disbursement processes. For strongest segregation of duties, the ________ should distribute paychecks.A) accounts payable departmentB) cashierC) internal audit departmentD) external auditorAnswer: BObjective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

30) Falk Noam is the internal auditor for Matan Incorporated. Before investigating the HRM / payroll cycle at Matan, Falk decided to read up on the proper segregation of duties regarding payroll disbursement processes. For strongest segregation of duties, the ________ should record payroll.A) accounts payable departmentB) cashierC) internal audit departmentD) external auditorAnswer: AObjective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

31) Falk Noam is the internal auditor for Matan Incorporated. Before investigating the HRM / payroll cycle at Matan, Falk decided to read up on the proper segregation of duties regarding payroll disbursement processes. For strongest segregation of duties, the ________ should periodically observe the paycheck distribution process.A) accounts payable departmentB) cashierC) internal audit departmentD) external auditorAnswer: CObjective: Learning Objective 3Difficulty: ModerateAACSB: Analytic

21



Chapter 16 General Ledger and Reporting System

16.1 Describe the information processing operations required to update the general ledger and

to produce reports for internal and external users.

1) The general ledger and reporting system consists of the ________ involved in ________ the

general ledger and ________ reports.

A) business transactions; updating; processing

B) data processing; business transactions for; printing

C) information processing; updating; creating

D) business transactions; data processing; preparing

Answer: C



AACSB: Analytic

2) Which item below is not considered a major input to the general ledger and reporting system?

A) summary entries from the major subsystems

B) reports from managers

C) adjusting entries

D) financing and investing activities

Answer: B


Difficulty: Easy

AACSB: Analytic

3) Who should provide the adjusting entries in a well-designed general ledger and reporting

system?

A) various user departments

B) the treasurer's area

C) the other major AIS subsystems

D) the controller's area

Answer: D


Difficulty: Easy

AACSB: Analytic

1


4) Which of the following user groups generally receive information produced by the general

ledger and reporting system?

A) internal users

B) external users

C) inquiry processing by internal or external users

D) all of the above

Answer: D


Difficulty: Easy

AACSB: Analytic

5) The general ledger system of an organization should be designed to serve the information

requirements of both internal and external users. This means that the system should support

A) producing expansive regular periodic reports to cover all information needs.

B) the real-time inquiry needs of all users.

C) producing regular periodic reports and respond to real-time inquiry needs.

D) access by investors and creditors of the organization to general ledger balances.

Answer: C



AACSB: Analytic

6) Identify the most correct statement with regard to how the various accounting subsystems

update the general ledger.

A) Individual journal entries for each accounting subsystem transaction update the general ledger

every 24 hours.

B) Summary journal entries that represent the results of all transactions for a certain time period

are used to update the general ledger.

C) The controller or treasurer must approve accounting subsystem journal entries before any

updating may occur.

D) Nonroutine transactions are entered into the system by the treasurer's office.

Answer: B



AACSB: Analytic

7) When updating the general ledger, sales, purchases, and production are examples of ________

entries, and issuance or retirement of debt and the purchase or sale of investment securities are

examples of ________ entries.

A) adjusting; controller originated

B) accounting subsystem; treasurer originated

C) adjusting; special journal

D) controller generated; special journal

Answer: B



AACSB: Analytic

2


8) Which of the following are used to document entries made to update the general ledger?

A) general journal

B) subsidiary journal

C) subsidiary ledgers

D) journal vouchers

Answer: D


Difficulty: Easy

AACSB: Analytic

9) Not all journal entries affect cash flow. Adjusting entries that reflect events that have already

occurred, but have no effect on cash, are classified as

A) accruals.

B) deferrals.

C) revaluations.

D) corrections.

Answer: A


Difficulty: Easy

AACSB: Analytic

10) Recording interest earned on an investment is an example of which type of adjusting journal

entry?

A) accrual entry

B) deferral entry

C) revaluation entry

D) correcting entry

Answer: A



AACSB: Analytic

11) Identify the adjusting entry that is made at the end of an accounting period to reflect an

exchange of cash prior to the performance of a related event is classified as a(n)

A) accrual entry.

B) deferral entry.

C) revaluation entry.

D) correcting entry.

Answer: B


Difficulty: Easy

AACSB: Analytic

3


12) Depreciation expense and bad debt expense are examples of which type of adjusting journal

entry?

