CH 13 The Expenditure Cycle PDF

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CH 13 The Expenditure Cycle OICE

nditure cycle, the primary external exchange of information occurs with rs. s. c) management. d) the audit committee.

2. Within the expenditure cycle, internal information flows a) b) c) d)

from the production cycle to the expenditure cycle. from the revenue cycle to the expenditure cycle. to the general ledger from the expenditure cycle. All of the above are correct.

3. To accomplish the objectives set forth in the expenditure cycle, a number of key management decisions must be addressed. Which of the decisions below is not ordinarily found as part of the expenditure cycle? a) b) c) d)

How can cash payments to vendors be managed to maximize cash flow? What is the optimal level of inventory and supplies to carry on hand? Where should inventories and supplies be held? What are the optimal prices for each product or service?

4. There are three basic activities in the expenditure cycle. One of the basic activities is the receiving and storage of goods, supplies, and services. What is the counterpart of this activity in the revenue cycle? a) b) c) d)

the sales order entry process the shipping function the cash collection activity the cash payments activity

5. The first major business activity in the expenditure cycle is ordering inventory and supplies. The traditional approach to management of inventory to ensure sufficient inventory to maintain production is known as a) b) c) d)

safety stock. just-in-time production. economic order quantity. optimal inventory quantity.

6. EOQ includes several variables that must be taken into consideration when calculating the optimal order size. One variable, the costs associated with holding inventory, is referred to as a) b) c) d)

ordering costs. carrying costs. the reorder point. stockout costs.

7. The decision of when to place an order in a traditional inventory system is specified by the a)

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company inventory policies.

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c order quantity. point. point.

ds are being ordered from a vendor, which electronic files are either read or updated? a) b) c) d)

inventory, vendors, and accounts payable vendors and accounts payable open purchase orders and accounts payable inventory, vendors, and open purchase orders

9. One alternative approach to managing inventory is materials requirements planning (MRP). What is a key feature of this approach? a) b) c) d)

to minimize or entirely eliminate carrying and stockout costs to reduce required inventory levels by scheduling production rather than estimating needs to determine the optimal reorder point to determine the optimal order size

10. The major advantage of an MRP inventory system is that it reduces inventory levels. This is because a)

the uncertainty about when materials are needed is reduced, thus reducing the need to carry large levels of inventory. b) the system is able to compute exactly the cost of purchasing by taking into account all costs associated with inventory carrying. c) inventory is brought to the production site exactly when needed and in the correct quantities by the vendor. d) None of the above are correct .

11. The inventory management approach that attempts to minimize, if not eliminate, carrying and stockout costs is a) b) c) d)

the materials requirements planning. the economic order quantity. a just-in -time inventory system. There is no such inventory management approach.

12. What aspect below best characterizes a JIT inventory system? a) b) c) d)

frequent deliveries of smaller quantities of items to the work centers frequent deliveries of large quantities to be held at the work centers less frequent deliveries of large quantities of goods to central receiving infrequent bulk deliveries of items directly to work centers

13. What is the key difference between the MRP and JIT inventory management approaches? a) b) c) d)

Only JIT reduces costs and improves efficiency. MRP is especially useful for products such as fashion apparel. JIT is more effectively used with products that have predictable patterns of demand. MRP schedules production to meet estimated sales needs; JIT schedules production to meet customer demands.

14. MRP will be a preferred method over JIT when the

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for inventory is fairly predictable. for inventory is mostly unpredictable. has a short life cycle. the above are correct.

15. A key decision in ordering is selecting a suitable vendor. Which of the following would not be a major criterion in vendor selection? a) b) c) d)

prices of goods quality of goods credit rating of the vendor ability to deliver on time

16. Once a vendor is selected for a product, the company's identity is recorded in the a) b) c) d)

general ledger. purchase requisition file. product inventory transaction file. product inventory master record.

17. The paper document or electronic form that formally requests a supplier to sell and deliver specified products at designated prices is called a) b) c) d)

a purchase order. a materials requisition. a sales invoice. a receiving report.

18. A purchase order is a) b) c) d)

a document formally requesting a vendor to sell a certain product at a certain price. a request for delivery of certain items and quantities. a contract between the buyer and vendor once accepted by the vendor. All of the above are true.

19. A standing order to purchase specified items at a designated price, from a particular supplier for a set period of time, is called a a) b) c) d)

set order. blanket purchase order . purchase order. commodity order.

20. A major cost in the purchasing function is the number of purchase orders processed. One technique that may reduce purchasing-related expenses is to have suppliers compete with each other to meet demand at the lowest price. This name of this technique is a) b) c) d)

an EDI auction. a trading exchange. a reverse auction. a supplier consortium.

21. The receiving and storage of goods is the responsibility of the receiving department, which usually reports to the __________ function in the company.

