Chapter 13 The Expenditure Cycle: Purchasing to Cash Disbursements
Chapter 13 The Expenditure Cycle: Purchasing to Cash Disbursements
Accounting Information Systems, 14e (Romney/Steinbart)
1 Discuss the basic business activities and related information processing operations in the expenditure cycle, explain the general threats to those activities, and describe the controls that can mitigate those threats.
1) To accomplish the objectives set forth in the expenditure cycle, a number of key management decisions must be addressed. Which of the decisions below is not ordinarily found as part of the expenditure cycle?
A) How can cash payments to vendors be managed to maximize cash flow?
B) What is the optimal level of inventory and supplies to carry on hand?
C) Where should inventories and supplies be held?
D) What are the optimal prices for each product or service?
Answer: D
Concept: Expenditure cycle information system
Objective: Learning Objective 1
Difficulty: Easy
AACSB: Analytical Thinking
2) What types of decision-making and strategic information should the AIS provide in the expenditure cycle?
Answer: The AIS should provide decision making information to: Determine when and how much additional inventory to order. Select the appropriate vendors from whom to order. Verify the accuracy of vendor invoices. Decide whether purchase discounts should be taken. Monitor cash flow needs to pay outstanding obligations. AIS should also provide the following strategic and performance evaluation information on: Efficiency and effectiveness of the purchasing department. Analysis of vendor performance such as on-time delivery, quality, etc. Time taken to move goods from the receiving dock into production. Percentage of purchase discounts taken.
Concept: Expenditure cycle information system
Objective: Learning Objective 1
Difficulty: Moderate
AACSB: Analytical Thinking
3) Requiring all packing slips be reconciled to purchase orders before accepting a delivery of inventory would be most likely to prevent which of the following situations?
A) A supplier delivers more inventory than ordered at the end of the year and sends an invoice for the total quantity delivered.
B) An employee mails a fake invoice to the company, which is then paid.
C) The inventory records are incorrectly updated when a receiving department employee enters the wrong product number on the receiving report.
D) Receiving department employees steal inventory and then claim the inventory was received and delivered to the warehouse.
Answer: A
Concept: Expenditure cycle information system
Objective: Learning Objective 1
Difficulty: Moderate
AACSB: Reflective Thinking
4) One of the basic activities in the expenditure cycle is the receiving and storage of goods, supplies, and services. What is the counterpart of this activity in the revenue cycle?
A) sales order entry process
B) shipping function
C) cash collection activity
D) cash payments activity
Answer: B
Concept: Expenditure cycle information system
Objective: Learning Objective 1
Difficulty: Moderate
AACSB: Reflective Thinking
5) There is a symmetrical interdependence between a firm's expenditure cycle and its suppliers' A) production cycle.
B) revenue cycle.
C) expenditure cycle.
D) general ledger and reporting system.
Answer: B
Concept: Expenditure cycle information system
Objective: Learning Objective 1
Difficulty: Moderate
AACSB: Reflective Thinking
6) The Gwallter Reece Chihuahua Sweater Co. (GRCCo) was established in 2013. It recently signed a large contract with PetCo pet stores. GRCCo will be required to track and forecast sweater sales. The technology that is used for communication between GRCCo and PetCo is A) electronic data interchange.
B) vendor-managed inventory.
C) sales force automation.
D) optical character recognition.
Answer: A
Concept: Expenditure cycle information system
Objective: Learning Objective 1
Difficulty: Moderate
AACSB: Analytical Thinking
7) Explain what is meant by the expenditure cycle as a "mirror image" of the revenue cycle. Answer: The expenditure cycle has been called a "mirror image" of the revenue cycle because the activities of the expenditure cycle are the opposite, or "reflection" of several activities found in the revenue cycle. For example, the order goods activity generates a purchase order, which serves as customer input to the sales order entry process. The receive goods activity handles the goods sent via the supplier's shipping function. The pay for goods activity generates the payments that are processed by the supplier's cash collection activity. This mirror image also means that major technological improvements in the expenditure cycle may bring about complementary improvements in suppliers' revenue cycle as well.
