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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 organizations 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:
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?
What factors should be considered?
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
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
Inferior quality of purchased goods
52. Exposures Violation of laws or import quotas
Payment for items not received
Inaccurate inventory records
loss of assets
53. Exposures Cash flow problems
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
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