CHAPTER 5

Differentiate between a purchase requisition and a purchase order.

When inventories drop to a predetermined reorder point, a purchase requisition is
prepared by inventory control and sent to the prepare purchase order function to initiate the
purchase process, the prepare purchase order function receives the purchase requisitions, which
are then sorted by vendor if necessary.
What purpose does a purchasing department serve?
The purchasing department receives the purchase requisitions sorts them by vendor, and
adds a record to the digital open purchase order file. One copy of the purchase order is sent to the
vendor another is sent to inventory control.
Distinguish between an AP file and a vouchers payable file.
An AP file consists of the AP packet which has the purchase order, receiving report, and
invoice. Once this pocket is reconciled into the file the organization is able to record the liability.
In a vouchers payable system the AP department uses cash disbursement system and maintains a
voucher register. After the AP clerk performs the three-way match 9 when the invoice arrives
reconciling the financial information with the receiving report and purchase order in the AP
pending file0, he/she makes a cash disbursement voucher along with supporting source
document in the voucher payable file- equivalent to the open AP file.
What are the three logical steps of the cash disbursements system?
The three logical steps of the cash disbursements system are:
1. Identify liabilities due,
2. Prepare cash disbursement, and
3. Update AP record.
What general ledger journal entries does the purchases system trigger? From which
departments do these journal entries arise?
Vendor invoice file trigger the purchase journal and AP sub ledger, updating the inventory
sub ledger and general ledger for the invoice file.
What two types of exposure can close supervision of the receiving department reduce?
The two types of exposure can close supervision of the receiving department reduce are:
1. Failure to properly inspect the assets, and
2. The theft of assets.
What steps of independent verification does the general ledger department perform?
The steps of independent verification includes, receiving journal vouchers and summary
reports from inventory control, AP, and cash disbursement. Then verifies that the total
obligations recorded equal the total inventories received and that the total reductions in AP equal
the total disbursement of cash.
What is (are) the purpose(s) of maintaining a valid vendor file?
The purpose of maintaining a valid vendor file is to prevent unauthorized purchases from
unapproved vendors.
How do computerized purchasing systems help to reduce the risk of purchasing
bottlenecks?
Computerized purchasing systems help to reduce the risk of purchasing bottlenecks by
eliminating human error and human bottlenecks. For simple automated task a system can quickly
push them through “gate check” and allow for quick, standard, and accurate turnaround.
What is the purpose of the blind copy of a purchase order?
The copy of purchase order which contains no information about the products to be
received, its quality and the information about its price is called blind copy of purchase order.
One of the purpose of blind copy is to force the workers to count the goods.
Give one advantage of using a vouchers payable system.
Voucher provides improved control over cash disbursement and allows firm to
consolidate several payments to the same supplier on a single voucher, thus reducing the number
of checks written.
 CHAPTER 6