Concept: Expenditure cycle information system
Objective: Learning Objective 1
Difficulty: Challenging
AACSB: Reflective Thinking
8) Which of the following is not an activity performed in the expenditure cycle?
A) ordering
B) receiving
C) cash disbursement
D) shipping
Answer: D
Concept: Expenditure cycle information system
Objective: Learning Objective 1
Difficulty: Moderate
AACSB: Analytical Thinking
9) The first major business activity in the expenditure cycle is A) ordering inventory, supplies, or services.
B) a customer sale.
C) shipping goods to customers.
D) receiving goods from vendors.
Answer: A
Concept: Expenditure cycle information system
Objective: Learning Objective 1
Difficulty: Moderate
AACSB: Analytical Thinking
10) Which of the following threats is not specific to the purchase requisition process of the expenditure cycle?
A) stockouts
B) purchasing from unauthorized vendors
C) requisitioning goods not needed
D) All of the above are threats in the purchase requisition process.
Answer: B
Concept: Expenditure cycle information system
Objective: Learning Objective 1
Difficulty: Moderate
AACSB: Analytical Thinking
11) Identify ten threats and applicable control procedures in the expenditure cycle.
Answer: Answers can include the following information:
1: Stock-outs — Controls: Inventory control system; accurate perpetual inventory; and vendor performance analysis is needed to prevent this problem
2: Requesting goods not needed — Controls: Review and approval by supervisors; use of prenumbered requisition forms; and restricted access to blank purchase orders
3: Purchasing goods at inflated prices — Controls: Competitive bidding and proper supervision; approved purchase orders; and price list consultations are needed to prevent this problem 4: Purchasing goods of inferior quality — Controls: Use experienced buyers who know good vendors; review purchase orders; and incorporate approved vendor list into formal procedures 5: Purchasing from unauthorized vendors — Control: Pre-numbered purchase orders should be approved; restrict access to approved vendor list and have procedures in place for any change to the list
6: Kickbacks paid to buyers to influence their decisions — Controls: Clear conflict of interest policy prohibiting the acceptance of any gift from vendors; disclosure of financial interest policy for purchasing agents; and vendor audits
7: Receiving unordered goods — Controls: Receiving department must reject any goods for which there is no approved purchase order
8: Errors in counting goods received — Controls: Use "blind" P.O. copies to force receiving personnel to actually count goods; provide incentives for counting goods
9: Theft of inventory — Controls: Secure inventory storage locations; make transfers of inventory with proper approval and documentation; do periodic physical count and reconciliation with recorded amounts
10: Errors in vendor invoices — Controls: Invoice accuracy should be verified and compared to P.O.s and receiving report data
11: Paying for goods not received — Controls: Voucher package and original invoice should be necessary for payments
12: Failure to take available purchase discounts — Controls: File approved invoices by due date; track invoices by due date; use a cash budget to plan for cash needs
13: Paying same invoice twice — Controls: Invoices should be approved only with a full voucher package and paid ones should be canceled so they cannot be used again; do not pay invoices marked "Duplicate" or "Copy"
14: Recording and posting errors for purchases and payments — Controls: Data entry controls, and periodic reconciliation of subsidiary ledger with general ledger control account
15: Misappropriation of cash by paying fictitious vendors and alteration of checks — Controls: Restrict access to cash, blank checks, and check signing machine; use check protection, prenumbered checks, and imprinted amounts on checks to cut down on forgery and fraud; use petty cash fund for small expenditures only; have proper segregation of duties and independent bank reconciliation function
16: Theft associated with EFT use — Controls: Access controls to the system; encryption of transmissions; time-stamp and number transmissions; control group should monitor all EFT activity
17: Loss of data — Controls: Use file labels, back up of all data files regularly; and, use access controls
18: Poor performance — Controls: Preparation and review of performance reports
Concept: Expenditure cycle information system
Objective: Learning Objective 1
Difficulty: Moderate
AACSB: Analytical Thinking
12) How can using RFID tags or bar codes on goods or products provide significant benefit in the expenditure cycle?
