BUEINSS CYCLES & INTERNAL CONTROL

ProjectExample_Lowes_ComprehensiveProject1.docx

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Accounting 3310 Accounting Information Systems and Controls Final Comprehensive Project

Introduction

For this comprehensive final exam project, the client I chose was Lowe’s Home Improvement. Here is the link to my video describing what type of business Lowe’s does; https://www.bloomberg.com/news/videos/2015-05-20/home-depot-vs-lowe-s-the-business-of-home-improvement.

Lowe’s is a retail store that specializes in home improvement and appliances. It was founded in 1946 in North Wilkesboro, NC, and has grown to be the 2nd largest home improvement retailer in the world and the 19th largest overall retailer. On their most recent financial statements, Lowe’s reported $65,017,000,000 in revenue, $22,464,000,000 in gross profit, and $3,093,000,000 in net income.

With my experience working at Lowe’s, I have seen first hand the pros of the way they do things and the negatives. Sometimes their business cycles run smoothly and sometimes they don’t. Lowe’s can benefit from my work in this project in a couple of ways. First, Lowe’s can benefit from this project by getting a second opinion on what would make their business cycles run more efficiently. Businesses are always looking for ways to become more efficient and this project can give Lowe’s ideas on how to achieve greater efficiency. As well, Lowe’s can benefit from my work by seeing what their employees are thinking. Most of the time, they just do what they’ve been doing for ever and don’t take into account employee opinions. If I myself am thinking about some of these issues with regards to their business cycles, I can’t be the only one. This project will hopefully open Lowe’s’ eyes to implement some of their employee’s suggestions.

Business Cycle Documentation

The business cycles we learned about and studied in class are extremely important to Lowe’s as a business. The revenue, expenditure, production, and hrm/payroll cycles are all seen in the day-to-day operations of the company. First off, the revenue cycle is a recurring set of business activities and related info processing operations associated with providing goods and services to customers and collecting cash in payment for those sales. This is important to Lowe’s because this is what their business is based on, providing high-quality home improvement products at everyday low prices. Just as important is the expenditure cycle. Lowe’s carries over 40,000 products in store and tons more online. The expenditure cycle deals with how they acquire those products to sell to consumers. The production cycle relates back to Lowe’s in the area of special orders. What a customer wants for their project isn’t always readily available. Lowe’s need to specially order and produce a product for a customer if the customers’ desired product is not in-store. Lastly, the HRM/Payroll cycle is important because the sales specialists and other employees need to be paid for their work.

Revenue Cycle

First up is the revenue cycle. As mentioned above, the revenue cycle is a recurring set of business activities and related information processing operations associated with providing goods or services to customers and collecting cash in payment for those sales. The four major activities in the revenue cycle are sales order entry, shipping, billing, and cash collection. At Lowes, a customer will place an order and the store will receive it. The sales associate would then update the sales order file, update the customer file, and check available inventory. The merchandise would then be sent to shipping where it is picked, packed, and shipped to the customer using an 3rd party like UPS or FedEx. The billing department would then receive the bill of lading from shipping so they can properly invoice the customer. After the customer receives the invoice for their order, they would send payment to the cash collections department. There, they would update the appropriate files and deposit the payment into the bank. I have constructed a data flow diagram, a business process diagram, and a flowchart to depict the revenue cycle.

Expenditure Cycle

After the revenue cycle comes the expenditure cycle. The expenditure cycle is a recurring set of business activities and related info processing operations associated with the purchase of payment for goods. Activities of the expenditure cycle include ordering goods, receiving goods, and paying for goods. Whether it’s production, a store department or inventory management, each will send a purchase requisition to order a specific product. The order system will then check available inventory and appropriate vendors. If the item needs to come from a vendor, the vendor will send the inventory, packing slip, and bill of lading to the stores where the receiving department receives it. Receiving will check the shipment against the purchase order to make sure it is correct. Once the shipment of merchandise has been received, the cash disbursement department will pay the vendor according to the invoice they sent along with the correct purchase order. I have made a data flow diagram to show the expenditure cycle at Lowe’s.

