3. Functions in the Revenue Cycle
• Sales department obtains customer order and validates.
• Credit department checks customer’s credit.
• Sales department determines that products or services are
available and prepares a sales order.
• Stores assemble goods for shipment which
may involve using a picking ticket to
remove goods from the warehouse.
• Shipping department ships ordered goods
including a packing slip for customer
validation.
4. Functions in the Revenue Cycle
• Billing department bills customer upon receipt of a
shipping notice from shipping department.
• Cashier receives and deposits cash intact daily using a
deposit slip.
• Accounts receivable clerk updates accounts receivable
database by reference to the customer remittance
advice which accompanies payment.
• Appropriate personnel prepare needed reports.
5. Inputs to the Revenue Cycle
• Sales Orders - prenumbered and usually prepared in
multiple copies
• Sales Invoices - prepared after shipment of goods or
providing of a service
• Customer Checks - deposited intact daily by cashier
• Remittance Advices - serve as source document for
credits to accounts receivable; advices may be
turnaround documents
• Shipping Notices - copies will serve as packing slips
and bills of lading
• Credit memos - issued for sales returns and allowances
6. Outputs of the Revenue Cycle
• Open Orders Report - lists those sales orders that are not
completely shipped and billed
• Customer Billing Statement - includes customer account
activity such as sales, returns, and cash receipts
• Accounts Receivable Aging Statement - contains data
concerning the status of open balances of all active credit
customers arranging the overdue amounts by time periods
• Sales Analysis Reports - captures detailed data about each
sale in order to monitor sales activities and plan production
and marketing efforts
• Customer Listing Report - shows customer codes,
contacts, shipping and billing addresses, credit limits, and
billing terms
8. Cycle Billing in Accounts
Receivable
• Companies which have a large volume of
customers may choose to use cycle billing.
• This plan involves subdividing the
accounts receivable file by alphabet
or account number and sending bills
out in cycles.
• Cycle billing distributes the preparation of
customer statements over the working days of the
month.
9. Types of Sales Order Systems
• incomplete prebilling
• separate order and billing
• postbilling
13. blanket order
• a single order which calls for several
shipments to the same customer over a
specific time period.
14. Factoring of Accounts
Receivable
• Factoring involves selling accounts receivable
at a discount to collection agencies.
• Advantages: avoids accounts receivable
recordkeeping costs and speeds up cash
collection.
• Disadvantages: fees charged by factoring agencies
are unusually large and there could be potential
negative effects of factoring on customer relations.
15. Methods of Maintenance of
Accounts Receivable
• Balance forward method - applies a customer
payment against the outstanding balance rather
than against a specific invoice by merging all
invoice amounts of previous months and
showing a “balance forward”.
• Open invoice method - matches
each payment with a specific invoice,
thus disputed invoices are more easily
isolated.
16. Sales Returns and Allowances
• credit memorandum: a form used to
document reductions to a customer's
account due to sales returns or sales
allowances.
17. Write-off of Accounts Receivable
• Numerous techniques are available to
collect past due accounts (e.g., follow-up
letters, collection agencies), but some
accounts are ultimately worthless.
18. Write-off of Accounts Receivable
• central feature in a write-off procedure is an
analysis of past due accounts, usually done
with an aged trial balance.
19. Lapping of Accounts
Receivable-a Risk Exposure
• Lapping is a type of embezzlement that
involves the theft of cash and its concealment by
a succession of delayed postings to
customer accounts.
• The risk exposures include a loss of funds
received from customers and overstated
accounts receivable balances.
• Using a bank lockbox system and segregation
of duties can help reduce exposure.
20. Internal Controls in the
Revenue Cycle
• Inventory is transferred, picked, and shipped only
on the basis of a written authorization.
• Customers are billed only upon the shipment of
goods.
• Credit for returns is issued only after goods are
returned and checked by the receiving department.
• Write-offs of customer accounts are approved by
the credit manager
21. The Expenditure Cycle
• The purpose of the Expenditure Cycle is to
facilitate the exchange of cash with vendors for
needed goods and services.
• Purchases may be for cash or credit
• The Expenditure Cycle captures
information relating to purchases,
suppliers, and payables.
22. Objectives of the Expenditure
Cycle
• Ensure goods and services are ordered as needed.
• Receive all ordered goods, verify condition, and
safeguard until needed.
• Determine that vendor invoices are valid and correct and
paid at the optimal time for cash discounts and
avoidance of finance charges for late payment.