Answer: RFID tags and bar codes can significantly improve the process of receiving goods from suppliers for several reasons. First, they can easily be scanned electronically. Electronically capturing the unique number of a product not only provides identification and quantity data about the product; it can also provide specific production information such as date and time of manufacture, production run information, etc. Electronically encoding such information into an integrated AIS provides up-to-the-minute inventory counts, as well as counts of units sold, and returns for use in a perpetual inventory system. Also, both vendor and customers can read tags and bar codes, and certain formats are universal in nature. This allows goods to be sold virtually anywhere in the world, allowing for easier global marketing efforts to be made by businesses. It also eliminates the need for human data entry and reduces the risk of stockouts.
Concept: Expenditure cycle information system
Objective: Learning Objective 1
Difficulty: Moderate
AACSB: Analytical Thinking
13) Which of the following controls can minimize the threat of stockouts and excess inventory? A) The use of positive pay.
B) Do not inform receiving employees about quantity ordered.
C) The use of ERS.
D) Perpetual inventory system.
Answer: D
Concept: Revenue cycle information system
Objective: Learning Objective 1
Difficulty: Moderate
AACSB: Analytical Thinking
14) Which of the following controls can minimize the threat of check alteration? A) The use of positive pay.
B) Do not inform receiving employees about quantity ordered.
C) The use of ERS.
D) Perpetual inventory system.
Answer: A
Concept: Revenue cycle information system
Objective: Learning Objective 1
Difficulty: Moderate
AACSB: Analytical Thinking
15) Which of the following controls can minimize the threat of mistakes in counting incoming inventory?
A) The use of positive pay.
B) Do not inform receiving employees about quantity ordered.
C) The use of ERS.
D) Perpetual inventory system.
Answer: B
Concept: Revenue cycle information system
Objective: Learning Objective 1
Difficulty: Moderate
AACSB: Analytical Thinking
16) Which of the following controls can minimize the threat of errors in supplier invoices? A) The use of positive pay.
B) Do not inform receiving employees about quantity ordered.
C) The use of ERS.
D) Perpetual inventory system.
Answer: C
Concept: Revenue cycle information system
Objective: Learning Objective 1
Difficulty: Moderate
AACSB: Analytical Thinking
2 Explain the process and key decisions involved in ordering goods and services, identify the threats to those activities, and describe the controls that can mitigate those threats.
1) The Gwallter Reece Chihuahua Sweater Co. (GRCCo) was established in 2013. It recently signed a large contract with PetCo pet stores. GRCCo will be required to track and forecast sweater sales by linking in to PetCo's sales database. GRCCo will then be responsible for shipping products to PetCo as needed. The relationship between GRCCo and PetCo is an example of
A) sales force automation.
B) electronic data interchange.
C) optical character recognition.
D) vendor-managed inventory.
Answer: D
Concept: Ordering goods and services
Objective: Learning Objective 2
Difficulty: Easy
AACSB: Analytical Thinking
2) The traditional approach to inventory management to ensure sufficient quantity on hand to maintain production is known as A) safety stock.
B) just-in-time production.
C) economic order quantity.
D) optimal inventory quantity.
Answer: C
Concept: Ordering goods and services
Objective: Learning Objective 2
Difficulty: Easy
AACSB: Analytical Thinking
3) Economic Order Quantity (EOQ) includes several variables that must be taken into consideration when calculating the optimal order size. One variable, the costs associated with holding inventory, is referred to as A) ordering costs.
B) carrying costs.
C) the reorder point.
D) stockout costs.
Answer: B
Concept: Ordering goods and services
Objective: Learning Objective 2
Difficulty: Easy
AACSB: Analytical Thinking
4) The ________ specifies the point at which inventory is needed.
