Accounting Information Systems A

Practitioner Emphasis 7th Edition

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Chapter 10

The Purchasing Process

MULTIPLE CHOICE QUESTIONS

1. What is a common flow of data in the purchasing process?

A. Sales order processing, shipping, invoicing, and receiving cash
B. Receiving inventory, storing inventory, and shipping inventory
C. Ordering goods, receiving, invoicing, and disbursing cash
D. Ordering goods, shipping, and disbursing cash
C

2. Why are audit trails for the purchasing process somewhat more complicated than
those for the revenue process?
A. The revenue process involves the revenue recognition principle.
B. The purchasing process usually includes only a single journal entry and,
therefore, provides inadequate support.
C. The purchasing process may involve two journal entries often made at
difference times.
D. The revenue process is vulnerable to errors when posting from the cash
receipts journal.
C

3. What is the most voluminous task in the purchasing process?

A. Accounts payable data entry
B. Purchase order data entry
C. Cash payments data entry
D. Receiving data entry
B

4. Which of the following is true about retainages?

A. Most organizations, with the exception of construction contractors, must
have retainages.
B. Most organizations have this feature in its payables module.
C. Retainages are more applicable to payables than to receivables.
D. Retainages provide additional assurance that an agreed upon task will be
completed.
D

5. What are alternative names for the purchasing process?

A. Expenditure, receiving, procurement
 B. Receiving, expenditure, acquisition
C. Ordering, receiving, procurement
D. Expenditure, procurement, acquisition
D

6. “Resources” in the purchasing process refer to what?

A. To tangible goods and to intangible services
B. To tangible and intangible goods and to services
C. To intangible goods and to tangible services
D. To intangible goods and to services
B

7. Which of the following is not correct with regard to goods and services?
A. Goods and services do not include services provided by the organization’s
employees as these are not external goods or services.
B. Goods and services are purchased to meet an organization’s needs.
C. In recent years, considerable debate has brewed over how much
competition organizations should foster among their vendors.
D. While organizations commonly use only one accounting firm, they have
traditionally dealt with larger numbers of raw materials and merchandise
vendors.
A

8. When is purchasing initiated?

A. When inventory records indicate that the quantity on hand has reached the
average order size
B. When an order has been placed with the vendor
C. When a manager authorizes a purchase requisition and forwards it to the
purchasing department
D. When a manager approves a purchase order
C

9. Where are purchase order data stored?

A. Completed purchase order file
B. Open invoice file
C. Inventory order file
D. Open purchase order file
D

10. Which of the following initiates a bidding situation among suppliers?

A. Request for quotation; request for proposal
B. Request for bid response; request for quotation
C. Request for deliverables; request for quotation
D. Request for proposal; request for bid response
A
11. Which of the following statements is false?
A. Payment for goods and services typically makes the largest demand on an
organization’s cash.
B. Most commonly, after a purchase order has been approved, a manager will
then deal with vendors directly.
C. The order for goods and services has traditionally been in the form of a
paper purchase order that is mailed to a vendor.
D. Purchasing personnel are responsible for periodically reviewing the file
records and following up on unfilled orders.
B

12. Which of the following statements is true?

A Petty cash limits tend to smaller in small organizations and higher in larger
organizations.
B. Actual disbursement of cash is the responsibility of the accounts payable
department.
C. Cash disbursements to a vendor may not be made from petty cash.
D. It is not wise to “net out” a payable to and a receivable from a trading
partner.
D

13. What should disbursement records include?

A. Date, name of payee, amount of check, and description of good or service
B. Date, name of payee, amount of check, and vendor’s invoice number
C. Date, name and number of payee, amount of check and vendor’s invoice
number
D. Date, name of payee, amount, description of good or service, and vendor’s
invoice number
C

14. What are the two major data entry processes?

A. Creation and issuance of purchase orders; recording of cash disbursements
B. Creation and issuance of purchase orders; recording of merchandise
received and services rendered
C. Recording of merchandise received and services rendered; recording of
cash disbursements
D. Creation and issuance of purchase orders; recording of accounts payable
B

15. Why is the automatic distribution entry useful in the accounts payable module?
A. An invoice must be channeled through several check points before
approval for payment is made.
B. There are many invoices that run through an organization’s accounts
payable cycle.
C. Any manager can pull up invoices in the form of exception or periodic
reports to determine any “red flags.”
 D. It permits the specification of a master account to which entries will be
made.
D

