Complete
Solutions for Accounting Information System 12e by Marshall B. Romney Paul J. Steinbart
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CHAPTER 12
THE REVENUE CYCLE: SALES
AND CASH COLLECTIONS
12.1 Customer relationship management systems hold great promise, but
their usefulness is determined by the amount of personal data customers are
willing to divulge. To what extent do you think concerns about privacy-related
issues affect the use of CRM systems?
12.2 Some products, like music and software, can be digitized. How does
this affect each of the four main activities in the revenue cycle?
12.3 Many companies use accounts receivable aging schedules to project
future cash inflows and bad-debt expense. Review the information typically presented
in such a report (see Figure 12-8). Which specific metrics can be calculated
from those data that might be especially useful in providing early warning
about looming cash flow or bad-debt problems?
12.4 Table 12-1 suggests that restricting physical access to inventory
is one way to reduce the threat of theft. How can information technology help
accomplish that objective?
12.5 Invoiceless pricing has been adopted by some large businesses for
B2B transactions. What are the barriers, if any, to its use in B2C commerce?
12.6 The use of some form of electronic “cash” that would provide the
same kind of anonymity for e-commerce that cash provides for traditional
physical business transactions has been discussed for a long time. What are the
advantages and disadvantages of electronic cash to customers? To businesses?
What are some of the accounting implications of using electronic cash?
SUGGESTED ANSWERS TO THE
PROBLEMS
12.1 Match the term in the left column with its definition in the right
column.
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1. CRM system
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a. Document used
to authorize reducing the balance in a customer account
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2. Open-invoice method
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b. Process of
dividing customer account master file into subsets and preparing invoices for
one subset at a time
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3. Credit memo
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c. System that
integrates EFT and EDI information
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4. Credit limit
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d. System that
contains customer-related data organized in a manner to facilitate customer
service, sales, and retention
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5. Cycle billing
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e. Electronic
transfer of funds
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6. FEDI
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f. Method of
maintaining accounts receivable that generates one payments for all sales
made the previous month
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7Remittance advice
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g. Method of
maintaining customer accounts that generates payments for each individual
sales transaction
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8. Lockbox
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h. Maximum
possible account balance for a customer
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9. Back order
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i. Electronic
invoicing
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10. Picking ticket
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j. Post office box to
which customers send payments
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11. Bill of lading
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k. Document used to
indicate stock outs exist
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l. Document used to
establish responsibility for shipping goods via a third party
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m. Document that
authorizes removal of merchandise from inventory
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n. Turnaround document
returned by customers with payments
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12.2 What internal control procedure(s) would provide protection against
the following threats?
1. a. Theft
of goods by the shipping dock workers, who claim that the inventory shortages
reflect errors in the inventory records.
b. Posting the sales amount to the wrong customer account because a
customer account number was incorrectly keyed into the system.
c. Making a credit sale to a customer
who is already four months behind in making payments on his account.
d. Authorizing a credit memo for a sales
return when the goods were never actually returned.
e. Writing off a customer’s accounts
receivable balance as uncollectible to conceal the theft of subsequent cash
payments from that customer.
f. Billing customers for the quantity
ordered when the quantity shipped was actually less due to back ordering of
some items.
g. Theft of checks by the mailroom clerk,
who then endorsed the checks for deposit into the clerk’s personal bank
account.
h. Theft of funds by the cashier, who
cashed several checks from customers.
1. i. Theft
of cash by a waiter who destroyed the customer sales ticket for customers who
paid cash.
2. j. Shipping
goods to a customer but then failing to bill that customer.
1. k. Lost
sales because of stockouts of several products for which the computer records
indicated there was adequate quantity on hand.
1. l. Unauthorized
disclosure of buying habits of several well-known customers.
2. m. Loss
of all information about amounts owed by customers in New York City because the
master database for that office was destroyed in a fire.
3. n. The
company’s Web site was unavailable for seven hours because of a power outage.