A) company inventory policies
B) reorder point
C) economic order quantity
D) stockout point
Answer: B
Concept: Operational audits of an AIS
Objective: Learning Objective 2
Difficulty: Easy
AACSB: Analytical Thinking
5) Which electronic files are either read or updated when goods are ordered from a vendor?
A) inventory, vendors, and accounts payable
B) vendors and accounts payable
C) inventory, vendors, and open purchase orders
D) open purchase orders and accounts payable
Answer: C
Concept: Ordering goods and services
Objective: Learning Objective 2
Difficulty: Moderate
AACSB: Analytical Thinking
6) What is a key feature of materials requirements planning (MRP)?
A) minimize or entirely eliminate carrying and stockout costs
B) reduce required inventory levels by scheduling production rather than estimating needs
C) determine the optimal reorder point
D) determine the optimal order size
Answer: B
Concept: Ordering goods and services
Objective: Learning Objective 2
Difficulty: Easy
AACSB: Analytical Thinking
7) Materials requirements planning (MRP)
A) reduces the uncertainty about when materials are needed, thereby reducing the need to carry large levels of inventory.
B) is able to compute exactly the cost of purchasing by taking into account all costs associated with inventory carrying.
C) requires vendors to deliver inventory to the production site exactly when needed and in the correct quantities.
D) None of the above is correct.
Answer: A
Concept: Ordering goods and services
Objective: Learning Objective 2
Difficulty: Moderate
AACSB: Analytical Thinking
8) ________ attempts to minimize or eliminate carrying and stockout costs.
A) Just-in-time inventory
B) Materials requirements planning
C) Economic order quantity
D) Evaluated receipt settlement
Answer: A
Concept: Ordering goods and services
Objective: Learning Objective 2
Difficulty: Challenging
AACSB: Analytical Thinking
9) Just-In-Time (JIT) inventory is best characterized by
A) frequent deliveries of large quantities to be held at the work centers.
B) frequent deliveries of smaller quantities of items to the work centers.
C) less frequent deliveries of large quantities of goods to central receiving.
D) infrequent bulk deliveries of items directly to work centers.
Answer: B
Concept: Ordering goods and services
Objective: Learning Objective 2
Difficulty: Easy
AACSB: Analytical Thinking
10) What is the key difference between the MRP and JIT inventory management approaches? A) Only JIT reduces costs and improves efficiency.
B) MRP is especially useful for products such as fashion apparel.
C) JIT is more effectively used with products that have predictable patterns of demand.
D) MRP schedules production to meet estimated sales needs; JIT schedules production to meet customer demands.
Answer: D
Concept: Ordering goods and services
Objective: Learning Objective 2
Difficulty: Moderate
AACSB: Analytical Thinking
11) When would an MRP inventory approach be preferred to a JIT inventory approach?
A) when a product has a short life cycle
B) when demand for inventory is fairly predictableC) when demand for inventory is very unpredictable
D) MRP is always a preferred method over JIT.
Answer: B
Concept: Ordering goods and services
Objective: Learning Objective 2
Difficulty: Moderate
AACSB: Analytical Thinking
12) Which of the following is least likely to be a major criterion in vendor selection?
A) prices of goods
B) credit rating of the vendor
C) quality of goods
D) ability to deliver on time
Answer: B
Concept: Ordering goods and services
Objective: Learning Objective 2
Difficulty: Easy
AACSB: Analytical Thinking
13) Once a vendor is selected for a product, the vendor's identity is recorded in the A) purchase requisition transaction file.
B) purchase requisition master file.
C) inventory transaction file.
D) inventory master file.
Answer: D
Concept: Ordering goods and services
Objective: Learning Objective 2
Difficulty: Moderate
AACSB: Analytical Thinking
14) Duc An Incorporated provides free coffee to employees. Starbucks delivers coffee packages, sugar, creamer, and filters each week. Every month, Starbucks sends Duc An an invoice. This arrangement is best described as a A) set purchase order.
