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Chapter 12: The Purchasing Process

Review Questions

1. What is the purchasing process?


The purchasing process is an interacting Structure of people, equipment, methods,
and controls that is designed to accomplish the following primary functions.

2. What primary functions does the purchasing process perform? Explain each function.
 Handle the repetitive work routines of the purchasing department and the
receiving department.
 Support the decision needs of those who manage the purchasing and
receiving departments.
 Assist in the preparation of internal and external reports.

 First, the purchasing process handles the repetitive work routines of the purchasing
and receiving departments by capturing and recording data related to the day-to-day
operations of the departments. The recorded data then may be used to generate
source documents (such as purchase orders and receiving reports) and to produce
internal and external reports.

3. With what internal and external entities does the purchasing process interact?

4. What are the fundamental responsibilities of each position: purchasing manager,


buyer, and receiving supervisor?

 Purchasing Manager – usually performs major buying activities as well as the


required administrative duties of running a department.
 Buyers – do the actual buying.
 Receiving Supervisor – responsible for receiving incoming goods, signing the
bill of lading presented by the carrier or the supplier in connection with the
shipment, reporting the receipt of goods, and making prompt transfer of
goods to the appropriate warehouse or department.
5. Describe supply chain management.
 Supply chain management (SCM) is the combination of processes and procedures
used to ensure the delivery of goods and services to customers at the lowest cost
while providing the highest value to the customers.

6. Describe the five basic components of the Supply Chain Operations Reference (SCOR)
Model.
 Plan: Measure customer demand for a product or service and develop a
course of action to source, produce, deliver, and, if necessary, return the
product or service.
 Source: Select supply sources and procure the goods and services to meet the
planned or actual demand, receive product, and authorize payments to
suppliers.
 Make: Transform a product to a finished state to meet planned or actual
demand.
 Deliver: This is the order fulfillment step. Receive customer orders, provide
goods or services to customers, and invoice customers.
 Return: Perform post-delivery customer support and receive defective or
excess products back from customers.

7. How does supply chain management software support supply chain management?
 Supply chain management software helps an organization execute the steps in the
supply chain. Software products are available to perform individual functions within
each of the five steps in SCM and products are available to perform complete steps or
several of the steps.

8. Describe Vendor Managed Inventory (VMI), Co-Managed inventory, Collaborative


Forecasting and Replenishment (CFAR), and Collaborative Planning Forecasting and
Replenishment (CPFR).
 Vendor Managed Inventory (VMI) - also known as Continuous Replenishment
(CRP) and Supplier Managed Inventory ISMII). A vendor (i.e., the
seller/supplier) obtains a buyer's current sales, demand, and inventory data in
real time and replenishes the buyer’s inventory.
 Co-Managed Inventory – is a form of CRP. The vendor replenishes standard
merchandise, and the buyer manages the replenishment of promotion
merchandise.
 Collaborative Forecasting and Replenishment (CFAR) – was a precursor of
CPFR. Retailer and manufacturer forecast demand and schedule production
jointly.
 Collaborative Planning Forecasting and Replenishment (CPFR) - Collaborative
processes across the supply chain using a set of processes and technology
models.

9. What is the bullwhip effect?

 An organization in the chain can relay a false demand signal. For example, a retailer
could misread retail demand and double its normal order. Assume further that the
wholesaler in response doubles its normal order (now four times the retail order) and
so on up the chain to the manufacturer and its supplier. The multiplication of these
orders up the supply chain can cause wild demand and supply fluctuations known as
the bullwhip effect.
10. What three major logical processes
does the purchasing process
perform? Describe each process.

1.0 Determine Requirements - The


purchasing process begins with each
department identifying its need for
goods and services. One of two data
flows entering bubble 1.0 depicts
these needs: inventory's purchase
requisition or purchase requisition—
supplies and services.
2.0 Order Goods and Services - A buyer
generally consults the vendor master
data to identify potential suppliers
that have been approved for use by
the organization and then evaluates
each prospective vendor for a
particular purchase. The requestor
may have indicated a preferred
vendor, and the buyer would need to determine the appropriateness of this choice.
3.0 Receive Goods and Services - In the case of inventory, the vendor packing slip, which
accompanies the purchased inventory from the vendor and identifies the shipment,
triggers the receiving process. As indicated by bubble 3.1 of the figure, goods arriving at
the receiving department are inspected and counted, and these data are matched against
the vendor packing slip and the "PO receiving notification" (i.e., the blind copy of the PO).

