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The Revenue Cycle: Sales and Cash Collections. Chapter 10. Describe the basic business activities and related data processing operations performed in the revenue cycle.

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learning objectives
Describe the basic business activities and related data processing operations performed in the revenue cycle.

Discuss the key decisions that need to be made in the revenue cycle and identify the information needed to make those decisions.

Document your understanding of the revenue cycle.

Identify major threats in the revenue cycle and evaluate the adequacy of various control procedures for dealing with those threats.

Learning Objectives
revenue cycle business activities
The revenue cycle is a recurring set of business activities and related information processing operations associated with providing goods and services to customers and collecting cash in payment for those sales.Revenue CycleBusiness Activities
revenue cycle business activities1
What are the four basic revenue cycle business activities?

Sales order entry

Filling customer orders and Shipping

Billing and accounts receivable

Cash collections

Revenue CycleBusiness Activities
revenue cycle business activities sales order entry
Sales order entry process entails three steps:

Taking the customer’s order

Checking and approving the customer’s credit

Checking inventory availability

Revenue Cycle Business Activities:Sales Order Entry
revenue cycle business activities shipping
The second basic activity in the revenue cycle – filling customer orders and shipping the desired merchandise – entails two steps:

Picking and packing the order

Shipping the order

Revenue Cycle Business Activities:Shipping
revenue cycle business activities cash collections
The fourth step in the revenue cycle is cash collections. It involves:

Handling customer remittances

Depositing remittances in the bank

Revenue Cycle Business Activities:Cash Collections
revenue cycle key decisions
The revenue cycle’s primary objective is to provide the right product in the right place at he right time for the right price.

How does a company accomplish this objective?

To accomplish the revenue cycle’s primary objective, management must make the following key decisions:

Revenue Cycle – Key Decisions
revenue cycle key decisions1
To what extent can and should products be customized to individual customers’ needs and desires?

How much inventory should be carried, and where should that inventory be located?

How should merchandise be delivered to customers? Should the company perform the shipping function itself or outsource it to a third party that specializes in logistics?

Revenue Cycle– Key Decisions
revenue cycle key decisions2
Key decisions, continued

Should credit be extended to customers?

How much credit should be given to individual customers?

What credit terms should be offered?

How can customer payments be processed to maximize cash flow?

Revenue Cycle –Key Decisions
tue 30 3 sales order entry activity 1
This step includes all the activities involved in soliciting and processing customer orders.

Key decisions and information needs:

decisions concerning credit policies, including the approval of credit

information about inventory availability and customer credit status from the inventory control and accounting functions, respectively

Tue 30-3 Sales Order Entry (Activity 1)
sales order entry activity 1
The sales order entry function involves three main activities:

Responding to customer inquiries

Checking and approving customer credit

Checking inventory available

Sales Order Entry (Activity 1)
slide14

Inventory

Customer

Customer

Sales Order

1.1

Take

Order

Customer

Orders

Rejected Orders

Orders

1.2

Approve

Credit

DFD for

Sales Order Entry

Response

Inquiries

Acknowledgment

Approved

Orders

1.3

Check

Inv.

Avail.

1.4

Resp. to

Cust. Inq.

Back Orders

Sales

Order

Sales

Order

Picking

List

Shipping

Billing

Ware-

house

Purchas-

ing

mon 28 3 information needs and procedures
The AIS should provide the operational information needed to perform the following functions:

Respond to customer inquires about account balances and order status.

Decide whether to extend credit to a customer.

Mon 28-3 Information Needs and Procedures
sales order entry activity 11
Regardless of how customer orders are initially received, the following edit checks are necessary:

Validity checks

A Completeness test

Automatic lookup of reference data like customer address.

Reasonableness tests

comparing quantity ordered to past history.

Credit approval

General authorization

Credit limit (for existing customers)

Specific authorization

Limit checks (new, have past-due balances, Exceeding)

Sales Order Entry (Activity 1)
sales order entry activity 12
Next, the system checks whether the inventory is sufficient to fill accepted orders.

Internally generated documents produced by sales order entry:

sales order

packing slip

picking ticket

Sales Order Entry (Activity 1)
information needs and procedures
Determine inventory availability.

Decide what types of credit terms to offer.

Set prices for products and services.

Set policies regarding sales returns and warranties.

Select methods for delivering merchandise.

Information Needs and Procedures
thu 1 4 shipping activity 2
Warehouse workers are responsible for filling customer orders by removing items from inventory.

Key decisions and information needs:

Determine the delivery method.

in-house

outsource

Thu 1-4 Shipping (Activity 2)
slide20

Sales Order

Inventory

Shipments

Shipping

2.1

Pick &

Pack

Sales

Order

Entry

Picking List

Goods &

Packing

List

Sales

Order

2.2

Ship

Goods

Bill of

Lading &

Packing Slip

Billing &

Accts.

Rec.

Goods,

Packing Slip,

& Bill of Lading

Carrier

shipping activity 2
Documents, records, and procedures:

The picking ticket printed by the sales order entry triggers the shipping process and is used to identify which products to remove from inventory and the quantities. The packing slip lists the quantity and description of each item in the shipment.

A physical count is compared with the quantities on the picking ticket (Warehouse) and packing slip (Shipping). If there are discrepancies, a back order is initiated.

