The revenue and expenditure cycles chapter 7
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The Revenue and Expenditure Cycles - Chapter 7 Sales Order Processing Accounts Receivable System REVENUE CYCLE APPLICATIONS Sales department obtains customer order and validates. Credit department checks customer’s credit.

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Revenue cycle applications l.jpg

Sales Order Processing

Accounts Receivable System

REVENUE CYCLE APPLICATIONS


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Sales department obtains customer order and validates.

Credit department checks customer’s credit.

Sales department determines that products or services are available and prepares asales order.

Stores assemble goods for shipment which may involve using apicking ticket toremove goods from the warehouse.

Shipping department ships ordered goods including a packing slip for customer validation.

Functions in the Revenue Cycle


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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 customerremittance advice which accompanies payment.

Appropriate personnel prepare needed reports.

Functions in the Revenue Cycle


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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 andbills of lading

Credit memos - issued for sales returns and allowances

Inputs to the Revenue Cycle


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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

Outputs of the Revenue Cycle


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Cash Receipts

Billing

Accounts Receivable

Credit

General Ledger

Accounts Receivable Functions


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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.

Cycle Billing in Accounts Receivable


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incomplete prebilling to use

separate order and billing

postbilling

Types of Sales Order Systems



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both a sales order and an invoice are used in a sales order application system.

separate order and billing



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a single order which calls for several shipments to the same customer over a specific time period.

blanket order


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Factoring customer over a specific time period. 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.

Factoring of Accounts Receivable


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Balance forward method customer over a specific time period. - 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.

Methods of Maintenance of Accounts Receivable


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credit memorandum: a form used to document reductions to a customer's account due to sales returns or sales allowances.

Sales Returns and Allowances


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Numerous techniques are available to collect past due accounts (e.g., follow-up letters, collection agencies), but some accounts are ultimately worthless.

Write-off of Accounts Receivable


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central feature in a write-off procedure is an analysis of past due accounts, usually done with an aged trial balance.

Write-off of Accounts Receivable


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Lapping past due accounts, usually done with an aged trial balance.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.

Lapping of Accounts Receivable-a Risk Exposure


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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

Internal Controls in the Revenue Cycle


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The purpose of the basis of a written authorization.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.

The Expenditure Cycle


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Ensure goods and services are ordered as needed. basis of a written authorization.

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.

Objectives of the Expenditure Cycle


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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.

Functions in the Expenditure Cycle


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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.

Functions in the Expenditure Cycle


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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.

Other Related Functions of the Expenditure Cycle


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List of Approved Vendors employer payroll taxes- 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

Inputs to the Expenditure Cycle


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Open Purchase Order reports employer payroll taxes-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

Outputs of the Expenditure Cycle


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Vendor checks employer payroll taxes- 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

Outputs of the Expenditure Cycle


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Price lists employer payroll taxes - 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

Inventory Control Output Reports of the Expenditure Cycle


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Kiting employer payroll taxes 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.

Check Kiting - a Risk Exposure


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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.

Voucher System of Cash Disbursements


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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.

Internal Controls in the Expenditure Cycle


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Personnel outside the purchasing department.

Timekeeping

Payroll

Payroll


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responsible for placing people on the company's payroll, specifying rates of pay, and authorizing all deductions from pay.

Personnel


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responsible for collecting and maintaining time cards or time reports, and reconciling these data to job time summary reports

Timekeeping



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Details the computation of net pay (gross pay less deductions from pay).

Payroll register


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Paychecks are sent to cash disbursements for signature, review, and distribution.

Payroll Controls


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The use of a separate imprest payroll account for paychecks to facilitate reconciliation

Payroll Controls



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the person who distributes pay is independent of the payroll preparation process.

independent paymaster


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Federal old-age, survivors', disability, and hospital insurance (F.I.C.A.)

Federal unemployment insurance

State unemployment insurance

Income taxes withheld

Payroll Processing Requirements


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