Full Name _________________________________________________

INFO 31787 - Accounting Information Systems

Midterm Theory Exam Summer 2017

Exam Protocol:

Read all exam instructions carefully prior to answering the questions.

Leave your student ID face up on the desk.

This is a closed book exam. No notes, textbooks or on-line references are allowed.
Please no books, bags, or other material on the desks during the exam. Peaked caps are to be taken
off and put away or turned backwards.
For the written part of the midterm, you are allowed pen, pencil, ruler and eraser, and calculator to
complete the test.
You are not allowed any additional notes, review sheets, or access to the internet for any portions of
the exam.
The exam is out of 44 marks and is worth 20% of your final grade.
The Theory exam is 1 hour and 15 minutes in length.
Answer all questions in the exam booklet provided.
As soon as you have completed the short answer questions and case, hand in your exam and start the
MS Access exam.
You must hand in all the exam instructions, exam questions, answer sheets, and rough work.

Good Luck!

Question 1 or Question 2 6

Question 3 or Question 4 8

Question 5 Data Flow Diagrams 10

Case Analysis 20

Total 44

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Case Analysis (20 marks Introduction 3 marks, Analysis 14 marks, Recommendations 3 marks)

Heirloom Photo Plans

Heirloom Photo Plans is a privately held limited liability company that sells a $900 photography plan to rural
customers using a commissioned sales force. Rather than pay the price up front, most customers pay $250 down and
make 36 monthly payments of $25 each. The $900 plan includes the following:

1. A coupon book good for one free sitting every six months for the next five years (10 sittings) at any
Heirloom-approved photo studio. The customer receives one free 11 x 14 inch black and white print.
Additional photos or colour upgrades can be purchased at the photographers retail prices.
2. To preserve the 11x14 inch photos, the family name is embossed in 24-carat gold on a leather bound photo
album.

The embossed leather album, with a retail value of $300, costs Heirloom $75. Each sitting and free 11x14 inch
print, with a retail value of $150, costs Heirloom only $50 because photographers are given exclusive rights to all
Heirloom customers in a geographic region and have the opportunity to offer customers upgrades to colour
and/or more pictures.

The commissioned sales staff is paid on the 10th of each month, based on the prior months sales. The
commission rates are as follows:

Number of Plans Sold Commission Quantity Bonus

Fewer than 100 $100 per plan
101 to 200 $125 per plan On sale of plan #101, $2,500 is paid to
cover the extra $25 on the first 100
sales.
More than 200 $150 per plan On sale of plan #201, $5,000 is
paid to cover the extra $25 on
the first 200 sales.

Over 70% of all agents sell at least 101 plans per year; 40% sell over 200. There is a strong sales surge
before year end as customers purchase plans to give as holiday gifts. About 67% of all agents reach their highest
incentive level in late November or December. Heirloom treats the sales staff and photographers as
independent contractors and does not withhold any income or payroll taxes on amounts paid to them.

Salespeople send Heirlooms accounting department the order form, the total payment or the down
payment, and the signed note for $650 if the customer finances the transaction. Often, the payment is a
handwritten money order. Because many customers live in rural areas, the return address is often a Post Office
Box number, and some customers do not have phones. The accounting department forwards payments to
Accounts Receivable for recording but they do not keep a reconciliation between payments received and
amounts forwarded to the AR department.

All the Sales Staff were hired by the owners of the company.

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Heirloom makes the following entries at the time a new contract is recorded:

___________________________________________________________

To Record the Sales of the Contract (Assumes Contract is Financed)

Cash 250
Note receivable 650
Sales of photo plans 950

To Record the Expenses Related to the Sale

Album Expense 65
Embossing/shipping 10
Sales expense 130
Album inventory 65
Accounts payable 10
Commissions payable 130

Sales expense is estimated using the average cost paid to the salesperson in the prior year.

To Record the Liability for Photographer Sitting Expenses

Photographer expense 500

Accrued liabilities 500
___________________________________________________________

Because the entire cost of the photographer is accrued, the company points to the last entry to show
how conservative its accounting is.

After waiting 10 days for the cheque or money order to clear, Heirloom embosses and ships the album,
the photo coupon book, and a payment coupon book with 36 payments for $25. Customers mail a payment
coupon and a cheque or money order to a three-person Receivables Department at headquarters. The
Receivables employees open the envelopes, post the payments to the receivables records, and prepare the bank
deposit.

The photo coupon book has 10 coupons for photographer sessions, each good for a specific six-month
period. If the coupon is not used within the six-month period, the coupon expires.

Each month, the credit manager sends letters and makes phone calls to collect on delinquent accounts.
Between 35% and 40% of all customer eventually stop paying on their notes, usually either early (months 4 to 8)
or at the two year point (months 22 to 26).

Account receivables are written off when they are 180 days delinquent. Heirlooms CFO and credit
manager use their judgment to adjust the Allowance for Bad Debt monthly. They are confident they can
accurately predict the Allowance balance needed at any time, which historically has been about 5% of
outstanding receivables.

Agricultural product prices in the area where Heirloom sells its plans have been severely depressed for
the second straight year.

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Heirloom has been growing quickly and finds that it is continually running short of cash, partly because
of the large salaries paid to the two equal owners and their spouses. (The spouses each receive $100,000 to
serve as the secretary and treasurer respectively; very little time is required to perform these duties.) In
addition, Heirloom spent large amounts of cash to buy headquarters, equipment and furnishings, and expensive
automobiles for the two owners, their spouses, and four vice presidents.

Heirloom needs to borrow from a local bank for corporate short-term operating purposes to handle the
cash shortfall. It is willing to pledge unpaid contracts as collateral for a loan. A local bank president is willing to
lend Heirloom up to 70% of the total value of notes receivable that are not more than 60 days overdue.
Heirloom must also provide, by the fifth day of each month, an AR aging report for the preceding month and a
calculation showing the maximum amount Heirloom may borrow under the agreement. In addition, the bank
will now require Heirloom to provide monthly financial statements prepared in compliance with IFRS accounting
standards. Annual audited financial statements are now required by the bank.

The company has recently hired a new CFO to handle the financial statement preparation. The CFO has
determined that the accounting system does not facilitate timely preparation of the financial statements. It is
not possible to produce the AR aging report within the time frame required by the bank. The CFO also knows
they must hire external auditors to certify the financial statements.

The following diagram identifies the parties with internal and external relationships with Heirloom:

Accounting Bank
Employees

Sales Force Heirloom Photographers

Management Customers

Instructions:

You work for Heirloom Photography. You are making a presentation to senior management and to organize your
thoughts, you are summarizing recent events within Heirloom. Using the case format taught in class, identify the events
affecting the organization, perform an analysis to assess deviations from known management models, and make
recommendations on how the company can reduce risk. (The mark breakdown is 3 marks for the introduction, 14 marks
for analysis (make 7 points), and 3 marks for recommendations).

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