Answer Ch 01_02

By Lois Harrison,2014-09-20 11:54
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Answer Ch 01_02




    2.1 Table 2-1 lists some of the documents used in the revenue, expenditure, and human resources cycle. What kinds of input or output documents or forms would you find in the production (or conversion) cycle?

    Students will not know the names of the documents but they should be able to identify the tasks about which information needs to be gathered. Here are some of those tasks:

Requests for items to be produced

     Documents to plan production

     Schedule of items to be produced

     List of items produced, including quantity and quality

     Form to allocate costs to products

     Form to collect time spent on production jobs

     Form requesting raw materials for production process

     Documents showing how much raw materials are on hand

     Documents showing how much raw materials went into production

     List of production processes

     List of items needed to produce each product

     Documents to control movement of goods from one location to another

    2.2 With respect to the data processing cycle, explain the phrase “garbage in, garbage out.” How can you prevent this from happening?

    When garbage, defined as errors, is allowed into a system that error is processed and the resultant erroneous (garbage) data stored. The stored data at some point will become output. Thus, the phrase garbage in, garbage out. Data errors are even more problematic in ERP systems because the error can affect many more applications than an error in a non-integrated database.

    Companies go to great lengths to make sure that errors are not entered into a system. To prevent data input errors:

     Data captured on source documents and keyed into the system are edited by the computer

    to detect and correct errors and critical data is sometimes double keyed. Companies use turnaround documents to avoid the keying process.

     Companies use source data automation devices to capture data electronically to avoid

    manual data entry with its attendant errors.

     Well-designed documents and screens improve accuracy and completeness by providing

    instructions or prompts about what data to collect, grouping logically related pieces of

    information close together, using check off boxes or pull-down menus to present the


    Ch. 2: Overview of Business Processes

    available options, and using appropriate shading and borders to clearly separate data


     Data input screens are preformatted to list all the data the user needs to enter. Prenumbered source documents are used or the system automatically assigns a sequential

    number to each new transaction. This simplifies verifying that all transactions have been

    recorded and that none of the documents has been misplaced.

     The system is programmed to make sure company policies are followed, such as

    approving or verifying a transaction. For example, the system can be programmed to

    check a customer’s credit limit and payment history, as well as inventory status, before

    confirming a sale to a customer.

    2.3 What kinds of documents are most likely to be turnaround documents? Do an internet search to find the answer and to find example turnaround documents.

    Documents that are commonly used as turnaround documents include the following:

Utility bills

     Meter cards for collecting readings from gas meters, photocopiers, water meters etc Subscription renewal notices

     Inventory stock cards


     Checks (banks encode account info on the bottom of checks)

     Annual emissions inventory forms


     Adult Literary Information and Evaluation System forms


Students will find many other turnaround documents.

    Here are some URLs for turnaround document definitions and examples:,2542,t=turnaround+document&i=53248,00.asp

Here are some turnaround document images (1 long URL):

    2.4 The data processing cycle in Figure 2-1 is an example of a basic process found throughout nature. Relate the basic input/process/store/output model to the functions of the human body.

    There are a number of ways to relate the input/process/store/output model to the human


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body. Here are a few of them

     Brain. We read, see, hear, and feel things. We process that input in order to understand

    what it is and how it relates to us. We store that data in our brains and then process it

    again in order to produce solve problems, make decisions, etc., which represent output. Stomach. We take food in as input. It is processed to produce energy to fuel all bodily

    functions. If we eat more food than the body needs at any one time it is stored as fat. The

    output is walking, talking, thinking all functions fueled by the energy produced.

    Human waste is also an output of that process.

    Students will come up with other examples of how the input/process/store/output model applies to the human body

    2.5 Some individuals argue that accountants should focus on producing financial statements and leave the design and production of managerial reports to information systems specialists. What are the advantages and disadvantages of following this advice? To what extent should accountants be involved in producing reports that include more than just financial measures of performance? Why?

     There are no advantages to accountants focusing only on financial information. Both the accountant and the organization would suffer if this occurred. Moreover, it would be very costly to have two systems rather than one that captures and processes operational facts at the same time as it captures and reports financial facts.

    The main disadvantage of this is that accountants would ignore much relevant information about the organization’s activities. To the extent that such nonfinancial information (e.g.,

    market share, customer satisfaction, measures of quality, etc.) is important to management, the value of the accounting function would decline. Moreover, accountants have been trained in how to design systems to maximize the reliability of the information produced. If relevant information is not produced by the AIS, there is danger that the information may be unreliable because the people responsible for its production have not been trained in, or adequately aware of, the potential threats to reliability and the best measures for dealing with those threats.


    Ch. 2: Overview of Business Processes


    2.1 The chart of accounts must be tailored to an organization’s specific needs. Discuss how

    the chart of accounts for the following organizations would differ from the one presented for S&S in Table 2-2.

     Some of the changes in the chart of accounts for each type of entity include the following:

a. University

     No equity or summary drawing accounts. Instead, have a fund balances section for

    each type of fund.

     Several types of funds, with a separate chart of accounts for each. The current fund

    is used for operating expenses, but not capital expenditures. Loan funds are used to

    account for scholarships and loans. Endowment funds are used to account for

    resources obtained from specific donors, generally with the objective that principal

    be preserved and that income be used for a specific purpose. Plant funds are used

    for major capital expenditures. Most fund categories would be further divided into

    restricted and unrestricted categories.