A) deferrals

B) accruals

C) revaluations

D) estimates

Answer: D


Difficulty: Easy

AACSB: Analytic

13) Adjusting entries that are made to reflect differences between the actual and recorded value

of an asset or a change in accounting principle are called

A) reconciliations.

B) revaluations.

C) estimates.

D) accruals.

Answer: B


Difficulty: Easy

AACSB: Analytic

14) Adjusting entries that are made to counteract the effects of errors found in the general ledger

are called

A) accruals.

B) corrections.

C) deferrals.

D) estimates.

Answer: B


Difficulty: Easy

AACSB: Analytic

15) Corrections are entries made to correct errors found in

A) all journals.

B) special journals.

C) the general ledger.

D) the financial statements.

Answer: C


Difficulty: Easy

AACSB: Analytic

4


16) Immediately after the adjusting entries are posted, the next step in the general ledger and

reporting system is to prepare

A) an adjusted trial balance.

B) closing entries.

C) financial statements.

D) an unadjusted trial balance.

Answer: A



AACSB: Analytic

17) Financial statements are prepared in a certain sequence. Which statement is prepared last?

A) the adjusted trial balance

B) the income statement

C) the balance sheet

D) the statement of cash flows

Answer: D


Difficulty: Easy

AACSB: Analytic

18) A listing of journal vouchers by numerical sequence, account number, or date is an example

of

A) a general ledger control report.

B) a budget report.

C) a batch to be processed.

D) responsibility accounting.

Answer: A



AACSB: Analytic

19) Who generally is responsible for providing the accounting department with information

about financing and investing activities to create the appropriate general ledger journal entries?

A) budget department

B) controller

C) treasurer

D) chief executive officer

Answer: C


Difficulty: Easy

AACSB: Analytic

5


20) Adjusting entries that are made to recognize revenue that has been received but not yet

earned are classified as

A) estimates.

B) deferrals.

C) accruals.

D) revaluations.

Answer: B


Difficulty: Easy

AACSB: Analytic

21) Adjusting entries that reflect a change in accounting principle used to value inventories are

classified as

A) corrections.

B) estimates.

C) deferrals.

D) revaluations.

Answer: D


Difficulty: Easy

AACSB: Analytic

22) Explain the purpose of a journal voucher file.

Answer: A journal voucher is a form on which journal entries to update the general ledger are

documented. The individual entries are stored in the journal voucher file. This file is equivalent

to the general journal in a manual AIS. The journal voucher file forms an important part of the

audit trail as well. Various internal controls must be implemented in order to maintain adequate

security and access control over the file, because it provides a way to alter and change the data

contained in the general ledger.



AACSB: Analytic

16.2 Identify the major threats in general ledger and reporting activities and evaluate the

adequacy of various control procedures for dealing with them.

1) If you believe not all adjusting entries were posted in the general ledger, you should prepare a

general ledger control report listing journal vouchers in

A) numerical sequence.

B) chronological order.

C) general ledger account number order.

D) any order, since you have to review them all anyway.

Answer: A




6


2) If you believe a general ledger account was not adjusted properly or at all, you should prepare

a general ledger control report listing journal vouchers in

A) numerical sequence.

B) chronological order.

C) general ledger account number order.

D) any order, since you have to review them all anyway.

Answer: C




3) Which of the following are appropriate controls for the general ledger and reporting system?

A) using well-designed documents and records

B) online data entry with the use of appropriate edit checks

C) prenumbering documents and accounting for the sequence numbers

D) All of the above are appropriate.

Answer: D


Difficulty: Easy

AACSB: Analytic

4) A type of data entry control that would ensure that adjusting entries are posted to existing

general ledger accounts is called a(n) ________ check.

A) validity

B) existence

C) closed loop verification

D) reasonableness

Answer: A


Difficulty: Easy

AACSB: Analytic

5) One way of ensuring that recurring adjusting journal entries are made each month would be to

A) make all the entries a month in advance.

B) rotate the responsibility among the accounting staff.

C) program the entries to be made automatically.

D) create a standard adjusting journal entry file.

Answer: D


Difficulty: Easy

AACSB: Analytic

7


6) Which of the following tasks are facilitated by maintaining a strong and secure audit trail?

