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Accounting Information Systems, 13e (Romney/Steinbart) Chapter 13 The Expenditure Cycle: Purchasing to Cash Disbursements13 Explain the basic business activities and related information processing operations performed in the expenditure cycle. The Gwallter Reece Chihuahua Sweater Co. (GRCCo) was est...

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Accounting Information Systems, 13e (Romney/Steinbart) Chapter 13 The Expenditure Cycle: Purchasing to Cash Disbursements 13.1 Explain the basic business activities and related information processing operations performed in the expenditure cycle. 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 Objective: Learning Objective 1 Difficulty: Easy AACSB: Analytic 2) 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 Objective: Learning Objective 1 Difficulty: Moderate AACSB: Reflective Thinking 3) 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 Objective: Learning Objective 1 Difficulty: Easy AACSB: Analytic

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4) 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 Objective: Learning Objective 1 Difficulty: Easy AACSB: Analytic 5) 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 Objective: Learning Objective 1 Difficulty: Easy AACSB: Analytic 6) 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 Objective: Learning Objective 1 Difficulty: Moderate AACSB: Analytic 7) 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 Objective: Learning Objective 1 Difficulty: Easy AACSB: Analytic

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8) 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 Objective: Learning Objective 1 Difficulty: Moderate AACSB: Analytic 9) ________ 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 Objective: Learning Objective 1 Difficulty: Difficult AACSB: Analytic 10) 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 Objective: Learning Objective 1 Difficulty: Easy AACSB: Analytic 11) 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 Objective: Learning Objective 1 Difficulty: Moderate AACSB: Analytic

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12) When would an MRP inventory approach be a 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 Objective: Learning Objective 1 Difficulty: Moderate AACSB: Analytic 13) 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 Objective: Learning Objective 1 Difficulty: Easy AACSB: Analytic 14) 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 Objective: Learning Objective 1 Difficulty: Moderate AACSB: Analytic 15) 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 Objective: Learning Objective 1 Difficulty: Easy AACSB: Analytic

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16) 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 Objective: Learning Objective 1 Difficulty: Moderate AACSB: Analytic 17) Which of the following is generally not shown on a receiving report? A) price of the items B) quantity of the items C) purchase order number D) counted and inspected by Answer: A Objective: Learning Objective 1 Difficulty: Easy AACSB: Analytic 18) A receiving clerk notes that a delivery of 10 units has been received, but the purchase order specified 12 units. A debit memo will need to be prepared to adjust for the difference between the quantity ordered and received. Who should prepare this document? A) the receiving clerk B) the controller C) the vendor D) the purchasing department manager Answer: D Objective: Learning Objective 1 Difficulty: Moderate AACSB: Analytic 19) Identify in which of the following scenarios a company could adjust the balance due the vendor by issuing a debit memo. A) quantity different from that ordered B) damage to the goods C) goods that fail inspection for quality D) All of the above are possible scenarios. Answer: D Objective: Learning Objective 1 Difficulty: Moderate AACSB: Analytic

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20) 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 the carrier verify quantities and item numbers before shipment B) requiring all suppliers to include RFID tags on their items 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 Answer: B Objective: Learning Objective 1 Difficulty: Moderate AACSB: Analytic 21) Vendor invoices are approved by the ________, which reports to the ________. A) purchasing department; controller B) accounts payable department; treasurer C) purchasing department; treasurer D) accounts payable department; controller Answer: D Objective: Learning Objective 1 Difficulty: Moderate AACSB: Analytic 22) The disbursement voucher and supporting documents are sent to the ________ for payment prior to the due date. A) cashier B) treasurer C) controller D) accounts payable department Answer: A Objective: Learning Objective 1 Difficulty: Easy AACSB: Analytic 23) A(n) ________ system posts an approved invoice to the vendor account and stores it in an open invoice file until payment is made by check. A) nonvoucher B) voucher C) cycle D) evaluated receipt settlement Answer: A Objective: Learning Objective 1 Difficulty: Easy AACSB: Analytic

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24) A disbursement voucher contains A) a list of outstanding invoices. B) the net payment amount after deducting applicable discounts and allowances. C) the general ledger accounts to be debited. D) All of the above are correct. Answer: D Objective: Learning Objective 1 Difficulty: Easy AACSB: Analytic 25) One 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) electronic funds transfer for small, occasional purchases from suppliers. B) a nonvoucher system. C) EDI for all small, occasional purchases from suppliers. D) a disbursement voucher system. Answer: D Objective: Learning Objective 1 Difficulty: Moderate AACSB: Analytic 26) What is not an advantage of 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. Answer: D Objective: Learning Objective 1 Difficulty: Easy AACSB: Analytic 27) Which of the following is not an advantage of a voucher system? A) Several invoices may be included on one voucher, reducing the number of checks. B) Disbursement vouchers may be pre-numbered and tracked through the system. C) The time of voucher approval and payment can be kept separate. D) It is a less expensive and easier system to administer than other systems. Answer: D Objective: Learning Objective 1 Difficulty: Moderate AACSB: Analytic

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28) A voucher package should include A) a purchase requisition, vendor invoice, and receiving report. B) a purchase order, vendor invoice, and receiving report. C) a purchase requisition, purchase order, and receiving report. D) a bill of lading and vendor invoice. Answer: B Objective: Learning Objective 1 Difficulty: Moderate AACSB: Analytic 29) When purchasing miscellaneous supplies, companies can reduce costs, improve efficiency, and combat employee fraud by A) using procurement cards. B) implementing a JIT inventory system. C) requiring employees to personally purchase items then reimbursing employees at the end of each month. D) paying amounts out of petty cash. Answer: A Objective: Learning Objective 1 Difficulty: Easy AACSB: Analytic 30) If available, a 1% discount for payment within 10 days instead of 30 days represents an approximate savings of ________% annually. A) 1 B) 12 C) 18 D) 36 Answer: C Objective: Learning Objective 1 Difficulty: Moderate AACSB: Analytic 31) 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 Objective: Learning Objective 1 Difficulty: Moderate AACSB: Reflective Thinking