11. Describe how Radio-Frequency Identification (RFID) works.

 Radio-Frequency Identification (RFID) is a system for sending and receiving data, using
wireless technology, between an RFID tag and an RFID transceiver. RFID tags are
computer chips with an antenna that contains information about the object to which it
is attached. Active RFID tags store information using a power source within the tag,
and passive tags obtain their power from a transceiver. Transceivers transmit, receive,
and decode data from RFID tags.

12. What types of frauds are typically found in the purchasing process?

 An employee (e.g., a buyer, purchasing manager, or other person) places


purchase orders with a particular vendor(s) in exchange for a kickback, secret
commission, or other form of inducement from the vendor(s).
 An employee has a conflict of interest between his responsibilities to his
employer and his financial interest—direct or indirect—in a company with
whom the employer does business.

13. What are the typical effectiveness goals of the purchasing process? Provide an example
illustrating each goal.

Purchasing and receiving operations goals both contained in Figure 1213 both play a vital role
in effectiveness.
 (GOAL A) Purchasing operations goal - assist in sustaining other functional
departments, help with generating a stable end consistent flow of supply through
supplier selection, assist in punctuality of deliveries, end reduce returns, ordering cost,
cost of items procured and payments.

 (GOAL B) Receiving operations goals - handle only approved receipts, rapidly alert
other functional departments of receipts, punctuality promote items to the
storehouse, reduce materiel handling cost rates, and quickly eliminate substandard or
flawed items.

14. What characterizes a valid purchase order input? What characterizes a valid vendor
packing slip input?

 Valid purchase order inputs - (i.e., purchase requisitions) begin with a


requisition that is approved by the appropriate cost center authorities, and
result in purchase orders that are themselves approved and issued to an
authorized vendor.
 Valid vendor packing slip inputs - are supported by an approved purchase
order and an actual receipt of goods. Failure to achieve these goals may result
in overstocking inventory and, if the inventory cannot be used, an
overstatement of the inventory asset.

15. What are the key control plans associated with the purchasing process? Describe how
each works and what it accomplishes.

 Approve purchase requisition - An authorized individual, or several individuals, such as


cost center or department management, should approve purchase requisitions to
ensure that the purchase is within an applicable budget and that the purchase is
desirable.
 Use authorized vendor data - Vendors should be vetted to determine their suitability
to provide the organization with goods and services. The screening process might
include vendor financial viability and performance record. The vendor data would
include payment terms, address, and bank account.
 Independent vendor master data maintenance - Assumes that there is a separation of
duties between the personnel who create vendor records (to authorize purchases and
payments) and those that create and approve purchase orders, record accounts
payable, and approve payments.
 Compare vendors for favorable prices, terms, quality, and product availability - Before
executing a purchase, prospective vendors should be compared to determine that
they are the optimal choice for the purchase.
 Approve purchase order - Before being issued, the appropriate personnel should
approve purchase orders to ensure that an appropriate supplier has been selected
and that the correct goods and services, for the correct amounts, are being
purchased.
 Confirm purchase order to requesting department - To prevent duplicate purchase
requests and to allow the requesting department to ensure that a purchase order is
created; the requesting department should be informed when a purchase order has
been issued in response to a purchase requisition.
 Independent authorization to record receipt - Before a receipt can be accepted and
recorded, the receipt data should be compared with the purchase order master data
to determine that an approved purchase order is on file and that the correct goods
have been received. Receipts that are not authorized may be paid for and not be
needed.
 Inspect goods - To ensure that the correct goods are received in acceptable condition.

16. Describe the impact that company level controls (i.e., control environment, pervasive
controls, and general/ IT general controls) can have on the effectiveness of purchasing
business process controls.
Chapter 13: The Accounts Payable/Cash Disbursements (AP/CD) Process
Review Questions

1. What is the AP/ CD process?


 The accounts payable/eash disbursements (AP/CD) process is an interacting structure
of people, equipment, methods, and controls designed to accomplish the following
primary functions:

2. What primary functions does the AP/ CD process perform? Explain each function.
 Handle the repetitive work routines Of the accounts payable department and the
cashier.
 Support the decision needs of those who manage the accounts payable department
and cashier.
 Assist in the preparation of internal and external reports.

3. With what internal and external entities does the AP/CD process interact?
4. What are the fundamental responsibilities of the accounts payable department and the
cashier?
 The accounts payable department is responsible for processing invoices received from
vendors, preparing payment vouchers for the subsequent disbursement of cash for
goods or services received, and recording purchase and disbursement events.
 The cashier has custody of the organization's cash and executes the payments
authorized by the accounts payable department.