B) fixed purchase order.
C) blanket purchase order.
D) standard purchase order.
Answer: C
Concept: Ordering goods and services
Objective: Learning Objective 2
Difficulty: Easy
AACSB: Analytical Thinking
15) A major cost in the purchasing function is the number of purchase orders processed. One technique that may reduce purchasing-related expenses is to have suppliers compete with each
other to meet demand at the lowest price. The name of this technique is A) an EDI auction.
B) a trading exchange.
C) a reverse auction.
D) a supplier consortium.
Answer: C
Concept: Ordering goods and services
Objective: Learning Objective 2
Difficulty: Moderate
AACSB: Analytical Thinking
16) Ngai Nhung is the sales manager at Hung Technologies. At lunch with the company CEO, Ngai proudly announced that he had negotiated a(n) ________ with a client that represented the customer's long-term commitment to buy components from Hung.
A) purchase order
B) evaluated receipt settlement
C) voucher
D) blanket purchase order
Answer: D
Concept: Ordering goods and services
Objective: Learning Objective 2
Difficulty: Easy
AACSB: Analytical Thinking
17) Ngai Nhung is the sales manager at Hung Technologies. At lunch with the company CEO, Ngai proudly announced that he had received a ________ from a client. The client had just requested a large quantity of components from Hung.
A) blanket purchase order
B) voucher
C) purchase order
D) purchase requisition
Answer: C
Concept: Ordering goods and services
Objective: Learning Objective 2
Difficulty: Easy
AACSB: Analytical Thinking
18) Define and describe the EOQ approach to inventory management.
Answer: EOQ (economic order quantity) is the traditional inventory control method to maintain sufficient inventory levels so production can continue without interruption. EOQ should take into account a situation where inventory use is greater than expected. EOQ calculates the optimal order size to minimize the sum of ordering, carrying, and stockout costs. Ordering costs — all expenses associated with processing purchasing transactions. Carrying costs — costs associated with holding inventory. Stockout costs — costs from inventory shortages, such as lost sales or production costs.
Concept: Ordering goods and services
Objective: Learning Objective 2
Difficulty: Moderate
AACSB: Analytical Thinking
19) Discuss the differences between EOQ, MRP, and JIT.
Answer: Economic Order Quantity (EOQ) is the traditional approach to managing inventory. EOQ is used to find the optimal order size. Ordering costs, carrying costs, and stockout costs are considered in finding the EOQ. The MRP (Materials Requirements Planning) inventory method seeks to reduce inventory levels by scheduling production, based on estimated sales, rather than by estimating needs (which EOQ does). A just-in-time inventory system (or JIT) attempts to minimize, if not totally eliminate, both carrying and stockout costs through the frequent delivery of small amounts of materials, parts, and supplies when they are needed. JIT does not attempt to estimate needs or schedule production based on estimated sales, as it is based on customer demand at a given time. A JIT system almost eliminates finished goods inventory.
Concept: Ordering goods and services
Objective: Learning Objective 2
Difficulty: Challenging
AACSB: Analytical Thinking
20) a) What is the major cost driver in the purchasing function? b) Describe how information technology can be used to control this cost driver.
Answer:
a) The major cost driver in the purchasing function is the number of purchase orders processed.
b) The number of purchase orders can be reduced or streamlined by: Electronic data interchange (EDI) for transmitting purchase orders to vendors. Use procurement cards for small dollar and small quantity purchases of non-inventory items. Reduce clerical costs by using the Internet to perform certain purchasing functions. Use vendor-managed inventory programs to reduce purchasing and inventory costs. Implement reverse auctions and pre-award audits.
Concept: Ordering goods and services
Objective: Learning Objective 2
Difficulty: Moderate
AACSB: Analytical Thinking
21) Under what conditions is MRP more suitable than JIT and vice versa?