Some spot checks are made and a bill of lading is prepared.

Shipping (Activity 2)
shipping activity 21
The bill of lading is a legal contract that defines responsibility for goods in transit

3 copies: (shipping, billing, and carrier)

It identifies:

The carrier

The source

The destination

Special shipping instructions

Who pays for the shipping?

Shipping (Activity 2)
billing and accounts receivable activity 3
Two activities are performed at this stage of the revenue cycle:

Invoicing customers

Maintaining customer accounts

Key decisions and information needs:

Accurate billing is crucial and requires information identifying the items and quantities shipped, prices, and special sales terms.

Billing and AccountsReceivable (Activity 3)
slide24

Customer

Sales

Packing Slip &

Bill of Lading

3.1

Billing

Shipping

Sales

Order

Entry

Sales Order

Invoice

Sales

General

Ledger &

Rept. Sys.

Customer

Monthly Statements

3.2

Maintain

Accts.

Rec.

Mailroom

Billing and

Accounts

Receivable

Remittance

List

billing and accounts receivable activity 31
The documents in this activity:

The sales invoice notifies customers of the amount to be paid and where to send payment.

A monthly statement summarizes transactions that occurred and informs customers of their current account balance.

A credit memo authorizes the billing department to credit a customer’s account.

credit manager may issue a credit memo for:

Returns

Allowances for damaged goods

Write-offs as uncollectible

Billing and AccountsReceivable (Activity 3)
billing and accounts receivable activity 32
Types ofbilling systems:

In a postbilling system, invoices are prepared after confirmation that the items were shipped.

In a prebilling system, invoices are prepared (but not sent) as soon as the order is approved.

The inventory, accounts receivable, and general ledger files are updated at this time.

Billing and AccountsReceivable (Activity 3)
billing and accounts receivable activity 33
Methods for maintaining accounts receivable:

open invoice method

balance-forward method

To obtain a more uniform flow of cash receipts, many companies use a process called cycle billing.

Billing and AccountsReceivable (Activity 3)
billing and accounts receivable activity 34
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

Billing and AccountsReceivable (Activity 3)
billing and accounts receivable activity 35
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.

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.

Billing and AccountsReceivable (Activity 3)
billing and accounts receivable activity 36
14-4 Tue 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

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 and AccountsReceivable (Activity 3)
wed 31 3 information needs and procedures
What are examples of additional information the AIS should provide? (performance Evaluation.)

Respond time to customer inquiries

Time required to fill and deliver orders

Percentage of sales that required back orders

Customer satisfaction rates and trends

Profitability analyses by product, customer, and sales region

Sales volume in both dollars and number of customers

Effectiveness of advertising and promotions

Sales staff performance

Bad debt expenses and credit policies

Wed 31-3 Information Needs and Procedures
cash collections activity 4
Two areas are involved in this activity:

The cashier, who reports to the treasurer, handles customer remittances and deposits them in the bank

The accounts receivable function

Cash Collections (Activity 4)
cash collections activity 41
Key decisions and information needs:

Reduction of cash theft is essential.

The billing/accounts receivable function should not have physical access to cash or checks.

The accounts receivable function must be able to identify the source of any remittances and the applicable invoices that should be credited.

Cash Collections (Activity 4)
cash collections activity 42
Documents, records, and procedures:

Checks are received and deposited.

A remittance listis prepared and entered on-line showing the customer, invoice number, and the amount of each payment.

The system performs a number of on-line edit checks to verify the accuracy of data entry.

Cash Collections (Activity 4)
control objectives threats and procedures
In the revenue cycle (or any cycle), The second function of a well-designed AIS is to provide adequate controls to ensure that the following objectives are met:

Transactions are properly authorized.

(emp_ write off account)

Recorded transactions are valid.

Showing false revenues in a financial statement

Control: Objectives,Threats, and Procedures
control objectives threats and procedures1
Valid, authorized transactions are recorded. Don’t show Discounts higher net sales

Transactions are recorded accurately.

Assets (cash, inventory, and data) are safeguarded from loss or theft.

Business activities are performed efficiently and effectively.

Control: Objectives,Threats, and Procedures

Objectives, continued

revenue cycle information needs operational data
Operational Data are needed to monitor performance and to perform the following recurring tasks:

Respond to customer inquiries about account balances and order status

Decide whether to extend credit to a particular customer

Determine inventory availability

Select methods for delivering merchandise

Revenue Cycle Information Needs: Operational Data
revenue cycle information needs current and historical information
Current and historical information is needed to enable management of make the following strategic decisions:

Setting prices for products and services

Establishing policies regarding sales returns and warranties

Deciding what types of credit terms to offer

Determining the need for short-term borrowing

Planning new marketing campaigns

Revenue Cycle Information Needs: Current and Historical Information
revenue cycle information needs performance evaluation
The AIS must also supply the information needed to evaluate performance of the following critical processes:

Respond time to customer inquiries

Time required to fill and deliver orders

Percentage of sales that required back orders

Customer satisfaction rates and trends

Profitability analyses by product, customer, and sales region

Sales volume in both dollars and number of customers

Effectiveness of advertising and promotions

Sales staff performance

Bad debt expenses and credit policies

Revenue Cycle Information Needs: Performance Evaluation