In 1989, Robert Smith opened a small fruit and vegetable market in Bethlehem, Pennsylvania. Originally, Smith sold only produced grown on his family farm and orchard. As the market’s popularity grew, however, he added bread, canned goods, fresh meats, and a limited supply of frozen goods. Today, Smith’s market is a full range farmers’ market with a strong local customer base. Indeed, the market’s reputation for low prices and high-quality draws customers from other Pennsylvania cities and even from the neighboring state of New Jersey. Currently, Smith’s market has 40 employees. These include sales staff, shelf stockers, farm laborers, shift supervisors, and clerical staff. Recently, Smith has noticed a decline in profits and sales, while his purchases of products for resale have continued to rise. Although the company does not prepare audited financial statements, Robert Smith has commissioned your public accounting firm to assess his company’s sales procedures and controls. Smith’s market revenue cycle procedures are described in the following paragraphs:
Revenue Cycle
Customers push their shopping carts to the checkout register where a clerk processes the sale. The market has four registers, but they are not dedicated to specific sales clerks because the clerks play many roles in the day-to-day operations. In addition to checking out customers, sales clerks will stock shelves, unload delivery trucks, or perform other tasks as demand in various areas rises and falls throughout the day. This fluid-work demand makes the assignment of clerks to specific registers impractical.
At the beginning of the shift, the shift supervisor collects four cash register drawers from the treasury clerk in an office in the back of the market. The drawers contain $100 each in small bills (known as float) to enable the clerks to make change. The supervisor signs a log indicating that he has taken custody of the float and places the drawers into the respective cash registers.
Sales to customers are for cash, check, or credit card only. Credit card sales are performed in the usual way.
The clerk swipes the card and obtains online approval from the card issuer at the time of sale. The customer then signs the credit card voucher, which the clerk places in a special compartment of the cash register drawer. The customer receives a receipt for the purchase and a copy of the credit card voucher.
For payments by check, the clerk requires the customer to present a valid driver’s license. The license number is added to the check and the check is matched against a “black” list of customers who have previously passed bad checks. If the customer is not on the list, the check is accepted for payment and placed in the cash register drawer. The clerk then gives the customer a receipt.
The majority of sales are for cash. The clerk receives the cash from the customer, makes change, and issues a receipt for the purchase.
At the end of the shift, the supervisor returns the cash register drawers containing the cash, checks, and credit cards receipts to the treasury clerk and signs a log that he has handed in the cash drawers. The clerk later counts the cash and credit card sales. Using a stand-alone PC, he records the total sales amounts in the sales journal and the general ledger sales and cash accounts. The treasury clerk then prepares a deposit slip and delivers the cash, checks, and credit card vouchers to the local branch of the bank two blocks away from the market.
Required
- a. Create a data flow diagram of the current system.
- b. Create a system flowchart of the existing system.
- c. Analyze the physical internal control weaknesses in the system. Model your response according to the six categories of physical control activities specified in the COSO internal control model.
- d. Describe the IT controls that should be in place in this system.
