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 customers 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