American University

BUSINESS A 101

Chapter 5-The Expenditure Cycle Part I: Purchases and Cash Disbursements Procedures

TRUE/FALSE

1)Purchasing decisions are authorized by inventory control.

2. The blind copy of the purchase order that goes to the receiving department contains no item descriptions.

3. Firms that wish to improve control over cash disbursements use a voucher system.

4. In a voucher system, the sum of all unpaid vouchers in the voucher register equals the firm’s total voucher payable balance.

5. The accounts payable department reconciles the accounts payable subsidiary ledger to the control account.

6. The use of inventory reorder points suggests the need to obtain specific authorization.

7. Proper segregation of duties requires that the responsibility approving a payment be separated from posting to the cash disbursements journal.

8. A major risk exposure in the expenditure cycle is that accounts payable may be overstated at the end of the accounting year.

9. When a trading partner agreement is in place, the traditional three way match may be eliminated.

10. Authorization of purchases in a merchandising firm occurs in the inventory control department.

11. A three way match involves a purchase order, a purchase requisition, and an invoice.

12. Authorization for a cash disbursement occurs in the cash disbursement department upon receipt of the supplier’s invoice.

13. An automated cash disbursements system can yield better cash management since payments are made on time.

14. Permitting warehouse staff to maintain the only inventory records violates separation of duties.

15. A purchasing system that employs electronic data interchange does not use a purchase order.

16. Inventory control should be located in the warehouse.

17. Inspection of shipments in the receiving department would be improved if the documentation showed the value of the inventory.

18. One reason for authorizing purchases is to enable efficient inventory management.

19. If accounts payable receives an invoice directly from the supplier it needs to be reconciled with the purchase order and receiving report.

20. Supervision in receiving is intended to reduce the theft of assets.

MULTIPLE CHOICE

1. The purpose of the purchase requisition is to
   1. order goods from vendors
   2. record receipt of goods from vendors
   3. authorize the purchasing department to order goods
   4. bill for goods delivered
2. The purpose of the receiving report is to

2. 1. order goods from vendors
   2. record receipt of goods from vendors
   3. authorize the purchasing department to order goods
   4. bill for goods delivered
3. All of the following departments have a copy of the purchase order except
   1. the purchasing department
   2. the receiving department
   3. accounts payable
   4. general ledger
4. The purpose of the purchase order is to
   1. order goods from vendors
   2. record receipt of goods from vendors
   3. authorize the purchasing department to order goods
   4. approve payment for goods received
5. The open purchase order file in the purchasing department is used to determine
   1. the quality of items a vendor ships
   2. the best vendor for a specific item
   3. the orders that have not been received
   4. the quantity of items received
6. The purchase order
   1. is the source document to make an entry into the accounting records
   2. indicates item description, quantity, and price
   3. is prepared by the inventory control department
   4. is approved by the end-user department
7. The reason that a blind copy of the purchase order is sent to receiving is to
   1. inform receiving when a shipment is due
   2. force a count of the items delivered
   3. inform receiving of the type, quantity, and price of items to be delivered
   4. require that the goods delivered are inspected
8. The receiving report is used to
   1. accompany physical inventories to the storeroom or warehouse
   2. advise the purchasing department of the dollar value of the goods delivered
   3. advise general ledger of the accounting entry to be made
   4. advise the vendor that the goods arrived safely
9. When a copy of the receiving report arrives in the purchasing department, it is used to

9. 1. adjust perpetual inventory records
   2. record the physical transfer of inventory from receiving to the warehouse
   3. analyze the receiving department’s process
   4. recognize the purchase order as closed
10. The financial value of a purchase is determined by reviewing the
    1. packing slip
    2. purchase requisition
    3. receiving report
    4. supplier’s invoice
11. Which document is least important in determining the financial value of a purchase?
    1. purchase requisition
    2. purchase order
    3. receiving report
    4. supplier’s invoice
12. In a merchandising firm, authorization for the payment of inventory is the responsibility of
    1. inventory control
    2. purchasing
    3. accounts payable
    4. cash disbursements
13. In a merchandising firm, authorization for the purchase of inventory is the responsibility of
    1. inventory control
    2. purchasing
    3. accounts payable
    4. cash disbursements
14. When purchasing inventory, which document usually triggers the recording of a liability?
    1. purchase requisition
    2. purchase order
    3. receiving report
    4. supplier’s invoice
15. Because of time delays between receiving inventory and making the journal entry
    1. liabilities are usually understated
    2. liabilities are usually overstated
    3. liabilities are usually correctly stated
    4. none of the above
16. Usually the open voucher payable file is organized by

16. 1. vendor
    2. payment due date
    3. purchase order number
    4. transaction date
17. Which of the following statements is not correct?
    1. the voucher system is used to improve control over cash disbursements
    2. the sum of the paid vouchers represents the voucher payable liability of the firm
    3. the voucher system permits the firm to consolidate payments of several invoices on one voucher
    4. many firms replace accounts payable with a voucher payable system
18. In the expenditure cycle, general ledger does not
    1. post the journal voucher from the accounts payable department
    2. post the account summary from inventory control
    3. post the journal voucher from the purchasing department
    4. reconcile the inventory control account with the inventory subsidiary summary
19. The documents in a voucher packet include all of the following except
    1. a check
    2. a purchase order
    3. a receiving report
    4. a supplier’s invoice
20. To maintain a good credit rating and to optimize cash management, cash disbursements should arrive at the vendor’s place of business
    1. as soon as possible
    2. on the due date
    3. on the discount date
    4. by the end of the month
21. The cash disbursement clerk performs all of the following tasks except
    1. reviews the supporting documents for completeness and accuracy
    2. prepares checks
    3. signs checks
    4. marks the supporting documents paid
22. When a cash disbursement in payment of an accounts payable is recorded
    1. the liability account is increased
    2. the income statement is changed
    3. the cash account is unchanged
    4. the liability account is decreased

