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Week 10 - The Expenditure Cycle

Accounting Information System (Monash University)

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Week 10 - The Expenditure Cycle

Chapter 13
Expenditure cycle - A recurring set of business activities and related data processing operations
associated with the purchase of and payment for goods and services.
- Primary objective - acquire and maintain inventory, supplies, and services of required quality
at lowest cost

When does the expenditure cycle begin and end?

- Begin - need of goods and services to be provided
- End - when goods and services are delivered and sold to customers

2 separate elements
- Purchasing
- Accounts payable

To accomplish this objective, management must make the following 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?
●● How can the organization consolidate purchases across units to obtain optimal prices?
●● How can information technology (IT) be used to improve both the efficiency and accuracy of the
inbound logistics function?
●● How can the organization maintain sufficient cash to take advantage of any discounts suppliers
offer?
●● How can payments to vendors be managed to maximize cash flow?

The answers to those questions guide how an organization performs the four basic expenditure
cycle activities depicted in Figure 13-2:
1. Ordering materials, supplies, and services
2. Receiving materials, supplies, and services
3. Approving supplier invoices
4. Cash disbursements

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1. Ordering

Threats Controls
Inaccurate inventory records Perpetual inventory method - inventory stocks
- Stockouts - lost sales are always current
- Excessive inventory - increase costs
Data entry errors - inaccurate perpetual inventory Using information technology
records
Purchasing items not currently needed Barcoding
Multiple purchases of same item by different Affixing RFID tags to individual products
submits of organisation
ABC cost analysis
- most critical items to least critical items

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- most critical items to least critical items

2. Receiving

Threats Controls
Accepting unordered Accept only deliveries for which there is an approved purchased order
items
Mistakes in counting Inquiry processing system
Verify receipts of Hold appropriate supervisor accountable for all such costs incurred by that
services department
Inventory theft Segregation of duties
Control procedures
- receiving dept and inventory stores dept acknowledge transfer of
goods
- Inventory stores and production dept acknowledge release of
inventory into production

3. Approving supplier invoices

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non voucher system - A method for processing accounts payable in which each approved invoice is
posted to individual supplier records in the accounts payable file and is then stored in an open
invoice file. Contrast with voucher system.

voucher system - A method for processing accounts payable in which a disbursement voucher is
prepared instead of posting invoices directly to supplier records in the accounts payable subsidiary
ledger. The disbursement voucher identifies the supplier, lists the outstanding invoices, and
indicates the net amount to be paid after deducting any applicable discounts and allowances.
Contrast with nonvoucher system.

Threats Controls
Discrepancies between actual and quoted prices charged; Keep receipts to verify accuracy of
miscalculations of the total amount due monthly statement
ERS - evaluated receipt settlement
Freight related threats
Mistakes in recording and posting payments to suppliers - Data entry and processing controls
additional errors - poor decision making

Cash disbursements
Threats Controls
Failing to take advantage of purchase discounts for Print periodic list of all outstanding
prompt payment - costly invoices
Cash flow budget
Paying for goods not received Compare quantities indicated on supplier
invoice with quantities entered by
inventory control person

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inventory control person

Reimbursement of employees' travel and entertainment Additional evidence - conference agenda
expenses identifying attendees
an employee to book multiple flights or hotels, cancel all Use corporate credit cards for travel
but the cheapest ones, but submit a reimbursement
claim for the most expensive option
Duplicate payments Invoices should be approved for
payment only when accompanied by a
complete voucher package

Original copy of an invoice should be

paid

Cancel (paid) voucher package and

voucher to prevent resubmission
Theft or misappropriation of funds Restriction controls
Strict access controls over all outgoing
EFT transactions
Constant monitoring online banking
transactions
Segregation of duties
Keystroking logging software Specific computer to be used for online
banking to restrict access
Checks in excess of a certain amount
require 2 signatures
Reconcile bank accounts
Theft through check alteration Check protection machines imprinting
amount in distinctive colours
Cash flow problems Cash flow budget

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