A) tracing a transaction from original source document to the general ledger to a report

B) tracing an item in a report back through the general ledger to the original source document

C) tracing changes in general ledger accounts from beginning to ending balances

D) All of the above are facilitated by the audit trail.

Answer: D



AACSB: Analytic

7) Marina Filimena is an accountant at Jasmina Hair Products. Marina received the following

error message while making an adjusting entry to the general ledger: "The account number

referenced in your journal entry does not exist. Create a new account?" This is an example of a

A) validity check.

B) closed loop verification.

C) zero-balance check.

D) completeness test.

Answer: A



AACSB: Analytic


error message while making an adjusting entry to the general ledger: "Your journal entry must be

a numeric value. Please reenter." This is an example of a

A) validity check.

B) field check.



Answer: B


Difficulty: Easy

AACSB: Analytic


error message while making an adjusting entry to the general ledger: "The amounts debited and

credited are not equal. Please correct and try again." This is an example of a

A) validity check.

B) field check.



Answer: C


Difficulty: Easy

AACSB: Analytic

8



error message while making an adjusting entry to the general ledger: "The data you have entered

does not include a source reference code. Please enter this data before saving." This is an

example of a

A) validity check.

B) field check.



Answer: D


Difficulty: Easy

AACSB: Analytic

11) How is an audit trail used in the general ledger and reporting system?

Answer: An audit trail shows the path of a transaction through the accounting system. It can

provide information needed to trace any changes made to the general ledger by tracing either to

or from an original source document to the general ledger. It helps in tracing all changes in

general ledger accounts from beginning balances to ending balances as well as any adjustments

made to the accounts.



AACSB: Analytic

9


12) Describe three threats in the general ledger and reporting system and identify corresponding

controls for each threat.

Answer:

THREAT 1: Errors in updating the general ledger because of inaccurate/incomplete journal

entries or posting of journal entries — Controls: (1) Input, edit, and processing controls over

summary entries from subsystems. (a) Validity check over existence of general ledger accounts.

(b) Field check over numeric data in amount field. (c) Zero-balance check ensures equality of

debits and credits (d) Completeness test — all pertinent data are entered (e) Redundant data

check — closed loop verification to see if on account numbers and descriptions, to ensure that

the correct general ledger account is being accessed (f) Standard adjusting entry file for recurring

entries — improves accuracy of the process (g) Sign check on debit and credit entries

(h) Calculation of run-to-run totals can verify the accuracy of journal voucher batch processing

(2) Reconciliation and control reports — can detect errors made during updating and processing;

trial balances, clearing, and suspense accounts are examples (a) Balancing of control and

subsidiary accounts (b) Control reports can help identify the source of errors in the general

ledger update process — listings of journal vouchers and general journal entries will show

entries posted to the general ledger and ensures equality of debits and credits (3) The audit trail

— the path of transactions through the system-should be able to perform the following tasks:

(a) Trace any transaction from its original source document to the general ledger; any other

document or report using that data (b) Trace any item from a report or an output document to the

general ledger and thence to the source document (c) Trace all changes in the general ledger

balances from their beginning balance to their ending balance.

THREAT 2: Loss or unauthorized disclosure or alteration of financial data — Controls:

(1) User IDs, passwords, and access controls should be used (2) Enforce segregation of duties

(3) Adjusting entries only from the controller's area (4) Valid authorization for journal voucher

submission.

THREAT 3: Loss or destruction of the general ledger — Controls: (1) Use of internal and

external file labels to protect from accidental data loss (2) Make regular backup copies of the

general ledger, one copy stored off-site (3) A good disaster recovery plan and (4) access and

processing integrity controls to ensure confidentiality and accuracy of data transmitted to branch

offices or externally.

THREAT 4: Poor performance — Controls: (1) XBRL, (2) redesign business processes,

and (3) redesign metrics used to report results of business activities.



AACSB: Analytic

13) Identify one way "rainbow tables" are often used.

A) to discover plaintext passwords associated with a hash

B) to integrate different tables into one, master table

C) to perform a zero-balance check

D) to ensure referential integrity of all the associated tables

Answer: A



AACSB: Analytic

10


14) What system privileges should an employee involved in the general ledger and reporting

system be given?

