Chapter 12

A number that enables customers to remit payments via an ACH credit without requiring the seller to divulge detailed information about its bank account is called

UPIC

Explain how validity checks, completeness tests and reasonableness tests can be implemented to ensure accuracy of customer orders

Validity checks can be used to compare the customer and inventory information on the customer order with the information in the customer and inventory master files. A completeness test can ensure that all the necessary information is present on the customer order. A reasonableness test can compare the quantity ordered with the customer's past order history for that item

Discuss ways in which technology can be used to streamline cash collections

Answers may include the following points: A lockbox system can reduce delays due to processing and geographicaldistance between customer and company. Customers send remittances to a nearby P.O. box; a local bank picks upremittances, deposits cash and sends remittance advices and copies of all checks to the company. The maindisadvantage is cost; the banks charge a service fee up to 1% of the cash processed through the system. Informationtechnology can provide additional efficiencies in the use of lockboxes. An electronic lockbox sends electronicnotification of remittances to the company. This method enables the company to begin applying remittances tocustomer accounts before the photocopies of the checks arrive. NAn EFT system eliminates paper checks and useselectronic payments between banks. Integrating EFT and EDI, called the financial electronic data interchange,automates billing and cash collections. N Procurement cards or credit cards can be used. These cards eliminate the risksand costs associated with creating and maintaining accounts receivable, but cost between 2% to 4% of the gross salesprice

Failure to collect cash on credit sales is a threat in the revenue cycle. What controls can be used to help neutralize this threat?

Both accounts receivable and cash flows should be monitored. Segregation of duty controls should always beimplemented and monitored for compliance. Also, a control used to deal with accounts receivable (which directlyimpacts cash flow) is to use an accounts receivable aging schedule. This schedule lists customer account balances bylength of time outstanding and provides information for estimating bad debts. It can also assist in evaluating creditpolicies and specific customer credit limits. Also, a cash budget can be used to provide a more precise estimate of cashinflows (cash collected from sales) and cash outflow (outstanding payables). An organization can be alerted to apending cash flow shortage, thus enabling it to secure short-term financing at competitive rates to deal with theproblem in a timely manner

Define and describe benefits of a CRM system

CRM stands for customer relationship management. Since customer service is so important today, special CRM software packages have been created that support this vital process. CRM systems help a company to organize detailed data about customers so that more personalized service can be given to them. A CRM system may retain customer preferences and customer transaction history, which can be used to suggest other products the customer may wish to purchase. The system could also take a pro-active marketing approach in contacting customers at certain re-order points. A well-implemented CRM system can help the business achieve the goal of turning satisfied customers into loyal customers

The bill of lading is a legal contract that defines responsibility for the goods in the company's warehouse

False

What is image processing technology and how can it help companies improve the efficiency and effectiveness of managing their customer accounts?

Image processing technology can further improve the efficiency and effectiveness of managing customer accounts. The digital images of customer remittances and invoices can be stored electronically and then be easily retrieved, manipulated, and integrated with other images and data to produce various types of output. Doing so provides employees fast access to all documents relating to a customer and eliminates the time wasted searching through file cabinets for lost paperwork. If a customer needs a duplicate copy of a monthly statement or an invoice to replace a lost original, it can be retrieved, printed, and faxed while the employee is talking to the customer on the phone. Image processing also can facilitate resolving customer complaints, because the same image can be viewed simultaneously by more than one person. Thus, a customer account representative and a credit manager could both review an image of a document in question while discussing the problem with the customer on the telephone. Image processing also reduces the space and cost associated with storing paper documents. The savings in this area can be substantial: One optical disk can store thousands of documents, in a fraction of the space

Describe typical credit approval procedures

Most business-to-business sales are made on credit. Key to revenue cycle success is the approval of credit sales before they are processed and goods shipped. A part of good control in this area is to establish a credit limit for customers. With new customers, or when orders exceed a customer's credit limit, or the customer has a past due balance, specific authorization for the credit manager should specifically authorize and approve further credit. The system can also be programmed to do a limit check for each order processed to maintain further control in this area. Also, marketing personnel should not make credit decisions, as a potential conflict of interest is possible

