68) Describe the basic revenue cycle activities.

Answer: The revenue cycle is a recurring set of business activities and related information
processing operations associated with providing goods and services to customers and collecting
cash in payment for those sales. The basic activities in the revenue cycle are: order entry
soliciting and processing customer activities filling customer orders and shipping merchandise
invoicing customers and maintaining customer accounts collections the cashier handles
remittances and deposits them in the bank; accounts receivable personnel credits customer
accounts for the payments received.
Page Ref: 333
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
16) During the sales order entry process, a ________ is performed to compare the quantity
ordered with the standard amounts normally ordered.
A) completeness test
B) redundant data check
C) field check
D) reasonableness test
Answer: D
17) During the sales order entry process, a ________ is performed to verify that each transaction
record contains all appropriate data items.
A) completeness test
B) redundant data check
C) field check
D) reasonableness test
Answer: A
69) Explain how validity checks, completeness tests and reasonableness tests can be
implemented to ensure accuracy of customer orders.
Answer: Validity checks can be used to compare the customer and inventory information on the
customer order with the information in the customer and inventory master files. A completeness
test can ensure that all the necessary information is present on the customer order. A
reasonableness test can compare the quantity ordered with the customer's past order history for
that item.
Page Ref: 339
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
70) Define and describe benefits of a CRM system.
Answer: CRM stands for customer relationship management. Since customer service is so
important today, special CRM software packages have been created that support this vital
process. CRM systems help a company to organize detailed data about customers so that more
personalized service can be given to them. A CRM system may retain customer preferences and
customer transaction history, which can be used to suggest other products the customer may wish

to purchase. The system could also take a pro-active marketing approach in contacting customers
at certain re-order points. A well-implemented CRM system can help the business achieve the
goal of turning satisfied customers into loyal customers.
Page Ref: 343
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
71) How can Electronic Data Interchange (EDI) facilitate the billing and accounts receivable
process?
Answer: The basic document created in the billing process is the sales invoice. Many companies
still print paper invoices and send them to customers in the mail. Batch processing of invoices
may create cash flow problems because of the time it takes invoices to flow through the regular
mail system. Companies that use EDI can create quicker turnaround for payment, and save costs
by reducing paper handling and processing. Depending on the number of invoices processed per
year, these savings can be significant.
Page Ref: 349
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
72) Describe typical credit approval procedures.
Answer: Most business-to-business sales are made on credit. Key to revenue cycle success is the
approval of credit sales before they are processed and goods shipped. A part of good control in
this area is to establish a credit limit for customers. With new customers, or when orders exceed
a customer's credit limit, or the customer has a past due balance, specific authorization for the
credit manager should specifically authorize and approve further credit. The system can also be
programmed to do a limit check for each order processed to maintain further control in this area.
Also, marketing personnel should not make credit decisions, as a potential conflict of interest is
possible.
Page Ref: 339-340
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
73) Describe the two methods to manage accounts receivable.
Answer: Open invoice system customers pay the invoice by returning a remittance advice
turnaround document and a check. Remittances are applied against specific open invoices. The
open-invoice method can be used to offer discounts for prompt payments since invoices are
individually tracked. However, such individual tracking adds complexity in maintaining
information. Balance-forward method customers pay according to the amount shown on a
monthly statement and remittances are applied against the total outstanding balance; this method
is used by department stores typically where customers make a large number of smaller dollar
amount purchases.
Page Ref: 350
Objective: Learning Objective 1
Difficulty : Moderate

AACSB: Analytic
74) Describe cycle billing and identify how an organization might benefit by using cycle billing.
Answer: Cycle billing is spreading out the customer base so that a portion of the billing is done
each day to a group of customers. Credit card and utility companies use it extensively because of
their large customer bases. The advantage of this method is that the billing load is dispersed and
the cash flow of the company is evened out dramatically.
Page Ref: 351
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
75) Failure to collect cash on credit sales is a threat in the revenue cycle. What controls can be
used to help neutralize this threat?
Answer: Both accounts receivable and cash flows should be monitored. Segregation of duty
controls should always be implemented and monitored for compliance. Also, a control used to
deal with accounts receivable (which directly impacts cash flow) is to use an accounts receivable
aging schedule. This schedule lists customer account balances by length of time outstanding and
provides information for estimating bad debts. It can also assist in evaluating credit policies and
specific customer credit limits. Also, a cash budget can be used to provide a more precise
estimate of cash inflows (cash collected from sales) and cash outflow (outstanding payables). An
organization can be alerted to a pending cash flow shortage, thus enabling it to secure short-term
financing at competitive rates to deal with the problem in a timely manner.
Page Ref: 341, 356
Objective: Learning Objective 3
Difficulty : Difficult
AACSB: Analytic
76) Discuss ways in which technology can be used to streamline cash collections.
Answer: Answers may include the following points: A lockbox system can reduce delays due to
processing and geographical distance between customer and company. Customers send
remittances to a nearby P.O. box; a local bank picks up remittances, deposits cash and sends
remittance advices and copies of all checks to the company. The main disadvantage is cost; the
banks charge a service fee up to 1% of the cash processed through the system. Information
technology can provide additional efficiencies in the use of lockboxes. An electronic lockbox
sends electronic notification of remittances to the company. This method enables the company to
begin applying remittances to customer accounts before the photocopies of the checks arrive.
An EFT system eliminates paper checks and uses electronic payments between banks.
Integrating EFT and EDI, called the financial electronic data interchange, automates billing and
cash collections. Procurement cards or credit cards can be used. These cards eliminate the
risks and costs associated with creating and maintaining accounts receivable, but cost between
2% to 4% of the gross sales price.
Page Ref: 354
Objective: Learning Objective 1
Difficulty : Difficult
AACSB: Analytic

