Chapter 9 —The Revenue Cycle a) credit has been approved

b) the customer is billed for the exact quantity shipped

TRUE/FALSE c) the goods shipped match the goods ordered
d) inventory records are reduced for the goods shipped
1. The packing slip is also known as the shipping notice.
ANS: F ANS: C
2. The bill of lading is a legal contract between the buyer and the
seller. 3. The adjustment to accounting records to reflect the decrease in
ANS: F inventory due to a sale occurs in the
3. Another name for the stock release form is the picking ticket. a) warehouse
ANS: T b) shipping department
4. Warehouse stock records are the formal accounting records for c) billing department
inventory. d) inventory control department
ANS: F
5. The purpose of the invoice is to bill the customer. ANS: D
ANS: T
4. Which document triggers the revenue cycle?
6. In most large organizations, the journal voucher file has
a) the sales order
replaced the formal general journal.
b) the customer purchase order
ANS: T
c) the sales invoice
7. The cash receipts journal is a special journal.
d) the journal voucher
ANS: T
8. In the revenue cycle, the internal control “limit access” applies ANS: B
to physical assets only.
ANS: F 5. Copies of the sales order can be used for all of the following
9. In real-time processing systems, routine credit authorizations are except
automated. ANS: T a) purchase order
10. In a computerized accounting system, segregation of functions b) credit authorization
refers to inventory control, accounts receivable, billing, and c) shipping notice
general ledger tasks. d) packing slip
ANS: F
11. A written customer purchase order is required to trigger the ANS: A
sales order system.
ANS: F 6. The purpose of the sales invoice is to
12. Inventory control has physical custody of inventory. a) record reduction of inventory
ANS: F b) transfer goods from seller to shipper
13. The principal source document in the sales order system is the c) bill the customer
sales order. d) select items from inventory for shipment
ANS: T ANS: C
14. Sales orders should be prenumbered documents.
ANS: T 7. The customer open order file is used to
15. Integrated accounting systems automatically transfer data a) respond to customer queries
between modules. b) fill the customer order
ANS: T c) ship the customer order
16. If a customer submits a written purchase order, there is no need d) authorize customer credit
to prepare a sales order.
ANS: F ANS: A
17. Sales return involves receiving, sales, credit, and billing
departments, but not accounts receivable. 8. The stock release copy of the sales order is not used to
ANS: F a) locate and pick the items from the warehouse shelves
18. A remittance advice is a form of turn-around document. b) record any out-of-stock items
ANS: T c) authorize the warehouse clerk to release custody of the
19. A bill of lading is a request for payment for shipping charges. inventory to shipping
ANS: F d) record the reduction of inventory
20. In point of sale systems, authorization takes the form of
ANS: D
validation of credit card charges.
ANS: T 9. The shipping notice
a) is mailed to the customer
MULTIPLE CHOICE
b) is a formal contract between the seller and the shipping
1. The revenue cycle consists of company
a) one subsystem–order entry c) is always prepared by the shipping clerk
b) two subsystems–sales order processing and cash receipts d) informs the billing department of the quantities shipped
c) two subsystems–order entry and inventory control
ANS: D
d) three subsystems–sales order processing, credit
authorization, and cash receipts 10. The billing department is not responsible for
a) updating the inventory subsidiary records
ANS: B
b) recording the sale in the sales journal
2. The reconciliation that occurs in the shipping department is c) notifying accounts receivable of the sale
intended to ensure that d) sending the invoice to the customer
ANS: A ANS: B

11. Customers should be billed for backorders when 18. Which document is included with a shipment sent to a
a) the customer purchase order is received customer?
b) the backordered goods are shipped a) sales invoice
c) the original goods are shipped b) stock release form
d) customers are not billed for backorders because a backorder c) packing slip
is a lost sale d) shipping notice

ANS: B ANS: C

12. Usually specific authorization is required for all of the following 19. Good internal controls in the revenue cycle should ensure all of
except the following except
a) sales on account which exceed the credit limit a) all sales are profitable
b) sales of goods at the list price b) all sales are recorded
c) a cash refund for goods returned without a receipt c) credit is authorized
d) write off of an uncollectible account receivable d) inventory to be shipped is not stolen

ANS: B ANS: A

13. Which of following functions should be segregated? 20. Which control does not help to ensure that accurate records are
a) opening the mail and making the journal entry to record kept of customer accounts and inventory?
cash receipts a) reconcile accounts receivable control to accounts receivable
b) authorizing credit and determining reorder quantities subsidiary
c) maintaining the subsidiary ledgers and handling customer b) authorize credit
queries c) segregate custody of inventory from record keeping
d) providing information on inventory levels and reconciling d) segregate record keeping duties of general ledger from
the bank statement accounts receivable

