UNIT 7: FINANCE CYCLE APPLICATIONS

Contents
7.0 Introduction
7.1 Objectives
7.2 Cash Receipts Application System
7.3 Cash Disbursement Application System
7.4 Summary
7.5 Answers to Check Your Progress

7.0 INTRODUCTION

Finance cycle, also called funds management system, treasury or investment cycle, concerns
on the acquisition and use of capital funds. Capital funds include working capital (cash and
other liquid resources) as well as long-term funds such as bonds, investments, and capital
stock.

Acquisition of funds:
funds: sources of funds include sales to customers, loans from banks, issues of
bonds, sales of stock, sales of plant assets, dividends and interest, sales of investments,
factoring of accounts receivable, and delays in payments on accounts payable.

Uses of funds:
funds: funds may be disbursed for purchase of goods and services, conversion into
plant assets or investments, repurchase of the firms own stock, retirement of loans and bond
issues, payment of dividends and interest and redemption of stock rights or options.

7.1 OBJECTIVES

After careful reading of this unit, the reader must be able to:
describe the features and controls in cash receipts application system
describe the major features and controls in cash disbursement.

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7.2 CASH RECEIPTS APPLICATION SYSTEM

7.2.0 Overview
This is an application system used to control the flow of information and documents regarding
cash receipts. Most of a companys cash receipts are generated though sales. Sales, of course,
may be made either for cash or on account. Although sales accounts are handled through the
companys billing and collection system, the end product of sales on account and subsequent
billings is the receipt of cash. Flow diagram shows flow of cash receipts application system.
The chart includes both cash sales and customer remittances sent on account. The major
features of the system are the separation of function and the generation of initial
documentation. Separation of functions ensure that no one person has complete control over a
cash receipts transaction

7.2.1 Objectives
After careful reading of this section, the reader must be able to:
describe the major features and controls in cash receipt application system
draw a flow diagram that shows cash receipt application.

(I) Cash received on account application system

Cash received on account system is used when there is established customer account balance
cash received on account typically comes into a business through the mail or is paid in person
to a central cashier or cash window. In either case the customer should have the payment
acknowledged. He or she should receive a receipt and a monthly statement showing amounts
paid. This customer audit is a significant control in cash received on account application
system. The recorded receivable that exists on the books prior to payment enhances control
over payments received. In the event that a customers payment is not acknowledged on his or
her next statement, the customer will likely notify the company and inquire as to the reason.
The major feature of the system is the separation of the following function.

Mailroom
Customer remittances on account are received in the mailroom. The mail is opened and the
checks and remittance advices are separated. Checks are restrictively endorsed and totaled. A
remittance list that documents the payments received is prepared. The remittance list is

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balanced to the total of the checks received, and the agreement of these amounts is approved.
A copy of the remittance list and the remittance advices are forwarded to accounts receivable.
The checks and a control total are forwarded to cash receipts for deposit. A copy of the
remittance list and the control total are filed by date.

Cash receipts
The basics objective in any cash receipts application is to minimize exposure to loss.
Procedures such as immediate deposit of receipts intact centralization of cash handling,
maintenance of minimal cash balances and immediate recording of cash transactions are
fundamental control techniques. Physical safeguards such as cash registers, vaults, immediate
endorsement of checks, and limited access to cash areas are generally necessary as well.

Checks received from the mailroom are combined with cash receipts, and a deposit slip is
prepared in three copies. The remittance fist and control total received from the mailroom are
balanced to the deposit slip, and the agreement of these amounts is approved. The remittance
list is then used to post the amount of the payments received from the mailroom into the cash
receipts journal. A journal voucher is prepared and forwarded to the general ledger. The
remittance list, control total, and a copy of the deposit slip are filed by date. The deposit is for
warded intact to the bank.

Accounts receivable
The remittance advices are posted to the accounts receivable ledger. The postings to the ledger
are totaled. The control total is balanced to the remittance list. The agreement of these
amounts is approved. The remittance advices are sorted and filed by customer. The remittance
list and a copy of the control total of postings are filed by date. A copy of the control total is
forwarded to the general ledger.

