Hall_5e_TB_Ch05
Chapter 5—The Expenditure Cycle Part I: Purchases and Cash Disbursements Procedures
TRUE/FALSE
1. Purchasing decisions are authorized by inventory control.
ANS: T
2. The blind copy of the purchase order that goes to the receiving department contains no item
descriptions.
ANS: F
3. Firms that wish to improve control over cash disbursements use a voucher system.
ANS: T
4. In a voucher system, the sum of all unpaid vouchers in the voucher register equals the firm’s total
voucher payable balance.
ANS: T
5. The accounts payable department reconciles the accounts payable subsidiary ledger to the control
account.
ANS: F
6. The use of inventory reorder points suggests the need to obtain specific authorization.
ANS: F
7. Proper segregation of duties requires that the responsibility approving a payment be separated from
posting to the cash disbursements journal.
ANS: T
8. A major risk exposure in the expenditure cycle is that accounts payable may be overstated at the end of
the accounting year.
ANS: F
9. When a trading partner agreement is in place, the traditional three way match may be eliminated.
ANS: T
10. Authorization of purchases in a merchandising firm occurs in the inventory control department.
ANS: T
11. A three way match involves a purchase order, a purchase requisition, and an invoice.
ANS: F
12. Authorization for a cash disbursement occurs in the cash disbursement department upon receipt of the
supplier’s invoice.
ANS: F
13. An automated cash disbursements system can yield better cash management since payments are made
on time.
ANS: T
14. Permitting warehouse staff to maintain the only inventory records violates separation of duties.
ANS: T
15. A purchasing system that employs electronic data interchange does not use a purchase order.
ANS: F
16. Inventory control should be located in the warehouse.
ANS: F
17. Inspection of shipments in the receiving department would be improved if the documentation showed
the value of the inventory.
ANS: F
18. One reason for authorizing purchases is to enable efficient inventory management.
ANS: T
19. If accounts payable receives an invoice directly from the supplier it needs to be reconciled with the
purchase order and receiving report.
