ACTG 2011 Chapter Notes - Chapter 5: Working Capital, Deferred Income, Free Cash Flow

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3 Oct 2014

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Cash flow, profitability and the cash flow statement. The cycle of investing cash in resources, providing goods/services to customers using those resources and collecting cash from customers. You need to expend cash to buy resources before collecting any cash. Buying capital, paying back loans and paying dividends, makes cash leave. Cash lag: delay between expenditure and receipt of cash. Inventory conversion period: average length of time between receiving inventory from a supplier and selling it to a customer. Payables deferral period: average number of days between receipt of goods/service from a supplier to payment of the supplier: the amount of days the entity does not have to pay; suppliers finance purchased by providing credit. Receivables conversion period: average length of time between delivery of goods to a customer and receipt of cash. As sales increase, more inventory has to be carried to meet customer demand; companies need more cash to purchase it.

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(ACCOUNTING INFORMATION SYSTEM)

Business scenario:

The model enterprise in this study is Euphoria Event Management Company (EEMC). As one of the major players in the event management industry, it provides a one-stop wedding service, organizes birthday parties, manages various kinds of celebrations and thus offers catering services based on the requirements of the customers. Due to this, the company handles multiple food inventory sales and purchases transactions and often slipped off the appropriate tracking and consumption of costs. Moreover, since it is classified as SME (small to medium-sized enterprise), it often fails to appreciate the importance of internal control in its daily operations.

The revenue cycle system at EEMC

The steps and procedures implemented within the revenue cycle of the company can generally be explained as follows:

1) Sales executive receives customer order by phone, fax or from a meeting.

2) She forwards the customer order to the kitchen department with details on quantities of food inventory needed and the date of delivery to customer.

3) The kitchen supervisor issues a Sales Order or sometimes a Packing Slip for the food order. Using this document, EEMC delivers the goods to customer.

4) Upon receiving the food, customer stamps and signs the Sales Order/Packing Slip.

5) One month after the delivery date, the accounts clerk at EEMC bills the food with Sales Invoice (stamp-duty receipt with authorized signature). The customer takes the original invoice while the company gets the copy of invoice and stamped receipt generated by the customer.

6) Two month after the delivery date, the accounts clerk makes a courtesy call to customer on the payment due.

7) Customer makes payment either using a cheque/clearing deposit slip or via a bank transfer.

8) As evidence of payment, the accounts clerk requests the original payment document (receipts or cheque stub) from

the customer or just check the transaction from the bank statements.

9) The accounts clerk records the sales transaction and the amount of sales in the general ledger. She also keeps the revenue cycle related documents as proof of the transaction.

The expenditure cycle system at EEMC

The steps and procedures implemented within the revenue cycle of the company can generally be explained as follows:

1) EEMC sets the budget for inventory purchase.

2) The Bill of Materials/Purchase Requisition document is created.

3) The procurement officer invites interested suppliers to quote their inventory price.

4) The procurement officer compares the quotation (price) of inventory among the various suppliers and appoints the

supplier who offers lowest price that commensurate with the desired quality of food. Appointment is usually conveyed by phone or fax.

5) When the food inventory arrives at the warehouse, the accounts clerk checks the quantity and the quality of inventory to confirm the order with the Bill of Materials.

6) Next, the supplierâs invoice (no Packing Slip from supplier, so the inventory is delivered with the invoice) is signed and the copy is taken and kept at the accounts department.

7) Between one to two weeks after the receipt of inventory, the accounts clerk confirms and pays for the purchases via a bank transfer. EEMC keeps the original receipt.

8) The accounts clerk records the purchase transaction and the amounts of obligation paid in the general ledger. She also keeps the expenditure cycle related documents as proof of the transaction.

Instructions:

Using the above information on EEMC operation and your knowledge on systems documentation techniques , draw the possible data flow diagrams to explain the revenue cycle and expenditure cycle.

2. Analyse and identify potential weaknesses in the current revenue and expenditure cycle implemented by the company.

3. Evaluate and comment on the internal control system related to the revenue cycle and expenditure cycle of the company. For each of the cycle, your answers must relate to the organizational control, documentation control and management practice control.

4. Using your own knowledge and creativity, suggest at least 3 ways to strengthen the documentation process and procedures using only the limited information given above.

5. Provide specific recommendations on how to overcome the discovered potential weaknesses on the organizational structure and authority of the company.

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Question 1

Identify the item below that is not one of the four different types of data processing activities.

		deleting
		reading
		creating
		using

Question 2

All of the following are advantages of an ERP system except

		ERPs permit manufacturing plants to receive new orders in real time.
		in an ERP, data input is captured or keyed once.
		it takes considerable experience and training to use an ERP system effectively.
		ERPs permit management to gain greater visibility into every area of the enterprise.

