the wooden nickel case

Owner (K.)Budgeting and purchasingAdvertisingWriting and controlling checksPayrollBank statement reconciliationCredit card process

Manager, Women’s Department (Melanie)Supervises salesclerksPrepares work schedulesMerchandisingAssists with buying for women’s departmentSales as neededHandles alterations

Manager, Men’s Department (Jay)Supervises salesclerksPrepares work schedulesMerchandisingAssists with buying for men’s departmentSales as neededHandles all vendor returnsDeposits to bank

Bookkeeper (Kim)Prepares daily depositsPosts accounts receivablesPrepares statements for customer accounts monthlyReceivingMakes inventory tagsFilingSales as needed

Salesclerks(5–6)All sales functions (are not specifically assigned to a

department)Assist with merchandising and inventory taggingGeneral housekeeping duties

A-21 Appendix: Comprehensive Cases

CASE A.4: THE WOODEN NICKEL1

Background

The Wooden Nickel is a small retail clothing storelocated in Stillwater, Oklahoma, across the streetfrom Oklahoma State University. The store wasopened in 1976 by K. Cohlmia and is run as a soleproprietorship. The store specializes in casual cloth-ing and caters to the upscale university student mar-ket. Stillwater has approximately 35,000 residents, sothe 18,000 students at the university have a tremen-dous impact on all retail stores in town.

The Wooden Nickel divides its inventory into amen’s department and a women’s department. K.strives to provide the type of clothing that is notfound in discount outlets. In fact, the store is the onlyauthorized supplier of Polo products in the city andsurrounding area.

At the current time, all accounting is done manu-ally. The store’s business can be divided into twocycles: (1) spring and summer and (2) fall and winter.Because of the cyclical nature of the business, it isoften necessary to borrow to cover the outlay forpurchases. This is then repaid as quickly as the rev-enue from the sales cycle permits. K. negotiates withlocal banks to cover this need on a yearly basis.Thereare currently nine employees (job descriptions arepresented in Fig. 1).

The store has a display area which covers theentire front of a renovated older building. One cen-trally located electronic cash register is used for allsales. The back of the building is divided into a largeoffice and a merchandise storage area. K. uses theoffice for all of his ownership duties.The bookkeeperalso uses this office and the managers use it when-ever the need arises. In addition, the safe is located inthe office. There is a rear entrance near the storagearea where goods can be unloaded.

Revenue Cycle

Regular Sales. The Wooden Nickel has yearly salesof between $700,000 and $800,000. The store gener-ates from 50 to 70 sales tickets each day, with an aver-age of 2 items per ticket. The daily sales process isdiscussed in detail below. While the majority of the customers pay by cash, check, or credit card, they

1This case was prepared by Patrick Dorr, School of Accounting, Oklahoma State University, and by Martha M. Eining,University of Utah, as a basis for classroom discussion rather than to illustrate effective or ineffective handling of an account-ing system. Reprinted with permission.

Figure 1 Job Descriptions

Case A.4: The Wooden Nickel A-22

do have approximately 500 charge customers.Historically, K. has allowed only customers he knowspersonally to open charge accounts. The store has noestablished policy for charge customers.

When a customer wishes to make a sale, the cus-tomer can give the merchandise to any availablesalesclerk or take it to the cash register station. Thesalesclerk completes two copies of a prenumberedsales ticket. If a bank card is being used, a three-partbank card receipt is also completed. The transactionis then entered into the cash register by transactiontype:• Cash key. The sales ticket is validated on the backwith the date and amount.• Credit key/charge account. The sales ticket is val-idated as above.• Check key. The sales ticket and the check are val-idated.• Bank card key. Bank card receipt is validated.

The first copy of the sales ticket (and bank cardreceipt if applicable) is given to the customer. Thesecond copy is placed in the cash register. The thirdcopy of the bank card receipt is filed by date in theback office. The top copy of the sales ticket is pre-sented in Fig. 2, and the bank card receipt is pre-sented in Fig. 3.

Layaway Sales. When a customer chooses to put an item on layaway, a special layaway form is com-pleted (see Fig. 4). A minimum down payment of25% is required to hold the merchandise. The bal-ance is due in three equal payments over the nextthree months. The sale is entered using the layawaykey on the register, and the form is validated with thedate and amount. The cash deposit is included in the daily sales and handled as described in the salescycle.