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y control on ng

22. The receiving department has two major responsibilities in connection with the expenditure cycle. Identify one of these responsibilities. a) b) c) d)

shipping products most efficiently and at the lowest cost deciding if the delivery should be accepted verifying any purchase discounts for the delivery deciding on the location where the delivery will be stored until used

23. Which of the following is generally not shown on a receiving report? a) b) c) d)

price of the items quantity of the items purchase order number counted and inspected by

24. A receiving clerk notes that a delivery of 10 units has been received, but the purchase order specified 12 units. A debit memo will be prepared to adjust for the difference in the quantity ordered and received. Who should prepare this document? a) b) c) d)

the receiving clerk management the sales department the purchasing department

25. Identify which of the following scenarios the buyer could adjust by using a debit memo document. a) b) c) d)

quantity different from that ordered damage to the goods goods that fail inspection for quality All of the above are possible scenarios.

26. What is one of the best ways to improve the overall efficiency and effectiveness of the receipt and storage of ordered items? a) requiring all suppliers to have a second party verify quantities purchased before shipment b) requiring all suppliers to have bar-codes on their items to allow electronic scanning upon delivery by the receiving department c) requiring all suppliers to use EDI to expedite the receiving department function d) requiring all delivery trucks to have satellite data terminals to expedite the receiving department function

27. All of the following technologies could be useful aids in the receiving process except a) b) c) d)

bar coding. radio frequency identification tags. EFT. satellite technology.

28. Vendor invoices are approved by the __________, which reports to the __________. a)

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purchasing department; controller

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payable department; treasurer ng department; treasurer payable department; controller

al standpoint, when does the obligation to pay a vendor arise? a) b) c) d)

when the goods are requisitioned when the goods are ordered when the goods are received by the purchaser when the goods are billed

30. The disbursement voucher and supporting documents are sent to the __________ for payment prior to the due date. a) b) c) d)

cashier treasurer controller accounts payable department

31. A __________ system is a system in which an approved invoice is posted to the vendor account and is stored in an open invoice file until payment is made by check. a) b) c) d)

voucher nonvoucher cycle blanket invoice

32. A disbursement voucher contains a) b) c) d)

a list of outstanding invoices. the net payment amount after deducting applicable discounts and allowances. the general ledger accounts to be debited. All of the above are correct.

33. A legal obligation arises at the time goods are received from a supplier. The objective of accounts payable is to authorize payment only for goods or services actually ordered and received. The best way to process supplier invoices is to use a) b) c) d)

electronic funds transfer for small, occasional purchases from suppliers. a nonvoucher system. EDI for all small, occasional purchases from suppliers. a disbursement voucher system.

34. What is not an advantage to using disbursement vouchers? a) Disbursement vouchers reduce the number of checks written. b) Disbursement vouchers can be prenumbered which simplifies the tracking of all payables. c) Disbursement vouchers facilitate separating the time of invoice approval from the time of invoice payment. d) There are no disadvantages to using disbursement vouchers.

35. Which of the following is not an advantage of a voucher system? a) b) c) d)

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several invoices may be included on one voucher, reducing the number of checks disbursement vouchers may be pre-numbered and tracked through the system the time of voucher approval and payment can be kept separate it is a less expensive and easier system to administer than other systems

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e final activity in the expenditure cycle? goods nd storage of goods g vendor invoices for payment d) the payment of approved invoices

37. In a typical cash disbursement procedure, who usually handles the checks and may even be able to sign checks up to a certain dollar limit? a) b) c) d)

the accounts payable supervisor the controller the cashier the treasurer

38. Duties in the expenditure cycle should be properly segregated to promote internal control. This means that the authorization function is performed by __________, the recording function is performed by __________, and the cash disbursement function is performed by the __________. a) b) c) d)

accounts payable; purchasing; cashier purchasing; accounts payable; cashier purchasing; cashier; accounts payable purchasing; accounts payable; treasurer

39. A voucher package should include a) b) c) d)

a purchase requisition, vendor invoice, and receiving report. a purchase order, vendor invoice, and receiving report. a purchase requisition, purchase order, and receiving report. a bill of lading and vendor invoice.

40. The evaluated receipt settlement (ERS) replaces the more traditional 3-way matching process with a 2-way match of the purchase order and the a) b) c) d)

vendor invoice. sales invoice. receiving report. disbursement voucher.

41. What may be the biggest opportunity to improve the efficiency of accounts payable? a) b) c) d)

convert a manual AIS system to EDI and EFT streamline noninventory purchases use ERS use disbursement vouchers

42. When purchasing miscellaneous supplies, companies can reduce costs, improve efficiency, and combat employee fraud by using a) b) c) d)

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procurement cards. a JIT inventory system. credit cards. debit cards.

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e, a 1% discount for payment within 10 days represents an approximate __________ % annually.

c) 18 d) 36

44. When a legacy system is replaced with an integrated Enterprise Resource Planning (ERP) system, many benefits are realized for the organization. What is a key improvement in the record keeping function? a) b) c) d)

Any department can now submit a request to purchase items. The system tracks the exact time of delivery. Major suppliers send electronic notification of incoming deliveries. Inventory records are more accurate and timely.