Question 3

Sam Jones has been the controller of Downtown Tires for 25 years. Ownership of the firm recently changed hands and the new owners are conducting an audit of the financial records. The audit has been unable to reproduce financial reports that were prepared by Sam. While there is no evidence of wrongdoing, the auditors are concerned that the discrepancies might contribute to poor decisions. Which of the following characteristics of useful information is absent in the situation described above?

		relevant
		reliable
		complete
		timely
		understandable
		verifiable
		accessible

Question 4

An ERP system might facilitate the purchase of direct materials by all of the following except

		preparing a purchase order when inventory falls to reorder point.
		routing a purchase order to a purchasing agent for approval.
		communicating a purchase order to a supplier.
		selecting the best supplier by comparing bids.

Question 5

Antia Carmie is the largest collector and retailer of Japanese fans in the St. Louis area. Antia uses computer technology to provide superior customer service. The store's database system was designed to make detailed information about each Japanese fan easily accessible to her customers. Accordingly, the fan price and condition are provided for each fan, along with many pictures of each fan. In Antia's database, the price of the Japanese fans is a(n)

		entity.
		attribute.
		field.
		record.

Question 6

Which of the following is not considered a source document?

		A copy of the company's shipping document.
		A copy of the company's ledger.
		A copy of the company's sales journal.
		A copy of the company's financial statements.

Question 7

In an ERP system, the module used to record data about transactions in the disbursement cycle is called

		financial.
		order to cash.
		customer relationship management.
		purchase to pay.

Question 8

Baggins Incorporated identifies new product development and product improvement as the top corporate goals. An employee developed an innovation that will correct a shortcoming in one of the company's products. Although Baggins current Return on Investment (ROI) is 12%, the product innovation is expected to generate ROI of only 10%. As a result, awarding bonuses to employees based on ROI resulted in

		goal conflict.
		information overload.
		decreased value of information.
		goal congruence.

Question 9

________ are examples of activities that constitute inbound logistics.

		Activities that transform inputs into final products or services
		Activities that provide post-sale support to customers
		Activities that consist of receiving, storing, and distributing the materials used as inputs by the organization to create goods and/or services it sells
		Activities that help customers to buy the organization's products or services

Question 10

In which transaction cycle would information for inventory purchases be most likely to pass between internal and external accounting information systems?

		the revenue cycle
		the expenditure cycle
		the human resources / payroll cycle
		the financing cycle

Question 11

The collection of customer payment is part of which transaction cycle?

		the human resources cycle
		the production cycle
		the revenue cycle
		the expenditure cycle

Question 12

Which of the following is an example of source data automation?

		POS (point-of-sale) scanners in retail stores
		a bill of lading
		a subsidiary ledger
		a utility bill

Question 13

All of the following are guidelines for developing a good coding system except

		be as sophisticated as possible to promote usage.
		be consistent with its intended use.
		be flexible to allow for growth.
		be consistent with the company's organization structure.

Question 14

What is a key decision that needs to be made with regards to borrowing money from lenders?

		the location
		pro forma income statement
		how much capital to acquire
		job descriptions

Question 15

Identify the false statement below.

		A service company does not have an inventory system.
		Retail stores do not have a production cycle.
		Financial institutions have installment-loan cycles.
		Every organization should implement every transaction cycle module.

Question 16

The chart of accounts of a fast-food restaurant would probably include

		a list of customers.
		a list of financial statement accounts.
		a list of vendors.
		a list of employees.

Question 17

Which statement below regarding the AIS is false?

		Traditionally, most AIS have been designed so that both financial and operational data are stored in a manner that facilitates their integration in reports.
		The AIS must be able to provide managers with detailed and operational information about the organization's performance.
		Both traditional financial measures and operational data are required for proper and complete evaluation of performance.
		The AIS was often just one of the information systems used by an organization to collect and process financial and nonfinancial data.

Question 18

In Petaluma, California, electric power is provided to consumers by Pacific Power. Each month Pacific Power mails bills to 186,000 households and then processes payments as they are received. What is the best way for this business to ensure that payment data entry is efficient and accurate?

		well-designed paper forms
		turnaround documents
		source data automation
		sequentially numbered bills

Question 19

Data must be converted into information to be considered useful and meaningful for decision making. There are seven characteristics that make information both useful and meaningful. If the same information can be reproduced by two independent and knowledgeable people, it is representative of the characteristic of

		verifiability.
		truthful.
		relevance.
		reliability.

Question 20

		entity.
		attribute.
		field.
		record.

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ACTG 2011 Chapter Notes - Chapter 5: Working Capital, Deferred Income, Free Cash Flow

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