ANS: T
20. Supervision in receiving is intended to reduce the theft of assets.
ANS: T
MULTIPLE CHOICE
1. The purpose of the purchase requisition is to
a. order goods from vendors
b. record receipt of goods from vendors
c. authorize the purchasing department to order goods
d. bill for goods delivered
ANS: C
2. The purpose of the receiving report is to
a. order goods from vendors
b. record receipt of goods from vendors
c. authorize the purchasing department to order goods
d. bill for goods delivered
ANS: B
3. All of the following departments have a copy of the purchase order except
a. the purchasing department
b. the receiving department
c. accounts payable
d. general ledger
ANS: D
4. The purpose of the purchase order is to
a. order goods from vendors
b. record receipt of goods from vendors
c. authorize the purchasing department to order goods
d. approve payment for goods received
ANS: A
5. The open purchase order file in the purchasing department is used to determine
a. the quality of items a vendor ships
b. the best vendor for a specific item
c. the orders that have not been received
d. the quantity of items received
ANS: C
6. The purchase order
a. is the source document to make an entry into the accounting records
b. indicates item description, quantity, and price
c. is prepared by the inventory control department
d. is approved by the end-user department
ANS: B
7. The reason that a blind copy of the purchase order is sent to receiving is to
a. inform receiving when a shipment is due
b. force a count of the items delivered
c. inform receiving of the type, quantity, and price of items to be delivered
d. require that the goods delivered are inspected
ANS: B
8. The receiving report is used to
a. accompany physical inventories to the storeroom or warehouse
b. advise the purchasing department of the dollar value of the goods delivered
c. advise general ledger of the accounting entry to be made
d. advise the vendor that the goods arrived safely
ANS: A
9. When a copy of the receiving report arrives in the purchasing department, it is used to
a. adjust perpetual inventory records
b. record the physical transfer of inventory from receiving to the warehouse
c. analyze the receiving department’s process
d. recognize the purchase order as closed
ANS: D
10. The financial value of a purchase is determined by reviewing the
a. packing slip
b. purchase requisition
c. receiving report
d. supplier’s invoice
ANS: D
11. Which document is least important in determining the financial value of a purchase?
a. purchase requisition
b. purchase order
c. receiving report
d. supplier’s invoice
ANS: A
12. In a merchandising firm, authorization for the payment of inventory is the responsibility of
a. inventory control
b. purchasing
c. accounts payable
d. cash disbursements
ANS: C
13. In a merchandising firm, authorization for the purchase of inventory is the responsibility of
a. inventory control
b. purchasing
c. accounts payable
d. cash disbursements
ANS: A
14. When purchasing inventory, which document usually triggers the recording of a liability?
a. purchase requisition
b. purchase order
c. receiving report
d. supplier’s invoice
ANS: D
15. Because of time delays between receiving inventory and making the journal entry
a. liabilities are usually understated
b. liabilities are usually overstated
c. liabilities are usually correctly stated
d. none of the above
ANS: A
16. Usually the open voucher payable file is organized by
a. vendor
b. payment due date
c. purchase order number
d. transaction date
ANS: B
17. Which of the following statements is not correct?
a. the voucher system is used to improve control over cash disbursements
b. the sum of the paid vouchers represents the voucher payable liability of the firm
c. the voucher system permits the firm to consolidate payments of several invoices on one
voucher
d. many firms replace accounts payable with a voucher payable system
ANS: B
18. In the expenditure cycle, general ledger does not
a. post the journal voucher from the accounts payable department
b. post the account summary from inventory control
c. post the journal voucher from the purchasing department
d. reconcile the inventory control account with the inventory subsidiary summary
ANS: C
19. The documents in a voucher packet include all of the following except
a. a check
b. a purchase order
c. a receiving report
d. a supplier’s invoice
ANS: A
20. To maintain a good credit rating and to optimize cash management, cash disbursements should arrive
at the vendor’s place of business
a. as soon as possible
b. on the due date
c. on the discount date
d. by the end of the month
ANS: C
21. The cash disbursement clerk performs all of the following tasks except
a. reviews the supporting documents for completeness and accuracy
b. prepares checks
c. signs checks
d. marks the supporting documents paid
ANS: C
22. When a cash disbursement in payment of an accounts payable is recorded
a. the liability account is increased
b. the income statement is changed
c. the cash account is unchanged
d. the liability account is decreased
ANS: D
23. Authorization for payment of an accounts payable liability is the responsibility of
a. inventory control
b. purchasing
c. accounts payable
d. cash disbursements
ANS: C
24. Of the following duties, it is most important to separate
a. warehouse from stores
b. warehouse from inventory control
c. accounts payable and accounts receivable
d. purchasing and accounts receivable
ANS: B
25. In a firm with proper segregation of duties, adequate supervision is most critical in
a. purchasing
b. receiving
c. accounts payable
d. general ledger
ANS: B
26. The receiving department is not responsible to
a. inspect shipments received
b. count items received from vendors
c. order goods from vendors
d. safeguard goods until they are transferred to the warehouse
ANS: C
27. The major risk exposures associated with the receiving department include all of the following except
a. goods are accepted without a physical count
b. there is no inspection for goods damaged in shipment
c. inventories are not secured on the receiving dock
d. the audit trail is destroyed
ANS: D
28. When searching for unrecorded liabilities at the end of an accounting period, the accountant would
search all of the files except
a. the purchase requisition file
b. the cash receipts file
c. the purchase order file
d. the receiving report file
ANS: B
29. In regards to the accounts payable department, which statement is not true?
a. the purchase requisition shows that the transaction was authorized
b. the purchase order proves that the purchase was required
c. the receiving report provides evidence of the physical receipt of the goods
d. the supplier’s invoice indicates the financial value of the transaction
ANS: B
30. In a computerized system that uses an economic order quantity (EOQ) model and the perpetual
inventory method, who determines when to reorder inventory?
