The Expenditure Cycle: Purchasing

to Cash Disbursements
Chapter 13

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 Learning Objectives
Explain the basic business activities and related
information processing operations performed in
the expenditure cycle.

Discuss the key decisions to be made in the

expenditure cycle, and identify the information
needed to make those decisions.

Identify major threats in the expenditure cycle,

and evaluate the adequacy of various control
procedures for dealing with those threats.
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 Basic Expenditure Cycle Activities

Order materials, supplies, and services

Receive materials, supplies, and services
Approve supplier (vendor) invoice
Cash disbursement

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 Order Goods (Materials/Supplies) or
Services Processing Steps
Identify what, when, and how much to purchase
Source document: purchase requisition
Choose a supplier
Source document: purchase order

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 Ordering Goods/Services
Threats Controls
1. Stockouts and excess 1 a. Perpetual inventory system
inventory b. Bar-coding, RFID
2. Purchasing items not needed 2 a. Review and approval of
3. Purchasing items at inflated purchase requisitions
prices 3 a. Price lists
4. Purchasing goods of poor b. Competitive bids
quality 4 a. Use approved suppliers
5 a. Monitor supplier
5. Unreliable suppliers
performance
6. Purchasing from
b. Require quality certification
unauthorized suppliers
6 a. Purchase from approved
7. Kickbacks
suppliers
7 a. Supplier audits
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 Receiving Process

Goods arrive
Verify goods ordered against the purchase order
(what, how much, quality)
Source document: receiving report

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 Receiving Goods or Services

Threats Controls
1. Accepting unordered items 1 a. Authorized purchase orders
2. Mistakes in counting needed before receiving
3. Verifying receipt of services goods
4. Inventory theft 2 a. Bar codes or RFID
3 a. Budget controls and audits
4 a. Restrict physical access to
inventory
b. Document all inventory
transfers
c. Segregate custody vs.
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 Approve Supplier Invoice and Cash
Disbursements
Match the supplier invoice to:
Purchase order
Receiving report
supplier invoice + purchase order + receiving report = voucher

Approve supplier invoice for payment

Source document: disbursement voucher
Pay vendor

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 Approve Supplier Invoice
Threats
1. Errors in supplier invoice
2. Mistakes in posting to
accounts payable
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Control
1 a. Verify invoice accuracy
2 a. Data entry edit controls
b. Reconcile detailed accounts
payable records to the
general ledger accounts
payable account
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 Cash Disbursements
Threats Controls
1. Failure to take discounts 1 a. File invoices by due date to
2. Pay for items not received take advantage of discounts
3. Duplicate payments 2 a. Match supplier invoice to
4. Theft of cash supporting documents
(purchase order, receiving
5. Check alteration
report)
6. Cash flow problems
3 a. Pay only original invoices
b. Cancel supporting document
when payment is made
4 a. Physical security of checks
b. Separation of duties
c. Reconcile bank accounts
5 a. Check Protection machines
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 Key Terms

Expenditure cycle Vendor-managed inventory

Economic order quantity Kickbacks
(EOQ) Receiving report
Reorder point Debit memo
Materials requirement Voucher package
planning (MRP) Nonvoucher system
Just-in-time (JIT) inventory Voucher system
system Disbursement voucher
Purchase requisition Evaluated receipt settlement
Purchase order (ERS)
Blanket purchase order Procurement card
Imprest fund
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