23. Authorization for payment of an accounts payable liability is the responsibility of
    1. inventory control
    2. purchasing
    3. accounts payable
    4. cash disbursements
24. Of the following duties, it is most important to separate
    1. warehouse from stores
    2. warehouse from inventory control
    3. accounts payable and accounts receivable
    4. purchasing and accounts receivable
25. In a firm with proper segregation of duties, adequate supervision is most critical in
    1. purchasing
    2. receiving
    3. accounts payable
    4. general ledger
26. The receiving department is not responsible to
    1. inspect shipments received
    2. count items received from vendors
    3. order goods from vendors
    4. safeguard goods until they are transferred to the warehouse
27. The major risk exposures associated with the receiving department include all of the following except
    1. goods are accepted without a physical count
    2. there is no inspection for goods damaged in shipment
    3. inventories are not secured on the receiving dock
    4. the audit trail is destroyed
28. When searching for unrecorded liabilities at the end of an accounting period, the accountant would search all of the files except
    1. the purchase requisition file
    2. the cash receipts file
    3. the purchase order file
    4. the receiving report file
29. In regards to the accounts payable department, which statement is not true?
    1. the purchase requisition shows that the transaction was authorized
    2. the purchase order proves that the purchase was required
    3. the receiving report provides evidence of the physical receipt of the goods
    4. the supplier’s invoice indicates the financial value of the transaction

30. In a computerized system that uses an economic order quantity (EOQ) model and the perpetual inventory method, who determines when to reorder inventory?
    1. the inventory control clerk
    2. the purchasing department
    3. the vendor
    4. the computer system
31. Firms can expect that proper use of a valid vendor file will result in all of the following benefits except
    1. purchasing agents will be discouraged from improperly ordering inventory from related parties
    2. purchases from fictitious vendors will be detected
    3. the most competitive price will be obtained
    4. the risk of purchasing agents receiving kickbacks and bribes will be reduced
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
    1. all checks manually signed by the treasurer
    2. all checks signed by check-signing equipment
    3. checks over a certain dollar amount manually signed by the treasurer
    4. checks over a certain dollar amount manually signed by the cash disbursements clerk
33. The document which will close the open purchase requisition file is the
    1. purchase order
    2. vendor invoice
    3. receiving report
    4. none of the above
34. Goods received are inspected and counted to
    1. determine that the goods are in good condition
    2. determine the quantity of goods received
    3. preclude payment for goods not received or received in poor condition
    4. all of the above
35. If a company uses a standard cost system, inventory records can be updated from the
    1. vendor invoice
    2. purchase order
    3. receiving report
    4. purchase requisition
36. If a company uses an actual cost system, inventory records can first be updated from the
    1. vendor invoice
    2. purchase order

36. 3. receiving report
    4. purchase requisition
37. Copies of a purchase order are sent to all of the following except
    1. inventory control
    2. receiving
    3. general ledger
    4. accounts payable
38. The receiving report
    1. is used to update the actual cost inventory ledger
    2. accompanies the goods to the storeroom
    3. is sent to general ledger
    4. is returned to the vendor to acknowledge receipt of the goods
39. A supplier invoice
    1. is included with the goods
    2. shows what was ordered even if all was not shipped
    3. is sent by vendor to accounts payable
    4. none of the above
40. The cash disbursement function is
    1. part of accounts payable
    2. an independent accounting function
    3. a treasury function
    4. part of the general ledger department

SHORT ANSWER

1. Which internally generated document should be compared to the supplier’s invoice to verify the price of an item?

2. Which internally generated document should be compared to the supplier’s invoice to verify the quantity being billed for?

3. List specific jobs that should be segregated in the purchases processing system.

4. List specific jobs that should be segregated in the cash disbursements system.

5. Describe an internal control procedure that would detect that a vendor overcharged for goods delivered.

6. Describe an internal control procedure that would prevent payment of a invoice for goods that were never delivered.

7. Describe an internal control procedure that would prevent issuing two checks in payment of the same invoice.

8. Explain why supervision is so important in the receiving department.

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?

10. What type of error or fraud might happen if suppliers’ invoices are not compared to purchase orders or to receiving reports before payment?

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.

12. Why should the copy of a purchase order, which is sent to receiving, be a “blind” copy?

13. What is(are) the purpose(s) of maintaining a valid vendor file?

14. Name two major benefits of automating the purchasing effort.

15. What function or department typically initiates a purchase in a merchandising business?

16. Where in the purchasing/cash disbursement functions is access control exercised?

17. Explain why a three way match may not be required for transactions covered by a trading partner agreement.

ESSAY

1. Differentiate between a purchase requisition and a purchase order.

2. What general ledger journal entries are triggered by the purchases system? From which departments do these journal entries arise?

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.

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?

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?

6. What are the steps taken in the cash disbursement system?

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?

8. What are the key segregation of duties issues in purchasing and cash disbursements?