American University

BUSINESS A 101

Chapter 4-The Revenue Cycle

TRUE/FALSE

1)The packing slip is also known as the shipping notice.

2. The bill of lading is a legal contract between the buyer and the seller.

3. Another name for the stock release form is the picking ticket.

4. Warehouse stock records are the formal accounting records for inventory.

5. The purpose of the invoice is to bill the customer.

6. In most large organizations, the journal voucher file has replaced the formal general journal.

7. The cash receipts journal is a special journal.

8. In the revenue cycle, the internal control “limit access” applies to physical assets only.

9. In real-time processing systems, routine credit authorizations are automated.

10. In a computerized accounting system, segregation of functions refers to inventory control, accounts receivable, billing, and general ledger tasks.

11. A written customer purchase order is required to trigger the sales order system.

12. Inventory control has physical custody of inventory.

13. The principal source document in the sales order system is the sales order.

14. Sales orders should be prenumbered documents.

15. Integrated accounting systems automatically transfer data between modules.

16. If a customer submits a written purchase order, there is no need to prepare a sales order.

17. Sales return involves receiving, sales, credit, and billing departments, but not accounts receivable.

18. A remittance advice is a form of turn-around document.

19. A bill of lading is a request for payment for shipping charges.

20. In point of sale systems, authorization takes the form of validation of credit card charges.

MULTIPLE CHOICE

1. The revenue cycle consists of
   1. one subsystem–order entry
   2. two subsystems–sales order processing and cash receipts
   3. two subsystems–order entry and inventory control
   4. three subsystems–sales order processing, credit authorization, and cash receipts
2. The reconciliation that occurs in the shipping department is intended to ensure that
   1. credit has been approved
   2. the customer is billed for the exact quantity shipped
   3. the goods shipped match the goods ordered
   4. inventory records are reduced for the goods shipped
3. The adjustment to accounting records to reflect the decrease in inventory due to a sale occurs in the
   1. warehouse
   2. shipping department

3. 3. billing department
   4. inventory control department
4. Which document triggers the revenue cycle?
   1. the sales order
   2. the customer purchase order
   3. the sales invoice
   4. the journal voucher
5. Copies of the sales order can be used for all of the following except
   1. purchase order
   2. credit authorization
   3. shipping notice
   4. packing slip
6. The purpose of the sales invoice is to
   1. record reduction of inventory
   2. transfer goods from seller to shipper
   3. bill the customer
   4. select items from inventory for shipment
7. The customer open order file is used to
   1. respond to customer queries
   2. fill the customer order
   3. ship the customer order
   4. authorize customer credit
8. The stock release copy of the sales order is not used to
   1. locate and pick the items from the warehouse shelves
   2. record any out-of-stock items
   3. authorize the warehouse clerk to release custody of the inventory to shipping
   4. record the reduction of inventory
9. The shipping notice
   1. is mailed to the customer
   2. is a formal contract between the seller and the shipping company
   3. is always prepared by the shipping clerk
   4. informs the billing department of the quantities shipped
10. The billing department is not responsible for
    1. updating the inventory subsidiary records
    2. recording the sale in the sales journal

10. 3. notifying accounts receivable of the sale
    4. sending the invoice to the customer
11. Customers should be billed for backorders when
    1. the customer purchase order is received
    2. the backordered goods are shipped
    3. the original goods are shipped
    4. customers are not billed for backorders because a backorder is a lost sale
12. Usually specific authorization is required for all of the following except
    1. sales on account which exceed the credit limit
    2. sales of goods at the list price
    3. a cash refund for goods returned without a receipt
    4. write off of an uncollectible account receivable
13. Which of following functions should be segregated?
    1. opening the mail and making the journal entry to record cash receipts
    2. authorizing credit and determining reorder quantities
    3. maintaining the subsidiary ledgers and handling customer queries
    4. providing information on inventory levels and reconciling the bank statement
14. Which situation indicates a weak internal control structure?
    1. the mailroom clerk authorizes credit memos
    2. the record keeping clerk maintains both accounts receivable and accounts payable subsidiary ledgers
    3. the warehouse clerk obtains a signature before releasing goods for shipment
    4. the accounts receivable clerk prepares customer statements every month
15. The most effective internal control procedure to prevent or detect the creation of fictitious credit memoranda for sales returns is to
    1. supervise the accounts receivable department
    2. limit access to credit memoranda
    3. prenumber and sequence check all credit memoranda
    4. require management approval for all credit memoranda
16. The accounts receivable clerk destroys all invoices for sales made to members of her family and does not record the sale in the accounts receivable subsidiary ledger. Which procedure will not detect this fraud?
    1. prenumber and sequence check all invoices
    2. reconcile the accounts receivable control to the accounts receivable subsidiary ledger
    3. prepare monthly customer statements
    4. reconcile total sales on account to the debits in the accounts receivable subsidiary ledger