45. The threat of paying prices that are too high for goods ordered can pose a problem in the expenditure cycle. What is an appropriate control that would be applicable to help mitigate this threat? a) b) c) d)

require the receiving department to verify the existence of a valid purchase order use only approved suppliers and solicit competitive bids only pay invoices that are supported by the original voucher package use bar-code technology

46. What is probably the most effective control for the prevention of kickbacks to purchasing agents? a) b) c) d)

purchasing from approved vendors good supervision in the purchasing area a corporate policy to prohibit purchasing agents from accepting kickbacks reviews of vendor performance

47. There are several threats that are associated with the process and activity of receiving and storing goods. Identify one of these threats below. a) b) c) d)

errors in counting kickbacks requests for unnecessary items errors in vendor invoices

48. What is the easiest way to prevent the acceptance of unordered goods? a) order only from approved vendors b) always require that a valid purchase order exists before goods can be accepted at the time of delivery c) have an appropriate conflict of interest policy in place d) require receiving personnel to call the vendor before accepting any goods

49. Which of the following is not a common control for ensuring inventory is secure and inventory counts are accurate? a) control of physical access to the inventory storage areas b) transfers of inventory with proper documentation c) sending "blind" copies of purchase orders to inventory control for data entry

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physical counts of inventory at least once per year

ecking the accuracy of an invoice is an applicable control that can help to a threat in the expenditure cycle. What process or activity would y be associated with this control? a) b) c) d)

order goods receive and store goods pay for goods and services general issues

51. There is a threat of paying an invoice twice. What is an applicable control that may help mitigate this threat? a) b) c) d)

payment should never be authorized for a photocopy of an invoice double-check invoice accuracy approval of a purchase order adequate perpetual inventory records

52. Which control would be best to prevent payments made to fictitious vendors? a) b) c) d)

allow payments only to approved vendors restrict access to any payment or approval documents have an independent bank reconciliation make sure all documents are in order before approving payments

53. In the expenditure cycle, good control dictates that expenditures should be paid by check. This may not be feasible when minor purchases are made. To facilitate quick payment for minor purchases, a(n) __________ should be set up and maintained using __________. a) b) c) d)

special bank account; disbursement vouchers imprest fund; vouchers cash box; small denomination bills petty cash fund; procurement cards

54. A surprise count of petty cash by the auditor should find the total of __________ equal to the amount authorized for the fund. a) b) c) d)

cash and credit memos cash and petty cash vouchers cash cash and checks

55. Special care should be taken when EFT payments are made to vendors. What control should be put in place that assigns responsibility for EFT payments? a) b) c) d)

encrypt all EFT transmissions time stamp all EFT transactions establish a control group to monitor EFT transactions for validity and accuracy number all EFT transactions

56. Which of the following threats is not specific to the purchase requisition process of the expenditure cycle? a)

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stockouts

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ng from unauthorized vendors oning goods not needed e above are threats in the purchase requisition process.

data is a threat encountered in the expenditure cycle. What is the related process/activity and applicable control used to counteract the threat? a) b) c) d)

order goods; backup and disaster recovery plans general issues; backup and disaster recovery plans general issues; development of periodic review of appropriate performance reports order goods; various data entry and processing edit controls

SHORT ANSWER

58. a) Define expenditure cycle. b) What are the basic expenditure cycle activities? 59. What is the EOQ approach? What are the components of EOQ? 60. Define the materials requirement planning (MRP) 61. Define just-in-time (JIT) inventory methods. 62. Briefly discuss the differences among EOQ, MRP, and JIT. 63. a) What is the major cost driver in the purchasing function? b) How can information technology be used to control this cost driver? 64. How is the expenditure cycle a "mirror image" of the revenue cycle? 65. What are the possible problems associated with receiving goods ordered from a vendor? 66. Name and describe the two common systems for approving vendor payments. 67. How can information technology be used to improve the vendor invoice approval process? ESSAY 68. Under what conditions is MRP preferable to JIT and vice versa? 69. In the expenditure cycle, the majority of payments made are by check. What are some control issues related to payment of vendors by check? 70. Identify ten threats and applicable control procedures for each in the expenditure cycle. 71. What types of decision-making and strategic information should the AIS provide in the expenditure cycle? 72. How can using bar codes on goods or products provide significant benefit in the expenditure cycle?

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4) 5) 6) 7) 8) 9) 10) 11) 12) 13) 14) 15) 16) 17) 18) 19) 20) 21) 22) 23) 24) 25) 26) 27) 28) 29) 30) 31) 32) 33) 34) 35) 36) 37) 38) 39) 40) 41) 42) 43) 44) 45) 46) 47) 48) 49) 50) 51) 52) 53) 54)

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