Chapter 13 - Test Bank Romney AIS PDF

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Accounting Information Systems, 14e (Romney/Steinbart) Chapter 13 The Expenditure Cycle: Purchasing to Cash Disbursements1 Discuss the basic business activities and related information processing operations in the expenditure cycle, explain the general threats to those activities, and describe the c...

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Accounting Information Systems, 14e (Romney/Steinbart) Chapter 13 The Expenditure Cycle: Purchasing to Cash Disbursements 1 Discuss the basic business activities and related information processing operations in the expenditure cycle, explain the general threats to those activities, and describe the controls that can mitigate those threats. 1) To accomplish the objectives set forth in the expenditure cycle, a number of key management decisions must be addressed. Which of the decisions below is not ordinarily found as part of the expenditure cycle? A) How can cash payments to vendors be managed to maximize cash flow? B) What is the optimal level of inventory and supplies to carry on hand? C) Where should inventories and supplies be held? D) What are the optimal prices for each product or service? Answer: D Concept: Expenditure cycle information system Objective: Learning Objective 1 Difficulty: Easy AACSB: Analytical Thinking 2) What types of decision-making and strategic information should the AIS provide in the expenditure cycle? Answer: The AIS should provide decision making information to: Determine when and how much additional inventory to order. Select the appropriate vendors from whom to order. Verify the accuracy of vendor invoices. Decide whether purchase discounts should be taken. Monitor cash flow needs to pay outstanding obligations. AIS should also provide the following strategic and performance evaluation information on: Efficiency and effectiveness of the purchasing department. Analysis of vendor performance such as on-time delivery, quality, etc. Time taken to move goods from the receiving dock into production. Percentage of purchase discounts taken. Concept: Expenditure cycle information system Objective: Learning Objective 1 Difficulty: Moderate AACSB: Analytical Thinking

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3) Requiring all packing slips be reconciled to purchase orders before accepting a delivery of inventory would be most likely to prevent which of the following situations? A) A supplier delivers more inventory than ordered at the end of the year and sends an invoice for the total quantity delivered. B) An employee mails a fake invoice to the company, which is then paid. C) The inventory records are incorrectly updated when a receiving department employee enters the wrong product number on the receiving report. D) Receiving department employees steal inventory and then claim the inventory was received and delivered to the warehouse. Answer: A Concept: Expenditure cycle information system Objective: Learning Objective 1 Difficulty: Moderate AACSB: Reflective Thinking 4) One of the basic activities in the expenditure cycle is the receiving and storage of goods, supplies, and services. What is the counterpart of this activity in the revenue cycle? A) sales order entry process B) shipping function C) cash collection activity D) cash payments activity Answer: B Concept: Expenditure cycle information system Objective: Learning Objective 1 Difficulty: Moderate AACSB: Reflective Thinking 5) There is a symmetrical interdependence between a firm's expenditure cycle and its suppliers' A) production cycle. B) revenue cycle. C) expenditure cycle. D) general ledger and reporting system. Answer: B Concept: Expenditure cycle information system Objective: Learning Objective 1 Difficulty: Moderate AACSB: Reflective Thinking

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6) The Gwallter Reece Chihuahua Sweater Co. (GRCCo) was established in 2013. It recently signed a large contract with PetCo pet stores. GRCCo will be required to track and forecast sweater sales. The technology that is used for communication between GRCCo and PetCo is A) electronic data interchange. B) vendor-managed inventory. C) sales force automation. D) optical character recognition. Answer: A Concept: Expenditure cycle information system Objective: Learning Objective 1 Difficulty: Moderate AACSB: Analytical Thinking 7) Explain what is meant by the expenditure cycle as a "mirror image" of the revenue cycle. Answer: The expenditure cycle has been called a "mirror image" of the revenue cycle because the activities of the expenditure cycle are the opposite, or "reflection" of several activities found in the revenue cycle. For example, the order goods activity generates a purchase order, which serves as customer input to the sales order entry process. The receive goods activity handles the goods sent via the supplier's shipping function. The pay for goods activity generates the payments that are processed by the supplier's cash collection activity. This mirror image also means that major technological improvements in the expenditure cycle may bring about complementary improvements in suppliers' revenue cycle as well. Concept: Expenditure cycle information system Objective: Learning Objective 1 Difficulty: Challenging AACSB: Reflective Thinking 8) Which of the following is not an activity performed in the expenditure cycle? A) ordering B) receiving C) cash disbursement D) shipping Answer: D Concept: Expenditure cycle information system Objective: Learning Objective 1 Difficulty: Moderate AACSB: Analytical Thinking