17. Which department is least likely to be involved in the revenue cycle?
    1. credit
    2. accounts payable
    3. billing
    4. shipping
18. Which document is included with a shipment sent to a customer?
    1. sales invoice
    2. stock release form
    3. packing slip
    4. shipping notice
19. Good internal controls in the revenue cycle should ensure all of the following except
    1. all sales are profitable
    2. all sales are recorded
    3. credit is authorized
    4. inventory to be shipped is not stolen
20. Which control does not help to ensure that accurate records are kept of customer accounts and inventory?
    1. reconcile accounts receivable control to accounts receivable subsidiary
    2. authorize credit
    3. segregate custody of inventory from record keeping
    4. segregate record keeping duties of general ledger from accounts receivable
21. Internal controls for handling sales returns and allowances do not include
    1. computing bad debt expense using the percentage of credit sales
    2. verifying that the goods have been returned
    3. authorizing the credit memo by management
    4. using the original sales invoice to prepare the sales returns slip
22. The printer ran out of preprinted sales invoice forms and several sales invoices were not printed. The best internal control to detect this error is
    1. a batch total of sales invoices to be prepared compared to the actual number of sales invoices prepared
    2. sequentially numbered sales invoices
    3. visual verification that all sales invoices were prepared
    4. none of the above will detect this error
23. Which department prepares the bill of lading?
    1. sales
    2. warehouse
    3. shipping

23. 4. credit
24. A remittance advice is
    1. used to increase (debit) an account receivable by the cash received
    2. is a turn-around document
    3. is retained by the customer to show proof of payment
    4. none of the above
25. A weekly reconciliation of cash receipts would include comparing
    1. the cash prelist with bank deposit slips
    2. the cash prelist with remittance advices
    3. bank deposit slips with remittance advices
    4. journal vouchers from accounts receivable and general ledger
26. At which point is supervision most critical in the cash receipts system?
    1. accounts receivable
    2. general ledger
    3. mail room
    4. cash receipts
27. EDI trading partner agreements specify all of the following except
    1. selling price
    2. quantities to be sold
    3. payment terms
    4. person to authorize transactions
28. A cash prelist is
    1. a document that records sales returns and allowances
    2. a document returned by customers with their payments
    3. the source of information used to prepare monthly statements
    4. none of the above
29. An advantage of real-time processing of sales is
    1. the cash cycle is lengthened
    2. current inventory information is available
    3. hard copy documents provide a permanent record of the transaction
    4. data entry errors are corrected at the end of each batch
30. Commercial accounting systems have fully integrated modules. The word “integrated” means that
    1. segregation of duties is not possible
    2. transfer of information among modules occurs automatically
    3. batch processing is not an option

30. 4. separate entries are made in the general ledger accounts and the subsidiary ledgers
31. The data processing method that can shorten the cash cycle is
    1. batch, sequential file processing
    2. batch, direct access file processing
    3. real-time file processing
    4. none of the above
32. Which of the following is not a risk exposure in a microcomputer accounting system?
    1. reliance on paper documentation is increased
    2. functions that are segregated in a manual environment may be combined in a microcomputer accounting system
    3. backup procedures require human intervention
    4. data are easily accessible
33. Which journal is not used in the revenue cycle?
    1. cash receipts journal
    2. sales journal
    3. purchases journal
    4. general journal
34. Periodically, the general ledger department receives all of the following except
    1. total increases to accounts receivable
    2. total of all sales backorders
    3. total of all sales
    4. total decreases in inventory
35. The credit department
    1. prepares credit memos when goods are returned
    2. approves credits to accounts receivable when payments are received
    3. authorizes the granting of credit to customers
    4. none of the above
36. Adjustments to accounts receivable for payments received from customers is based upon
    1. the customer’s check
    2. the cash prelist
    3. the remittance advice that accompanies payment
    4. a memo prepared in the mailroom
37. The revenue cycle utilizes all of the following files except
    1. credit memo file
    2. sales history file