General ledger
The journal voucher from cash receipts and the control total received from accounts
receivable are compared. The amounts are then posted to the general ledger. The source of
posting the general ledger is the cashiers journal voucher notification of the amount of the
deposit of the payments received. This amount must agree with the total of items posted to the
accounts receivable ledger. The journal voucher and the control total are filed by date.

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Bank
The bank accepts the deposit and validates a copy of the deposit slip. The validated copy of
the deposit slip is returned to Internet audit. The validated deposit slip is filed by date.

Internal Audit
Internal audit receives the periodic bank statement. An independent bank reconciliation is a
significant control in a cash-received on account application system.

To control incoming cash received through the mail, it is important that no one in the
mailroom (where the correspondence is opened), in the cashiers office (where the money is
summarized and a deposit prepared), or in the accounts receivable section (where the assert
reduction is recorded) has complete control over the transaction. In many systems, the invoice
or statement that is sent to a customer is prepared in such a way that the portion with the name
and address of the customer is returned with the payment. This is common with telephone,
utility, and department store invoices, and provides good documentation for the payment

The source of posting the general ledger is the journal voucher notification issued by the
cashier indicating the amount of the deposit of cash receipts. This amount must agree with the
accumulated total of the items posted to the subsidiary receivable file. Validated copies of the
deposit slip go to the internal auditor, who uses them when reconciling the ban account. The
control of actual cash (as opposed to checks) received by mail relies largely on direct
supervision.

Remittance advice
Send to: FTR Corporation
Mauritius road, P. O. Box, 12445
Addis Ababa
Remittance advice
Date costumes No Amount paid check No

____________________________________________________________
Please return the upper portion with your payment thank you

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To: Selam- Saffron
Tanzania road
P. O. Box: 2542
Addis Ababa
Due data customer No Amount clue

Data Invoice No Designation Amount due.

Tank you for giving FTR corporation the chance to serve you
Previous balance
Payments
Credits
Late fees
Tax
Ending balance

(ii) Cash sales application system.

The significant difference between a cash sales application system and cash received on
account application system is that there is no previous asset record (customer account
balance) in a cash sales system. The generation of initial documentation is thus the focal point
of the control system. Once a record has been prepared, cash sales are subject to accounting
control. The major feature of this system is the separation of the following functions:

Finished goods
The finished goods department has custody of the assets that are available for sale to
customers. Sales to customers are documented on sales orders. A sales order indicates the
amount due for the purchase as well as the inventory control numbers of the items being sold.

Cash receipts
The customer takes a copy of the sales order to cash receipts the cash receipts department
records the sale in a cash register or other secure device, accepts the customers payment, and
issues a sales receipt (two copies) to the customer. Number files the sales order. At the end of

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the day, the daily cash summary is generated and includes a control total of the days cash
sales. One copy of this total is forwarded to the general ledger: the other copy is filed by date.

Billing
Sales orders are reviewed by reasonableness and posted to the sales journal. Any inventory
control information contained on sates could be processed at this point. A journal voucher is
prepared to summarize cash sales. The sales orders are filed by date. The journal voucher is
forwarded to general ledger.

General ledger
The journal voucher from the billing department and the control total received from the cash
receipts department are compared. The amounts are then posted to the general ledger. Note
that the source of posting the general ledger is the journal voucher notification by billing
indicating the amount of sales orders received. This amount must agree with the total of the
cash received from customers by cash receipts. Finished goods do not release goods until the
customer returns from the cash receipts department with a sates receipt. The goods are
released with the sales receipt. A copy of the sales receipt is filed in the finished goods
department.

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 Data flow diagram- cash receipt application system

1
Stores 2 Billin
g
3
5 4 7
G/L
Customer Cash 12
Receipts
13
8 14
9
Bank
10 11
Mailroo
m A/R
Details 15

Customer
Data
Internal
Data flow key audit

1. cash sales 9. checks

2. sales slip 10. remittance advice
3. sales slip 11.control total mail receipts
4. sales receipt 12. journal voucher
5. goods released 13. deposit
6. journal voucher 14. deposit slip
7. control total cash sales 15. bank statement
8. mail receipts

Learning activity 1
1. What are the basic objectives in any cash receipts application?
___________________________________________________________________________
___________________________________________________________________________

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7.3 CASH DISBURSEMENT APPLICATION SYSTEM

7.3.0 Overview
Cash disbursements result primarily from payments to vendors (accounts payable) and
employees (payroll). To initiate the cash disbursement, accounts payable prepares a check
request, or voucher and forward, it either by hand or by computer to cashier.