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9) The first major business activity in the expenditure cycle is A) ordering inventory, supplies, or services. B) a customer sale. C) shipping goods to customers. D) receiving goods from vendors. Answer: A Concept: Expenditure cycle information system Objective: Learning Objective 1 Difficulty: Moderate AACSB: Analytical Thinking 10) Which of the following threats is not specific to the purchase requisition process of the expenditure cycle? A) stockouts B) purchasing from unauthorized vendors C) requisitioning goods not needed D) All of the above are threats in the purchase requisition process. Answer: B Concept: Expenditure cycle information system Objective: Learning Objective 1 Difficulty: Moderate AACSB: Analytical Thinking

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11) Identify ten threats and applicable control procedures in the expenditure cycle. Answer: Answers can include the following information: 1: Stock-outs — Controls: Inventory control system; accurate perpetual inventory; and vendor performance analysis is needed to prevent this problem 2: Requesting goods not needed — Controls: Review and approval by supervisors; use of prenumbered requisition forms; and restricted access to blank purchase orders 3: Purchasing goods at inflated prices — Controls: Competitive bidding and proper supervision; approved purchase orders; and price list consultations are needed to prevent this problem 4: Purchasing goods of inferior quality — Controls: Use experienced buyers who know good vendors; review purchase orders; and incorporate approved vendor list into formal procedures 5: Purchasing from unauthorized vendors — Control: Pre-numbered purchase orders should be approved; restrict access to approved vendor list and have procedures in place for any change to the list 6: Kickbacks paid to buyers to influence their decisions — Controls: Clear conflict of interest policy prohibiting the acceptance of any gift from vendors; disclosure of financial interest policy for purchasing agents; and vendor audits 7: Receiving unordered goods — Controls: Receiving department must reject any goods for which there is no approved purchase order 8: Errors in counting goods received — Controls: Use "blind" P.O. copies to force receiving personnel to actually count goods; provide incentives for counting goods 9: Theft of inventory — Controls: Secure inventory storage locations; make transfers of inventory with proper approval and documentation; do periodic physical count and reconciliation with recorded amounts 10: Errors in vendor invoices — Controls: Invoice accuracy should be verified and compared to P.O.s and receiving report data 11: Paying for goods not received — Controls: Voucher package and original invoice should be necessary for payments 12: Failure to take available purchase discounts — Controls: File approved invoices by due date; track invoices by due date; use a cash budget to plan for cash needs 13: Paying same invoice twice — Controls: Invoices should be approved only with a full voucher package and paid ones should be canceled so they cannot be used again; do not pay invoices marked "Duplicate" or "Copy" 14: Recording and posting errors for purchases and payments — Controls: Data entry controls, and periodic reconciliation of subsidiary ledger with general ledger control account 15: Misappropriation of cash by paying fictitious vendors and alteration of checks — Controls: Restrict access to cash, blank checks, and check signing machine; use check protection, prenumbered checks, and imprinted amounts on checks to cut down on forgery and fraud; use petty cash fund for small expenditures only; have proper segregation of duties and independent bank reconciliation function 16: Theft associated with EFT use — Controls: Access controls to the system; encryption of transmissions; time-stamp and number transmissions; control group should monitor all EFT activity 17: Loss of data — Controls: Use file labels, back up of all data files regularly; and, use access controls 18: Poor performance — Controls: Preparation and review of performance reports

