To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Accounting Information Systems CHAPTER 10 THE REVENUE CYCLE: SALES AND CASH COLLECTIONS SUGGESTED ANSWERS TO DISCUSSION QUESTIONS 10.1 This should generate a great deal of discussion The basic issue concerns the willingness of consumers to divulge the kind of information that would allow companies to personalize the sales interaction versus concerns that such information would be misused or sold to other parties In addition, with the growing problem of identity theft, consumers are becoming increasingly concerned about the safety and security of their personal information Companies that wish to collect this data will most likely have to demonstrate the need for this information to the consumer and also the company’s ability to keep this information secure 10.2 Digitized products force little change on the four business activities of the revenue cycle For all products, whether digitized or not, an order must be taken, the product shipped, an invoice delivered, and cash collected The only thing that digitized products is change the way these four activities are carried out Digitized products actually facilitate the four activities by incorporating electronic sales orders, shipping, billing, and cash collections 10.3 Employees need to be trained to use the POS properly Such training should include understanding how the POS works, stressing that In that errors on the employees part will directly affect the inventory master file numbers If an item does not “scan”, then it must be rescanned or dealt with so that the integrity of the records is upheld Similarly, employees should be trained not to skip sales If an item does not “scan”, the employee should be trained to accurately enter in the “bar code” of the item Entering a generic or erroneous code not only creates an inventory error, but it also frustrates the customer who may take their business elsewhere In addition, employees should be trained to report and/or fix errors in bar codes as they are encountered and in a timely manner 10.4 The report already provides dollar amounts outstanding by number of days past due by customer and by invoice However, the percentage of total accounts receivable categorized by days past due would help to alert management of categories that are increasing This could also be reported by customer and by invoice This way if a particular invoice was not being paid, the company could more quickly identify the invoice, contact the customer, and potentially resolve any problems or disputes about the particular invoice In addition, reporting by customer can help to identify chronic “slow paying” customers so that corrective action could be taken such as offering discounts for quick payment, changes in term, and notifying the credit manager to restrict credit for this particular customer Furthermore, the company may have a certain threshold for each category of past due accounts either in percentages or absolute dollars A metric could be calculated and presented that highlights the categories exceeding that threshold 10-1 © 2009 Pearson Education, Inc Publishing as Prentice Hall To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 10: The Revenue Cycle: Sales and Cash Collections 10.5 This is a good question to get students to explore and compare the role of technology in dynamic price setting policies You may want to preface the discussion by relating the following scenario: You have graduated from collage and started your own consulting firm A client has an urgent need that requires you to travel to his location Since this is a last minute trip, you pay full price for an airline ticket Since this client is on a fixed contract, you cannot charge the cost of the ticket back to the client While riding on the airplane you find yourself sitting next to a college student who is majoring in accounting During the course of the conversation with this accounting student, you find that he purchased his airline ticket from a discount reseller and paid less than half of what you paid for the same flight How you feel about this arrangement? Do think this type of pricing arrangement could transfer to other products? Would the companies that sell these other products be put at a competitive disadvantage when customers find that they are paying different prices for the same goods or services? 10.6 The instructor can facilitate discussion of invoiceless pricing in a B2C environment by asking students how they would feel about not receiving a phone or cable bill What are the problems the phone or cable company and phone or cable consumers encounter without a paper bill? What about billing problems and disputes What about payment deadlines or consumers that want to pay in person or pay in cash? 10.7 Any form of electronic or digital cash has the same audit risks as physical cash: susceptibility to theft and loss of an audit trail In addition, digital “cash” also has risks associated with the durability of the store of value – to what extent can the cash be recovered if the storage media becomes defective? Another issue concerns the potential loss of privacy, because the digital currency can be “marked” in a manner that enables tracing its path through the economy 10.8 Why not indeed? Copies of the sales order can be used by inventory personnel as a picking ticket to select inventory items ship to the customer In similar fashion, the sales order converted into a picking ticket can also be used as a packing slip Just make sure a copy is sent with the package and not the original so that in case there is a problem the original form can be reviewed for any errors or discrepancy If sales orders are created electronically, the information contained on the electronic sales order can be used to create paper (or electronic) picking tickets, packing slips, or invoices 10-2 © 2009 Pearson Education, Inc Publishing as Prentice Hall To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Accounting Information Systems SUGGESTED