Answer: MRP systems schedule production based on estimated sales, and JIT systems schedule production based on customer demand. The choice between these two systems is based on the types of products a company sells. For example, products that have predictable patterns of demand and a long life cycle are more suitable for MRP systems. In this case, sales can be forecast with greater accuracy. Conversely, if the product has an unpredictable pattern of demand and a shorter life cycle, then a JIT system is more suitable. JIT is able to adapt better to continuously changing production levels.
Concept: Ordering goods and services
Objective: Learning Objective 2
Difficulty: Moderate
AACSB: Analytical Thinking
22) Identify the department below that should not be able to submit a purchase requisition.
A) Marketing
B) Production
C) Inventory Control
D) None of the above
Answer: D
Concept: Ordering goods and services
Objective: Learning Objective 2
Difficulty: Challenging
AACSB: Analytical Thinking
23) Once a purchase request is approved, what is the next step? A) The system creates a purchase order.
B) The accounts payable department approves the purchase request, creating a purchase order.
C) The inventory master file is accessed to find the preferred supplier(s).
D) The department that created the purchase request may buy the requested item(s).Answer: C
Concept: Ordering goods and services
Objective: Learning Objective 2
Difficulty: Moderate
AACSB: Analytical Thinking
24) The traditional approach to inventory management generally involves A) high stockout costs.
B) minimizing item cost.
C) receiving goods or services just prior to the time they are needed.
D) maintaining inventory levels so that production can continue even if inventory use is greater than expected.
Answer: D
Concept: Ordering goods and services
Objective: Learning Objective 2
Difficulty: Moderate
AACSB: Analytical Thinking
25) Under the EOQ inventory approach, carrying costs are usually ignored for low-cost/lowusage items.
Answer: TRUE
Concept: Ordering goods and services
Objective: Learning Objective 2
Difficulty: Easy
AACSB: Analytical Thinking
26) The EOQ approach to managing inventory has been gaining popularity in recent years.
Answer: FALSE
Concept: Ordering goods and services
Objective: Learning Objective 2
Difficulty: Easy
AACSB: Analytical Thinking
27) Although there are some similarities between JIT and MRP, identify one major difference below.
A) production scheduling
B) reducing the opportunity for inventory theft
C) reducing inventory carrying costs
D) requires more analysis than EOQ
Answer: A
Concept: Ordering goods and services
Objective: Learning Objective 2
Difficulty: Moderate
AACSB: Analytical Thinking
28) Ideally, inventory purchases occur in response to ________ in a JIT inventory system.
A) customer demand
B) optimal demand
C) forecast demand
D) supplier demand
Answer: A
Concept: Ordering goods and services
Objective: Learning Objective 2
Difficulty: Moderate
AACSB: Analytical Thinking
29) A JIT inventory system would be especially useful for a company that manufactures A) toys associated with new movie releases.
B) toothpaste.
C) alarm clocks.
D) motor oil.
Answer: A
Concept: Ordering goods and services
Objective: Learning Objective 2
Difficulty: Moderate
AACSB: Analytical Thinking
30) Which of the following factors is not of key importance when selecting inventory suppliers?
A) product price
B) vendor corporate structure
C) product quality
D) vendor delivery dependability
Answer: B
Concept: Ordering goods and services
Objective: Learning Objective 2
Difficulty: Moderate
AACSB: Analytical Thinking
31) MacDougalKids is a mid-sized manufacturer of organic baby food. MacDougalKids uses the EOQ inventory management approach. Which of the following factors would likely be least important when selecting inventory suppliers?
A) product price
B) product quality
C) vendor delivery dependabilityD) All would be equally important.
Answer: C
Concept: Ordering goods and services
Objective: Learning Objective 2
Difficulty: Moderate
AACSB: Analytical Thinking
32) MacDougalKids is a mid-sized manufacturer of organic baby food. MacDougalKids uses a JIT inventory management approach. Which of the following factors would likely be least important when selecting inventory suppliers?