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Concept: Expenditure cycle information system Objective: Learning Objective 1 Difficulty: Moderate AACSB: Analytical Thinking 12) How can using RFID tags or bar codes on goods or products provide significant benefit in the expenditure cycle? Answer: RFID tags and bar codes can significantly improve the process of receiving goods from suppliers for several reasons. First, they can easily be scanned electronically. Electronically capturing the unique number of a product not only provides identification and quantity data about the product; it can also provide specific production information such as date and time of manufacture, production run information, etc. Electronically encoding such information into an integrated AIS provides up-to-the-minute inventory counts, as well as counts of units sold, and returns for use in a perpetual inventory system. Also, both vendor and customers can read tags and bar codes, and certain formats are universal in nature. This allows goods to be sold virtually anywhere in the world, allowing for easier global marketing efforts to be made by businesses. It also eliminates the need for human data entry and reduces the risk of stockouts. Concept: Expenditure cycle information system Objective: Learning Objective 1 Difficulty: Moderate AACSB: Analytical Thinking 13) Which of the following controls can minimize the threat of stockouts and excess inventory? A) The use of positive pay. B) Do not inform receiving employees about quantity ordered. C) The use of ERS. D) Perpetual inventory system. Answer: D Concept: Revenue cycle information system Objective: Learning Objective 1 Difficulty: Moderate AACSB: Analytical Thinking 14) Which of the following controls can minimize the threat of check alteration? A) The use of positive pay. B) Do not inform receiving employees about quantity ordered. C) The use of ERS. D) Perpetual inventory system. Answer: A Concept: Revenue cycle information system Objective: Learning Objective 1 Difficulty: Moderate AACSB: Analytical Thinking

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15) Which of the following controls can minimize the threat of mistakes in counting incoming inventory? A) The use of positive pay. B) Do not inform receiving employees about quantity ordered. C) The use of ERS. D) Perpetual inventory system. Answer: B Concept: Revenue cycle information system Objective: Learning Objective 1 Difficulty: Moderate AACSB: Analytical Thinking 16) Which of the following controls can minimize the threat of errors in supplier invoices? A) The use of positive pay. B) Do not inform receiving employees about quantity ordered. C) The use of ERS. D) Perpetual inventory system. Answer: C Concept: Revenue cycle information system Objective: Learning Objective 1 Difficulty: Moderate AACSB: Analytical Thinking 2 Explain the process and key decisions involved in ordering goods and services, identify the threats to those activities, and describe the controls that can mitigate those threats. 1) The Gwallter Reece Chihuahua Sweater Co. (GRCCo) was established in 2013. It recently signed a large contract with PetCo pet stores. GRCCo will be required to track and forecast sweater sales by linking in to PetCo's sales database. GRCCo will then be responsible for shipping products to PetCo as needed. The relationship between GRCCo and PetCo is an example of A) sales force automation. B) electronic data interchange. C) optical character recognition. D) vendor-managed inventory. Answer: D Concept: Ordering goods and services Objective: Learning Objective 2 Difficulty: Easy AACSB: Analytical Thinking

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2) The traditional approach to inventory management to ensure sufficient quantity on hand to maintain production is known as A) safety stock. B) just-in-time production. C) economic order quantity. D) optimal inventory quantity. Answer: C Concept: Ordering goods and services Objective: Learning Objective 2 Difficulty: Easy AACSB: Analytical Thinking 3) Economic Order Quantity (EOQ) includes several variables that must be taken into consideration when calculating the optimal order size. One variable, the costs associated with holding inventory, is referred to as A) ordering costs. B) carrying costs. C) the reorder point. D) stockout costs. Answer: B Concept: Ordering goods and services Objective: Learning Objective 2 Difficulty: Easy AACSB: Analytical Thinking 4) The ________ specifies the point at which inventory is needed. A) company inventory policies B) reorder point C) economic order quantity D) stockout point Answer: B Concept: Operational audits of an AIS Objective: Learning Objective 2 Difficulty: Easy AACSB: Analytical Thinking 5) Which electronic files are either read or updated when goods are ordered from a vendor? A) inventory, vendors, and accounts payable B) vendors and accounts payable C) inventory, vendors, and open purchase orders D) open purchase orders and accounts payable Answer: C Concept: Ordering goods and services Objective: Learning Objective 2 Difficulty: Moderate AACSB: Analytical Thinking 8 Copyright © 2018 Pearson Education, Inc.

