Accounting Information Systems A Practitioner Emphasis 7th Edition By Cynthis Heagy, Contance Lehhma

TEST BANK

ACCOUNTING INFORMATION SYSTEMS A PRACTIONER EMPHASIS 7TH EDITION BY CYNTHIA HEAGEY, CONTANCE LEHHMANN SOLUTIONS MANUAL Chapter 1 Significance of Accounting Information Systems and the Accountant’s Role

INTRODUCTORY SCENARIO: SUGGESTED SOLUTIONS TO QUESTIONS 1.

Employee overtime hours, customer information (e.g., age groups), inventory levels, reorder points, EOQ calculation, volume/quantity discount analysis, square footage in use v. storage, customer flow data, spoilage

2.

How much is client willing to pay? System that is easy for servers to use with proper controls. Bob’s hourly rate would be a concern for client. Will Bob be around “after the sale” (i.e., tech support)? What types of pre-packaged systems are available?

3.

Information to help with software division (e.g., total sales dollars, complexity of accounting system). How many computers needed? Any expansion planned? What types of employees do they have (e.g., waiters would want quick touch screens)?

4

The owner of the restaurant wants a new accounting system because he needs up-to-date information on how the business is doing. Waiting until the end of the year, or even the quarter, does not give Marshall the information he needs to make those day-to-day decisions that will ensure the success of his restaurant.

CHAPTER VIGNETTES: SUGGESTED RESPONSES TO QUESTIONS Vignette 1.1 1.

Closer relationships with remaining suppliers, the ability to carry less inventory (reducing carrying costs and risks of theft or loss of inventory), sharing of planning information with suppliers, easier to monitor vendor performance. Might lose volume discounts if trying to minimize inventory on hand by having smaller shipments from vendors shipped more often.

2.

Reduction in paperwork, reduction in input errors, ordering and cash receipt processes more efficient, increases in efficiency in meeting changes in demand. One disadvantage would relate to problems with settling disputed orders or payments with loss of “paper trail” that includes authorized signatures.

Vignette 1.2 1.

Managers would probably find information in units to be most useful for planning decisions because this information would represent things over which he/she has control. While the manager might not have control over salaries, he/she does have control over the amount of overtime and the approval of vacation of the employees.

2.

Managers would probably want information related to production numbers (to determine seasonality; during slow times, more employees could be on vacation), the number of vacation hours per employee, the number of overtime hours per employee, backorder information, and information to help the manager match staffing levels with production.

Vignette 1.3

1.

The privacy of information is a major consideration, as the customer might not want their spending pattern information shared with other parties. Loss of confidential information can be disastrous to a company’s reputation and lead to significant financial losses (lost sales, fines, etc.) Information about customers must be protected from information leakage to other third parties who gain authorized (or unauthorized) access

2.

to information. At the very least, confidential information about the customers should be encrypted and have limited access.

Inventory management (e.g., turnover, obsolescence, supply/demand, reorder levels), potential markets or product lines for expansion, frequent buyer programs.

Vignette 1.4 1.

The situation could have been avoided if employees had been part of the decision-making and testing early in the project. Employee buy-in is essential to the success of any new system implementation. It is key that the system provide managers with information that they need for decision-making. It is also important to have a maintenance contract in place, with better reporting to management and regular follow-up. It appears that this decision was not made by executive management, so its success was questionable since the “tone at the top” with regard to the project was “ignorance”. Since executive management did not monitor the project, they could not respond to Kluger’s complaints, nor could they provide “strong encouragement” for continuation of the project originally started by Lehmann. In fact, it appears that executive management was not involved in the decision to take on the new system. Kluger was not given the opportunity to learn the new system, nor was there motivation to learn the new system. The company also had inadequate backup so that the project could continue in the absence of a key employee.

2. .Here are some suggested “next steps”  Improve the governance process and the “tone at the top” to get executive management involvement and oversight of system projects—this includes aligning any system projects with the strategy of the company  Determine that any system chosen by management will provide quality information useful for decisionmaking at all levels  Reinstate the maintenance contract and set up a training contract if it is determined more cost-effective and in line with the company business plan to use the new system  Provide training and employee involvement in developing the system  Provide better oversight of the controller function Vignette 1.5 1.

The redesign process can be improved using the following suggestions:  Set up end-user groups to get input regarding output needs, data collection needs, screen, and form layouts  Develop a schedule of tests to be conducted with representative end users for pilot testing  Allow end user input for changes and improvements to system  Set up training for all affected employees  Get management and programmer buy-in for essential controls and audit trails at the front end of development  Emphasize the importance of controls, protection of information assets, and protection of confidential/private information

SOLUTIONS TO DISCUSSION QUESTIONS AND PROBLEMS

1.

The project that Finkelstein and Associates is considering is a capital investment that requires information on the estimated initial investment and the estimated future return. The future return would be measured by net incremental cash flows to the mall (incremental cash inflows less incremental cash outflows).

Estimated initial investment would include: • Architects fees • Renovation of existing facilities • Construction of new facilities and food court • Cost of disruption of trade during project

Estimated net incremental cash flows would include: Cash inflows: • Increased store rents from existing facilities • Rents from new facilities and food court Less cash outflows: • Increased janitorial costs • Increased security costs Estimates of the future cash inflows and outflows could be based on the mall's historical accounting data.

Estimates of the renovation and construction costs would be based primarily on the architect's judgment and experience. It would be difficult to make precise estimates of the cost of trade disruption, although some data may be available from industry sources. Additional useful information would include demographic data for the local community and estimates of local economic activity and consumer buying power.

2. a. and b.

Purchasing data might reveal the degree of competition among vendors and vendors' pricing policies. An organization might decide to integrate vertically by buying an equity position in key vendors or by producing some of the needed goods and services itself.

Perpetual inventory records indicate inventory carrying costs and might reveal buying patterns for different classes of goods. An organization might decide to drop some product lines that are expensive to carry in inventory and for which demand is decreasing, erratic, or highly seasonal.

Manufacturing cost data might shed light on an organization's ability to compete in its market. An organization with unusually low manufacturing costs, because of a high degree of automation or for other reasons, would enjoy a distinct competitive advantage.

Customer credit and accounts receivable data contain valuable information on customers' financial condition. An organization would wish to target high-income customers or customers with good credit histories in its promotional campaigns. Some organizations might also be tempted to sell credit data to other firms to aid their promotional efforts. However, except for credit companies themselves, such sale of credit data is restricted by law and may also raise serious ethical concerns.

Personnel and payroll records contain valuable information about employees' financial condition and possibly about their tastes and habits. Such information might be used to target an organization's own employees in promotional campaigns. The release of personnel and payroll data to other organizations, except to credit companies, is prohibited by privacy laws.

3.

External auditors and accountants need a basic understanding of accounting information systems, their components, their modes of operation, and their supporting technologies. Auditors are likely to be involved primarily because of their expertise in internal controls and their knowledge of what enhances or detracts from a system's auditability. Accountants are likely to be involved primarily because of their expertise in evaluating and designing a system's outputs in relation to the needs of the organization and its users.

4.

Under Section 201of the Sarbanes-Oxley Act of 2002, auditors are prohibited from providing any non-audit service, including information systems design and implementation, to its audit clients. (This Act does not

directly apply to non-public companies.) Accountants can still provide consulting services, and this will continue to be a large practice-just not to their own audit clients.

5.

If accounting systems are to do their job of providing high quality accounting information effectively and efficiently, users must participate in systems development. Some aspects of development require specialized expertise, for example, in computer science or auditing, that users may not have. However, many other aspects relate to the types of accounting information that are needed and the way in which that information should be presented to users. In these areas, users are the experts. A system developed entirely by technical specialists may be technologically superior but may fail to meet the users' needs.

User participation in systems development does not necessarily mean membership on systems projects.

The required participation can be provided in other ways, such as regular meetings with project members.

But experience has shown that the intimacy of contact provided by project membership is the best way to ensure that the users' point of view is represented in development decisions.

6.

The CPA license is a highly respected certification providing evidence of accounting competence and authorizing the holder to engage in types of public accounting practice regulated by state law. However, other certifications are more directly relevant to other types of accounting practice, such as management accounting or internal auditing. Although the CMA and CIA designations do not carry the legal status of the CPA license and may not yet have the same public recognition, they are growing rapidly in acceptance in their respective fields. A student who plans to practice in one of these fields is likely to be served better by a specialized certification than by obtaining a CPA license

7.

The purpose of this activity is to get students to start thinking about what a basic accounting information system is and to initiate a lively discussion. The instructor should allow considerable flexibility in answers to this question. When the students are finished, tell them they just created an “accounting system.”

Randomly select one team to present its solution to the class. At the appropriate time in the presentation, the instructor should raise questions for any team to answer.

What is a transaction?

What is a journal entry?

How can you ensure that this transaction gets recorded? Recorded only one time? Recorded in the correct time period? Recorded for the correct amount?

How can you be sure an employee does not steal the ski poles?

What happens if the sales amount is recorded as, e.g., $1,500 instead of $1,600? How can you prevent this from happening?

How can we know if this order exceeds Snowmass’ credit limit?

What information does the accounting system need to provide so you can determine: How profitable are the ski poles are?

Should you offer another product?

Which salesperson is getting the highest volume of orders for ski poles?

Is this salesperson offering too many sales discounts?

Which salesperson is making the most profit on sales?

Which salespeople sold what ski products?

Which customers bought which ski products?

If you manufacture (as opposed to buying the finished good to resell) these ski poles will your accounting system provide the following?

How long did it take you from the time you received the customer’s order for 50 ski poles until you delivered them to the customer? If it takes too long, a competitor no doubt is eager to take the order.

For every 50 ski poles you manufacture, how many are defective and have to be put back into production for rework? If you have any defects, you are engaging in “non-value added activities.” Do it right the first time!

How many hours of direct labor went into making the 50 ski poles? Was that too many hours? Too few? Just right?

What was the quality of the raw materials you bought to make the ski poles?

Does your supplier of raw materials deliver on time, without defects?

Today our accounting system needs to be able to answer these questions as well as tell how profitable the organization was for a period to time or what the assets, liabilities, and ownership equity were at a given moment. Thanks to the technology available today, we can get all these answers from our accounting system.

The following questions can be asked later in the course after students have learned about the revenue, purchasing, and inventory processes.

How can we break this complex accounting system down into smaller sections so understand and manage better? If I say to you, "Tran, you go evaluate the effectiveness and efficiency of the accounting system" or "Tran, you go design and implement some internal controls in the accounting system" or "Tran, you go audit the accounting system so you can express an opinion on the fairness of the financial statements."

Any one of these is a big task. To make the system more manageable, how could the entire systems be broken down so you could assign, e.g., the first question to several different people or different teams?

Chapter 2 Accounting Systems Documentation

INTRODUCTORY SCENARIO: SUGGESTED SOLUTIONS TO QUESTIONS 1.

2.

3.

4.

Proper documentation would have significantly reduced the amount of time it would have taken to convert the system. Sarbanes-Oxley compliance requires documentation of all systems and proper change and update processes. It is difficult for companies to merge, relocate or convert systems without proper documentation.

It is time-consuming (as was found in this situation) to prepare the documentation the first time. Processes have to be documented and reviewed to make sure the documentation and the actual practices match.

Required periodic reviews to record updates can also be time-consuming and are generally not an “enjoyable” task. Reviews, however, are necessary for compliance and audits.

Regular reviews/updates of the documentation should be scheduled, with business process owners being responsible for either updating and signing off on the documentation themselves, or delegating the responsibility to someone else. The procedures should include how often these reviews need to be done (e.g., every quarter and every time a change is made to the system) and by whom.

The bottleneck was caused by a lack of systems documentation to assist the two consultants in their understanding of the relationship among the components of each personnel system. All four of the types of systems documentation discussed in this chapter–system narrative descriptions, block diagrams, data flow diagrams, system flowcharts–would have been helpful to the consultants. Documentation for each personnel system should have included: (1) a system narrative description explaining the system's goals and objectives (2) one block diagram presenting the entire system so the consultants could quickly see all the major subsystems of the system and see how the subsystems were related (3) data flow diagrams for each subsystem showing the flow of data through the subsystem (4) system flowcharts for each subsystem showing all components (computer programs, computer screens, files, and reports) and how they relate to each other.

SOLUTIONS TO DISCUSSION QUESTIONS AND PROBLEMS

1.

2.

3.

4.

5.

6.

7.

8.

A C D B A C D D

9.

10.

11.

12.

13.

14.

15.

16.

17.

18.

B C D A B D D D B A

19. The appropriate flowchart symbols are as follows: 19. a.

19. b.

Yes

Balance = 0?

<=

No

No

19. c.

<=30 days

31-60 days Account age?

>60 days

20. The appropriate flowchart symbols are as follows:

20. a.

20. b.

Purchase order

D

Sales transaction file

21. The appropriate flowchart symbols are as follows:

Manual Processes: 21. a.

21. b.

First National Bank

Prepare invoice

Make bank deposit

21. c.

21. d.

Assistant controller

E9 Post transactions to ledger

Verify transaction entries

Computerized Processes:

21. e.

21. f. #RTVOPN

Sort customer file alphabetically

Retrieve open accounts

21. g.

Computer #20 Copy sales transaction file

21.h.

#J-2

Perform file maintenance

22. The appropriate flowchart symbols are as follows:

22.a.

22.c.

Monthly open order report 2

3

4

5

To shipping To sales

1 Customer invoice To customer

22.b.

2 Materials requisition

1

3

4 To stores clerk

23. The system flowchart for the portion of Aquamarine Company’s production system that is described is as follows:

Production Department

Stores

4 3 2 1

Materials requisition

Supervisor

4 3 2

Authorize requisition?

Yes

No 4 3 2 1

Materials requisition

Mark "not authorized"

4 3 2 Materials requisition

N

1

Materials requisition

1

24.

The systems flowchart for the portion of Adam Company’s production system that is described is as follows:

Computer program Production cost transaction file

Sort transaction records by job number

Sorted production cost transaction file

Computer program Open (unfinished) job file

Update open (unfilled) job file

Updated open (unfinished) job file

Unfinished job report

To production manager

25. The context diagram for Mason Company’s system that is described is as follows:

Warehouse

Authorized purchase requisition Purchase order processing

Purchase order Vendor

26.

The level 0 diagram for Mason Company’s system that is described is as follows:

Warehouse

Authorized purchase requisition

1.0 Validate authorization and budget coverage

Budget master file

Authorized purchase requisition

Vendor master file

Purchase requisition file

Authorized purchase requisition

2.0 Select vendor

Authorized purchase requisition

3.0 Prepare purchase order

Purchase order data Open (unfilled) purchase order file

Purchase order 5.0 Record purchase order

Warehouse

4.0 Notify departments

6.0 Record acknowledgment Purchase order

Receiving Accounts payable

Vendor acknowledgment

Vendor

Chapter 3 Essential Elements and Basic Activities of Accounting Systems INTRODUCTORY SCENARIO: SUGGESTED SOLUTIONS TO QUESTIONS 1.

A master file in a computerized system is similar to a subledger in a manual system. The customer master file, for example, contains all the information you would find in an accounts receivable subledger (e.g., customer number, customer name, outstanding balance) and more (e.g., 12 months’ sales year-to-date, contact person at the company, information about the CEO, information about the business). Master files are typically found for vendors and inventory as well.

2.

A transaction file in a computerized system is similar to a journal in a manual system. We would expect to find a sales transaction file, as a company would have many of these transactions daily. There might also be a purchases transaction file, as well as transaction files for cash disbursements and cash receipts.

3.

An open file in a computerized system is similar to a “pending” file in a manual system. Information about outstanding sales orders, purchase orders, customer invoices, and vendor invoices are just some examples of the types of open files one would expect to find in a computerized system. Similar to the “pending” file in a manual system, these files hold information about outstanding items so that they can be tracked by managers. When these items are filled/paid, the file is then updated and the pending items closed.

4.

Frank Beecham was careful to give an explanation to Alice Bois of how the accounting system worked that was adequate but not so technical that the CEO would be overwhelmed. His explanation was the following: The computerized accounting system carries out virtually the same sequence of operations as you did in your college practice set. You just can’t see the intermediate results. In large companies it’s best to store processed data in computer files rather than printing out paper journals or ledgers. Because we process millions of transactions, paper journals would be expensive to produce and cumbersome to use. Instead, any authorized user can retrieve records from a computer terminal and look at them. The user can also summarize or analyze sets of records to meet specific information needs. Even though we can’t see the transactions being processed, we know they are processed correctly because the system has been exhaustively tested. And, because of the controls built into the system, we are confident that it will always provide reliable output–at least so long as we’re careful to screen input data for authorization, reasonableness, and the like.

Answers about providing the CEO with additional information will vary, and students should be able to justify their answers.

SOLUTIONS TO DISCUSSION QUESTIONS AND PROBLEMS Note to Instructor: To answer some of the questions at the end of this chapter, students will need blank forms. Blank forms that can be copied and given to students are at the end of these solutions for Chapter 3. The questions and the necessary forms are as follows:

10. a.

10. b.

11.

13.

15.

16.

18.

22.

23.

24.

25. a.

25. b.

Cash receipts prelist Cash receipts journal Accounts receivable subsidiary ledger and general ledger Purchase order Bill of lading Receiving report Cash disbursements journal, accounts payable subsidiary ledger, and general ledger Purchase order Sales order Bill of lading Sales journal Accounts receivable subsidiary ledger and merchandise inventory subsidiary ledger

1.

The information that is reported in an organization’s accounting system comes from transactions and other events and circumstances that have an effect on the organization.

2.

The essential elements of a paper-based accounting system are:      

3.

Source documents Accounts Chart of accounts Journals (special and general) Ledgers (subsidiary and general) Outputs

The data elements in the documents listed are as follows: Document

Data Elements

Bill of lading

Name of document; document number; name and address of shipper and consignee; shipper number; name of carrier; date goods delivered to carrier; delivery route; vehicle number; for each product shipped its quantity, product number, kind of packaging, description, special marks and exception, weight, freight rate, and charge; total amount of freight charges; indication of how freight charges will be paid; signatures of shipper and carrier and date signed

Cash receipts prelist

Name of document; document number; name of organization; month for which cash receipts listed; for each cash receipt the date received, source of receipt, purpose of receipt, invoice number and amount if purpose is accounts receivable collection, check number, amount received, and signature of preparer

Customer invoice

Name of document; invoice number and date; name, address, and telephone number of seller; name and address of customer; address where goods shipped; salesperson’s name; customer’s purchase order number and date; seller’s sales order number and date, date shipped, name of carrier; F.O.B location; credit terms; for each product its number, quantity, s.k.u., description, unit price, trade discount, if any, and extended amount; subtotal for all items; sales tax rate and amount; shipping and handling charges; total amount due

Document

Data Elements

Purchase order

Name of document; purchase order number and date; name, address, telephone number of buyer; buyer’s purchase requisition number, name, address, and code of vendor; address where goods to be shipped; name of individual who placed order; date goods expected; name of carrier; F.O.B location; credit terms; for each product its number, quantity, s.k.u., description, unit price, trade discount, if any, and extended amount; subtotal for all items; sales tax rate and amount; shipping and handling charges; total amount due; signature of customer’s purchasing agent

Receiving report

Name of document; receiving report number and date; name and address of organization; purchase order number or return request number; name and address of who goods received from; name of freight carrier; freight bill number; for each product received its number, quantity, and description; remarks; initials of employee who received the goods

Sales order

Name of document; sales order number and date; name, address, telephone number, and account number of seller; name and address of customer; address where goods to be shipped; customer number; customer’s purchase order number and date; promised shipment date; F.O.B location; credit terms; for each product its number, quantity,

Time card

Name of document; document number; name of organization; pay period; name of employee; time when started and stopped working each day; number of regular and overtime hours by day and in total; supervisor’s authorization; employee’s signature acknowledging correctness of hours and receipt of paycheck

4.

The five major categories in the chart of accounts are: a. Assets b. Liabilities c. Ownership equity d. Revenues e. Expenses

5.

The ledgers would appear as follows before and after creating a control account and a subsidiary ledger: BEFORE CREATING CONTROL ACCOUNT AND SUBSIDIARY LEDGER General Ledger Account Name

Payable-Deakin Pool Supplies

AFTER CREATING CONTROL ACCOUNT AND SUBSIDIARY LEDGER Accounts Payable Subsidiary Ledger

General Ledger Current Bal. $5,100

Payable-Major Pool Supplies

Account Name

Current Bal.

Accounts Payable (control account)

$14,100

Account Name Deakin Pool Supplies

Current Bal. $5,100

Major Pool Supplies $9,000

$9,000

6.

One difference between general ledger and subsidiary ledger accounts in a paper-based accounting system is that accounts in the general ledger are included in the chart of accounts, but accounts in subsidiary ledgers are not included in the chart of accounts.

7.

The substitute in a computerized accounting system for paper medium in a paper-based accounting system is magnetic medium.

8.

The file in a computerized accounting system that corresponds to the paper journal in a paper-based system is the transaction file.

9.

The purpose of preclassifying transactions is to facilitate the data capturing activity. Preclassifying occurs naturally within an organization because source documents originate in different locations. For example, purchase orders are created in purchasing, and sales orders are created in sales. Transaction data that are captured electronically can be preclassified by a software program.

10. a.

The check needs to be entered on the Cash Receipts Prelist as shown below:

CASH RECEIPTS PRELIST

Document No. CR645 Month July Prepared By

ACA POOL CO. 2700 BAY AREA BLVD. CLEAR LAKE CITY, TX 77058-1098

PURPOSE A/R COLLECTION

1 2 . . .

9 10

DATE

RECEIVED FROM

7/28/2012

G. H. Allen

CASH SALE

INVOICE NO.

INVOICE AMT.

I00023

$1,134

OTHER

CHECK NO.

AMOUNT RECEIVED

6311

$1,134

10. b. The transaction needs to be entered in the Cash Receipts Journal as follows:

CASH RECEIPTS JOURNAL Date

Page 1

Customer Name

Invoice No.

Customer Check No.

Cash in Bank, Dr. 1120 Accounts Receivable, Cr. 1230

G. H. Allen

I00023

6311

$1,134

2012 July

28

TOTAL 10. c.

The two ledgers that need to be posted because of this cash receipt are the accounts receivable subsidiary ledger and the general ledger. The amount owing in the accounts receivable subsidiary ledger for G. H. Allen will be decreased by $1,134 leaving a balance of 0. In the general ledger, cash in bank will be increased by $1,134 and accounts receivable will be decreased by $1,134.

11.

The posting will be from the cash receipts journal to the accounts receivable subsidiary ledger and the general ledger as follows:

ACCOUNTS RECEIVABLE SUBSIDIARY LEDGER

Allen, G. H. 200 Scarsdale Drive Dallas, TX 76033 Beginning Balance

Invoice, Check, Debit/Credit Memo No.

Date

1,134

I00023/Ck #6311

7/28/12

Debit Amount

GENERAL LEDGER Accounts Receivable Account No. 1230 Date 7/28/12

Debit Amount

Credit Amount 1,134

Current Balance

Credit Amount

Amount Owing

1,134

0

Cash in Bank Account No. 1120 Date

Debit Amount

7/28/12

1,134

Credit Amount

Current Balance

12. a.

The Open Customer Invoice File contains one record that stores the data regarding G. H. Allen’s unpaid invoice.

12. b.

The receipt of the check will be entered in the Cash Receipts Transaction File.

12. c.

The three files that need to be updated as a result of the receipt of the check from G. H. Allen are the customer master file (sometimes called accounts receivable master file), the general ledger master file, and the customer invoice open file.

13.

A purchase order needs to be completed as follows:

Aca Pool Co.

Purchase Order

2700 Bay Area Blvd.

Clear Lake City, TX 77058-1098 Tel: (713) 555-1234 Fax: (713) 555-1235

Date: June 27, 2012 P. O. Number: PO2121 This number must appear on all invoices, packages, and correspondence.

Vendor:

Our P. R. No.:

8686

Ship to above address.

Deakin Pool Supplies Kansas City, MO

Please inform us immediately if unable to fill this order now.

VENDOR CODE

PLACED BY

DATE EXPECTED

SHIP VIA

F.O.B.

TERMS

V15

B. Wang

7/11/12

Rao Freight Co.

Kansas City, MO

2/10, Net 30

DESCRIPTION

UNIT PRICE

EXTENDED AMOUNT

Diving board - 8' Water volleyball sets

$98.00 18.75

PRODUCT NO.

P1060 P1140

QUANTITY

S.K.U.

10 30

ea. ea.

DISCOUNT

SUBTOTAL SALES TAX RATE %

$ 980.00 562.50

1,542.50 exempt

SALES TAX SHIPPING & HANDLING TOTAL DUE IMPORTANT INSTRUCTIONS & TERMS OF THIS PURCHASE ORDER 1. Enclose invoice copy or packing list in all shipments.

2. Incomplete or partial shipments will be accepted. Place shorts on back order and notify immediately of anticipated in-stock date. Purchaser reserves the right to cancel unfilled items at any time prior to receipt by notifying vendor.

3. Vendor will be responsible for extra freight cost on partial shipment unless prior permission is obtained.

B. Wang

PURCHASING AGENT

COD $1,542.50

14.

The open purchase order file will contain one record to store the data regarding unfilled purchase order number 2121.

15.

The bill of lading needs to be completed as shown on the following page.

STRAIGHT BILL OF LADING

Deakin Pool Supplies

DOCUMENT NO. BL062

Kansas City, MO TO: Consignee Aca Pool Co. Street 2700 Bay Area Blvd.

City/State/Zip Clear Lake City, TX 77058-1098 Route: Kansas City-Houston-Direct Vehicle #: TX-8880 KIND OF

DESCRIPTION

SPECIAL

WEIGHT (SUBJECT TO

PRODUCT NO.

PACKAGING

OF ARTICLES

MARKS & EXCEPTIONS

CORRECTION)

P1060 P1140

Boxes Boxes

QUANTITY SHIPPED

10 30

Date July 8, 2012 Shipper No. S4455 Carrier No. F3696 Carrier Name: Rao Freight Co.

Diving Board Volleyball Set

FREIGHT CHARGES (CHECK ONE): Prepaid Bill to Shipper SHIPPER: Deakin Pool Supplies

Mary Chen

None None

1,200 lbs 150 lbs

TOTAL:

X Collect

BY: DATE: 7/8/12 Note - Where the rate is dependent on value, shippers are required to state specifically in writing the agreed or declared value of the property.

The agreed or declared value of the property is hereby specifically stated by the shipper to be not exceeding. $ per

CHARGES

RATE

(FOR CARRIER USE ONLY)

$30.00 30.00

$360.00 45.00

$405.00

CARRIER: Rao Freight Co. BY:

Val Mason

Subject to Section 7 of the conditions, if this shipment is to be delivered to the consignee without recourse on the consignor, the consignor will sign the following statement: The carrier will not make delivery of this shipment without payment of freight and all other lawful charges.

(Signature of Consignor) Received subject to the classifications and tariffs in effect on the date of the issue of this Bill of Lading, the property described above in apparent good order, except as noted (contents and condition of contents of packages unknown), marked, consigned, and destined as indicated above which said carrier (the word carrier being understood throughout this contract as meaning any person or corporation in possession of the property under the contract) agrees to carry to its usual place of delivery at said destination, if on its route, otherwise to deliver to another carrier on the route to said destination. It is mutually agreed as to each carrier of all or any of, said property over all or any portion of said route to destination and as to each party at any time interested in all or any said property, that every service to be performed hereunder shall be to all the bill of lading terms and conditions in the governing classification on the date or shipment.

Shipper hereby certifies that he is familiar with all the bill of lading terms and conditions in the governing classification and the said terms and conditions are hereby agreed to by the shipper and accepted for himself and his assigns.

16.

The receiving report should be completed as follows:

RECEIVING REPORT ACA POOL CO.

Report No. R46

2700 Bay Area Blvd.

Clear Lake City, TX 77058-1098

Date: 7/11/12

Purchase Order No. Or Return Request Received From Address

P02121

Deakin Pool Supplies

Kansas City, MO

Freight Carrier

Rao Freight Co.

ITEM NO.

Freight Bill No.

QUANTITY

DESCRIPTION

P1060

10

Diving boards - 8'

2 P1140

30

Volleyball sets

1

3 4 5 6 7 8 9 10 11 12 REMARKS: CONDITION OF ITEMS, ETC.

Good RECEIVED BY

J. Dedmon

BL062

17.

The vendor invoice open file contains one record to store the data regarding unpaid invoice #1207.

18.

The journal entries and postings are as follows:

CASH DISBURSEMENTS JOURNAL Vendor Name

Invoice No.

Check No.

Deakin Pool Supplies

1207

4444

Date

Page 1

Accounts Payable, Dr. 2110 Cash in Bank, Cr. 1120

2012 Aug.

1

$1,542.50

TOTAL ACCOUNTS PAYABLE SUBSIDIARY LEDGER Deakin Pool Supplies Kansas City, MO Contact Person: Mary Chen Beginning Balance

Invoice, Check, Debit/Credit Memo No.

Date

Debit Amount

1,542.50

1207/4444

8/1/12

1,542.50

Credit Amount

Current Balance

Credit Amount

Amount Owing 0

GENERAL LEDGER Accounts Payable Account No. 2110 Date

Debit Amount

8/1/12

1,542.50

(Cont’d next page)

Cash in Bank Account No. 1120 Date

Debit Amount

8/1/12

Credit Amount

Current Balance

1,542.50

19. a.

The cash disbursement will be entered in the cash disbursements transaction file.

19. b.

The two files that need to be updated as a result of the cash disbursement are the vendor master file (sometimes called accounts payable master file) and the general ledger master file.

20.

The report is as follows:

Aca Pool Co. Schedule of Aged Accounts Receivable As of 7/1/2012

Invoice Date

Total

Bath YWCA I20021

6/06/2012

6,900

Franklin Resorts I20003

3/28/2012

2,200

Franklin Resorts I20016

4/25/2012

3,937

Leeds Hotel I20020

5/12/2012

3,700 16,737

Totals

21.

The report is as follows:

Current

01-30 Days Past Due

31- 60 Days Past Due

61 - 90 Days Past Due

91+ Days Past Due

6,900

0

0

0

0

0

0

2,200

0

2,200

0

3,937 3,700 6,900

3,700

3,937

Aca Pool Co. Schedule of Aged Accounts Payable As of 7/1/2012

Current

01-30 Days Past Due

31- 60 Days Past Due

61 - 90 Days Past Due

91+ Days Past Due

6,900

6,900

0

0

0

0

5/12/2012

3,700

0

3,700

0

0

0

Fennell Chemical Co. 17622

3/28/2012

2,200

0

0

0

2,200

0

Chan Pool Supplies 984

4/25/2012

3,900

0

0

3,900

0

0

Major Pool Supplies 2030

6/30/2012

1,300

1,300

0

0

0

0

18,000

8,200

3,700

3,900

2,200

0

Invoice Date

Total

Coventry Auto Co. 2002

6/06/2012

Deakin Pool Supplies 1986

Totals

22.

A purchase order needs to be completed as follows:

Ingram’s Shoe Store

Purchase Order

Watertown, New York

Date: November 1, 2012 P. O. Number: PO6521 This number must appear on all invoices, packages, and correspondence.

Vendor:

Our P.R. No.:

623

Ship to above address.

Black Shoe Company Syracuse, NY

Please inform us immediately if unable to fill this order now.

VENDOR CODE

PLACED BY

DATE EXPECTED

SHIP VIA

F.O.B.

TERMS

V32

Sue Connor

1/5/2013

Splash Trucking Co.

Syracuse, NY

2/10, Net 30

PRODUCT NO.

L4445 L4446 M2221 M2222

QUANTITY

S.K.U.

200 200 150 150

pair pair pair pair

DESCRIPTION

UNIT PRICE

DISCOUNT

Light Spirit - Encore Light Spirit-Pleasure Exeter-Sport Exeter-Executive

$30.00 34.00 40.00 60.00

$ 6,000.00 6,800.00 6,000.00 9,000.00

SUBTOTAL SALES TAX RATE % SALES TAX SHIPPING & HANDLING TOTAL DUE

27,800.00 exempt

IMPORTANT INSTRUCTIONS & TERMS OF THIS PURCHASE ORDER 1. Enclose invoice copy or packing list in all shipments.