A) general privileges to create, delete, update, or modify data

B) no privileges permitting the creation, deletion, updating, or modification of data

C) only the specific privileges necessary to perform an employee's assigned duties

D) read-only privileges

Answer: C


Difficulty: Easy

AACSB: Analytic

15) What control procedure(s) should be used to reduce the risk of unauthorized disclosure of the

financial statements?

A) multifactor authentication

B) physical security

C) encryption

D) all of the above

Answer: D


Difficulty: Easy

AACSB: Analytic

16) What control procedure(s) should be used to reduce the risk of the destruction of financial

statement master data?

A) multifactor authentication

B) backup and disaster recovery

C) encryption

D) all of the above

Answer: B



AACSB: Analytic

17) True or False: It is important to verify that all temporary accounts have a zero balance at

least two times during the time period covered by the financial statements.

Answer: FALSE


Difficulty: Easy

AACSB: Analytic

18) True or False: Periodic account reconciliations are a control that can be used to reduce the

risk of employees creating unauthorized adjusting entries.

Answer: FALSE


Difficulty: Easy

AACSB: Analytic

11


16.3 Understand the implications of new IT developments, such as XBRL, and changes in the

external reporting requirements, such as IFRS, for the design and operation of the general ledger

and reporting system.

1) Which of the following statements is not true regarding XBRL?

A) XBRL is a variant of XML.

B) XBRL is specifically designed for use in communicating the content of financial data.

C) XBRL creates unique tags for each data item.

D) XBRL's adoption will require accountants and systems professionals tag data for their clients.

Answer: D



AACSB: Analytic

2) The benefits of XBRL include

A) organizations can publish financial information only once, using standard XBRL tags.

B) tagged data is readable and interpretable by computers, so users don't need re-enter data into

order to work with it.

C) Both are benefits of XBRL.

D) Neither is a benefit of XBRL.

Answer: C



AACSB: Analytic

3) Communications technology and the Internet can be used to reduce the time and costs

involved in disseminating financial statement information. Users of such financial information

still struggle in that many recipients have different information delivery requirements and may

have to manually reenter the information into their own decision analysis tools. The ideal

solution to solve these problems and efficiently transmit financial information via the Internet is

to use

A) HTML code.

B) XML.

C) pdf file.

D) XBRL.

Answer: D


Difficulty: Easy

AACSB: Analytic

12


4) Which of the following statements is not true about an XBRL instance document?

A) An instance document includes instruction code as to how the document should be physically

arranged and displayed.

B) An instance document contains facts about specific financial statement line items.

C) An instance document uses separate tags for each specific element.

D) An instance document can be used to tag financial and nonfinancial elements.

Answer: A



AACSB: Analytic

5) IFRS is an acronym for what?

A) International Financial Reporting Standards

B) Internal Forensic Response System

C) Input and Financial Reporting Standards

D) Internal Fault Recovery System

Answer: A


Difficulty: Easy

AACSB: Analytic

6) Which of the following is true about IFRS?

A) There is a global trend towards using IFRS for reporting purposes, though U.S. companies are

not currently required to do so.

B) The switch to IFRS is required by the Sarbanes-Oxley Act.

C) IFRS is only slightly different than U.S. GAAP.

D) The switch to IFRS is cosmetic only—there isn't any real impact on AIS.

Answer: A



AACSB: Analytic

7) Which of the following scenarios will not be allowed under IFRS?

A) A landscaping and garden retail store keeps piles of river rock, gravel, paving stones, and

small decorative rocks in a fenced area on the side of the store. The store uses the most recent

inventory costs when calculating cost of goods sold, since new inventory is piled on top of the

older inventory.

B) A grocery store strictly enforces a shelf rotation policy, so that older inventory is always at the

front and sold first. The store uses the oldest inventory costs to calculate cost of goods sold.

C) A farm chemical supplier maintains a large holding tank of chemicals, into which deliveries

are periodically combined with the older chemicals. The supplier averages the cost of all

inventory to calculate cost of goods sold.

D) All of the above are acceptable under IFRS.

Answer: A




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8) Which of the following is true about accounting for fixed assets?

A) Depreciation expense under IFRS will likely be higher than under GAAP, because

acquisitions of assets with multiple components must be separately depreciated under IFRS,

whereas under GAAP assets could be bundled and depreciated over the longest of the useful life

for any of the components.