Sales Returns. The store’s policy is never to give acash refund when the item was paid for by cash orcheck. Instead, it issues a credit for the merchandisethat has been returned. A three-part sales ticket isprepared and marked as a return. If the original salewas made on account, only two copies are prepared.If the merchandise was purchased on a credit card,then the refund is made through the credit card.In this case, a bank card credit receipt must also beprepared.

The sales return transaction is entered using thesales return key on the register.After the ticket is val-idated, the original is given to the customer, the dupli-cate is placed in the cash register, and the third copyis placed in a credit file which is kept near the cash

register. The bookkeeper uses the second copy ofcredit account returns to post the transaction to theaccounts receivable subsidiary cards. Even thoughthe amount of the sales return is actually a credit, it iskept in the accounts receivable card to avoid thenecessity of setting up an accounts payable file.

Figure 2 Example Sales Ticket

225 S. KNOBLOCK 377-8808STILLWATER, OKLAHOMA 74074

________________________ 19 _______

Customer

Sold by Cash Charge On Acct. Paid Out

Qty. Description Price Amount

NO CASH REFUNDS

SALES TAX

TOTAL

48598

The following morning, the bookkeeper retrievesall the items from the safe. The bookkeeper recon-ciles the register tape with the checks, cash, and bankcard receipts from the previous day.A daily deposit isthen prepared by the bookkeeper. The managerdelivers the deposit to the bank.

Finally, the bookkeeper uses the sales tickets topost credit sales to the accounts receivable subsidiarycards. Daily sales amounts from the daily receiptsreconciliation are entered into the sales journal atthis time. Figure 7 provides an overview of the dailysales register.All paper documentation is then storedin a file cabinet.

Expenditure Cycle

Purchasing. The owner plans the budget, breakingthe total amount down into retail dollars availablefor each department based on projected sales. Hetakes 8 to 10 buying trips per year.While on each triphe comes in contact with at least 40 vendors who pro-vide him with their own purchase orders. He usesthese purchase orders to make notations on whatitems he would like to order, constantly trying tomaintain a running total so he doesn’t exceed thedepartment’s budgeted amount. The actual orderingis not done until the owner returns to the store andreviews the purchase orders. He then places theorder by sending a copy of the completed purchaseorder to the vendor.A duplicate copy of the purchaseorder is filed by vendor.

Receiving. All shipments are sent via UPS.Shipments will typically arrive and be unloaded

When the customer returns to use the credit topurchase an item, the credit is verified with the copywhich has been placed in the credit file. This copy isthen validated and put in the cash register. It is usedby the bookkeeper to offset the balance in theaccounts receivable subsidiary card.

Cash Receipts. The owner or one of the store man-agers opens the mail daily and separates the checksor receipts. The manager prepares a sales ticket foreach receipt and then enters the checks into the reg-ister using the accounts receivable key. The salesticket is validated with the date and amount. Thechecks are placed in the drawer and included in thedaily deposit. The bookkeeper posts the collectionsfrom the information on the sales ticket to the indi-vidual accounts receivable cards. The same proce-dure is used for layaway payments.

End-of-Day Activity. At the end of the day, one ofthe store managers rings out the register and recon-ciles the money and bank card receipts in the cashdrawer with the total on the register tape. The cashregister tape indicates totals by transaction type.Figure 5 presents an example of the cash registertape. The information from the cash register tape isentered into the daily receipts reconciliation (see Fig.6). One hundred dollars is kept in the cash registerdrawer and becomes the next day’s beginning bal-ance. The manager then places all other money,copies of sales tickets and bank card receipts, the register tape, and the reconciliation in the safeovernight.


Figure 3

Example Bank Card Receipt

received with the packing list accompanying the ship-ment. If any discrepancies exist (i.e., errors inamounts shipped), they are noted on the packing list

through the back entrance. However, sometimes theywill be delivered through the front. The bookkeeperor owner unpacks the goods and compares the units


LAYAWAY MERCHANDISE IDENTIFICATION TICKET

Date ___________________________ No. 1931

Name

Address

City

Telephone _______________________________ Clerk No. ___________________________

Qty. Description Price

LAYAWAY

Sub Total

Tax

Layaway Fee

Total

Deposit

Balance

Date Old Balance Amount Paid New Balance

LAYAWAY

Location _______________________________ No. of Packages ____________________

No Exchanges or Cash RefundsCustomer’s Identification Stub

—Agreement—

Payments of $ _____________❏ MO.

