Chapter 4: The Revenue Cycle

1. What document initiates the sales process?

- A customer order. usually in the form of a purchase order. initiates the sales process.

2. Distinguish between a packing slip, a shipping notice, and a bill of lading.

- Packing slip - travels with the goods to the customer, and it describes the contents on the order. Upon filling
the order, the shipping department sends the shipping notice to the billing department to notify it that the
order has been filled and shipped.
- Shipping notice - contains additional information that the packing slip may not contain, such as shipment
date, carrier, and freight charges.
- Bill of Lading - is a formal contract between the seller and the transportation carrier; it shows legal ownership
and responsibility for assets in transit.

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

4. The general ledger clerk receives summary data from which departments? What form of summary data?
- The general ledger clerk receives a total of all sales from the billing department in the form of a summary
journal voucher. The accounts receivable department sends an account summary of the individual accounts
receivable so that the accounts receivable control account can be verified against the accounts receivable
ledger. The inventory control department sends summary information in the form of a journal voucher that
reflects the total reductions of inventory in financial terms and the associated charges to cost of goods sold.

5. What are the three authorization controls?

a. credit checks
b. returns policy for granting cash refunds and credits, and
c. cash prelists providing verification that customer checks and remittance advices match in amount.

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

7. At which points in the revenue cycle are independent verification controls necessary?
a. Shipping department—verifies that the correct amount and types of goods are sent from the warehouse by
reconciling the stock release document and the packing slip.
b. Billing department—reconciles the shipping notice with the invoice to ensure that customers are appropriately
billed.
c. GL clerks—reconcile journal vouchers from various departments such as the billing department, the accounts
receivable department, and inventory control

8. What is the purpose of physical controls

- The purpose of physical controls is to control the actions of people.

9. How can we prevent inventory from being reordered automatically each time the system detects a low
inventory level?
- once an item is on order, control should be in place to ensure that it is not ordered again until the original
order has been received from the supplier. One method of accomplishing this is to "flag" the inventory item
"on order" by entering a value (e.g., the number of items ordered) in the on-order field of the inventory record.
This field has a value of zero when the item in question is not on order.

10. Distinguish between an edit run, a sort run, and an update run.
- An edit run is the first run; it detects most data entry errors. Only "clean" data progresses to the sort run. The
sort run sequences the transaction records according to its primary key field and possibly a secondary key
field. Once the data is sorted, the update program posts the transactions to the appropriate corresponding
records in the master file. During a sequential update, each record is copied from the original master file to
the new master file regardless of whether the balance is affected

11. What are the key features of a POS system?

 - A point of sale system immediately records both cash and credit transactions and inventory information. The
sales journal, accounts receivable, and inventory accounts may be updated in real-time, or a transaction file
may be used to later update a master file.

12. How is a credit check in the advanced technology system fundamentally different from a credit check in
the basic technology system?
- In the advanced technology system, the system logic, not a human being, makes the decision to grant or
deny credit based on the customer's credit history contained in the credit history file. If credit is denied, the
sales clerk should not be able to force the transaction to continue.
- In the basic technology system, credit checking of prospective customers is a function of the credit
department, which has responsibility for ensuring the proper application of the firm's credit policies. The
complexity of credit procedures will vary depending on the organization, its relationship with the customer,
and the materiality of the transaction. Credit approval for first-time customers may take time and involve
consultation with an outside credit bureau. In contrast, credit decisions about existing customers that involve
ensuring only that the current transaction does not exceed the customer's credit limit may be dealt with very
quickly.

13. What is multilevel security?

- Multilevel security employs programmed techniques that permit simultaneous access to a central system by
many users with different access privileges but prevents them from obtaining information for which they lack
authorization

14. Why does billing receive a copy of the sales order when the order is approved but does not bill until the
goods are shipped?
- The billing department's receipt of the sales order occurs in most instances before the goods are actually
shipped; thus, the economic event is not complete. Some of the goods may not be available to ship; thus, the
customer should not be billed until the goods are shipped and the economic event is complete

15. Why was EDI devised?

- EDI was devised to expedite routine transactions between manufacturers and wholesalers, and between
wholesalers and retailers. An added benefit is the reduction of clerical errors.

16. What assets are at greatest risk in a POS system?

- Cash and inventory

17. In a manual system, after which event in the sales process should the customer be billed?
- Billing occurs after the product is shipped to the customer

18. What is a bill of lading?

- billing of lading is a formal contract between the seller and the shipping company (carrier) to transport the
goods to the customer

19. What document initiates the billing process?

- The billing process is initiated by the shipping notice, which signals the shipment of the goods to the buyer.

20. Where in the cash receipts process does supervision play an important role?
- Supervision plays an important role in the mail room where both the check (asset) and remittance advice
(accounting record) are in the hands of one person. Mail room fraud can result, which involves stealing the
check and destroying the remittance advice to cover the theft.

Chapter 5: The Expenditure Cycle Part I - Purchases and Cash Disbursements Procedures

1. Differentiate between a purchase requisition and a purchase order.

Purchase Requisition:
- created by the sales team when the inventory is dropped to reorder level, which is predefined in the system
- Sent to the purchase department where the purchase is approved
- A request to create a purchase order

Purchase order:
- When the purchasing department collects purchase requisitions, it creates one purchase order per vendor
- Legal document and includes contractual terms and conditions
- official offer issued to the buyer
2. What purpose does a purchasing department serve?
- The Purchasing department receives the purchase requisition, sorts them by vendor and adds a record to the
digital open purchase order file.

3. Distinguish between an AP file and a vouchers payable file.

- An AP file consists of the AP packet which has the PO, receiving report, and invoice. Once this packet is
reconciled into the file the organization is able to record the liability. In a vouchers payable system the AP
department uses cash disbursement systems and maintains a voucher register. After the AP clerk performs
the three-way match (when the invoice arrives reconciling the financial information with the receiving report
and PO in the AP pending file), he/she makes a cash disbursement voucher to approve payment. The AP
clerk files the cash disbursement voucher along with supporting source documents in the vouchers payable
file - equivalent to the open AP file.

4. What are the three logical steps of the cash disbursements system?
1) Identify and approve the liability due
2) Prepare cash disbursement
3) Update the AP record and the general ledger

5. What general ledger journal entries does the purchases system trigger? From which departments do
these journal entries arise?
There are two entries triggered in the general ledger by the purchase function:
1) AP account summary triggered form the AP department
2) Journal voucher triggers from the cash disbursement system

6. What two types of risks can close supervision of the receiving department reduce?
1) Failure of inspection of assets
2) theft of assets

7. What is a three-way match?

- Used by the AP department
- Done in order to verify the invoice, the purchase order, and the receiving report to ensure that a payment
should be made.

8. What steps of independent verification does the general ledger department perform?
- receives journal vouchers and summary reports from inventory control, AP, and cash disbursements. then
verifies that the total obligations recorded equal the total inventories received and that the total reductions in
AP equal the total disbursements of cash

9. What is (are) the purpose(s) of maintaining a valid vendor file?

- to make sure they only buy from valid vendors and allows for automatic approval of orders

10. Some organizations do not use an AP subsidiary ledger or a purchases journal. How is this possible?
- If they eliminate the receiving function in an advanced technology system where integrated purchase system
is implemented.

11. What is the purpose of the blind copy of a PO?

- reconciled with the goods received from the vendor. ensurers that the receiving clerk physically counts the
inventory and inspect stem before preparing the receiving report

12. Give one advantage of using a vouchers payable system.

AP uses the cash disbursement vouchers and these are maintained in the voucher register.
- cash disbursements can be improved b/c no checks are written without authorization and entry into the
register