ANSWERS TO THE PROBLEMS 10.1 Types of controls used at various steps in the revenue cycle Process/ Activity Sales order entry Shipping Applicable Controls (P = Preventive, D = Detective, C = Corrective) Threat Incomplete or inaccurate customer orders Various data entry edit controls P Credit sales to customers with poor credit Proper credit approval, prior to delivery of goods or services P; accurate, current customer data P Legitimacy of order Authorized customer purchase order P; digital signatures D Lost sales due to stockouts, excessive carrying costs, and lost revenue due to markdowns Shipping errors: Wrong merchandise Wrong quantities Wrong address Inventory control systems P; periodic physical inventory counts D; improved sales forecasts P; better supply chain management P and C Compare sales order with packing list and shipping documents D; bar coding P Theft of inventory Billing and accounts receivable Physical access controls P; documentation of all inventory movements D; periodic physical inventory counts D Segregation of shipping and billing functions P; one-for-one matching of invoices (or EDI acknowledgments) against shipping documents D and C Failure to bill Billing errors Comparison of sales orders, shipping documents, and invoices P and C; various edit checks D and C Errors in maintaining customer accounts Data entry edit checks D and C; use of remittance advices P; monthly statements to customers D and C 10-3 © 2009 Pearson Education, Inc Publishing as Prentice Hall To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 10: The Revenue Cycle: Sales and Cash Collections Process/ Activity Cash collections Threat 10 Theft of cash General 11 Loss of data Applicable Controls (P = Preventive, D = Detective, C = Corrective) Segregation of cash handling and accounts receivable functions P; use of lockboxes or EFT P; bank account reconciliation by someone not involved in cash receipts processing D and C; segregation of bad debt/credit memo authorization from cash handling and accounts receivable functions P Backup procedures C; disaster recovery plans P; physical and logical access controls P 12 Poor performance Development and periodic review of appropriate performance metrics D and C 10.2 Information Technology to enhance the restriction of physical access to inventory: Electronic locks on all entrances and exits to the inventory area Smart card technology where employees must scan their ID card prior to entering/exiting the inventory area Install motion detectors Attach security tags to inventory items and install security tag scanners at each exit of the inventory area Attach RFID tags to inventory items to track the movement of inventory Install and monitor surveillance cameras in the inventory area Install an infrared alarm system Build a fence around the inventory area and equip the fence with cameras and sensors 10-4 © 2009 Pearson Education, Inc Publishing as Prentice Hall To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Accounting Information Systems 10.3 a Shipping personnel should be required to document (on paper or by computer) receipt of goods from the finished goods storeroom This procedure acknowledges responsibility for custody of the goods transferred b Either a redundant data check or closed loop verification could be used If the transactions are being entered in batches, redundant data such as the first five characters of the customer's name could be included in each input record; after finding a match on customer account number, the system would also verify that the name characters match before posting the transaction If the transactions are being entered online, the system could respond to operator entry of the account number by retrieving and displaying the customer's name for the operator to review c Up-to-date credit records should be maintained, and credit checks should be made prior to approval of sales orders d A receiving report should be required to support the authorization of credits for sales returns e Separate the function of authorizing write-offs of uncollectible accounts from the function of handling of collections on account, in order to prevent any single individual from perpetrating this type of fraud f Shipping personnel should be required to record the actual quantity shipped on the order document and/or enter the quantity shipped into the sales order processing system, in order that bills can be prepared based upon the quantity shipped rather than the quantity ordered g Supervision of mailroom operations, limitation of authority to endorse checks to the cashier only, and instructions to the bank to accept only those checks endorsed for deposit in the company's account h Cash receipts should be listed and totaled in the mailroom before the cashier receives the checks A third person compares the amount deposited as shown by a validated deposit slip to the batch total prepared in the mailroom i All sales tickets should be prenumbered and accounted for This would quickly spot a missing ticket j Segregate shipping and billing functions k Implement accurate inventory control and sales forecasting systems including periodic physical inventory counts and frequent review and revision of sales forecasts 10-5 © 2009 Pearson Education, Inc Publishing as Prentice Hall To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 10: The Revenue Cycle: Sales and Cash Collections l A system of user IDs and passwords is the first line of defense followed by allowing “read only” access to customer data for sales staff, implement access controls over individual terminals, and maintaining activity logs m Regular backups with copies being stored off-site n Backup generators as well as cold and/or warm site contracted backup facilities o Encrypting sensitive data prior to transmission, creating virtual private networks, and transmitting data over secure socket layer (SSL) networks p A system of user IDs and passwords is the first line of defense followed by allowing “read only” access to