The Revenue Cycle: Sales and Cash Collections

1. The Revenue Cycle:Sales and Cash Collections Chapter 10

2. 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

3. 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

4. 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

5. 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

6. 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

7. The third basic activity in the revenue cycle involves: Billing customers Updating accounts receivable Revenue Cycle Business Activities:Billing and Accounts Receivable

8. 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

9. 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

10. 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

11. 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

12. 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)

13. 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)

14. 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

15. 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

16. 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)

17. 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)

18. 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

19. 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)

20. 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

21. 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)

22. 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)

23. 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)

24. 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

25. 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)

26. 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)

27. 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)

28. 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)

29. 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)

30. 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)

31. 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

32. 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)

33. 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)

34. 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)

35. 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

36. 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

37. Threats and Applicable Control Procedures toSales Order Entry

38. Threats and Applicable Control Procedures toShipping

39. Threats and Applicable Control Procedures toBilling and Accounts Receivable

40. Threat and Applicable Control Procedures toCash Collections

41. General Control Issues

42. 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

43. 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

44. 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