Which document is used by cost accounting to allocate direct labor charges to work-in-
process?
Document used by cost accounting to allocate direct labor charges to work-in-process is
Job tickets.
Which department authorizes changes in employee pay rates?
Human resource is the department that authorizes changes in employee pay rates.
Why should the employee’s supervisor not distribute paychecks?
Supervisor should not distribute the paycheck because the supervisor gathers the time
cards and reviews them for accuracy. But not allowing the supervisor to distribute the paycheck
an increased amount of separation of duties helps lower the risk of fraud.
Why should employee paychecks be drawn against a special checking account?
A separate imprest account is established for the exact amount of the payroll based on the
payroll summary. When the paychecks are crashed, this account should clear leaving a zero
balance. Any errors in checks would result in a non-zero balance in the imprest account and/or
some paycheck would not be clear. This will alert management to the problem so corrective
action can be taken.
Why should employees clocking on and off the job be supervised?
Employees should clocking on and off the job be supervised to avoid employees clocking
in for other workers.
What is a personnel action form?
Personnel action form is a document that identify employees authorized to receive a
paycheck and are reflect changes in hourly pay rates, payroll deductions, and job classifications.
What tasks does a payroll clerk perform upon receipt of hours-worked data from the
production department?
The payroll department reconciles the information, calculates payroll, and sends the
paychecks to the paymaster for distribution to employees.
What documents are included in the audit trail for payroll?
Documents included in the audit trail for payroll are time cards, job tickets and
disbursement vouchers, journal information from labor distribution, subsidiary ledger accounts,
and general ledger accounts.
What are the strengths and weaknesses of a batch process with sequential files?
The advantage of sequential file access is that because data is appended to the end of the
file, the writing process is fast. On the other hand, retrieving data can be extremely slow,
depending of the data's location. The disadvantage is that disk space can be wasted if data does
not fill the entire record or if some record numbers do not have data.
What are the strengths and weaknesses of a batch system with direct access files?
A data center's staff can schedule batch processing during times when the computers are
otherwise idle, such as overnight. The computer operators can delay or prioritize different
batches easily, depending on circumstances. Batch jobs are standard computer files containing
commands, programs and data; once created, some can be run repeatedly as needed, adding
convenience for the staff and helping keep processing costs low. All of a batch job's input data
must be ready before the computer can run it; this means it must be carefully checked. Problems
with data, errors and program crashes that occur during batch jobs bring the whole process to a
halt; the inputs must be carefully checked before the job can be run again. Even minor data
errors, such as typos in dates, can prevent a batch job from running.
What are the objectives of a fixed asset system?
The objectives of a fixed asset system is to:
1. Process the acquisition
2. Maintain adequate accounting records
3. Maintain accurate depreciation records
4. Provide management with info to help plan for future fixed asset investments, and
5. Properly record the retirement and disposal of fixed asset.
How do fixed asset systems differ from purchases systems?
Fixed asset systems differ from purchases systems in a way that Fixed Asset Systems
processes non-routine for a wider group of users in the organizations.
What are three tasks of the fixed asset system?
The three tasks of the fixed asset system are:
1. Acquisition
2. Maintenance, and
3. Disposal
What information is found on the depreciation schedule? How can this information be
verified?
Type of asset, description, month, current depreciation, amount, book value, and asset
location. Sometimes a group code. To verify check the original PO and physically observing.
Why is it crucial to the integrity of the financial statements that the fixed asset department
be informed of asset improvements and disposals?
The fixed asset department authorizes the removal of the asset from the general ledger,
they must know when to record the authorization.
What is the auditor’s role with respect to the fixed asset system?
They review the authorization control procedures to determine the reasonableness of
authorizations used for acquisition of fixed assets. Examine the supervision controls over the
physical guarding of assets. Periodically verify the location, condition and fair value of the
organization fixed assets.
Which department performs the formal recordkeeping function for fixed assets?
The department who performs the formal recordkeeping function for fixed assets is Fixed
Asset Department.
What document shows when fixed assets are fully depreciated?
The document that shows when fixed assets are fully depreciated is Depreciation
schedule.
Who should authorize disposal of fixed assets?
Persons who should authorize disposal of fixed asset is the Management and the Fixed
Asset Accounting Department.
Assets used for production are secured in a warehouse. Who has custody of fixed assets?
The person who has custody of fixed asset used for production which are secured in a
warehouse are the Department Manager.
 CHAPTER 7

Define the conversion cycle.

Conversion cycle is the process of transforms input resources such as raw materials,
labor, and overhead in to finished products and services for sale
What activities are involved in the batch processing system?
Activities are involved in the batch processing system includes, Plan and control
production, maintain inventory control, perform cost accounting
Distinguish between continuous, batch, and made-to-order processing.
Continuous processing creates a homogeneous product through a series of standard
processes. Made to order processing involves the fabrication of discrete products in accordance
with customer specifications. Batch - discrete groups of products each item in the batch is similar
and undergoes same operation
What documents trigger and support batch processing systems?
1. Production schedule – plan
2. Bill of materials – list
3. Route sheet - operation list
4. Work order - initiates work
5. Move ticket - moves work from one center to next
6. Material required - gives authorization to release material
What are the primary determinants for both materials and operations requirements?
The primary determinants for both materials and operations requirements are Inventory
analysis, sales forecast, engineering, specs and bill of materials
What are the objectives of inventory control in the production process?
The objectives of inventory control in the production process to Minimize total inventory
cost while insuring that adequate inventories exist to meet demand.
What document triggers the beginning of the cost accounting process for a given
production run?
Document triggers the beginning of the cost accounting process for a given production
run includes, requisitions, excess material, material returns, standard cost file, WIP account
What documents are needed for cost accounting clerks to update the WIP accounts with
standard charges?
Journal vouchers are sent from cost to the general ledger account
a. Labor variance
b. Material variances
What types of management reports are prepared by the cost accounting system?
The types of management reports prepared by the cost accounting system is Move tickets
signal the end of the production process.
What document signals the completion of the production process?
1. Inventory should be separate from record management and FG inventory custody
2. Cost accounting separate from work centers
3. G/L separate from other acct function
What functions should be separated to segregate record keeping from asset custody?
Give an example for each of the following control activities in the conversion cycle:
transaction authorization, segregation of duties, and access.
Distinguish between CAD and CAM.
CAD or Computer-aided design is the use of software to create two- or three-dimensional
designs, while CAM, computer-aided manufacturing, is the use of computer software and
machinery to manufacture three-dimensional objects. For CAD users the end product is a design
or image. For CAM users the end product is an object.
What is meant by the statement, “Inventories camouflage production problems and can
cause overproduction”? What is wrong with overproduction if you already own the RM?
What are the primary goals of lean manufacturing?
Distinguish between activities and cost objects in ABC.
Activities are the work being performed in a firm. Preparing a purchase order, shipping a
product. Cost objects are things that cause activities, products, services, customers.
Differentiate between essential and nonessential activities.
Essential activities add value while non-essential activities do not. Non-essential
activities should be eliminated from the production process.
What is meant by the term islands of technology?
Islands of technology - modern automation that stands alone. Islands are CNC machines
that can perform multiple operations with little human involvement.
Define computer integrated manufacturing (CIM).
A completely automated environment with the objective of eliminating non–value-added
activities. A CIM facility makes use of group technology cells composed of various types of
CNC machines to produce an entire part from start to finish in one location. In addition to CNC
machines, the process employs automated storage and retrieval systems and robotics. CIM
supports flexible manufacturing by allowing faster development of high-quality products, shorter
production cycles, reduced production costs, and faster delivery times.
Define the term value stream.
The complexities of ABC have caused many firms to abandon this method in favor of a
simpler accounting model called value stream accounting. Value stream accounting captures
costs by value stream rather than by department or activity. Value stream accounting includes all
the costs associated with the product family, but makes no distinction between direct costs and
indirect costs. Raw material costs are calculated based on how much material has been purchased
for the value stream, rather than tracking the input of the raw material to specific products. Thus,
the total value stream material cost is the sum of everything purchased for the period. This
simplified (lean) accounting approach works because RM and WIP inventories on hand are low,
representing perhaps only one or two days of stock. This approach would not work well in a
traditional manufacturing environment in which several months of inventory may carry over
from period to period.
 CHAPTER 8

