Jasmine Tea

(Prepared by Meridith Coyne and Gaby Keely, Lehigh University)

Jasmine Tea distributes specialty tea leaves to coffee shops, cafes, and restaurants across the country. The company’s headquarters is in Newark, New Jersey, and two distribution warehouses are in Philadelphia and Boston.

Established in 1985, the company’s first warehouse was in Newark. Jasmine Tea began by purchasing and distributing from one Chinese tea supplier. Within two years, sales had doubled and the company was seeking more varieties of tea. It now has dozens of suppliers and over 50 varieties of tea. Currently there are 155 employees and annual sales of over

$50 million. Last year was its most successful year with an annual sales growth of 6.5 percent.

In addition to the company’s great successes, Jasmine Tea has been receiving complaints from customers and suppliers about billing, shipping, and payment problems.

Under the current operating system, each department has independent computer terminals.

The complaints and inefficient computer system have triggered the management team to seek alternative solutions that will enable them to better serve their customers and meet the demands.

Sales Procedures Jasmine Tea’s revenue cycle begins when a customer places an order with a sales representative by phone or fax. A sales department employee enters the customer order into a standard sales order format at a computer terminal. This generates six documents: three copies of sales orders, a stock release, a shipping notice, and a packing slip. The billing department receives a copy of the sales order, the warehouse receives the stock release and a copy of the sales order, and the shipping department receives a shipping notice and packing slip. The sales clerk files a copy of the sales order in the open customer order file.

Upon receipt of the sales order, the billing department creates an invoice and sends it to the customer. The billing clerk enters the sale in the computer terminal. This process records the sale in the sales journal and in the AR journal. The journal summaries are sent to the general ledger, where the information is posted.

The warehouse receives a copy of the sales order and stock release. A warehouse employee picks the product and sends it to the shipping department along with the stock release. The sales order is filed in the warehouse.

A warehouse clerk updates the inventory records at the warehouse computer terminal. The general ledger department then posts the inventory summary to the general ledger.

The shipping department receives a shipping notice and packing slip from the sales department. Upon receipt of goods and stock release, the shipping clerk prepares the bill of lading at a computer terminal. Two copies of the bill of lading and packing slip are sent with the product to the carrier. The shipping notice is filed. The billing department receives and reconciles the stock release with the invoice to determine if the customer was billed for the correct quantity and prices.

Cash Receipts Procedure The mail room has five employees who open and sort all mail. Each employee has two bins, one for remittance advice and one for checks.

Before separating the two documents and putting them in their corresponding bins, a mail clerk reconciles the amount on the check and remittance advice.

The remittance advice is sent to AR. The AR clerk records each remittance advice on the remittance list and then sends a copy to the cash receipts department. The AR clerk updates the customer account and the AR at a computer terminal. The summary is sent to the general ledger department, where it is posted to the general ledger.

The check is sent to the cash receipts department, which endorses each check with

“For Deposit Only” and verifies the checks with the remittance list and then records the cash receipts in the cash receipts journal. The clerk sends the check to the bank.

The general ledger department posts all journal summaries at a computer terminal upon receiving them. Copies of the account summaries are kept in the general ledger department.

Required:

a. Create a data flow diagram of the current system.

b. Create a document flowchart of the existing system.

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

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