ANS: A ANS: B

14. Which situation indicates a weak internal control structure? 21. Internal controls for handling sales returns and allowances do
a) the mailroom clerk authorizes credit memos not include
b) the record keeping clerk maintains both accounts receivable a) computing bad debt expense using the percentage of credit
and accounts payable subsidiary ledgers sales
c) the warehouse clerk obtains a signature before releasing b) verifying that the goods have been returned
goods for shipment c) authorizing the credit memo by management
d) the accounts receivable clerk prepares customer statements d) using the original sales invoice to prepare the sales returns
every month slip

ANS: A ANS: A

15. The most effective internal control procedure to prevent or 22. The printer ran out of preprinted sales invoice forms and several
detect the creation of fictitious credit memoranda for sales sales invoices were not printed. The best internal control to
returns is to detect this error is
a) supervise the accounts receivable department a) a batch total of sales invoices to be prepared compared to
b) limit access to credit memoranda the actual number of sales invoices prepared
c) prenumber and sequence check all credit memoranda b) sequentially numbered sales invoices
d) require management approval for all credit memoranda c) visual verification that all sales invoices were prepared
d) none of the above will detect this error
ANS: D
ANS: A
16. The accounts receivable clerk destroys all invoices for sales
made to members of her family and does not record the sale in 23. Which department prepares the bill of lading?
the accounts receivable subsidiary ledger. Which procedure will a) sales
not detect this fraud? b) warehouse
a) prenumber and sequence check all invoices c) shipping
b) reconcile the accounts receivable control to the accounts d) credit
receivable subsidiary ledger
c) prepare monthly customer statements ANS: C
d) reconcile total sales on account to the debits in the accounts
24. A remittance advice is
receivable subsidiary ledger
a) used to increase (debit) an account receivable by the cash
ANS: C received
b) is a turn-around document
17. Which department is least likely to be involved in the revenue c) is retained by the customer to show proof of payment
cycle? d) none of the above
a) credit
b) accounts payable ANS: B
c) billing
25. A weekly reconciliation of cash receipts would include
d) shipping
comparing
 a) the cash prelist with bank deposit slips 33. Which journal is not used in the revenue cycle?
b) the cash prelist with remittance advices a) cash receipts journal
c) bank deposit slips with remittance advices b) sales journal
d) journal vouchers from accounts receivable and general c) purchases journal
ledger d) general journal

ANS: A ANS: C

26. At which point is supervision most critical in the cash receipts 34. Periodically, the general ledger department receives all of the
system? following except
a) accounts receivable a) total increases to accounts receivable
b) general ledger b) total of all sales backorders
c) mail room c) total of all sales
d) cash receipts d) total decreases in inventory

ANS: C ANS: B

27. EDI trading partner agreements specify all of the following 35. The credit department
except a) prepares credit memos when goods are returned
a) selling price b) approves credits to accounts receivable when payments are
b) quantities to be sold received
c) payment terms c) authorizes the granting of credit to customers
d) person to authorize transactions d) none of the above

ANS: D ANS: C

28. A cash prelist is 36. Adjustments to accounts receivable for payments received from
a) a document that records sales returns and allowances customers is based upon
b) a document returned by customers with their payments a) the customer’s check
c) the source of information used to prepare monthly b) the cash prelist
statements c) the remittance advice that accompanies payment
d) none of the above d) a memo prepared in the mailroom

ANS: D ANS: C

29. An advantage of real-time processing of sales is 37. The revenue cycle utilizes all of the following files except
a) the cash cycle is lengthened a) credit memo file
b) current inventory information is available b) sales history file
c) hard copy documents provide a permanent record of the c) shipping report file
transaction d) cost data reference file
d) data entry errors are corrected at the end of each batch
ANS: D
ANS: B
38. All of the following are advantages of real-time processing of
30. Commercial accounting systems have fully integrated modules. sales except
The word “integrated” means that a) The cash cycle is shortened
a) segregation of duties is not possible b) Paper work is reduced
b) transfer of information among modules occurs c) Incorrect data entry is difficult to detect
automatically d) Up-to-date information can provide a competitive
c) batch processing is not an option advantage in the marketplace
d) separate entries are made in the general ledger accounts and
the subsidiary ledgers ANS: C

ANS: B

31. The data processing method that can shorten the cash cycle is
a) batch, sequential file processing
b) batch, direct access file processing
c) real-time file processing
d) none of the above

ANS: C

32. Which of the following is not a risk exposure in a

microcomputer accounting system?
a) reliance on paper documentation is increased
b) functions that are segregated in a manual environment may
be combined in a microcomputer accounting system
c) backup procedures require human intervention
d) data are easily accessible