5. What major logical processes does the AP/ CD process perform? Explain each.

 Establish Payable - The first step in establishing the payable involves validating the
vendor invoice. This process is triggered by receipt of the vendor invoice, a business
document that notifies the purchaser of an obligation to pay the vendor for goods (or
services) that were ordered by and shipped to the purchaser.
 Make Payment - The payment process is triggered by payment due-date information
residing on the accounts payable master data. As you can see, the payment process
begins with the preparation of a list of payments that might be made at this time. The
selection of items for this list is based on payment due dates and terms that may
indicate a discount can be taken for a payment at this time.

6. Describe how the processing of non-invoiced disbursements is handled in (a) a "true"


voucher System and (b) a non-voucher System.

 a true voucher is used in which all expenditures must be vouchered—that is, formally
recorded as a payable—before they can be paid
 a non-voucher process is employed.

7. What data is contained in the purchasing events data, the accounts payable master
data, and the cash disbursements event data?

 Purchasing events data contains, in chronological sequence, the details of each


invoice that is recorded. Each record shows the date recorded; vendor invoice
number; account distributions, such as assets, expenses, freight, sales tax (or the
clearing account for inventory receipts); and gross invoice amount.
 Accounts payable master data is a repository Of all unpaid vendor invoices. The data
includes vendor number, vendor invoice number and date, terms, date due, line item
details (items, quantities, cost), and invoice total.
 Cash disbursements events data contains, in chronological sequence, the details of
each cash payment made. Accordingly, each record in this data store shows the
payment date, vendor identification, disbursement voucher number (if a voucher
process is used), vendor invoice number(s) and gross invoice amount(s), cash
discount(s) taken on each invoice, net invoice amount(s), check amount, and check
number.

8. What are e-invoicing and e-payments?

 E-invoicing is accomplished in one of three ways.


- First, an accounts payable office scans paper invoices upon receipt from the
vendors.
- Second, an organization can use purchasing cards, or p-cards, to make purchases.
- Third, vendors can submit invoices electronically in either EDI or XML formats.
These invoices may be submitted using VANs or the Internet. Upon receipt, they
are fed directly into the accounts payable system (i.e., no manual entry is
required).

9. How does EDI improve the effectiveness and efficiency of the AP/ CD process?
- EDI can be adopted in most any business process, but it is prevalent in AP/CD
processes where cost savings can be significant, and buyers can dictate its use with
their vendors. Although often considered a dying technology, EDI continues to
find favor among a number of organizations.

10. What is EIPP? How does it improve the efficiency and effectiveness of the AP/CD
process?
- Electronic invoice presentment and payment (EIPP) systems are B2B systems that
combine e-invoicing and e-payment processes to send invoices to customers via a
Web portal or secure network using a third-party service provider and to receive
electronic payments that are initiated by the payer, processed the third party, and
settled by the ACH network, Wire transfer, or Credit Card Company.

11. What are two operations process (effectiveness) goals Of the AP / (I) process? Provide
an example illustrating each goal.

Goals A and B identify effectiveness goals that are typical of the AP/CD process.
Several processes must be in place to achieve:
- Goal A, optimize cash discounts, including processes to see that invoices are
received in a timely manner, recorded promptly upon receipt, and paid within the
discount period.
- Goal B , ensure that the amount maintained in demand deposit accounts is
sufficient (but not excessive) to satisfy cash discounts, requires that sufficient data
regarding purchases and upcoming payments is available and used to plan the
availability of cash resources.

For example, vendor invoices must be recorded with amounts due, dates, and terms
so that the treasurer can plan for payments.
12. What characterizes a valid vendor invoice input? What characterizes a valid payment
input?

- Valid vendor invoices input are those that are for goods that were actually ordered
and actually received (i.e., the invoices are supported by proper purchase orders
and receiving reports).
- Valid payment inputs are those that are documented by valid, unpaid vendor
invoices. Note that in this case, part of ensuring validity is to prevent paying an
item twice.

13. What the key control plans associated With the AP/ CD process? Describe how each
works and what it accomplishes.

 Independent validation of vendor invoices - Authority to record a vendor invoice


should come from the purchase order and receiving data created by entities other
than the entity that records the vendor invoice to preclude unauthorized and
invalid accounts payable records.
 Match invoice with purchase order and receiving report - The invoice should be
matched to the purchase order and receiving report data to ensure that items on
the invoice were ordered and received and that the invoice is accurately recorded.
 Independent authorization to make payment - To ensure that only authorized
payments are made, the accounts payable records on which the payment is based
should be created by an entity other than the entity that executes the payment.
 Reconcile bank account - Records of cash disbursements should be marched to
the bank's records to ensure that all disbursements actually made by the bank
were authorized and accurate. An entity other than accounts payable and cash
disbursements should perform this reconciliation.