     Unlikely to have Notes Receivable, but may have Accounts Receivable for students

    who pay tuition in installment payments.

     Tuition and fees would be one source of revenue. Others include gifts, investment

    income, sales of services, and, for public universities, state appropriations.

     Student loans are an asset; student deposits are a liability.

b. Bank

     Loans to customers would be an asset, some current others noncurrent, depending

    upon the length of the loan.

     No inventory

     Customer accounts would be liabilities.

     Classification of revenue would be among loans, investments, service charges, etc.

     No cost of goods sold.

c. Government Unit

     No equity or summary drawing accounts. Instead, have fund balances.

     Balance sheet shows two major categories: (1) assets and (2) liabilities and fund


     Separate chart of accounts for each fund (general fund, special revenue fund,

    capital projects fund, and debt service fund).


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     Revenue and expenditure accounts would be grouped by purpose (e.g., police,

    highways, sanitation, education, etc.).

     Encumbrance accounts

     Revenues would include taxes, licenses and permits, fines, and charges for specific


     Taxes receivable as a separate category due to importance. No cost of goods sold.

d. Manufacturing Company

     Several types of inventory accounts (raw materials, work-in-process, and finished


     Additional digits to code revenues and expenses by products and to code

    assets/liabilities by divisions.

e. Expansion of S&S

     Additional digits to code:

    ; Revenues and expenses by products and by stores

    ; Assets/liabilities by stores.


    Ch. 2: Overview of Business Processes

    2.2 Design a chart of accounts for SDC. Explain how you structured the chart of accounts to meet the company’s needs and operating characteristics. Keep total account code

    length to a minimum, while still satisfying all of Mace’s desires.

     (Adapted from the CMA Exam)

A six-digit code (represented by letters ABCDEF) is sufficient to meet SDC’s needs:

    A This digit identifies the 4 divisions plus the corporate office. One digit can

    accommodate up to 9 different divisions, assuming that no division would be zero.

    Thus, the number of divisions would have to more than double before the chart of

    accounts would have to be revised.

    B This digit represents major account types (asset, liability, equity, revenue, expense).

    There are only 6 categories, so one digit is sufficient.

    C This digit represents the major classification within account type:

     For balance sheet accounts, this represents specific sub-categories (current

    assets, plant and equipment, etc.), as only six categories are needed.

     For expense and revenue accounts, this digit represents the product group, as

    again there are only five products plus general costs.

    D This digit represents specific accounts or cost centers:

     For balance sheet accounts, this is the control account; one digit is adequate

    because the problem says no more than 10 categories.

     For expense accounts, this is the cost center; one digit is adequate because the

    problem indicates no more than 6 cost centers.

    EF These two digits represent the subsidiary accounts and natural expense categories:

     For expense accounts, these represent the 56 natural expense categories and

    variances for each cost center.

     For the balance sheet, these two digits accommodate up to 100 subsidiary



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    2.3 An audit trail enables a person to trace a source document to its ultimate effect on the financial statements or work back from amounts in the financial statements to source documents. Describe in detail the audit trail for the following:

    a. The audit trail for inventory purchases includes linking purchase requisitions, purchase

    orders, and receiving reports to vendor invoices for payment. All these documents would

    be linked to the check or EFT transaction used to pay for an invoice and recorded in the

    Cash Disbursements Journal. In addition, these documents would all be linked to the

    journal entry made to record that purchase. There would be a general ledger account

    number at the bottom of each column in the journal. The journal reference would appear

    in the General Ledger, Inventory Ledger, and Accounts Payable ledger.



    Purchase Receiving InvoiceOrderReport




    Cash PaymentDisbursements









    Ch. 2: Overview of Business Processes

    b. The audit trail for the sale of inventory links the customer order, sales order, and

    shipping document to the sales invoice. These documents are linked to the journal entry

    recording the sale of that merchandise. The invoice would also be linked to the cash

    received from the customer and to the journal entry to record that receipt.



    Shipping Sales OrderDocuments

    Sales Invoice






    Cash Receipts General







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    c. The audit trail for employee payroll links records of employee activity (time cards, time sheets, etc.) to paychecks and to the journal entry to record payment of payroll. In a manufacturing company, there would also be links to the job-time tickets used to allocate labor costs to specific products or processes.

    Employee Employee Time



    Payroll Disbursements

    Journal Journal



    Trial Balance

     Financial Statements


Ch. 2: Overview of Business Processes

    2.4 Your nursery sells various types and sizes of trees, bedding plants, vegetable plants,

    and shrubs. It also sells fertilizer and potting soil. Design a coding scheme for your


     Grading depends upon the instructor’s judgment about the quality of the coding scheme. The

    coding scheme should be either a group or block coding. In addition, the student’s solutions

    should provide sufficient detail in order to determine whether the solution represents a group

    or block coding scheme.

     An example block code is as follows (under each major heading the student would list the

    specific products offered for sale, such as 701 Fuji apple tree). Four digits instead of three

    would allow the nursery to list more products for sale.

     100 Flowers - Annual

     200 Flowers Perennial

     300 Vegetables

     400 Fruits

     500 Shrubs

     600 Trees- Flowering

     700 Trees Fruit and Nut

     If the nursery had four locations, a group code could be used with the first digit indicating the

    location (2 location digits would allow for more growth). Other digits could be added to the

    group code to indicate other ways of identifying products.


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