2. Incomplete or partial shipments will be accepted. Place shorts on back order and notify immediately of anticipated in-stock date. Purchaser reserves the right to cancel unfilled items at any time prior to receipt by notifying vendor.

3. Vendor will be responsible for extra freight cost on partial shipment unless prior permission is obtained.

Sue Connor

PURCHASING AGENT

EXTENDED AMOUNT

COD $27,800.00

23.

The Sales Order needs to be completed as follows:

Sales Order

Black Shoe Company Syracuse, NY

Date: November 1, 2012 S. O. Number: SO777 Sold To and Bill:

Ship to (if different address):

Ingram’s Shoe Store Watertown, NY

Customer No.

C800

Customer P. O. No.

PO6521

PRODUCT NO.

QUANTITY

S.K.U.

L4445 L4446 M2221 M2222

200 200 150 150

pair pair pair pair

Customer P. O. Date

Nov. 1, 2012

Promised Shipment Date

Jan. 5, 2013

DESCRIPTION

Light Spirit-Encore Light Spirit-Pleasure Exeter-Sport Exeter-Executive

F.O.B.

TERMS

New York, NY

2/10, Net 30

UNIT PRICE

DISCOUNT

$30.00 34.00 40.00 60.00

SUBTOTAL SALES TAX RATE % SALES TAX SHIPPING & HANDLING TOTAL DUE Sold By

Steve Hite

Steve Hite

Authorized Signature

EXTENDED AMOUNT

$6,000.00 6,800.00 6,000.00 9,000.00

$27,800.00 exempt COD $27,800.00

24.

The bill of lading needs to be completed as follows:

STRAIGHT BILL OF LADING

DOCUMENT NO. BL999

Black Shoe Company Syracuse, NY

TO: Consignee

Ingram’s Shoe Store

Date

Jan. 5, 2013

Street

Shipper No.

S3002

City/State/Zip Watertown, NY

Carrier No.

F2003

Route: Syracuse-Watertown-Direct

Carrier Name: Splash Trucking Co.

Vehicle #:

NY-7777 KIND OF

DESCRIP-

PRODUCT NO.

PACKAGING

TION OF ARTICLES

L4445 L4446 M2221 M2222

Boxes Boxes Boxes Boxes

QUANTITY SHIPPED

4 4 3 3

FREIGHT CHARGES (CHECK ONE): Prepaid Bill to Shipper SHIPPER: Black Shoe Company

Maria Garcia

Ladies Shoes Ladies Shoes Mens Shoes Mens Shoes

X Collect

BY: DATE: 1/5/2013 Note - Where the rate is dependent on value, shippers are required to state specifically in writing the agreed or declared value of the property.

The agreed or declared value of the property is hereby specifically stated by the shipper to be not exceeding. $ per

SPECIAL

WEIGHT

CHARGES (FOR

MARKS & EXCEPTIONS

(SUBJECT TO CORRECTION)

RATE

CARRIER USE ONLY)

300 lbs 300 lbs 225 lbs 225 lbs

$30.00 30.00 30.00 30.00

None None None None

TOTAL:

$ 90.00 90.00 67.50 67.50

$315.00

CARRIER: Splash Trucking Co. BY:

Ruth Adams

Subject to Section 7 of the conditions, if this shipment is to be delivered to the consignee without recourse on the consignor, the consignor will sign the following statement: The carrier will not make delivery of this shipment without payment of freight and all other lawful charges.

(Signature of Consignor) Received subject to the classifications and tariffs in effect on the date of the issue of this Bill of Lading, the property described above in apparent good order, except as noted (contents and condition of contents of packages unknown), marked, consigned, and destined as indicated above which said carrier (the word carrier being understood throughout this contract as meaning any person or corporation in possession of the property under the contract) agrees to carry to its usual place of delivery at said destination, if on its route, otherwise to deliver to another carrier on the route to said destination. It is mutually agreed as to each carrier of all or any of, said property over all or any portion of said route to destination and as to each party at any time interested in all or any said property, that every service to be performed hereunder shall be to all the bill of lading terms and conditions in the governing classification on the date or shipment.

Shipper hereby certifies that he is familiar with all the bill of lading terms and conditions in the governing classification and the said terms and conditions are hereby agreed to by the shipper and accepted for himself and his assigns.

25. a.

The transaction should be recorded as follows:

SALES JOURNAL

Date

Customer Name

Invoice No.

Accounts Receivable, Dr. 1230

Ingram’s Shoe Store

I8899

$27,800

Page 1

Sales of Goods, Cr. 4100

Sales Tax Payable, Cr. 2460

Cost of Goods Sold, Dr. 5010 Mdse. Inventory, Cr. 1300

$27,800

0

$13,900

2013 Jan

5

25. b.

The two following subsidiary ledgers need to be posted from the sales journal:

ACCOUNTS RECEIVABLE SUBSIDIARY LEDGER Ingram’s Shoe Store Watertown, NY Beginning Balance

Invoice, Check, Debit/Credit Memo No.

Date

Debit Amount

0

I8899

1/5/13

27,800

Credit Amount

Amount Owing 27,800

MERCHANDISE INVENTORY SUBSIDIARY LEDGER Light Spirit-Encore Product No. L4445

Unit

Selling Price Per Unit

Quantity Beginning Balance

Increase + Decrease -

Quantity Current Balance

Cost Per Unit

Total Cost

pair

30.00

8,200

200-

8,000

15.00

120,000

Quantity Current Balance

Cost Per Unit

Total Cost

8,000

17.00

136,000

Light Spirit-Pleasure Product No. L4446

Unit

Selling Price Per Unit

Quantity Beginning Balance

Increase + Decrease -

pair

34.00

8,200

200-

Exeter-Sport Product No. M2221

Unit

Selling Price Per Unit

Quantity Beginning Balance

Increase + Decrease -

pair

40.00

7,150

150-

Quantity Current Balance

Cost Per Unit

Total Cost

7,000

20.00

140,000

Quantity Current Balance

Cost Per Unit

Total Cost

7,000

30.00

210,000

Exeter-Executive Product No. M2222

Unit

Selling Price Per Unit

Quantity Beginning Balance

Increase + Decrease -

pair

60.00

7,150

150-

26.

The sale would be stored as follows:

File 1: Invoice No.

Invoice Date

Customer Code

Cash/Credit Sale

Sales Order No.

I8899

1/5/2013

C800

2

S0777

File 2:

27. a.

Invoice No.

Product No.

Quantity Shipped/ Delivered

I8899

L4445

200

I8899

L4446

200

I8899

M2221

150

I8899

M2222

150

The record would appear as follows:

Customer Code C800

27. b.

Name

Address

Credit Limit

Credit Terms

Sales Tax Exemption No.

Amount Owing

Ingram’s Shoe Store

Watertown, NY

100,000

2/10, net 30

NY4000

27,800

The record would appear as follows: Customer Code C800

Name

Address

Credit Limit

Credit Terms

Sales Tax Exemption No.

Amount Owing

Ingram’s Shoe Store

Watertown, NY

100,000

2/10, net 30

NY4000

0

Purchase Order Date: P. O. Number: This number must appear on all invoices, packages, and correspondence.

Vendor:

Our P. R. No.:

Ship to above address.

Please inform us immediately if unable to fill this order now.

VENDOR CODE

PLACED BY

DATE EXPECTED

SHIP VIA

F.O.B.

TERMS 2/10, Net 30

PRODUCT NO.

QUANTITY

S.K.U.

DESCRIPTION

UNIT PRICE

DISCOUNT

SUBTOTAL SALES TAX RATE % SALES TAX SHIPPING & HANDLING TOTAL DUE IMPORTANT INSTRUCTIONS & TERMS OF THIS PURCHASE ORDER 1. Enclose invoice copy or packing list in all shipments.

2. Incomplete or partial shipments will be accepted. Place shorts on back order and notify immediately of anticipated in-stock date. Purchaser reserves the right to cancel unfilled items at any time prior to receipt by notifying vendor.

3. Vendor will be responsible for extra freight cost on partial shipment unless prior permission is obtained. _PURCHASING AGENT

EXTENDED AMOUNT

Sales Order Date: S. O. Number: Sold To and Bill:

Customer No.

PRODUCT NO.

Ship to (if different address):

Customer P. O. No.

QUANTITY

S.K.U.

Customer P. O. Date

Promised Shipment Date

DESCRIPTION

F.O.B.

UNIT PRICE

DISCOUNT

SUBTOTAL SALES TAX RATE % SALES TAX SHIPPING & HANDLING TOTAL DUE

Sold By

Authorized Signature

TERMS

EXTENDED AMOUNT

STRAIGHT BILL OF LADING

DOCUMENT NO.

TO: Consignee

Date

Street

Shipper No.

City/State/Zip

Carrier No.

Route:

Carrier Name:

Vehicle #: QUANTITY SHIPPED

PRODUCT NO.

KIND OF

DESCRIPTION

SPECIAL

WEIGHT (SUBJECT

PACKAGING

OF ARTICLES

MARKS & EXCEPTIONS

TO CORRECTION)

FREIGHT CHARGES (CHECK ONE): Prepaid Bill to Shipper Collect SHIPPER: BY: Note - Where the rate is dependent on value, shippers are required to state specifically in writing the agreed or declared value of the property.

The agreed or declared value of the property is hereby specifically stated by the shipper to be not exceeding. $ per

CHARGES

RATE

(FOR CARRIER USE ONLY)

TOTAL: CARRIER: BY: DATE: Subject to Section 7 of the conditions, if this shipment is to be delivered to the consignee without recourse on the consignor, the consignor will sign the following statement: The carrier will not make delivery of this shipment without payment of freight and all other lawful charges.

(Signature of Consignor) Received subject to the classifications and tariffs in effect on the date of the issue of this Bill of Lading, the property described above is in apparent good order, except as noted (contents and condition of contents of packages unknown), marked, consigned, and destined as indicated above which said carrier (the word carrier being understood throughout this contract as meaning any person or corporation in possession of the property under the contract) agrees to carry to its usual place of delivery at said destination, if on its route, otherwise to deliver to another carrier on the route to said destination. It is mutually agreed as to each carrier of all or any of, said property over all or any portion of said route to destination and as to each party at any time interested in all or any said property, that every service to be performed hereunder shall be to all the bill of lading terms and conditions in the governing classification on the date or shipment.

Shipper hereby certifies that he is familiar with all the bill of lading terms and conditions in the governing classification and the said terms and conditions are hereby agreed to by the shipper and accepted for himself and his assigns.

CASH RECEIPTS PRELIST

Document No. Month Prepared By PURPOSE A/R COLLECTION DATE

1 2 3 4 5 6 7 8 9 10

RECEIVED FROM

CASH SALE

INVOICE NO.

INVOICE AMT.

OTHER

CHECK NO.

AMOUNT RECEIVED

RECEIVING REPORT Report No. Date: Purchase Order No. Or Return Request No. Received From Address Freight Carrier ITEM NO.

Freight Bill No. QUANTITY

1 2 3 4 5 6 7 8 9 10 REMARKS: CONDITION OF ITEMS, ETC.

RECEIVED BY

DESCRIPTION

CASH RECEIPTS JOURNAL Date

Customer Name

Invoice No.

Customer Check No.

Page 1

Cash in Bank, Dr. 1120 Accounts Receivable, Cr. 1230

TOTAL

Date

TOTAL

Vendor Name

CASH DISBURSEMENTS JOURNAL

Page 1

Invoice No.

Dr. 2100 Cr. 1120

Check No.

Accounts Payable, Cash in Bank,

SALES JOURNAL

Date

Customer Name

Invoice No.

Accounts Receivable, Dr. 1230

Sales of Goods, Cr. 4100

Page 1

Sales Tax Payable, Cr. 2370

Cost of Goods Sold, Dr. 5010 Mdse. Inventory, Cr. 1300

ACCOUNTS RECEIVABLE SUBSIDIARY LEDGER

Beginning Balance

Invoice, Check, Debit/Credit Memo No.

Beginning Balance

Date

Invoice, Check, Debit/Credit Memo No.

Debit Amount

Credit Amount

Amount Owing

Date

Debit Amount

Credit Amount

Amount Owing

ACCOUNTS PAYABLE SUBSIDIARY LEDGER

Beginning Balance

Invoice, Check, Debit/Credit Memo No.

Beginning Balance

Date

Invoice, Check, Debit/Credit Memo No.

Debit Amount

Credit Amount

Amount Owing

Date

Debit Amount

Credit Amount

Amount Owing

MERCHANDISE INVENTORY SUBSIDIARY LEDGER

Unit

Selling Price Per Unit

Quantity Beginning Balance

Unit

Unit

Selling Price Per Unit

Selling Price Per Unit

Quantity Beginning Balance

Unit

Increase + Decrease -

Quantity Beginning Balance

Increase + Decrease -

Selling Price Per Unit

Quantity Beginning Balance

Quantity Current Balance

Cost Per Unit

Increase + Decrease -

Quantity Current Balance

Quantity Current Balance

Cost Per Unit

Increase + Decrease -

Total Cost

Cost Per Unit

Total Cost

Cost Per Unit

Total Cost

Total Cost

Quantity Current Balance

GENERAL LEDGER

Debit Amount

Date

Credit Amount

Debit Amount

Date

Credit Amount

Debit Amount

Date

Date

Date

Current Balance

Current Balance

Credit Amount

Debit Amount

Current Balance

Credit Amount

Debit Amount

Current Balance

Credit Amount

Current Balance

Chapter 4 Data Flows, Activities, and Structure of Accounting Systems INTRODUCTORY SCENARIO: SUGGESTED SOLUTIONS TO QUESTIONS 1.

Master files: no change in number of records, only field totals change. Transaction files increase in number of records with updates. Open files increase when records are added, decrease when records are deleted (e.g., open invoice is paid).

2.

Manufacturing: sales order, shipping, accounts receivable*, sales analysis. Insurance: sales, accounts receivable*, sales analysis, underwriting. Government agency: budget allocation, revenue collection, revenue analysis, budget replenishment, procurement. * These would include invoicing and cash receipts.

3.

The flow of transactions refers to the movement of transaction data through the processing stages of an accounting information system. The flow begins with the initial input of the data and ends with its inclusion in output. Exhibit 4.28, page 4-44, provides an overview of how data flow through the various subsystems of an accounting system. The section entitled, "Illustration of Data Flows," explains the flow in more detail.

SOLUTIONS TO DISCUSSION QUESTIONS AND PROBLEMS

1.

C

2.

C

3.

The listed accounting subsystems fall in the following business processes:

Accounting Subsystem Production control Shipping Accounts payable Accounts receivable Inventory management Cost accounting Receiving

Business Process Inventory process Revenue process Purchasing process Revenue process Inventory process Inventory process Purchasing process

4.

For each type of organization listed, the following accounting subsystems might be included in the revenue process: Type of Organization

Accounting Subsystems

Large manufacturing firm

Sales order processing, shipping, accounts receivable (sometimes divided into customer invoicing and cash receipts), sales analysis

Large insurance company

Sales, accounts receivable (sometimes divided into client invoicing and cash receipts), sales analysis

Federal government agency1

Budget allocation, revenue collection, revenue analysis, budget replenishment

Charitable organization

General fund raising, distribution of funds and/or shipment of supplies, donor invoicing, cash receipts, analysis of fund raising

1

Federal government agencies are of several different types. Some agencies provide services, some provide supplies, some services are free of charge, some services generate revenue.

5.

The flow of transaction data originating from a check received from a customer is as follows: Data entry and verification; addition of records to the cash receipts transaction file and printing of the cash receipts journal; updating (and closing if payment is in full) of the corresponding record in the open customer invoice file; updating of the customer master file; transfer of summarized transaction data to general journal transaction file; printing of general journal; updating of the cash and accounts receivable accounts in the general ledger master file; preparation of financial statements showing the effect of the cash receipt transaction in the cash and accounts receivable accounts. Exhibits 4.1 (c), page 4-7, and (d), page 48, flowchart the flow of the cash receipts transaction data.

6.

Responses to the kinds of data files in different organizations will vary widely; one possible response would be as shown in the table below. There may be some disagreement concerning the nonprofit institution because that category covers such a wide range of organizations; the usages shown below might correspond to a charitable or religious institution.

Data File* Budget MF Cash receipts TF Cash disbursements TF Sales TF Purchases TF Payroll TF Employee MF Customer MF Work in process inventory MF Finished goods inventory MF Merchandise inventory MF Repair services MF Standard costs RF Investments MF Volunteer MF Donor MF Archive files

Service Organization

Merchandising Organization

Manufacturing Organization

X X X X X X X X

X X X X X X X X

X X X X X X X X X X

X

X X

X

X

X X X

X

X

X

Nonprofit Institution X X X X X X

X X X X

* MF = Master file RF = Reference file TF = Transaction file

7.

An inventory master file could be sequenced in as many ways as there are fields (or even distinct combinations of fields) in each record. Some of these ways might serve a useful purpose, while others would not. In the former category, some examples would be sorting by inventory item number, item description, color/style/size, unit cost, extended cost, unit sales price, extended sales price, vendor number, vendor name, warehouse location, quantity on hand, quantity on order, quantity on reserve, reorder quantity, reorder point, age, latest purchase date, or latest order date.

8.

The results of updating the raw materials inventory master file are shown below by date.

Date

6/30

Extended Amount

Raw Materials Inventory Master File

Part No.

Reorder Point

Economic

Description

Order Quantity

Vendor No.

Quantity on Hand

Unit Cost

A12

Right-hand widget

150

100

V256

150

2.00

$300.00

7/1

250

500.00

7/5

130

260.00

7/13

230

460.00

7/19

160

320.00

7/20

360

720.00

7/26

440

880.00

7/29

280

560.00

9.

The results of updating the open invoice file are shown below.

9. a.

Cash Disbursements Transaction File after sorting on voucher number. Note that only File 2 needs to be sorted.

Cash Disbursements Transaction File 1 Check Check Vendor No. Date No. 146 3/31/2012 301 147 3/31/2012 302 148 3/31/2012 310 149 3/31/2012 312 150 3/31/2012 305

Cash Disbursements Transaction File 2 Check Voucher Amount No. No. Paid 150 961 275.00 146 962 105.00 148 963 225.00 147 964 50.00 149 965 85.00 146 966 325.00 147 967 140.00 146 969 100.00

9. b.

Open Invoice File after posting. Note that only File 2 needs to be updated.

Open Invoice File 1 Voucher Vendor No. No. 961 305 962 301 963 310 964 302 965 312 966 301 967 302 968 304 969 301 970 311 971 303

Invoice Date 3/2/2012 3/2/2012 3/5/2012 3/6/2012 3/9/2012 3/11/2012 3/12/2012 3/12/2012 3/12/2012 3/25/2012 3/28/2012

Invoice Amount 275.00 105.00 260.00 50.00 85.00 325.00 140.00 400.00 130.00 45.00 92.00 (Cont’d on next page)

9. b.

Continued

Open Invoice File 2 Voucher Date Invoice No. Paid 961 3/31/2012 962 3/31/2012 963 3/31/2012 964 3/31/2012 965 3/31/2012 966 3/31/2012 967 3/31/2012 969 3/31/2012

9. c.

Check No. 150 146 148 147 149 146 147 146

The invoices that can be purged are voucher numbers. 961, 962, 964, 965, 966, 967. After purging these records, the open invoice file would appear as follows: Open Invoice File 1 Voucher Vendor No. No. 963 310 968 304 969 301 970 311 971 303

Invoice Date 3/5/2012 3/12/2012 3/12/2012 3/25/2012 3/28/2012

Open Invoice File 2 Voucher Date Invoice No. Paid 963 3/31/2012 969 3/31/2012

9. d.

Amount Paid 275.00 105.00 225.00 50.00 85.00 325.00 140.00 100.00

Invoice Amount 260.00 400.00 130.00 45.00 92.00

Amount Paid 225.00 100.00

Check No. 148 146

Reconciliation: Total open invoices before posting Less: total cash disbursements Total open invoices after posting

$1,907.00 1,305.00 $ 602.00

10.

10. a.

The results of updating the vendor master file are shown below.

Cash Disbursements Transaction File after sorting on vendor number. Note that only File 1 needs to be sorted.

Cash Disbursements Transaction File 1 Check Check Vendor No. Date No. 146 3/31/2012 301 147 3/31/2012 302 150 3/31/2012 305 148 3/31/2012 310 149 3/31/2012 312

Cash Disbursements Transaction File 2 Check Voucher Amount No. No. Paid 146 962 105.00 146 966 325.00 146 969 100.00 147 964 50.00 147 967 140.00 148 963 225.00 149 965 85.00 150 961 275.00

10. b.

Vendor master file after posting: Vendor Master File Vendor No. Name 300 Elm Company 301 Apple, Inc. 302 Yew & Sons 303 Pine Associates 304 Oak Company 305 Cedar, Inc. 306 Peach Bros.

307 Maple Enterprises 308 Fir, Inc. 309 Cyprus Company 310 Fig Bros.

311 Pear Associates 312 Plum Company

10. c.

Current Balance 0 30.00 0 92.00 400.00 0 0 0 0 0 35.00 45.00 0

A vendor would be deleted only if management had made a decision not to make any more purchases from a particular vendor. In this case, the vendor’s record would be purged provided the vendor’s balance was zero.

10. d.

Reconciliation: Total vendor balances before posting

$1,907.00

Less: total cash disbursements

1,305.00

Total vendor balances after posting

$ 602.00

Chapter 5 Reporting Process, Coding Methods, and Audit Trails INTRODUCTORY SCENARIO: SUGGESTED SOLUTIONS TO QUESTIONS

1.

Weekly purchase order report, weekly purchase request report, monthly video sales reports, daily sales reports by store, weekly inventory turnover report by store, monthly payroll reports, quarterly financial statements, daily video rental report by store. It would be helpful for individual store managers to receive reports related to activity in their stores, such as video sales and rentals (daily) or delinquent accounts (daily), as well as inventory reports (weekly). They might not need to receive reports about other stores, only reports of those items over which they have control.

2.

Most reports would be by store.

3.

Reports to indicate problems; e.g., videos not being rented often (might need to be transferred to another location where the video is more popular or might need to be sold), delinquent accounts, excessive overtime reports. The purpose of these reports is to provide Andrea or the managers with succinct reports of variances from an expected norm so they can make timely decisions.

4.

Reports might be prepared on a daily or weekly basis showing the number of film rentals for each store compared with prior data or budget amounts. These will permit some judgment of operations between monthly reporting periods. Staffing levels (number of workers in attendance) or hours worked by day or week might also be valuable. Each store manager should be provided with copies of the reports that relate only to their operation.

A report showing (1) the number of rentals per film title, (2) the number of copies of each film, and (3) the rentals per copy [(1) divided by (2)] will suggest which films are understocked and which are overstocked.

Because there will be a large number of titles, only the titles having extremely high or low rental per copy should be included in the report. And since store managers initiate the purchase of films, these reports should be prepared for each store.

5. The reports illustrate the concepts of: Concise reports (daily and weekly rental and staffing data) Reporting both physical and monetary data (rent is a physical measure) Frequency of reporting (some reports are daily or weekly and others are monthly) Responsibility reporting (store mangers are held responsible for their store) Comparative reporting (data is compared with prior data and/or budgets) Exception reporting (only some film titles are reported) SOLUTIONS TO DISCUSSION QUESTIONS AND PROBLEMS

1.

Ray can exercise influence over the quantity of direct labor used and the yield rate (amount of spoilage).

Therefore, he should receive each morning a report of activities for the previous day. The report on the

next page is a suitable report; however, the students’ solutions will vary. Their solutions should emphasize physical reporting on a daily basis for Ray. DAILY PRODUCTION REPORT Date: March 5

Machine 1 2 3 4 5

Production 514 623 580 531 255 2,403

Yield 493 581 549 506 243

Direct Labor Hours

263

Output per Hour

9.14

Yield Rate 95.9 93.3 94.7 95.3 95.3

This report will enable Ray to monitor yield by machine daily and to determine how effectively direct labor is used. If (1) work is organized so that direct labor hours can be captured for each machine and (2) the benefits justified the additional record-keeping, then direct labor hours might be accumulated by machine.

If this report had been in use, it is likely that excess spoilage would have been avoided for almost an entire week.

The report now in use should continue to be furnished to Joe on a weekly basis. If problems arise, he can refer to the reports received by Ray. 2. a.

COLUMBUS CABLE TV, INC. For October 2013 and 2012

Service Level

2013

2012

Incr. (Decr.)

Percent

New Subscribers Basic Super Premium

839 110 605

1,234 296 599

(395) (186) 6

(32.0) (62.8) 1.0

Subscribers Lost Basic Super Premium

441 579 285

450 563 257

(9) 16 28

(2.0) 2.8 10.9

Changes in Level of Service Basic (147) Super ( 26) Premium 173

(120) ( 15) 135

(27) ( 11) 38

(22.5) (73.3) 28.1

2. b.

The comparative report above gives an entirely different impression of the fall 2013 campaign’s effectiveness as compared with Exhibit 5.2. The drop in new subscribers is dramatic. There seems to have been no effect on lost subscribers. An improved mix of service levels is revealed, but this is of little comfort given the decline in market penetration. Extraneous factors must also be considered, such as the existing market share of the company and changes in competition as well as demographic changes in the Columbus market. Unless extraneous factors are felt to have significantly affected October results, the consultant should probably not be retained.

2. c.

The report illustrates the principle of conciseness by its brevity. Use of subscribers illustrates the use of physical measures. Comparative reporting is illustrated by comparing the current month with the same month last year. Finally, it illustrates functional reporting since is designed for the marketing and sales manager for the company.

3. a.

A general relationship exists between the length of the reporting period and the likelihood a given type of data (physical or monetary) will be the most useful to report. The shorter the reporting period, the more likely that physical data will be most useful, and the longer the reporting period the more likely that monetary data will be most useful.

3. b.

Production personnel seem to have a greater affinity for and find physical data to be most useful, sales personnel find both physical and monetary data useful, while financial personnel find that financial data is most useful.

4.

The four basic steps that go into the creation of an instance document are as follows: A. Select a standard taxonomy and download this taxonomy into the XBRL software roduct. Taxonomies are available at no cost at www.xbrl.org and www.xbrl.us.

B. Mark up the data. Assign a specific XBRL tag from the standard taxonomy to each data item in the inancial report. If an appropriate tag is not available from the standard taxonomy, the preparer can create a new customized XBRL tag.

C. Edit the tagging to detect any errors. The XBRL software does this.

D. Generate the instance document. The XBRL software does this.

5.

An XBRL instance document is a document that has been tagged according to the rules of XBRL thus making it available for analysis and processing. In other words, the document is an instance of one that follows the rules of XBRL. An instance document includes coding that comes from an appropriate taxonomy.

6.

Some XBRL taxonomies are: IFRS-GP (International Financial Reporting Standards, General Purpose) and US-GAAP. Some United States taxonomies for specific industries are US GAAP Commercial and Industrial, US GAAP Banking and Savings, US GAAP Insurance, US GAAP Investment Banking. There is also the XBRL GL( global ledger) taxonomy for internal reporting and consolidations within organizations only.

7.

The difference in extensible markup language (XML) and hypertext markup language (HTML) is that HTML tags identify the elements of a page so a browser such as Internet Explorer can display that page on your computer screen. The tags in HTML don’t say anything about the content of the data. XML tags, on the other hand, describe the content, for example <course_name>AIS</course_name> and are used for data exchange over the Web. Content is separated from presentation. An XML document contains only data (no formatting).

8.

 

 

The number 640 would be assigned to the advertising expense general ledger account so the number would occupy the first three digit fields for entries for all types of advertising.

The coding for the second field, which contains four digits, would be as follows: The first digit would denote either the department (shoes, clothing, cosmetics, etc.) Or that the advertisement was institutionally-related. Each department would be assigned a number from one through eight, with nine being reserved for institutional advertising.

If the first digit referenced either the shoe or clothing department, the second digit would denote whether the department was in the ladies’, mens’, or children’s section. Each classification would be assigned a number from one through three. If this reference is not applicable, i.e., the advertising if for one of the other departments or is institutional, a digit of zero would be used.

The third digit would signify where the advertisement was being run. Each of the different media would be assigned a number from one through four.

The fourth digit would denote the activity involved. The different activities for newspaper and television advertisements would be assigned a number from one through four. A digit of zero would indicate that this field was not applicable for billboard and yellow pages advertisements.

This coding system is depicted below: 640.

X 1 - Shoes 2 - Clothing 3 - Cosmetics 4 - Linens 5 - Housewares 6 - Furniture 7 - Appliances 8 - Electronics 9 - Institutional

X 0 - N/A 1 - Ladies’ 2 - Mens’ 3 - Children’s

X 1 - Newspaper 2 - Television 3 - Billboard 4 - Yellow Pages

X 0 - NA 1 - Advertisement Space 2 - Advertisement Layout 3 - Broadcast Time 4 - Film Production

The account number to use for an expenditure for layout on a Ladies’ shoes ad would be 640.1112.

9.

The 06/03/12 and 06/25/12 debits allow an auditor to find the proper entry in the cash disbursements transaction file since the check number, which is internally generated and pre-numbered, is referenced and the cash disbursements journal is in check number order. However, the 06/19/12 debit references only the vendor’s credit memo number, which is not internally generated and, therefore, is not suitable for use as a reference identifier.

All of the credit entries are lacking a suitable reference identifier. Four of these entries use a Pannell Partnerships purchase order number, which is inappropriate because a purchase order does not evidence a completed transaction. Although the purchase order number may allow the auditor to find the relevant purchase transaction file entry in many, or even most, situations, this reference would prove insufficient if there were multiple shipments and invoices on a single purchase order. Also, purchase transactions will not be in the same order as the purchase orders. The other entry references the vendor’s invoice number, which is inappropriate, because entries in the purchases journal (the source for this entry) will not be in an order that will permit a lookup of the source entry except perhaps by random scanning for the invoice number.

Each entry in the purchases journal should be numbered, and these numbers should be used as references in the vendor accounts. The same should be done for credit memoranda.

10. a.

Our sales invoices, credit memos and checks are good identifiers for an audit trail.

10. b.

Our purchase orders and any document originating outside our organization are poor identifiers for an audit trail.

10. c.

The documents representing the transaction must be sequentially numbered, be of uniform size, and be created at the same time as the transaction occurs. Only some internal documents will meet this requirement.

11.

The sales transaction file in Exhibit 4.4 shows a credit sale, invoice #1006, to customer code #203, 60 hours at $100 per hour.

Exhibit 4.4 Writing Sale Transactions to the Sales Transaction File (A 0 denotes a cash sale, and a 1 denotes a credit sale.)

File 1: Invoice No. 1001 1002 1003 1004 1005 1006

Invoice Date 01/02/12 01/04/12 01/08/12 01/10/12 01/21/12 01/28/12

File 2: Invoice No. 1001 1002 1003 1004 1005 1006

Customer Code 202 201 204 202 206 203

Billable Hours 6 42 27 30 15 60

Cash/Credit Sale 0 1 1 1 0 1

Billable Rate 100 100 100 100 100 100

The sales journal in Exhibit 4.6, which is a printout of the sales transaction file in Exhibit 4.4, shows invoice #1006, to customer code 203-Cherry Gardens for $6,000. Furthermore, the total for customer 203 is $6,000. Total credit sales are $15,900.

Exhibit 4.6 Printing the Sales Journal SALES JOURNAL Month Ending 1/31/12

Date 01/02/12 01/04/12 01/08/12 01/10/12 01/21/12 01/28/12 Totals

Code 202 201 204 202 206 203

Customer Name Green Brothers Black Corp.

Brown Company Green Brothers Red Flag Sales Cherry Gardens

Cash Sales $600

$4,200 2,700 3,000 1,500 6,000 $15,900

$2,100

Totals for Customer Codes: 201 202 203 204 206

Credit Sales

Invoice No. 1001 1002 1003 1004 1005 1006

$4,200 3,000 6,000

$600

2,700 1,500

The customer master file in Exhibit 4.7 shows customer code 203-Cherry Gardens with year-to-date balance of $0 and a current balance of $2,400 before updating (posting). After updating, the year-to-date and current balances have been increased by the $6,000 sale.

Exhibit 4.7 Updating the Customer Master File with the Sales Transaction File (a) File Before Posting (as it was in Exhibit 4.3) Customer Code 201 202 203 204 206

Customer Name Black Corp.