Production Cycle

The production cycle is a recurring set of activities and information related to manufacturing products. The four basic steps in a production cycle are product design, planning and scheduling, production operation, and cost accounting. While Lowe’s doesn’t necessarily manufacture anything in the traditional sense, the still have a production cycle. Their production cycle deals in the area of special orders. When a customer wants a product that is not in-store, they need to special order the product. This way, Lowe’s can offer a large variety of options without running out of space in their stores. When a Lowe’s employee special orders a product for a customer, the special order is sent to the appropriate supplier of the product. They will check if they need to build the product or ship it as is. Once the item is shipped by the supplier, it is received by the customers’ Lowe’s store. Here, the sales associate who helped the customer will set up a date and time for the item to be delivered to the customer or for them to pick it up. I have constructed a business process diagram to show Lowes’ production cycle.

HRM/Payroll Cycle

The last cycle is the human resource and payroll cycle. This is a set of business activities and related data processing operations associated with effectively managing the employee workforce. This cycle is straight forward. An employee will clock in and out on Kronos, which is Lowe’s workforce management software. HR will update employee and company information into Kronos as well. Employees are then paid every two weeks via direct deposit or check and can view their pay stub on Kronos. Here is a flowchart showing the hr/payroll cycle of Lowe’s.

Internal Controls

Controls Against Computer Fraud and Abuse

A lot of Lowe’s business is done through a computer. Whether it is managing orders, checking inventory or paying employees, computers are used every day at Lowe’s and can be suspect to fraud and abuse. To access a computer terminal at Lowe’s you need to have your employee number and password. This is to ensure that someone who is not an employee doesn’t access the information. As well, when trying to access the employee portal from a computer that is not in a Lowe’s store, you need to answer two security questions along with your employee number and password. This control prevents masquerading or impersonation. Lastly, Lowe’s uses a website blocker that blocks any unapproved websites. This prevents against malware or viruses being downloaded onto a Lowe’s terminal and infiltrating the system.

Control and AIS

There are three overarching control types; preventative, detective, and corrective. Some preventative controls Lowe’s implements are hiring qualified personnel and segregation of duties. These especially apply to those in management positions because they are dealing with company information and customer payment on a regular basis. Some detective controls Lowe’s uses are double-checking cash counts and preparing accurate deposit slips. Lastly, some corrective controls include maintaining both a printed copy and a digital copy of a customer’s order.

Controls for Information Security

There are several principles that help form information security controls. Those are security, confidentiality, privacy, processing integrity, and availability. Lowe’s important accounting information is restricted to only specified individuals. There is both physical and technological access to this information. Secondly, confidentiality deals with organizational information. Only managers have access to this information. Even managers might not have entire access to organizational info. Some of this is restricted except only to those at the corporate office in North Carolina. Privacy deals with customer and employee information. Customer info such as address and credit card numbers are used only by those in charge or receiving customer payment, usually those at the customer service desk and managers. The only person at Lowe’s that can access employee sensitive information is HR.

Confidentiality and Privacy Controls

Since Lowe’s is a publicly traded company on the New York Stock Exchange it must follow GAAP. One of the specific controls Lowe’s uses for confidentiality, and everything in general, is training. When you first start working at Lowe’s there is usually a one-week training period where you watch videos on various subjects. As well, there are training videos that have specific due dates on them that employees must watch every so often. Lowe’s makes sure its employees are up to date on their control procedures.

Processing Integrity and Availability Controls

Lowe’s uses a lot of data entry controls to make their systems reliable. They employ field checks, limit checks, size checks, completeness checks, and validity checks. Lowe’s enables field checks when scanning for inventory and making product labels, they implement completeness checks when filling out a purchase order for a customer, and Lowe’s employs validity checks when signing in to the Lowe’s terminal database. All these checks they use ensure that the inventory, customer orders, company data, etc. is accurate.