What are some of the more common uses of data codes in AIS?
Other uses of data coding in Accounting Information Systems (AIS) are to:
1. Concisely represent large amounts of complex information that would otherwise be
unmanageable.
2. Provide a means of accountability over the completeness of the transactions processed.
3. Identify unique transactions and accounts within a file.
4. Support the audit function by providing an effective audit trail.
Compare and contrast the relative advantages and disadvantages of sequential, block,
group, alphabetic, and mnemonic codes.
Sequential codes represent items in some sequential order (ascending or descending). A
common application of numeric sequential codes is the pre-numbering of source documents.
Sequential coding supports the reconciliation of a batch of transactions, such as sales orders, at
the end of processing. If the transaction processing system detects any gaps in the sequence of
transaction numbers, it alerts management to the possibility of a missing or misplaced
transaction. However, Sequential codes carry no information content beyond their order in the
sequence. For instance, a sequential code assigned to a raw material inventory item tells us
nothing about the attributes of the item. Also, sequential coding schemes are difficult to change.
Block code is a variation on sequential coding that in part remedies the disadvantages
just described. Block coding allows for the insertion of new codes within a block without having
to reorganize the entire coding structure. However, as with the sequential codes, the information
content of the block code is not readily apparent. For instance, account number 626 means
nothing until matched against the chart of accounts, which identifies it as advertising expense.
Group codes are used to represent complex items or events involving two or more pieces
of related data. The code consists of zones or fields that possess specific meaning. They facilitate
the representation of large amounts of diverse data. They allow complex data structures to be
represented in a hierarchical form that is logical and more easily remembered by humans. They
permit detailed analysis and reporting both within an item class and across different classes of
items. However, the primary disadvantage of group coding results from its success as a
classification tool. Because group codes can effectively present diverse information, they tend to
be overused. Unrelated data may be linked simply because it can be done. This can lead to
unnecessarily complex group codes that cannot be easily interpreted. Finally, overuse can
increase storage costs, promote clerical errors, and increase processing time and effort.
Alphabetic codes are used for many of the same purposes as numeric codes. The
capacity to represent large numbers of items is increased dramatically through the use of pure
alphabetic codes or alphabetic characters embedded within numeric codes (alphanumeric codes).
The earlier example of a chart of accounts using a three-digit code with a single blocking digit
limits data representation to only 10 blocks of accounts—0 through 9. However, the primary
drawbacks with alphabetic coding are (1) as with numeric codes, there is difficulty rationalizing
the meaning of codes that have been sequentially assigned and (2) users tend to have difficulty
sorting records that are coded alphabetically.
Mnemonic codes are alphabetic characters in the form of acronyms and other
combinations that convey meaning. The mnemonic coding scheme does not require the user to
memorize meaning; the code itself conveys a high degree of information about the item that is
being represented. Although mnemonic codes are useful for representing classes of items, they
have limited ability to represent items within a class. For example, the entire class of accounts
receivable could be represented by the mnemonic code AR, but we would quickly exhaust
meaningful combinations of alphabetic characters if we attempted to represent the individual
accounts that make up this class. These accounts would be represented better by sequential,
block, or group coding techniques.
What information is contained in a journal voucher?
A journal voucher contains a record of daily events. Its primary purpose is to process
accounting entries, which include single routine transactions, adjustments, and closing. It's the
medium or source input to the general ledger.
How are journal vouchers used as a control mechanism?
Journal vouchers are used as a control mechanism by only being approved by responsible
managers, which prevents unauthorized entries. Since every entry has proper information about
transactions amounts and summaries of transactions, it's considered a control mechanism.
What information is contained in the general ledger master file?
The information contained in the general ledger master file is about separate general
ledger accounts (Invoices, Payroll, etc.). Some common data found in the master file are account
number, description, account balance, debit/credit, current balance, etc. Contains a set of
individual records that possesses information for a specific general ledger.
What is the purpose of the general ledger history file?
The purpose of the general ledger history file is responsible for providing the historical
financial data of the past situations. Information from these files can help with comparing
financial reports.

