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Chapter 12. The Revenue Cycle: Sales to Cash Collections. INTRODUCTION. The revenue cycle is a recurring set of business activities and related information processing operations associated with: Providing goods and services to customers Collecting their cash payments

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Chapter 12

Chapter 12

The Revenue Cycle: Sales to Cash Collections


Introduction

INTRODUCTION

  • The revenue cycle is a recurring set of business activities and related information processing operations associated with:

    • Providing goods and services to customers

    • Collecting their cash payments

  • The primary external exchange of information is with customers.


Introduction1

INTRODUCTION

  • Information about revenue cycle activities flows to other accounting cycles, e.g.:

    • The expenditure(acquisition) and production(conversion) cycles

  • Receive information about sales transactions so they’ll know when to initiate the purchase or production of more inventory.


Introduction2

INTRODUCTION

  • Information about revenue cycle activities flows to other accounting cycles, e.g.:

    • The expenditure and production cycles

    • The human resources/payroll cycle

  • Uses information about sales to calculate commissions and bonuses.


Introduction3

INTRODUCTION

  • Information about revenue cycle activities flows to other accounting cycles, e.g.:

    • The expenditure and production cycles

    • The human resources/payroll cycle

    • The general ledger and reporting function

  • Uses information produced by the revenue cycle in preparing financial statements and performance reports.


The revenue cycle

The Revenue Cycle


Revenue cycle activities

Revenue Cycle Activities

Sales order entry

Shipping

Billing

Cash collections


Overview of erp system to support revenue cycle

Overview of ERP System to Support Revenue Cycle


General revenue cycle threats controls

General Revenue Cycle Threats/Controls

  • Inaccurate or invalid master data

    • Controls

      • Data processing integrity controls

      • Restriction of access to master data

      • Review of all changes to master data


General revenue cycle threats controls1

General Revenue Cycle Threats/Controls

  • Unauthorized disclosure of sensitive information

    • Controls

      • Access controls

      • Encryption


General revenue cycle threats controls2

General Revenue Cycle Threats/Controls

  • Loss or destruction of master data

    • Controls

      • Backup and disaster recovery procedures

  • Poor performance

    • Controls

      • Managerial reports


Sales order entry

Sales Order Entry

Take order

Check and approve credit

Check inventory availability


Sales order threats controls

Sales Order Threats/Controls

  • THREAT NO. 5—Incomplete or inaccurate customer order (Table 12-1)

    • Why is this a problem?

      • It’s inefficient. The customer has to be re-contacted, and the order has to be re-entered.

      • Causes customer dissatisfaction and may impact future sales.

    • Controls

      • Data entry edit controls (see Chapter 10)

      • Restriction of access to master data


Sales order threats controls1

Sales Order Threats/Controls

  • THREAT NO. 6—Orders that are not legitimate

    • Why is this a problem?

      • You can’t make good credit decisions or collect from a customer you haven’t properly identified.

      • Traditionally, legitimacy of customer orders is established by receipt of a signed purchase order from the customer.

      • Digital signatures and digital certificates provide similar control for electronic business transactions.

    • Online credit card transactions with retail customers are fraught with issues.

      • Authentication issues

      • Repudiation issues


Sales order threats controls2

Sales Order Threats/Controls

  • THREAT NO. 6—Orders that are not legitimate

    • Controls

      • Digital signatures or written signatures

      • For online credit card transactions(card holder not present)

        • See next slide


Sales order threats controls3

Sales Order Threats/Controls

  • Some actions companies are taking with online or phone-order retail customers(cardholder not present transactions):

    • Requiring the three-digit code on the back of the credit card for confirmation that the customer physically possesses the card.

    • Billing zip code

    • Checking to see if billing address and shipping address are the same

    • Sending emails to the customer to confirm the transaction.

    • Verified by Visa/ MasterCard secure

      • Addresses authentication and non repudiation issue


Sales order threats controls4

Sales Order Threats/Controls

  • THREAT NO. 7—Uncollectible accounts (Sales to customers with poor credit)

    • Why is this a problem?

      • Results in lost assets or revenues.

    • Controls

      • Credit limits

      • Specific authorization to approve sales to new customers or sales that exceed a customer’s credit limit

      • Aging of accounts receivable


Sales order threats controls5

Sales Order Threats/Controls

  • THREAT NO. 8—Stockouts, carrying costs, and markdowns

    • Why is this a problem?

      • If you run out of merchandise, you may lose sales.

        • Can’t sell empty shelf space

      • If you carry too much merchandise, you incur excess carrying costs and/or have to mark the inventory down to sell it.