a. the inventory control clerk
b. the purchasing department
c. the vendor
d. the computer system
ANS: D
31. Firms can expect that proper use of a valid vendor file will result in all of the following benefits except
a. purchasing agents will be discouraged from improperly ordering inventory from related
parties
b. purchases from fictitious vendors will be detected
c. the most competitive price will be obtained
d. the risk of purchasing agents receiving kickbacks and bribes will be reduced
ANS: C
32. In a real-time processing system with a high number of transactions, the best and most practical
control over cash disbursements is to have
a. all checks manually signed by the treasurer
b. all checks signed by check-signing equipment
c. checks over a certain dollar amount manually signed by the treasurer
d. checks over a certain dollar amount manually signed by the cash disbursements clerk
ANS: C
33. The document which will close the open purchase requisition file is the
a. purchase order
b. vendor invoice
c. receiving report
d. none of the above
ANS: C
34. Goods received are inspected and counted to
a. determine that the goods are in good condition
b. determine the quantity of goods received
c. preclude payment for goods not received or received in poor condition
d. all of the above
ANS: D
35. If a company uses a standard cost system, inventory records can be updated from the
a. vendor invoice
b. purchase order
c. receiving report
d. purchase requisition
ANS: C
36. If a company uses an actual cost system, inventory records can first be updated from the
a. vendor invoice
b. purchase order
c. receiving report
d. purchase requisition
ANS: A
37. Copies of a purchase order are sent to all of the following except
a. inventory control
b. receiving
c. general ledger
d. accounts payable
ANS: C
38. The receiving report
a. is used to update the actual cost inventory ledger
b. accompanies the goods to the storeroom
c. is sent to general ledger
d. is returned to the vendor to acknowledge receipt of the goods
ANS: B
39. A supplier invoice
a. is included with the goods
b. shows what was ordered even if all was not shipped
c. is sent by vendor to accounts payable
d. none of the above
ANS: C
40. The cash disbursement function is
a. part of accounts payable
b. an independent accounting function
c. a treasury function
d. part of the general ledger department
ANS: C
SHORT ANSWER
1. Which internally generated document should be compared to the supplier’s invoice to verify the price
of an item?
ANS:
purchase order
2. Which internally generated document should be compared to the supplier’s invoice to verify the
quantity being billed for?
ANS:
receiving report
3. List specific jobs that should be segregated in the purchases processing system.
ANS:
inventory control from warehouse, general ledger from accounts payable subsidiary ledger
4. List specific jobs that should be segregated in the cash disbursements system.
ANS:
general ledger from accounts payable subsidiary ledger, accounts payable subsidiary ledger from cash disbursements
5. Describe an internal control procedure that would detect that a vendor overcharged for goods
delivered.
ANS:
Accounts payable should compare the price on the purchase order to the price on the supplier’s
invoice. Accounts payable should recalculate the math (extensions and additions) and check all other charges such as freight, tax, etc.
6. Describe an internal control procedure that would prevent payment of a invoice for goods that were
never delivered.
ANS:
Accounts payable should match every item on every invoice to a receiving report.
7. Describe an internal control procedure that would prevent issuing two checks in payment of the same
invoice.
ANS:
The supporting documents should be marked “paid” after the check is signed. A computerized system will tag the invoice number as paid.
8. Explain why supervision is so important in the receiving department.
ANS:
Receiving department employees have custody of the asset and record keeping responsibilities.
Without proper supervision, employees may fail to count and inspect incoming shipments. Without proper supervision, shipments may disappear from the receiving dock before being transferred to the warehouse.
9. What type of error or fraud might happen if the accounts payable ledger is not periodically reconciled
to the control account in the general ledger?
ANS:
errors in A/P processing would go undetected, overstated payments produce debit balances in A/P. 10. What type of error or fraud might happen if suppliers’ invoices are not compared to purchase orders or
to receiving reports before payment?
ANS:
payment at higher than anticipated prices, overpayment for goods not received
11. What internal accounting control(s) would be the most effective in preventing a storekeeper from
taking inventory home at night? When shortages become apparent, he claims the goods were never received.
ANS:
receiving records items received on a receiving report, storekeeper initials receipt of goods
12. Why should the copy of a purchase order, which is sent to receiving, be a “blind” copy?
ANS:
to force workers in receiving to count and inspect the goods received
13. What is(are) the purpose(s) of maintaining a valid vendor file?
ANS:
Inventories should only be acquired from valid vendors. This control procedure helps to deter the
purchasing agent from buying inventories at excessive costs and receiving kickbacks or from buying from an entity in which the purchasing agent has a relationship, such a relative or a friend.