16. What is a unique aspect of vendor maintenance?

A. Add a new vendor
B. 1099 tasks
C. Deactivate a vendor
D. Tax Form 1099
B

17. An organization must have a regular schedule for making payments of invoices.
Which are criteria for selection of invoices for payment?
A. Select all invoices coming due on or before a specified date
B. Select all invoices with a specified vendor
C. All of the above
D. None of the above
C

18. Which of the following are principal reports required for effective management of
the purchasing process?
A. Vendor performance; outstanding purchase orders
B. Vendor invoices; discounts lost
C. All of the above
D. B only
C

19. Where is there rarely a deficiency in the audit trail between?

A. Purchases journal and cash disbursements
B. Purchases journal and vendor accounts
C. Vendor accounts and cash disbursements
D. Cash disbursements and vendor accounts
D

20. Which is an example of an acquired good?

A. Patents and janitorial services
B. Computer programs and consultants
C. Fixed assets and raw materials
D. Catering company and accounting firms
C

21. What is a major source of purchasing errors?

A. Data entry errors
B. Not setting budgets for managers
C. Not validating the purchase order
D. EDI errors
A

22. What documents the receipt of goods?

A. Receipt verification
B. Ticket
C. Purchase validation
D. Invoice
B

23. When do disbursement activities begin?

A. Upon receipt of goods
B. After validation of receipt of goods
C. Upon approval of the invoice
D. After data has been keyed into the open invoice file
C

24. When is a cash requirements forecast prepared?

A. After invoices have been approved for payment
B. After a schedule of aged accounts payable has been prepared
C. Before a schedule of aged accounts payable has been prepared
D. At regular intervals
D

25. What are listings of the cash disbursements transaction file are referred to?
A. Accounts payable master file
B. Check register
C. Invoice register
D. Vendor master file
B

26. Which of the following is effected through the Purchase Order module?
A. Issuance of purchase orders
B. Monitoring of outstanding purchase orders
C. Reporting on outstanding purchase orders
D. All of the above
D

27. Which of the following is false regarding the accounts payable module?
A. Single checks issued by a company are referred to as manual checks.
B. A batch of checks may be posted after a proof list is prepared.
C. Printing batches of checks is an efficient way of issuing checks.
D. Posting may be invoked several times a day.
A

28. After an organization compares the vendor invoice with the purchase order data
and the receiving data, the invoice data are then keyed into what file?
 A. Purchase order file
B. Open invoice file
C. Accounts payable file
D. Receiving transaction file
B

29. Recording a payable after the invoice is matched with other documents requires
which journal entry?
A. Debit to cash; credit to accounts payable
B. Debit to accounts payable; credit to unbilled payables
C. Debit to unbilled payables; credit to cash
D. Debit to unbilled payables; credit to accounts payable
D

30. What has replaced the traditional paper purchase order?

A. Electronic Data Exchange
B. Facsimile
C. Optical scanners
D. Graphical user interfaces
A

31. After an organization compares the vendor invoice with the purchase order data
and the receiving data, the invoice data are then keyed into which file?
A. Open purchase order file.
B. Open vendor invoice file.
C. Open accounts transaction file.
D. Open customer invoice file.
B

32. Which of the following are the principal reports required for the effective
management of the purchasing process?
A. Vendor performance.
B. Outstanding sales orders.
C. Discounts taken.
D. All of the above.
A

33. Which of the following is NOT a reason why a company would be motivated to
use an EDI system for purchase orders?
A. With an EDI system, purchase orders can be sent through the computer to
a vendor.
B. An EDI system is inexpensive to purchase and easy to implement.
C. EDI systems reduce the possibility of human data entry error.
D. With the computerized EDI system, there is less paperwork involved.
B
34. What are two major data entry processes (think of the processes that require the
most entry items per transaction)?
A. Creation and issuance of purchase orders; recording of cash
disbursements.
B. Creation and issuance of purchase orders; recording of merchandise
received and services rendered.
C. Recording of merchandise received and services rendered; recording of
cash disbursements.
D. Creation and issuance of purchase orders; recording of accounts payable.
B

35. Which of the following describes the best physical control(s) over cash
disbursements?
A. All disbursements to vendors over $50 are made with prenumbered
checks.
B. Cash can be disbursed to vendors when approved by the purchasing
manager.
C. Access to inventory is limited to authorized personnel only.
D. All of the above are good physical controls over cash disbursements.
A

36. Which of the following is TRUE regarding the segregation of duties in the
purchasing process?
A. The authority to approve disbursement vouchers should be separate from
the authority to sign checks.
B. Segregation of computerized functions can be attained through the use of
passwords, file/record locks, and designated terminal access.
C. The password system allows a receiving clerk to read, but not write to, an
open purchase order.
D. All of the above are true regarding the segregation of duties in the
purchasing process.
D

