it 4a romney
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©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart
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Accounting Information Systems9th Edition
Marshall B. Romney
Paul John Steinbart
©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart
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The Expenditure Cycle:Purchasing and Cash Disbursements
Chapter 12
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Learning Objectives
1. Describe the basic business activities and related data processing operations performed in the expenditure cycle.
2. Discuss the key decisions to be made in the expenditure cycle, and identify the information needed to make those decisions.
3. Document an understanding of the expenditure cycle activities.
©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart
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Learning Objectives
4. Identify major threats in the expenditure cycle, and evaluate the adequacy of various control procedures for dealing with those threats.
5. Read and understand a data model (REA diagram) of the expenditure cycle.
©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart
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Introduction
Linda Spurgeon, Alpha Omega Electronics’ (AOE) president, asked Elizabeth Venko, the controller, to address the following issues:What must be done to ensure that
AOE’s inventory records are current and accurate?
What can be done to ensure timely delivery of quality components?
©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart
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Introduction
Is it possible to reduce AOE’s investment in materials inventories?
What must be done to ensure that available discounts are taken?
How could the information system provide better information to guide planning and production?
How could IT be used to reengineer expenditure cycle activities?
©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart
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Learning Objective 1
Describe the basic business activities and related data processing operations performed in the expenditure cycle.
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Expenditure Cycle: Main Objective The expenditure cycle is a recurring set of
business activities and related data processing operations associated with the purchase of and payment for goods and services.
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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Expenditure Cycle: 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? Where should inventories and supplies be
held? How can the organization consolidate
purchases across units to obtain optimal prices?
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Expenditure Cycle: Key Decisions How can information technology be used to
improve both the efficiency and accuracy of the inbound logistics function?
Is sufficient cash available to take advantage of any discounts suppliers offer?
How can payments to vendors be managed to maximize cash flow?
©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart
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Expenditure Cycle:Business Activities
What are the three basic business activities in the expenditure cycle?
1. Ordering goods, supplies and services
2. Receiving and storing goods, supplies and services
3. Paying for goods, supplies and services
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Ordering Goods, Supplies And Services The first major business activity in the
expenditure cycle is ordering inventory or supplies.The traditional inventory control
method (often called economic order quantity [EOQ]):
• This approach is based on calculating an optimal order size so as to minimize the sum of ordering, carrying, and stockout costs.
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Ordering Goods, Supplies And Services
Alternative inventory control methods:– MRP (material requirement planning)
• This approach seeks to reduce required inventory levels by scheduling production, rather than estimating needs.
– JIT (just in time)• JIT systems attempt to minimize both
carrying and stockout costs.
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Ordering Goods, Supplies And Services What is a major difference between MRP
and JIT? MRP systems schedule production to meet
estimated sales need, thereby creating a stock of finished goods inventory.
JIT systems schedule production to meet customer demands, thereby virtually eliminating finished goods inventory.
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Ordering Goods, Supplies And Services Documents and procedures: The purchase requisition is a
document that identifies the following:– requisitioner and item number– specifies the delivery location and
date needed– specifies descriptions, quantity, and
price of each item requested– may suggest a vendor
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Ordering Goods, Supplies And Services
What is a key decision? – determine vendor
What factors should be considered?– price– quality of materials– dependability in making deliveries
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Ordering Goods, Supplies And Services Documents and procedures: The purchase order is a document that
formally requests a vendor to sell and deliver specified products at designated prices.
It is also a promise to pay and becomes a contract once it is accepted by the vendor.
Frequently, several purchase orders are generated to fill one purchase requisition.
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Receiving and Storing Goods, Supplies and Services
The second major business activity involves the receipt and storage of ordered items.
Key decisions and information needs: The receiving department has two
major responsibilities:1 Deciding whether to accept a delivery2 Verifying quantity and quality
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Receiving and Storing Goods, Supplies and Services
Documents and procedures: The receiving report documents
details about each delivery, including the date received, shipper, vendor, and purchase order number.For each item received, it shows the
item number, description, unit of measure, and count of the quantity received.
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Pay for Goods and Services:Approve Vendor Invoices
The third activity entails approving vendor invoices for payments.The accounts payable department
approves vendor invoices for paymentThe cashier is responsible for making
the payment
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Pay for Goods and Services:Approve Vendor Invoices
The objective of accounts payable is to authorize payment only for goods and services that were ordered and actually received.
There are two ways to process vendor invoices:
1. Nonvoucher system
2. Voucher system
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Pay for Goods and Services:Improving Accounts Payable
Processing efficiency can be improved by:
Requiring suppliers to submit invoices electronically, either by EDI or via the Internet
Eliminating vendor invoices. This “invoiceless” approach is called evaluated receipt settlement (ERS).
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Pay for Goods: Pay Approved Invoices
The cashier approves invoices The combination of vendor invoice
and supporting documentation is called a voucher package.
A key decision in the cash disbursement process is determining whether to take advantage of discounts for prompt payment.