Green Brothers Cherry Gardens Brown Company Red Flag Sales

Year-ToDate Sales 0 0 0 0 0

Current Balance 0 0 2,400 4,300 3,600

(b) File After Posting

Customer Code 201 202 203 204 206

Customer Name Black Corp.

Green Brothers Cherry Gardens Brown Company Red Flag Sales

Year-ToDate Sales 4,200 3,600 6,000 2,700 1,500

Current Balance 4,200 3,000 8,400 7,000 3,600

A customer invoice in Exhibit 4.8 is for invoice #1006 to Cherry Gardens with an amount due of $6,000.

See Exhibit 4.8 on the next page.

Exhibit 4.8 Printing Customer Invoices

CUSTOMER INVOICE Green Brothers

Invoice No. Invoice Date

CUSTOMER INVOICE 1001

Black Corp.

Invoice No. Invoice Date

01/02/12 Cash X

Credit

Billable Hours 6

01/04/12 Cash

Billable Rate $100

Total Amount Due $600

Credit X

Billable Hours 42

CUSTOMER INVOICE Brown Company

Invoice No. Invoice Date

Billable Rate $100

Total Amount Due $4,200

CUSTOMER INVOICE 1003

Green Brothers

Invoice No. Invoice Date

01/08/12 Cash

Credit X

Billable Hours 27

Total Amount Due $2,700

Credit X

Billable Hours 30

CUSTOMER INVOICE Red Flag Sales

Cash X

Invoice No. Invoice Date

1005

Cherry Gardens

Total Amount Due $3,000

Invoice No. Invoice Date

01/21/12

Total Amount Due $1,500

1006 01/28/12

Cash Billable Rate $100

Billable Rate $100

CUSTOMER INVOICE

Credit

Billable Hours 15

1004 01/10/12

Cash Billable Rate $100

1002

Credit X

Billable Hours 60

Billable Rate $100

Total Amount Due $6,000

The open customer invoice file in Exhibit 4.9 that has been updated by the sales transaction file shows a new record for invoice #1006, in the amount of $6,000.

Exhibit 4.9 Updating the Open Customer Invoice File with the Sales Transaction File (a) File Before Posting Invoice No. 0998 0999 1000

Invoice Date 12/06/11 12/16/11 12/17/11

Customer Code 206 203 204

Invoice Amount 3,600 2,400 4,300

Date Invoice Paid

Amount Paid

Customer Code 206 203 204 202 201 204 202 206 203

Invoice Amount 3,600 2,400 4,300 600 4,200 2,700 3,000 1,500 6,000

Date Invoice Paid

Amount Paid

01/02/12

600

01/21/12

1,500

(b) File After Posting Invoice No. 0998 0999 1000 1001 1002 1003 1004 1005 1006

Invoice Date 12/06/11 12/16/11 12/17/11 01/02/12 01/04/12 01/08/12 01/10/12 01/21/12 01/28/12

The general journal transaction file in Exhibit 4.18 shows summarized credit sales transferred from the sales transaction file according to transaction number SA855. Two general ledger accounts are affected by this transaction–account #1230 is debited for $15,900, and account #4200 is credited for $15,900. The $6,000 credit sale to Cherry Gardens is included in both $15,900 amounts. As previously mentioned, $15,900 is the amount of total credit sales shown in Exhibit 4.6.

Exhibit 4.18 Writing Other Transaction Data to the General Journal Transaction File Transaction No. GJ850 GJ850 GJ851 GJ851 GJ852 GJ852 GJ853 GJ853 SA854 SA854 SA855 SA855 CA856 CA856

TransAccount action No. Amount* Explanation Date 01/10/12 5700 3,300 Office rent 01/10/12 1120 (3,300) Office rent 01/15/12 5690 1,800 Repairs to vehicles 01/15/12 2110 (1,800) Repairs to vehicles 01/31/12 5130 6,300 Monthly payroll 01/31/12 1120 (6,300) Monthly payroll 01/31/12 5340 300 Depreciation on equipment 01/31/12 1650 (300) Depreciation on equipment 01/31/12 1120 2,100 Cash sales 01/31/12 4200 (2,100) Cash sales 01/31/12 1230 15,900 Credit sales 01/31/12 4200 (15,900) Credit sales 01/31/12 1120 12,900 Collections on account 01/31/12 1230 (12,900) Collections on account *Positive numbers are debits; negative numbers are credits.

The general journal in Exhibit 4.19 is a printout of the general journal transaction file. Therefore, the journal includes the same information just described in the general journal transaction file except that we can see from the journal that account number 1230 is accounts receivable, and account number 4200 is sales of services.

Exhibit 4.19 Printing the General Journal GENERAL JOURNAL Month Ending 1/31/12 Transaction No. GJ850 GJ850

Transaction Date 01/10/12 01/10/12

No. 5700 1120

Account Name Rent expense Cash in bank

GJ851 GJ851 GJ852 GJ852 GJ853 GJ853 SA854 SA854 SA855 SA855 CA856 CA856

01/15/12 01/15/12 01/31/12 01/31/12 01/31/12 01/31/12 01/31/12 01/31/12 01/31/12 01/31/12 01/31/12 01/31/12

5690 2110 5130 1120 5340 1650 1120 4200 1230 4200 1120 1230

Repair expense Accts. payable Salary expense Cash in bank Depre. expense Accumulated depre.

Cash in bank Sales of services Accounts receivable Sales of services Cash in bank Accounts receivable

Debit 3,300

Credit 3,300

1,800

1,800

6,300

6,300

300

300

2,100

2,100

15,900

15,900

12,900

12,900 $42,600

$42,600

Explanation Office rent Office rent Repairs to vehicles Repairs to vehicles Monthly payroll Monthly payroll Depre. on equipment Depre. on equipment Cash sales Cash sales Credit sales Credit sales Collections on account Collections on account

The general ledger master file in Exhibit 4.21(a) before posting and 4.21(b) after posting shows the details of the activity in the following two accounts affected by the sale to Cherry Gardens: #1230-Accounts Receivable Beginning balance (before posting) $10,300 dr Debited per transaction SA855 15,900 dr Credited per transaction CR856 12,900 cr Current balance $13,300 dr

#4200-Sales of Services Beginning balance (before posting) 0 Credited per transaction SA854 $ 2,100 cr Credited per transaction SA855 15,900 cr Current balance $18,000 cr

Exhibit 4.21 Updating the General Ledger Master File with the General Journal Transaction File (a) File Before Posting [as it was in Exhibit 4.16(b) Account Account Name Number 1120 Cash in bank 1230 Accounts receivable 1600 Equipment 1650 Accumulated depreciation 2110 Accounts payable 3100 Owner's equity 4200 Sales of services 5130 Salary expense 5340 Depreciation expense 5690 Repair expense 5700 Rent expense (b) Files After Posting File 1: Account Number Account Name 1120 1230 1600 1650 2110 3100 4200 5130 5340 5690 5700

See File 2 on the next page.

Cash in bank Accounts receivable Equipment Accumulated depreciation Accounts payable Owner’s equity Sales of services Salary expense Depreciation expense Repair expense Rent expense

Beginning Balance 4,100 10,300 15,000 (1,800) (2,800) (24,800) 0 0 0 0 0

Current Balance 4,100 10,300 15,000 (1,800) (2,800) (24,800) 0 0 0 0 0

Beginning Balance

Current Balance

4,100 10,300 15,000 (1,800) (2,800) (24,800) 0 0 0 0 0

9,500 13,300 15,000 (2,100) (4,600) (24,800) (18,000) 6,300 300 1,800 3,300

File 2: Account No. 1120 1120 1120 1120 1230 1230 1650 2110 4200 4200 5130 5340 5690 5700

Debit/Credit Activity (3,300) (6,300) 2,100 12,900 15,900 (12,900) (300) (1,800) (2,100) (15,900) 6,300 300 1,800 3,300

Transaction No. GJ850 GJ852 SA854 CA856 SA855 CA856 GJ853 GJ851 SA854 SA855 GJ852 GJ853 GJ851 GJ850

Transaction Date 01/10/12 01/31/12 01/31/12 01/31/12 01/31/12 01/31/12 01/31/12 01/15/12 01/31/12 01/31/12 01/31/12 01/31/12 01/15/12 01/10/12

Explanation Office rent Monthly payroll Cash sales Collections on account Credit sales Collections on account Depreciation on equipment Repairs to vehicles Cash sales Credit sales Monthly payroll Depreciation on equipment Repairs to vehicles Office rent

The general ledger account activity report in Exhibit 4.22 is a printout of the general ledger master file.

Therefore, the report includes the same information just described in the general ledger master file.

The income statement in Exhibit 4.23 shows sales of services of $18,000. The balance sheet shows accounts receivable of $13,300.

Exhibit 4.23 Preparing the Financial Statements

Income Statement 1/01/12 to 1/31/12 REVENUE Sales of services TOTAL REVENUE EXPENSES Salary expense Depreciation expense Repair expense Rent expense TOTAL EXPENSES NET INCOME

Balance Sheet As of 1/31/12

$18,000 $18,000 6,300 300 1,800 3,300 11,700 $ 6,300

ASSETS Cash Accounts receivable Equipment Accumulated depre.

TOTAL ASSETS LIABILITIES AND OWNER’S EQUITY Accounts payable Owner’s equity TOTAL LIABILITIES & OWNER’S EQUITY

$ 9,500 13,300 $15,000 - 2,100

12,900 $35,700

$ 4,600 31,100 $35,700

12. a. $

$ $

12. b.

The advantages of a computerized profit plan system for Kenbart Company include the following: Complex financial relationships may be modeled and programmed, permitting management to obtain rapidly the results of alternative decisions or assumptions. Therefore, a greater number of alternatives may be examined within the planning cycle.

Continuous planning is made possible. Because the computer takes over burdensome computational tasks, management may update plans or redo plans for changed conditions at any time of the year.

Flexibility in output options is possible. Various output formats and comparisons for actual results, original plans, revised plans, and the current outlook may be programmed.

In the redesign of the format for the Profit Plan Report, the account titles and their order of presentation would not change. Data would be presented for both the current month and year-to-date. Thus, the columns under the Month and Year-to-Date headings would be the same. In order to assist management in reviewing results and planning operations, three plan columns—original, revised, flexed revised—should be included under both the Month and Year-to-Date headings. Furthermore, a current outlook column should be included. An example of the column headings is shown below.

The Original Plan and Revised Plan columns are included in the report for reference purposes. Those two plans were the predecessor of the flexed revised plan and may be useful in tracing changes. The Flexed Revised Plan is the most current plan and is the one to which Actual Results should be compared. A comparison of Actual Results to this plan yields the Over/Under plan calculations in dollar and percentage amounts. The current outlook column was not included in the original report but should be added to give management an idea what the results for the year are expected to be.

12. c.

Kenbart Company would have to capture the original plan by month for each account in the files. However, only the monthly sales and fixed expenses would have to be stored because the variable and mixed (semivariable) costs could be calculated from the flexible budget equations which can either be stored in data files or incorporated into the software. Changes in any parameter value can be input into the system as needed for generating revised or revised flexible plans. To complete actual columns on the report(s), Kenbart would also have to capture the actual dollar results for the current and prior months by month.

13. a.

Sequence coding is the assignment of numbers or letters in some designated consecutive order, i.e., 1,2,3,4 . . . or A, B, C, D . . . The next incident or increment is assigned the next higher sequential designation.

Examples: check numbers, calendar years, purchase orders, etc.

Block Coding assigns specific groups of numbers for designated purposes. Address numbers in cities, e.g., 100 to 199, are referred to as the 100 block. Accounting systems commonly use blocks of numbers to specify classes of accounts, 100-200 for assets, 300 for liabilities, etc.

Group Coding consists of two or more subgroups of digits or letters combined in a field to designate several classifications. Each subgroup specifies a data classification in a series. The series is generally a left-to-right arrangement with the positions or blocks of designators becoming more specific the further to the right they are in series. Postal ZIP codes are an example of group coding with each successive digit indicating an ever more precise geographic location.

13. b.

A chart of accounts coding system must satisfy specific requirements. These requirements will dictate the nature and type of coding used. Among these factors are the following:

$

Organizational considerations. The company’s organization factors need to be considered, i.e., the type and complexity of business structure; number of divisions, plants, departments; number of product lines, etc.

Type of information requirements. A system user must be able to access information for retrieval by addressing major groups of data. The composition of the account numbers must allow for easy identification and use.

Growth. The coding must allow for growth in the number of items that will be included in the system. A one position field in a strictly numeric system can specify no more than ten items or classes; if alphanumeric, no more than 36. If the items or classes to be identified by the field have the potential to exceed these limits, the field should be expanded.

$ $

$

Cost effectiveness. The longer the code designation, the more costly it is to maintain and process the associated data. A numeric coding system is more efficient in an electronic data processing system. In all systems, shorter codes are preferable.

13. c.

A group coding system would provide the best approach to a sales analysis coding system for Universal Floor Coverings. The sales analysis code would include the following positions:

Item Identification Type of Use Product

Digit 1 1

Brand*

1

Line/pattern*

1

Color

1 or 2

Type of Sale

1

Territory

1

District

1 or 2

Specific Customer Identification

4

Explanation Only have two types of use–commercial and residential.

Only have three product lines now–carpet, vinyl floor covering, padding.

One digit should be sufficient because this is a subcode: Carpet—5 brands each Vinyl – 4 brands One digit should be sufficient because this again is a subgroup: Carpet–5 lines maximum per brand Vinyl–8 patterns per brand There are a maximum of 15 color styles for the carpet. This would require two numeric digits or one alphanumeric digit.

One digit would be sufficient to identify wholesale, retail showroom, corporations, contractors, retail chain and outlet.

There are currently seven territories; one digit is sufficient unless the company plans to expand the number of territories.

Currently there are 10 districts in some territories. This means that 1 digit is sufficient now, but another position or an alpha coding might be used for expansion.

If sales analysis by customer is desired, then a 4 digit numeric code should be used to provide adequate expansion.

A digit is not needed for salespersons because only one salesperson is assigned to each district. If this is due to change in the near future, then a digit should be added now.

All these codes would be numeric except as indicated above. *The type of pad could be identified under brand or line/pattern.

Chapter 6 Internal Control and Risk Assessment INTRODUCTORY SCENARIO: SUGGESTED SOLUTIONS TO QUESTIONS

1.

Management should have provided better oversight of the trading function. Management ignored red flags, never investigated the increase in Kerviel’s salary, and never monitored Kerviel’s activities as a trader. The general controls surrounding access to the system were lax, and management did not consider the possibility that promoting a back office worker to a trading position would provide that person with the opportunity to commit and conceal illegal acts (e.g., violating policies with regard to desk limits). There was a risk-taking culture in the organization. Management did not enforce vacations and failed to follow up on questions brought up by the Eurex Exchange. No one noticed the false trades and there was a failure to monitor the security systems and trades.

2.

Because Kerviel was making money for the bank, management might have been reluctant to act on activities that looked suspicious (such as the violations of desk limits). Since the internal environment encouraged a risk-taking culture, lines of responsibility and authorization were blurred, and there was little if any oversight of the trading function.

VIGNETTES: SUGGESTED SOLUTIONS TO QUESTIONS Vignette 6.1 1.

2.

Proper oversight and review of transactions posted. A batch system with review of the proof list by someone other than the data entry clerks may have caught some of the errors. Edit checks could be installed to minimize input errors.

Rotation of duties, incentives to reward low data entry error rates.

Vignette 6.2 1.

2.

Procedures should have been in place to require that all orders be approved before entry into the system. In other words, the order process should have been separate from the data entry, and all orders should have been properly authorized. Inventory management should have been maintained by the headquarters office, with proper documentation required before maintenance was done on any inventory items. Physical inventory counts should be done more frequently to minimize the opportunity for losses due to “phantom inventories” to grow.

A strong internal environment with an incentive system that would not encourage product managers to enter fraudulent data. Proper oversight with proper authorization for orders should be required. Separation of the record-keeping, authorization, and custody functions should be maintained. The incentive program needs to be revised to encourage productivity, not fraudulent activity.

Vignette 6.3 1.

The internal environment is lax. Management does not appear to be interested in adhering to personnel policies that encourage the hiring and retention of qualified employees. There is no formal means of obtaining consistent and regular feedback on performance. The job posting and merit increase procedures appear to be somewhat “informal.” Personnel do not know what they must do to be promoted or to receive

2.

significant merit increases. Procedures should be in place to demonstrate the organization’s commitment to the advancement of qualified personnel to higher levels of responsibility.

Fair and equitable policies for salaries and raises should be clearly stated and adhered to. The evaluation process should be properly scheduled and provide an opportunity for managers and their employees to applaud excellence in performance and provide a means for suggesting improvements.

Vignette 6.4 1. Kelly’s incentives as a manager were to make the company look good according to the numbers. The shareholders’ incentives relate to wanting the company to keep up with technological advances and jump into new markets and products as technology changes. While this is risky, it reflects the notion that shareholders have no “downside” risk, i.e., they cannot lose any more than the amount they originally invested in the stock. They have unlimited “upside” potential, in that any successes the company has can be shared with the stockholders through either the distribution of dividends and/or capital gains from increases in the value of the stock.

2. As an independent board member, Lopez had every right to require a discussion of Kelly’s performance. It would have been better if the chairman of the board had NOT been an insider. The Sarbanes-Oxley Act requires that the Audit Committee be made up of non-insiders, including a “financial expert.” The internal and external auditors report directly to the Audit Committee and should be allowed to independently review the CEO’s performance BEFORE he comes under investigation for fraud.

Vignette 6.5 1. No periodic review of the control system. Improper oversight of the treasury function. Duffy was able to continue his money laundering without anyone suspecting his wrongdoing. Minichello’s attitude about risktaking encouraged “creative” methods for making money by her employees. She did not appear to take the internal environment seriously, so she could not expect her employees to take it seriously either.

2. Periodic audits of the operational areas of the company by internal auditors and annual audits by external auditors. Proper oversight of the treasury function through reviews and rotation of duties within the department. Enforced vacations (assuming Duffy was the “perfect employee” who never took any time off) would also allow for someone else to review transactions processed in the treasury department.

3. Periodic review and updates to the control system, a change in Minichello’s attitude toward the importance of the control system, rotation of duties, proper oversight and authorization of transactions, enforced vacations.

SOLUTIONS TO DISCUSSION QUESTIONS AND PROBLEMS

1.

2 3.

4.

B D B D

5. a. and b.

The internal environment factors at Reed, Inc., that Smith, CPA, must understand to perform an audit of Reed's financial statements are listed below. Along with each factor, the components that are of interest are discussed.

Management Philosophy and Operating Style Management philosophy and operating style include the following: management’s behavior toward other managers or personnel; management’s approach to business risk; management’s attitude toward accounting functions; and management’s attitude toward information processing.

Integrity and Ethics An organization’s integrity and ethical values affect the design, administration, and monitoring of the other factors of the internal environment.

Commitment to Competence Commitment to competence indicates to the auditor how competently the employees perform their jobs.

Human Resource Policies and Practices Human resource policies and practices include the organization's policies for hiring, orienting, training, evaluating, counseling, compensating, promoting, and remedial actions.

Board of Directors The board of directors is a committee that primarily represents stockholders but may also represent employees, communities, and environmental interests. The board is responsible for overseeing operations, evaluating management's performance, and assuring that the organization is in compliance with applicable laws and regulations. Boards set broad policies and see that they are carried out. They typically choose the chief executive and participate in selecting other senior staffers. More specific responsibilities vary, depending on the organization’s charter and the nature of the business. An independent board of directors is one in which a significant number, preferably a majority, of its members are outside directors. Outside directors are those who are neither current nor former employees of the organization.

Audit Committee The audit committee is a standing subcommittee of the board whose main objectives are to protect against management wrongdoing and to increase public confidence in the independent auditor’s opinion. It is an extension of the oversight role of the board of directors and, consequently, reports directly to the board.

The audit committee is responsible for making recommendations regarding the selection of the external auditors, reviewing financial information, directing investigations of possible fraud, seeing that effective internal control is maintained, and serving as a communication link between the internal and external auditors and the board of directors. An audit committee composed of independent board members can ensure that its decisions are free from management’s influence.

Organizational Structure A formal organizational structure provides the framework within which the organization’s activities for achieving its objectives are planned, executed, monitored, and controlled. Limits of managerial authority,

areas of responsibility, and lines of reporting are defined. Employees know what authority and responsibility they have, whom they report to, and who reports to them. The organizational structure is expressed in and documented by an organizational chart and job descriptions.

Assignment of Authority and Responsibility Assignment of authority and responsibility includes policies and communications directed at ensuring that all personnel understand the management objectives, know how their individual actions interrelate and contribute to those objectives, and recognize how and for what they will be held accountable. Assignment of authority and responsibility establishes authorization hierarchies and reporting relationships.

6.

The four organization objective categories are strategic objectives, quality of reporting (both internal and external), effectiveness and efficiency of operations, and compliance with applicable laws and regulations.

The eight components of internal control–internal environment, objective setting, event identification, risk assessment, risk response, control activities, information and communication, and monitoring–can be associated with all four management objective categories. No one component should be viewed as a singular aspect of any one objective category.

7. a.

To enable the president's activities to be concealed, the board of directors probably had to cooperate. The members of the board of directors evidently did not fear civil or criminal suit for conspiracy, or, if they did, they had some overriding interest in keeping quiet. The board may have been composed entirely of family members or individuals who also held management positions. If any members of the board were independent, they were probably in a minority and may have been bribed to conceal the wrongdoing. Also, there may have been no established audit committee with overall responsibility for control matters.

7. b.

The company's procedures for dealing with control violations were clearly inadequate. If the prescribed penalty for an offense is termination, that penalty should be carried out automatically regardless of management's preoccupation with other matters.

7. c.

Hiring policies were inadequate. The credentials of all new employees should be checked, and, where doubts exist, a job applicant should be tested for competence.

7. d. The company evidently had no formal orientation or training programs, or, if it had, orientation and training were not required for people transferring within the organization. Orientation and training programs should acquaint new employees or transferees with company and departmental procedures.

7. e.

Presumably, the organization had no formal code of conduct regulating the manner in which employees were to deal with customers. Also, supervision may have been inadequate; the invoice should have been checked before being mailed.

7. f.

Control consciousness seems to have been lacking. With such attitudes among employees, management would have a hard job building effective internal control.

8.

Internal control is only as good as the people involved. The quality of these people depends heavily on the quality of the organization's human resource policies and practices. The human resource policies and practices should be tailored to the required skills and the sensitivity of the positions filled and should address the needs for: • Hiring • Orientation • Training • Evaluating • Counseling

• Compensating • Promoting • Remedial actions A large insurance company would need people with special training and skills, such as actuaries, appraisers, and information services specialists, as well as clerical, sales, and general management personnel. Its employees would most likely be regarded as a valuable long-term resource. They would be recruited with care and continually nurtured to maintain their effectiveness and to realize their full potential. Suitable incentives would be needed to attract the right people, keep them with the company, and challenge them to achieve their personal, as well as the corporate, goals. A contented, but personally and professionally challenged, work force is a vital asset to any company; to a professional service organization, it is essential for long-term survival and success. Such a work force is also the basis of effective internal control.

Before personnel are hired, their credentials should be checked to verify their suitability for employment.

New hires and transferees should be given appropriate orientation and training covering, among other things, company policies and procedures. Periodic performance reviews should be made of performance and constructive feedback provided to each individual. Opportunities should exist for advancement within the organization, and a "hire-from-within" policy should be adhered to whenever feasible. Employee frustration should carefully be avoided, and successful employees should be offered a future with the company that provides a basis for the realization of their monetary and nonmonetary ambitions. Absence of frustration and expectations of advancement are important elements supporting the control consciousness.

Individuals who feel the need for a change of job should, to the extent possible, be able to move laterally in the organization. Opportunities should also be provided for individuals who are in the process of recovering from illness or personal problems and need to demonstrate their continued self-worth and worth to the company. Compensation should be commensurate with the service provided to the organization.

The insurance company should establish written policies and procedures stating the disciplinary actions that will follow violations of expected behavior. Prompt, impersonal disciplinary action sends a message that violations will not be tolerated.

9. a.

The objectives of an audit committee are to protect against management wrongdoing and to increase public confidence in the independent auditor’s opinion. External auditors can communicate with audit committees and discuss control and other issues without management being present. It is an extension of the oversight role of the board of directors and, consequently, reports directly to the board. The audit committee is responsible for making recommendations regarding the selection of the external auditors, reviewing financial information, directing investigations of possible fraud, seeing that effective internal control is maintained, and serving as a communication link between the internal and external auditors and the board of directors. An audit committee composed of independent board members can ensure that its decisions are free from management’s influence.

9. b.

When setting up an audit committee, an organization must consider the committee's charter and membership and also must consider the effects of the discipline that the committee will impose on upper management. The committee's charter should spell out what its responsibilities are and what opportunities it will be given to meet them. The committee should be made up of individuals drawn from among the independent members of the board of directors. The selected individuals should have an interest in internal control and, where possible, previous experience or relevant training. They must make the commitment to acquaint themselves with details of the organization's internal environment and with the broad features of its control activities. The committee members must commit the time necessary to provide effective oversight and, in particular, the time that may be needed to investigate in detail certain matters of concern.

The members must be prepared for the typically unpleasant tasks of exposing high-level wrongdoing in the organization and of carrying through whatever corrective measures are deemed necessary.

Upper management must be prepared to expose its actions to the audit committee's scrutiny. The legal and ethical aspects of management behavior will be reviewed and also management's performance in running the organization. Management must be prepared to cooperate with the audit committee in any investigations the committee chooses to pursue. Good managers will welcome this kind of oversight because it stimulates continual improvement and enhances the organization's success. Poor managers are likely to resent the oversight because it exposes their incompetence and possibly their own wrongdoing.

10.

The formal organizational structure defines areas of responsibility, limits of managerial authority, and lines of reporting. An organizational structure that is appropriate to an organization's mission contributes to a strong internal environment. The structure provides the framework within which the organization's activities for achieving its objectives are planned, executed, monitored, and controlled. People know what authority and responsibility they have, whom they report to, and who reports to them.

The organizational structure should be designed to support the organization's mission by establishing relationships among people and activities to facilitate decision making, preserve accountability, and achieve teamwork and harmony. In designing an organizational structure, top management must consider organizational goals and objectives, operating functions, and regulatory requirements. Management decides at what level decisions can be made, the degree to which individuals and teams can use their own initiative in addressing issues and solving problems, and what limits to put on their authority.

The type of organizational structure is influenced by the nature of an organization's activities and by its size. A large organization may require a high degree of structure with formal areas of responsibilities, limits of authority, and lines of reporting. On the other hand, a small organization may require a less formal structure because of adequate direct supervision and oral communications. The organizational structure may be centralized or decentralized. A centralized organization retains the authority for decision making at the top levels of management while a decentralized organization delegates decision-making authority to middle and lower managers. In decentralized organizations, significant authority may be delegated to the managers of business units. In most cases, the larger the unit, the greater the autonomy that is vested in the unit's manager. Business units may be distinguished by industry or product line, geographical location, functional activity, distribution or marketing network, or a particular project.

After an appropriate organizational structure has been designed, management must adopt techniques for communicating and maintaining the areas of responsibility, limits of authority, and lines of reporting.

Organizational charts need to be redrawn and job descriptions need to be rewritten to reflect the changes.

11.

12.

Even if the rumors that members of top management overstate their travel vouchers are false, the fact that they are spreading throughout the organization–and are believed–is a sign of poor employee morale and a breakdown of trust. If the rumors are true, they portray a very poor account of the internal environment. In either case, the rumors are likely to erode morale further and to have a negative effect on employees’ own attitudes toward integrity and ethical behavior.

Management of any organization should strive to communicate to employees the importance of integrity and ethical behavior. Such indoctrination should be accomplished by training programs, continual reinforcement by supervisors, a code of conduct, and prompt disciplinary action against violators.

However, employees are sensitive not only to formal indoctrination but also to subtle messages from their superiors. If employees perceive that senior managers lack integrity and behave in an unethical manner, the employees may be influenced to act accordingly. The employees may surmise that the indoctrination program is a sham and conclude that integrity and ethical behavior are really not important.

The defense offered by the CEO of the U.S. construction company was frequently voiced during the Congressional hearings that led to passage of the Foreign Corrupt Practices Act of 1977. Indeed, the offering and acceptance of bribes is common in some parts of the world, and American business people have often complained that the act's prohibition of bribery puts them at a disadvantage relative to foreign

competitors whose societies are less squeamish about such practices. The alleged disadvantage is one of the factors claimed to prevent U.S. companies from competing in world markets on a "level playing field."

Regardless of whether the complaints are valid, the U.S. government has concluded that bribery is unethical and undermines the trust that should exist, not only among competitors in the market place, but also between business and government and between business and society. Most people agree that bribery and similar corrupt practices are not in the best long-term interests of either business organizations or the national economy and cannot contribute to society's well-being.

13. a.

An outside director is a member of the board of directors of an organization and is not otherwise involved as an employee or manager of the organization. Such a board member should also be free from financial entanglements as a creditor or debtor of the organization. An outside director has no conflict of interest that could interfere with his or her oversight of management's effectiveness in running the organization.

He or she is, therefore, in a favorable position to evaluate reports and presentations made to the board by corporate management.

13. b.

As a member of the board of directors, X will be expected to attend regular meetings of the board and, if selected, to serve on standing or ad-hoc committees. X will also be expected to become acquainted with the organization's and the industry's activities to be able to offer informed advice to other board members and to management.

13. c.

Few independent board members–or even the organization's own managers–would be prepared to serve as directors if there were no remuneration. As long as directors' fees are not tied to the way they vote or to the outcome of specific actions proposed by management, there is no significant erosion of independence. An independent board member's acceptance of remuneration should be viewed in a similar light as the acceptance of fees by an external auditor.

14. a.

The story about Malcolm Trenton draws attention to an increasingly serious problem of protecting the confidentiality of corporate data. Many managers take work home to do in the evenings and on weekends.

Their workload demands more time than is available during normal work hours, and, at home, these managers can escape the continual interruptions that occur at the office. The managers can work quietly and think more creatively. But taking work away from the office presents an internal control risk because sensitive material may be exposed to unauthorized access.

The problem is compounded by the growing pattern of two-career families. A manager's spouse may work for a competing organization or a third party with a potential interest in information to which the manager may be privy. Important in this regard are documents or reports in the manager's possession, information stored in a home computer, and information in a corporate database that is accessible via a home computer.

Most married couples reach an agreement not to discuss corporate secrets and to respect the privacy of each other's work. However, situations can arise--particularly if experiencing marital difficulties--when one partner may deliberately invade the other's privacy. This seems to have been the situation described in the problem.

14. b.

As noted, work-at-home schemes offer many advantages in reducing operating costs and in accommodating personal preferences for working conditions and hours. On the other hand, internal control over access to information or even access to computer facilities are difficult to establish and enforce. Supervisors and internal auditors are unable to monitor the treatment given to printed material or the use or abuse of computer equipment outside the work place. Much responsibility has to be borne by individual employees, and they may be less careful in their own homes than they would be at the office. Some employees may actually take advantage of the lack of oversight.

Because of potentially lax security, organizations must balance the advantages and disadvantages of workat-home schemes and set ground rules for situations in which it is permitted. Particularly sensitive work should be done only at the office, and only trusted employees should be permitted to do less sensitive work

at home. In cases where off-site work is permitted, employees should be made aware of the security problems and be trained in necessary control activities. Whether they observe the control activities remains an open question.

15. a.

Substance abuse can have a two-fold effect on internal control. First, an abuser's work competence and judgment are likely to be impaired. Second, the need to meet the ever increasing cost of illegal drugs often drives abusers to steal.

15. b.

Instead of drug testing, education needs to be the primary weapon to attack substance abuse. On the other hand, random drug testing has also proved to be an effective weapon against substance abuse in the work place. Today, many organizations require new hires to agree to random testing as a condition of employment. While the average person views drug testing as intrusive and unpleasant, there is growing recognition that it is a necessary evil. Few people find drug testing so unpleasant that they would turn down an attractive job offer for this reason–unless they had something to hide.

16.

The first step in the audit committee's investigation should be to interview the board members who made the charges to determine what evidence they had and to evaluate the seriousness of the alleged fraud.