Discuss the advantage and disadvantage of the open-invoice method

One advantage of the open-invoice method is that it is conducive to offering discounts for prompt payment, as invoices are individually tracked and aged. It also results in a more uniform flow of cash collections throughout the month. A disadvantage of the open-invoice method is the added complexity required to maintain information about the status of each individual invoice for each customer

Discuss the general control issue of the loss of data, as it relates to the revenue cycle

One of the two general objectives that pertain to all revenue cycle activities is the loss of data. The primary threats related to the data availability objective are the loss of data and access controls. It is imperative that accurate customer account and inventory records be maintained for external and internal reporting purposes and for customer inquiries. Such records must be protected from loss and damage by using backup files. One backup file should be kept on-site, while a second should be kept off-site. Backup files of the most recent transactions should also be maintained. Also, all disks and tapes should have both external and internal file labels to reduce the possibility of accidental erasure of important files. Access controls are also important as a general control. Unauthorized access to information may cause leaks of the information to competitors and the risk of damage to sensitive and important data files. Employees should have certain access restrictions to help prevent this threat from occurring. Passwords and user IDs will help to limit access to files and the operations allowed to be performed on files. For example, the sales staff should not be allowed write-access to customers' credit limit and approval information. Individual terminals should also have access controls in place. An example of this control would be to prevent someone at a shipping dock terminal from entering a sales transaction order. Another control that should be put in place is to require activity logs of any management approved transaction. Such a log should be maintained for audit trail purposes

Describe two methods to manage accounts receivable

Open invoice system N customers pay the invoice by returning a remittance advice turnaround document and a check. Remittances are applied against specific open invoices. The open-invoice method can be used to offer discounts for prompt payments since invoices are individually tracked. However, such individual tracking adds complexity in maintaining information. Balance-forward method N customers pay according to the amount shown on a monthly statement and remittances are applied against the total outstanding balance; this method is used by department stores typically where customers make a large number of smaller dollar amount purchases

What is QR codes and can companies use them to improve interactions with their customers?

QR codes are two-dimensional bar codes that can be scanned with a smartphone. They provide potential customers with access to multimedia anywhere at anytime. For example, consider a charity fund-raising event such as an outdoor concert. QR codes can be printed on posters, displayed on video screens, and included in the program. When attendees scan the code, they are directed to a mobile website where they can make a donation via their smartphone. Such a process is likely to result in a higher percentage of attendees actually donating, because they can act immediately upon their impulse. QR codes can also increase sales by enhancing customer service.

The best solution for maintaining accurate automated perpetual inventory system is to use

RFID tags

What is RFID tags and how do companies use them to improve their shipping process?

RFID tags improve the efficiency and accuracy of tracking inventory movement. With bar codes, the item or box must be positioned properly so that the bar code can be read by the scanner. Switching to an RFID tag eliminates this need to align items with scanners; instead, the tags can be read as the inventory moves throughout the warehouse. In addition, each RFID tag can store detailed information to facilitate proper storage and routing of the inventory item. For companies that handle large volumes of merchandise, such as Federal Express and UPS, RFID's ability to reduce by even a few seconds the time it takes to process each package can yield enormous cost savings

Explain how to effectively segregate duties in the sales order activity

Sales orders should be recorded by sales personnel. Credit decisions should be made by the credit manager, not sales personnel. Also, sales orders authorize release of goods to shipping. Warehouse and shipping should be separate from sales. Because a computer does recording and authorization, it is important to ensure integrity of the programs and to perform edit checks on any online entries