37. Which of the following control activities ensure that the hours worked by a
contractor are valid?
A. The contractor provides a weekly printout of time charged per job from his
company’s system.
B All employee time should be positive and bear a reasonable relationship to
the standard 40-hour work week.
C. Claims for large hours or excessive wage rates are reviewed quarterly by
the Vice President of Human Resources.
D. The contracting office provides the names and tax identification numbers
of all contractors prior to the processing of payroll.
B
38. Which of the following represent batch controls for the processing of purchase
orders?
A. Control totals.
B. Record counts.
C. Hash totals.
D. All of the above are batch controls that would be used in the processing of
purchase orders.
D

39. Which of the following modules would you expect to find in the purchasing
function?
A. Sales Order Processing, Accounts Payable, Vendor Invoicing,
Disbursements.
B. Purchase Order Processing, Accounts Receivable, Receiving, Vendor
Invoicing.
C. Purchase Order Processing, Accounts Payable, Vendor Invoicing,
Disbursements.
D Sales Order Processing, Accounts Payable, Vendor Invoicing, Receiving,
Cash Receipts.
C

40. Which of the following are actions that result from the receipt of a properly
authorized purchase requisition?
A. Issuance of a purchase order.
B. Adding the record to the open purchase order file.
C. Both a and b.
D. Neither a nor b.
C

41. The following actions are associated with which of the following triggers in the
purchasing process:
A. Associate/match purchase order, receiving report, vendor invoice.
B. Add to open vendor invoice file.
C. Update vendor master file.
D. Receipt of goods.
E. Shipment to customer.
F. Arrival of due date for payment.
G. None of the above.
D

42. Which of the following actions result from the disbursement of cash for payment
in the purchasing process?
A. Creation of the vendor invoice file.
B. Creation of a new record in the cash disbursement file.
C. Closing of the open sales order file record.
D. Closing of the receiving transaction file record.
B

43. Which of the following is/are the principal report(s) required for the effective
management of the purchasing process?
A. Vendor performance.
B. Outstanding sales orders.
C. Discounts taken.
D. All of the above.
A

44. After an organization compares the vendor invoice with the purchase order data
and the receiving data, the invoice data are then keyed into which file?
A. Open purchase order file.
B. Open vendor invoice file.
C. Open accounts transaction file.
D. Open customer invoice file.
B

45. Which of the following is NOT a reason why a company would be motivated to
use an EDI system for purchase orders?
A. With an EDI system, purchase orders can be sent through the computer to
a vendor.
B. An EDI system is inexpensive to purchase and easy to implement.
C. EDI systems reduce the possibility of human data entry error.
D. With the computerized EDI system, there is less paperwork involved.
B

TRUE / FALSE

1. Warehouse personnel are responsible for periodically reviewing the open

purchase order file and following up on unfilled orders.
F

2. Competitive bidding is a relatively uncomplicated procedure in that the lowest

priced bidder that can meet the needs of the organization will be accepted.
F

3. The delivery of goods or provision of contracted services places the organization

under an obligation to pay the vendor.
T

4. Financial planners want an aging that monitors the expected timeliness of delivery
while purchasing officers desire an aging that estimates future cash requirements.
F
5. Providing managers with budgets delegates authority to managers to spend up to a
prescribed ceiling on goods and services related to their assigned responsibilities.
T

6. An organization should compare the vendor’s invoice with the purchase order
data and the open invoice file.
F

7. Petty cash limits often tend to be higher in small organizations than they are in
large, well-run organizations.
T

8. A listing of the cash disbursements transactions file is referred to as the cash

disbursements journal, or check register.
T

9. In most accounting information systems, the purchasing function is represented

by two modules: purchase order and receiving, sometimes referred to as the
vendor module.
F

10. Rarely is there a deficiency in the audit trail between the cash disbursements
journal and the vendor accounts since the check number is ordinarily used as a
posting reference.
T

11. The purchasing process normally includes purchase order processing, receiving,
and accounts payable.
T

12. While a budget is important for planning and control, it does not have any special
purpose in the purchasing process.
F

13. Because purchase orders are not completed transactions, they do not need to be
stored in a file.
F

14. An organization is not under an obligation to pay a vendor until the organization
receives the vendor’s invoice.
F

15. Two reports that are helpful to management in selecting invoices to pay are the
cash requirements forecast and the schedule of aged accounts payable.
T
16. Cash disbursements to vendors are recorded in the cash disbursements transaction
file which is then used to update the open vendor invoice file and the vendor
master file.
T