Presumably, the matter was discussed at a board meeting, and upper management was informed of the charges. The audit committee should give senior managers an opportunity to rebut the charges. The committee should also approach the head of internal audit in confidence to inquire whether the latter's department had any suspicion of fraud. The committee would likely review the findings of the most recent external audit, particularly any observations or recommendations that may have been made concerning internal control weaknesses.

If the audit committee was satisfied that due cause existed, it could proceed in one of two ways. The committee could set up a task force to investigate the charges further. The task force could consist of some or all of the audit committee members, representatives from the internal audit department, and possibly one or more individuals from the organization's external audit firm. The task force could schedule interviews with senior managers, the controller, and other accounting staff. Most likely, an accounting firm had already been selected to audit the end-of-year financial statements, and the external auditors may already have performed initial procedures. The task force may recommend that the external auditors expand their preliminary investigations or proceed with tests that they would otherwise have conducted later in the fiscal year. Alternatively, the audit committee could recommend that the external auditors immediately perform a complete financial audit of the interim statements and await the outcome before taking further action.

The full board would have to approve the retention of external auditors or the expansion of their responsibilities.

If a senior manager confesses to the fraud or if strong evidence points to a particular manager, the manager should be suspended immediately, and charges should be filed by the board of directors. Unless the board takes prompt, effective legal action against the perpetrator, it too could be implicated in any future lawsuit brought by stockholders or creditors. The board would have to take similar action to protect itself against a possible criminal suit in the case of an illegal political contribution.

17. a.

An organization's best defense against involvement in illegal activities by high-level management is a strong internal environment. In particular, an independent board of directors can exercise the necessary oversight which itself is a deterrent against wrongdoing. An independent board can also take decisive action to investigate any allegations or wrongdoing.

17. b.

One action an organization can take to encourage potential whistle-blowers to reveal their information internally instead of going outside is to provide a mechanism for communicating concerns to a suitable level–the manager of internal audit, the president, or the board of directors–so whistle-blowers can be assured of prompt responses. Simply confiding suspicions to an immediate supervisor is unlikely to be effective. Second, the employees must be assured that they will not face recrimination. This is a crucial

issue because, historically, large numbers of whistle-blowers have been fired, demoted, transferred to a less favorable location, given demeaning work, or harassed for their actions. A mechanism whereby employees can express concerns anonymously can help in this regard, although anonymity creates other problems, such as irresponsible charges.

18.

Pertinent comments on the risks inherent in Mr. White's position are as follows: •

Mr. White could suddenly become unable to perform his duties, harming the ongoing administration of the church. Most likely there are no written operating procedures, and a new financial secretary and/or treasurer would have difficulty learning the job.

•

The jobs of financial secretary and treasurer are incompatible duties from an internal control standpoint and should not be held by the same individual.

•

Mistakes could be made in the receipt and disbursement of church funds or in the recording of transactions and never be detected. Mr. White's capabilities for detailed clerical work may be declining.

•

Mr. White might experience unusual financial hardship and be tempted to divert church funds to his own use, or to "borrow" money and be unable to pay it back. If he became mentally confused, he might not be able to properly distinguish between his own money and church funds.

19.

The risks associated with the new division of Arcade Co. of Orlando, Florida, are presented below: Activity

Risk

Transaction Execution

(a) Unauthorized - Play of games - Collection of coins - Record of collection - Deposit of coins (b) Theft or loss of cash Reduce or share (insurance)

Transaction Recording and Classification

(a) Incorrect account (b) Incorrect time period (c) Incorrect amount (d) Omitted transaction or incomplete recording Avoid with controls in system

Access to Assets

(a) Theft of games (b) Theft of machines (c) Damage to machines (d) Theft of money (e) Loss of money Avoid with physical controls, surprise audits

Periodic Comparisons of Accountability

(a) All risks previously discussed may not be under adequate control.

May be able to reduce this risk with periodic re-evaluation of how controls are working

Spreadsheet Assignment a.

The amount that could be misappropriated from the ten accounts using the salami technique is shown below.

The data for January are in the problem.

FEBRUARY DATA:

Account 1 2 3 4 5 6 7 8 9 10

Interest Cumulative Monthly Rounded Amount Amount Balance Interest Interest Cut Off Transferred 35.20 0.16133 0.16 0.00133 0.03824 192.53 0.88243 0.88 0.00243 0.04067 274.75 1.25927 1.25 0.00927 0.04994 303.19 1.38962 1.38 0.00962 0.05956 398.97 1.82861 1.82 0.00861 0.06817 413.90 1.89704 1.89 0.00704 0.07521 691.40 3.16892 3.16 0.00892 0.08413 1523.95 6.98477 6.98 0.00477 0.08890 3257.20 14.92883 14.92 0.00883 0.09773 10129.31 46.42600 46.42 0.00600 0.10374

MARCH DATA:

Account 1 2 3   

Interest Cumulative Monthly Rounded Amount Amount Balance Interest Interest Cut Off Transferred 35.36 0.16207 0.16 0.00207 0.10580 193.41 0.88646 0.88 0.00646 0.11227 276.00 1.26500 1.26 0.00500 0.11727

DECEMBER DATA:

Account 1 2 3 4 5 6 7 8 9 10

Interest Cumulative Monthly Rounded Amount Amount Balance Interest Interest Cut Off Transferred 36.80 0.16867 0.16 0.00867 0.57214 201.49 0.92350 0.92 0.00350 0.57564 287.56 1.31798 1.31 0.00798 0.58362 317.32 1.45438 1.45 0.00438 0.58800 417.58 1.91391 1.91 0.00391 0.59191 433.21 1.98555 1.98 0.00555 0.59746 723.70 3.31696 3.31 0.00696 0.60442 1595.20 7.31133 7.31 0.00133 0.60575 3409.55 15.62710 15.62 0.00710 0.61285 10603.20 48.59800 48.59 0.00800 0.62085

The amount netted by the criminal from these ten accounts is surprisingly small. Even when the amount is multiplied by 1,000 (10,000 total accounts / 10 accounts in sample) to estimate the defalcation for the total population of accounts, it is still only $620.90 a year--hardly enough to compensate for the risk of detection! b.

The amount stolen in Part a. would be larger if (i) there were more accounts, or (ii) interest were compounded more frequently. Most financial institutions compound interest daily. In this case, the defalcation could grow to approximately $19,000 a year. It should be noted that the stake does not increase with the size of the accounts; it averages $0.005 an account, each interest date, regardless of the amount of the balance.

In-Class Internal Control Activity This activity works very well for an initial introduction to internal controls because it dramatizes the importance of internal control. Reactions from students while going through this activity indicate that it definitely makes an impact. After witnessing how easy it is to steal assets and cover up the theft, students are more eager to learn about internal control. The activity takes about 45 minutes of class time and involves all the class members. The activity addresses control activities which are discussed in more detail in Chapter 13. However, we recommend using it before covering Chapter 12 because it piques students’ interest in the topic of internal control.

We have made these instructions on how to execute the activity very detailed to save you preparation time.

The instructions are virtually a script for your role. We first tell you what materials you need to assemble in advance so you can take them to class. Then, we begin the script. We have tried to made the instructions so complete that you can walk into class with the materials and administer the activity without even going through these instructions in advance. We recommend, however, that you go through a trial run with another instructor or a student.

The activity requires five volunteers from the class to play the roles of employees and customers. Each of the other students plays the role of an auditor.

Before class: 1.

Assemble three packets to hand out to three players as follows. The materials for these packets are at the end of these instructions.

One packet for the manager which includes: Instructions for all 3 rounds 4 blank sales invoices 2 blank receiving reports 1 blank purchase order One packet for the recordkeeper which includes: Instructions for rounds 2 and 3 One packet for the authorizer which includes: Instructions for round 3 The instructions for the manager, recordkeeper, and authorizer are very detailed. The players just need to follow the instructions carefully. The customers and auditors do not need written instructions. You will direct these players during the activity.

2.

Take a sheet of 8 1/2" x 11" paper and fold into thirds so it will stand up and can be used as a name plate. Write the word “Manager” in large letters on one of the surfaces. Make another name plate with the word “Recordkeeper,” one with the word “Authorizer,” one with “ Snowmass Village,” and one with “ Buttermilk Mountain.” You will place these in front of the students who are playing these roles. The name plates help the rest of the class keep track of who is playing which role.

One the day you will be doing the activity, be sure to take the following: 1. These instructions 2. Packets for players containing instructions and documents that you assembled 3. Name plates you made Physical Layout for Internal Control Activity The manager, recordkeeper, and authorizer, who are the employees of Aspen Ski Equipment Co., should sit together at a desk at the front of room so the other students can see them. All students, including the employees, should be able to see the blackboard. In the first round, only the manager will sit at this desk.

In the second round, the manager and the recordkeeper will sit at this desk. In the third round, the manager, recordkeeper, and authorizer will sit at this desk. The two customers–Snowmass Village and Buttermilk Mountain–can stay in their seats.

Below is a diagram of how the blackboard will be used. However, do not draw anything on the blackboard before the activity begins. You will do this as you go along.

This area is for the purchase order that the two customers–Snowmass Village and Buttermilk Mountain–will complete.

Purchase Order

This area is for the students as auditors. Based on the transactions, you (as assistant to the auditors) fill in here what the following should look like for Aspen Ski Equipment Co. Sales Purchase Receiv- Snowboard inventory Invoice Order ing Rpt t-account You will also need space here to show calculations of inventory balances and of operating profit.

Script Any sentences in this script that are bold-faced italics are instructions to you and should NOT be said aloud. Incidentally, if you would like to have a copy of the data file of these instructions so you can print them in a larger font and incorporate more page breaks, please contact Cynthia Heagy.

There will be a take-home assignment relating to this activity. You will need to keep your working papers because you will need your figures for the assignment.

We need five volunteers to play roles in this activity. Three are employees of Aspen Ski Equipment Co. and two are customers. The volunteers will play the same roles in all three rounds. The roles are: 1. A manager of Aspen Ski Equipment Co. 2. A recordkeeper for Aspen Ski Equipment Co. 3. An authorizer of transactions for Aspen Ski Equipment Co. 4. The customer Snowmass Village 5. The customer Buttermilk Mountain Those of you who do not fill these roles will be auditors of Aspen Ski Equipment Co. Ask for volunteers to play the roles.

For the first round we need the manager and the two customers.

For the second round we need the manager, two customers, and the recordkeeper.

For the third round we need the manager, two customers, the recordkeeper, and the authorizer.

Everyone, including the five volunteers, needs to have pencil and paper.

ROUND #1 The purpose of this first round is to demonstrate how loss can occur in the absence of any internal controls.

A secondary purpose is to give you experience in creating a document, specifically a purchase order form.

In this round, the manager has responsibility for authorizing transactions, maintaining custody of assets, and performing all recordkeeping. In other words, Aspen Ski Equipment has no segregation of duties.

Also, Aspen Ski Equipment does not maintain any internal documents in this round. The players in this round are the manager, the two customers, and the rest of you as auditors. As auditors you will maintain your own set of records for dual control.

For this round 1, move the manager to the front of the room so the students can see the manager but in a position so the manager will be able to see the blackboard . The two customers do not need to be in the front of the room, but need easy access to the board. Give the manager his/her instructions and ask that the instructions be returned to you after the game so you can reuse them. Give the manager a few minutes to look over the instructions. Put a name plate in front of each of the three players.

The beginning balance of Aspen Ski Equipment Co's snowboard inventory is 100 boards @ $100 each, or $10,000.

Write the following on the blackboard:

Snowboard Inventory (100) $10,000

Tell the auditors to write down this t-account because they will be recording transactions that will be posted to this account. Tell the auditors to note the number of units in the inventory t-account as well as the dollar amounts because they will need this information.

In this round, Aspen Ski Equipment Co. is going to have three transactions: A sale to Snowmass Village of 15 snowboards A purchase from Snowboard Manufacturing Co. of 10 snowboards A sale to Buttermilk Mountain of 20 snowboards Since Aspen Ski Equipment will receive purchase orders from customers, let's design a PO form. With the help of the class, create a purchase order similar to the one at the end of these instructions. Put this in an area of the blackboard where it can remain for reuse in all three rounds.

Sale to Snowmass Village: First, Aspen makes a sale to Snowmass Village of 15 snowboards.

Have the Snowmass Village customer come up and fill in his/her purchase order for 15 snowboards.

The PO is received by Aspen Ski Equipment and since Aspen has no internal documents, it records the sale using the customer's PO. You are the auditors and are going to make your own journal entries as you think they should be made. At the same time, the manager of Aspen Ski Equipment is making journal entries for the company.

Students, at this time, using the customer PO as a source document, you need to: (1) make the journal entry for this transaction (2) post to ledger accounts The journal entry that the auditors should make is as follows but let them make the entry on their own.

Accounts Receivable-Snowmass Village (15 boards * $200) Cost of Goods Sold (15 boards * $100) Sales Inventory

3,000 1,500 3,000 1,500

Remind the manager to make his/her journal entry and post to ledger accounts. Be sure the manager records this transaction as shown on the manager’s instructions. It is the same as above.

Purchase from Snowboard Manufacturing Co.: Next, Aspen makes a purchase from Snowboard Manufacturing Co. The manager makes the purchase on account. The manager calls Snowboard Manufacturing Co. and arranges for the purchase and same-day delivery of 10 boards at $100 each.

Assume the boards have been received so at this time you need to: (1) make the journal entry for this transaction (2) post to ledger accounts Journal entry should be as follows: Inventory (10 boards * $100) Accounts Payable

1,000 1,000

Remind the manager to make his/her journal entry and post to ledger accounts. Be sure the manager records this transaction as noted in the manager’s instructions. The manager’s entry is as follows: Cost of Goods Sold (5 boards * $100) 500 Inventory (5 boards * $100) 500 Accounts Payable (10 boards * $100)

1,000

Sale to Buttermilk Mountain: Finally, Aspen Ski makes a sale of 20 snowboards to Buttermilk Mountain.

Have the Buttermilk Mountain customer come up and fill in his/her purchase order for 20 snowboards.

Auditors, at this time, using the customer’s PO as a source document: (1) make the journal entry for this transaction (2) post to ledger accounts The journal entry that the auditors should make is as follows, but let them make the entry on their own.

Accounts Receivable-Buttermilk Mountain (20 boards * $200) Cost of Goods Sold (20 boards * $100) Sales Inventory

4,000 2,000 4,000 2,000

Remind the manager to make his/her journal entry and post to ledger accounts as noted in his/her instructions. The journal entry will be just like the auditors’ entry.

Comparisons: Now we need to compare the auditors’ ending balance in the inventory account and the operating profit for the period to these same items in Aspen Ski Equipment Co.'s records.

Tell the auditors to make their calculations now and tell the manager to make his/her calculations. Ask the auditors to tell you what they have for the ending balance in inventory and then ask the manager what he/she has for the ending balance. Ask the auditors how they calculated operating profit, and ask the manager how he/she calculated operating profit. The auditors’ records are correct and should be as follows.

Students’ ending balance in inventory is: 75 boards for $7,500 Students’ operating profit is: Sales CGS Operating profit

$7,000 -3,500 3,500

Aspen's ending balance in inventory is: 70 boards for $7,000

Aspen's operating profit is: Sales CGS Operating profit

$7,000 -4,000 3,000

Questions to ask the class at end of Round #1: 1. Why is Aspen's inventory balance 5 boards and $500 less than the auditors?

After discussing for a while, ask the manager to put his/her journal entry for the purchase of the snowboards on the board. Other than this purchase, all transactions were recorded the same by the auditors and the manager.

2.

Why is the Aspen's operating profit $500 less than ours?

3.

Why did the manager debit cost of goods sold for 5 snowboards? What did he/she do with the 5 snowboards?

4.

How would this loss be discovered?

ROUND #2 The purpose of the second round is to demonstrate how loss can occur in the presence of inadequate internal controls. A secondary purpose is to give you experience in creating documents, specifically a sales invoice form and a receiving report.

In this second round, Aspen Ski Equipment adds some segregation of duties and some internal documents.

The manager still has responsibility for: authorizing transactions maintaining custody of assets But a new employee, the recordkeeper, performs all recordkeeping.

Also, Aspen Ski Equipment now uses a sales invoice form and a receiving report.

We will have four players for this round: 1.

2.

3.

The manager of Aspen Ski Equipment Co. The recordkeeper for Aspen Ski Equipment Co. Two customers–Snowmass Village and Buttermilk Mountain

Move the manager and the recordkeeper to the front of the room. Put a name plate in front of the recordkeeper.

Give the manager and the recordkeeper their instructions and ask that they return them to you after the game. Give them a few minutes to look over their instructions.

Again, the rest of you in the class are auditors who will maintain your own set of records.

The beginning balance of Aspen Ski Equipment Co's snowboard inventory is 100 boards @ $100 each, or $10,000.

Write on blackboard:

Snowboard Inventory (100) $10,000

Tell each student to write down this t-account because he/she will be recording transactions. For inventory, include units as well as dollar amount.

In this round, Aspen Ski Equipment Co. is going to have the same three transactions as we had in Round #1: A sale to Snowmass Village - 15 snowboards A purchase from Snowboard Manufacturing Co. - 10 snowboards A sale to Buttermilk Mountain - 20 snowboards Sale to Snowmass Village: First, Aspen makes a sale to Snowmass Village of 15 snowboards.

Have the Snowmass Village customer come up and fill in his/her purchase order for 15 boards, using the PO form you put in the blackboard in round #1.

Since Aspen now uses a sales invoice form, let's design one.

With the help of the class, create a sales invoice form similar to the one at the end of these instructions.

Place it on the blackboard so you can reuse it. The manager has his/her own hard copy to use. The one on the blackboard that you will be filling in is for the auditors.

Since the manager still authorizes transactions and has custody of assets, you (manager) need to make a hard copy of the sales invoice. Do so at your desk. Mark on the sales invoice that you delivered the goods today. Then hand this sales invoice to the recordkeeper so he/she can make the journal entry from the sales invoice and post to the ledger accounts.

You fill in sales invoice as the auditors think it should appear.

Tell the auditors to (1) make the journal entry for this transaction using the sales invoice as the source document (2) post to ledger accounts

The journal entry that the auditors should make is as follows but let them make the entry on their own.

Accounts Receivable-Snowmass Village (15 boards * $200) 3,000 Cost of Goods Sold (15 boards * $100) 1,500 Sales 3,000 Inventory (15 boards * $100) 1,500 Be sure the recordkeeper records this transaction just as the auditors do.

Purchase from Snowboard Manufacturing Co.: The manager now makes a purchase of 10 snowboards on account. The manager calls Snowboard Manufacturing Co. and arranges for the purchase and same-day delivery of 10 boards at $100 each.

Upon receipt of the boards, the manager will fill out a receiving report and give it to the recordkeeper to use as the source document for recording the journal entry.

Aspen now has another new document, a receiving report.

With the help of the class, create a receiving report on the blackboard similar to the one at the end of these instructions.

Since this is Aspen's only document for recording the purchase, the manager will need to write in the cost per unit on this receiving report.

You fill out the receiving report as the auditors think it should appear, i.e., 10 boards purchased from Snowboard Mfg. at $100 each. We have no PO number or item number.

Tell the auditors to: (1) make the journal entry for this transaction using the receiving report as the source document (2) post to ledger accounts The journal entry that the auditors should make is as follows, but let them make the entry on their own.

Inventory (10 boards * $100) 1,000 Accounts Payable 1,000 Manager, you can fill out your hard copy of the receiving report at this time.

Be sure the manager (without the class knowing it) fills out a receiving report showing only 5 boards at a cost of $1,000 as shown in the manager’s instructions.

Manager, give your receiving report to the recordkeeper so he/she can make a journal entry from information on the receiving report and post to ledger accounts.

Make sure the recordkeeper records this transaction in Aspen's records as follows, as shown on the recordkeeper’s instructions, and posts to the ledger accounts: Inventory (5 boards) 1,000 Accounts Payable 1,000

Sale to Buttermilk Mountain: Next, Aspen makes a sale to Buttermilk Mountain of 20 snowboards.

Have the Buttermilk Mountain customer come up and fill in his/her purchase order for 20 snowboards.

You fill in the sales invoice as the auditors think it should appear based on Buttermilk's PO. Auditors you need to: (1) make a journal entry for this transaction (2) post to ledger accounts Students’ journal entry should be as follows: Accounts Receivable-Buttermilk Mountain (20 boards * $200) Cost of Goods Sold (20 boards * $100) 2,000 Sales Inventory (20 boards * $100)

4,000 4,000 2,000

Manager, you need to make a hard copy of Aspen's sales invoice. Mark on it that you delivered the goods today. Then hand this sales invoice to the recordkeeper so he (she) can make the journal entry from the sales invoice and post to ledger accounts.

Remind the recordkeeper to make his/her journal entry from the sales invoice and post to ledger accounts. The recordkeeper records this transaction with same accounts and units as the rest of the class, but the cost per unit will be different. The journal entry is given in the recordkeeper’s instructions.

Recordkeeper's journal entry is: Accounts Receivable-Buttermilk Mountain (20 boards * $200) Cost of Goods Sold (20 boards x $105.56*) Sales Inventory *

100 -15 +5

10,000 -1,500 +1,000

Subtotal

90

9,500

4,000 2,111 4,000 2,111

or $105.56 each.

Comparisons: Now we need to compare the auditors’ ending balance in the inventory account and operating profit for the period to these same items in Aspen's records.

Tell the auditors to make their calculations now and tell the recordkeeper to make his/her calculations. Students’ records are correct as follows.

Students' ending inventory balance is 75 boards for $7,500.

Students' operating profit is: Sales CGS Operating profit

$7,000 -3,500 $3,500

Aspen's ending inventory balance, both units and dollars, is 70 boards at $7,389.

Aspen's operating profit for the period, is as follows: Sales $7,000 CGS -3,611 Operating profit $3,389 Questions to ask class at end of Round #2: 1.

Why is the Aspen's inventory balance 5 boards less than the auditors’?

After discussing for a while, ask the recordkeeper to put his/her receiving report and journal entry for the purchase of the snowboards on the board and his entry for the last sale (to Buttermilk).

2.

Why did the Manager show only 5 snowboards on the receiving report? What did he/she do with the 5 snowboards?

The manager had to be more creative this round since he/she has the recordkeeper to deal with.

Remember in round #1, he/she could make any journal entries he/she wanted to. In this round, to cover himself/herself, the manager has to do something to the receiving report.

3.

Why is Aspen Ski Equipment Co.'s operating profit less than the auditors’?

Because on the last sale, Aspen's cost per unit is higher ($105.56) than the auditors’ ($100) due to the one purchase being recorded as 5 units instead of 10.

4.

How would this loss be discovered?

Point out that having some controls may not be any better than having no controls at all.

ROUND #3 The purpose of this round is to demonstrate how losses can be prevented with adequate internal controls.

In this third round, Aspen Ski Equipment has adequate segregation of duties and an appropriate number of internal documents.

A new employee has responsibility for authorizing all transactions. The manager has responsibility for custody of assets. The recordkeeper performs all recordkeeping.

Also, Aspen Ski Equipment has a purchase order form now. This document is in addition to the sales invoice form and receiving report it had in round 2.

We will have five players in this round: 1.

The manager of Aspen Ski Equipment Co.

2.

The recordkeeper for Aspen Ski Equipment Co.

3.

The employee who authorizes transactions for Aspen Ski Equipment Co.

4.

Two customers–Snowmass Village and Buttermilk Mountain

Move manager, recordkeeper, and authorizer to the front of the class. Put a place card in front of the authorizer.

Give instructions to all six players.

Again, students, you are auditors and maintain your own records to compare with Aspen Ski Equipment’s records.

The beginning balance of Aspen Ski Equipment Co's snowboard inventory is 100 boards @ $100 each, or $10,000.

Write on board:

Snowboard Inventory (100) $10,000

Tell each student to write down this t-account because he/she will be recording transactions. Include units as well as the dollar amount.

In this round, Aspen is going to have the same three transactions it had in rounds 1 and 2: A sale to Snowmass Village - 15 snowboards A purchase from Snowboard Manufacturing Co. - 10 snowboards A sale to Buttermilk Mountain - 20 snowboards Sale to Snowmass Village: First, Aspen makes a sale to Snowmass Village for 15 snowboards.

Have the Snowmass Village customer come up and fill in his/her purchase order for 15 boards.

Manager, you make a hard copy of the sales invoice and give it to the authorizer. The authorizer initials the sales invoice to indicate approval to make the credit sale to Snowmass. The authorizer has made a credit investigation and made a decision about Snowmass' credit worthiness.

Manager, mark on the sales invoice that you shipped the goods today. Then hand this sales invoice to the recordkeeper so he/she can make the journal entry from the sales invoice and post to ledger accounts.

You fill in sales invoice as the auditors think it should appear.

Students you can now: (1)) make the journal entry for this transaction, using the sales invoice as the source document (2) post to ledger accounts The auditors’ journal entry should be as follows: Accounts Receivable-Snowmass Village (15 boards * $200) Cost of Goods Sold (15 units * $100) Sales Inventory

3,000 1,500 3,000 1,500

Be sure the recordkeeper records this transaction just as the auditors did.

Purchase from Snowboard Manufacturing Co.: Now Aspen is going to purchase 10 snowboards from Snowboard Manufacturing Company on account for $100 each.

Here are the steps Aspen now takes for a purchase transaction. As I go over these steps, the employees of Aspen can take the appropriate action.

The manager fills out one of Aspen's PO for 10 units and puts no cost figures on the PO. Wait for Manager to do this.

Manager gives PO to the authorizer for authorization. Authorizer initials PO to indicate that it is all right for the manager to make the purchase. No company can allow all employees to make purchases.

The authorizer gives the PO back to the manager. Wait for manager and authorizer to finish.

Manager mails the PO to the vendor and gives a copy to the recordkeeper. Wait for manager and vendor to finish.

Assume the 10 boards have been received from the vendor. Manager completes a receiving report and gives it to the recordkeeper. Wait for manager to finish.

You fill in the receiving report as the auditors think it would appear.

Recordkeeper, you need to locate your copy of the purchase order for the 10 snowboards and compare the purchase order to the receiving report. If you are satisfied that everything looks all right and you have all the information you need, you can record the transaction and post to ledger accounts.

Auditors, you can now: (1) make journal entry on the board

(2) post to ledger accounts Students’ journal entry should be: Inventory (10 boards * $100) Accounts Payable

1,000 1,000

Be sure the recordkeeper makes a journal entry just like the auditors'.

Sale to Buttermilk Mountain: Next, Aspen makes a sale of 20 snowboards to Buttermilk Mountain.

Have the Buttermilk Mountain customer come up and fill in his/her purchase order for 20 snowboards.

Manager, you now make a hard copy of the sales invoice and give it to the authorizer for authorization.

Authorizer initials the sales invoice.

Manager, hand the sales invoice to the recordkeeper so he/she make the journal entry from the sales invoice and post to ledger accounts.

You fill in the sales invoice on blackboard as the auditors think it should appear.

Auditors you can now: (1) make journal entry for this transaction (2) post to ledger accounts Students’ journal entry should be as follows: Accounts Receivable-Buttermilk Mountain (20 boards * $200) Cost of Goods Sold (20 boards * $100) Sales Inventory

4,000 2,000 4,000 2,000

Be sure the recordkeeper records this transaction just as the auditors did.

Comparisons: Now we need to compare the auditors’ ending balance in the inventory account, both units and dollar amount, and the operating profit for the period to these same items in Aspen's records.

Tell the auditors to make their calculations now and tell the recordkeeper to make his/her calculations.

The auditors’ and Aspen’s records should agree this time.

Ending inventory balance is 75 boards for $7,500.

Operating profit is: Sales CGS Operating profit

$7,000 -3,500 $3,500

Questions to ask at the end of Round #3:

1.

When the recordkeeper made the journal entry for the purchase transaction, what important information did he/she look for?

The recordkeeper had to be sure that the authorizer had initialed the PO and had to make sure the PO and the receiving report agreed.

2.

Why did your records and Aspen's records agree for this round?

3.

What do you think about all the additional steps that had to be taken in round #3 versus the steps taken in rounds #1 and #2?

MANAGER'S INSTRUCTIONS FOR ROUND #1

You perform all the recordkeeping for Aspen Ski Equipment Co as well as authorize transactions and maintain custody of assets. You will do the recordkeeping at your seat (instructor will move you to the front of the class) on paper that only you can see.

Aspen starts out this accounting period with 100 snowboards in inventory at a total cost of $10,000. Show these amounts in a t-account as follows:

Snowboard Inventory (100) $10,000

Sale to Snowmass Village: Make Aspen Ski Equipment's journal entry for the sale of 15 boards to Snowmass using the data in Snowmass' purchase order. Your entry should be as follows: Accounts Receivable-Snowmass Village (15 boards * $200) Cost of Goods Sold (15 boards * $100) Sales Inventory Post to ledger accounts.

3,000 1,500 3,000 1,500

Purchase from Snowboard Manufacturing Co.: Make Aspen's journal entry for the purchase of 10 boards from Snowboard Manufacturing Co. You are stealing 5 boards and are hiding the theft by debiting cost of goods sold for the 5 boards you are stealing.

You record the transaction as follows: Cost of Goods Sold (5 boards * $100) Inventory (5 boards * $100) Accounts Payable (10 boards * $100) Be sure to post to ledger accounts.

500 500 1,000

Sale to Buttermilk Mountain: Record the journal entry for the sale of 20 boards to Buttermilk Mountain. Your journal entry should be as follows: Accounts Receivable-Buttermilk Mountain (20 boards * $200) Cost of Goods Sold (20 boards * $100) 2,000 Sales Inventory

4,000

Comparisons: Calculate Aspen's ending balance of inventory. It should be 70 boards for $7,000.

Calculate Aspen's operating profit. It should be: Sales CGS Operating profit

$7,000 -4,000 $3,000

4,000 2,000

MANAGER'S INSTRUCTIONS FOR ROUND #2 You have responsibility for authorizing transactions and maintaining custody of assets.

You no longer make journal entries because now Aspen Ski Equipment Co. has a recordkeeper.

Sale to Snowmass Village: Complete a sales invoice for 15 boards with a selling price of $200 and give it to the recordkeeper.

Purchase from Snowboard Manufacturing Co.: Complete a receiving report for the purchase of 5 boards and write in a total cost of $1,000 and give the receiving report to the recordkeeper. This report shows 5 snowboards, even though Aspen purchased 10, at a cost of $1,000. You stole 5 snowboards.

Sale to Buttermilk Mountain: Complete a sales invoice for 20 boards with a unit selling price of $200 and give it to recordkeeper.

RECORDKEEPER'S INSTRUCTIONS FOR ROUND #2 You perform all the recordkeeping for Aspen Ski Equipment Co. You will do the recordkeeping at your seat (instructor will move you to the front of the room) on paper that only you can see.

You start out with 100 snowboards in inventory at a total cost of $10,000. Show these in a t-account in your records as follows:

Snowboard Inventory (100) $10,000

Sale to Snowmass: When the manager gives you a sales invoice for Snowmass, make the following journal entry from the sales invoice and post to the ledger accounts: Accounts Receivable-Snowmass Village (15 boards * $200) Cost of Goods Sold (15 boards * $100) Sales Inventory

3,000 1,500 3,000 1,500

Post to ledger accounts.

Purchase from Snowboard Manufacturing Co.: Next, you will receive from the manager a receiving report for the receipt of 5 snowboards that he/she purchased. Make your journal entry from this receiving report.

Your entry should be as follows: Inventory (5 boards) 1,000 Accounts Payable

1,000

Post to the ledger accounts.

Sale to Buttermilk Mountain: When the manager gives you a sales invoice for Buttermilk, make the following journal entry from the sales invoice and post to the ledger accounts: Accounts Receivable-Buttermilk Mountain (20 boards * $200) 4,000 Cost of Goods Sold (20 boards * $105.56) 2,111 Sales

4,000

Inventory

2,111

Post to the ledger accounts.

Comparisons: Finally, calculate Aspen's ending inventory balance, both units and dollars. It should be 70 boards at $7,389.

Also calculate Aspen's operating profit for the period, which should be as follows: Sales $7,000 CGS -3,611 Operating profit $3,389

MANAGER'S INSTRUCTIONS FOR ROUND #3 You have responsibility for custody of assets. Aspen Ski Equipment Co. still has a recordkeeper and now has an employee to authorize transactions.