B) IFRS doesn't allow capitalization of any asset that separately accounts for less than 20% of

total assets.

C) Depreciation expense under IFRS will likely be less than under GAAP, because standards for

depreciable lives on asset classes are much longer than under GAAP.

D) IFRS and GAAP account for fixed assets in much the same way.

Answer: A




9) Explain the benefits of XBRL.

Answer: XBRL (Extensible Business Reporting Language) is a variation of XML, which is

designed to communicate the content of data. XML improves upon HTML by being able to

describe the content of the data presented. However, XML is limited when communicating

financial information. For financial purposes, XBRL identifies each piece of data, along with

how the data should be processed and how the data relate to other data items. XBRL may soon

become the universal standard computer language for communicating financial data. XBRL

enables organizations to publish financial information only once, using standard XBRL tags.

XBRL tagged information is interpretable and doesn't need to be re-entered by users.



AACSB: Analytic

10) Identify the year the SEC will require American companies to switch from U.S.-based GAAP

to IFRS as the basis for preparing financial statements.

A) 2016

B) 2018

C) 2020

D) At this point it is unclear when the SEC will require American companies to implement IFRS,

though the SEC remains committed to requiring U.S. companies use IFRS at some point.

Answer: A



AACSB: Analytic

14


11) A major way in which IFRS differs from GAAP that will affect the design of a company's

general ledger and reporting system is an IFRS principle known as

A) componentization.

B) monetization.

C) securitization.

D) none of the above

Answer: A



AACSB: Analytic

12) At a minimum, a switch to IFRS from GAAP will affect companies' accounting information

system by

A) requiring companies to increase the processing power of their existing accounting information

systems.

B) requiring IT departments to hire programmers that are fluent in languages besides English.

C) requiring the creation of additional fields in research and development (R&D) records to

capture information about the stage of research and development that costs are incurred in.

D) requiring firms to completely redesign their existing accounting information systems because

current systems are not compatible with IFRS accounting principles.

Answer: C



AACSB: Analytic

13) XBRL stands for

A) extensible business reporting language.

B) extreme business reporting ledgers.

C) external business reporting language.

D) extensive business report logic.

Answer: C



AACSB: Analytic

14) True or False: The SEC requires U.S. companies to use XBRL when submitting their filings.

Answer: TRUE


Difficulty: Easy

AACSB: Analytic

15


15) Each specific data item in an XBRL document is called a(n)

A) taxonomy.

B) element.

C) instance.

D) schema.

Answer: B



AACSB: Analytic

16.4 Discuss how tools like responsibility accounting, balanced scorecards, and graphs can be

used to provide information managers need to effectively monitor performance.

1) The ________ is the managerial report that shows planned cash inflows and outflows for

major investments or acquisitions.

A) journal voucher list

B) statement of cash flows

C) operating budget

D) capital expenditures budget

Answer: D


Difficulty: Easy

AACSB: Analytic

2) The operating budget

A) compares estimated cash flows from operations with planned expenditures.

B) shows cash inflows and outflows for each capital project.

C) depicts planned revenues and expenditures for each organizational unit.

D) is used to plan for the purchase and retirement of property, plant, and equipment.

Answer: C


Difficulty: Easy

AACSB: Analytic

3) Budgets used for internal planning purposes and performance evaluation should be developed

on the basis of

A) responsibility accounting.

B) generally accepted accounting principles.

C) financial accounting standards.

D) managerial accounting standards.

Answer: A


Difficulty: Easy

AACSB: Analytic

16


4) Performance reports for cost centers should compare actual versus budget ________ costs.

A) controllable

B) uncontrollable

C) fixed

D) variable

Answer: A


Difficulty: Easy

AACSB: Analytic

5) Performance reports for sales departments should compare actual revenue versus budgeted

A) revenue.

B) cost.

C) return on investment.

D) profit.

Answer: A


Difficulty: Easy

AACSB: Analytic

6) Departments that mostly provide services to other units and charge those units for services

rendered should be evaluated as ________ centers.

A) cost

B) profit

C) investment

D) revenue

Answer: B



AACSB: Analytic

7) As responsibility reports are rolled up into reports for higher level executives, they

A) become less detailed.

B) become more detailed.

C) become narrower in scope.

D) look about the same.