4. o. Interception
and theft of customers’ credit card numbers while being sent to the company’s
Web site.
1. p. A
sales clerk sold a $7,000 wide-screen TV to a friend and altered the price to
$700.
2. q. A
shipping clerk who was quitting to start a competing business copied the names
of the company’s 500 largest customers and offered them lower prices and better
terms if they purchased the same product from the clerk’s new company.
3. r. A
fire in the office next door damaged the company’s servers and all optical and
magnetic media in the server room. The company immediately implemented its
disaster recovery procedures and shifted to a backup center several miles away.
The company had made full daily backups of all files and stored a copy at the
backup center. However, none of the backup copies were readable.
12.3 For good internal control, which of
the following duties can be performed by the same individual?
1. Approve changes to customer credit limits
2. Sales order entry
3. Shipping merchandise
4. Billing customers
5. Depositing customer payments
6. Maintaining accounts receivable
7. Issuing credit memos
8. Reconciling the organization’s bank accounts
9. Checking inventory availability
12.4 Excel Project. (Hint: For help on steps b and c, see the article
“Dial a Forecast,” by James A. Weisel, in the December 2006 issue of the Journal of Accountancy. The Journal of Accountancy is available in print or
online at the AICPA’s Web site: www.aicpa.org
Required:
a. Create a 12-month cash flow budget in Excel using
the following assumptions:
§ · Initial
sales of $5,000,000 with forecasted monthly growth of 1%
§ · 40%
of each month’s sales for cash; 30% collected the following month; 20%
collected 2 months later; 8% collected 3 months later; and 2% never collected
§ · Initial
cash balance of $350,000
b. Add a “spinner” to your spreadsheet that will
enable you to easily change forecasted monthly sales growth to range from 0.5%
to 1.5% in increments of 0.1%.
d.
Design appropriate data entry and processing controls to ensure spreadsheet
accuracy.
12.5 For each of the following activities identify the data that must
be entered by the employee performing that activity and list the appropriate
data entry controls:
1. a. Sales
order entry clerk taking a customer order
1. b. Shipping
clerk completing a bill of lading for shipment of an order to a customer
12.6 Create a questionnaire checklist that can be used to evaluate
controls for each of the four basic activities in the revenue cycle (sales
order entry, shipping, billing, and cash collections).
a. For each control issue, write a Yes/No question
such that a “No” answer represents a control weakness. For example, one
question might be “Are customer credit limits set and modified by a credit
manager with no sales responsibility?”
b. For each Yes/No question, write a brief
explanation of why a “No” answer represents a control weakness.
12.7 O’Brien Corporation is a midsize, privately owned, industrial
instrument manufacturer supplying precision equipment to manufacturers in the
Midwest. The corporation is 10 years old and uses an integrated ERP system. The
administrative offices are located in a downtown building and the production,
shipping, and receiving departments are housed in a renovated warehouse a few
blocks away.
Customers place orders on the company’s website, by fax, or by
telephone. All sales are on credit, FOB destination. During the past year sales
have increased dramatically, but 15% of credit sales have had to written off as
uncollectible, including several large online orders to first-time customers
who denied ordering or receiving the merchandise.
Customer orders are picked and sent to the warehouse, where they
are placed near the loading dock in alphabetical sequence by customer name. The
loading dock is used both for outgoing shipments to customers and to receive
incoming deliveries. There are ten to twenty incoming deliveries every day,
from a variety of sources.
The increased volume of sales has resulted in a number of errors
in which customers were sent the wrong items. There have also been some delays
in shipping because items that supposedly were in stock could not be found in
the warehouse. Although a perpetual inventory is maintained, there has not been
a physical count of inventory for two years. When an item is missing, the
warehouse staff writes the information down in log book. Once a week, the warehouse
staff uses the log book to update the inventory records.
The system is configured to prepare the sales invoice only after
shipping employees enter the actual quantities sent to a customer, thereby
ensuring that customers are billed only for items actually sent and not for
anything on back order.