What is the purpose of a responsibility center file?

 The responsibility center file contains the revenues, expenditures, and other resource
utilization data for each responsibility center in the organization. The MRS draws upon these
data for input in the preparation of responsibility reports for management.
List the primary users of the FRS and discuss their information needs.
The primary users of FRF (Financial Reporting Systems) are business owners, creditors,
employees, and investors. They use FRF to assess the creditability and profitability of the
investments they made and will later determine the course of their actions.
What are the 11 steps, in order, of the financial reporting process?
1. Maintaining/recording the transaction,
2. Preparing special journal for transactions,
3. Preparing the subsidiary ledger,
4. Making the general ledger,
5. Formulating the unevaluated balance,
6. Correcting the errors and ordering the transactions,
7. Journalize and post adjusting entries,
8. Prepare adjusted trial balance,
9. Formulating the financial statements,
10. Journalize and recording the entries closed,
11. Maintaining the balance sheet for closing.
What assumption is made regarding the external users of financial statements?
The statements are prepared on the assumption that the users understand the conventions
and accounting principles that are applied, and that the financial statements have information
content and useful.
\When are adjusting entries made to the worksheet and what is their purpose? When are
the corresponding voucher entries made?
The main objective of passing adjusting entries is to identify any error or unrecorded
transaction and correct/record them. Corresponding Voucher entries are made after adjusting
entries are posted.
What are the purposes of an audit trail? What is meant by a defective audit trail? How can
a defective audit trail be prevented?
An audit trail facilitates error prevention and correction when the data files are
conveniently and logically organized. Also, the general ledger and other files that constitute the
audit trail should be detailed and rich enough to (1) provide the ability to answer inquiries, for
example, from customers or vendors; (2) be able to reconstruct files if they are completely or
partially destroyed; (3) provide historical data required by auditors; (4) fulfill government
regulations; and (5) provide a means for preventing, detecting, and correcting errors.
What tasks should the general ledger clerk not be allowed to do?
 The general ledger clerk isn't allowed to have responsibility of maintaining special
journals or general ledgers, preparation of journal vouchers, control and custody of physical
assets.
What are two operational reports produced by the FRS that provide proof to the accuracy
of the process?

Explain which of the four potential exposures in the FRS may be controlled better by a
close examination of the journal voucher listing.

Explain how the formalization of tasks promotes internal control.