Discuss revenue cycle threat of stockouts, carrying costs, and markdowns

Stockouts, carrying costs, and markdowns are a threat in the sales order entry process. The problem with stockouts is that when goods are not available to ship to customers, the business risks losing the sale to a competitor that can provide the goods in a timely manner. The opposite problem can also occur where excess inventory increases carrying costs, with the result that markdowns may be necessary in order to sell the inventory. Two controls can be implemented to cope with this threat. One control that can be put into place is to establish accurate inventory control. An AIS with real-time online capabilities can be programmed to use the perpetual inventory method. This will ensure that accurate records are maintained about the quantity of inventory for sale. This will eliminate mistakes in placing orders for goods when a sufficient inventory amount is on hand. Periodic physical counts of inventory will also verify the perpetual amounts recorded by the AIS. Another important control in this situation is that of accurate sales forecasting. Proper marketing efforts should be made in conjunction with regularly reviewing sales forecasts for accuracy. Such forecasts should be revised as necessary. Sales force marketing efforts should be commensurate with inventory levels as well

How can electronic data interchange facilitate the billing and accounts receivable process?

The basic document created in the billing process is the sales invoice. Many companies still print paper invoices andsend them to customers in the mail. Batch processing of invoices may create cash flow problems because of the time ittakes invoices to flow through the regular mail system. Companies that use EDI can create quicker turnaround forpayment, and save costs by reducing paper handling and processing. Depending on the number of invoices processedper year, these savings can be significant

Describe the basic revenue cycle activities

The revenue cycle is a recurring set of business activities and related information processing operations associated with providing goods and services to customers and collecting cash in payment for those sales. The basic activities in the revenue cycle are: order entry N soliciting and processing customer activities N filling customer orders and shipping merchandise N invoicing customers and maintaining customer accounts collections N the cashier handles remittances and deposits them in the bank; accounts receivable personnel credits customer accounts for the payments received

Describe four threats in the revenue cycle and identify appropriate controls for each threat

Threat 1: Sales to customers with poor credit N Controls: Having an independent credit approval function and maintaining good customer accounting can help to prevent problems. Threat 2: Shipping errors N Controls: Reconciling shipping notices with picking tickets; bar-code scanners; and data entry application controls will help to catch these errors. Threat 3: Theft of inventory N Controls: Secure the location of inventory and document transfers; release only with valid shipping orders; have good accountability for picking and shipping; and finally, periodically reconcile records with a physical count. Threat 4: Failure to bill customers N Controls: Separating shipping and billing and pre-numbering of shipping documents helps along with reconciliation of all sales documents. Threat 5: Billing errors N Controls: Reconciliation of picking tickets and bills of lading with sales orders; data entry edit controls; and price lists may prevent billing errors. Threat 6: Theft of cash N Controls: Segregation of duties is essential to prevent this serious problem (the following duties should be separate: handling cash and posting to customer accounts; handling cash and authorizing credit memos and adjustments; issuing credit memos and maintaining customer accounts); use of lockboxes for receipts and EFT for disbursements; mailing customer statements monthly; use cash registers in retail operations where cash payments are received; deposit cash daily in the bank; and have the bank reconciliation function performed by independent third parties. Threat 7: Posting errors in updating accounts receivable N Controls: Use of editing and batch totals is essential here. Threat 8: Loss of data N Controls: Regular backups are essential with one copy stored off-site; and logical and physical access controls to prevent leakage to competitors and irregularities. Threat 9: Poor performance N Controls: Use sales and profitability analyses; accounts receivable aging; and cash budgets to track operations.

In a revenue cycle with proper controls, the ____ who reports to the __________ is not involved in any cash handling activities

accounts receivable clerk; controller

In a revenue cycle with proper controls, the ________ who reports to the __________ is not involved in any cash handling activities

accounts receivable clerk; controller

In the ______ method of tracking accounts receivable, customers pay according to the amount showing on their monthly statement and payments are applied against the total account balance

balance forward

Which of the following controls can minimize the threat of theft of inventory?

bar code and RFID technology

the ____ is a legal contract that defines responsibility for the goods in the company's warehouse

bill of lading

During the sales order entry process, a ________ is performed to verify that each transaction record contains all appropriate data items.

completeness test

To ensure proper segregation of duties, only the ________ has authority to issue credit memos.