ANS: A
Chapter 10—The Expenditure Cycle Part I: Purchases and Cash b) record receipt of goods from vendors
Disbursements Procedures c) authorize the purchasing department to order goods
d) bill for goods delivered
TRUE/FALSE
ANS: C
1. Purchasing decisions are authorized by inventory control.
ANS: T 2. The purpose of the receiving report is to
2. The blind copy of the purchase order that goes to the receiving a) order goods from vendors
department contains no item descriptions. b) record receipt of goods from vendors
ANS: F c) authorize the purchasing department to order goods
3. Firms that wish to improve control over cash disbursements use d) bill for goods delivered
a voucher system.
ANS: T ANS: B
4. In a voucher system, the sum of all unpaid vouchers in the
3. All of the following departments have a copy of the purchase
voucher register equals the firm’s total voucher payable balance.
order except
ANS: T
a) the purchasing department
5. The accounts payable department reconciles the accounts
b) the receiving department
payable subsidiary ledger to the control account.
c) accounts payable
ANS: F
d) general ledger
6. The use of inventory reorder points suggests the need to obtain
specific authorization. ANS: D
ANS: F
7. Proper segregation of duties requires that the responsibility 4. The purpose of the purchase order is to
approving a payment be separated from posting to the cash a) order goods from vendors
disbursements journal. b) record receipt of goods from vendors
ANS: T c) authorize the purchasing department to order goods
8. A major risk exposure in the expenditure cycle is that accounts d) approve payment for goods received
payable may be overstated at the end of the accounting year.
ANS: F ANS: A
9. When a trading partner agreement is in place, the traditional
three way match may be eliminated. 5. The open purchase order file in the purchasing department is
ANS: T used to determine
10. Authorization of purchases in a merchandising firm occurs in the a. the quality of items a vendor ships
inventory control department. b. the best vendor for a specific item
ANS: T c. the orders that have not been received
11. A three way match involves a purchase order, a purchase d. the quantity of items received
requisition, and an invoice. ANS: C
ANS: F
12. Authorization for a cash disbursement occurs in the cash 6. The purchase order
disbursement department upon receipt of the supplier’s invoice. a) is the source document to make an entry into the
ANS: F accounting records
13. An automated cash disbursements system can yield better cash b) indicates item description, quantity, and price
management since payments are made on time. c) is prepared by the inventory control department
ANS: T d) is approved by the end-user department
14. Permitting warehouse staff to maintain the only inventory
records violates separation of duties. ANS: B
ANS: T
15. A purchasing system that employs electronic data interchange 7. The reason that a blind copy of the purchase order is sent to
does not use a purchase order. receiving is to
ANS: F a) inform receiving when a shipment is due
16. Inventory control should be located in the warehouse. b) force a count of the items delivered
ANS: F c) inform receiving of the type, quantity, and price of items to
17. Inspection of shipments in the receiving department would be be delivered
improved if the documentation showed the value of the d) require that the goods delivered are inspected
inventory.
ANS: B
ANS: F
18. One reason for authorizing purchases is to enable efficient 8. The receiving report is used to
inventory management. a) accompany physical inventories to the storeroom or
ANS: T warehouse
19. If accounts payable receives an invoice directly from the b) advise the purchasing department of the dollar value of the
supplier it needs to be reconciled with the purchase order and goods delivered
receiving report. c) advise general ledger of the accounting entry to be made
ANS: T d) advise the vendor that the goods arrived safely
20. Supervision in receiving is intended to reduce the theft of assets.
ANS: T ANS: A
MULTIPLE CHOICE 9. When a copy of the receiving report arrives in the purchasing
department, it is used to
1. The purpose of the purchase requisition is to a) adjust perpetual inventory records
a) order goods from vendors
 b) record the physical transfer of inventory from receiving to c) the voucher system permits the firm to consolidate
the warehouse payments of several invoices on one voucher
c) analyze the receiving department’s process d) many firms replace accounts payable with a voucher
d) recognize the purchase order as closed payable system

