The Expenditure Cycle: Purchasing and Cash Disbursements

1. The Expenditure Cycle: Purchasing and Cash Disbursements UAA – ACCT 316 – Fall 2002 Accounting Information Systems Dr. Fred Barbee

3. The Primary Objective

4. Main Objective The primary objective of the expenditure cycle is to minimize the total cost of acquiring and maintaining inventories, supplies, and the various services necessary for the organization to function.

5. Key Decisions of the Cycle

6. Key Decisions What is the optimal level of inventory and supplies to carry? Which suppliers provide the best quality and service at the best prices?

7. Key Decisions Where should inventories and supplies be held? How can the organization consolidate purchases across units to obtain optimal prices?

8. Key Decisions How can information technology be used to improve both the efficiency and accuracy of the inbound logistics function?

9. Key Decisions Is sufficient cash available to take advantage of any discounts suppliers offer? How can payments to vendors be managed to maximize cash flow?

10. The Expenditure Cycle – Defined

11. Defined The expenditure cycle is a recurring set of business and related information processing operations associated with the purchase of and payment for goods and services.

12. The first function of a well-designed AIS is to support the effective performance of the organization’s business activities.

13. The Expenditure Cycle – Business Activities

15. Business Activities Order Goods Receive and Store Goods Pay for Goods

16. Business Activities – Up Close and Personal

18. Order Goods (Activity 1) The first major business activity in the expenditure cycle involves ordering inventory or supplies.

19. Order Goods (Activity 1) What to purchase? When to purchase? How much to purchase? From what supplier?

20. Order Goods (Activity 1) Inventory control methods: EOQ MRP JIT

21. What is the major difference between MRP and JIT?

22. MRP Systems Schedule production to meet estimated sales need, thereby creating a stock of finished goods inventory.

23. JIT Systems Schedule production to meet customer demands, thereby virtually eliminating finished goods inventory.

24. Documents and Procedures

26. Order Goods What is a key decision? determine vendor What factors should be considered? price quality of materials dependability in making deliveries

30. Receive and Store Goods The receiving department has two major responsibilities: Deciding whether to accept a delivery Verifying quantity and quality

34. Pay for Goods The objective of accounts payable is to authorize payment only for goods and services that were ordered and actually received.

36. Key Decisions and Information Needs

37. The third function of a well-designed AIS is to provide useful information for decision making.

38. Key Decisions Determine when and how much additional inventory to order. Select the appropriate vendors from whom to order. Verify the accuracy of vendor invoices.

39. Key Decisions Decide whether purchase discounts should be taken. Monitor cash flow needs to pay outstanding obligations.

40. Other Information Needed Efficiency and effectiveness of the purchasing department Analyses of vendor performance such as on-time delivery, quality, etc.

41. Other Information Needed Time taken to move goods from the receiving dock into production Percentage of purchase discounts taken

42. Control Objectives, Threats, and Procedures

43. The second function of a well-designed AIS is to provide adequate controls to ensure the firm meets its objectives.

44. Control Objectives Transactions are properly authorized. Recorded transactions are valid. Valid, authorized transactions are recorded. Transactions are recorded accurately.

45. Control Objectives Assets (cash, inventory, and data) are safeguarded from loss or theft. Business activities are performed efficiently and effectively.

46. Threats to the Expenditure Cycle

47. Threats Stockouts Purchasing too many or unnecessary goods Purchasing goods at inflated prices Purchasing goods of inferior quality

48. Threats Purchasing from unauthorized vendors Kickbacks Receiving unordered goods Errors in counting goods

49. Threats Theft of inventory Failure to take available purchasing discounts Errors in recording and posting purchases and payments Loss of data

50. Expenditure Cycle Exposures

51. Exposures Production delays and lost sales Increased inventory costs Cost overruns Inferior quality of purchased goods Inflated prices

52. Exposures Violation of laws or import quotas Payment for items not received Inaccurate inventory records loss of assets

53. Exposures Cash flow problems Overstated expenses Incorrect data for decision making

54. Expenditure Cycle Control Procedures

55. Control Procedures Inventory control system Vendor performance analysis Approved purchase requisitions Restricted access to blank purchase requisitions

56. Price list consultation Budgetary controls Use of approved vendor lists Approval of purchase orders Prenumbered purchase orders Control Procedures

57. Prohibition of gifts from vendors Incentives to count all deliveries Physical access control Recheck of invoice accuracy Cancellation of voucher package Control Procedures