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Chapter 4 Solutions
Accounting Information Systems
- SMITHS MARKET (SMALL BUSINESS ACCOUNTING SYSTEM) In 1989, Robert Smith opened a small fruit and vegetable market in Bethlehem, Pennsylvania. Originally, Smith sold only produce grown on his family farm and orchard. As the markets popularity grew, however, he added bread, canned goods, fresh meats, and a limited supply of frozen goods. Today Smiths Market is a full-range farmers market with a strong local customer base. Indeed, the markets reputation for low prices and high quality draws customers from other Pennsylvania cities and even from the neighboring state of New Jersey. Currently Smiths has 40 employees. These include sales staff, shelf Stockers, farm laborers, shift supervisors, and clerical staff. Recently, Smith has noticed a decline in profits and sales, while his purchases of products for resale have continued to rise. Although the company does not prepare audited financial statements, Robert Smith has commissioned your public accounting firm to assess his companys sales procedures and internal controls. Smiths market expenditure cycle procedures are described below. Expenditure Cycle The expenditure cycle begins in the warehouse adjacent to the market, where Smiths keeps its inventory of nonperishable goods such as canned goods and paper products. The company also maintains a one-day inventory of produce and other perishable products in the warehouse so clerks can quickly restock the shelves when necessary. At close of business each evening, the warehouse clerk reviews the market shelves for items that need to be replenished. The clerk restocks the shelves and adjusts the digital stock records accordingly from the warehouse PC. At this time, the clerk takes note of what needs to be reordered from the suppliers and prints purchase orders from the PC. Depending upon the nature of the product and urgency of the need, the clerk either mails the purchase order to the supplier or orders by phone. Phone orders are followed up by faxing the purchase order to the supplier. When the goods arrive from the vendor, the warehouse clerk reviews the packing slip, restocks the warehouse shelves, and updates the stock records from the PC. At the end of the day the clerk prepares a hard-copy purchases summary from the PC and sends it to the treasury clerk for posting to general ledger. The vendors invoice is sent to the accounting clerk. She examines it for correctness and files it in a temporary file until it is due to be paid. The clerk reviews the temporary file daily, looking for invoices to be paid. Using the accounting department PC, the clerk prints a check and records it in the digital check register. She then files the invoice and mails the check to the supplier. At the end of the day she prints a hard-copy journal voucher from the PC, which summarizes the days cash disbursements, and sends it to the treasury clerk for posting to the general ledger. Using the department PC, the treasury clerk posts the journal voucher and purchases summary information to the appropriate GL accounts. Required a. Create a data flow diagram of the current system. b. Create a system flowchart of the current system. c. Analyze the physical internal control weaknesses in the system. Model your response according to the six categories of physical control activities specified in the Committee of Sponsoring Organizations of the Treadway Commission (COSO) internal control model. d. Describe the IT controls that should be in place in this system.arrow_forwardSmith’s Market (Small Business Cash Sales Accounting System) In 1989 Robert Smith opened a small fruit and vegetable market in Bethlehem, Pennsylvania. Originally Smith sold only produce grown on his family farm and orchard. As the market’s popularity grew, however, he added bread, canned goods, fresh meats, and a limited supply of frozen goods. Today Smith’s Market is a full-range farmers’ market with a strong local customer base. Indeed, the market’s reputation for low prices and high quality draws customers from other Pennsylvania cities and even from the neighboring state of New Jersey. Currently Smith’s has 40 employees. These include sales staff, shelf stockers, farm laborers, shift supervisors, and clerical staff. Recently Smith has noticed a decline in profits and sales, while his purchases of products for resale have continued to rise. Although the company does not prepare audited financial statements, Robert Smith has commissioned your public accounting firm to assess his…arrow_forwardSMITH'S MARKET (SMALL BUSINESS CASH SALES ACCOUNTING SYSTEM) In 1989, Robert Smith opened a small fruit and vegetable market in Bethlehem, Pennsylvania. Originally, Smith sold only produce grown on his family farm and orchard. As the market's popularity grew, however, he added bread, canned goods, fresh meats, and a limited supply of frozen goods. Today Smith's Market is a full-range farmers' market with a strong local customer base. Indeed, the market's reputation for low prices and high quality draws customers from other Pennsylvania cities and even from the neighboring state of New Jersey. Currently Smith's has 40 employees. These include sales staff, shelf stockers, farm laborers, shift supervisors, and clerical staff. Recently, Smith has noticed a decline in profits and sales, while his purchases of products for resale have continued to rise. Although the company does not prepare audited financial statements, Robert Smith has commissioned your public accounting firm to assess…arrow_forward