price lists for sales staff, implement access controls over individual terminals, and maintaining activity logs q A system of user IDs and passwords is the first line of defense followed by allowing “read only” access to customer data for sales staff, implement access controls over individual terminals, and maintaining activity logs In addition, formal non-compete agreement could be used when hiring personnel r A nightly backup with copies being stored off-site s Periodically testing backup data for access and compatibility with current company hardware and software 10.4 Formulas: Sales (1% Growth Rate) E5 and Row 5: =D5*101%, =E5*101%, =F5*101%, … 10-6 © 2009 Pearson Education, Inc Publishing as Prentice Hall To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Accounting Information Systems Cash Collections: D7: =D5*40% E7: =E5*40%+D5*30% F7: =F5*40%+E5*30%+D5*20% G7: =G5*40%+F5*30%+E5*20%+D5*8% Copy and paste G7 formula to remaining cells Beginning Balance: Ending Balance: E2: =D9 (same formula for remaining cells in Row 2) D9: =D3+D7 (same formula for remaining cells in Row 9) Spinner and Scroll Bar: b Spinner Select index key to link to the spinner Format Control, C17 Enter formula to calculate growth rate display, C13 (=C17/1000) Click View, Toolbars, Forms Select Spinner and draw on the worksheet Right click and select Format Control Fill in data below: 10-7 © 2009 Pearson Education, Inc Publishing as Prentice Hall To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 10: The Revenue Cycle: Sales and Cash Collections Modify formulas in Row 5, beginning E5, e.g., cell E5, =D5*(100%+$C$13) Note: to copy and paste formula to other cells, use absolute reference for C13 or $C$13 c Scroll bar Select index key to link to the scroll bar Format Control, C16 Enter formula to calculate growth rate display, C11 (=C16*10000) Click View, Toolbars, Forms Select scroll bar and draw on the worksheet Right click and select Format Control Fill in data below: 10-8 © 2009 Pearson Education, Inc Publishing as Prentice Hall To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Accounting Information Systems Modify initial sales from a value to reference formula, i.e., =C11 d Various controls could be implemented including format cells so that only numerical data will be accepted and reviewing cell formulas for accuracy or the column totals could be crossfooted as a check against the row totals In addition, a validation check could be put in place for the various cells to make sure the appropriate data was entered into the various cells For example, to make sure only numbers are input into the numeric cells, Excel’s Data Validation tool could be used The tool is invoked by clicking on Data-Validation The following displays an example: 10-9 © 2009 Pearson Education, Inc Publishing as Prentice Hall To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 10: The Revenue Cycle: Sales and Cash Collections 10-10 © 2009 Pearson Education, Inc Publishing as Prentice Hall To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 10: The Revenue Cycle: Sales and Cash Collections undetected differences between the subsidiary ledger and the general ledger Also, fees earned and cash receipts or accounts receivable could be understated because of failure to record billings, cash receipts, and write-offs accurately Control: Periodic reconciliation of the subsidiary accounts receivable ledger to the general ledger control account for accounts receivable 10-26 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Accounting Information Systems 10.10 (CPA Examination, May 1988, Auditing Question 4, adapted) Weakness Exposure Recommendation No credit approval Uncollectible sales Separate credit approval Warehouse clerk initiates posting to inventory records by preparing shipping advice Failure to prepare would result in inaccurate inventory records; could release goods to friends with no invoice Inventory posting should be done by sales clerk once sales approved Warehouse clerk releases merchandise prior to credit approval Loss of inventory to customers who not pay Do not release goods until notified of credit approval Warehouse clerk does not retain copy of shipping advice Cannot easily identify loss if carrier has accident Use 4-copy shipping advice and retain one copy in warehouse Bookkeeper A authorizes customer credit and prepares source documents for posting to customer accounts Sales to friends that exceed Credit manager should credit limit approve all credit Bookkeeper A prepares invoices without notification about what was shipped and when Billing mistakes Bookkeeper A authorizes Can approve sales to write-offs of customer friends and later write accounts and approves credit them off 10-27 Prepare invoice only after receive copy of shipping advice indicating quantities shipped and date Someone else should authorize write-off of customer accounts To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 10: The Revenue Cycle: Sales and Cash Collections Bookkeeper B does not periodically verify that all sales orders and shipping advices have been invoiced Failure to bill customers Periodically verify that all sales orders and shipping advices have been invoiced Bookkeeper C does not reconcile subsidiary A/R with general ledger Potential imbalances due to posting errors Reconcile subsidiary A/R ledger with the general ledger Bookkeeper C maintains journals and posts to ledgers No independent check on accuracy of recording process Bookkeeper B should record in journals and Bookkeeper C post to ledgers Collection Clerk directly receives and records customer checks Theft of checks Have all checks endorsed and listed in mail room prior to delivery to collection clerk and send a copy of the remittance list to Bookkeeping Collections Clerk does not deliver postdated checks and checks with errors to an employee independent of the bank deposit for review and disposition Possible theft of checks Deliver all checks not deposited to another employee who has no bank