Sale to Snowmass Village: Complete a sales invoice and give it to the authorizer for authorization. Then, give the sales invoice to the recordkeeper.

Purchase from Snowboard Manufacturing Co.: Complete a purchase order for 10 snowboards from Snowboard Manufacturing Co. Give the PO to the authorizer for authorization. The authorizer will give the PO back to you.

Assume you have mailed a copy of the PO to the vendor. Give your copy to the recordkeeper.

Complete a receiving report for the purchase of 10 snowboards and give the receiving report to the recordkeeper.

Sale to Buttermilk Mountain: Complete a sales invoice and give it to the authorizer for authorization. Then, give the sales invoice to the recordkeeper.

AUTHORIZER'S INSTRUCTIONS FOR ROUND #3 Your responsibility is to authorize all transactions for Aspen Ski Equipment Co. Sale to Snowmass Village: You will authorize the sales invoice for Snowmass that the manager gives you by initialing it. Give the sales invoice back to the manager.

Purchase from Snowboard Manufacturing Co.: You will authorize the PO to Snowboard Manufacturing Co. that the manager gives you by initialing it.

Give the PO back to the manager.

Sale to Buttermilk Mountain: You will authorize the sales invoice for Buttermilk that the manager gives you by initialing it. Give the sales invoice back to the manager.

RECORDKEEPER'S INSTRUCTIONS FOR ROUND #3 You perform all the recordkeeping for Aspen Ski Equipment Co. You will do the recordkeeping at your seat (instructor will move you to the front of the room) on paper that only you can see.

You start out with 100 snowboards in inventory at a total cost of $10,000. Show these in a t-account in your records as follows:

Snowboard Inventory (100) $10,000

Sale to Snowmass Village: When the manager gives you a sales invoice for Snowmass, make the following journal entry from the sales invoice and post to ledger accounts: Accounts Receivable-Snowmass Village (15 boards * $200) 3,000 Cost of Goods Sold (15 units * $100) 1,500 Sales 3,000 Inventory 1,500 Purchase from Snowboard Manufacturing Co.: After the manager has given you both the purchase order and the receiving report for the purchase of 10 snowboards, make the following journal entry from the two documents and post to the ledger accounts: Inventory (10 boards * $100) Accounts Payable

1,000 1,000

Sale to Buttermilk Mountain: When the manager gives you a sales invoice for Buttermilk, make the following journal entry from the sales invoice and post to the ledger accounts: Accounts Receivable-Highlands Mountain (20 boards * $200) Cost of Goods Sold (20 boards * $100) Sales Inventory

Comparisons:

4,000 2,000 4,000 2,000

Finally, calculate your ending inventory balance, both units and dollars. This should be 75 boards at $7,500.

Also calculate your operating profit for the period, which is as follows: Sales $7,000 CGS -3,500 Operating profit $3,500

Purchase Order Date: P. O. Number: This number must appear on all invoices, packages, and correspondence.

Vendor:

Our P. R. No.:

Ship to above address.

Please inform us immediately if unable to fill this order now.

VENDOR CODE

PLACED BY

DATE EXPECTED

SHIP VIA

F.O.B.

TERMS 2/10, Net 30

PRODUCT NO.

QUANTITY

S.K.U.

DESCRIPTION

UNIT PRICE

DISCOUNT

SUBTOTAL SALES TAX RATE % SALES TAX SHIPPING & HANDLING TOTAL DUE IMPORTANT INSTRUCTIONS & TERMS OF THIS PURCHASE ORDER 1. Enclose invoice copy or packing list in all shipments.

2. Incomplete or partial shipments will be accepted. Place shorts on back order and notify immediately of anticipated in-stock date. Purchaser reserves the right to cancel unfilled items at any time prior to receipt by notifying vendor.

3. Vendor will be responsible for extra freight cost on partial shipment unless prior permission is obtained.

PURCHASING AGENT

EXTENDED AMOUNT

Invoice Invoice Number: Date: Customer No.

Bill to:

Ship to (if different address):

SALESPERSON

CUSTOMER P.O. NO.

OUR S.O. NO.

PRODUCT NO.

QUANTITY

S.K.U.

S.O. DATE

DATE SHIPPED

SHIPPED VIA

DESCRIPTION

F.O.B.

UNIT PRICE

DISCOUNT

SUBTOTAL SALES TAX RATE % SALES TAX SHIPPING & HANDLING TOTAL DUE

THANK YOU FOR YOUR ORDER!

TERMS

EXTENDED AMOUNT

RECEIVING REPORT Aspen Ski Equipment Co.

Report No. Date:

Purchase Order No. Received From Address ITEM NO.

QUANTITY

1 2 3 4 5 6 7 8 9 10 11 12 REMARKS: CONDITION OF ITEMS, ETC.

RECEIVED BY:

DESCRIPTION

Assignment Over In-Class Internal Control Activity Students will answer these questions over the internal control activity in a variety of ways with no one answer being correct. The instructor should use his/her own discretion in grading the quality of the answers.

Chapter 7 Control Activities and Monitoring INTRODUCTORY SCENARIO: SUGGESTED SOLUTIONS TO QUESTIONS 1.

2.

Rotate the duties of the clerks periodically, maintain better control over the returned checks (e.g., have all paperwork mailed directly from the bank to the accounting department, including returned checks). All deposit slips should be prenumbered and audited periodically to make sure all are accounted for and have not been altered. The clerk running to the bank should not be allowed to prepare the deposit slips. Proper review of all deposits should be made by whoever is reconciling the bank account (this should be someone other than the clerks involved with preparing the deposits and delivering them to the bank).

Proper oversight of the deposits by a manager. Periodic reconciliation of the bank account by someone in another area. All paperwork from the bank (statements, returned checks and other correspondence) should be mailed from the bank directly to someone in an oversight position in the accounting department.

VIGNETTES: SUGGESTED SOLUTIONS TO QUESTIONS Vignette 7.1 1. Henry should not have had record-keeping, authorization, and custody of the pledges and contributions. Pledge checks and cash should have been verified by two people prior to the deposit being prepared. The reconciliation of the account should have been done by someone other than Henry, and a periodic audit of the cash accounts should have been done by an auditor. Because there was not a strong control system in place, Henry should have admitted his mistake up front so the donors could be contacted and “stop payments” put on the checks so they could be reissued.

2. Dual control verification of contributions, regular audits of the cash account, separation of the counting, depositing, recording and reconciliation of the accounts.

Vignette 7.2 1. It is recommended that the backup copies be tested to make sure they are readable. The retention periods appear to be adequate, but the backup disks physically need to be replaced periodically (rather than reused over and over again).

2. Backup copies should be adequately maintained and tested to make sure they are useable. It might also be advisable to keep some records indefinitely, depending on whether there is information that might be needed for tax or insurance purposes.

Vignette 7.3 1. The backups should be tested regularly to make sure they are useable. The disaster recovery plan should include more than just data recovery, as seen by the destruction of the information services facility. Obviously, key personnel should not have flown on the same plane (if possible).

2. Rehearse procedures in the event of a disaster (so that it becomes second nature to the employees), making sure that everyone knows what their roles are in a disaster, know your office of emergency management contacts, have telecommuting procedures in place. Business continuity planning should include all areas of the business, not just IT.

Vignette 7.4 1. Control strengths include the verification controls (Hyasi must verify amounts on purchase requisition and key in authorization code), reasonableness checks (e.g., rejecting the quantities greater than 10 when the price was more than $1000), log for exceptions regularly reviewed by auditor, Hyasi protects his authorization code.

2. Suggested control activity recommendations: require authorized signatures on requisitions, put policies in place for authorization, make sure purchasing employees have “read only” access to purchase requisitions, any changes to purchase requisitions should be authorized and a new/corrected requisition issued.

SOLUTIONS TO DISCUSSION QUESTIONS AND PROBLEMS

1.

D

2.

D

3.

B

4.

D

5.

A

6.

B

7.

A

8.

B

9.

A

10.

C

11.

C

12.

A

13.

A

14.

Responses to which control concepts relate to which control activities may vary. The following suggestions should be helpful: a.

Isolation b.

Assistance c.

Comparison, accountability d.

Oversight e.

Isolation, oversight, accountability, assistance f.

Isolation, redundancy g.

Comparison h.

Redundancy, assistance i.

Redundancy, comparison j.

Redundancy, comparison, oversight, assistance k.

Accountability l.

Isolation

15.

The correct number of documents are in the batch, but the composition of the batch cannot be reconciled with the data on the transmittal ticket. The hash total of the account codes appearing in the transaction log is 17,742 (compared with 17,301 on the transmittal ticket), and the dollar control total is $89,935 (compared with $103,090). Examination of the transaction log indicates that document #255 appears two times while document #256 is missing. Probably this was a data entry error. Assuming no other error was introduced after preparation of the batch transmittal ticket, the missing document, #256, described a transaction affecting account code 1996 with an amount of $16,100; these values (17,7422,437+1,996=17,301 and $89,935-2,945+16,100=$103,090) would provide the correct batch totals.

16.

Several programmed controls need to be implemented in the sales system. A unique number should be assigned to all transactions at the time of entry. The invoice number generally is used for the reference number. Point-of-entry edit checks are needed to reduce the likelihood of invalid or erroneous data entry.

More extensive edit checks can be performed after the data are written to the transaction file. Edit checks could include tests of data element existence, data element type, length of data element, account codes, numerical sign, reasonableness, and completeness of transactions. Account code validation should be performed using check digits, or complete verification could be done by a table look-up. An edit listing of all transactions should be prepared at least daily for manual verification and supervisor approval. Frequent backup of the transaction file is needed to protect against equipment malfunction.

Some means must be found to compensate for the lack of documents. A small printer could produce a hard-copy record of sales transactions in case of loss of data before the transaction file is copied. Such a printer might be attached to the input terminal to copy the transaction from the screen after each sale has been entered. In particularly sensitive situations, it might be necessary to capture transactions simultaneously on two storage devices, say, magnetic disk and magnetic tape.

17.

All organizations, including Lathan Industries, should develop budgets to control operations. But the degree of emphasis on budget conformity varies from one organization to another. A "bottom-line" company–whose major preoccupation is with profits–typically attaches more importance to meeting the budget than to other aspects of management control, such as enforcing internal control compliance or meeting product quality standards.

The budget provides a set of short-term, financial targets which managers throughout the organization are expected to attain. Faced with a performance evaluation system based on budget conformity, managers recognize this priority and try to respond accordingly. Formal incentives, such as bonuses, provide additional motivation to do so. Emphasis on budget conformity is a necessary control activity, imposing a proper discipline on organizational behavior.

On the other hand, excessive emphasis on meeting the budget could communicate a message that upper management considers other ideals, such as conformity with ethical or legal standards or compliance with other control activities, to be less important and possibly to be dispensable. Even if lower-level managers avoid unethical or illegal acts, they may be forced into other types of dysfunctional behavior. Most managers try to behave functionally--that is, in a way that upper management would approve of--but excessive pressure can cause them to do otherwise. For example, a sales manager may allow credit to be extended to poor credit risks to increase sales. Or a production manager may lower quality standards to increase output. Other managers may cut corners in discretionary expenditures, such as repairs and maintenance, advertising, or research and development, in an attempt to conform to an expense budget.

Such behavior may temporarily relieve pressure on the managers, but it may be disastrous in the long term.

Budget conformity helps an organization achieve satisfactory profits, but profits cannot be guaranteed no matter how much emphasis is given to budget conformity. Furthermore, short-term profits do not guarantee long-term survival and growth. Even--or perhaps especially--a bottom-line company should recognize the importance of internal control. Lathan Industries would be wise to balance the ideal of budget conformity with the need to generate short- and long-term profits and to recognize the role that effective control activities can play in achieving both.

18.

The four areas of vulnerability in Aidbart Company's new distributed processing system are hardware, software, people, and the computer network. Risk exposures for these areas and the degrees of exposure are shown on the next page.

Area of Vulnerability

Risk Exposures

Degree of Risk

Hardware

The computer hardware could be damaged due to such occurrences as fires, floods, power outages, or malicious acts.

Overall, the exposure to these risks is moderate. Although the equipment has a high value, the likelihood of fires and other occurrences is relatively slight.

Software

Unauthorized changes could be made to the software, thereby adversely affecting its reliability and efficiency or creating an undesirable benefit (such as fraudulent appropriation of funds by some perpetrator).

Overall, the exposure to these risks is moderate. Although the effects of changes could be costly to the firm, only a relatively few persons possess the programming skills needed to make changes.

People

Unauthorized employees and other persons could gain access to confidential data.

Overall, the exposure to this risk is great, since numerous people would have the opportunity to use the workstations Furthermore, these people could possibly create great losses, for example, by eliminating the balances due from customers.

Computer Network

Data could be intercepted (tapped) as messages are transmitted over the computer network.

Overall, the exposure to this risk is moderate. While the interception of confidential market plans and financial results could be costly, much of these data are not transmitted and, thus, are not subject to interception. Also, relatively few persons have the skill and equipment to perform taps.

[CMA adapted]

19.

The main emphasis for controls at First National Bank would be on minimizing downtime and ensuring the security and the accuracy of the data. Many banks have dual processing systems where the two control processors ordinarily share the work load, but where one processor can, if necessary, service all the personal computers. Frequent backup of secondary storage would be needed, probably two times a day. If a database system is used (as is likely), transactions should be logged on magnetic tape to furnish an audit trail and also to provide a means of reconstructing the data base in the event of a system crash. Backup copies of the data base and the transaction log tapes should be stored off-site.

All remote terminals should be individually locked and an effective system of passwords and user identification codes incorporated to control electronic access. The usual controls relating to physical access to the central computer room would apply. A comprehensive system of menus and input prompts should be incorporated to reduce teller training time and to cut down on input errors. Record lockout would be required to protect against simultaneous access to the same customer record from two or more terminals.

The main burden of error detection in a real-time system falls on the input controls. Adequate point-ofentry controls should be incorporated, including verification of account-number/name consistency.

Withdrawal transactions should require automatic checking of the customer's balance. Each transaction should be recorded on a hard-copy source document as well as be keyed into the terminal; alternatively, a hard-copy record could be generated automatically at the time of entry. One copy of the source document should be given to the customer and another copy retained for independent reconciliation at least two times a day with an edit listing of all transactions made. Frequent audits should be performed by the internal audit staff in which sampled account balances are reconciled with source documents and transaction logs.

20.

The file maintenance procedure in the small business has a major control weakness. File maintenance programs should never provide for editing of amount fields, at least not those involved in a posting process, despite what may be stated in the user documentation. Even if all necessary care is taken, further errors can easily be made. Moreover, the audit trail is destroyed. Errors in account balances should be corrected by input and posting of reversing entries followed by input and posting of the correct transaction.

The ability to run the file maintenance program by any user represents a further control weakness. File maintenance is a sensitive operation, and it should be restricted to a designated user and should be protected by the granting or withholding of user rights. The lack of a permanent log or hard-copy change listing makes the matter worse. Anyone could make changes to a file, process data, and then reverse the changes. By this means, irregularities could be perpetrated on a regular basis with little possibility of detection. Statements by employees that they are scared to touch the files should not be accepted as evidence that irregularities will not occur.

Even if there is no possibility that the system can be changed, the risks can be reduced to some degree by compensating control activities. Operating procedures can be developed restricting use of the file maintenance program to the editing of character fields and requiring that a paper log be kept of all changes.

Periodic independent review of file listings could be made to ensure that all changes have been documented. The file maintenance program should be loaded onto the system each time it is required and then purged from secondary storage to prevent unauthorized use by other employees.

21. a.

Therion Company should have had control activities to prevent the disclosure of the passwords. The most effective measure would have been to have the password file read-protected. Many organizations store the password file in encrypted form, which makes it virtually impossible to read even if the file should be accessed. Also, the password file itself should be protected by a high-level password and should be accessible only through a designated personal computer or by submittal of a designated operator identification number. In any case, a log should automatically be maintained indicating who accessed a file, at what time, and from which personal computer.

Closer supervision would have made it difficult for the data entry clerk to spend an hour copying the contents of the file from the screen. It is not clear whether the clerk had a previous record of information theft. If she had, the hiring process was defective.

21. b.

Therion Company also should have had control activities to prevent the exploitation of the password disclosure. Passwords should have been routinely changed, perhaps every month, to prevent exploitation of any illicit dissemination. If this had been done, MacGregor would never have been able to carry on its intelligence work over a two-year period. Improved file controls would have made it impossible for the competitor to make changes to the files without detection. Access logs should have captured all attempts to access the files, and routine review of these logs should have triggered an immediate investigation. Crossbalancing of one file against another, which should have been another routine procedure, would also have disclosed file tampering. Therion's managers must have been negligent not to investigate the causes of their faulty decisions. They must have had little feel for how the company was doing or for the general flavor of the data in the accounting reports.

21. c.

Therion Company should have ensured that the situation could never have been concealed. The conspiracy between the manager and the assistant manager of the information services department succeeded in covering up the incidents that occurred. Such a conspiracy would circumvent certain types of administrative controls. But the raise given to the assistant manager should have provoked some questions from upper management unless the size of the raise could be justified on other grounds. Unexpected and unscheduled requests for raises should always provoke at least an informal investigation. Senior management should have interviewed both individuals to gain more information. Presumably, if the raise could have been justified on other grounds, it would not have been so effective in buying the assistant manager's silence.

22.

The types of fraud and control activities are presented in the table on the next page.

Type of Fraud Computer Virus

Attempted Unauthorized Access

Theft or Destruction of Computing Resources

Destruction of Data

23. a.

Control Activities Build firewalls in networks.

Deny employees use of bulletin boards.

Prohibit employees from downloading program files Run virus scan programs frequently to scan hard disks Classify data to isolate confidential data.

Require user authentication.

Develop a password system to access files.

Grant rights to files only to certain users.

Encrypt transmitted messages.

Encrypt password file.

Use fiber optic cable for communication channels.

Require callback devices for dial-in users.

Install automatic log-off capabilities for workstations.

The devices and measures listed below should be placed where computer hardware is located and should extend to off-site storage locations and vaults used for archive storage of back-up files.

Smoke detectors Water detectors Fire suppression devices Burglar alarms Surveillance cameras Individual locks Security personnel Immediately deny terminated employees access to all computer equipment and data to prevent their ability to destroy or alter equipment or data.

Most of the control activities that are appropriate to prevent theft or destruction of computing resources Additional control activities are as follows: Make regular backup files and store at secure off-site Encrypt stored data.

Use uninterruptible power supplies.

Use a database management system with an automatic rollback feature.

Instigate rotation/replacement of backup media Regularly test processes to restore data to determine restored data is readable.

Limit access to back-up data and to offsite facility

The computer security weaknesses present at Gleicken Corporation that made it possible for a disastrous data loss to occur include the following: •

The information processing facility was housed in a building with exposed wooden beams and a woodshingled exterior instead of one constructed of fire retardant materials.

•

There was no sprinkler system or a fire suppression system under a raised floor, and there were no fire doors.

•

Only weekly tape backups were made of the system. Backups, with checkpoints and restarts, should be performed at least daily. Backup files should be retained at a secure off-site storage location.

•

Data and programs should have been kept in a library separate from the information processing room, with the library area constructed of fire retardant materials.

There was no written disaster recovery plan with arrangements in place to use an alternate off-site computer center in the event of a disaster or an extended service interruption.

•

23. b.

•

A phone list of information services personnel existed but without assigned responsibilities as to actions to be taken when needed.

•

Complete systems documentation was not stored outside the information processing area.

The components that should have been included in the disaster recovery plan at Gleicken Corporation to ensure computer recovery within 72 hours include the following: •

A written disaster recovery plan should be developed with review and approval by senior management, data processing management, end user management, and internal audit.

•

Backup data and programs should be stored at an off-site location that will be quickly accessible in an emergency.

•

The disaster recovery team should be organized. Select the disaster recovery manager, identify the tasks, segregate into teams, develop an organization chart for disaster procedures, match personnel to team skills and functions, and assign duties and responsibilities to each member.

•

The duties and responsibilities of the recovery team include: - Obtaining use of a previously arranged alternate data processing facility; activating the backup system and network - Retrieving backup data files and programs, restoring programs and data, processing critical applications, and reconstructing data entered into the system subsequent to latest saved backup/restart point

23. c.

Factors, other than those included in the disaster recovery plan itself, that should be considered when formulating the plan include the following: •

Arranging business interruption insurance in addition to liability insurance

•

Ensuring that all systems and operations documentation is kept up to date and is easily accessible for use in case of a disaster

•

Performing a risk/cost analysis to determine the level of expense that may be justified to obtain reasonable, as opposed to certain, assurance that recovery can be accomplished in 72 hours (for example, is the purchase of a duplicate hardware set-up at another location justified?)

[CMA adapted] 24.

One control weakness that allowed Joe Delano to carry out his acts lies in the company's hiring policies.

An individual with a criminal record should never have been hired as an applications developer with access to sensitive files. Second, a terminated employee in a sensitive area should never be given notice.

Immediately upon being fired, the person should be asked to return all keys, should be given the appropriate number of weeks' severance pay, and should be escorted to the gate by a security guard. Had such a procedure been used, Delano would never have been able to tamper with the data and programs and would have found it much more difficult to return to the plant in May. Aside from these considerations, there must have been serious lack of separation of duties for Delano to have been able to access the data files, program files, and documentation. Supervision must have been inadequate for Delano to have been able to spend his last two weeks modifying the software. The program

modifications described would have taken time to complete, and someone should have asked Joe what he was doing. Furthermore, applications should not have been released for routine operation until they had been tested and approved. In addition, the backup copies of the files should have been stored off-site.

Finally, physical security measures must have been lax if Delano could return to the plant after termination to damage and steal equipment. He may have made a copy of his key to the building, but entry to the computer facilities should be by means of a magnetic card or other device that cannot be copied.

Moreover, not even current employees in good standing should be allowed access to computer facilities without supervision or adequate security provisions.

Student Activity This activity is a baseball game that is played by the students in class. A game is based on a real-world situation.

Three cases have been prepared, and they are as follows: Abundant Life Church Cash Receipts System Baseball, Inc., Payroll System Bal Harbour Manufacturing Company Raw Materials and Purchasing System The approximate time to play a game, that is, one case, is 2 1/2 hours. The game can be easily played over two class periods. The break should be made after the students have studied the case and before you start playing baseball.

We recommend you play at least one game (case) in one semester but no more than two games. The students enjoy the game very much and are surprisingly competitive. We award inexpensive prizes to the winning team. One way to break a tie is to ask trivia questions to the teams who tied. Have them write down the answers, and then you can look at the answers to see if you have a winner.

Several materials are included to assist you in playing the game. They are as follows: Instructor’s Instructions for Baseball Game Students’ Instructions for Baseball Game Baseball Game Blackboard Layout Baseball Game–Scoring Sheet A narrative description, flowchart, and solution for each case

INSTRUCTOR'S INSTRUCTIONS FOR BASEBALL GAME

1. Randomly assign students to teams of 4-5 each. Students assigned to team #1 will be first at bat. Team 2 will be second at bat, etc. Try to keep at 4-5 teams. Avoid having an even number of teams because the same team will always be coming up with weaknesses or risks or recommendations. But you can get around this problem by starting the second round with team #2 instead of 1. Start the third round with team #3, etc. Do not play with only three teams. Unless one team gets a strike, which is unlikely, all will have the same score.

2. Distribute the flowchart and narrative description of the case you decide to use to each team. Give students 45 minutes to analyze the case with their team members. Tell students this problem is a past CPA exam question but with flowchart only, no narrative documentation.

3. Distribute to each team (or have students locate in their packets) one copy of the students' instructions and go over instructions with them. Explain that the team spokesperson is the only team member allowed to speak during the game and once having served as a spokesperson will be ineligible to do so for future games.

4. Explain that each weakness has been assigned a number of bases from one to a home run depending on its severity. The attendant risk and recommendation are assigned the same number of bases as the weakness. The members of the winning team (the team with the most runs) will get a prize. To break a tie, the team with a batter closest to home plate is the winner or Trivial Pursuit questions can be used.

5. Have the teams begin working and make a note of when 45 minutes will be up.

6. Draw a softball diamond on the board for each team. See the copy of the blackboard layout that is placed after the students’ instructions.

7. After the 45 minutes are up, select one person to be the scorekeeper who is not already serving as a spokesperson.

Select a person from another team who is not a spokesperson and who is sitting on the front row to be the score auditor. Have scorekeeper stand at the board. The auditor can sit on the first row with his/her team.

8. Ask each team for its name and have the scorekeeper write the name on top of the team's diamond.

9. Explain that the first team at bat will identify an internal control weakness. The response must be specific and identify only one weakness. The second team will identify a risk/result, that is, the loss or damage, that may result because of the weakness identified by the first team. The third team will make a recommendation to overcome the internal control weakness. Give an example of a weakness, risk, recommendation because students may have difficulty expressing each. For example, a weakness is that vendors are not approved. The risk is that a fictitious vendor could be paid. The recommendation to correct this weakness is to have someone, perhaps the credit manager, investigate the authenticity of all new vendors.

The team spokesman must answer in 30 seconds or the team gets a strike. The team may ask for, and get, a 30second conference.

(Instructor’s Instructions continue on next page.)

(Instructor’s Instruction’s Continued)

Playing the Game 1. Start the game by asking the first team at bat to identify an internal control weakness. The team has 30 seconds to answer. Show the bases earned by marking them on the team’s diamond. If the team does not identify a weakness, it gets a strike.

2. Ask the second team at bat to identify the risk/result for the control weakness identified by the previous team at bat. If correct, the team gets the same number of bases as the team that identified the weakness.

3. Ask the third team at bat to make a recommendation for the internal control weakness. If correct, the team gets the same number of bases as the team that identified the weakness.

4. Start the process over with the fourth team at bat, e.g., identify a weakness, etc. If you have an even number of teams, then after each team has participated, you will need to start with the second team instead of the first team to avoid the problem of a team always coming up with, for example, weaknesses.

STUDENTS' INSTRUCTIONS FOR BASEBALL GAME Teams will be given 45 minutes to: A. Come up with a team name B. Identify a team spokesperson C. Study the case, identify, and list: 1. Weaknesses in internal control. Be very specific about the weaknesses and list each one separately. Rank the weaknesses in order of severity, that is, the amount of loss the company could suffer because of the weakness.

2. Risk, or result, associated with each weakness 3. Recommendation for overcoming each internal control weakness You might want to use the following format for your list: Weakness

Risk/ Result

Recommendation

The spokesperson is the only one who can speak for the team. However, teams are allowed a 30-second “team conference” if necessary.

Write team members’ names on your list of weaknesses, risks, recommendations, and turn in the list at the end of class.

BLACKBOARD LAYOUT

BASEBALL GAME BOARD LAYOUT

TEAM #1

TEAM #2

TEAM NAME: _______

TEAM #3

TEAM NAME: _______

TEAM NAME: _______

2ND 2ND

3RD

2ND

1ST

3RD

HOME

1ST

3RD

1ST

HOME

HOME

RUNS:

RUNS:

RUNS:

STRIKES:

STRIKES:

STRIKES:

NOTE: MAKE ONE DIAMOND FOR EACH TEAM. THE ABOVE LAYOUT IS, OBVIOUSLY, FOR THREE TEAMS. MARK BASE RUNNERS OUTSIDE DIAMOND SO CAN ERASE THEM EASILY.

BASEBALL GAME - SCORING SHEET WEAKNESS

TEAM #

RISK/RESULT

BASES

TEAM #

BASES

RECOMMENDATION

TEAM #

BASES

ROUND 1 ROUND 2 ROUND 3 ROUND 4 ROUND 5 ROUND 6 ROUND 7 ROUND 8 ROUND 9 ROUND 10 ROUND 11

FINAL SCORE: TEAM #1 # RUNS BASES WITH PLAYERS

TEAM #2

TEAM #3

TEAM #4

TEAM #5

TEAM #6

TEAM #7

CASE FOR BASEBALL GAME ON INTERNAL CONTROLS ABUNDANT LIFE CHURCH CASH RECEIPTS SYSTEM You have been asked by the board of trustees of Abundant Life Church to review its internal controls. As a part of this review, you have prepared the following comments relating to the collections made at weekly services and the recordkeeping for members’ pledges and contributions.

The church’s board of trustees has delegated responsibility for financial management and audit of the financial records to the finance committee. This committee prepares the annual budget and approves major disbursements; however, the members of the committee are not involved in cash collections or recordkeeping. No audit has been considered necessary in recent years because the same trusted employee has kept church records and has served as financial secretary for fifteen years.

A team of ushers collects the contributions at the weekly service. The head usher counts the collections in the church office following each service and records the amount of the collections in the Collections Register. She then places the collections and the Collections Register in the church safe.

The next morning, the financial secretary opens the safe and recounts the collections. He withholds $100 to meet cash expenditures during the coming week and deposits the remainder of the collections in the bank. To facilitate the deposit, members who contribute by check are asked to draw their checks to “cash.”

If specifically requested by members, they are furnished prenumbered, predated envelopes in which to insert their weekly contributions. The head usher removes the cash from the envelopes so it can be counted with the loose cash included in the collection and discards the envelopes. No record is maintained of issuance or return of the envelopes, and the envelope system is not encouraged.

Each member is asked to prepare a contribution pledge card annually. The pledge is regarded as a moral commitment by the member to contribute a stated weekly amount. Based on the amounts shown on the pledge cards, the financial secretary furnishes a letter once a year to each member to support the tax deductibility of the member’s pledge.

Abundant Life Church Cash Receipts System

USHERS

HEAD USHER

From Ushers

Collect contributions at weekly service

Mem bers who pay by check are asked to draw checks payable to cash.

Cash and Checks

FINANCIAL SECRETARY

Church Safe

Cash and Checks

Cash and Checks

Take cash and checks to church office. Rem ove cash from envelopes.

Count collections and rem ove $100

To Head Usher

Envelopes

To Trash

Cash and Checks

Church Safe

Cash and Checks

$100 Cash

Deposit in Bank

Collections 1 Register

A Count cash and checks and record total am ount Pledge Cards

Prepare letters lis ting am ount pledged to support tax deductibility

Cash and Checks 2 Collections Register

Church Safe

Mem bers subm it annually Letters

To Mem bers

SOLUTION TO ABUNDANT LIFE CHURCH CASH RECEIPTS SYSTEM

Bases

Weakness

Risk/Result

Recommendation

Triple

Financial secretary exercises too much control over collections.

Can falsify records.

Financial secretary’s responsibilities should be confined to record keeping.

Single

Finance committee is not exercising its assigned responsibility for collections.

Poor control practices are allowed to develop.

Finance committee should assume a more active supervisory role.

Single

The auditing function has been assigned to the Finance committee, which also has responsibility for the administration of the cash function. Also, the finance committee has not performed the auditing function.

Poor control practices develop because there is no independent overview.

An auditing committee should be appointed to perform periodic auditing procedures or to engage outside auditors.

Home Run

The head usher has sole access to cash during the period of the count. One person should not be left alone with the cash until the amount has been recorded, or control has been established in some other way.

Cash could be taken unnoticed.

The number of counters should be increased to at least 2, and cash should remain under joint surveillance until counted and recorded so that any discrepancy will be brought to attention.

Single

The collection is vulnerable to robbery while it is being counted and transported from the church safe to its deposit in the bank.

Robbery

Deposit should be made as soon as possible after the count. Bolt the door during the count, increase the number of counters.

Triple

Head usher’s count lacks usefulness from a control standpoint because he surrenders custody of both cash and record of the count.

Someone can change the recorded count and take the cash.

Financial secretary should receive a copy of the collection report for posting to the financial records.

The head usher should maintain a copy for use by the audit committee.

Double

Contributions are not deposited intact. May not be accounted for properly.

Cash may be misappropriated.

Contributions should be deposited intact. Set up a petty cash fund with check replenishment for receipts.

Double

Members are asked to draw checks to “cash,” thus negotiable.

Anyone can cash.

Have checks payable to the church. At the count, endorse “For deposit only.”

Triple

The envelope system has not been encouraged.

No report to members.

Members can’t verify amount contributed.

Encourage prenumbered envelope system. Ushers tick amount posted on outside of envelope, which is used to post pledge card for later publication.

Double

Tax deduction statements made from pledged amounts.

Amounts misappropriated will not be discovered.