- Frenchies is a medium-sized regional bakery that specializes in providing orders to grocery and convenience stores. Because of the popularity of its brand, it has also opened a small café for walk-in business. In order to maintain its high quality standard, Frenchies produces only three products: breakfast muffins, fresh bread, and chocolate chip cookies. Although business has been good in the past few years, a lucky contact with a large chain has recently allowed it to expand its brand out of the local region. Growth has been high since the new contract went into effect. In 2020, Frenchies sold 45,000 one-dozen packages of muffins for $5.50 each, 65,000 one-dozen packages of cookies for $4.75 each, and 85,000 one-dozen loaves of bread for $5.25 each. They will raise prices to $6.00 for muffins, $5.25 for cookies, and $5.75 for bread for 2021. Sales will drop some in the first quarter of 2021. They always drop off a bit after the holidays anyway, but with the increase in sales prices,…arrow_forwardFrenchies is a medium-sized regional bakery that specializes in providing orders to grocery and convenience stores. Because of the popularity of its brand, it has also opened a small café for walk-in business. In order to maintain its high quality standard, Frenchies produces only three products: breakfast muffins, fresh bread, and chocolate chip cookies. Although business has been good in the past few years, a lucky contact with a large chain has recently allowed it to expand its brand out of the local region. Growth has been high since the new contract went into effect. In 2020, Frenchies sold 45,000 one-dozen packages of muffins for $5.50 each, 65,000 one-dozen packages of cookies for $4.75 each, and 85,000 one-dozen loaves of bread for $5.25 each. They will raise prices to $6.00 for muffins, $5.25 for cookies, and $5.75 for bread for 2021. Sales will drop some in the first quarter of 2021. They always drop off a bit after the holidays anyway, but with the increase in sales prices,…arrow_forwardYou are the purchasing officer of a fast-food restaurant that is selling hamburger in the city of Muscat. The fast food chain business operates 25 stores strategically located in the region. Due to the decline in demand caused by the epidemic, the company is proposing measures to cut cost. The manager asked you to look for cheaper source of raw materials (bread). The company always avail of trade and cash discount. You decided to call the suppliers and gathered the following data; Supplier A (Lulu Supermarket) – The supplier offers 15% trade discount. Supplier B (Carrefour Market) – The supplier offers chain discounts of 10/5/2. Supplier C (Danube Supermarket) – The supplier offers no trade discount but cash discount of 5/10, n/30. Supplier D (Panda Supermarket) – The supplier offers trade discount of 10%, the terms of payment are 2/10, n/30. If the company decides to buy OMR 1,500 worth of bread from Supplier D (Panda Supermarket), what is…arrow_forward
- You are the purchasing officer of a fast-food restaurant that is selling hamburger in the city of Muscat. The fast food chain business operates 25 stores strategically located in the region. Due to the decline in demand caused by the epidemic, the company is proposing measures to cut cost. The manager asked you to look for cheaper source of raw materials (bread). The company always avail of trade and cash discount. You decided to call the suppliers and gathered the following data; Supplier A (Lulu Supermarket) – The supplier offers 15% trade discount. Supplier B (Carrefour Market) – The supplier offers chain discounts of 10/5/2. Supplier C (Danube Supermarket) – The supplier offers no trade discount but cash discount of 5/10, n/30. Supplier D (Panda Supermarket) – The supplier offers trade discount of 10%, the terms of payment are 2/10, n/30. If the company decides to buy OMR 1,500 worth of bread from Supplier A (Lulu Supermarket), what is the amount of trade discount? What…arrow_forwardKroger, the country’s leading grocery-only chain, added a line of private-label organic and natural foods call Simple Truth to its stores. If you’ve priced organic foods, you know they are more expensive. For example, a dozen conventionally farmed grade-A eggs at Kroger costs