17. In most AISs, the purchasing function is represented by two modules-purchase

order and accounts receivable.
F

18. The addition of a new vendor is handled in the vendor account maintenance
function of the purchase order module.
F

19. The most common deficiency in audit trails in the purchasing process is postings
from the cash disbursements transaction file.
F

20. Retainages are commonly required for construction contractors.

T

21. The use of prenumbered checks is an effective preventive control in the

purchasing process.
T

22. Invoices for received items not yet paid are stored in the purchases transaction
file.
F

23. For a purchase order system to be effective, it must be a real-time system.

F

SHORT ANSWER/ESSAY QUESTIONS

1. List and explain the activities in the purchasing process.

Answer:
Procuring goods and vendor services. Goods and services are purchased to
meet an organization’s needs. Goods may consist of raw materials, parts or
components, supplies, merchandise, fixed assets, or intangibles such as patents or
computer programs. Acquired services included those provided by contractors,
catering companies, janitorial companies, consultants, law firms, and accounting
firms. These services also include those provided by the organization’s
employees.
Paying for procured goods and vendor services. Vendors must be paid for the
goods and services they provide.
2. Define and explain the purpose of retainages.

Answer:
Retainages are most commonly required for construction contractors. Most large
construction contracts require progress payments as certain milestones in the
project are reached. Assume that a school district awards a $1 million
construction contract so that as each one-fourth of the contract is completed, one-
fourth of the contract amount is to be paid, with a 10 percent deduction (or
retainage) to assure completion of the contract. When the contract is complete
and the building is accepted, then the final payment is due plus the earlier
amounts retained. The purpose is to provide additional assurance that the
contractor will complete the agree upon task to the satisfaction of the company.

3. Describe some factors which may complicate competitive bidding.

Answer:
Several factors may complicate competitive bidding. First, only one or two
vendors may choose to respond to the solicitation. The other vendors may feel
that the vendor would not be worthwhile or that they have little expectations of
winning. Second, several vendors may respond, but the purchasing department
may decide to look elsewhere for the required goods or services and not to accept
any of the bids. Third, where complex goods or services are involved, the
vendors’ proposals may vary so much that the purchasing agent and requesting
managers find themselves trying to compare “applies with oranges.”

4. Identify and describe at least three principal reports required for effective
management of the purchasing process.

Answer:
Students may choose any three of the following to identify and describe.
Vendor performance report. Helps to monitor the effectiveness of vendors in
achieving price, quality, and delivery promises.
Future cash requirements. Useful for financial planners so that estimates can be
made of future cash requirements arising from the purchase orders.
Expected timeliness of delivery. Purchasing officers can maintain contact with
suppliers and obtain assurance that all actions are being taken so that merchandise
will arrive by the scheduled dates. Whereas this aging report for purchasing
officers will include all purchase orders, another PO report will include only those
POs related to shipments expected to arrive in the immediate future. This report
can be used to anticipate these arrivals at the receiving dock and to reschedule
personnel and equipments so that the unloading and placing of merchandise in
stock is expedited.
Cash budget. This report is integrated along with the PO cash requirements
forecast.
Discounts lost report. Used to judge the efficacy of a company’s cash payments
operation.
5. Identify and describe the two data entry points for the purchasing process that
attention must be focused on.

Answer:
Purchase order entry. Data entry for purchase points is likely the most
voluminous task in the purchasing process. All the detail of what you wish to
order must be entered into the system, although some efficiencies have been
designed into the process through lookup tables.
Accounts payable data entry. This includes purchase transactions and cash
payments transactions. Cash payments transactions require that you select
invoices to pay.

6. What are the advantages of EDI over paper purchase orders?

Answer:
By linking the accounting information system of the purchasing organization with
its vendors, EDI speeds up the purchasing process, reduces the costs of
paperwork, and eliminates data entry errors.

7. What are some of the key reports required for effective management of the
purchasing process?

Answer:
Some key reports are the vendor performance report, PO cash requirements
forecast, expected deliveries report, discounts lost report, and schedule of aged
accounts payable.

8. What is the purpose of the unbilled payables account in the purchasing process
and when it is debited and credited?

Answer:
The purpose of the unbilled payables account is to allow a purchaser to record
receipt of goods before receiving the vendor invoice. The account is credited
when inventory items are received. (Inventory is debited.) When the vendor
invoice is received, unbilled payables is debited and accounts payable is credited.