6) What is a key feature of materials requirements planning (MRP)? A) minimize or entirely eliminate carrying and stockout costs B) reduce required inventory levels by scheduling production rather than estimating needs C) determine the optimal reorder point D) determine the optimal order size Answer: B Concept: Ordering goods and services Objective: Learning Objective 2 Difficulty: Easy AACSB: Analytical Thinking 7) Materials requirements planning (MRP) A) reduces the uncertainty about when materials are needed, thereby reducing the need to carry large levels of inventory. B) is able to compute exactly the cost of purchasing by taking into account all costs associated with inventory carrying. C) requires vendors to deliver inventory to the production site exactly when needed and in the correct quantities. D) None of the above is correct. Answer: A Concept: Ordering goods and services Objective: Learning Objective 2 Difficulty: Moderate AACSB: Analytical Thinking 8) ________ attempts to minimize or eliminate carrying and stockout costs. A) Just-in-time inventory B) Materials requirements planning C) Economic order quantity D) Evaluated receipt settlement Answer: A Concept: Ordering goods and services Objective: Learning Objective 2 Difficulty: Challenging AACSB: Analytical Thinking 9) Just-In-Time (JIT) inventory is best characterized by A) frequent deliveries of large quantities to be held at the work centers. B) frequent deliveries of smaller quantities of items to the work centers. C) less frequent deliveries of large quantities of goods to central receiving. D) infrequent bulk deliveries of items directly to work centers. Answer: B Concept: Ordering goods and services Objective: Learning Objective 2 Difficulty: Easy AACSB: Analytical Thinking 9 Copyright © 2018 Pearson Education, Inc.

10) What is the key difference between the MRP and JIT inventory management approaches? A) Only JIT reduces costs and improves efficiency. B) MRP is especially useful for products such as fashion apparel. C) JIT is more effectively used with products that have predictable patterns of demand. D) MRP schedules production to meet estimated sales needs; JIT schedules production to meet customer demands. Answer: D Concept: Ordering goods and services Objective: Learning Objective 2 Difficulty: Moderate AACSB: Analytical Thinking 11) When would an MRP inventory approach be preferred to a JIT inventory approach? A) when a product has a short life cycle B) when demand for inventory is fairly predictable C) when demand for inventory is very unpredictable D) MRP is always a preferred method over JIT. Answer: B Concept: Ordering goods and services Objective: Learning Objective 2 Difficulty: Moderate AACSB: Analytical Thinking 12) Which of the following is least likely to be a major criterion in vendor selection? A) prices of goods B) credit rating of the vendor C) quality of goods D) ability to deliver on time Answer: B Concept: Ordering goods and services Objective: Learning Objective 2 Difficulty: Easy AACSB: Analytical Thinking 13) Once a vendor is selected for a product, the vendor's identity is recorded in the A) purchase requisition transaction file. B) purchase requisition master file. C) inventory transaction file. D) inventory master file. Answer: D Concept: Ordering goods and services Objective: Learning Objective 2 Difficulty: Moderate AACSB: Analytical Thinking

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14) Duc An Incorporated provides free coffee to employees. Starbucks delivers coffee packages, sugar, creamer, and filters each week. Every month, Starbucks sends Duc An an invoice. This arrangement is best described as a A) set purchase order. B) fixed purchase order. C) blanket purchase order. D) standard purchase order. Answer: C Concept: Ordering goods and services Objective: Learning Objective 2 Difficulty: Easy AACSB: Analytical Thinking 15) A major cost in the purchasing function is the number of purchase orders processed. One technique that may reduce purchasing-related expenses is to have suppliers compete with each other to meet demand at the lowest price. The name of this technique is A) an EDI auction. B) a trading exchange. C) a reverse auction. D) a supplier consortium. Answer: C Concept: Ordering goods and services Objective: Learning Objective 2 Difficulty: Moderate AACSB: Analytical Thinking 16) Ngai Nhung is the sales manager at Hung Technologies. At lunch with the company CEO, Ngai proudly announced that he had negotiated a(n) ________ with a client that represented the customer's long-term commitment to buy components from Hung. A) purchase order B) evaluated receipt settlement C) voucher D) blanket purchase order Answer: D Concept: Ordering goods and services Objective: Learning Objective 2 Difficulty: Easy AACSB: Analytical Thinking

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17) Ngai Nhung is the sales manager at Hung Technologies. At lunch with the company CEO, Ngai proudly announced that he had received a ________ from a client. The client had just requested a large quantity of components from Hung. A) blanket purchase order B) voucher C) purchase order D) purchase requisition Answer: C Concept: Ordering goods and services Objective: Learning Objective 2 Difficulty: Easy AACSB: Analytical Thinking 18) Define and describe the EOQ approach to inventory management. Answer: EOQ (economic order quantity) is the traditional inventory control method to maintain sufficient inventory levels so production can continue without interruption. EOQ should take into account a situation where inventory use is greater than expected. EOQ calculates the optimal order size to minimize the sum of ordering, carrying...