Identify at least three weaknesses in O’Brien Corporation’s
revenue cycle activities. Describe the problem resulting from each weakness.
Recommend control procedures that should be added to the system to correct the
weakness.
12.8 Parktown Medical Center, Inc. is a small health care provider
owned by a publicly held corporation. It employs seven salaried physicians, ten
nurses, three support staff, and three clerical workers. The clerical workers
perform such tasks as reception, correspondence, cash receipts, billing, and
appointment scheduling. All are adequately bonded.
Most patients pay for services rendered by cash or check on the
day of their visit. Sometimes, however, the physician who is to perform the
respective services approves credit based on an interview. When credit is
approved, the physician files a memo with one of the clerks to set up the
receivable using data the physician generates.
The servicing physician prepares a charge slip that is given to
one of the clerks for pricing and preparation of the patient’s bill. At the end
of the day, one of the clerks uses the bills to prepare a revenue summary and, in
cases of credit sales, to update the accounts receivable subsidiary ledger.
The front office clerks receive cash and checks directly from
patients and give each patient a prenumbered receipt. The clerks take turns
opening the mail. The clerk who opens that day’s mail immediately stamps all
checks “for deposit only.” Each day, just before lunch, one of the clerks
prepares a list of all cash and checks to be deposited in Parktown’s bank
account. The office is closed from 12 noon until 2:00 p.m. for lunch. During
that time, the office manager takes the daily deposit to the bank. During the
lunch hour, the clerk who opened the mail that day uses the list of cash
receipts and checks to update patient accounts.
The clerks take turns preparing and mailing monthly statements to
patients with unpaid balances. One of the clerks writes off uncollectible
accounts only after the physician who performed the respective services
believes the account will not pay and communicates that belief to the office
manager. The office manager then issues a credit memo to write off the account,
which the clerk processes.
The office manager supervises the clerks, issues write-off memos,
schedules appointments for the doctors, makes bank deposits, reconciles bank
statements, and performs general correspondence duties.
Additional services are performed monthly by a local accountant
who posts summaries prepared by the clerks to the general ledger, prepares
income statements, and files the appropriate payroll forms and tax returns.
Identify at least three control weaknesses at Parktown. Describe
the potential threat and exposure associated with each weakness, and recommend
how to best correct them
12.9 Figure 12-18 depicts the activities performed in the revenue cycle
by the Newton Hardware Company.
a. Identify at least 7 weaknesses in Newton Hardware’s
revenue cycle. Explain the resulting threat and suggest methods to correct the
weakness.
b. Identify ways to use IT to streamline Newton’s
revenue cycle activities. Describe the control procedures required in the
new system.
12.10 The Family Support Center is a small charitable organization. It
has only four full-time employees: two staff, an accountant, and an office manager.
The majority of its funding comes from two campaign drives, one in the spring
and one in the fall. Donors make pledges over the telephone. Some donors pay
their pledge by credit card during the telephone campaign, but many prefer to
pay in monthly installments by check. In such cases, the donor pledges are
recorded during the telephone campaign and they are then mailed pledge cards.
Donors mail their contributions directly to the charity. Most donors send a
check, but occasionally some send cash. Most donors return their pledge card
with their check or cash donation, but occasionally the Family Support Center
receives anonymous cash donations. The procedures used to process donations are
as follows:
Sarah, one of the staff members who has worked for the Family
Support Center for 12 years, opens all mail. She sorts the donations from the
other mail and prepares a list of all donations, indicating the name of the
donor (or anonymous), amount of the donation, and the pledge number (if the
donor returned the pledge card). Sarah then sends the list, cash, and checks to
the accountant.