37. 3. shipping report file
    4. cost data reference file
38. All of the following are advantages of real-time processing of sales except
    1. The cash cycle is shortened
    2. Paper work is reduced
    3. Incorrect data entry is difficult to detect
    4. Up-to-date information can provide a competitive advantage in the marketplace

SHORT ANSWER

1. Distinguish between a packing slip, shipping notice, and a bill of lading.

2. State two specific functions or jobs that should be segregated in the sales processing system.

3. State two specific functions or jobs that should be segregated in the cash receipts system.

4. List two points in the sales processing system when authorization is required.

5. For the revenue cycle, state two specific independent verifications that should be performed.

6. What task can the accounts receivable department engage in to verify that all checks sent by

the customers have been appropriately deposited and recorded?

7. What specific internal control procedure would prevent the sale of goods on account to a fictitious customer?

8. The clerk who opens the mail routinely steals remittances. Describe a specific internal control procedure that would prevent or detect this fraud.

9. A customer payment of $247 was correctly posted in the general ledger but was recorded as $274 in the customer’s account receivable. Describe a specific internal control procedure that would detect this error.

10. Goods are shipped to a customer, but the shipping department does not notify billing and the customer never receives an invoice. Describe a specific internal control procedure that would detect this error.

11. A clerk embezzles customer payments on account and covers up the theft by making an adjustment to the accounts receivable ledger. Describe a specific internal control procedure that would prevent this fraud.

12. A credit sale is made to a customer, even though the customer’s account is four months overdue. Describe a specific internal control procedure that would prevent this from happening.

13. What specific internal control procedure would prevent a customer from being billed for all 50 items ordered although only 40 items were shipped?

14. What specific internal control procedure would prevent the shipping clerk from taking goods from the storeroom and sending them to someone who had not placed an order?

15. What specific internal control procedure would prevent an accounts receivable clerk from issuing a fictitious credit memo to a customer (who is also a relative) for goods that were “supposedly” returned from previous sales?

16. What specific internal control procedure would prevent an increase in sales returns since salesmen were placed on commission?

17. What specific internal control procedure would detect the misplacement of a sales invoice after preparation and not mailed to the customer? The invoice was never found.

18. What function does the receiving department serve in the revenue cycle?

19. What are the three rules that ensure that no single employee or department processes a transaction in its entirety.

20. What is automation and why is it used?

21. What is the objective of re-engineering?

22. What are the key segregation of duties related to computer programs that process accounting transactions.

23. How is EDI more than technology? What unique control problems may it pose?

24. What makes point-of-sales systems different from revenue cycles of manufacturing firms?

25. Give three examples of Access Control in a Point-of-Sale (POS) system.

ESSAY

1. When Clipper Mail Order Co. receives telephone and fax orders, the billing department prepares an invoice. The invoice is mailed immediately. A copy of the invoice serves as a shipping notice. The shipping department removes inventory from the warehouse and prepares the shipment. When the order is complete, the goods are shipped. The clerk checks the customer’s credit before recording the sale in the general journal and the account receivable subsidiary ledger.

The receptionist opens the mail and lists all payments. The receptionist also handles all customer complaints and prepares sales return forms for defective merchandise. The cashier records all cash receipts in the general journal and makes the appropriate entry in the accounts receivable subsidiary ledger. The cashier prepares the daily bank deposit.

Describe at least four internal control weaknesses at Clipper Mail Order Co.

2. How may an employee embezzle funds by issuing an unauthorized sales credit memo if the appropriate segregation of functions and authorization controls were not in place?

3. For each of the following documents, describe its purpose, the functional area preparing it, and the key data included: sales order, bill of lading, credit memo.

4. What features of a reengineered cash receipts system contribute to improved control and reduced costs? What complicates the process?