Tax deduction statements be made from amounts collected per envelopes.

Double

Deposit slip not reconciled to collections register.

Errors or misappropriations not discovered.

Finance committee reconcile deposit slips to collections register.

CASE FPR BASEBALL GAME ON INTERNAL CONTROLS BASEBALL, INC., PAYROLL SYSTEM Baseball, Inc., is a manufacturing company with 88 wage employees. Eight of these employees are foremen who supervise ten employees each. All 88 employees are paid weekly based on the clock card he/she submits at the end of each week.

At the beginning of the week when entering the gate, each wage employee picks up a clock card, writes his/her name on it, clocks the card in, and takes the card with him/her to the job site. When leaving the gate, the employee clocks the card out and puts the card in a card rack; the next day the same card is used to clock in again. At the end of the week each foreman picks up his/her employees’ cards from the rack, manually summarizes the cards into a report of regular and overtime hours, initials the cards, and sends the initialed cards to payroll clerk #2.

Payroll clerk #2 manually computes regular and overtime hours for each employee, records the hours on the employee’s clock card, then looks up that employee’s Updated Employee Payroll Data on a report supplied by the Personnel Department. Employment status is verified, along with wage rate and deductions. Payroll clerk #2 manually posts the hours, wage rates, and deductions to the Payroll Register. This clerk then files the clock cards by date and completes the Payroll Register by calculating gross and net payroll. The completed Payroll Register is then given to the bookkeeper.

The bookkeeper crossfoots the column totals on the Payroll Register, prepares sequentially numbered payroll checks, runs the checks through a signature machine, reconciles the checks to the register, and files the Payroll Register. The signed checks are given to payroll clerk #2.

Payroll clerk #2 pulls the initialed clock cards and verifies the regular and overtime hours shown on the payroll check stub before giving the payroll checks to payroll clerk #1.

Payroll clerk #1 verifies that the name and payroll numbers agree with the Updated Employee Payroll Data Report.

The checks are then given to the foremen for distribution to their employees.

Baseball, Inc., Payroll System Factory Em ployees

Factory Forem an

Payroll Clerk No. 2

Payroll Clerk No. 1

Bookkeeper A

Clock Cards

Clock Card

(Employ ees)

(Foreman) Initialed Clock Cards (Foreman)

Punch Clock Cards In and Out Daily

From Personnel

Punch Clock Cards In and Out Daily

(Employ ees)

Compute Regular and Ov ertime Hours and Record on Clock Cards Updated Employ ee Pay roll Data Collect All Clock Cards at End of Week

Initialed Clock Cards With Regular and Ov ertime Hours Recorded (Foreman) (Employ ees)

Check Employ ment Status, Wage Rate, and Pay roll Deductions and Partially Complete Pay roll Register

A

Clock Cards (Foreman) (Employ ees)

Initialed Clock Cards With Regular and Ov ertime Hours Recorded (Foreman) (Employ ees)

Rev iew and Initial Clock Cards and Prepare Summary of Regular and Ov ertime Hours

Compute Gross and Net Pay roll and Complete Pay roll Register

D

Initialed Clock Cards (Foreman)

Initialed Clock Cards With Regular and Ov ertime Hours Recorded (Foreman) (Employ ees)

(Employ ees)

Pay roll Register (partially completed)

Pay roll Register (completed)

Pay roll Register (completed)

A Crossf oot Column Totals, Prepare Sequentially Numbered Pay roll Checks, Af f ix Signature With Signature Stamp Machine, Reconcile Checks to Pay roll Register

Summary of Regular and Ov ertime Hours

D

Pay roll Checks (Foreman) (Employ ees)

Pay roll Checks (Employ ees)

Distribute Pay roll Checks to Factory Employ ees

Pay roll Checks (Foreman) Verif y Identity of Pay ee

(Employ ees)

Verif y Regular and Ov ertime Hours

Pay roll Checks (Foreman) (Employ ees)

Pay roll Register (completed)

D

SOLUTION TO BASEBALL, INC., PAYROLL SYSTEM

Bases Double

Single

Double

Triple

Home Run

Single

Triple

Single

Triple

Single

Weakness Foreman’s clock card is not approved by an appropriate supervisor.

Computation of regular and overtime hours by Payroll Clerk #2 is not compared with the summary of regular and overtime hours prepared by foreman.

Computations and payroll data used by Payroll Clerk #2 to prepare Payroll Register are not checked by another employee.

Payroll checks are not reconciled to the payroll register.

Signature stamp machine should not be in custody of the bookkeeper who has access to unsigned checks.

Payroll is not approved by an officer of the company.

Distributer of paychecks should be independent of payroll process.

Unclaimed paychecks should be in the custody of independent person.

Foreman should not have access to blank clock cards.

Comparison of Gross to Net on paychecks vs payroll register should not be clerk who prepares paychecks.

Risk/Result Wages could be paid for work not authorized or not performed.

Errors in payroll calculations.

Intentional overstatement of earnings in kickback arrangement between the factory employee and Payroll Clerk #2.

Errors in wage rates, withholdings, and deductions and in computations.

Checks could be issued to the wrong employees and in the wrong amounts.

Bookkeeper could issue unauthorized checks to self and they would not be recorded in the Payroll Register.

Control procedures may not have been followed, allowing unauthorized disbursement of funds.

Foreman could cause paycheck for inactive employee, and cash it.

Foreman could cause paycheck for inactive employee, and cash it.

Foreman could cause paycheck for inactive employee, and cash it.

Intentional overstatement of earnings in kickback arrangement between the factory employee and Bookkeeper.

Recommendation Foreman’s clock card should be approved by his/her immediate supervisor.

Payroll Clerk #1 should reconcile the Foreman’s summary of regular and overtime hours with Payroll Clerk #2's Payroll Register.

Payroll Clerk #1 should check the computations and payroll data used by Payroll Clerk #2.

Payroll Clerk #1 should reconcile the payroll checks to the payroll register before the checks are signed.

The signature stamp machine should be in custody of and used

by Payroll Clerk #1.

Have an officer sign off on payroll - maybe a supervisor who keeps count of signature machine.

Have independent person distribute paychecks based on company-photo ID. Have independent person distribute paychecks and maintain custody.

Payroll clerk #1 post names to clock cards from work schedule, and place in rack.

Clerk #1 or #2 should make comparison.

CASE FOR BASEBALL GAME ON INTERNAL CONTROLS BAL HARBOUR MANUFACTURING COMPANY RAW MATERIALS AND PURCHASING An employee in Stores at Bal Harbour Manufacturing Company has become aware of the low inventory level of the motor that goes into the manufacture of one of its refrigerators. Therefore, the employee prepares a three copies of a purchase requisition (PR). The first copy is sent to the purchasing department. The second copy is sent to the receiving department where it is filed by requisition number. The third copy of the purchase requisition is retained in Stores, filed by PR number.

In the purchasing department, a purchasing agent uses the information from the purchase requisition to prepare six copies of a purchase order. The first two copies of the purchase order are mailed to the vendor. The third copy is sent to the receiving department where it is filed by purchase order number. The fourth copy is sent to the accounts payable department. The fifth copy is sent to Stores where it is attached to the purchase requisition. The sixth copy of the purchase order is retained in the purchasing department where it is attached to purchasing’s copy of the purchase requisition. Purchasing files the purchase order and purchase requisition by purchase order number.

When the receiving department receives the merchandise ordered, it gets its copy of the purchase order out of the file. Receiving counts the merchandise and prepares three copies of a receiving report. The first two copies of the receiving report are sent to the purchasing department. The third copy of the receiving report is attached to the purchase order. This copy of the receiving report and purchase order stay in the receiving department, filed by vendor name.

When purchasing receives a vendor invoice for the merchandise received, it attaches the invoice to its copies of the purchase order, the purchase requisition, and the two copies of the receiving report. The first copy of the receiving report and the vendor invoice are sent to accounts payable. Then, the second copy of the receiving report, purchasing’s copy of the purchase order, and its copy of the purchase requisition are filed by purchase order number.

When accounts payable receives the receiving report and vendor invoice, it retrieves its copy of the purchase order and compares the purchase order, receiving report, and invoice. Accounts payable then prepares a voucher.

Accounts payable sends the voucher, with the receiving report, vendor invoice, and purchase order attached, to cash disbursements.

Case for Baseball Game on Internal Controls, Bal Harbor Manufacturing Company Raw Material Purchasing System (Part of Production Transaction Cycle) STORES

PURCHASING

RECEIVING

ACCOUNTS PAYABLE

Purchase Requisition

Prepare Purchase Requisitio n

1 Purchase Requisition 2

Prepare Purchase Order

Purchase Requisition

Requisition No.

1 2 3 Purchase Order 1

To Vendor

Requisition No.

Purchase Order

2 3

3

4

Purchase Order

5

4

6

Purchase Order No.

Purchase Order 5

Purchase Requisition 1

Purchase Requisition

Purchase Order 3

Attach Purchase Req. to Purchase Order

Vendor Name

3

Count merchandise receiv ed and prepare Receiv ing Report

Match Purchase Order and Purchase Requisition Purchase Order

Purchase Order 4 4

6 Purchase Requisition

1

Purch. Req.

Purchase Order

3

3

Purchase Order 5 Purch.

Order No.

From Vendor

Receiv ing Report 1

Receiv ing Report

Purchase Order

Vendor Inv oice

Compare Purchase Order, Receiv ing Report, and Vendor Inv oice and Prepare Voucher

Attach Purchase Order to Receiv ing Report

6 Purch. Req.

1 3

2

Vendor Inv oice

Receiv ing Report

2

1

1

Match Purch.

Order, Purch.

Req., Rec. Report, & Vendor Inv oice

Voucher with documents attached

Purchase Order 3 3 3

Receiv ing Report

Receiv ing Report

2 Purchase Order 6 Purch. Req.

1 To Cash Disbursements

Vendor Inv oice 1

Purch.

Order No.

Vendor Name

SOLUTION TO BASEBALL GAME - BAL HARBOUR MFG COMPANY RAW MATERIALS AND PURCHASING

Bases

Weakness

Risk/Result

Home Run

PR not approved by supervisor in Stores.

Stores employee could purchase items for own personal use.

Double

PRs and POs are not prenumbered.

Single

Second copy of PR to Receiving not necessary.

PR and PO not compared in Stores, just matched.

Triple

Single

Matched POs and PRs should not be filed with open PRs.

Triple

Purchasing Dept. does not compare vendor invoice to PO, PR, Receiving Rpt Copy of PO sent to Receiving should not have quantity filled in.

Materials received and PO not compared in Receiving.

No indication of what should happen if quantity rec’d differs from quantity ordered.

Receiving reports not prenumbered.

Triple

Triple

Single

Double

Will lose control over PRs and POs. E.g., not know if PR authorized, not know if PR and PO consummated.

Resources are wasted.

Mats purchased not conform to mats requisitioned.

PRs will not be used for intended purpose which is to serve as a control over mats requisitioned but not yet ordered.

Could pay for something not ordered and subsequently received.

Receiving might not count and inspect goods for condition and quality.

Mats received might not be mats ordered.

Employee in Receiving not know how to handle over- or short shipments.

Mats received might be stolen by employee in Receiving.

Recommendation Stores supervisor should review PR for appropriateness and then indicate approval on the PR. Purchasing should validate that PR approved before preparing PO. PRs and POs should be prenumbered.

Discontinue making second copy of PR. Before matching PO and PR, requisitioner (since he be charged with the mats ordered) should check that prices are reasonable; qual. of materials ordered acceptable; delivery dates in accordance with co. needs; all data in PO and PR in agreement.

Matched POs and PRs should be filed in separate file apart from open PRs.

Purchasing Dept. should compare vendor invoice, PO, PR, and Receiving Rpt. Prepare Receiving Dept’s copy of PO so quantity not show.

Materials received and PO should be compared in Receiving.

Procedures for handling over shipments and short shipments should be clearly articulated and included on the flowchart.

Receiving reports should be prenumbered.

Triple

Copy of receiving report not sent to Stores.

Order may not have been filled accurately.

Employee in Receiving could have stolen mats received.

A fourth copy of receiving report should be sent from Receiving directly to Stores along with mats received. Stores verifies accuracy of receiving report, indicates approval on that copy, and sends receiving report to accts. payable dept. as proof PO filled appropriately.

Chapter 8 The Financial Process INTRODUCTORY SCENARIO: SUGGESTED SOLUTIONS TO QUESTIONS

1.

Should the money be invested elsewhere or used in a different way? Should he purchase an AIS?

2.

Vendor (A/P) module, purchasing, customer module (revenue process), human resources module (to handle contractors), GL module, inventory module (for assembly).

SOLUTIONS TO DISCUSSION QUESTIONS AND PROBLEMS 1. a.

Cash in bank Accounts receivable

BALANCE SHEET January 31, 2012 December 31, 2011 Percent Percent $9,500 27% $4,100 15% 13,300 37% 10,300 37%

Equipment Less accumulated depr.

Total assets

15,000 -2,100 $35,700

42% -6%

15,000 -1,800

55% -7%

100%

$27,600

100%

Accounts payable Owner's equity

4,600 31,100

13% 87%

2,800 24,800

10% 90%

Total liabilities and equity

$35,700

100%

$27,600

100%

1. b.

INCOME STATEMENT January 2012 Over/Under Actual Budget Budget Sales of services $18,000 $18,300 $-300 Less expenses: Salary 6,300 6,200 100 Depreciation 300 375 -75 Repair 1,800 2,150 -350 Rent 3,300 3,150 150 Total expenses $11,700 $11,875 $-175 Net income

$6,300

$6,425

$-125

2.

The comparison is not valid because a single value cannot be used to make a judgment. Additional financial data that would permit one to form a judgment of the relative performance of the two companies would include trends in profits of the two companies and invested capital of each company. Non-financial data would include the status and trends in market share for their respective products. In effect, no single data element has meaning aside from the entire context within which a company operates.

3.

RATIO REPORT 1/31/12 Solvency Ratios: Current ratio Quick ratio Current liabilities to net worth Total liabilities to net worth Fixed assets to net worth

4.96 2.06 .15 .15 .41

Efficiency Ratios: Sales to accounts receivable

1.35

Sales to inventory–not applicable Sales to assets Sales to accounts payable

.50 3.91

Profitability Ratios: Return on sales Return on assets Return on equity

35.0% 17.6% 20.3%

12/31/11 5.14 1.46 .11 .11 .53 Operating Activity not available for year 2011

4. a.

Petty cash and the payroll cash account are normal accounts. The general checking-cash account is a master account and the remainder are sub-accounts.

4. b.

The total cash balance is the sum of the debit amounts less the credit amounts, or $159,200.

4. c.

The following accounts and amounts would appear: Petty cash $ 500 General checking—cash 157,700 Payroll cash 1,000

4. d.

Fiberboard Processing, Inc. Cash Flow Statement Cash flows from operating activities: Collections from customers Payments to suppliers Payments for operating expenses Payments for income taxes

$367,200 -215,400 - 73,700 - 3,900 74,200

Cash flows from investing activities: Fixed assets acquired Fixed assets retired

$-6,300 5,800

-500

Cash flows from financing activities: Bonds issued Bonds retired Stock issued Stock acquired

$130,000 -80,000 47,000 -13,000

84,000

Net increase in cash balance

$157,700

5.

Data entered into the GL module may be categorized as: a. Data captured in and transferred from other processes to the financial process b. Transactions originally recorded in the financial process c. End-of-period adjustments required in the financial process

6. a.

The traditional journals and their uses for a manual system are: Journal Name Cash Receipts Cash Disbursements Sales Purchases General

To Record All Cash receipts transactions Cash disbursements transactions Credit merchandise sales transactions Credit purchase transactions Any remaining transactions

6. b.

Various manual journals are used to enable more than one person to enter transactions simultaneously. All cash transactions are assigned to the cash receipts and cash disbursements journals for control purposes.

Note that only merchandise sales are recorded in the sales journal, whereas all credit purchases (supplies, fixed assets, as well as merchandise) are recorded in the purchases journal.

6. c.

In a computerized AIS, only customer remittances are recorded in the cash receipts journal since that journal is located in the AR module. Other cash receipts are recorded in the general journal which is in the GL module. In some packages, a separate “other” cash receipts journal may be in the GL module for these non-customer receipts.

7. a.

The best design would permit the administrator to permit unbalanced entries on a user-by-user basis. If users have the option, they can require balancing or not as they please.

7. b.

Accounting programs should be written so that entries can be started and saved without being in balance.

Long entries, for example, could be saved due to impending weather problems, hardware problems, end of the work day, and required attendance at a meeting. However, out-of-balance entries should not be allowed to post to the general ledger. Thus, many packages have an out-of-balance suspense account to put the entry in balance so it can post. Entries to suspense accounts need to be analyzed and reclassified.

8.

Repetitive month-end adjustments may be automated by setting them up as recurring entries. The recurring entry facility in an AIS permits you to setup or create either transactions or adjustments, such as depreciation expense or an interest accrual. Each time the entry needs to be made, you invoke the stored entry, which places the entry in an appropriate journal from where it may later be posted. Thus, you setup the entry one time, and it is made automatically thereafter.

Most systems permit you to specify various times at which the recurring entry will be automatically invoked and placed in the journal. For example, when creating a recurring entry, you may be able to choose to have it recorded weekly, monthly, or on the 1st and 15th of each month. You may be able to specify when an entry will begin and end or how many times it will be recorded.

Recurring entries for depreciation expense are fixed amount recurring entries since the amount is usually constant for several periods. In contrast, an interest accrual will likely be different each period, and it will be known as an entry of varying amounts. When you invoke such an entry, the AIS should request that you enter the appropriate amount.

9. a.

Depreciation expense allocated to each city is as follows: City Berlin, NH Conway, NH Hanover, VT Laconia, NH Lebanon, VT Totals

Population Percent Allocation 13,084 20.2% $ 1,616 8,939 13.8% $ 1,104 15,980 24.7% $ 1,976 15,575 24.1% $ 1,928 11,134 17.2% $ 1,376 64,712

100%

$ 8,000

9. b.

Automatic distribution entries should be used. The user should designate master accounts and subaccounts, specify to which sub-accounts entries should be distributed and how the allocations should be made. Entries are then made to the master accounts, but the accounting information system computes and places the appropriate amounts in the related sub-accounts.

9. c.

Each month 55 transactions must be allocated to 5 expense accounts by city. Each entry will have 5 debits and 1 credit for a total of 6 debits and credits. With the recommended system, each transaction will require a single debit and a single credit for a total of 2. The saving is 4 debit/credits x 55 = 220. Moreover, the accounting program will make the allocation rather than clerical staff having to calculate the amounts.

10. a.

If the change is made from dollar entry to cents entry: Additional keystrokes to enter other even dollar payments (85 payments x 2 keystrokes for zeros) Saving on keystrokes for payments with dollars and cents (29 payments x 1 keystroke by not having to enter the decimal) Net additional keystrokes required

170 -29 141

10. b.

If the change is made from dollar entry to cents entry: Additional keystrokes to enter 1% even dollar values (53 x 2) Saving on keystrokes with 99% of remittances with dollars and cents (5,321 x .99) Net saving on keystrokes

11. a.

106 -5,268 -5,162

Two factors suggest the number of interim periods needed within a fiscal year. First, the nature of the business may suggest a number. Regulations require financial institutions (banks) to close their books daily to assure that they meet reserve requirements on a continuing basis. Other businesses need a weekly, monthly, or, in some cases, only a quarterly interim reporting period.

Second, an organization may desire an end-of-year audit period. This audit period will have no time length, but will be used to make either end-of-year entries and/or adjustments proposed by the auditors.

11. b.

This question is particularly applicable to businesses in which some days of the week are busier than others. Department stores do a large part of their business on Saturdays and Sundays. For example, there are five full weekends in September 2001, but only four full weekends in August 2001 and September 2000. Reports contrasting sales of September 2001 with the immediate prior month and with the same month of the prior year are not fully comparable.

One solution for obtaining comparable quarterly data is to (1) divide each quarter into two four-week months plus a five-week month. In this way, months for each year will be comparable with the prior year months and quarters. A second solution is to adopt a 13-month year, with each month having four full weeks. Since 13 months x 28 days is only 364 days, then each year except leap year has a “year day” at the end which is a separate period, and leap years have a 2-day period at the end of the year.

12. a.

A package that supports “time-sensitive” entries permits you to make entries during the current period that apply to past and/or future periods. Thus, you “date” an entry, and the system places it in the appropriate period.

12. b.

The most significant problem in the absence of time-sensitive entry capability is that all entries must be made for a period, and the AIS must be completely closed before any activity can be recorded for the ensuing period. For example, one may have no form W-2s to print employee earnings at year-end and be unable to process payroll in early January because the books cannot be closed before W-2s are printed.

Adjustments for an immediate past period may not yet be completed, but sales and other activity of the current period must be processed.

13.

Some AISs permit you to print financial statements without a permanent posting of transactions. This feature is called provisional or “pencil” posting as compared with “ink” posting.

Upon scanning printouts of reports and documents, you can often find obvious errors, such as a credit balance for inventory or a large balance for miscellaneous expenses. With pencil posting, you can print statements, review them for errors, make corrections to the original entries, pencil post, review, and correct, until you are satisfied with the output. Then you “ink” post, after which no further changes can be made to the original entries, although correcting or reversing entries can be made.

14. a.

Inactive accounts are those which can no longer receive entries or be adjusted. Once a general ledger account is designated as inactive, no additional transaction entries can be made to it. The ability to designate accounts as inactive is a control feature.

14. b. Inactive accounts must be retained in the GL until the end of the year so that accurate financial statements can be prepared. If comparative financial statements are prepared, then inactive accounts must be retained for two or more years to provide the historical data.

15. a.

The principal purpose of interim (usually monthly) closings is to update monthly summary totals in master file records. (See field 5 “End month 1 balance” and those fields that follow in Exhibit 8.12.) Annual closings, in contrast, either archive data for the past year or erase (less often) the data and zero out fields to prepare the account for the new year.

15. b.

Soft and hard closings are similar to “pencil” and “ink” postings. You can go back and make additional entries after a soft closing, but no entries can be made after a hard closing. If time-sensitive entries are supported, entries for prior periods may be permitted after a hard closing, but only with high-level approval enforced by the use of passwords.

15. c.

While soft closings permit additional entries to be made, provisional postings permit existing entries to be changed.

16.

A block code would denote the expense part of the Income statement, for example 09.

A sequence code would specify the order of accounts within each block, for example 400 for salaries expense.

Another code would specify a division, for example 4 for division 4.

Another code would specify a department, for example 15 for department 15.

The account code for salaries expense for the entire organization would be 09400.0.00.

The account code for salaries expense for division 4 would be: 09400.4.0.

The account code for salaries expense for department 15 of division 4 would be: 09400.4.15.

The account code for total expenses for division 4 would be 09000.4.00.

The account code for total expenses for department 15 of division 4 would be 09000.4.15.

17.

Dolly and Madison Ford, a Partnership Chart of Accounts Coding Scheme: AB = Block Code

Denotes different groups of accounts in the balance sheet and income statement, e.g., current assets, revenues.

CDE = Sequence Code

Specifies order of accounts within each block, or group.

FG = Subaccount Dealership:

00: All dealerships 01: Baytown 02: Liberty

HI - Subaccount Automobile:

00: All automobiles 01: Mustang 02: Taurus

Assets 01 100 00 00 01 200 00 00 01 210 00 00 01 300 00 00 01 300 00 01 01 300 00 02 01 300 01 00 01 300 01 01 01 300 01 02 01 300 02 00 01 300 02 01 01 300 02 02 01 380 00 00 01 380 00 01 01 380 00 02 01 380 01 00 01 380 01 01 01 380 01 02 01 380 02 00 01 380 02 01 01 380 02 02 01 400 00 00 01 450 00 00 02 550 00 00 02 560 00 00 02 600 00 00 02 610 00 00 02 700 00 00 02 710 00 00

Cash Accounts Receivable Allowance for Bad Debt Automobile Inventory Automobile Inventory - Mustang Automobile Inventory - Taurus Automobile Inventory - Baytown Automobile Inventory - Baytown-Mustang Automobile Inventory - Baytown-Taurus Automobile Inventory - Liberty Automobile Inventory - Liberty-Mustang Automobile Inventory - Liberty-Taurus Allowance to Reduce Inventory to Lower Cost or Market Allowance to Reduce Inventory to Lower Cost or Market-Mustang Allowance to Reduce Inventory to Lower Cost or Market-Taurus Allowance to Reduce Inventory to Lower Cost or Market-Baytown Allowance to Reduce Inventory to Lower Cost or Market-Baytown-Mustang Allowance to Reduce Inventory to Lower Cost or Market-Baytown-Taurus Allowance to Reduce Inventory to Lower Cost or Market-Liberty Allowance to Reduce Inventory to Lower Cost or Market-Liberty-Mustang Allowance to Reduce Inventory to Lower Cost or Market-Liberty-Taurus Supplies Inventory Prepaid Expenses Long-term Investments-Bonds Long-term Investments-Stocks Equipment Accumulated Depreciation-Equipment Furniture and Fixtures Accumulated Depreciation-Furniture and Fixtures

Dolly and Madison Ford, a Partnership Chart of Accounts (Continued) Assets (Continued) 03 950 00 00 03 960 00 00 03 980 00 00

Intangibles Deferred Charges Other Assets

Liabilities 04 100 00 00 Accounts Payable 04 130 00 00 Wages & Salaries Payable 04 160 00 00 Social Security Tax Payable 04 190 00 00 Medicare Tax Payable 04 220 00 00 Federal Income Tax (Employee's) Payable 04 250 00 00 Federal Unemployment Tax Payable 04 280 00 00 State Unemployment Tax Payable 04 370 00 00 Accrued Expenses Payable 04 440 00 00 Current Portion of Long-term Notes Payable 04 450 00 00 Sales Tax Payable 05 800 00 00 Notes Payable

Owners' Equity 06 100 00 00 06 150 00 00 06 200 00 00 06 250 00 00 06 300 00 00 06 300 01 00 06 300 02 00

Dolly Ford, Capital Dolly Ford, Drawing Madison Ford, Capital Madison Ford, Drawing Current Earnings Current Earnings-Baytown Current Earnings-Liberty

Revenues 07 100 00 00 07 100 01 00 07 100 02 00 07 100 01 01 07 100 01 02 07 100 02 01 07 100 02 02 07 130 00 00 07 130 01 00 07 130 02 00 07 130 01 01 07 130 01 02 07 130 02 01 07 130 02 02

Sales of Goods Sales of Goods-Baytown Sales of Goods-Liberty Sales of Goods-Baytown-Mustang Sales of Goods-Baytown-Taurus Sales of Goods-Liberty-Mustang Sales of Goods-Liberty-Taurus Sales Discounts Sales Discounts-Baytown Sales Discounts-Liberty Sales Discounts-Baytown-Mustang Sales Discounts-Baytown-Taurus Sales Discounts-Liberty-Mustang Sales Discounts-Liberty-Taurus

Dolly and Madison Ford, a Partnership Chart of Accounts (Continued)

Revenues (Continued) 07 160 00 00 07 160 01 00 07 160 02 00 07 160 01 01 07 160 01 02 07 160 02 01 07 160 02 02 07 200 00 00 07 200 01 00 07 200 02 00 07 200 01 01 07 200 01 02 07 200 02 01 07 200 02 02 07 510 00 00 07 510 01 00 07 510 02 00

Sales Returns & Allowances Sales Returns & Allowances-Baytown Sales Returns & Allowances-Liberty Sales Returns & Allowances-Baytown-Mustang Sales Returns & Allowances-Baytown-Taurus Sales Returns & Allowances-Liberty-Mustang Sales Returns & Allowances-Liberty-Taurus Sales of Services Sales of Services-Baytown Sales of Services-Liberty Sales of Services-Baytown-Mustang Sales of Services-Baytown-Taurus Sales of Services-Liberty-Mustang Sales of Services-Liberty-Taurus Other Income Other Income-Baytown Other Income-Liberty

Expenses 08 100 00 00 08 100 01 00 08 100 02 00 08 100 01 01 08 100 01 02 08 100 02 01 08 100 02 02 09 120 00 00 09 120 01 00 09 120 02 00 09 120 01 01 09 120 01 02 09 120 02 01 09 120 02 02 10 130 00 00 10 130 01 00 10 130 02 00 10 160 00 00 10 160 01 00 10 160 02 00 10 190 00 00 10 190 01 00 10 190 02 00

Cost of Goods Sold Cost of Goods Sold-Baytown Cost of Goods Sold-Liberty Cost of Goods Sold-Baytown-Mustang Cost of Goods Sold-Baytown-Taurus Cost of Goods Sold-Liberty-Mustang Cost of Goods Sold-Liberty-Taurus Cost of Services Provided Cost of Services Provided-Baytown Cost of Services Provided-Liberty Cost of Services Provided-Baytown-Mustang Cost of Services Provided-Baytown-Taurus Cost of Services Provided-Liberty-Mustang Cost of Services Provided-Liberty-Taurus Wages & Salaries Expense Wages & Salaries Expense-Baytown Wages & Salaries Expense-Liberty Employee Fringe Benefits Expense Employee Fringe Benefits Expense-Baytown Employee Fringe Benefits Expense-Liberty Social Security Tax Expense Social Security Tax Expense-Baytown Social Security Tax Expense-Liberty

Dolly and Madison Ford, a Partnership Chart of Accounts (Continued)

Expenses (Continued) 10 220 00 00 10 220 01 00 10 220 02 00 10 250 00 00 10 250 01 00 10 250 02 00 10 280 00 00 10 280 01 00 10 280 02 00 11 310 00 00 11 310 01 00 11 310 02 00 11 340 00 00 11 340 01 00 11 340 02 00 11 400 00 00 11 400 01 00 11 400 02 00 11 430 00 00 11 430 01 00 11 430 02 00 11 550 00 00 11 550 01 00 11 550 02 00 11 640 00 00 11 640 01 00 11 640 02 00 11 670 00 00 11 670 01 00 11 670 02 00 11 700 00 00 11 700 01 00 11 700 02 00 11 730 00 00 11 730 01 00 11 730 02 00 11 760 00 00 11 760 01 00 11 760 02 00

Medicare Tax Expense Medicare Tax Expense-Baytown Medicare Tax Expense-Liberty Federal Unemployment Tax Expense Federal Unemployment Tax Expense-Baytown Federal Unemployment Tax Expense-Liberty State Unemployment Tax Expense State Unemployment Tax Expense-Baytown State Unemployment Tax Expense-Liberty Depreciation Expense-Equipment Depreciation Expense -Equipment-Baytown Depreciation Expense Equipment-Liberty Depreciation Expense-Furniture & Fixtures Depreciation Expense -Furniture & Fixtures-Baytown Depreciation Expense Furniture & Fixtures-Liberty Interest Expense Interest Expense-Baytown Interest Expense-Liberty Bad Debt Expense Bad Debt Expense-Baytown Bad Debt Expense-Liberty Advertising Expense Advertising Expense-Baytown Advertising Expense-Liberty Supplies Expense Supplies Expense-Baytown Supplies Expense-Liberty Telephone & Fax Expense Telephone & Fax Expense-Baytown Telephone & Fax Expense-Liberty Rent Expense Rent Expense-Baytown Rent Expense-Liberty Utilities Expense Utilities Expense-Baytown Utilities Expense-Liberty Miscellaneous Expense Miscellaneous Expense-Baytown Miscellaneous Expense-Liberty

Chapter 9 The Revenue Process INTRODUCTORY SCENARIO: SUGGESTED SOLUTIONS TO QUESTIONS 1.

Grace should have financial statements prepared including a cash flow statement. Since her records are cash-basis, she might want to prepare the statements using the accrual method to see how that affects her tax liability. The IRS generally requires estimated quarterly payments for self-employed individuals, so it is important that she project her earnings so her estimated payments are close enough to her actual liability to avoid penalties.

2.

Depending on the size of the business and the amount of activity that Grace’s company is experiencing, either method would be acceptable. The open item billing would be advantageous if she wanted to track how long it took her clients to pay their bills. If she allows partial payments or has too many individual items/transactions to be easily tracked, the balance forward method would be advantageous.

3.

High activity customers.

SOLUTIONS TO DISCUSSION QUESTIONS AND PROBLEMS 1.

2.