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32) 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 Objective: Learning Objective 1 Difficulty: Moderate AACSB: Analytic 33) 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 Objective: Learning Objective 1 Difficulty: Easy AACSB: Analytic 34) 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 Objective: Learning Objective 1 Difficulty: Easy AACSB: Analytic 35) Ngai Nhung is the sales manager at Hung Technologies. At lunch with the company CEO, Ngai complained that a recent shipment from a vendor had been unsatisfactory and was returned. As a result, Hung's purchasing manager needed to send a ________ to the supplier. A) debit memo B) purchase order C) blanket purchase order D) receiving report Answer: A Objective: Learning Objective 1 Difficulty: Easy AACSB: Analytic 9 Copyright © 2015 Pearson Education, Inc.

36) To minimize the number of checks that need to be written to pay vendor invoices, a company should use A) a voucher system. B) a just-in-time inventory system. C) a nonvoucher system. D) an evaluated receipt settlement system. Answer: A Objective: Learning Objective 1 Difficulty: Moderate AACSB: Analytic 37) Evaluated receipt settlement increases efficiency by A) eliminating the need for receiving reports. B) eliminating the need for vendor invoices. C) eliminating the need for purchase orders. D) eliminating the need to prepare and mail checks. Answer: B Objective: Learning Objective 1 Difficulty: Easy AACSB: Analytic 38) In the expenditure cycle, Financial Electronic Data Interchange (FEDI) increases efficiency by A) eliminating the need for receiving reports. B) eliminating the need for vendor invoices. C) eliminating the need for purchase orders. D) eliminating the need to prepare and mail checks. Answer: D Objective: Learning Objective 1 Difficulty: Easy AACSB: Analytic 39) Procurement cards differ from corporate credit cards in which of the following ways? A) Credit limits can be set for procurement cards, but not corporate credit cards. B) Credit cards can be used to make purchases without an explicit sign off by supervisors, but procurement cards require a sign off. C) Procurement cards can only be used with approved vendors, but credit cards can be used anywhere. D) Procurement card invoices are sent separately for each card, whereas corporate credit cards are consolidated into a single invoice. Answer: C Objective: Learning Objective 1 Difficulty: Moderate AACSB: Analytic

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40) 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, and stockout costs. Ordering costs — all expenses associated with processing purchasing transactions. Carrying costs — costs associated with holding inventory. Stockout costs — costs from inventory shortages, such as lost sales or production costs. Objective: Learning Objective 1 Difficulty: Moderate AACSB: Analytic 41) Discuss the differences between EOQ, MRP, and JIT. Answer: Economic Order Quantity (EOQ) is the traditional approach to managing inventory. EOQ is used to find the optimal order size. Ordering costs, carrying costs, and stockout costs are considered in finding the EOQ. The MRP (Materials Requirements Planning) inventory method seeks to reduce inventory levels by scheduling production, based on estimated sales, rather than by estimating needs (which EOQ does). A just-in-time inventory system (or JIT) attempts to minimize, if not totally eliminate, both carrying and stockout costs through the frequent delivery of small amounts of materials, parts, and supplies when they are needed. JIT does not attempt to estimate needs or schedule production based on estimated sales, as it is based on customer demand at a given time. A JIT system almost eliminates finished goods inventory. Objective: Learning Objective 1 Difficulty: Difficult AACSB: Analytic 42) a) What is the major cost driver in the purchasing function? b) Describe how information technology can be used to control this cost driver. Answer: a) The major cost driver in the purchasing function is the number of purchase orders processed. b) The number of purchase orders can be reduced or streamlined by: Electronic data interchange (EDI) for transmitting purchase orders to vendors. Use procurement cards for small dollar and small quantity purchases of non-inventory items. Reduce clerical costs by using the Internet to perform certain purchasing functions. Use vendor-managed inventory programs to reduce purchasing and inventory costs. Implement reverse auctions and pre-award audits. Objective: Learning Objective 1 Difficulty: Moderate AACSB: Analytic

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43) 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. Objective: Learning Objective 1 Difficulty: Difficult AACSB: Reflective Thinking 44) How can information technology be used to improve the vendor invoice approval process? Answer: EDI eliminates the need to enter invoice data and the matching of payment documents — all of this can be done using computers and network technologies. Technology can eliminate the need for vendor invoices by approving payment upon receipt of the goods. Imaging systems can eliminate paper flow, and universal languages such as XML can provide a paperless means of receiving and storing vendor invoices. Use of procurement cards, credit cards, and electronic expense forms can improve the efficiency of non-inventory purchases. ERS, which is invoiceless, is a means to replace the traditional three-matching process (vendor invoice, receiving report and purchase order) with a two-way match of the purchase order and receiving report. Objective: Learning Objective 1 Difficulty: Moderate AACSB: Analytic 45) Under what conditions is MRP more suitable than JIT and vice versa? Answer: MRP systems schedule production based on estimated sales, and JIT systems schedule production based on customer demand. The choice between these two systems is based on the types of products a company sells. For example, products that have predictable patterns of demand and a long life cycle are more suitable for MRP systems. In this case, sales can be forecast with greater accuracy. Conversely, if the product has an unpredictable pattern of demand and a sh...