consumers $1.70, whereas Simple Truth eggs are priced at $3.50 per dozen. One study found that, overall, the average price of organic foods is 85 percent more than conventional foods. However, if prices get too high, consumers will not purchase the organic options. One element of sustainability is organic farming, which costs much more than conventional farming, and those higher costs are passed on to consumers. Suppose that a conventional egg farmer’s average fixed costs per year for conventionally farmed eggs are $1 million per year, but an organic egg farmer’s fixed costs are three times that amount. The organic farmer’s variable costs of $1.80 per dozen are twice as much as conventional farmer’s variable…arrow_forwardKroger, the country’s leading grocery-only chain, added a line of private-label organic and natural foods call Simple Truth to its stores. If you’ve priced organic foods, you know they are more expensive. For example, a dozen conventionally farmed Grade A eggs at Kroger costs consumers $1.70, whereas Simple Truth eggs are priced at $3.50 per dozen. One study found that, overall, the average price of organic foods is 85 percent more than that of conventional foods. However, if prices get too high, consumers will not purchase the organic options. One element of sustainability is organic farming, which costs much more than conventional farming, and those higher costs are passed on to consumers. Suppose that a conventional egg farmer’s average fixed costs per year for conventionally farmed eggs are $1 million, but an organic egg farmer’s fixed costs are three times that amount. Further assume that the organic farmer’s variable costs of $1.80 per dozen are twice as much as a conventional…arrow_forward
- Zuzu is a large manufacturer of snack cakes. The company operates distribution centers in Chicago. The distribution center bakes and packages the snack cakes and ships them to grocery warehouses throughout the country. Because of the high standards set for both quality and appearance, there is a reasonable number of “seconds” that do not meet standards and are sold to company outlets for sale at reduced prices. In recent years, the company’s average yield has been 90% of first-quality products for sale to grocery warehouses. The remaining 10% is sent to the outlet store. Zuzu’s performance-evaluation system pays its distribution center managers substantial bonuses if the company achieves annual budgeted profit numbers. In the last quarter of 2017, Noah Spalding, Zuzu’s controller, noted a significant increase in yield percentage of the Chicago distribution center, from 90% to 98%. This increase resulted in a 10% increase in the center’s profits. During a recent trip to the Chicago…arrow_forwardZuzu is a large manufacturer of snack cakes. The company operates distribution centers in Chicago. The distribution center bakes and packages the snack cakes and ships them to grocery warehouses throughout the country. Because of the high standards set for both quality and appearance, there is a reasonable number of “seconds” that do not meet standards and are sold to company outlets for sale at reduced prices. In recent years, the company’s average yield has been 90% of first-quality products for sale to grocery warehouses. The remaining 10% is sent to the outlet store. Zuzu’s performance-evaluation system pays its distribution center managers substantial bonuses if the company achieves annual budgeted profit numbers. In the last quarter of 2017, Noah Spalding, Zuzu’s controller, noted a significant increase in yield percentage of the Chicago distribution center, from 90% to 98%. This increase resulted in a 10% increase in the center’s profits. During a recent trip to the Chicago…arrow_forwardArchie’s Apples grows organic apples and sells them to national grocery chains, local grocers, andmarkets. Archie purchased a machine for $450,000 that sorts the apples by size. The largest applesare sold as loose apples to the various stores, the medium sized apples are bagged and sold tothe grocers in their bagged state, and the smallest apples are sold to deep discounters or to a localmanufacturing plant that processes the apples into applesauce. Archie is considering keeping thesmall apples and processing them into apple juice that would be sold under Archie’s own label tolocal grocers. The small apples currently sell to the deep discounters and local manufacturers for$1.10 per dozen. The variable cost to prepare the small apples for sale, including transporting theapples, is $0.30 per dozen. Archie can sell each gallon of organic apple juice for $3.50 per gallon.It takes two dozen small apples to make one gallon of apple juice. The cost to produce the organicapple juice will be…arrow_forward
- Accounting Information SystemsAccountingISBN:9781337619202Author:Hall, James A.Publisher:Cengage Learning,Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage Learning