The Revenue and Expenditure Cycles - Chapter 7

REVENUE CYCLE APPLICATIONS

• Sales Order Processing

• Accounts Receivable System

Functions in the Revenue Cycle

• Sales department obtains customer order and validates.• Credit department checks customer’s credit.• Sales department determines that products or services are

available and prepares a sales order.• Stores assemble goods for shipment which

may involve using a picking ticket to remove goods from the warehouse.

• Shipping department ships ordered goods including a packing slip for customer validation.

Functions in the Revenue Cycle

• Billing department bills customer upon receipt of a shipping notice from shipping department.

• Cashier receives and deposits cash intact daily using a deposit slip.

• Accounts receivable clerk updates accounts receivable database by reference to the customer remittance advice which accompanies payment.

• Appropriate personnel prepare needed reports.

Inputs to the Revenue Cycle

• Sales Orders - prenumbered and usually prepared in multiple copies

• 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 and

bills of lading• Credit memos - issued for sales returns and allowances

Outputs of the Revenue Cycle• Open Orders Report - lists those sales orders that are not

completely shipped and billed

• 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 terms

Accounts Receivable Functions

• Cash Receipts

• Billing

• Accounts Receivable

• Credit

• General Ledger

Cycle Billing in Accounts Receivable

• Companies which have a large volume of customers may choose to use cycle billing.

• 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.

Types of Sales Order Systems

• incomplete prebilling

• separate order and billing

• postbilling

incomplete prebilling

• the invoice is not completed until the goods are ready for shipment.

separate order and billing

• both a sales order and an invoice are used in a sales order application system.

postbilling

• the invoice is prepared or completed after shipment.

blanket order

• a single order which calls for several shipments to the same customer over a specific time period.

Factoring of Accounts Receivable

• Factoring involves selling accounts receivable at a discount to collection agencies.

• 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.

Methods of Maintenance of Accounts Receivable

• Balance forward method - applies a customer payment against the outstanding balance rather than against a specific invoice by merging all invoice amounts of previous months and showing a “balance forward”.

• Open invoice method - matches each payment with a specific invoice, thus disputed invoices are more easily isolated.

Sales Returns and Allowances

• credit memorandum: a form used to document reductions to a customer's account due to sales returns or sales allowances.

Write-off of Accounts Receivable

• Numerous techniques are available to collect past due accounts (e.g., follow-up letters, collection agencies), but some accounts are ultimately worthless.

Write-off of Accounts Receivable

• central feature in a write-off procedure is an analysis of past due accounts, usually done with an aged trial balance.

Lapping of Accounts Receivable-a Risk Exposure

• Lapping is a type of embezzlement that involves the theft of cash and its concealment by a succession of delayed postings to customer accounts.

• 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.

Internal Controls in the Revenue Cycle

• Inventory is transferred, picked, and shipped only on the basis of a written authorization.

• 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 manager

The Expenditure Cycle

• The purpose of the Expenditure Cycle is to facilitate the exchange of cash with vendors for needed goods and services.

• Purchases may be for cash or credit

• The Expenditure Cycle captures information relating to purchases, suppliers, and payables.

Objectives of the Expenditure Cycle

• Ensure goods and services are ordered as needed.

• 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.

Functions in the Expenditure Cycle

• Stores recognizes the need for goods or services and issues a purchase requisition.

• 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 department ascertains validity of the payment obligation by vouching the vendor invoice to supporting documentation.

• 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.

Other Related Functions of the Expenditure Cycle

• Payroll disbursements - includes accrual of payroll and employer payroll taxes

• 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.

Inputs to the Expenditure Cycle

• List of Approved Vendors - reflects merchants with whom the company has been authorized to do business

• 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 goods

Outputs of the Expenditure Cycle

• Open Purchase Order reports - show all purchases for which invoices have not been approved for payment

• 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 problems

Outputs of the Expenditure Cycle

• Vendor checks - should be supported by a voucher and signed by a person designated by management

• 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 invoices

Inventory Control Output Reports of the Expenditure Cycle

• Price lists - maintained to show prices charged for raw materials and to determine standard costs for budgeting production costs

• 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 balances

Check Kiting - a Risk Exposure

• Kiting is a type of embezzlement that involves transfers of checks among bank accounts.

• 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.

Voucher System of Cash Disbursements

• Before payment to a vendor an accounts payable clerk matches together the purchase requisition, purchase order, and receiving report with the vendor invoice and prepares a voucher.

• The voucher serves as a control over cash disbursements to vendors by avoiding duplicate payments.

Internal Controls in the Expenditure Cycle

• Purchase requisitions should originate and be approved outside the purchasing department.

• 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.

Payroll

• Personnel

• Timekeeping

• Payroll

Personnel

• responsible for placing people on the company's payroll, specifying rates of pay, and authorizing all deductions from pay.

Timekeeping

• responsible for collecting and maintaining time cards or time reports, and reconciling these data to job time summary reports

Payroll

• payroll department is responsible for the actual computation and preparation of payroll.

Payroll register

• Details the computation of net pay (gross pay less deductions from pay).

Payroll Controls

• Paychecks are sent to cash disbursements for signature, review, and distribution.

Payroll Controls

• The use of a separate imprest payroll account for paychecks to facilitate reconciliation

Payroll Controls

• An independent reconciliation of the payroll account bank statement

independent paymaster

• the person who distributes pay is independent of the payroll preparation process.

Payroll Processing Requirements

• Federal old-age, survivors', disability, and hospital insurance (F.I.C.A.)

• Federal unemployment insurance

• State unemployment insurance

• Income taxes withheld