The accountant enters the information from the list into the
computer to update the Family Support Center’s files. The accountant then
prepares a deposit slip (in duplicate) and deposits all cash and checks into
the charity’s bank account at the end of each day. No funds are left on the
premises overnight. The validated deposit slip is then filed by date. The
accountant also mails an acknowledgment letter thanking each donor. Monthly,
the accountant retrieves all deposit slips and uses them to reconcile the
Family Support Center’s bank statement. At this time, the accountant also
reviews the pledge files and sends a follow-up letter to those people who have
not yet fulfilled their pledges.
Each employee has a computer workstation that is connected to the
internal network. Employees are permitted to surf the Web during lunch hours.
Each employee has full access to the charity’s accounting system, so that
anyone can fill in for someone else who is sick or on vacation. Each Friday,
the accountant makes a backup copy of all computer files. The backup copy is
stored in the office manager’s office.
a. Identify two major control weaknesses in the Family
Support Center’s cash receipts procedures. For each weakness you identify,
suggest a method to correct that weakness. Your solution must be specific—identify which specific employees should do what. . Assume that no new employees can be hired.
b. Describe the IT control procedures that should
exist in order to protect the Family Support Center from loss, alteration, or
unauthorized disclosure of data.
12.11 Match the threats in the first column to the
appropriate control procedures in the second column (more than one control may
address the same threat).
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Threat
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Applicable Control
Procedures
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1. 1. Uncollectible
sales
2. a. Restrict
access to master data.
A. 2. Mistakes
in shipping orders to customers.
B. b. Encrypt
customer information while in storage.
i.
3. Crediting customer
payments to the wrong account.
ii.
c. Backup and disaster recovery
procedures.
a. 4. Theft
of customer payments.
b. d. Digital
signatures.
a. 5. Theft
of inventory by employees.
b. e. Physical
access controls on inventory
a. 6. Excess
inventory.
b. f. Segregation
of duties of handling cash and maintaining accounts receivable.
a. 7. Reduced
prices for sales to friends.
b. g. Reconciliation
of packing lists with sales orders.
a. 8. Orders
later repudiated by customers who deny placing them.
b. h. Reconciliation
of invoices with packing lists and sales orders.
a. 9. Failure
to bill customers.
b. i. Use
of bar-codes or RFID tags.
a. 10. Errors in
customer invoices
b. j. Periodic
physical counts of inventory
a. 11. Cash flow
problems
b. k. Perpetual
inventory system.
a. 12. Loss of
accounts receivable data
b. l. Use
of either EOQ, MRP, or JIT inventory control system.
a. 13. Unauthorized
disclosure of customer personal information.
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m. Lockboxes or
electronic lockboxes.
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1. 14. Failure to
ship orders to customers.
2. n. Cash
flow budget
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1. o. Mail
monthly statements to customers.
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1. p. Credit
approval by someone not involved in sales.
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1. q. Segregation
of duties of shipping and billing.
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1. r. Periodic
reconciliation of prenumbered sales orders with prenumbered shipping
documents.
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12.12 Excel problem
Use EXCEL’s regression tools to analyze and forecast future sales.
(Hint: The article “Forecasting with Excel,” by James A. Weisel
in the February 2009 issue of the Journal of Accountancy (available
at www.aicpa.org) explains how to perform the following tasks using either Excel
2003 or Excel 2007).
a. Create a spreadsheet with the following data about
targeted emails, click ads, and unit sales:
b. Create a scattergraph to illustrate the relationship
between targeted emails and unit sales. Display the regression equation and the
R2 between the two variables on the chart.
c. Create a scattergraph to illustrate the relationship
between click ads and unit sales. Display the regression equation and the R2 between the two
variables on the chart.
d. Which variable (targeted emails or click ads) has the
greater influence on unit sales? How do you know?
e. Use the “ =Forecast “function to display the forecasted sales for
200,000 targeted emails and for 200 click ads.
12.13 Give two specific examples of nonroutine transactions that may
occur in processing cash receipts and updating accounts receivable. Also
specify the control procedures that should be in place to ensure the accuracy,
completeness, and validity of those
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