Answer: A




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8) Variances for variable costs will be misleading when the planned output differs from budgeted

output. A solution to this problem would be

A) calling all costs fixed.

B) to use flexible budgeting.

C) better prediction of output.

D) to eliminate the budgeting process.

Answer: B


Difficulty: Easy

AACSB: Analytic

9) Which of the following balanced scorecard dimensions provides measures on how efficiently

and effectively the organization is performing key business processes?

A) financial

B) internal operations

C) innovation and learning

D) customer

Answer: B


Difficulty: Easy

AACSB: Analytic

10) Which of the following is not one of the principles of proper graph design for bar charts?

A) Include data values with each element.

B) Use 3-D rather than 2-D bars to make reading easier.

C) Use colors or shades instead of patterns to represent different variables.

D) Use titles that summarize the basic message.

Answer: B


Difficulty: Easy

AACSB: Analytic

18


11) Which of the following statements is true about the chart below?

A) The x-axis is in reverse chronological order, which violates a principle of proper graph

design.

B) The chart appears to conform to the principles of proper graph design.

C) The vertical axis doesn't appear to start at the origin (zero).

D) The chart used 2-D bars instead of 3-D, which violates a principle of proper graph design.

Answer: A



AACSB: Analytic

12) What is responsibility accounting?

Answer: Responsibility accounting involves the reporting of financial results on the basis of

managerial responsibilities within an organization. Reports show actual amounts and variances to

budget for the current month and year to date for items controllable at that level.



AACSB: Analytic

13) How is a balanced scorecard used to assess organizational performance?

Answer: The balanced scorecard contains four perspectives of measurement of the organization.

The perspectives are financial, internal operations, innovation and learning, and customer.

Together these different perspectives provide a dimensional overview of organizational

performance that is greater than financial measures alone. A scorecard that has been properly

designed will measure key aspects of the organization's strategy as well as show important links

across the perspectives or dimensions.



AACSB: Analytic

19


14) Discuss the value and role of budgets as managerial reports.

Answer: Budgets are managerial reports that can be extracted from the general ledger and

reporting system. Budgets are used for planning and evaluating the organization's performance.

There are several different types of budgets that an organization may use in this regard. The

operating budget shows the planned revenues and expenditures for each organizational unit. Cash

flow budgets compare the estimated cash inflows from operations with planned expenditures,

and they are particularly useful to determine the borrowing needs of the organization. A capital

expenditure budget shows the projected cash inflows and outflows for a given project. Budgetary

reports should be tailored to the nature of the unit or department being evaluated, and they

should show actual versus projected budget amounts. Unfortunately, many budget amounts are

viewed as fixed targets, and they are therefore static and inflexible. Such an approach may either

reward or penalize managers for factors that are beyond their control. A solution to this problem

is to develop a flexible budget, in which variable budgeted amounts change in relation to some

measure of organizational activity, such as labor hours, or a percentage of sales. A flexible

budget may also break amounts into their respective fixed and variable components. Variable

amounts can then be adjusted for fluctuations in sales or production.




15) The balanced scorecard attempts to solve what major issue associated with traditional

accounting reports?

A) Traditional accounting reports focus too narrowly on financial performance.

B) Traditional accounting reports are not easily understood by non-accountants.

C) Traditional accounting reports are expensive to produce.

D) Traditional accounting reports are produced too slowly to provide value.

Answer: A



AACSB: Analytic

16) Which of the following is not a perspective reflected in the balanced scorecard?

A) customer perspective

B) internal operations perspective

C) financial perspective

D) efficiency and effectiveness perspective

Answer: D



AACSB: Analytic

20


17) True or False: Organizations should set their balanced scorecard targets to reflect industry

benchmark values.

Answer: FALSE


Difficulty: Easy

AACSB: Analytic

18) Which type of graph is the most commonly used to display trends in financial data?

A) pie chart

B) scatterplot chart

C) bar chart

D) stochastic chart

Answer: C



AACSB: Analytic

19) Which of the following balanced scorecard dimensions provides measures on new products?

A) financial

B) internal operations

C) innovation and learning

D) customer

Answer: C



AACSB: Analytic

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Accounting Information Systems, 13e (Romney/Steinbart)

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Transcript of Accounting Information Systems, 13e (Romney/Steinbart)