Rosalind accumulates the following points: Regular employment Earnings Professional Telephone Automobile Checking account Saving account Credit card Total points obtained by Rosalind

20 20 20 5 5 10 5 10 95

It is presumed that filling orders is most efficient by proceeding from A to B and then to C-Shed, and then by bay or aisle, followed by position. The columns of data are arranged in the order in which they will be required by a person filling the order. Thus, location is first, the data identifying the item are next, and the unit of measure and quantities to be pulled for this shipment are next.

See the Inventory Picking List on the next page.

INVENTORY PICKING LIST

Sales Order: 0699327

Customer: Davey Jones Plumbing

Date: July 3, 2012

Special instructions: Deliver to east dock for shipping

Location Bldg A-Shed B-Shed B-shed C-Shed C-Shed

Bay/ Aisle 7 12 18 29 43

Product Shelf/ Position C-13 A-17 B-23

Description Single-flow brass faucet ¾” cutoff 1” no.3 O-ring 40” shower stall 14” marble sink

Order filled by: Phil Jones

Unit

Checked by:

Quantity Requested 50 100 4 3 8

Picked 50 83 4 3 8

Total Number of Items Supplied

148

Identifier SFBF18593968234 CO-75-937950B33 OR-100-3-829578 SS-40-MB-395747 MS-14-PAS483721

of Meas. ea ea doz ea ea

Kim Freilee

3. a. The account would appear as follows:

August view of the account

Sept 1 view

August view of the account

Sept 1 view

8/01 8/03 8/10 8/13 8/21

BALANCE FORWARD METHOD Balance forward 500 8/28 9508 350 9583 1,750 9665 800 9697 1,230

9/01 Balance forward

8/01 8/03 8/10 8/13 8/21

9267 9508 9583 9665 9697

8/03 9508 8/13 9665 8/21 9697

2,250

2,380

OPEN ITEM METHOD 500 8/28 (9267 & 9583) 350 1,750 800 1,230 350 800 1,230

2,250

3. b.

Under the balance forward method, only the balance forward on September 1 of $2,380 would be available. While the open item method would likely not provide information on which items had been paid, the account shows all of the unpaid invoices. If One Company has a good filing system, the accounts could be reconstructed in either case from the original documents.

3. c.

Since Another Company sent a check and identified specific invoices being paid, this is probably the mode that they will continue to use in paying their account. Customers who pay “on invoice” should be accounted for as open item accounts.

3. d.

The $4,280 that Another Company paid was the balance of its account less invoice #9508 that is in dispute.

Apparently, Another Company will be paying “on statement” and should, consequently, be treated as a balance forward customer. This is particularly true since its payment did not identify which invoices were being paid.

4.

The primary file in a sales order module is the sales order file, an open file. The primary files in the customer module are the customer master file and transaction files for sales and cash receipts. The sales order module uses the customer master file for permanent information regarding the customer; thus, only an open file is required in the sales order module.

5.

Ted’s ending balance on November 30 is $1,100. Because we can determine the sales and cash receipts transactions for November from looking at the account, we will start with the October 31 balance of $1,225 to determine the age of those unpaid invoices.

Sales invoices for June through October total: June July Aug. Sept.

Oct. Total

$ 800 620 -0150 400 $1,970

Because the October balance is $1,225, apparently collections on this account totaled $745 ($1,970 $1,225). This $745 would have been applied to the June invoices so that unpaid invoices now are: June ($800-$745) July Aug. Sept.

Oct. Total as of Oct. 31

55 620 -0150 400 $1,225

In November, cash of $300 was received. This would be applied to the June and July invoices. Also, in November, two sales were made totaling $175 ($45 + $130). The unpaid invoices now are: June ($55 - 55) July [$620 - ($300-55)] Aug. Sept.

Oct. Nov. Total as of Nov. 30

$ -0375 -0150 400 175 $1,100

The aging would be as follows: 0-30 days past due (Nov.) 31-60 days past due (Oct.) 61-90 days past due (Sept.)

91-120 days past due (Aug.) Over 120 days past due(July)

$ 175 400 150 -0375

Total amount owed

$1,100

6. a. Using cycle billing, you divide customers into approximately equal size batches and assign each batch to a billing cycle. If four billing cycles in a month are anticipated, then the alphabet might be divided into A-F, G-M, N-S, and T-Z. Thus, you could bill A-F customers on the first Friday in a month, G-M customers the second Friday, N-S customers the third Friday. and T-Z on the fourth Friday.

6. b.

Without cycle billing, you attempt to produce all statements of account on a single day, perhaps the last day of the month. Customers receiving these statements remit the amounts due and these remittances begin arriving about the 15th. Thus, there are two heavy work periods during the month in the Accounts Receivable Department—the end of the month and around the middle of the month. At other times there may be considerable unassigned clerical time. The purpose of cycle billing is to even out the work load and thereby reduce the amount of labor that is required when there are two peak periods a month.

6. c.

Cycle billing is not needed for open item since the work load is usually distributed throughout the month.

Few open item customers desire statements of account and all customers pay on invoices, which arrive randomly throughout the month.

7.

The three methods of applying payments on open item customer accounts are pre-identification, postidentification, and automatic invoice identification.

With pre identification, the open items to which a payment should be applied must be identified before the payment is entered into the AIS. When the payment is entered, those items (invoices, credits, etc.) must be specified as the transaction is recorded.

Post-identification permits you to enter only the customer ID and the payment total in recording the remittance. Subsequently, you can call up the customer account and tag (identify) related invoices and credit memos with the payment. This system permits you to enter remittances rapidly without the delays involved under pre-identification when remittance advices are missing or unclear. Moreover, postidentification permits you to adopt a more flexible work schedule. This may be especially important if the work-load in the customer accounting department varies from day to day or week to week.

Automatic invoice identification requires that the AIS program be able to match invoices and other open items to payments by repetitive calculations. Well-designed programs can match most payments, but some are never matched in this manner. Post-identification must be used to resolve those that the program cannot match.

8.

Ace Cleaning Co.

Invoice

P. O. Box 322 Santa Fe, NM 90062

Invoice Number: Date:

Industrial Cleaning Services “Call Ace for a job well done.”

Bill to:

Service name and address:

CREW LEADER

DATE

CONTRACT NO.

DESCRIPTION

HOURS

RATE

AMOUNT

SUBTOTAL SALES TAX RATE % SALES TAX TOTAL DUE Terms n/30. 1.5% will be added to all overdue amounts.

9.

Some balance forward systems erase account details at the end of the month and carry forward only a balance. Customer statements must be printed for balance forward customers before this detail is lost.

If statements are printed for open item customers before closing occurs, the accounts will contain all of the payments on account and the paid invoices. We want to call attention on the statements to those invoices that have not been paid. In accounts where there is a great deal of activity, this can only be done by closing and then printing statements.

10.

11.

12.

13.

14.

15.

B C D C A B

16.

17.

C A

18. a.

The data that should be captured and stored in the computer-based file records for each customer include customer identification data, such as customer number, name, and address; credit data, such as credit limit and current credit status; a code for different types of transactions (sale, cash receipt, credit memo); and other data, such as the transaction date and dollar amount of transactions and date of the last sale.

18. b. 1. The proposed reports satisfy some, but not all, of management’s objectives. An analysis of each report follows.

Accounts Receivable Register. This report does provide timely information on customer account balances, but the report is useful only for customers’ inquiries of their balances. The report will not satisfy top management’s objectives of providing useful information to aid in controlling bad debts or recognizing delinquent accounts.

Customer Statements. This report generally satisfies top management’s objective with regard to producing timely notices to customers regarding amounts owed. There is no information to indicate whether the report provides information to customers regarding any change in the status of their accounts.

Aging Schedule–All Customers. This report may aid top management’s objective of providing useful information to aid in controlling bad debts on customer accounts. However, this report contains extraneous data.

Aging Schedule–Past Due Customers. This report satisfies top management’s objective of notifying the sales department of customer accounts that should be classified as delinquent and/or be written off as uncollectible.

Activity Reports. Reports 5.b. and 5.c. would help control bad debts by notifying the Sales Department that customers have exceeded their credit limit or sales are continuing to be made to customers who are delinquent.

Delinquency and Write-off Register. This report is designed to satisfy top management’s objective of notifying the Sales Department of customer accounts that are considered delinquent and/or closed.

Summary Journal Entries. This report is for accounting purposes only and not intended to address the specific management objective of notifying the Sales Department of customers whose accounts are considered uncollectible.

The various reports do provide information for meeting most of the objectives. However, the information should be produced more frequently than monthly to be timely. There is no report that notifies customers of a change in the status of their account. Furthermore, there is no evidence that the objective regarding procedures and controls to minimize the chance for errors in customers accounts has been met.

18. b. 2. There should be several changes made in the proposed reporting structure of the new accounts receivable system. General changes that need to be include the following.

Most of the reports need to be prepared on a more timely basis. The accounts receivable file probably is updated daily. Thus, daily and/or weekly reports could be provided to the Sales Department depending on the report and its intended use.

The format of the reports could be restructured so that a master report could be generated for the Sales Department that would provide important data for all customers. The master report would show such items as account status, credit limit, account balance, and aging.

A report could be developed that could be sent to customers telling them that their account status has changed.

Chapter 10 The Purchasing Process INTRODUCTORY SCENARIO: SUGGESTED SOLUTIONS TO QUESTIONS 1.

Offer financing incentives to small vendors for the hardware and software; offer to purchase hardware/software for vendors and lease it back to them; use the traditional method for “one-time” or items ordered rarely; provide information as to how the EDI environment will make the smaller vendors more competitive in the long-run, will result in less paperwork, and fewer errors. EDI could also help vendors expand their client base.

2.

Financing from hospital, training on use of the software, an extended deadline for compliance, a contractual agreement for minimum purchases.

3.

Vendor performance (number and dollar amounts of deliveries, late/defective merchandise), quality reports (e.g., how many of the shipments are rejected, listed by vendor), outstanding purchase orders (e.g., aging report) comparative pricing-volume discount reports.

SOLUTIONS TO DISCUSSION QUESTIONS AND PROBLEMS

1.

2.

3.

4.

5.

D A D B C

6.

Approval of the cash disbursement; data entry and verification; printing of a check; addition of records to the cash disbursements transaction file and printing of the cash disbursements journal; updating (and closing if payment is in full) of the corresponding record in the open vendor invoice file; updating of the vendor master file; transfer of summarized transaction data to the general journal transaction file; updating of the cash and accounts payable accounts in the general ledger master file; archiving of the transaction data.

7.

The principal improvement might be to convert the report into an exception report so those vendors such as Auto Zone who exhibit no problems would be excluded from the report. Attention would thereby be directed only at problem vendors. If our company has target prices for product, the record for achieving (or failing to achieve) the targets could also be included in the report.

8. a. and b.

An organization has all necessary information to record a sale because it controls the billing and the shipment of goods. But in the case of purchases, we may receive the goods before the invoice arrives.

Goods should be inspected, counted, and placed in inventory expeditiously. But at that point we do not have the vendor invoice and should not record the liability. At the same time, it is important that merchandise received be reflected on our books so that sales personnel have current information regarding availability. Therefore, we need to record events as follows:

When purchased goods are received: Inventory $xxx Unbilled payables

$xxx

When the invoice is received and matched with the PO and receiving report: Unbilled payables $xxx Accounts payable $xxx 9. a.

The report should have a general layout as follows:

In-house Item Number

Description

Requested Delivery Date

A73B2

Widget

11/3/12

A978

Cone

10/18/09

Expected Delivery Date (if different) 10/25/09

Action Needed?

(Y/N)

PO#

S.K.U.

Quantity Ordered

each

324

N

8472

doz

200

Y

9164

Action Taken Our truck will pickup on 10/17.

The 4th, 7th, and 9th columns of the report may be filled in by hand.

Since the purchasing agent will be comparing this report with the material requirements report, both should have the records listed in part number order.

9. b.

The extended price field is unnecessary since it can easily be computed from the quantity and price.

10. a.

Items to be paid are noted with PAST if past due, DISC if they should be paid to get the discount, and DUE if they will become due before the next payment date. Items not selected for payment have no notation.

Voucher #

Due Date

Gross Amount

Discount Date

Discount

Notation

Helium Co.

332 346 391

5/03 5/10 6/15

$

250 1,300 875

4/13 4/20 5/25

2% 2% 2%

PAST PAST

Neon Co.

318 329 358 373

4/20 5/01 6/11 5/21

700 550 2,400 160

4/01 4/10 5/20 5/06

1% 1% 1% 1%

PAST PAST DISC DUE

Xenon Co.

325 347 386

4/23 6/11 6/01

300 1,900 2,500

4/03 5/20 5/17

1.5% 1.5% 1.5%

PAST DISC DISC

Vendor

TOTAL

$10,935

The vouchers selected to pay total $10,060 although the cash payment will be the amount of the vouchers minus the discounts. Voucher #391 was not selected for payment because it can be paid at the next cash

payments date, May 22, if there is sufficient cash, and still be eligible for the discount.

10. b.

The payment of voucher #358 should be delayed if there is insufficient cash since we get only a 1% discount on it.

11.

At a minimum, vendor accounts should be posted just prior to selecting vouchers to pay. They may be posted more often if desired.

12.

The billing, retainage, and collection will be as follows:

Billing Retainage Collection

July 280,000 -14,000

August 280,000 -14,000 266,000

October 280,000 -14,000 266,000

November 280,000 -14,000 266,000

January 280,000 56,000 266,000

February

336,000

13. a.

The purpose of the 1099 tax form is to report to the IRS payments made to other parties that should be reported as income.

13. b.

The original of the 1099 goes to the IRS, and a copy is sent to the payee.

14.

The flowchart for Toys-R-Y’all is on the next page.

Input Prompts Goods Arrive

Open Purchase Order File

Count Goods, Compare to Purchase Order, and Enter Data

Purchases Transaction File

Inventory Master File

Vendor Master File

Update Open and Master Files

Updated Open Purchase Order File

Updated Inventory Master File

Updated Vendor Master File

Chapter 11 The Inventory Process INTRODUCTORY SCENARIO: SUGGESTED SOLUTIONS TO QUESTIONS 1.

Automation would provide much needed, timely reports to inventory managers and executive management.

It would allow setting up automated reorders, make managers aware of shelf lives of meat, and allow monitoring of loss due to theft and/or spoilage. It would also make year-end reporting easier by providing a quick comparison to physical counts of inventory.

2.

Automation might be difficult for employees to learn (need to convince them of the importance and benefits of automation). There also might be concern that an update might put some people out of a job.

The conversion process might be difficult.

3.

Exception reports: spoilage, inventory items remaining unsold more than “x” days (product turnover), aging of purchase orders filled, variance between physical counts and accounting reported inventory, stockout reports, backorder reports, returned shipments (quality control), aged accounts receivable, special orders lists, vendors-other-than-approved report. Other reports: order recommendation reports, excess inventory reports, sales and gross profits reports.

SOLUTIONS TO DISCUSSION QUESTIONS AND PROBLEMS .

1.

The number of units by which the inventory records for Peachtree Distribution of Atlanta should be adjusted are as follows:

Free stock Committed Balance per books Inventory count Adjustment to books

Green Beans 73 60 133 125 -8

Spinach 10 45 55 55 0

Steaks 55 20 75 77 2

The inventory record for green beans would be decreased by eight cartons, and the record for steaks would be increased by two packages.

2.

The quantities that need to be ordered for Peachtree Distribution of Atlanta are as follows:

Line 1 2 3 4 5 6 7 8 9 10 11

Safety stock Plus lead-time stock Equals reorder pt. (line 1+2) Inventory count Less committed Equals available (line 4-5) Plus on order Equals available + on order Excess of reorder pt. over available + on order (line 3-8) EOQ if line 3 >= line 8 Recommended order (line 9+10)

Green Beans 30 30 60 125 60 65 85 150

Spinach 15 12 27 55 45 10 17 27

Steaks 22 40 62 77 20 57 0 57

0 25 25

5 30 35

0 0

Since the reorder point has not been reached for green beans, no items need to be ordered. Spinach has just reached the reorder point, so EOQ should be ordered. Steaks available and on order are 5 packages below the reorder point so the EOQ plus and amount necessary to bring stock back up to reorder point must be ordered. Note that EOQ is a minimum reorder amount.

3.

A

4.

C

5.

B

6. a.

Warehouse method one requires an inventory record for each inventory item at each location. Thus, if there are three warehouses and 1,285 products, then the total number of inventory master file records will be 3,855 (3 x 1,285).

6. b.

If warehouse method two is used, there is an inventory record for each inventory item for all locations.

Thus, there will be 1,285 records. Usually, there will be a table for each record that shows the quantity at each location.

6. c.

With widely distributed inventory locations, ordering merchandise is usually more efficient than balancing inventory by shipping between locations. Thus, inventory is managed on a location basis rather than in total for all locations, and warehouse method one is used.

7. a.

The calculation of the number of business days the inventory on hand will likely last is as follows: Line 1 2 3 4

Inventory on hand–stocking units Inventory on hand–sales units Daily sales rate–sales units No. days sales on hand (line 2/line 3)

Pasta 110 110 80 1.4 days

Relish 10 240 60 4 days

Beans 200 200 100 2 days

7. b.

The calculation of the number of units that should be ordered is as follows: Pasta Relish Beans Line 1 Cases on hand 3.667 10 8.333 2 Less committed cases 0 .625 0 3 Available cases (line 1 - 2) 3.667 9.375 8.333 4 Plus on order cases 5 0 0 5 Available plus on order (line 3 + 4) 8.667 9.375 8.333 6 Reorder point 10 10 5 7 Cases below reorder point (line 6 - 5)* 2 1 0 8 EOQ for items at or below reorder pt.

12 15 9 Order size in cases (line 7 + 8) 14 16 0 *Since only whole cases can be ordered, any fractional cases are rounded up.

8.

C

19

A

10. a.

The purpose of the gross profit report is to call attention to the best products as well as to highlight those products that are least effective in generating gross profits. There are two solution approaches for low gross profit products. The first is to investigate whether the cost of the product can be reduced or whether the selling price can be increased. If neither of these is possible, management may wish to eliminate the low gross profit products since they require some costs that are not easily allocated to them.

10. b.

The gross profit report in Exhibit 11.12 does not use the principle of exception reporting. Only those products (records) having a significant deviation should appear on the report. Garden hoses, lawnmowers, and locking handles are probably the only items that should appear. The most severe problems should appear at the top of the report. Lawn mowers show the largest decline in gross profit, but this is probably explained by reduced selling prices to clear the inventory. Sales and gross profit are up significantly for locking handles. An investigation to determine the cause may reveal actions that could be taken to improve the sales and gross profits of other items.

11.

The actual daily changes in the quantity of Item No. 12345 in the warehouse are shown below: Beginning Qty. on Hand

Purchases (Units)

2/1 2/2 2/3 2/4 2/5

10 80 75 70 65

75

2/8 2/9 2/10 2/11 2/12

60 55 50 45 40

Date

Sales (Units)

Ending Qty. on Hand

5 5 5 5 5

80 75 70 65 60

5 5 5 5 5

55 50 45 40 35

2/15 2/16 2/17 2/18 2/19

35 30 25 20 15

2/22 2/23 2/24 2/25 2/26

10 80 75 70 65

75

5 5 5 5 5

30 25 20 15 10

5 5 5 5 5

80 75 70 65 60

(Cont’d on next page)

11.

(Continued) The changes in the perpetual inventory records, which are updated at the close of business on Fridays, are shown below:

Date

Beginning Qty. on Hand

Purchases (Units)

Sales (Units)

Ending Qty. on Hand

1/29 2/5 2/12 2/19 2/26

10 60 35 10

75

25 25 25 25

10 60 35 10 60

75

The discrepancies between warehouse quantities and perpetual inventory records are shown below: Ending Units on Hand Date

Warehouse

Records

Discrepancy

2/1 2/2 2/3 2/4 2/5

80 75 70 65 60

10 10 10 10 60

70 65 60 55 0

2/8 2/9 2/10 2/11 2/12

55 50 45 40 35

60 60 60 60 35

-5 -10 -15 -20 0

2/15 2/16 2/17 2/18 2/19

30 25 20 15 10

35 35 35 35 10

-5 -10 -15 -20 0

2/22 2/23 2/24 2/25 2/26

80 75 70 65 60

10 10 10 10 60

70 65 60 55 0

The largest discrepancy is 70 units. It occurs on Mondays following receipt of goods purchased when there are 80 units in the warehouse; the accounting records show only 10. The largest negative discrepancy occurs on Thursdays, during weeks in which no purchased goods are received. At those times, there are only 15 units on hand, but the records show a balance of 35 units.

Chapter 12 Database Structure of Accounting Systems

INTRODUCTORY SCENARIO: SUGGESTED SOLUTIONS TO QUESTIONS

1.

2.

3.

Number of customers per night, per day (to help with staffing decisions); inventory information related to alcoholic and non-alcoholic beverages, and food sold; hours worked by employees (to track overtime); transactions processed per hour (to aid in staffing).

Inventory turnover reports, spoilage reports, number of transactions per hour, order recommendation report, vendor quality reports, open purchase order report, variance reports on perishables.

Not only could the system generate all the information needed for financial reporting purposes, but managers could get additional reports on demand as needed for managing operations and making decisions.

The added cost data were useful in calculating markups and gross margin, and the purchase dates were helpful in determining how long products remained in stock. Being able to analyzing sales by product classification alerted managers to which products were “hot” and which were lagging. Managers were able to discern subtle patterns of seasonality that enabled them to adjust purchasing levels to local demand.

Managers gained more detailed insights into their local markets than they had ever had and could manage inventory more effectively.

SOLUTIONS TO DISCUSSION QUESTIONS AND PROBLEMS

1.

D

2.

A

3.

D

4.

C

5.

B

6.

Exhibit 12.5 can be used to explain how a data request is handled by a database management system product. The numbers in the exhibit correspond to the numbers of the following steps: 1.

2.

The data request goes to the database management system through the communication facility of the computer’s operating system. Application programs go to a run time routine. Query language commands go to the query language processor. Forms and reports go to the forms processor or report writer.

The requests are then forwarded to the database management system engine.

3.

4.

5.

7.

The database management system engine determines the exact physical location of the data required for the request and forwards this information to the data management facility of the computer’s operating system. Then, the operating system locates the data.

The operating system brings the data into the computer’s random access memory where the database management system engine processes the data request according to the instructions from the application programs, query language, forms, or reports. Then, the database management system engine again works with the computer’s operating system to store the data back to a physical location in the database.

The database management system engine sends the requested data to the user through the communication facility of the computer’s operating system.

To speed up the sorting process an index file can be created. The file will be maintained in alphabetical order of customer name and will be as follows: Index File (Customer Name) CustName CustCode (index key) (record address) Franklin Resorts C210 Lee C220 Leeds Hotel C200 Manchester Camp C230

The sorting program goes to the index file and reads the first record--Franklin Resorts, CustCode C210.

Then the program retrieves the entire record for CustCode C210 from the data file. Then the sorting program reads the next record in the index file, which is Lee. The sorting program then retrieves the entire record for CustCode C220 from the data file. The sorting program continues in the same fashion until all the records in the customer data file have been retrieved in alphabetical order of name. The file would be printed as follows: Customer Master File CUSTCODE CustName C210 Franklin Resorts C220 Lee C200 Leeds Hotel C230 Manchester Camp 8. a.

Other Data ... ... ... ...

CurrentBal 0 6,200 4,500 2,900

The basic differences between a conventional file system and a database management system (DBMS) include the following: • •

In a conventional file system the files of accounting data are “owned” by the application programs, each with its own set of files and with each file physically separate from the other files.

In a database management system, the data are pooled and are “owned” by the entire accounting system.

8. b.

The chapter mentions five advantages of a database management systems. Students may answer any three of the following advantages:



Data integration. Data elements can be combined in virtually limitless ways, providing the illusion of files of varying content and format.

Program and data independence. Application programs are independent of the physical structure of the data they process.



  

Programming simplification. Database management systems are normally supplied with all storage, retrieval, and similar processes in place. All that remains for application developers is interfacing their programs with the database management system.

Data quality and efficiency. Each data element is stored only once, and multiple programs can access every data element as needed.

Data security. Security features can be written into a database management system to prevent unauthorized access or inadvertent contamination of data.

The chapter mentions five disadvantages of a database management systems. Students may answer any three of the following disadvantages:

 





Increased hardware requirements. A database management system places heavy demands on the central processing unit because of its large number of instructions. Also secondary storage may need to be increased to accommodate access linkages, such as index files.

Required technical skills. The successful implementation and operation of a mainframe, client/server, or distributed processing database management system require that application developers and other information systems personnel have database technical skills. On the other hand, it is relatively easy to implement and operate a person computer database management system.

Difficult conversion from conventional files. Converting existing application programs to work with a database management system required the modification of program code relating to the storage and structure of the existing files. Moreover, data that formerly resided in independent data files must be restructured for inclusion in the database.

Vulnerability to system failure. Every application depends on the database management Potential for error contamination. The immediate availability of data to many different users precludes easy isolation and correction of erroneous data. Procedures for careful screening and editing of data before they enter the database are essential.

8 c.

The database administrator is responsible for planning, organizing, and maintaining the database to satisfy users’ needs. Specific responsibilities include:

       

Develop different models of the database.

Select the database management system.

Create the structure of the database.

Load data into the database.

Create the data dictionary.

Develop standards for the database.

Develop application program standards.

Develop operating procedures for efficient running of the database (for example, logging transactions, making backups, recovering data in the event of loss or damage, and maintaining data security).

Monitor performance of the database by collecting and analyzing statistics, such as run time for applications.

Make adjustments to the database when necessary.

 

9.

A data dictionary for Beltaine Company's purchasing cycle would include the following items at a minimum:

Name AmtDue AmtPd CheckNo Cond DateDel DateRequest DeptNo DiscAmt ExtAmt InvDueDate InvPaytDate PaytTerm ProdDesc ProdNo PurOrdDate PurOrdNo PurReqDate PurReqNo QtyBack QtyDel QtyOrd RecTktNo SKU UnitCost VendInvDate VendInvNo VendName VendNo VoucherNo

Description Amount due Amount paid Check number Condition of goods Date delivered Date requested Department number Discount amount Extended amount Invoice due date Invoice payment date Payment terms Product description Product number Purchase order date Purchase order number Purchase requisition date Purchase requisition number Quantity backordered Quantity delivered Quantity ordered Receiving ticket number Stock keeping unit Unit cost Vendor invoice date Vendor invoice number Vendor name Vendor number Voucher number

Length 9 9 12 20 8 8 5 7 9 8 8 6 30 15 8 12 8

Type (Decimal) ($2) ($2) N(0) A/N Date Date A/N ($2) ($2) Date Date A/N A/N N(0) Date N(0) Date

12 6 6 6 15 2 7 8 15 30 6 12

N(0) N(0) N(0) N(0) A/N A/N ($2) Date A/N A/N N(0) N(0)

10.

A data dictionary for the construction company's job costing and general ledger applications begins below:

DATA DICTIONARY Name

Description

AcctPay AcctRec ActEquipCost ActLaborCost ActMatCost ActTotBill ActTotCost ActTotRev AmtBill BillRetain Cash ConstinProg CurrEarn CurrL/TDebt CustName CustNo EquipDay EquipDesc EquipChgRate EquipLeaseRate EquipNo EstEquipCost Est.LaborCost EstMatCost EstTotCost EstTotRev ExpComplDate FedIncTaxPay FixAsset-Gen FixAsset-Heavy GLAcctDesc GLAcctNo JobDesc JobNo LaborCode LaborDesc LaborHrs LaborRate Location LTDebt

Accounts payable Accounts receivable Actual equipment cost Actual labor cost Actual materials cost Actual total billings Actual total cost Actual total revenue Amount billed Billing retainage Cash Construction in progress Current earnings Current portion of long-term debt Customer name Customer number Equipment days Equipment description Equipment chargeout rate/day Equipment lease rate/day Equipment number Estimated equipment cost Estimated labor cost Estimated materials cost Estimated total cost Estimated total revenue Expected completion date Federal income tax payable Fixed assets--general Fixed assets--heavy equipment General ledger account desc.

General ledger account number Job description Job number Labor grade code Labor grade description Labor hours Labor rate Location Long-term debt

Length 8 8 8 8 8 8 8 8 8 8 8 8 8 8 30 6 3 30 6 6 6 8 8 8 8 8 8 8 8 8 30 4 50 10 6 30 8 6 30 8

Type (Decimal) $(2) $(2) $(2) $(2) $(2) $(2) $(2) $(2) $(2) $(2) $(2) $(2) $(2) $(2) A/N A/N N(0) A/N $(2) $(2) A/N $(2) $(2) $(2) $(2) $(2) Date $(2) $(2) $(2) A/N N(0) A/N A/N A/N A/N N(0) $(2) A/N $(2) (Table continues)

10.

Continued MatDesc MatNo MatQty MatCost MatSKU MobilExp OwnEq PayTaxExp PayTaxPay PercentCompl RetEarn StartDate StIncTaxPay SubActCost SubEstCost SubNo SubCntrNo SuperExp TaxWHPay TelFaxExp TotCurrAsset TotAsset TotCurrLiab TotLiab TotL&OE TransExp UtilExp

Material description Material number Material quantity Material unit cost Material stock keeping unit Mobilization expense Owner's equity Payroll tax expense Payroll taxes payable Percentage completion Retained earnings Start date State income tax payable Subcontract actual cost Subcontract estimated cost Subcontract number Subcontractor number Supervisory expense Tax withholdings payable Telephone and fax expense Total current assets Total assets Total current liabilities Total liabilities Total liabilities and owner's equity Transportation expense Utilities expense

50 15 8 8 3 8 8 8 8 3 8 8 8 8 8 6 6 8 8 8 8 8 8 8 8 8 8

A/N A/N N(0) $(2) A/N $(2) $(2) $(2) $(2) N(2) $(2) Date $(2) $(2) $(2) A/N A/N $(2) $(2) $(2) $(2) $(2) $(2) $(2) $(2) $(2) $(2)

11. a.

The tables have a one-to-many relationship. One record in the customer table can match many records in the sales order table, but one record in the sales order table can match only one record in the customer table.

11. b.

To join the two tables, a foreign key needs to be added to the sales order table because it is the “many” side of the relationship. The foreign key is the primary key of the customer table.

11. c.

Customer Code needs to be added to the sales order table.

12. a.

The tables have a one-to-many relationship. One record in the department table can match many records in the equipment table, but one record in the equipment table can match only one record in the department table.

12. b.

To join the two tables, a foreign key needs to be added to the equipment table because it is the “many” side of the relationship. The foreign key is the primary key of the department table.

12. c.

Department Code needs to be added to the equipment table.

13. a.

The relational operation performed on the vendor master file/table to create a new table with the name and current balance of the vendors is projection. The new table will be as follows: Vendor Master File Vendor Name Major Pool Supplies Deakin Pool Supplies Coventry Auto Co. Fennell Chemical Co.

13. b.

Current Balance 9,000 600 4,200 3,500

The relational operations performed on the vendor master file/table to create a new table with the name and current balance of the vendors whose current balances are more than $4,000 are selection and projection.

The new table will be as follows: Vendor Master File Vendor Name Major Pool Supplies Coventry Auto Co.

14.

The relational operations performed on Richards Company’s two customer master files are union and selection. The new table will be as follows: Customer Code C50 C60 C30

15.

Current Balance 9,000 4,200

Customer Name Nash Geoffrey Sangster

Address London London London

Other Data ... ... ...

Current Balance 5,000 3,200 0

The first words of each line in a SQL query are SELECT, FROM, and WHERE. SELECT specifies the table columns–a projection operation. FROM specifies the tables that need to be searched to satisfy the query. WHERE specifies the conditions of the query, for example, within a range of dates.

Chapter 13 Developing a Relational Database for an Accounting Information System INTRODUCTORY SCENARIO: SUGGESTED SOLUTIONS TO QUESTIONS 1.

Resources (e.g., inventory, cash or other asset used in an event), Events (e.g., business activities such as making a sale or purchase), Agents (those individual(s) involved in the event—these can be internal or external agents; examples include purchasing agents, vendors, customers, sales reps).

2.

One-to-one, one-to-many, many-to-many.

3.

