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The Expenditure Cycle: Purchasing and Cash Disbursements. 12. UAA – ACCT 316 – Fall 2002 Accounting Information Systems Dr. Fred Barbee. Chapter. The Primary Objective. Main Objective.

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The expenditure cycle purchasing and cash disbursements l.jpg

The Expenditure Cycle: Purchasing and Cash Disbursements

12

UAA – ACCT 316 – Fall 2002

Accounting Information Systems

Dr. Fred Barbee

Chapter



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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.



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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?


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Key Decisions

  • Where should inventories and supplies be held?

  • How can the organization consolidate purchases across units to obtain optimal prices?


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Key Decisions

  • How can information technology be used to improve both the efficiency and accuracy of the inbound logistics function?


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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?



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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.


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



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Business Activities

  • Order Goods

  • Receive and Store Goods

  • Pay for Goods



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1.0

Order Goods


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Order Goods (Activity 1)

  • The first major business activity in the expenditure cycle involves ordering inventory or supplies.


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Order Goods (Activity 1)

  • What to purchase?

  • When to purchase?

  • How much to purchase?

  • From what supplier?


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Order Goods (Activity 1)

  • Inventory control methods:

    • EOQ

    • MRP

    • JIT



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MRP Systems

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


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JIT Systems

  • Schedule production to meet customer demands, thereby virtually eliminating finished goods inventory.



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Order Goods

  • What is a key decision?

    • determine vendor

  • What factors should be considered?

    • price

    • quality of materials

    • dependability in making deliveries


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2.0

Receive and Store Goods


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Receive and Store Goods

  • The receiving department has two major responsibilities:

    • Deciding whether to accept a delivery

    • Verifying quantity and quality


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3.0

Pay for Goods


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Pay for Goods

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



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


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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.


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Key Decisions

  • Decide whether purchase discounts should be taken.

  • Monitor cash flow needs to pay outstanding obligations.


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Other Information Needed

  • Efficiency and effectiveness of the purchasing department

  • Analyses of vendor performance such as on-time delivery, quality, etc.


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Other Information Needed

  • Time taken to move goods from the receiving dock into production

  • Percentage of purchase discounts taken



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


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Control Objectives

  • Transactions are properly authorized.

  • Recorded transactions are valid.

  • Valid, authorized transactions are recorded.

  • Transactions are recorded accurately.


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Control Objectives

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

  • Business activities are performed efficiently and effectively.



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Threats

  • Stockouts

  • Purchasing too many or unnecessary goods

  • Purchasing goods at inflated prices

  • Purchasing goods of inferior quality


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Threats

  • Purchasing from unauthorized vendors

  • Kickbacks

  • Receiving unordered goods

  • Errors in counting goods


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Threats

  • Theft of inventory

  • Failure to take available purchasing discounts

  • Errors in recording and posting purchases and payments

  • Loss of data



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Exposures

  • Production delays and lost sales

  • Increased inventory costs

  • Cost overruns

  • Inferior quality of purchased goods

  • Inflated prices


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Exposures

  • Violation of laws or import quotas

  • Payment for items not received

  • Inaccurate inventory records

  • loss of assets


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Exposures

  • Cash flow problems

  • Overstated expenses

  • Incorrect data for decision making



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Control Procedures

  • Inventory control system

  • Vendor performance analysis

  • Approved purchase requisitions

  • Restricted access to blank purchase requisitions


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Control Procedures

  • Price list consultation

  • Budgetary controls

  • Use of approved vendor lists

  • Approval of purchase orders

  • Prenumbered purchase orders


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Control Procedures

  • Prohibition of gifts from vendors

  • Incentives to count all deliveries

  • Physical access control

  • Recheck of invoice accuracy

  • Cancellation of voucher package