Figure below illustrates data flow diagram of a cash disbursement application system. Cash
disbursement systems are designed to control check disbursements as well as actual cash
disbursement. Typically, checks are used for the majority of disbursements, with currency
disbursements restricted t small amounts drawn from and accountable to a petty cash imp rest
fund.

The imp rest fund concept is not restricted to petty cash control: imp rest pay roll funds and
imp rest charge or expense funds are common in systems design. An imp rest fund is a fund
maintained at a specified, predetermined amount. At all times, the amount of cash on hand
plus documented expenditures should equal the specified amount of the tend, periodically, an
impress fund is replenished: documented expenditures (petty cash vouchers) are reviewed and
approved, and a check is drawn to the fund or custodian of the fund for the amount necessary
to bring the fund back to its specified amount separate checking accounts may be maintained
for payroll and other expense categories such as dividend payments.

Figure illustrates an analytic flow chat of a cash disbursements application system. The
major features of the system are the use of a voucher system to support the drawing of checks,
the separation of approval from actual payment and independent bank reconciliation. These
items are included in the following discussion.

7.3.1 Objectives
After careful reading of this section, the reader must be able to:
describe the major features and controls in cash disbursement application
draw a flow diagram for cash disbursement application

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Accounts payable
The accounts payable department receives copies of the purchase requisition, purchase order
receiving report and vendor invoice. These documents are reviewed, certified as to
completeness, and assemble in a voucher package. The voucher package is filed by date.

Periodically the voucher package file is reviewed and voucher packages that are due are
pulled for payment. Accounts payable performs payment processing calculating the amount
due, discount (if any), and other such items. A voucher check is prepared for each voucher.
Voucher checks are posted to the voucher register. A total of these postings are prepared.
Voucher packages are posted to the accounts payable ledger. This posting is summarized on a
journal voucher and a distribution voucher. The voucher checks, voucher packages, and
control total are approved and forwarded to the cash disbursements department. The journal
voucher is forwarded to general ledger. The distribution voucher is forwarded to the
department managing the expense ledger.

Cash disbursements
After the voucher checks and voucher packages are reviewed the checks are signed and the
voucher packages are canceled and filed by number. The voucher checks are then posted to a
check register. This posting is totted and reconciled to the control total received from accounts
payable. Voucher checks are forwarded directly to the payees. The control total is forwarded
to general ledger.

Expense ledger
The distribution voucher is posted to the expense ledger and/or inventory ledger as
appropriate. A distribution summary is prepared, reconciled to the distribution voucher, and
approved. The distribution voucher and a copy of the distribution report are filed by date. A
copy of the distribution summary is for warded to general ledger.

General ledger
The distribution summary received from the expense ledger the journal voucher received from
accounts payable and the control total from cash disbursements are reconciled and the totals
are posted to the general ledger. The distribution summary received from the expense ledger,

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 the journal voucher received from the accounts payable department, and the control total from
the cash disbursements department are filed by date.

Internal audit
The canceled checks are received from the bank along with the bank statement. Independent
bank reconciliation is an important control in a cash disbursement application system.

Voucher systems
A voucher system is essentially a review technique. A system in which every organizational
expenditure must be documented with an approved voucher. The real control over
disbursements is a final review of documents evidencing the entire transaction prior to the
authorization of payment. A voucher payable system, unlike the accounts payable system
encompasses all expenditures, including trade accounts, payroll capital expenditure, and so
on.

A voucher system centers around vouchers, which can take several form, ranging from a
simple form or envelope to a voucher check combination.

Data flow diagram for cash disbursement application system

3
Payment
data A/P
2
1

Details
Payee Expens
Cash e ledger
Disburs
ement
4

5 6

7
G/L

8
Interna
l Audit

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Data flow key

Data Flow Key

1. voucher check
2.distribution details
3.journal voucher
4. check
5. control total
6.control report
7. concealed checks
8. bank statement

Learning activity 2
1. Define an imp rest fund system
___________________________________________________________________________
___________________________________________________________________________

Answers to learning activities

Learning activity 1
1. What are the basic objectives in any cash receipts application?