14. Name two major benefits of automating the purchasing effort.
ANS:
improved inventory control, better cash management, streamlining the purchasing effort
15. What function or department typically initiates a purchase in a merchandising business?
ANS:
Inventory control determines that the level of certain items warrants restocking and sends a purchase requisition to purchasing.
16. Where in the purchasing/cash disbursement functions is access control exercised?
ANS:
physical control of inventory and cash, access to documents that control physical assets–such as
purchase requisitions, purchase orders, receiving reports, etc.
17. Explain why a three way match may not be required for transactions covered by a trading partner
agreement.
ANS:
Under a trading partner agreement the parties contractually agree to terms of trade such as price,
quantities to be shipped, discounts, and lead times. With these sources of potential discrepancy
eliminated, financial information about purchases is known in advance and the vendor’s invoice
provides no critical information that cannot be derived from the receiving report. Thus, a three way match is unnecessary.
ESSAY
1. Differentiate between a purchase requisition and a purchase order.
ANS:
A purchase order requisition is completed by the inventory control department when a need for
inventory items is detected. Purchase requisitions for office supplies and other materials may also be completed by staff departments such as marketing, finance, accounting, and personnel. The purchasing department receives the purchase requisitions, and if necessary, determine the appropriate vendor. If various departments have requisitioned the same order, the purchasing department may consolidate all requests into one order so that any quantity discounts and lower freight charges may be taken. In any case, the purchasing department prepares the purchase order, which is sent to the vendor, accounts
payable department, and the receiving department (blind copy).
2. What general ledger journal entries are triggered by the purchases system? From which departments
do these journal entries arise?
ANS:
(Accounts Payable)
Inventory Control Debit
Accounts Payable Credit
(Cash Disbursements)
Accounts Payable Debit
Cash Credit
3. The Soap Manufacturing Company has three employees who work in the warehouse. All of the
warehouse workers are authorized to order inventory when it falls below the reorder level. The
workers complete a purchase order and mail it to the supplier of their choice. The inventory is
delivered directly to the warehouse. The workers send a memo to accounts payable reporting the receipt of inventory.
Accounts payable compares the warehouse memo to the supplier’s invoice. Accounts payable prepares
a check which the treasurer signs.
Describe at least five needed internal control improvements.
ANS:
The warehouse workers should prepare a purchase requisition and send it to purchasing.
Warehouse workers should make a note that the inventory has been requisitioned to avoid each of the workers requisitioning the same inventory items.
Purchasing should prepare a purchase order.
Purchasing should select a vendor based on price, quality of goods, delivery time, etc.
Inventory should be delivered to the receiving department.
The receiving department should prepare a receiving report.
Accounts payable should receive a copy of the purchase requisition, purchase order, and receiving report and compare these documents to the supplier’s invoice.
Cash disbursements should prepare the check.
The supporting documents should be marked “paid” by cash disbursements.
4. How does a voucher payable system work? What documents are reconciled? Who prepares the
voucher? How is the A/P balance determined? How does the voucher payable system improve control over cash?
ANS:
In place of a standard accounts payable system, many firms use a voucher payable system. The A/P department prepares cash disbursement vouchers which are recorded in a voucher register. A clerk would reconcile purchase requisition, purchase order, receiving report, and vendor invoice. If all agree, the clerk would prepare the voucher–which vouches the need to disburse cash. This would then be approved by a superior. The sum of all open (or unpaid) vouchers is the A/P balance. Control is
improved over cash disbursements because of the itemization of items on the voucher and the
authorization required. Without the data and authorization, no check is prepared.
5. Before authorizing payment for goods purchased, accounts payable reconciles three documents related
to the purchase. Name them and explain what each indicates. What control area of SAS 78 is being addressed?
ANS:
The three documents are: the purchase order verifies the items were ordered, the receiving report that verifies the goods were received, and the invoice that is the vendor’s request for payment is
reasonable.
This process is a form of independent verification of the purchase.
6. What are the steps taken in the cash disbursement system?
ANS:
Accounts payable reviews the documents related to a liability: purchase requisition, purchase order, receiving report, and vendor invoice. If proper, cash disbursements is authorized to make payment.