77) Describe four threats in the revenue cycle and identify appropriate controls for each threat.
Answer: Answers can include the following information:
Threat 1: Sales to customers with poor credit Controls: Having an independent credit approval
function and maintaining good customer accounting can help to prevent problems.
Threat 2: Shipping errors Controls: Reconciling shipping notices with picking tickets; barcode scanners; and data entry application controls will help to catch these errors.
Threat 3: Theft of inventory Controls: Secure the location of inventory and document
transfers; release only with valid shipping orders; have good accountability for picking and
shipping; and finally, periodically reconcile records with a physical count.
Threat 4: Failure to bill customers Controls: Separating shipping and billing and prenumbering of shipping documents helps along with reconciliation of all sales documents.
Threat 5: Billing errors Controls: Reconciliation of picking tickets and bills of lading with
sales orders; data entry edit controls; and price lists may prevent billing errors.
Threat 6: Theft of cash Controls: Segregation of duties is essential to prevent this serious
problem (the following duties should be separate: handling cash and posting to customer
accounts; handling cash and authorizing credit memos and adjustments; issuing credit memos
and maintaining customer accounts); use of lockboxes for receipts and EFT for disbursements;
mailing customer statements monthly; use cash registers in retail operations where cash
payments are received; deposit cash daily in the bank; and have the bank reconciliation function
performed by independent third parties.
Threat 7: Posting errors in updating accounts receivable Controls: Use of editing and batch
totals is essential here.
Threat 8: Loss of data Controls: Regular backups are essential with one copy stored off-site;
and logical and physical access controls to prevent leakage to competitors and irregularities.
Threat 9: Poor performance Controls: Use sales and profitability analyses; accounts receivable
aging; and cash budgets to track operations.
Page Ref: 336-337
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic

78) Discuss the general control issue of the loss of data, as it relates to the revenue cycle.
Answer: One of the two general objectives that pertain to all revenue cycle activities is the loss
of data. The primary threats related to the data availability objective are the loss of data and
access controls. It is imperative that accurate customer account and inventory records be
maintained for external and internal reporting purposes and for customer inquiries. Such records
must be protected from loss and damage by using backup files. One backup file should be kept
on-site, while a second should be kept off-site. Backup files of the most recent transactions
should also be maintained. Also, all disks and tapes should have both external and internal file
labels to reduce the possibility of accidental erasure of important files. Access controls are also
important as a general control. Unauthorized access to information may cause leaks of the
information to competitors and the risk of damage to sensitive and important data files.
Employees should have certain access restrictions to help prevent this threat from occurring.
Passwords and user IDs will help to limit access to files and the operations allowed to be
performed on files. For example, the sales staff should not be allowed write-access to customers'
credit limit and approval information. Individual terminals should also have access controls in
place. An example of this control would be to prevent someone at a shipping dock terminal from
entering a sales transaction order. Another control that should be put in place is to require activity
logs of any management approved transaction. Such a log should be maintained for audit trail
purposes.
Page Ref: 335
Objective: Learning Objective 3
Difficulty : Difficult
AACSB: Analytic
79) Explain how to effectively segregate duties in the sales order activity.
Answer: Sales orders should be recorded by sales personnel. Credit decisions should be made by
the credit manager, not sales personnel. Also, sales orders authorize release of goods to shipping.
Warehouse and shipping should be separate from sales. Because a computer does recording and
authorization, it is important to ensure integrity of the programs and to perform edit checks on
any online entries.
Page Ref: 337-344
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic

80) Discuss the revenue cycle threat of stockouts, carrying costs, and markdowns.
Answer: Stockouts, carrying costs, and markdowns are a threat in the sales order entry process.
The problem with stockouts is that when goods are not available to ship to customers, the
business risks losing the sale to a competitor that can provide the goods in a timely manner. The
opposite problem can also occur where excess inventory increases carrying costs, with the result
that markdowns may be necessary in order to sell the inventory. Two controls can be
implemented to cope with this threat. One control that can be put into place is to establish
accurate inventory control. An AIS with real-time online capabilities can be programmed to use
the perpetual inventory method. This will ensure that accurate records are maintained about the
quantity of inventory for sale. This will eliminate mistakes in placing orders for goods when a
sufficient inventory amount is on hand. Periodic physical counts of inventory will also verify the
perpetual amounts recorded by the AIS. Another important control in this situation is that of
accurate sales forecasting. Proper marketing efforts should be made in conjunction with regularly
reviewing sales forecasts for accuracy. Such forecasts should be revised as necessary. Sales force
marketing efforts should be commensurate with inventory levels as well.
Page Ref: 342
Objective: Learning Objective 3
Difficulty : Difficult
AACSB: Analytic