Sales order threats controls6

Sales Order Threats/Controls

  • THREAT NO. 8—Stockouts, carrying costs, and markdowns

    • Controls

      • Perpetual inventory control system

      • Use of bar-codes or RFID

      • Training

      • Periodic physical counts of inventory

      • Sales forecasts and activity reports


Sales order threats

Sales Order Threats

  • THREAT NO. 9—Loss of Customers

    • Why is this a problem?

      • Rule of thumb: It takes 5 times as much effort to attract a new customer as it does to retain an existing one.

    • Controls

      • CRM systems, self-help Web sites, and proper evaluation of customer service ratings


Shipping

Shipping

Picking and packing the order

Shipping the order


Shipping threats controls

Shipping Threats/Controls

  • THREAT NO. 10 & 12—Picking Wrong Items/Quantities, Shipping errors

    • Why is this a problem?

      • Customer dissatisfaction and lost sales may occur if customers are shipped the wrong items or there are delays because of a wrong address.

      • Shipping to the wrong address may also result in loss of the assets.


Shipping threats controls1

Shipping Threats/Controls

  • THREAT NO. 10 & 12—Picking Wrong Items/Quantities, Shipping errors

    • Controls

      • Bar-code and RFID technology

      • Reconciliation of picking lists to sales order details

      • Reconciliation of shipping documents with sales orders, picking lists, and packing slips

      • Use RFID systems to identify delays

      • Data entry via bar-code scanners and RFID

      • Data entry edit controls (if shipping data entered on terminals)

      • Configuration of ERP system to prevent duplicate shipments


Shipping threats

Shipping Threats

  • THREAT NO. 11—Theft of Inventory

    • Why is this a problem?

      • Loss of assets.

      • Inaccurate inventory records (because thieves don’t generally record the reduction in inventory).

    • Controls

      • Restriction of physical access to inventory

      • Documentation of all inventory transfers

      • RFID and bar-code technology

      • Periodic physical counts of inventory and reconciliation to recorded quantities


Shipping threats controls2

Shipping Threats/Controls

  • Additional Threat. —Damage/Lost in transit

    • Why is this a problem?

      • Added costs

      • Customer dissatisfaction and lost sales may occur if goods are damaged


Shipping threats controls3

SHIPPING Threats/Controls

  • A major shipping decision is the choice of delivery methods:

    • Some companies maintain a fleet of trucks.

    • Companies increasingly outsource to commercial carriers.

      • Reduces costs.

      • Allows company to focus on core business.

    • Selecting best carrier means collecting and monitoring carrier performance data for:

      • On-time delivery.

      • Condition of merchandise delivered.


Billing

Billing

Invoicing

Updating accounts receivable


Billing1

BILLING

  • This function performs two basic tasks:

    • Debits customer accounts for the amount the customer is invoiced.

    • Credits customer accounts for the amount of customer payments.

  • Two basic ways to maintain accounts receivable:

    • Open-invoice method

    • Balance forward method


Billing2

BILLING

  • Open-invoice method:

    • Customers pay according to each invoice.

    • Two copies of the invoice are typically sent to the customer.

      • Customer is asked to return one copy with payment.

      • This copy is a turnaround document called a remittance advice.

    • Advantages of open-invoice method:

      • Conducive to offering early-payment discounts

      • Results in more uniform flow of cash collections

    • Disadvantages of open-invoice method:

      • More complex to maintain


Billing3

BILLING

  • Balance forward method:

    • Customers pay according to amount on their monthly statement, rather than by invoice.

    • Monthly statement lists transactions since the last statement and lists the current balance.

      • The tear-off portion includes pre-printed information with customer name, account number, and balance

      • Customers are asked to return the stub, which serves as the remittance advice.

      • Remittances are applied against the total balance rather than against a specific invoice.


Billing4

BILLING

  • Advantages of balance-forward method:

    • It’s more efficient and reduces costs because you don’t bill for each individual sale.

    • It’s more convenient for the customer to make one monthly remittance.


Billing5

BILLING

  • Cycle billing is commonly used with the balance-forward method.

    • Monthly statements are prepared for subsets of customers at different times.

      • EXAMPLE: Bill customers according to the following schedule:

        • 1st week of month—Last names beginning with A-F

        • 2nd week of month—Last names beginning with G-M

        • 3rd week of month—Last names beginning with N-S

        • 4th week of month—Last names beginning with T-Z


Billing6

BILLING

  • Advantages of cycle billing:

    • Produces more even cash flow.

    • Produces more even workload.

    • Doesn’t tie up computer for several days to print statements.


Billing threats controls

Billing Threats/Controls

  • Failure to bill

  • Billing errors

  • Customer account errors

    • Posting errors in accounts receivable

    • Inaccurate or invalid credit memos


Billing threats controls1

Billing Threats/Controls

  • THREAT NO. 13—Failure to bill customers

    • Why is this a problem?

      • Loss of assets and revenues.

      • Inaccurate data on sales, inventory, and accounts receivable.

