Green Leaf Produce Company—

Comprehensive Case

(Prepared by Glenn Adams and Nausheena Rahim, Lehigh University)

Green Leaf Produce Company, a wholesale distributor nestled in the coal-mining regions of Pennsylvania, generates revenues of $90 million per year and currently employs 187 people while servicing the northeastern United States. Its customer base is composed of restaurants, public schools, universities, and hospitals.

This family-owned operation competes against the likes of national food distributors Sysco and US Foods. The competition among these rivals can be fierce at times, as pricing strategies are employed to gain market share.

Green Leaf Produce Company first opened its doors to the general public in the 1930s.

The local ice company in town rented a small storefront to Green Leaf, giving birth to this mom-and-pop operation. During this time, small merchant businesses were on the rise as they tried their hand at entrepreneurship.

Green Leaf succeeded, as it captured the local market selling fruits and vegetables to the people of bustling Main Street.

Through the 1930s until the late 1950s, Green Leaf Produce continued to expand its operations to meet the ever-changing demands of its customers. Land, building, trucks, and equipment were purchased as revenues and earnings increased substantially. Over the years, its product base was expanded to include a line of frozen foods, seafood, and fresh meats to enhance the company’s product mix.

Green Leaf Produce purchases its inventory items from growers, manufacturers, and processors domestically and from around the world. Since the company’s inception, Green Leaf Produce has formed strategic partnerships with more than 47 different suppliers, including industry giants such as Frosty Acres, Tyson Food, H.J. Heinz, and Iceland Seafood.

Following another 40 years of growth servicing restaurants, public schools, universities, and hospitals, Green Leaf Produce relocated once again to its new 100,000-square-foot stateof-

the-art distribution center. The new facility has a refrigeration capacity of more than 2 million cubic feet, which will position them to meet the challenges of the twenty-first century.

Sales Order Processing Green Leaf’s credit approval system operates in a real-time processing environment. The sales order process begins with the receipt of customer orders indicating the type of product and quantity being requested. Green Leaf receives customer orders two ways, via a tollfree in which a customer service representative keys the order into the computer system, and from a sales representative located in the field who transmits orders to the plant from a wireless laptop. Customer records are then matched with the company’s database and checked for flags and credit limits before an approval is generated. If the customer’s account has been flagged, a message appears that notifies the representative that the account is under review by the credit department. The customer is notified at this point that a decision will be rendered within the hour. In real time, the flagged account is transmitted to the credit manager’s queue to ensure that proper application of the firm’s credit policies and procedures are followed. One aspect of the credit manager’s job function is to review customer accounts regularly for creditworthiness and to set appropriate high credit limits. A second look, also performed by the credit manager, is a process of reviewing customer orders for possibly missed sales opportunities or to give proper attention to past-due accounts.

Once a decision has been made regarding the order placed, the credit manager overrides the system, the sales order file is updated, and the customer is notified of the decision made.

A normal business day ends at 5:00 pm, and no new orders are accepted for delivery the next day. A manager in the computer operations department who maintains and operates the system sorts and compiles the orders that were processed and approved during the course of that day’s business transactions. At this point, the sales journal is updated. Once the orders have been compiled, records are matched against inventory levels to confirm whether the items are in stock.

An inventory report is then generated and sent to purchasing, notifying them of unavailable items to replenish inventory levels.

The sorted and compiled sales orders are then downloaded to the logistics department, where the sales orders are segregated according to geographic area. The groupings of sales orders are determined by the logistics program and are assigned to a truck.

Once the sales orders have been routed, they are uploaded to the mainframe in computer operations and stored in the routed deliveries file. The manager of the logistics department then runs the billing/invoice program from his terminal. The billing program accesses the records in computer operations and produces a three-part invoice along with the truck summary report detailing the customer stops. The first copy is sent to the credit department, is temporarily filed, and acts as a control copy in case of missing invoices.

Copies 2 and 3 of the invoice and the truck summary report are sent to shipping and temporarily filed. When the billing/invoice program is run, the accounts receivable and inventory records are updated in computer operations along with the journal voucher file.

The clerk in the computer operations department then accesses the routed delivery file and runs the order-picking program that generates the stock release and picking labels that go to the warehouse.

The labels, which contain customer number, name, truck to be loaded, product name, number, and quantity, are distributed to warehouse workers. Based on the information contained on the labels, goods are picked and loaded onto skids and shrink-wrapped. The stock release is filed in the warehouse, and the picked goods are sent directly to shipping, where the skids are loaded onto the trucks in reverse order of customer delivery.

Once the trucks are loaded with the customer orders, the shipping clerk pulls the second and third copies of the invoice, along with the truck summary report, and hands them to the driver with the deliveries for the day. After the driver unloads the orders, the driver has the customers sign the second invoice copy, which acts as Green Leaf’s binding contract, and gives the customer the other copy. At the end of the day, the driver delivers the truck summary report and the second copy of the invoices to the credit department.

A clerk in the credit department then reconciles the truck summary report and the invoice copy. Once they have been reconciled, the invoice is imaged into the optical control reader and stored in the imaged file. This allows invoices to be viewed online to answer customer questions about billing. In addition, this added feature provides internal controls by affording Green Leaf the capability of running spot checks by querying invoices by account number, customer name, amount, or date of invoice.

At 4:00 am, the computer operations manager begins the end-of-day batch update process. The journal vouchers are sorted, and the general ledger program is run to update the general journal for the previous day’s business transactions. After the general journal is updated, three management reports are produced: the sales recap report and the truck recap report, which are sent to the controller, and the account receivable control summary, which is distributed to the credit manager.