• Maintenance of vendor records by the purchasing
department, which is responsible for finding reputable
vendors who offer quality goods and services at
reasonable prices.
• Forecast cash outflows in order to prepare a cash budget.
23. Functions in the Expenditure
Cycle
• Stores recognizes the need for goods or services
and issues a purchase requisition.
• Purchasing department places an order for goods
or services by issuing a legally binding purchase
order with a supplier.
• Receiving department receives goods or accepts
services and completes a receiving report after
inspecting and counting goods.
24. Functions in the Expenditure
Cycle
• Accounts payable department ascertains validity of
the payment obligation by vouching the vendor
invoice to supporting documentation.
• Accounts payable prepares the disbursement check
on the basis of approved vendor invoices.
• Accounts payable department maintains accounts
payable and General ledger department posts
transactions to the general ledger.
• Appropriate personnel prepare needed financial
reports and other outputs.
25. Other Related Functions of the
Expenditure Cycle
• Payroll disbursements - includes accrual of payroll and
employer payroll taxes
• Capital expenditures - includes acquiring, trading,
salvaging and depreciating plant assets
• Purchase returns and allowances - arise when the
purchasing firm is unsatisfied with ordered goods and a
debit memorandum is issued
• Miscellaneous cash disbursements - i.e., discharge bank
loans, acquire investments and repurchase stock
• Petty cash disbursements - in order to control these
small expenditures an imprest system is normally used.
26. Inputs to the Expenditure
Cycle
• List of Approved Vendors - reflects merchants with
whom the company has been authorized to do business
• Purchase Requisition - shows items requested by
stores and may indicate the name of the vendor
• Purchase Order - based on purchase requisition but
also includes vendor information and payment terms
• Vendor Invoice - includes items shipped by vendors,
prices, shipping terms, and discounts provided
• Receiving Report - reflects the count and condition of
received goods
27. Outputs of the Expenditure
Cycle
• Open Purchase Order reports - show all purchases for
which invoices have not been approved for payment
• Open Invoices reports - list all approved invoices that are
currently unpaid
• Inventory Status reports - contain quantities received,
shipped, and on hand for each type of inventory
• Overdue Deliveries reports - reflect purchase transactions
which have arrived late from suppliers
• Payables Aging reports- reflect the status of old unpaid
invoices due to unresolved questions or liquidity problems
28. Outputs of the Expenditure
Cycle
• Vendor checks - should be supported by a voucher
and signed by a person designated by management
• Check registers - list all checks issued for a
particular period
• Discrepancy reports - used to identify any
differences among quantities on the purchase order,
receiving report, and vendor invoice
• Cash requirement forecasts - predict future
payments and payment dates by reference to
outstanding purchase order, unbilled receiving
reports, and vendor invoices
29. Inventory Control Output Reports
of the Expenditure Cycle
• Price lists - maintained to show prices charged for
raw materials and to determine standard costs for
budgeting production costs
• Periodic Usage reports - provide managerial
information about how various production
departments are using raw materials
• Inventory Status reports show inventory levels
for purchasing and production purposes
• Inventory Reconciliation reports note
discrepancies between the physical inventory
count and book balances
30. Check Kiting - a Risk Exposure
• Kiting is a type of embezzlement that involves
transfers of checks among bank accounts.
• The purpose is generally to cover cash
shortages or to inflate assets.
• The risk of kiting can be
reduced if bank reconciliations
are prepared and compared with
respect to all bank accounts as of
the same date.
31. Voucher System of Cash
Disbursements
• Before payment to a vendor an accounts
payable clerk matches together the purchase
requisition, purchase order, and receiving
report with the vendor invoice and
prepares a voucher.
• The voucher serves as a control
over cash disbursements to vendors
by avoiding duplicate payments.
32. Internal Controls in the
Expenditure Cycle
• Purchase requisitions should originate and be approved
outside the purchasing department.
• Purchasing should implement competitive bidding
procedures.
• Receiving should be separate from stores and should
perform a blind count of shipments received.
• Written authorization should accompany the movement of
inventory.
• Accounts payable should employ a voucher system.
• Cashier should sign checks.
• A physical count of inventory should be taken and
compared to inventory records.
42. Payroll Processing Requirements
• Federal old-age, survivors', disability, and
hospital insurance (F.I.C.A.)
• Federal unemployment insurance
• State unemployment insurance
• Income taxes withheld