To Be Made Every❏ WK.

Failure to make payment for 30 days will cause merchandise to be replaced in stock and the customer forfeiting all previous payments.Date ___________________Customer’sSignature

Figure 4

Example Layaway Form


NET SL 0031W/TAX 2189.33

ITEMS 0065

NO SLE 0012

TRAIN 00000.00

CASH 0031330.98

CHECK 00181097.03

CHARG 0003285.82

CARD 0006410.67

LAYAWY 0002164.69

GC RED 00000.00

LAY RA 000369.86

PO 00000.00

RA 000130.00

MARK 00000.00

VOID 00000.00

RETURN 00000.00

CREDIT 00000.00

TAX 128.83

Figure 5

Example Cash Register Tape Totals

Figure 6 Example Daily Receipts Reconciliation

DAILY RECEIPTS RECONCILIATION

DATE 10-17

Cash 330.98

Checks 1097.03

Deposit total 1428.01

Private charges

Rec. on acct. 30.00

Layaways 164.69

Layaways rec. on acct. 69.86

W.N. charge cards 285.82

Visa/Mastercard 410.67

Discover Card

Am. Express Card

Paid outs

and then discussed by phone with the vendor. Thesame procedure is used if any of the merchandise isdamaged. The vendor then issues a return authoriza-tion.This must be received before the merchandise isreturned.

The packing list is kept in an open file until the invoice is received. Any information about dis-crepancies and/or damaged goods is transferred tothe invoice when it is received and the invoice isadjusted accordingly. The packing list is then used bythe bookkeeper to make inventory tags. The sales-clerks attach the tags to the merchandise in theirspare time.

Cash Disbursements. When the vendor’s invoice isreceived, the packing list is pulled and checked fordiscrepancies. Any problems are handled by phone;the two documents are stapled together and filed bydue date. Most invoices carry a 2/10, net 30 discount.About 10% of the men’s clothing vendors and 90% ofthe women’s vendors offer cash discounts of 2%–8%.This cycle is summarized in the flowchart in Fig. 8.

Part One: Conceptual Foundations ofAccounting Information Systems

1. (Chapter 1) Identify the deficiencies in the cur-rent information system for the Wooden Nickel.Discuss the information that you think would bemost important for internal decision making and forexternal needs.2. (Chapter 2) Develop and describe codingschemes for tracking inventory in the WoodenNickel.3. (Chapter 3) Develop a data flow diagram for thesales cycle of the Wooden Nickel.4. (Chapter 3) Prepare document flowcharts toillustrate the current cycles presented for theWooden Nickel. Use the example presented for thecash disbursements cycle as a guide.5. (Chapter 5) Discuss how the use of a data basesystem could improve the information available tothe owner and managers of the Wooden Nickel.Whatproblems would be encountered with the implemen-tation of a data base system?6. (Chapter 6) Draw an E–R diagram to representa data base for the revenue and expenditure cycles,built according to the REA data model.

Part Two: The Technology of InformationSystems

7. (Chapter 7 or 8) To what extent should theWooden Nickel computerize? What items should beconsidered in the decision to computerize? Include a


All checks are prenumbered and controlled bythe owner. On the tenth of each month he pulls allthe invoices, issues the checks, and mails them.All other bills are paid by the owner on the fifteenthof each month. He also keeps track of the payroll,which is paid on the first and sixteenth of the month.He enters all amounts to the check register (see Fig. 9).

Periodic Procedures

The bookkeeper prepares customer statements by making a copy of the accounts receivable sub-sidiary cards illustrated in Fig. 10 on page A–29. Thestatements are mailed to customers at the end ofeach month. At this point there is no real effort totrack accounts receivable balances, and no interest ischarged on accounts.

The owner reconciles the bank statement andtakes care of all bank card activity. A periodic inven-tory is completed on January 1 and July 1. All avail-able employees assist with the inventory.

An outside accountant is retained to assist withtaxes and preparation of any financial reports whichmay be needed.The store currently maintains a dailysales register, a check register, and a file of accountsreceivable subsidiary cards. No other books are beingmaintained.

The requirements for this case are divided to coin-cide with the major sections of the book. In addition,the appropriate chapters are also identified.