Cash disbursements prepares the check, a separate person signs it, sends it to the vendor, and notifies accounts payable.
At the end of the period, cash disbursements and accounts payable send summary information to general ledger.
7. How does the procedure for determining inventory requirements differ between a basic batch
processing system and batch processing with real-time data input of sales and receipts of inventory?
What about for the procedures used by the receiving department?
ANS:
A system which employs real-time data entry of sales will have the inventory levels updated more
frequently. Thus, when a sale depletes the inventory level to the reorder point, the system will flag it for reorder more quickly than if it had to wait for a batch update of the inventory records. The sooner the item is ordered, the sooner it will be received. With respect to the real-time receipt of inventory, the inventory will be updated immediately to show the accurate amount which is on hand. Thus, a customer wishing to know how soon they may have an item shipped will receive more accurate
information regarding the status of the firm’s inventory levels. Thus, the customer benefits from better stocking of inventory and better information regarding the inventory levels.
The receiving departments uses real-time data entry; they enter the purchase order number and a receiving screen prompts the clerk for the quantities of goods received. This system should cause less discrepancies due to poor handwriting, carelessness, and loss of the receiving report form.
8. What are the key segregation of duties issues in purchasing and cash disbursements?
ANS:
The key segregation of duties issue in purchasing is the separation of inventory control from the warehouse. If the only inventory records were held in the same place as the goods themselves, theft would be easy to hide with changes in the inventory records.
Within the cash disbursements function it is important to separate CD from both general ledger and accounts payable to prevent alteration of records. The CD clerk is different from the check signer.
Check signer does not perform back reconciliation.
9. Supervision is extremely important in the receiving department. Two main reasons were given. What
were they? Why are these important?
ANS:
Supervision is important in the receiving department to assure that received goods are properly
counted and inspected and to prevent theft. The key issue is that goods received are what was ordered (blind copy of PO identifies what was ordered, not how many) in good condition and in the proper quantity. If insufficient or improper goods are received and the error was not identified in receiving, payment would be made for goods not received. If inadequate supervision occurs, goods could be stolen and the receiving report modified to cover the theft.
10. Why do companies devote resources to a purchasing department? Could not individual departments
make their own purchases more efficiently?
ANS:
The purchasing function is extremely important to a business. The members of the department work closely with suppliers to assure that the goods ordered are appropriately selected, priced, and
delivered. One of the tasks of purchasing is to monitor the performance of vendors and maintain an approved vendor list.
After a requesting department submits a purchase requisition, purchasing prepares a purchase order.
Hence the authorization occurs outside of purchasing separate from the processing of the purchase.
Significant separation of duties is built into this system: the same party cannot authorize and initiate the transaction. Purchasing employees cannot initiate a purchase. This could be a problem if vendors try to influence the purchasing staff for favorable treatment.
11. What are the key authorization issues in purchasing and cash disbursements?
ANS:
Inventory control monitors inventory and authorizes restocking with a purchase requisition.
Purchasing acts on the PR, it does not initiate the process.
Accounts payable authorizes the cash disbursement. The cash disbursement function cannot produce checks on its own without authorization from accounts payable.
12. What are the steps taken in the purchasing system?
ANS:
Inventory control monitors inventory and authorizes restocking with a purchase requisition. A copy is retained and one is sent to accounts payable.
Purchasing acts on the PR and prepares a purchase order. The original is sent to a vendor. Copies go to inventory control and accounts payable. A blind copy is sent to receiving and another is filed in
purchasing.
When the goods are received, the receiving staff count and inspect the goods. The blind PO tells what goods were ordered. The count is a significant control check. Receiving prepares a receiving report.
One copy accompanies the goods to the storeroom. Other copies go to purchasing, inventory control, and accounts payable.
Accounts payable reconciles the purchase requisition, purchase order and receiving report. When the vendor invoice arrives, it is examined thoroughly and reconciled and if all documents agree, the
transaction is recorded in the purchases journal and the accounts payable subsidiary ledger. The
information is filed until the time arises to make payment.
The general ledger department receives a journal voucher from AP and a summary from inventory control. The inventory and accounts payable control accounts are updated.