A) product price
B) product quality
C) vendor delivery dependability
D) All would be equally important
Answer: A
Concept: Ordering goods and services
Objective: Learning Objective 2
Difficulty: Moderate
AACSB: Analytical Thinking
33) What is the best control to mitigate the threat of paying prices that are too high for goods ordered?
A) Require the receiving department to verify the existence of a valid purchase order.
B) Use only approved suppliers and solicit competitive bids.
C) Only pay invoices that are supported by the original voucher package.
D) Use bar-code technology to eliminate data entry errors.
Answer: B
Concept: Ordering goods and services
Objective: Learning Objective 2
Difficulty: Moderate
AACSB: Analytical Thinking
34) The management at Barks-a-Million is considering a new inventory control system. The current system is inadequate because it frequently causes stockouts that interrupt production and lead to excess stock of other materials — resulting in markdowns and high carrying costs. The new system will focus on ensuring that these costs are minimized. The new inventory control system will likely employ A) a reorder point.
B) a just-in-time inventory system.
C) the economic order quantity.
D) materials requirements planning.
Answer: C
Concept: Ordering goods and services
Objective: Learning Objective 2
Difficulty: Moderate
AACSB: Reflective Thinking
35) The management at Barks-a-Million is considering a new inventory control system. The current system is inadequate because it frequently causes stockouts that interrupt production and lead to excess stock of other materials — resulting in markdowns and high carrying costs. The new system will focus on ensuring that orders are placed with sufficient lead time to prevent stockouts by using
A) a just-in-time inventory system.
B) the economic order quantity.
C) materials requirements planning.
D) a reorder point.
Answer: D
Concept: Ordering goods and services
Objective: Learning Objective 2
Difficulty: Moderate
AACSB: Reflective Thinking
36) The management at Barks-a-Million is considering a new inventory control system. The current system is inadequate because it frequently causes stockouts that interrupt production and lead to excess stock of other materials — resulting in markdowns and high carrying costs. The new system, which will focus on forecasting demand for their products, will likely employ A) a just-in-time inventory system.
B) the economic order quantity.
C) materials requirements planning.
D) a reorder point.
Answer: C
Concept: Ordering goods and services
Objective: Learning Objective 2
Difficulty: Moderate
AACSB: Reflective Thinking
37) The management at Barks-a-Million is considering a new inventory control system. The current system is inadequate because it frequently causes stockouts that interrupt production and lead to excess stock of other materials — resulting in markdowns and high carrying costs. The new system will focus on reducing or completely eliminating carrying costs, most likely employing
A) a just-in-time inventory system.
B) a reorder point.
C) materials requirements planning.
D) the economic order quantity.
Answer: A
Concept: Ordering goods and services
Objective: Learning Objective 2
Difficulty: Moderate
AACSB: Reflective Thinking
38) Which of the controls below would be least effective at preventing a company from ordering goods at a price higher than market?
A) Only place orders with vendors on an approved vendor list.
B) Variance analysis of actual expenses to budgeted expenses
C) For high-dollar goods, solicit competitive bids from possible vendors.
D) Frequent review of, and update to, vendor price lists stored in the AIS
Answer: B
Concept: Ordering goods and services
Objective: Learning Objective 2
Difficulty: Moderate
AACSB: Reflective Thinking
39) Identify possible problems associated with receiving goods and appropriate actions in response to the problems.
Answer: When a shipment of goods arrives, the quantity of goods received may not be the same as the quantity ordered; the goods may have been damaged in shipment and therefore are not suitable for use; and, goods may be received that are inferior in quality and fail an inspection. Whenever any of these problems occur, the purchasing department should deal with the vendor and issue a debit memo to record an adjustment to the order. The vendor should then issue a credit memo in acknowledgment of the problem and the pending adjustment.