deposit/reconciliation duties Collection Clerk initiates posting of receipts to subsidiary accounts receivable ledger and has initial access to cash receipts Theft by lapping Have one of the Bookkeepers record customer checks, using a copy of the check or a remittance listing Cash collection clerk does not deposit checks promptly Possible loss of checks; loss of interest Deposit all receipts promptly Cash collection clerk reconciles bank statement and has initial access to cash receipts Can cover up theft by “fudging” the bank reconciliation Have bank reconciliation performed by an employee with no other involvement in cash receipts processing 10-28 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Accounting Information Systems Some ways that Newton could use IT to improve efficiency include: On-line data entry by sales staff The system should include credit checks on customers as well as check inventory availability Email notification of each department (shipping, billing, etc.) whenever another department performs an action (e.g., billing is notified whenever shipping enters data indicating that an order has been released) EDI billing of customers Establishment of electronic lockboxes with banks so that customer payments go directly to company’s account Controls that should be implemented in the new system include: Passwords to limit access to authorized users, and to restrict the duties each employee may perform and which files they may access A variety of input edit checks (limit checks, range checks, reasonableness tests, etc.) to ensure completeness of data entry and accuracy 10-29 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 10.11 REVENUE CYCLE Contact Customer Accounting Transaction Journal Entry Documents Control Issues Approve Credit Transfer Goods Bill Customer Sale Call sheet Receive Remittance Credit Accounts Receivable Deposit Cash Cash Receipt Packing slip, shipping advice Dr A/R Cr Sales Invoice Remittance advice; remittance list Dr Cash Cr A/R Remittance Advice Sales order; picking list person Sales Purchase order from customer All items needed to complete the order Sales Credit Shipping Accounting Mail Accounting Cashier Follow company policy and strategy Do not violate laws or company policy Only approved customers get credit Ship only what was ordered; document all shipments * Bill for every shipment; bill accurately Prevent theft of checks or cash Prevent lapping; properly credit customer accounts * Theft Data Collected Department Customer Agrees to Sale balance Deposit slip deposit Qty shipped * * * * * * Information Required * * * * * * * * Information Generated * * * * * * * * Effect of Automation *-a lot of information is potentially required and generated at each step The key point to look for in student answers is whether they have identified non-financial information needs and data from external sources Similarly, there are countless potential answers to the effect of automation 10-30 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 10.12 10 11 12 e i g k c j h f a l b d 10.13 a Control Weaknesses Weakness - Sarah opens all mail and prepares a list of donations (cash and checks) Control - Mail should be opened by both Sarah and the other staff member Weakness - The donations and donation list are sent to the accountant for recording and bank deposit who therefore has custody of the donation and records the donation Weakness - Bank reconciliation performed by accountant who also makes the bank deposit Control - The donations should be sent to the office manager for deposit and the donation list sent to the accountant for recording This corrects both weaknesses Weakness - Each employee has full access (create, read, update, delete) to the accounting system Control - Only the accountant and office manager should have full access to the accounting system b The weekly back-up should be stored off-site, not in the manager's office The files both onsite and off-site should be password protected and encrypted to guard against alteration and unauthorized disclosure In addition, the backup files should be kept locked in a secure place 10-31 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 10: The Revenue Cycle: Sales and Cash Collections 10.14 Product Widgets Widgets Widgets Gadgets Gadgets Gadgets Gizmos Gizmos Gizmos Wingdings Wingdings Wingdings Dohingeys Dohingeys Dohingeys Thingamabobs Thingamabobs Thingamabobs Whatchamacallits Whatchamacallits Whatchamacallits Round2its Sales ($) b Number of products with sales > 200,000 c Total sales all products for Division A "=COUNTIF(B2:B23,">200000") 245000 74000 178944 123678 163888 201999 178000 123456 198346 158255 273050 95000 333000 144357 188500 184750 222000 100000 278000 200000 129905 103000 "=SUMIF(C2:C23,"A",B2:B23) 10-32 Division A B C A B C A B C A B C A B C A B C A B C A To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Accounting Information Systems Division to sum d Total sales all products in that division =IF(B28="A",SUMIF(C2:C23,"A",B2:B23),IF(B28="B",SU MIF(C2:C23,"B",B2:B23),IF(B28="C",SUMIF(C2:C23,"C", B2:B23), 0))) e To conditionally format a cell select Format >> Conditional Format For the sales column use option "Cell Value is" for the other two columns use "Formula is" and input a formula that references the sales column and tests if it is less than $100,000 10-33 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 10-34 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 10-35 ... filled on time Deliveries by customer, by delivery person, by geographic area, and by product Dollar value of deliveries over time Orders by time of day Deliveries by time of day To produce these... slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Accounting Information Systems 10.3 a Shipping personnel should be required to document (on paper or by computer)... Publishing as Prentice Hall To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Accounting Information Systems Cash Collections: D7: =D5*40% E7: =E5*40%+D5*30%