    • Controls

      • Separation of billing and shipping functions

      • Periodic reconciliation of invoices with sales orders, picking tickets, and shipping documents


Billing threats controls2

Billing Threats/Controls

  • THREAT NO. 14—Billing errors

    • Why is this a problem?

      • Loss of assets if you under-bill.

      • Customer dissatisfaction if you over-bill.

    • Controls

      • Configuration of system to automatically enter pricing data

      • Restriction of access to pricing master data

      • Data entry edit controls

      • Reconciliation of shipping documents (picking tickets, bills of lading, and packing list) to sales orders


Billing threats controls3

Billing Threats/Controls

  • THREAT NO. 15 &16—Errors in maintaining customer accounts/Inaccurate or invalid credit memos

    • Why is this a problem?

      • Leads to customer dissatisfaction and loss of future sales.

      • May indicate theft of cash.


Billing threats controls4

Billing Threats/Controls

  • THREAT NO. 15 &16—Errors in maintaining customer accounts/Inaccurate or invalid credit memos

    • Controls

      • Data entry controls

      • Reconciliation of batch totals

      • Mailing of monthly statements to customers

      • Reconciliation of subsidiary accounts to general ledger

      • Segregation of duties of credit memo authorization from both sales order entry and customer account maintenance

      • Configuration of system to block credit memos unless there is either corresponding documentation of return of damaged goods or specific authorization by management


Cash collections

CASH COLLECTIONS

  • The final activity in the revenue cycle is collecting cash from customers.

  • Because cash and checks are highly vulnerable, controls should be in place to discourage theft.


Cash collections1

CASH COLLECTIONS

  • Possible approaches to collecting cash:

    • Turnaround documents forwarded to accounts receivable.

  • The mailroom opens customer envelopes and forwards to accounts receivable either:

    • Remittance advices.

    • Photocopies of remittance advices.

    • A remittance list prepared in the mailroom.


Cash collections2

CASH COLLECTIONS

  • Customers remit payments to a bank P.O. box.

  • The bank sends the company:

    • Remittance advices.

    • An electronic list of the remittances.

    • Copies of the checks.

  • Advantages:

    • Prevents theft by company employees.

    • Improves cash flow management.

      • Lockboxes may be regional, which reduces time in the mail.

      • Checks are deposited immediately on receipt.

      • Foreign banks can be utilized for international customers.

  • Possible approaches to collecting cash:

    • Turnaround documents forwarded to accounts receivable.

    • Lockbox arrangements.


Cash collections3

CASH COLLECTIONS

  • Possible approaches to collecting cash:

    • Turnaround documents forwarded to accounts receivable.

    • Lockbox arrangements.

    • Electronic lockboxes.

  • Upon receiving and scanning the checks, the bank immediately sends electronic notification to the company, including:

    • Customer account number

    • Amount remitted


Cash collections4

CASH COLLECTIONS

  • Customers remit payment electronically to the company’s bank.

  • Eliminates mailing delays.

  • Typically done through banking system’s Automated Clearing House (ACH) network.

  • PROBLEM: Some banks do not have both EDI and EFT capabilities, which complicates the task of crediting the customer’s account on a timely basis.

  • Possible approaches to collecting cash:

    • Turnaround documents forwarded to accounts receivable.

    • Lockbox arrangements.

    • Electronic lockboxes.

    • Electronic funds transfer and bill payment.


Cash collections5

CASH COLLECTIONS

  • Possible approaches to collecting cash:

    • Turnaround documents forwarded to accounts receivable.

    • Lockbox arrangements.

    • Electronic lockboxes.

    • Electronic funds transfer and bill payment.

    • Financial electronic data interchange (FEDI).

  • Integrates EFT with EDI.

  • Remittance data and funds transfer instructions are sent simultaneously by the customer.

  • Requires that both buyer and seller use EDI-capable banks.


Cash collections threats controls

Cash Collections Threats/Controls

  • THREAT NO. 17—Theft of cash

    • Why is this a problem?

      • Loss of cash.

    • Controls

      • Separation of cash handling function from accounts receivable and credit functions

      • Regular reconciliation of bank account with recorded amounts by someone independent of cash collections procedures

      • Use of EFT, FEDI, and lockboxes to minimize handling of customer payments by employees

      • Prompt, restrictive endorsement of all customer checks

      • Having two people open all mail likely to contain customer payments

      • Use of cash registers

      • Daily deposit of all cash receipts


Cash collections threats controls1

Cash Collections Threats/Controls

  • THREAT NO. 18—cash flow problems

    • Why is this a problem?

      • Inability to pay bills, buy resources etc.

    • Controls

      • Lockbox arrangements, EFT, or credit cards

      • Discounts for prompt payment by customers

      • Cash flow budgets


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