Concept: Ordering goods and services
Objective: Learning Objective 2
Difficulty: Moderate
AACSB: Analytical Thinking
40) Identify one way to improve the accuracy of inventory records that use a perpetual inventory approach
A) use of an ERP system
B) require the accounting department to calculate cost of goods sold periodically
C) use IT to eliminate the need for manual data entry
D) use of an MRP inventory system
Answer: C
Concept: Ordering goods and services
Objective: Learning Objective 2
Difficulty: Moderate
AACSB: Analytical Thinking
41) Why would a firm perform ABC cost analysis?
A) to identify the best inventory supplier
B) to reconcile accounts payable
C) to prioritize physical inventory counts
D) to verify production quality
Answer: C
Concept: Ordering goods and services
Objective: Learning Objective 2
Difficulty: Difficult
AACSB: Analytical Thinking
42) It is important to physically count inventory, at least periodically, even in a perpetual inventory system.
Answer: TRUE
Concept: Ordering goods and services
Objective: Learning Objective 2
Difficulty: Easy
AACSB: Analytical Thinking
43) What is the main reason a list of potential alternative suppliers be maintained?
A) in case the primary supplier is out of stock
B) so the firm can sample different suppliers
C) in case the primary supplier is more expensive
D) to segregate purchasing suppliers
Answer: A
Concept: Ordering goods and services
Objective: Learning Objective 2
Difficulty: Moderate
AACSB: Analytical Thinking
44) Identify the most accurate statement below.
A) Several purchase requisitions are often created to fill one purchase order.
B) Several purchase orders are often created to fill one purchase requisition.
C) Every purchase requisition should lead to the creation of one purchase order.
D) Every purchase order should lead to the creation of one purchase requisition.
Answer: B
Concept: Ordering goods and services
Objective: Learning Objective 2
Difficulty: Moderate
AACSB: Analytical Thinking
45) Identify the item below that is the biggest purchasing function cost driver.
A) the number of purchase requisitions processed
B) the number of suppliers used
C) the number of purchase orders processed
D) the quantity of items ordered
Answer: C
Concept: Ordering goods and services
Objective: Learning Objective 2
Difficulty: Moderate
AACSB: Analytical Thinking
46) A reverse auction would likely be best suited to the purchase of A) central processing units (CPUs).
B) soybeans.
C) designer clothing.
D) automobiles.
Answer: B
Concept: Ordering goods and services
Objective: Learning Objective 2
Difficulty: Difficult
AACSB: Analytical Thinking
47) One way a firm could reduce the risk of problems with supplier dependability is to A) purchase inventory from only U.S.-based suppliers.
B) use an ERP system for purchases.
C) require suppliers to be ISO 9000 certified.
D) automate the purchasing function.
Answer: C
Concept: Ordering goods and services
Objective: Learning Objective 2
Difficulty: Moderate
AACSB: Analytical Thinking
48) An important control that can be used to reduce the risk of employee kickbacks is A) surveillance cameras.
B) job rotation.
C) off-site restrooms.D) use of ID badges.
Answer: B
Concept: Ordering goods and services
Objective: Learning Objective 2
Difficulty: Moderate
AACSB: Analytical Thinking
49) Restricting access to the approved supplier list can A) help reduce the risk of fraudulent disbursements.
B) cause purchase order approval delays.
C) eliminate the risk of duplicate payment.
D) improve the efficiency of the expenditure cycle.
Answer: A
Concept: Ordering goods and services
Objective: Learning Objective 2
Difficulty: Difficult
AACSB: Analytical Thinking
50) In a supplier audit, what are some of the red flags that could indicate potential supplier's problems?
Answer: (1) A large percentage of the supplier's gross sales was to the company conducting the supplier audit. (2) The supplier's pricing methods differ from standard industry practice. (3) The supplier does not own the equipment it rents but is itself renting that equipment from a third party. (4) Entertainment expenses are high in terms of a percentage of the supplier's gross sales.
(5) The supplier submits altered or fictitious third-party invoices. (6) The supplier's address on its invoices is ficti