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.
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
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
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 allowancesInputs to the Revenue Cycle
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 termsOutputs of the Revenue Cycle
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
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
Open invoice method - matches each payment with a specific invoice, thus disputed invoices are more easily isolated.Methods of Maintenance of Accounts Receivable
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
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 managerInternal Controls in the Revenue Cycle
Purchases may be for cash or credit
The Expenditure Cycle captures information relating to purchases, suppliers, and payables.The Expenditure Cycle
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
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
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
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
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 goodsInputs to the Expenditure Cycle
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 problemsOutputs of the Expenditure Cycle
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 invoicesOutputs of the Expenditure Cycle
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 balancesInventory Control Output Reports of the Expenditure Cycle
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
The voucher serves as a control over cash disbursements to vendors by avoiding duplicate payments.Voucher System of Cash Disbursements
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
Federal unemployment insurance
State unemployment insurance
Income taxes withheldPayroll Processing Requirements