Internal Control Overview

Internal controls are an important part of any business. If you want your business to be successful, you must protect it. Whether it be requiring strong passwords and multi-step verification for logging in or enabling antispyware and antimalware to protect against viruses, Lowe’s makes sure that its computers and online information is secure. By ensuring that their company, customer, and vendor information is safely stored, Lowe’s sets itself up for future success. If either of those is compromised, Lowe’s not only loses the information but loses trust in their customers and vendors, which would lead to lower sales.

Narrative Description and Tables

Revenue Cycle

In this cycle, Lowe’s receives orders for merchandise from customers. A sales associate will then pick the order and take it to the back to be shipped out by an external source like FedEx or UPS. Lowe’s will then receive payment for the product, record it, and deposit it into the bank.

Expenditure Cycle

In this cycle, Lowe’s acquires the inventory/merchandise it needs to sell to customers. Inventory will be automatically ordered by the computer system if it notices they are low or by a department manager. Once receiving takes the inventory off the delivery trucks, the inventory is placed on store shelves where it is set to sell.

Production Cycle

This is the cycle that deals with order and producing special orders. When a customer wants a product that Lowe’s does readily carry, they special order the product. The special order is sent to an external source who constructs the product and delivers it to the customer.

HR/Payroll Cycle

This cycle is done by the HR department. HR deals with hiring, firing, and training employees. Payroll is done by HR and the payroll departments. They deal with paying employees and filing taxes.

Lowe’s Employees

Computer

External Source

Revenue

Receive order

Pick order

Delivers order

Receive payment

Record Payment

Deposit payment

Expenditure

Request inventory

Order inventory

Deliver inventory

Receive inventory

Store inventory

Pay for inventory

Update AP

Production

Receive special order

Enter special order

Build special order

Ship to customer

Cost accounting

HR/Payroll

Clock in timecard

Approve timecard

Update payroll

Update tax rates

Pay taxes

Prepare payroll

Disburse payroll

Prepare benefits

Disburse benefits

Conclusion

Interesting Facts

Lowes was started by H. Carl Buchan, owner of North Wilkesboro Hardware Company. He wanted to create a chain of hardware stores. At the same time, Lowes was a small hardware store that sold all different types of products that was owned by James Lowe, Buchan’s brother-in-law. Buchan bought Lowe’s from his brother-in-law and it has grown into the home improvement store you know today. As well, each Lowe’s store has over 40,000 individual products in it.

Recommendations

One recommendation I have for Lowe’s is maintaining better inventory records. Whether it’s by using RFID or having more inventory counts, Lowe’s needs to have more accurate inventory levels. Often times, the system will say there is a large number of a certain product left but there are none to be found.

As well, certain products always are in delivery shipments no matter if they are low or not. This often times leads to too much inventory of certain products that never sell. Lowe’s should implement lean or pull manufacturing that responds to customer demand rather than in anticipation of it.

Another recommendation I have is installing security cameras along the side of the store. During the summer when all the mulch and top soil are store along the side, it is incredibly easy for someone to steal bags. While a security camera would not directly stop the theft of merchandise, it would help in the detection of it.

Lowe’s should update their computer system and software. For managing inventory and orders for customers, Lowe’s uses a system called Genesis. It is an outdated MS-DOS program that looks like it’s from the early days of computers. There is no mouse or pictures, just keystrokes. Even with sufficient training, this program is extremely difficult to navigate. By upgrading their inventory and order management system, they can become more efficient by not having employees waste time trying to figure out how to work the system.

Summary

In this project, I explore how Lowe’s operates and the business processes and cycles they employ. I looked at their revenue, expenditure, production, and HR/payroll cycles. I then created charts to demonstrate the flow of activities at Lowe’s. Next, I went through the different internal controls Lowe’s uses to keep their information secure. Lastly, I gave some recommendations for how Lowe’s can become more efficient in their business cycles and their controls.

This project was enjoyable because I was able to dive deeper into the inner-workings of how Lowe’s operates. It gave me a better appreciation of how much goes into running a successful home improvement store, and in Lowe’s case, the 2nd largest world. I hope my findings are an accurate representation of what I learned and I hope that my recommendations might be implemented one day. I have not received any feedback from Lowe’s yet.