credit manager

The legitimacy of customer orders is established by __________ in paper-based customer orders

customer's signature

Regularly reviewing an accounts receivable aging report can help management do what?

determine whether changes are needed in the firm's credit policies

Customers that send their payments electronically directly to the billing company's bank are using

electronic funds transfer (EFT)

A way to incorporate the advantages of Electronic Data Interchange with the Electronic Funds Transfer is

financial electronic data interchange

A way to incorporate the advantages of electronic data interchange with the electronic funds transfer is

financial electronic data interchange

An accounts receivable aging report is useful for doing everything except

future sales

If a firm does not use an ERP, the best way to mitigate the risk of the destruction of master data is to

implement backup and disaster recovery procedures

general threat to the revenue cycle

inaccurate master data, poor performance, and unauthorized disclosure of sensitive information

Bogumil Distributors is an Internet-based wholesaler. Customers enter their orders online. The manager of Cezary Foods was entering an order when the following error message popped up: "Your order exceeds your available credit. You will be contacted within 8 hours." This message is the result of a

limit check

The packing slip

lists the quantity and description of each item included in the shipment

Which of the following is not a general threat to the revenue cycle?

loss of customers

A company uses the method for tracking accounts receivable where customers pay according to individual sales invoices. This describes the _____ method

open-invoice

A method for tracking accounts receivable that matches specific invoices and payments from the customer is called a(n) __________ method

open-invoice

Laz Chance wears roller blades and headphones when he is at work at the Squishy Things Toy Company. He is a product packer. The headphones give him computer-generated instructions so he knows the location of each item and quantity that should be included in the order. These instructions are the equivalent of a

picking ticket

Before a shipping notice is prepared during the revenue cycle, shipping department personnel should match the inventory received from the warehouse to the

picking ticket and sales order

For strongest segregation of duties, the credit manager should never report to

the marketing department

A monthly statement sent to customers serves a control purpose by

providing an opportunity for customers to verify the balance owed and activity on the account

During the sales order entry process, a _________ is performed to compare the quantity ordered with the standard amounts normally ordered

reasonableness test

The manager of Callow Youth Clothing was entering an order online from Sad Clown Pajamas. He ordered 100 one-size fits all pajama bottoms, but when he ordered 1000 one-size fits all pajama tops, the following error message popped up: "Did you mean to enter a quantity of 1000 for your order?" This message is the result of a

reasonableness test

_____ is not a basic activity of the revenue cycle

receiving

The basic document created in the billion process is called a

sales invoice

the basic document created in the billing process is call a

sales invoice

The accounts receivable clerk destroys all invoices for sales made to family and friends and does not record the sales in the accounts receivable subsidiary ledgers. The family and friends usually give the clerk cash as a "thank you". Which procedure will not prevent or detect this fraud?

send monthly statements to all customers with balances owed

What is a typical procedure for processing sales orders from new customers or customers making a purchase that causes their credit limit to be exceeded

specific authorization must be granted by the credit manager

Consider the following revenue cycle scenario: The company has been exposed to customer dissatisfaction and the suggested control procedure to be implemented is to install and use bar-code scanners. What is the threat?

the company may be shipping the wrong merchandise

When a customer places an order (on account) for a certain product, what should be done before the order is checked for inventory availability?

the customer's available credit should be checked

A type of business document in which part of the original document is returned to the source for further processing is called a ________ document.

turnaround

A clerk at a grocery store scanned the bar code for a low cost bag of frozen chicken wings then gave his friend an expensive brand-name bag of frozen chicken wings. Which of the following controls would best prevent the clerk from getting away with doing this?

use of RFID tags

Which is the best control to prevent invoicing customers for more than the actual quantity shipped?

use the information from the packing slip to prepare the sales invoice

Matching customer account numbers and inventory item numbers to the numbers in the customer and inventory master files is an example of a

validity check

Which of the following is not a key decision that needs to be made in the revenue cycle?

which vendor should inventory be purchased from?