The basics objective in any cash receipts application is to minimize exposure to loss.
Procedures such as immediate deposit of receipts intact centralization of cash handling,
maintenance of minimal cash balances and immediate recording of cash transactions are
fundamental control techniques. Physical safeguards such as cash registers, vaults, immediate
endorsement of checks, and limited access to cash areas are generally necessary as well.

Checks received from the mailroom are combined with cash receipts, and a deposit slip is
prepared in three copies. The remittance fist and control total received from the mailroom are
balanced to the deposit slip, and the agreement of these amounts is approved. The remittance
list is then used to post the amount of the payments received from the mailroom into the cash
receipts journal. A journal voucher is prepared and forwarded to the general ledger. The

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remittance list, control total, and a copy of the deposit slip are filed by date. The deposit is for
warded intact to the bank.

Learning activity 2
1. Define an imp rest fund system
An imp rest fund is a fund maintained at a specified, predetermined amount. At all times, the
amount of cash on hand plus documented expenditures should equal the specified amount of
the tend, periodically, an impress fund is replenished: documented expenditures (petty cash
vouchers) are reviewed and approved, and a check is drawn to the fund or custodian of the
fund for the amount necessary to bring the fund back to its specified amount separate
checking accounts may be maintained for payroll and other expense categories such as
dividend payments.

Check Your Progress

1. For adequate internal control, the department responsible for preparing checks for signature
should be
A. The department that signs the checks.
B. The accounts payable department
C. The purchasing department
D. The treasury department
2. In cash receipts application system, the remittance list is prepared in the mail room should
be directly forwarded to
A. Finished goods
B. Billing
C. Accounts receivable
D. General ledger
3. In cash disbursements application systems, the voucher package should be canceled by
A. Cash disbursement
B. Accounts payable
C. Expense ledger distribution
D. General ledger

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4. In a cash receipts application system, the cash remittances received in the mail room should
be directly forwarded to
A. Cash receipts
B. Billing
C. Accounts receivable
D. General ledger
5. Which of the following documents should normally be included in a voucher package?
A. Vendor invoice
B. Purchase order
C. Both A and B
D. Neither A nor B

7.4 SUMMARY

Finance-cycle applications concern the acquisition and use of capital funds. Capital funds
include working capital as well as long term funds. Cash receipts and disbursements are two
common finance application systems.

The basic objectives of a finance cycle are summarized below:

(1) Maintenance of proper fund balance.

To assure that an adequate quantity of funds is available to meet all legitimate needs. Failure
to meet this objective exposes the company to two types of risk, depending on whether the
cash balance is too high or too low. The more immediate and obvious danger is the
maintenance of a cash balance that is too low. An inadequate balance may prevent the
company from functioning properly, with resultant losses of credit and production.

Having large, unnecessary cash balances also exposes the company to certain risks. Excess
cash balances represent an opportunity cost (e.g. interest revenue lost) to the company and
indicate that the company is not property invest in its funds. Although this risk is somewhat
subtle and not so important in the short run continual excess cash balances indicate poor
management and may reduce the companys ability to compete over the long run.

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(2) Records maintenance
The company should maintain certain records of cash receipts and cash disbursements. These
records provide audit trails for external and internal auditors, documentation and proof for
cash disbursements, and backup records and support for cash receipts. Canceled checks, bank
credit and debit memos, duplicate deposit slips, bank statements and company prepared bank
reconciliation all represent records that are normally kept on file by the company.

(3) Internal controls

Effective internal controls over cash is a primary objective of a well designed controls center
on monitoring of cash receipts that flow into the organization and exercising proper authority
for cash disbursements.

Cash receipts are obtained from four major sources:

(1) Collection on accounts receivable and cash sales
(2) Conversion of other assets into cash
(3) Bank loans, bond issues and sales of stock
(4) Refunds from suppliers.
On the other hand, cash payments are applied in four major ways:
(1) Payments on trade accounts payable and payrolls
(2) Investments in other assets
(3) Repayments of bank loans and bond issues
(4) Payments for operating expenses.

7.5 ANSWERS TO CHECK YOUR PROGRESS

1. B
2. D
3. A
4. C
5. C

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