9. List two reports generated by the purchasing process and indicate what they are
used for.

Answer:
Vendor performance (reviews performance of vendors--e.g., timeliness, defective
goods), outstanding purchase orders (unfilled orders, aging, cash requirements,
monitor deliveries), PO cash requirements, discounts lost (judges efficacy of cash
payment operations).

10. Define electronic data interchange (EDI). List 3 of the advantages of

implementing an EDI system.
 Answer:
EDI replaces the traditional paper purchase order. Involves an electronic message
transmitted from the purchasing organization's computer to the vendor's
computer. Advantages include: speeding up the purchasing process, reducing the
costs of paperwork, eliminating/reducing data entry errors.

11. List three of the four efficiency features for data entry AND give examples of
each..

Answer:
Recurring entries (depreciation, interest accrual), automatic distribution
entries/allocation entries (departmental allocation of tax bill/property tax), dollars
v. cents (format to have decimal), auto-enter (data with fixed number of
characters, automatically moves to next field).

12. Discuss two of the risks associated with the procurement of vendor goods and
services.

Answer: 1) Risks related to improper purchases: e.g., purchases made for

individual (as opposed to organizational) use, purchases of supplies not needed,
purchases recorded incorrectly (or not at all), or purchases made with unfavorable
payment terms. 2) Risk related to the payment of wages: e.g., wages paid for
unauthorized or incomplete work, wages paid to fictitious employees, wages paid
based on erroneous wage rates, payroll expenses/taxes incorrectly classified, or
incorrect deductions/withholding.

13. Discuss risks associated with the payment of invoices (i.e., disbursement of cash)
in the purchasing process.

Answer:
Payment made for goods/services that are not authorized or have not been
received, discounts lost because of late payments, misappropriation of discounts
taken, duplicate payments, forged signatures/endorsements, or alterations to the
vendor invoice or payee on a disbursement.

14. Explain why an analysis of vendor performance is an important control in the

purchase function.

Answer:
Consistent and regular review of vendor performance is important to determine 1)
how long it takes to receive an order, 2) the quality of the orders received (e.g.,
rejected shipment report), and 3) how often items are back-ordered aid
management in determining whether a vendor is meeting the company’s
 expectations. Reviews of purchasing agent performance to determine productivity
and compliance with set procedures also help management monitor the
purchasing process. Performance reviews of the personnel who inspect shipments
received should also be done regularly to make sure inspectors are not receiving
kickbacks or rejecting too many shipments.

15. Discuss the typical authorization controls one would expect to find in the
purchasing process in information processing.

Answer:
Proper authorization is needed to initiate a purchase order, to receive goods and
services, to capture/approve employee data, and to disburse cash. Authority to
initiate the purchasing process generally resides with the departmental manager.
Purchases are generally handled by a purchasing agent (after proper authorization
of the order has been verified). Authorized vendors and or purchase levels should
be reviewed and updated as necessary. Rejected purchase orders should be
captured by the system in an exception report.

The receipt of goods should be verified by a receiving clerk, with the quantities
received verified against the original order. The goods received should also be
compared to the vendor’s shipping document. The clerk can verify this
information through the open purchase order file.

The use of electronic time cards aids in the capture of employee time data,
allowing supervisors to verify employee time (especially overtime or special-time
rates). Limits can be set so that, for example, an employee cannot input time in
excess of 60 hours per week without a supervisor’s authorization.

The accounts payable department has the authority to disburse cash. The treasurer
has the final responsibility to determine that proper supporting data has been
entered into the system to substantiate the claim for payment. The computer can
compare the purchase order data and the receiving report with the vendor invoice
data before a voucher is prepared. Checks in excess of a pre-set amount should
require a second signature. The meter readings on the automatic check-signing
equipment and all prenumbered checks should be properly accounted for (i.e.,
issued, voided, unused).

16. Describe output controls typically found in the purchasing process.

Answer:
Output controls typically found in the purchasing process include the preparation
of reports such as the cash disbursements report (i.e., check register). The listing
of check numbers can be compared to the number of checks issued/printed and
the number of vouchers processed. The bank reconciliation should be performed
by an individual who is independent of check printing and signing. Care must be
 taken to ensure that all paychecks are properly distributed to employees and that
all vendor checks are mailed.

17. List four of the five actions that result from the receipt of merchandise from a
vendor.

Answer:
Physical count of shipment, create inventory adjustments transaction file (if
needed), create purchases and receiving transaction file, close record in open
purchase order file, update inventory master file.