ANS: D ANS: B

10. The financial value of a purchase is determined by reviewing the 18. In the expenditure cycle, general ledger does not
a) packing slip a) post the journal voucher from the accounts payable
b) purchase requisition department
c) receiving report b) post the account summary from inventory control
d) supplier’s invoice c) post the journal voucher from the purchasing department
d) reconcile the inventory control account with the inventory
ANS: D subsidiary summary
11. Which document is least important in determining the financial ANS: C
value of a purchase?
a) purchase requisition 19. The documents in a voucher packet include all of the following
b) purchase order except
c) receiving report a) a check
d) supplier’s invoice b) a purchase order
c) a receiving report
ANS: A d) a supplier’s invoice
12. In a merchandising firm, authorization for the payment of ANS: A
inventory is the responsibility of
a) inventory control 20. To maintain a good credit rating and to optimize cash
b) purchasing management, cash disbursements should arrive at the vendor’s
c) accounts payable place of business
d) cash disbursements a) as soon as possible
b) on the due date
ANS: C c) on the discount date
d) by the end of the month
13. In a merchandising firm, authorization for the purchase of
inventory is the responsibility of ANS: C
a) inventory control
b) purchasing 21. The cash disbursement clerk performs all of the following tasks
c) accounts payable except
d) cash disbursements a) reviews the supporting documents for completeness and
accuracy
ANS: A b) prepares checks
c) signs checks
14. When purchasing inventory, which document usually triggers
d) marks the supporting documents paid
the recording of a liability?
a) purchase requisition ANS: C
b) purchase order
c) receiving report 22. When a cash disbursement in payment of an accounts payable is
d) supplier’s invoice recorded
a) the liability account is increased
ANS: D b) the income statement is changed
c) the cash account is unchanged
15. Because of time delays between receiving inventory and making
d) the liability account is decreased
the journal entry
a) liabilities are usually understated ANS: D
b) liabilities are usually overstated
c) liabilities are usually correctly stated 23. Authorization for payment of an accounts payable liability is the
d) none of the above responsibility of
a) inventory control
ANS: A b) purchasing
c) accounts payable
16. Usually the open voucher payable file is organized by
d) cash disbursements
a) vendor
b) payment due date ANS: C
c) purchase order number
d) transaction date 24. Of the following duties, it is most important to separate
a) warehouse from stores
ANS: B b) warehouse from inventory control
c) accounts payable and accounts receivable
17. Which of the following statements is not correct?
d) purchasing and accounts receivable
a) the voucher system is used to improve control over cash
disbursements ANS: B
b) the sum of the paid vouchers represents the voucher
payable liability of the firm
25. In a firm with proper segregation of duties, adequate supervision b) all checks signed by check-signing equipment
is most critical in c) checks over a certain dollar amount manually signed by the
a) purchasing treasurer
b) receiving d) checks over a certain dollar amount manually signed by the
c) accounts payable cash disbursements clerk
d) general ledger
ANS: C
ANS: B
33. The document which will close the open purchase requisition
26. The receiving department is not responsible to file is the
a) inspect shipments received a) purchase order
b) count items received from vendors b) vendor invoice
c) order goods from vendors c) receiving report
d) safeguard goods until they are transferred to the warehouse d) none of the above

ANS: C ANS: C

27. The major risk exposures associated with the receiving 34. Goods received are inspected and counted to
department include all of the following except a) determine that the goods are in good condition
a) goods are accepted without a physical count b) determine the quantity of goods received
b) there is no inspection for goods damaged in shipment c) preclude payment for goods not received or received in
c) inventories are not secured on the receiving dock poor condition
d) the audit trail is destroyed d) all of the above

ANS: D ANS: D

28. When searching for unrecorded liabilities at the end of an 35. If a company uses a standard cost system, inventory records can
accounting period, the accountant would search all of the files be updated from the
except a) vendor invoice
a) the purchase requisition file b) purchase order
b) the cash receipts file c) receiving report
c) the purchase order file d) purchase requisition
d) the receiving report file
ANS: C
ANS: B
36. If a company uses an actual cost system, inventory records can
29. In regards to the accounts payable department, which statement first be updated from the
is not true? a) vendor invoice
a) the purchase requisition shows that the transaction was b) purchase order
authorized c) receiving report
b) the purchase order proves that the purchase was required d) purchase requisition
c) the receiving report provides evidence of the physical
receipt of the goods ANS: A
d) d. the supplier’s invoice indicates the financial value of the
37. Copies of a purchase order are sent to all of the following except
ANS: B a) inventory control
b) receiving
30. In a computerized system that uses an economic order quantity c) general ledger
(EOQ) model and the perpetual inventory method, who d) accounts payable
determines when to reorder inventory?
a) the inventory control clerk ANS: C
b) the purchasing department
38. The receiving report
c) the vendor
a) is used to update the actual cost inventory ledger
d) the computer system
b) accompanies the goods to the storeroom
ANS: D c) is sent to general ledger
d) is returned to the vendor to acknowledge receipt of the
31. Firms can expect that proper use of a valid vendor file will result goods
in all of the following benefits except
a) purchasing agents will be discouraged from improperly ANS: B
ordering inventory from related parties
39. A supplier invoice
b) purchases from fictitious vendors will be detected
a) is included with the goods
c) the most competitive price will be obtained
b) shows what was ordered even if all was not shipped
d) the risk of purchasing agents receiving kickbacks and
c) is sent by vendor to accounts payable
bribes will be reduced
d) none of the above
ANS: C 40. The cash disbursement function is
a) part of accounts payable
32. In a real-time processing system with a high number of b) an independent accounting function
transactions, the best and most practical control over cash c) a treasury function
disbursements is to have d) part of the general ledger department
a) all checks manually signed by the treasurer