Cash Receipts Procedures Green Leaf’s receptionist, Helen, greets all incoming visitors as they arrive. Each day the mail carrier delivers all the mail for the entire plant, which includes customer payments from orders previously delivered. Helen sorts the mail, separating customer payments from the rest of the mail. As each payment is opened, Helen carefully records the account number along with the business name in the memo section of the check and disposes of the remittance advice. Helen then delivers all the checks documented with customer account number and name to the accounting department to be posted to the respective accounts.

The AR clerk posts the payments to each of the customers’ accounts and updates the AR ledger and cash receipts journal by entering the information into the computer terminal.

All records and files are stored in the data processing department. After all payments are posted, two copies of the payment posting summary are generated. One is sent to the controller’s office and will later be reconciled with the validated deposit slip from the bank.

The other payment summary is delivered to the manager of the AR department. Next the clerk prepares three deposit slips, one of which will accompany the deposit to the bank. One of the copies is filed within the department, and the other is sent with the summary report to the controller’s office. When the validated deposit slip arrives from the bank, the controller reconciles the payment summary report and deposit slip against the validated deposit slip from the bank. The general journal and control accounts are updated.

Purchases System The purchasing agent reviews stock reports by category to determine what needs to be ordered based on sales demand and seasonal demand.

The order quantity is determined by sales demand/frequency and quantity on hand from the inventory file via a terminal. A full weekly stock reorder report is prepared. The purchasing agent then calls all the suppliers on the suppliers list for prices. The supplier with the best price is contracted, and a purchase order is sent. Two copies of the purchase order are made; one is attached to the stock reorder report, and both are permanently filed. The other purchase order is sent to the receiving area.

Once the goods arrive in the receiving area, the receiving clerk compares the purchase order to the goods and notes any discrepancies. A receiving report is prepared and a copy is made. The receiving report, packing slip, and bill of lading are sent to the AP department, where they are temporarily filed, awaiting the invoice. The copy of the receiving report is sent with the purchase order to the purchasing department, where they are reconciled with the stock reorder report in the open purchases file; the documents are then permanently filed. Inventory records are updated via a terminal in the receiving area, and the goods are sent to the warehouse. The receiving clerk prepares a journal voucher and sends it to the general accounting clerk to key into the general ledger control account file.

After the accounts payable department receives the invoice from the supplier, it is reconciled with the packing slip and receiving report. Once reconciled, the purchases journal is posted to and the supplier’s account is updated in the AP subsidiary ledger. The invoice is then filed by due date. The AP clerk prepares a summary of the entries in journal voucher form and sends it to the general accounting clerk to key into the general ledger control account file.

Current Cash Disbursements System As the due dates approach, the AP clerk writes a check to the supplier indicating the invoice number and amount due. The check is sent to the general accounting department comptroller for a signature. The check is signed, a copy made, and the check is mailed. The check copy is stamped as paid and is sent back to AP. The AP clerk then updates the AP subsidiary ledger to reflect the payments, prepares and sends an account summary to the general ledger, and permanently files the documents. The AP clerk also updates the check register, summarizes it, and sends a journal voucher to the general accounting clerk for keying into the general ledger control account file via a terminal.

Fixed Asset System Daniel Jefferson has been the fixed asset manager for 16 years. He is a trusted employee of Green Leaf Produce and has been given greater responsibility in recent years. Daniel is in charge of the acquisition, maintenance, and time logging of the fixed assets the company owns. In his tenure, he has implemented a program to buy all delivery trucks rather than lease them. The added equity that owning provides over leasing has allowed Green Leaf Produce to employ leverage in acquiring new assets. Recently, however, management has become concerned about the rise in maintenance costs. The average maintenance bill has increased by 15 percent over the last two years. Management is considering leasing once again and selling the trucks they now own.

Before taking any major steps, they have decided to investigate the fixed asset department.

Daniel is responsible for selecting repair companies and negotiating maintenance and repair contracts. Daniel selected Fix ‘Em All Repairs for all of the needed work. Jessica Jefferson, his wife, is the office manger of the repair shop. Daniel fills out the work orders as maintenance comes due and repairs are needed. Fix ‘Em All Repairs bills Green Leaf Produce at the end of the month for services rendered. Upon receipt of the bill, the AP department processes the payment, which takes five business days. Daniel makes the necessary entries to the general ledger.

Payroll System Management at Green Leaf Produce trusts the employees to be accurate in recording hours worked. Jim Richmond, treasurer of the company, has been working in the AP department since the early 1970s. Because of his extended service, he has been entrusted with many responsibilities. One of his responsibilities is to maintain the personnel files. He supplies this information for payroll processing purposes.

The employees prepare their timesheets when they arrive and note when they leave.

At the end of the workweek, each department sends the employee timesheets to Jim for approval. After he approves the timesheets, he sends them and the personnel action form to the payroll office to be processed. The paychecks are drawn on the company’s general cash account.
After preparing the payroll register, the payroll department sends the paychecks and the payroll register to the AP department for review.
AP then sends a journal voucher to the general ledger department, files the payroll register, and sends the paychecks to Jim for signing and distribution to the employees.
Required:

a. Create a data flow diagram for the fixed asset and payroll systems.

b. Create a document flowchart for the fixed asset and payroll systems.

c. Analyze the internal control weaknesses in each of the two systems. Model your response according to the six categories of physical control activities specified in SAS 78.

d. Prepare a system flowchart for each of the two redesigned computer-based systems resolves the control weaknesses that you identified.