Sales Layaway CashDate Sales *1 Tax Charges* Rec/Acct Layaway* Rec/Acct Refund Freight Deposit Bank Card*

10-17 2189.33 128.83 285.82 30.00 164.69 69.86 1428.01 410.67

Figure 7 Daily Sales Register

* All figures include sales taxes. This is because the information from the cash register tape includes sales taxes.1. Sales = cash (and check) receipts � receipts on account � layaway receipts + charge sales + layaway sales + bank cardsales.

9. (Chapter 9) Describe and discuss different pos-sibilities for using data communications at theWooden Nickel. For example, should it have net-work? If so, what kind? Should it use a point-of-salesystem? In your discussion, include both the positiveand negative aspects of each choice.

discussion of the type of computer hardware and the type of end-user software that you would sug-gest to the owner. Make sure that you justify yoursuggestions.8. (Chapter 8) Develop a proposal for K. to usemicrocomputers to support his decision-makingprocess. What should be provided? What would yousuggest differently for the two store managers?


Figure 8 Flowchart of Cash Disbursement Cycle

17. (Chapter 13) How can the Wooden Nickelachieve adequate segregation of duties consideringthe size of the company?18. (Chapter 14) Assuming that the WoodenNickel computerizes, set up a system of internal con-trols over the computer function.

Part Five: Accounting Information SystemsApplications

19. (Chapter 17) If you did not complete the docu-ment flowcharts for all cycles in Part 1, then youshould develop a document flowchart of the sales(revenue) cycle for the current operation of theWooden Nickel.20. (Chapter 17) Specifically identify the informa-tion needed for the revenue cycle. Develop docu-mentation to show how this output would beprovided.21. (Chapter 17) Identify the internal controlobjectives that should be established for the WoodenNickel’s revenue cycle. Assuming that the WoodenNickel will computerize its revenue cycle, des-cribe several internal control policies and proceduresthat should be established to achieve each of these objectives.22. (Chapter 18) If you did not complete the docu-ment flowcharts for all cycles in Part 1, then youshould develop a document flowchart of the expen-diture cycle for the current operation of the WoodenNickel.23. (Chapter 18) Specifically identify the informa-tion needed for the expenditure cycle. Develop

Part Three: The Systems DevelopmentProcess

10. (Chapter 10) Prepare a feasibility analysis forthe computerization of the Wooden Nickel. Be sureto consider the number of transactions and the needsof the store. You should also include both the quan-tifiable and the nonquantifiable items.11. (Chapter 10) Develop a plan to determine, indetail, the information needs for the Wooden Nickel.On the basis of the information in the case, indicatethe most important information needs for theWooden Nickel.12. (Chapter 10) How could the Wooden Nickeltake advantage of reengineering? Consider the salescycle. How could this cycle be reengineered?13. (Chapter 11) From the information needs dis-cussed in Requirement 1, design one of the reportsthat would be needed for the Wooden Nickel.14. (Chapter 11) Design the input forms andscreens needed to capture the information for thereport designed in Requirement 13.15. (Chapter 12) Develop a plan for K. to follow topurchase hardware and software. Include all itemsthat he should consider in choosing vendors.

Part Four: Control and Audit of AccountingInformation Systems

16. (Chapter 13) Identify the internal controlweaknesses in the current operation of the WoodenNickel. For each weakness, offer possible solutions.This will be easier if you provide the information bythe cycles discussed in the case.


Chk Selling MiscDate Number Description Purchases Freight Advertising Expense Repairs Rent Wages Dr Cr

10-10 2946 Polimer Supply 286.70

10-10 2947 B. Distributer 1049.21

10-15 2948 DK Advertising 216.00

Figure 9 Check Register

Wooden Nickel will computerize its expenditurecycle, describe several internal control policies andprocedures that should be established to achieveeach of these objectives.

documentation to show how this output would beprovided.24. (Chapter 18) Identify the internal controlobjectives that should be established for the WoodenNickel’s expenditure cycle. Assuming that the


Figure 10

Example AccountsReceivable SubsidiaryCard

225 SOUTH KNOBLOCK

STILLWATER, OKLAHOMA 74074405/377-8808

Acct. # 1076 B.B. CustomerNearby StreetStillwater, OK 74078

Date Description Debit Credit Balance

10-1 Purchase 186.16 186.16

10-16 Received on Account 20.00 166.16

the wooden nickel case

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