CHAPTER 13
THE EXPENDITURE CYCLE:
PURCHASING AND CASH DISBURSEMENTS
SUGGESTED ANSWERS TO DISCUSSION QUESTIONS
13.1 In this chapter and in Chapter 12 the controller of AOE played a major role in
evaluating and recommending ways to use IT to improve efficiency and
effectiveness. Should the company’s chief information officer make these decisions
instead? Should the controller be involved in making these types of decisions? Why
or why not?
13.2 Companies such as Wal-Mart have moved beyond JIT to VMI systems. Discuss the
potential advantages and disadvantages of this arrangement. What special controls,
if any, should be developed to monitor VMI systems?
1. Monitor inventory levels. At least at first, and then periodically thereafter, the retailer
should monitor inventory levels to determine whether the vendor is sending enough inventory
to prevent stock outs but not too much inventory that is slow to sell.
13.3 Procurement cards are designed to improve the efficiency of small noninventory
purchases. What controls should be placed on their use? Why?
13.4 In what ways can you apply the control procedures discussed in this chapter to
paying personal debts (e.g., credit card bills)?
Many people do not keep their credit card receipts as evidenced by receipts left at “pay–at-the-
pump” gas stations. If consumers do not keep their receipts, how do they know whether their
credit card bill is accurate? Thus, consumers should verify each charge on their bill to each
receipt.
13.5 Should every company switch from the traditional 3-way matching process
(purchase orders, receiving reports, and supplier invoices) to the 2-way match
(purchase orders and receiving reports) used in Evaluate Receipt Settlement (ERS)?
Why (not)?
13.6 Should companies allow purchasing agents to start their own businesses that
produce goods the company frequently purchases? Why? Would you change your
answer if the purchasing agent’s company was rated by an independent service, like
Consumer Reports, as providing the best value for price? Why?
The primary issue here is conflict of interest. If a purchasing manager owns a business that
supplies goods to his employer, how does the employer know that they are receiving the best
SUGGESTED ANSWERS TO THE PROBLEMS
13.1 a. A purchasing agent orders materials from a supplier that he partially owns.
b. Receiving-dock personnel steal inventory and then claim the inventory was sent
to the warehouse.
c. An unordered supply of laser printer paper delivered to the office is accepted
and paid for because the “price is right.” After jamming all of the laser printers,
however, it becomes obvious that the “bargain” paper is of inferior quality.
d. The company fails to take advantage of a 1% discount for promptly paying a
vendor invoice.
e. A company is late in paying a particular invoice. Consequently, a second invoice
is sent, which crosses the first invoice’s payment in the mail. The second invoice
is submitted for processing and also paid.
f. Inventory records show that an adequate supply of copy paper should be in
stock, but none is available on the supply shelf.
g. The inventory records are incorrectly updated when a receiving-dock employee
enters the wrong product number at the terminal.
h. A clerical employee obtains a blank check and writes a large amount payable to
a fictitious company. The employee then cashes the check.
i. A fictitious invoice is received and a check is issued to pay for goods that were
never ordered or delivered.
j. The petty cash custodian confesses to having “borrowed” $12,000 over the last
five years.
k. A purchasing agent adds a new record to the supplier master file. The company
does not exist. Subsequently, the purchasing agent submits invoices from the
fake company for various cleaning services. The invoices are paid.
l. A clerk affixes a price tag intended for a low-end flat panel TV to a top-of-the-
line model. The clerk’s friend then purchases that item, which the clerk scans at
the checkout counter.
13.2 Match the terms in the left column with their appropriate definition in the right
column.
Terms
Definitions
1. _n__ economic order
quantity
a. A document that creates a legal obligation to
buy and pay for goods or services.
2. __f_ materials requirements
planning (MRP)
b. The method used to maintain the cash balance in
the petty cash account.
3. _e__ Just-in-time (JIT)
inventory system
c. The time to reorder inventory based on the
quantity on hand falling to predetermined level.
4. __g_ purchase requisition
d. A document used to authorize a reduction in
accounts payable when merchandise is returned
to a supplier.
5. __b_imprest fund
e. An inventory control system that triggers
production based upon actual sales.
6. __a_ purchase order
f. An inventory control system that triggers
production based on forecasted sales.
7. _s__ kickbacks
g. A document only used internally to initiate the
purchase of materials, supplies, or services.
8. __r_ procurement card
h. A process for approving supplier invoices based
on a two-way match of the receiving report and
purchase order.
9. __p_ blanket purchase
order
i. A process for approving supplier invoices based
on a three-way match of the purchase order,
receiving report, and supplier invoice.
10. _h__ evaluated receipts
settlement (ERS)
j. A method of maintaining accounts payable in
which each supplier invoice is tracked and paid
for separately.
11. __m_ disbursement
voucher
k. A method of maintaining accounts payable that
generates one check to pay for a set of invoices
from the same supplier.
12. _q_ receiving report
l. Combination of a purchase order, receiving
report, and supplier invoice that all relate to the
same transaction.
13. __d_ debit memo
m. A document used to list each invoice being paid
by a check.
14. _o__ vendor managed
inventory
n. An inventory control system that seeks to
minimize the sum of ordering, carrying, and
stockout costs.
15. __l_ voucher package
o. A system whereby suppliers are granted access
to point-of-sale (POS) and inventory data in
order to automatically replenish inventory
levels.
16. _j__ non-voucher system
p. An agreement to purchase set quantities at
specified intervals from a specific supplier.
17. _k__ voucher system
q. A document used to record the quantities and
condition of items delivered by a supplier.
r. A special purpose credit card used to purchase
supplies.
s. A fraud in which a supplier pays a buyer or
purchasing agent in order to sell its products or
services.