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Learning Objective 2
Discuss the key decisions that need to be made in the expenditure cycle, and identify the information needed to make those decisions.
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Information Needs
The third function of the AIS is to provide information useful for decision making.
Usefulness in the expenditure cycle means that the AIS must provide the operational information needed to perform the following functions:Determine when and how much
additional inventory to order.
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Information Needs
AIS must provide the operational information needed to perform the following functions (con’t):
Select the appropriate vendors from whom to order.
Verify the accuracy of vendor invoices. Decide whether purchase discounts should
be taken. Monitor cash flow needs to pay outstanding
obligations.
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Information Needs
What are examples of additional information The AIS should provide?– Efficiency and effectiveness of the
purchasing department– Analyses of vendor performance such as on-
time delivery, quality, etc.– Time taken to move goods from the
receiving dock into production– Percentage of purchase discounts taken
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Learning Objective 3
Document your understanding of the expenditure cycle.
©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart
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Expenditure Cycle
Order goods
Requestgoods
Variousdepartments
Inventorycontrol
Reorder point
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Expenditure Cycle
Receivegoods
Order goods
Receipt of goods
Productioncycle
Revenuecycle
Needs
Vendor
Receiving report
Purchase order
Inventory
Back Orders
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Expenditure Cycle
Purchase Order Packing slip
A
From purchasing
Verify order,count, and
inspect
From suppliers
RECEIVING
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Expenditure Cycle
Compare, review,verify
accuracy
Frompurchasing
Fromstores
Fromvendor
Receivingreport
PurchaseorderInvoice
N
ACCOUNTS PAYABLE
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Expenditure Cycle
Invoice
CashierFrom A/P
Batch totals
Receivingreport
A
Purchaseorder
Disbursementvoucher
Review andcompute
batch totalBatchtotal
Compare andreconcile
©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart
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Learning Objective 4
Identify major threats in the expenditure cycle and evaluate the adequacy of various control procedures for dealing with those threats.
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Control: Objectives,Threats, and Procedures Another function of a well-designed AIS is
to provide adequate controls to ensure that the following objectives are met:
Transactions are properly authorized. Recorded transactions are valid. Valid, authorized transactions are recorded. Transactions are recorded accurately.
©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart
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Control: Objectives,Threats, and Procedures Assets (cash, inventory, and data) are
safeguarded from loss or theft. Business activities are performed efficiently
and effectively.
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Control: Objectives,Threats, and Procedures
What are some threats?– stockouts– purchasing too many or unnecessary
goods– purchasing goods at inflated prices– purchasing goods of inferior quality– purchasing from unauthorized vendors– kickbacks
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Control: Objectives,Threats, and Procedures– receiving unordered goods– errors in counting goods– theft of inventory– failure to take available purchasing
discounts– errors in recording and posting
purchases and payments– loss of data
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Control: Objectives,Threats, and Procedures
What are some control procedures?– inventory control system– vendor performance analysis– approved purchase requisitions– restricted access to blank purchase
requisitions– price list consultation – budgetary controls
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Control: Objectives,Threats, and Procedures– use of approved vendor lists– approval of purchase orders– prenumbered purchase orders– prohibition of gifts from vendors– incentives to count all deliveries– physical access control– recheck of invoice accuracy– cancellation of voucher package
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Learning Objective 5
Read and understand a data model (REA diagram) of the expenditure cycle.
©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart
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Expenditure Cycle Data Model The REA data model integrates both
traditional accounting transactions data with other operational data.
What are some examples?– the date and amount of each purchase – information about where items are stored– vendor performance measures, such as
delivery date
©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart
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Expenditure Cycle Data Model
Partial REA Diagram of the Expenditure Cycle
Inventory(1, N)
Order inventoryOrdergoods
(1, N)
Requestgoods
Fills
Request inventory(1, N)
(1, N)
(1, 1)
(1, N)
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Expenditure Cycle Data Model The REA diagram models the relationship
between the request goods and order goods events as being many-to-one.
Why? The company sometimes issues purchase
orders for individual purchase requests. At other times it takes advantage of volume
discounts by issuing one purchase order for a set of requests.
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Expenditure Cycle Data ModelPartial REA Diagram of the Expenditure Cycle
Inventory(1, N) Receive
inventoryReceivegoods(1, N)
Ordergoods
(0, N)
(1, N)
Order/Receive
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Expenditure Cycle Data Model Why is there a many-to-many relationship
between the order goods and receive goods events? Vendors sometimes make several separate
deliveries to fill one purchase order. Other times, vendors fill several purchase
orders with one delivery. Sometimes, vendors make a delivery to fill
a single purchase order in full.
©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart
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Case Conclusion What are the key points that Elizabeth
Venko proposed?1 Online terminals in each of AOE’s
departments2 JIT inventory system3 Use of EDI to send purchase orders to
vendors4 Use of EFT as much as possible5 Implementation of a relational data base
©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart
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End of Chapter 12