The purpose of formalization of tasks is to avoid an organizational structure in which the
organization’s performance, stability, and continued existence depend on specific individuals.
The organizational chart shows some typical job positions in a manufacturing firm. Although a
firm’s most valuable resource is its employees, it does not own the resource. Sooner or later, key
individuals leave and take their skills with them. By formalizing tasks, the firm can more easily
recruit individuals to fill standard positions left open by those who leave. In addition, the
formalization of tasks promotes internal control. With employee responsibilities formalized and
clearly specified, management can construct an organization that avoids assigning incompatible
tasks to an individual.
List and define the seven report attributes.
1. Relevance. Each element of information in a report must support the manager’s
decision. Irrelevancies waste resources and may even be dysfunctional by distracting
a manager’s attention from the information content of the report.
2. Summarization. Reports should be summarized according to the level of the
manager within the organizational hierarchy. In general, the degree of summarization
becomes greater as information flows from lower management upward to top
management.
3. Exception Orientation. Control reports should identify activities that are at risk of
going out of control and should ignore activities that are under control. An exception
oriented report would identify only those inventory items that have fallen to their
reorder levels. From this report, the agent could easily prepare purchase orders.
4. Accuracy. Information in reports must be free of material errors. A material error will
cause the user to make the wrong decision (or fail to make a required decision). We
often sacrifice accuracy for timely information. In situations that require quick
responses, the manager must factor this trade-off into the decision-making process.
5. Completeness. Information must be as complete as possible. Ideally, no piece of
information that is essential to the decision should be missing from the report. Like
the attribute of accuracy, we sometimes must sacrifice completeness in favor of
timely information.
 6. Timeliness. If managers always had time on their side, they may never make bad
decisions. However, managers cannot always wait until they have all the facts before
they act. Timely information that is sufficiently complete and accurate is more
valuable than perfect information that comes too late to use. Therefore, the MRS must
provide managers with timely information. Usually, information can be no older than
the period to which it pertains.
7. Conciseness. Information in the report should be presented as concisely as possible.
Reports should use coding schemes to represent complex data classifications and
provide all the necessary calculations (such as extensions and variances) for the user.
In addition, information should be clearly presented with titles for all values.
What is responsibility accounting?
A large part of management reporting involves responsibility accounting. This concept
implies that every economic event that affects the organization is the responsibility of and can be
traced to an individual manager. The responsibility accounting system personalizes performance
by saying to the manager, “This is your original budget, and this is how your performance for the
period compares to your budget.” Most organizations structure their responsibility reporting
system around areas of responsibility in the firm.
What are the two phases of responsibility accounting?
The flow of information in responsibility systems is both downward and upward through
the information channels. Figure 8-13 illustrates this pattern. These top-down and bottom-up
information flows represent the two phases of responsibility accounting:
(1) Creating a set of financial performance goals (budgets) pertinent to the manager’s
responsibilities and
(2) Reporting and measuring actual performance as compared to these goals.
What are the three most common forms of responsibility centers?
The three most common forms of responsibility centers are Cost centers, Profit
centers, and Investment centers.
What is goal congruence?
Lower-level managers pursuing their own objectives contribute in a positive way to the
objectives of their superiors. For example, by controlling costs, a production supervisor
contributes to the division manager’s goal of profitability. Thus as individual managers serve
their own best interests they also serve the best interests of the organization.
What is data mining?
The process of selecting, exploring, and modeling large amounts of data to uncover
relationships and global patterns that exist in large databases but are hidden among the vast
amount of facts. This involves sophisticated techniques such as database queries and artificial
intelligence that model real-world phenomena from data collected from a variety of sources,
including transaction processing systems, customer history databases, and demographics data
from external sources such as credit bureaus. Managers employ two general approaches to data
mining: verification and discovery.
What is a data warehouse?
A central feature of a successful data mining initiative is a data warehouse of archived
operational data. A data warehouse is a relational database management system that has been
designed specifically to meet the needs of data mining. The warehouse is a central location that
contains operational data about current events (within the past 24 hours) as well as events that
have transpired over many years. Data are coded and stored in the warehouse in detail and at
various degrees of aggregation to facilitate identification of recurring patterns and trends.
What is information overload?
Information overload occurs when a manager receives more information than he or she
can assimilate. This happens when designers of the reporting system do not properly consider the
manager’s organizational level and span of control. Information overload causes managers to
disregard their formal information and rely on informal cues to help them make decisions. Thus
the formal information system is replaced by heuristics (rules of thumb), tips, hunches, and
guesses. The resulting decisions run a high risk of being suboptimal and dysfunctional.
Explain some reporting techniques that may cause dysfunctional behavior by a manager.
The use of price variance to evaluate a purchasing agent can affect the quality of the
items purchased. 2. The use of quotas (such as units produced) to evaluate a supervisor can affect
quality control, material usage efficiency, labor relations, and plant maintenance. 3. The use of
profit measures such as ROI, net income, and contribution margin can affect plant investment,
employee training, inventory reserve levels, customer satisfaction, and labor relations.
Explain how ad hoc reports have allowed managers to make more timely and better-quality
decisions. Give an example.
Ad-Hoc reports allow mangers to retrieve information for situations that were not
anticipated. This retrieves information quickly allowing mangers to be efficient.
Explain how exception reporting would be invaluable to the manager of a credit
department.
This exception report delivers information regarding the sales transaction’s volume over
the stated limit. The credit manager might take the help the report to confirm that the transaction
was authorized by somebody in the credit manager or credit department.