Constructing REA models. (Case situations (a ) through ( d) come from Hollander, Denna, and Cherrington, 2000.) In each independent case situation below, construct a REA model and a database structure.
a. Tom’s Trailers. Tom owns a small recreational trailer business in a suburban community located close to the mountains. The community is relatively small but growing at a fast rate. Tom’s business is growing, not because of his effective sales style and personality, but by growth of the community. Currently, Tom’s competition has been nearly nonexistent but, as the area grows, he expects to encounter increasing competition.
Tom sells mostly trailers for vacationing and camping. When customers arrive on Tom’s lot, they are greeted by a salesperson. The salesperson may show the customers the trailers on the lot, but the salesperson need not be present during the entire showing. Depending on customer preference, either the salesperson will take the customer on a tour or the customer may roam the lot freely, inspecting trailers at his or her leisure.
Since recreational trailers are fairly large-ticket items, customers often will leave the lot without making a purchase, only to return another day after making the decision to purchase a trailer. When a customer decides to make a purchase, the salesperson initiates a series of procedures to properly document the order and sale transaction. First, the salesperson determines the model of the selected trailer and offers the customer a list of options that correspond to the particular model. The customer may (1) purchase a trailer of the lot with no added features, (2) purchase a trailer off the lot with additional features, or (3) special order a trailer not currently on the lot.
In most cases, customers do not pay cash for their trailers. If, however, the customer pays cash, a simple sales contract is prepared and the customer drives of with his or her trailer. The majority of customers use an installment method of purchase. Before an installment purchase is authorized, the customer’s credit must be verified to determine creditworthiness.
With an installment purchase, an installment agreement is prepared in addition to the sales contract. Tom has arranged financing through a local bank for all installment sales. When an installment sale is made, the bank sends Tom a lump-sum payment equal to the price of the trailer. Instead of making a payment to Tom, customers pay the bank plus interest. In either
case, Tom receives a lump-sum payment for each trailer sold, whether that lump sum comes from the customer or the bank.
Once the customer’s credit is approved, the customer can take delivery of the trailer. This involves a delivery person who checks the trailer before delivering it to the customer. The customer may pick up the trailer or have it delivered by Tom.
b Maple Bluff Pharmacy. Maple Bluff Pharmacy sells prescription drugs and over-the-counter medications and supplies. All prescriptions and over-the-counter items are sold using a cash register. Each cash register retains on the cash register’s journal tape a record of the transactions and who performed them. This information is subsequently entered into a computer.
Prescriptions received over the phone are taken by the pharmacist and recorded on a prescription slip. Also, prescriptions received over the phone are entered into a computer that matches the prescription with guideline dosage levels and instruction information and prints the necessary information for the prescription. After entering the prescription information into the computer, the prescription is filled and a hard copy of the prescription slip is filed numerically for future reference.
All sales items are paid for with cash, check, or credit card. On occasion, credit is extended to a customer, but he or she must be approved through the chief pharmacist. If credit is extended, a separate billing account is established. If a customer does not pay the bill within 120 days of the initial billing date, the account is turned over to a collection agency.
At the end of the day, cash in the register till is counted and compared with the total amount of credit card receipts and accounts receivable slips. This check is performed by two employees in the safe room and is always monitored on camera. In addition, total cash receipts recorded in the computer are compared with the deposit totals each day before Deposits Express picks up the money for deposit.
c . Western Steel Company. Western Steel Company produces steel for a variety of customers. When customers order steel, an order clerk enters information into a computer that prepares a purchase order to track the order from production to collection of payment. If the customer’s credit has been approved, production of the order begins immediately. If the customer is new, a credit check is performed.
After the order is filled, a tally count is made of the produced steel and the steel is shipped to the customer. If the steel is to be shipped by railroad, rail cars are checked for weight before shipping the order. The weight of the load is then compared to the order to ensure an accurate delivery. Accompanying the shipment is a computer-generated bill of lading and a copy of the purchase order.
Shortly after shipping an order, Western invoices the customer using prices on an approved price list. The invoice total is obtained by multiplying the quantity ordered and shipped by the standard price. Steel prices are set by the Sales Department, which determines competitive prices based on market conditions and cost information.
Customers send payments directly to a lockbox account in selected cities across the United States. The bank where a particular customer sends payment is located in the city closest to the customer’s location. Western receives no payment, but Western receives a record of customer deposits from the bank maintaining the lockbox account. Accounting personnel maintain the billing and collection accounts, while the Credit Department issues credit to customers and follows up on past due accounts.
d. Payroll process for a C PA firm. The payroll and personnel function represents a large expense for many companies—especially the audit divisions of accounting firms. Clients are frequently billed based on staff , manager, and partner involvement in the audit. Firms bill clients based on a predetermined rate for each person involved. For example, a company bills a partner’s hours at a substantially higher rate than it bills the staff’s hours. Partners also trade employees to work on different projects for different clients. Careful tracking and planning go into each audit to maintain both audit quality and the lowest possible cost to the client.
For each client engagement, an audit plan is developed to identify the type and quantity of hours necessary to complete each audit step. For example, the audit plan might specify 30 hours to count warehouse inventory. Each week, auditors record their time on a time-and-expense report and submit it to the audit supervisor. The supervisor compares the actual time to the budgeted time in the audit plan. The time-and-expense reports are then submitted to the Payroll Department, which prepares paychecks for the auditors. Each week, the Payroll Department calculates pay based on a yearly salary and overtime for each employee. In addition, the Payroll Department must track deductions for taxes, insurance, and benefits. Once the deductions are withheld, the net pay is deposited into the employee’s checking account, or a check is issued in the name of the employee.
e. Textbook ordering and purchasing process. Six weeks before the start of each academic term, accounting instructors at AIS University of America inform the department secretary of the books they’re planning to use for each class. Instructors may use one or more books for an individual class; different instructors may use different textbooks for various sections of the same course. The department secretary compiles the instructor-provided data and transmits them via e-mail to the bookstore’s purchasing agent. The purchasing agent prepares a purchase order and sends it to the textbook publisher; a single purchase order may combine textbooks for several different courses, so long as all the textbooks come from the same publisher. When the publisher ships the books, the bookstore’s receiving department records the shipment; stock clerks put the books on the shelves. The textbook publisher invoices the bookstore, which then writes a check in payment; unused textbooks are returned to the publisher roughly one month after the term begins.
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