This document summarizes the key activities and controls in the expenditure cycle, which involves ordering, receiving, and paying for goods and services. It describes the basic steps of ordering goods through a purchase requisition and purchase order, receiving goods and verifying the order, and approving the supplier invoice through matching it to supporting documents before payment. The document also identifies common threats at each step like purchasing unnecessary items, payment errors, and theft. It provides examples of control procedures to address these threats, such as segregating duties, taking inventory counts, and verifying orders against invoices.

1. Copyright © 2015 Pearson Education, Inc.
The Expenditure Cycle: Purchasing
to Cash Disbursements
Chapter 13
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2. Copyright © 2015 Pearson Education, Inc.
Learning Objectives
• Explain the basic business activities and related
information processing operations performed in
the expenditure cycle.
• Discuss the key decisions to be made in the
expenditure cycle, and identify the information
needed to make those decisions.
• Identify major threats in the expenditure cycle,
and evaluate the adequacy of various control
procedures for dealing with those threats.
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3. Copyright © 2015 Pearson Education, Inc.
Basic Expenditure Cycle Activities
• Order materials, supplies, and services
• Receive materials, supplies, and services
• Approve supplier (vendor) invoice
• Cash disbursement
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4. Copyright © 2015 Pearson Education, Inc.
Order Goods (Materials/Supplies) or
Services Processing Steps
• Identify what, when, and how much to purchase
▫ Source document: purchase requisition
• Choose a supplier
▫ Source document: purchase order
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5. Copyright © 2015 Pearson Education, Inc.
Ordering Goods/Services
Threats Controls
1. Stockouts and excess
inventory
2. Purchasing items not needed
3. Purchasing items at inflated
prices
4. Purchasing goods of poor
quality
5. Unreliable suppliers
6. Purchasing from
unauthorized suppliers
7. Kickbacks
1 a. Perpetual inventory system
b. Bar-coding, RFID
2 a. Review and approval of
purchase requisitions
3 a. Price lists
b. Competitive bids
4 a. Use approved suppliers
5 a. Monitor supplier
performance
b. Require quality certification
6 a. Purchase from approved
suppliers
7 a. Supplier audits
b. Prohibit gifts 13-5

6. Copyright © 2015 Pearson Education, Inc.
Receiving Process
• Goods arrive
▫ Verify goods ordered against the purchase order
(what, how much, quality)
▫ Source document: receiving report
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7. Copyright © 2015 Pearson Education, Inc.
Receiving Goods or Services
Threats Controls
1. Accepting unordered items
2. Mistakes in counting
3. Verifying receipt of services
4. Inventory theft
1 a. Authorized purchase orders
needed before receiving
goods
2 a. Bar codes or RFID
3 a. Budget controls and audits
4 a. Restrict physical access to
inventory
b. Document all inventory
transfers
c. Segregate custody vs.
receiving of inventory 13-7

8. Copyright © 2015 Pearson Education, Inc.
Approve Supplier Invoice and Cash
Disbursements
• Match the supplier invoice to:
▫ Purchase order
▫ Receiving report
supplier invoice + purchase order + receiving report = voucher
• Approve supplier invoice for payment
▫ Source document: disbursement voucher
• Pay vendor
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9. Copyright © 2015 Pearson Education, Inc.
Approve Supplier Invoice
Threats Control
1. Errors in supplier invoice
2. Mistakes in posting to
accounts payable
1 a. Verify invoice accuracy
2 a. Data entry edit controls
b. Reconcile detailed accounts
payable records to the
general ledger accounts
payable account
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10. Copyright © 2015 Pearson Education, Inc.
Cash Disbursements
Threats Controls
1. Failure to take discounts
2. Pay for items not received
3. Duplicate payments
4. Theft of cash
5. Check alteration
6. Cash flow problems
1 a. File invoices by due date to
take advantage of discounts
2 a. Match supplier invoice to
supporting documents
(purchase order, receiving
report)
3 a. Pay only original invoices
b. Cancel supporting document
when payment is made
4 a. Physical security of checks
b. Separation of duties
c. Reconcile bank accounts
5 a. Check Protection machines
6 a. Cash flow budget 13-10

11. Copyright © 2015 Pearson Education, Inc.
Key Terms
• Expenditure cycle
• Economic order quantity
(EOQ)
• Reorder point
• Materials requirement
planning (MRP)
• Just-in-time (JIT) inventory
system
• Purchase requisition
• Purchase order
• Blanket purchase order
• Vendor-managed inventory
• Kickbacks
• Receiving report
• Debit memo
• Voucher package
• Nonvoucher system
• Voucher system
• Disbursement voucher
• Evaluated receipt settlement
(ERS)
• Procurement card
• Imprest fund
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