Chris Hampton’s mission in the Introductory Scenario was to organize a task force to develop a new database management system for her company’s accounting system. She intended to use the REA framework approach to development of the database. Her strategy for fulfilling this mission was to organize a task force made up of at least one representative user from each functional area of the company. In addition, accountants, auditors, and information specialists would be on the task force. The accountants and auditors would be instrumental in ensuring that internal and external reporting requirements would be satisfied, that proper internal controls were designed into the system, and that the system would be auditable.

SOLUTIONS TO DISCUSSION QUESTIONS AND PROBLEMS

1. a.

The data elements that are needed to produce the purchase order are as follows:

P. O. number P. O. date Vendor code Vendor name Vendor address

Product number Quantity purchased Product description Unit cost Extended amount Total due

The document’s name (purchase order), the company’s name (Aca Pool Co.), its address, and telephone and fax numbers will be permanent elements of the purchase order format, and so are the labels for the various data elements.

1. b.

The steps to normalize the data with respect to the third normal form are as follows: i. ii.

Move all repeating data elements to a new table and assign primary keys to the original and new tables.

This step converts the data into the first normal form.

Move all nonkey data elements to a new table if they do not depend on, or are not determined by, the entire primary key and assign primary keys to the original and new tables. This step converts the data into the second normal form.

iii. Move any transitive dependencies to new tables and assign primary keys to the original and new tables. This step converts the data into the third normal form.

1. c.

The normalization process to determine what tables should be in the database so the accounting system can produce a purchase order follows. i.

Move all repeating data elements to a new table and assign primary keys to the original and new tables.

Nonrepeating Data Elements P. O. number P. O. date Vendor code Vendor name Vendor address

Repeating Data Elements Product number Quantity purchased Product description Unit cost

It is not necessary to store each extended amount and the total due because these are virtual data elements.

Tables in First Normal Form: (Primary keys are denoted by all capital letters and foreign keys are denoted by italicized letters):

PONO

Purchase Order Table PODate VendCode

Name

Address

Purchase Order Line Table PONO PRODNO

Desc

Cost

Qty

The purchase order table and the purchase order line table have a 1:* relationship because one record in the purchase order table can match many records in the purchase order line table. However, one record in the purchase order line table matches only one record in the purchase order table. To join the two tables, the primary key of the purchase order table (PONO) is added to the purchase order line table (the many side of the relationship). The primary key of the purchase order line table is the combination of PO number and product number. ii.

Move all nonkey data elements to a new table if they do not depend on, or are not determined by, the entire primary key and assign primary keys to the original and new tables.

The procedure used to convert the purchase order table to 1NF also converted it to 2NF. However, the purchase order line table, which has a composite key, needs to be converted to 2NF. Product number, description, and cost need to be moved to a new table because they are not determined by the entire composite key PONO/PRODNO. The new table is called the inventory table, and its primary key is product number.

The purchase order line table and the inventory table have a *:1 relationship because one record in the purchase order line table matches one record in the inventory table, but one record in the inventory table matches many records in the purchase order line table. Therefore, the “prodno” primary key of the inventory table needs to be a foreign key in the purchase order line table. The combination of PONO and PRODNO is the primary key of the purchase order line table. The purchase order line and inventory tables in 2NF are as follows:

Tables in Second Normal Form: Purchase Order Line Table PONO PRODNO Qty

iii.

Inventory Table PRODNO

Desc

Cost

Move any transitive dependencies to new tables and assign primary keys to the original and new tables. The purchase order table has a transitive dependency. PO number (the primary key) of the purchase order table determines vendor code (a nonkey data element). Vendor code determines name and address, other nonkey data elements. Therefore, vendor code, name, and address need to be moved from the purchase order table to another table, called vendor table, with vendor code as the primary key. The vendor table and the purchase order table have a *:1 relationship because one record in the vendor tables matches one record in the purchase order table, but one record in the purchase order table matches many records in the vendor table. Therefore, the primary key of the vendor table (“vendcode”) is a foreign key in the purchase order table.

Tables in Third Normal Form: Vendor Table VENDCODE

Name

Address

Purchase Order Line Table PONO PRODNO Qty

Purchase Order Table PONO PODate

Inventory Table PRODNO

Desc

VendCode

Cost

2.

The data access diagram for the purchase order tables created in Question 3 is shown below. The purchase order table and the purchase order line table comprise the purchases transaction file. The inventory table is the inventory master file, and the vendor table is the vendor master file.

Data Access Diagram for Tables in Third Normal Form in Question 3

Purchase Order Table PONO

PODate

VendCode

Purchase Order Line Table PONO

PRODNO

Qty

Inventory Table PRODNO

Desc

Cost

Vendor Table VENDCODE

Name

Address

The database is queried by purchase order number. Each purchase order, addressed to a particular vendor, owns one or more purchase order lines, keyed on the combination of P. O. number and product number. Each line is associated with a quantity and references the product number. The vendor is keyed on vendor code.

3. a. Tables in the third normal form are shown below. Primary keys are in capital letters, and foreign keys are italicized. Note that extended amount can be calculated on demand as a virtual data element.

ORIGINAL FILE DEFINITION Sales Transaction File: Invoice no.

Data entry clerk no.

Invoice date Sales representative no.

Sales order no.

Customer PO no.

Customer number Customer shipping address Product no.

S.K.U. Quantity sold Unit sales price

TABLES IN THIRD NORMAL FORM INVOICE NO. SALES ORDER NO. Invoice date

Open Sales Order File:

CUSTOMER NO. Customer name Customer billing address

Sales order no.

Customer PO no.

Date of sales order Promised shipment date Customer no.

Customer name Customer shipping address Customer billing address Product no.

Product description S.K.U. Quantity ordered Unit sales price Extended price

SALES ORDER NO. Date of sales order Salesrep. No. Customer no.

Customer PO no.

Customer shipping address Promised shipment date Data entry clerk no.

PRODUCT NO. Product description s.k.u.

Unit sales price SALE ORDER NO. PRODUCT NO. Quantity ordered Quantity sold

3. b.

The data access diagram showing how data elements would be retrieved is shown below.

Retrieval by sales order number starts at Point A; retrieval by invoice number starts at point B.

A

B

INVOICE NO.

SALES ORDER NO.

Invoice Date

SALES ORDER NO. SO Date Salesrep. no.

SALES ORDER NO.

PRODUCT NO.

Cust. no. Cust PO no.

Cust ship add Prom ship date

CUST NO. Cust Name

Cust billing address

Quantity ordered

PRODUCT NO. Prod description

Quantity sold

s.k.u.

Unit sales price

Clerk no.

4. a.

Tables in the third normal form are shown below. Primary keys are in capital letters, and foreign keys are italicized. Note that extended amount can be calculated on demand as a virtual data element.

ORIGINAL FILE DEFINITION Purchases Transaction File: Trans. no.

Data entry clerk no.

Date received Purchase order no.

Vendor code Product no.

S.K.U. Quantity received Unit purchase price Open Purchase Order File:

Purchase order no.

Purchase requisition no.

Date of purchase order Expected receipt date Vendor code Vendor name Product description S.K.U. Quantity ordered Unit purchase price Extended price

TABLES IN THIRD NORMAL FORM VOUCHER NO. PURCHASE ORDER NO. Date received PURCHASE ORDER NO. Date of purchase order Expected receipt date Vendor code Data entry clerk no.

Purchase requisition number VENDOR CODE Vendor name PRODUCT NO. Product Description s.k.u.

PURCHASE ORDER NO. PRODUCT NO. Quantity ordered Quantity received Unit purchase price

4. b.

The data access diagram showing how data elements would be retrieved is shown below. Retrieval by purchase order number starts at Point A; retrieval by voucher number starts at point B.

A

B

VOUCHER NO. PURCHASE ORDER NO. Date received

PURCHASE ORDER NO. PO Date Exp. receipt date

Vendor code

Clerk no.

Pur. req. no.

VENDOR CODE Vendor name

PURCHASE ORDER NO.

5. a.

PRODUCT NO.

Quantity ordered

Quantity received

PRODUCT NO.

Prod description

s.k.u.

Unit purchase price

The data elements that are needed to produce the project report are as follows: Project number Project description Project start date Project completion date Employee number Employee name

Specialty Estimated hours Actual hours Variance Total estimated hours Total actual hours Total variance

The name of the report (Project Report) and the labels for the various data elements will be permanent elements of the project report format.

5. b.

The steps to normalize the data with respect to the third normal form are as follows: i.

Move all repeating data elements to a new table and assign primary keys to the original and new tables.

This step converts the data into the first normal form.

ii.

Move all nonkey data elements to a new table if they do not depend on, or are not determined by, the entire primary key and assign primary keys to the original and new tables. This step converts the data into the second normal form. iii. Move any transitive dependencies to new tables and assign primary keys to the original and new tables. This step converts the data into the third normal form.

5. c.

The normalization process, which is used to determine what tables should be in the database so the accounting system can produce a project report, follows. i.

Move all repeating data elements to a new table and assign primary keys to the original and new tables.

Nonrepeating Data Elements

Repeating Data Elements

Project number Project description Project start date Project completion date

Employee number Employee name Specialty Estimated hours Actual hours

It is not necessary to store the amount of each variance between estimated hours and actual hours, the total estimated hours, the total actual hours, and the total variance because these are virtual data elements.

Tables in First Normal Form: (Primary keys are denoted by all capital letters and foreign keys are denoted by italicized letters): Project Table PROJNO

Project Line Table PROJNO EMPNO

Desc.

StartDate

CompDate

Name

Specialty

EstHrs

ActHrs

The project table and the project line table have a 1:* relationship because one record in the project table can match many records in the project line table. However, one record in the project line table matches only one record in the project table. To join the two tables, the primary key of the project table (PROJNO) is added to the project line table (the many side of the relationship).

ii.

Move all nonkey data elements to a new table if they do not depend on, or are not determined by, the entire primary key and assign primary keys to the original and new tables.

Tables in Second Normal Form: Project Table PROJNO

Desc.

StartDate

CompDate

The project table does not change because it did not have a composite key. It was already in 2NF. The project line table, however, needs to be converted to 2NF. The employee number, name, and specialty need to be moved to a new table because they are not determined by the entire composite key of PROJNO and EMPNO. Employee number is the primary key of the new employee table.

PROJNO

Project Line Table EMPNO EstHr ActHr

Employee Table EMPNO Name

Specialty

The project line table and the employee table have a *:1 relationship because one record in the project line table matches one record in the employee table, but one record in the employee table matches many records in the project line table. Therefore, the “empno” primary key of the employee table needs to be a foreign key in the project line table. The combination of PROJNO and EMPNO is the primary key of the project line table. iii. Move any transitive dependencies to new tables and assign primary keys to the original and new tables. The tables in the second normal form do not have any transitive dependencies; therefore, they are also in the third normal form.

6.

The data access diagram for the tables in the third normal form in the previous question is as follows:

Project Table Desc.

PROJNO

StartDate CompDate

Project Line Table PROJNO

EMPNO

EstHr

ActHr

Employee Table EMPNO

Name

Specialty

The database is queried by project number. Each project owns one or more project lines, keyed on the combination of project number and employee number. Each line is associated with an estimated number of hours and actual number of hours. Each line is also associated with one employee.

7. a.

The costs of the three active jobs are determined as follows: JOB 100 Part Number

Quantity

Unit Cost

Materials Cost

Employee Number

Hours Worked

Wage Rate

300 301 302 303

2 5 10 6

$100 120 140 160

$ 200 600 1,400 960 $3,160

800 801 802

40 40 30

$8.50 9.00 7.00

Total prime cost = $3,160 + $910 = $4,070

Labor Cost $340 360 210 $910

JOB 101 Part Number

Quantity

Unit Cost

Materials Cost

Employee Number

Hours Worked

Wage Rate

300 302

4 5

$100 140

$ 400 700 $1,100

802 803

10 40

$7.00 8.00

Labor Cost $ 70 320 $390

Total prime cost = $1,100 + $390 = $1,490

JOB 102 Part Number

Quantity

Unit Cost

Materials Cost

Employee Number

Hours Worked

Wage Rate

300 303

20 1

$100 160

$2,000 160 $2,160

804 805

40 40

$10.00 9.00

Labor Cost $400 360 $760

Total prime cost = $2,160 + $760 = $2,920

7. b.

The first two columns in Tables 2 and 4 contain the composite keys: job number/employee number and job number/part number, respectively. Only the third column in each of these tables contains "real data," namely the corresponding number of hours worked and the quantity of parts used. The composite keys serve to relate each job to the employees who worked on it and the parts that were used in it. Tables 3 and 5 represent the employee master file and raw materials inventory file.

8. a.

The entities for the purchase event are as follows:

Resources Inventory

Entities Events Purchase

The E-R diagram of the entities is on the next page.

Agents Employee Vendor

Entities in Entity-Relationship Diagram

EMPLOYEE INVENTORY

PURCHASE VENDOR

8. b.

The relationships and their types are: Relationship Purchase consists of inventory Purchase is made by an employee Purchase is made from a vendor

Type of Relationship *:* *:1 *:1

The most accurate way to determine the type of each relationship is to think in terms of tables even though they have not been created yet. 

Purchase and inventory. If we examine this purchase/inventory relationship from the viewpoint of the purchase, we know that one purchase can consist of many products. Another way of saying this is that one record in the purchase table can be matched with many records in the inventory table. If we examine the purchase/inventory relationship from the viewpoint of the inventory, we know that one product can be included in many vouchers. Another way of stating this is that one record in the inventory table can be matched with many records in the purchase table. The relationship between the purchase and inventory tables, therefore, is many-to-many (*:*).



Purchase and employee (purchasing agent). If we examine this purchase/employee relationship from the viewpoint of the purchase, we know that one purchase can be matched with one employee. From the viewpoint of the employee, one employee can be matched with many purchases. Therefore, the relationship between purchase and employee is many-to-one (*:1).



Purchase and vendor. From the viewpoint of the purchase, one purchase can be matched with one vendor.

From the viewpoint of the vendor, one vendor can be matched with many purchases. Therefore, the relationship between purchase and vendor is many-to-one (*:1).

The E-R diagram with the relationships and the types of relationship is as follows:

INVENTORY

*

consists of

*

*

1

made from

1

EMPLOYEE

PURCHASE *

8. c.

made by

VENDOR

The entities and their attributes are as follows:

Entities* Purchase

Attributes Voucher number, date, employee code, vendor code Inventory Product number, description, unit cost Employee Employee code, name Vendor Code, name, city Purchase/Inventory Voucher number, product number, quantity purchased *The purchase/employee and the purchase/vendor relationships have no attributes.

8. d.

The following five tables are required because one table is prepared for each entity and one for the manyto-many relationship:

Purchase Table VOUCHERNO

PurDate

EmpCode

Purchase/Inventory Table VOUCHERNO

PRODNO

Inventory Table PRODNO Desc

Cost

Employee Table EMPCODE

EmpName

Vendor Table VENDCODE

Name

City

Qty

VendCode

9. The data access diagram for the tables is as follows:

Purchase Table VO UCHERNO

PurDate

EmpCode

VendCode

Purchase/Inventory Table PRODNO

VOUCHERNO

Qty

Inventory Table PRODNO

Desc

Cost

Employee Table EMPCODE

EmpName

Vendor Table VENDCODE

10.

Name

City

One distinct difference in the system output approach and the REA framework approach is that the system output approach focuses on identifying the desired system outputs. The REA framework approach focuses on identifying business events, or activities, in the organization. The following table compares the steps required for the system output and REA framework approaches to developing a relational database for an accounting system.

Steps for Developing a Relational Database for an Accounting System System Output Approach  Identify and document the system outputs and the contents of the outputs that are of interest to users.  Identify and document what data elements need to be stored to produce the output.

 Determine what tables to create and what data elements to put in which tables by using a process called data normalization.  Evaluate the tables to determine if additional tables need to be created.  Document the tables with a data access diagram.

REA Framework Approach  Identify and document the business events, or activities, that are of interest to users and the resources and agents that are related to the events.  Identify and document the relationships among the events, resources, and agents that are of interest to users.  Identify and document the attributes that are related to the resources, events, agents, and relationships that are of interest to users.  Determine what tables to create and what data elements to put in which tables by referring to the E-R diagram.  Evaluate the tables to be sure they are in the third normal form.  Document the tables with a data access diagram.

Student Activity To assist students with this activity, we meet in the student computer lab for approximately 1 ½ hours. At this time, I walk the students through creating the database tables in Microsoft Access. Each student brings a diskette and saves the database. The students then prepare the invoice and the query for the invoices outside of the lab, on their own, using the tables they created in the lab.

Chapter 14 Electronic Business

INTRODUCTORY SCENARIO: SUGGESTED SOLUTIONS TO QUESTIONS 1.

Advantages: speed of transactions, reduction in input errors, reduces the number of vendors (closer relationship with those remaining), beneficial to vendors (aka trading partners) due to increases in volume of business, prices negotiated/fixed for longer periods, allows for just-in-time inventory, can eliminate invoices with Evaluated Receipts Settlement (ERS). Disadvantages: price per shipment might be higher with loss of volume discounts (but prices and minimum orders could be locked in for vendor), must provide some proprietary information to vendors to help them with planning, problems with legality/enforcement issues due to the use of electronic documents (i.e., no signatures). Might have to encourage employee “buyin.” A recommendation for the architecture would be a VAN, which would allow business transactions to take place 24/7. Point-to-point would be less expensive, but would be limited in when transactions could take place.

2.

Offer financing incentives for the hardware and software to small vendors; offer to purchase hardware/software for vendors and lease it back to them; use the traditional method for “one-time” or items ordered rarely; provide information as to how EDI environment will make the smaller vendors more competitive in the long-run, will result in less paperwork, and fewer errors. EDI could also help vendors expand their client base.

3.

EDI is widely used in the apparel, footwear, and accessories industries and is a “tried and true technology.”

Many of 7thOnline customers want to maintain their investment in EDI rather than migrate to XML. Therefore, 7thOnline found a way to marry EDI with Web-based technology. Using GE Global eXchange Services, 7thOnline can support EDI, XML, and other transaction formats.

SOLUTIONS TO DISCUSSION QUESTIONS AND PROBLEMS 1.

B

2.

D

3.

A value-added-network (VAN) expedites the delivery of electronic documents over a private network. The functions of a VAN are to: • Provide implementation and continuing support for new EDI users • Accept EDI transmissions to outside parties and store them • Deliver EDI transmissions when requested by intended recipients • Translate the transmissions from the sender’s format to that of the recipient, if necessary • Guarantee security and reliability

4.

B

5.

The EDI standard X.12 is set under the supervision of the American National Standards Institute and is used by most domestic companies. The EDIFACT (EDI for Administration, Commerce, and Transportation) is set under the supervision of the United Nations and is used more commonly overseas.

6.

7.

8.

9.

10.

11.

B C B C A A

12.

The three approaches to support EDI over the Internet are Internet EDI, Web-EDI, and XML/EDI. Internet EDI replaces VANs with Internet service providers. Standards for using encryption and digital certificates to secure EDI messages have been developed by a group called EDIINT. The trading partners purchase connectivity software that supports EDIINT. Web-EDI allows a small business to participate in EDI using only a browser and an Internet connection.

The larger company provides a Web-based EDI hosting service with web-based forms for every EDI message it accepts. The smaller trading partner can log onto the larger company’s web site and complete a form. This form goes to the larger company’s web server where it is validated, packaged as an EDI message, and then routed as a normal EDI message.

XML/EDI uses templates that enable the mapping of EDI messages from the way the data are stored in a database to the EDI standard message. XML/EDI processes the message on the client’s side. The client company has to upgrade its accounting package to one that supports XML/EDI. The client downloads the XML/EDI template and a software agent helps the client create the document.

13.

The best plan would be to start your presentation by explaining that EDI would enable customers to submit electronic purchase orders and for the company, in return, to send electronic invoices to customers.

Assuming that the textile company contracted with a value-added network to provide EDI services, little additional hardware and software would have to be acquired.

The most important benefit would be accelerating the flow of transactions. A women’s apparel manufacturer must be able to produce goods quickly to respond to rapid fashion changes. Enabling these manufacturers to place fabric orders on short notice would enhance your company’s ability and readiness to meet the needs of these customers. Demonstrating such concern would likely result in a stronger link with the customer and increased sales volume. Moreover, the apparel manufacturer might refer other organizations to your company. Another benefit would be the cost saving–and improved accuracy– resulting from elimination of transaction keying. Finally, the ability to send electronic invoices to customers would speed cash collection and help reduce accounts receivable.

14.

The factors to be considered by hospital administration before implementing an EDI system include:    

Initial and ongoing costs of the EDI system. Initial costs include necessary hardware and software, training, and conversion costs. Ongoing costs include fees paid to a value-added network.

The hospital’s ability to absorb the costs or to obtain external financing.

Expected savings from eliminating the preparation and mailing of paper purchase orders.

Pattern of purchasing. Does the hospital typically issue one purchase order for large volumes of supplies and drugs to be delivered over an extended period, or does it issue a purchase order for every batch of delivered goods?

   

15.

Urgency of receiving ordered goods. Does the hospital operate a just-in-time system for supplies and drugs? How does the hospital currently expedite ordering drugs needed on short notice for critical patient care?

Expected increase or decrease in purchasing volume.

Expected changes in the hospital’s mission. For example, a change from primary care and emergency services to rehabilitation would dramatically alter its need for placing expedited orders.

Access to an EDI system by major and minor vendors. What would happen if only some of the hospital’s vendors subscribed to EDI? Could incentives to given to bring vendors into an EDI system?

Security issues include the following: • confidentiality of the messages • authentication to determine if the sender is who the sender claims to be • prevention of access to the clients and servers on the network Because the Internet is unsecured, someone could intercept messages. Encrypting the messages makes them unreadable even though they may still be intercepted. In the paper world, a hand-written signature on a document serves as authentication. In the electronic world, a digital signature serves as authentication.

A digital signature is extra data appended to a message which identifies and authenticates the sender and message data using public-key encryption. Access to servers and clients is prevented by firewalls and proxy servers.A firewall consists of hardware and software that work together to channel all Internet communications through a control gateway and filter messages coming into the private network. A proxy server is a go-between between the user on the company’s network and the Internet. The proxy server filters requests for services from the Internet and actually sends the request itself and receives the response which it forwards to the user

16.

Repudiation is a customer’s denial that an order was placed for goods from a vendor. If a vendor shipped goods based on an order received and created an account receivable but the customer repudiates, the vendor may never be able to collect the receivable. A digital signature prevents repudiation.

17.

A firewall consists of hardware and software that work together to channel all Internet communications through a control gateway and filter messages coming into the private network. A proxy server acts as a go-between between a user and the Internet. The proxy server receives the request for the Internet service, such as a Web page, from the user. The proxy server evaluates the request according to its filtering rules.

If the request is validated by the filter, the proxy server itself makes the request from the Internet, receives the response, and then forwards the response to the user. The proxy server is invisible to the user.

18.

Students’ solutions will vary.

Chapter 15 AIS Selection and Implementation INTRODUCTORY SCENARIO: SUGGESTED SOLUTIONS TO QUESTIONS 1. The value-added reseller (VAR) will select an appropriate software package for Grace’s business. The VAR will then implement the system for Grace and, for an additional ongoing fee, provide continuing support for the system.

2. The programmers had to write a custom revenue module because the packaged revenue modules did not support Grace’s operations. In addition, the programmers had to write interfaces between the revenue module and the other modules.

3. The VAR for Grace’s company could use modular conversion, pilot conversion, parallel conversion, or direct conversionThe choices are modular conversion, pilot conversion, parallel conversion, or direct conversion. Given the small number of workers, a parallel conversion running two set systems simultaneously and learning the new system at the same time would be very difficult. Therefore, a direct conversion is recommended.

4. ESI is installing three new licensed modules and a custom module. It seems likely that the only interaction between modules will be between the general ledger and other modules, and this is likely to require only monthly data transfers to GL. Thus it appears that all modules could be installed sequentially, perhaps one a month. The conversions to be performed by module are: Receivables

General Ledger

Payables

Payroll

Present System

Mixed manual and computerized system

Provided by outside accountant

Manual system

Manual system

New System

Customized software system

Packaged software system

Packaged software system

Packaged software system

The receivable module supports daily operations as well as providing basic accounting functions. It should be implemented alone for several reasons: 1.

2.

3.

Customized software is more likely to have bugs than is packaged software.

It supports most of the business processes and thus will be far more difficult to implement.

Since it supports the business processes, keeping the new system going after conversion is critical to business operations, whereas one can easily fallback to the earlier methods if a failure occurs in other modules.

Benefits from conversion to the new receivables system are likely to be far greater than the other three modules combined. Therefore, a conversion to receivables should likely occur first, and after this module is operating satisfactorily, the other modules can be implemented.

Grace should insist that at least a partial cycle of actual data be run through the system before any implementation is attempted. At least a day’s activity should be input to the system, and all daily, monthly, and annual routines executed. This will test the ability of the system to handle all types of events, transactions, reports, and other activities. Thus, Grace should be sure that all types of events are included in the actual test data. This test could be conducted on a Saturday and/or Sunday.

Conversion to the new receivables system should be thoroughly planned. Some data will be input from manual records, other data will be transferred from the old computer files. The conversion work must be assigned and time budgets created for each step. Software used to convert existing electronic files must be created and tested.

Given the penalties that might be associated with a failure in receivables conversion, a fallback position should be considered. One even might conduct a trial conversion by selecting a weekend and practicing the conversion. For both the practice and the actual conversion, Grace may wish to select a 3-day (holiday) weekend.

Following a successful conversion of receivables, payables and/or payroll should likely be the next candidates for conversion. If desirable, data from receivables, payables, and payroll can continue to be handed off to the accountant for GL processing. Moreover, Grace and at least some of her employees are familiar with the AP and PR functions, whereas they are bringing GL operation in from the outside. If they implement GL first, they will have to develop a temporary procedure for entering manually generated AP and PR data into GL.

SOLUTIONS TO DISCUSSION QUESTIONS AND PROBLEMS

1.

2.

3.

B E C

4.

The primary reason that CPAs often advise against modification of packaged accounting software is that there is a continuing expense of making the modifications each time the packaged software developer releases a new version of the software. Additional reasons include the initial expense of modifications and the likelihood that modifications will be poorly documented.

5

If multiple suppliers for a system are acceptable, then a better solution may be possible since a much larger array of suppliers will qualify as bidders. The cost of the project may even be less. Disadvantages include (1) the difficulty in coordinating the work of different suppliers and (2) the probability that if problems arise, then the different vendors will deny responsibility and place the blame on each other.

6.

The conversion concepts are: Modular conversion Pilot conversion Parallel conversion Direct conversion Modular conversion is the implementation of modules in sequence, one after another. Total conversion of all modules at the same time is the opposite of modular conversion.

Parallel conversion is the implementation of a new system with the old system continuing to be run at the same time (in parallel), comparing the outputs and discontinuing the old system when results from the new are acceptable.

Direct conversion is the conversion of an old system to a new one and halting the old system at that point.

Direct conversion is the opposite of parallel conversion.

Pilot conversions occur when many identical systems are to be converted, as with identical operations in many locations (e.g., McDonalds, Western Auto, Wal-Mart). A pilot conversion would be an initial conversion at one or a few locations before a general conversion of all locations. This method isolates and resolves conversion problems on a small scale, thereby avoiding them in later conversions.

7.

A Gantt chart is a horizontal bar chart showing on a time scale the start and stop dates of project tasks. A network chart shows the sequence of the various project tasks. The network chart should be prepared first.

8.

A project implementation team should be headed by a senior organization manager so that the team will have sufficient power to expeditiously complete the project. If consultants are used, they are usually represented on the team because of the expertise in implementations and accounting software that they possess. Each functional area of the organization that will either use or be impacted by the new system should be represented so that they (1) can be assured that their needs are being met and (2) they “buy in” to the results.

9.

C

10.

Some sources of information regarding vertical market accounting packages include: Internet Trade associations Trade magazine classified advertisements

11.

The best sources of information regarding horizontal packages are: The Accounting Software Library, a software program and two-volume set of manuals published by Solutions, Inc., contains consultant procedures for conducting an implementation engagement.

CTS Software Selection is a website that allows the user to download a free software selection kit..

Several Internet sites list leading providers of accounting packages. Some examples are 2020software.com, accountingnet.com, and cpaadvisor.us.

12.

Accounting VARs (Value-Added Resellers) are organizations that specialize in the sale and implementation of accounting software. Many are CPAs and many CPA firms have selected personnel that perform the VAR function. Accounting VARs also offer (at a fee) continuing support to clients for whom they have implemented accounting software. This service is often the greatest source of fees from the sale, implementation, and support of accounting software.

13.

B

14.

A demonstration script is a detailed list of functions that should be performed in demonstrating the functionality of accounting software packages being considered.

A script to demonstrate the recording of customer remittances using both pre and post-identification is:

15.

a.

Set up several representative customer accounts abstracted from actual data. The number of accounts may be related to the usual complexity of customer accounting.

b.

Using pre-identification, record representative remittances as well as complex remittances (using actual data if feasible).

c.

Using post-identification, record representative remittances as well as complex remittances (using actual data if feasible). After recording the remittances, match the remittances with open items using post-identification.

You should investigate the product plans of potential accounting software suppliers to gain assurances that the product will continue to be supported and updated. In most cases, asking the vendor to sign a multiyear contract support agreement can test this. Occasionally software developers cancel support for a product abruptly and with little notice. One well-known accounting developer, who had previously supported their accounting software on a pay-as-you-go basis, announced termination of any support for a product unless a service contract was purchased within 30 days. Anyone licensing the software recently and planning to pay for support on an as-needed basis was thereby coerced into an annual contract even though they may have had considerable expertise in house. Several years ago Dow-Jones (publisher of the Wall Street Journal) marketed an accounting package for one year, found it to be unprofitable, and closed that division, leaving adopters with no support—and a dead-end product.

The financial status and plans of the supplier should be investigated to the extent possible. If the company is listed publicly, considerable information should be available from normal investment sources. At a minimum, credit-reporting agencies can be contacted to assess the credit-worthiness of the potential supplier. One can also observe industry trends to assess the probability that the company will continue.

Fortunately, another accounting software developer usually acquires those accounting packages that have a critical mass of usage when the original developer discontinues operations. Moreover, consolidation of the accounting software industry in recent years may portend greater stability in the future.

16.

Most newly adopted AISs are far more functional than the systems being replaced; therefore, they may be expected to have a greater licensing cost. For example, payroll systems are being replaced by human resource management systems. In addition to performing the payroll function, the latter track EEOC compliance, maintain succession tables that temporarily reassign duties upon the unplanned absence of essential personnel, and manage employee benefits such as retirement systems. Conventional sales order and receivables processing may be replaced by revenue systems that include sales contact management, electronic commerce with customers entering their purchase orders into our sales order system, and tracking the progress of their order by interrogating our system.

17.

A company with talented and experience personnel may not need a standard support agreement that provides either limited or unlimited support access at no cost in addition to the annual support fee. But support will be required nevertheless because the company will often not have access to the source code of the program in order to make necessary changes due to software bugs, operating requirement changes or regulatory requirements. And even if source code is available, the cost of internal maintenance involving programming is usually far more than the cost of vendor support. Therefore, at a minimum, there should be an agreement specifying (1) the availability of support for an hourly fee and (2) the availability of updates.

Oral assurances should not be accepted. This agreement should be in writing with at least some nominal consideration changing hands. To be left with the inability to bill customers if the program does not function could result in bankruptcy of our company. Programming bugs may lie undiscovered for years before interrupting the operation of a program. And if the company now is required to report form 1099 data electronically, an update from the program developer will be a fraction of the cost of internal development.

18.

D

19.

B

20. a.

Jose’s contract with the VAR may contain a clause denying any liability for consequential damages, which arose from Jose’s inability to bill his customers. The legal status of such clauses varies from state to state, so that in some states he may have a reasonable basis for the suit while in others the courts may summarily dismiss the suit. Even if the state law is favorable to Jose, recovering sufficient damages to make him whole is unlikely. Attorney’s fees usually compose the bulk of such settlements. While the VAR is probably local and easier to sue (the local courts will be the venue), the licensing contract with the Canadian company likely provides that any suits must be filed in local Canadian courts, which will be expensive.

20. b.

Jose may have overlooked the significance of two contract provisions, the merchantability clause as well as the clause denying liability for consequential damages. Moreover, he may not have investigated the viability of the software developer or the financial resources of his VAR.