Accounting Information Systems:

Essential Concepts and Applications

Fourth Edition by Wilkinson, Cerullo, Raval,
and Wong-On-Wing

Chapter 12: The Revenue

Cycle

Slides Authored by Somnath Bhattacharya, Ph.D.

Florida Atlantic University
Introduction

Revenue Cycles tend to be similar for all

types of firms.
Two subsystems perform the processing
steps within the revenue cycle:
The Sales Processing System
The Cash Receipts Processing System
Objectives of the Revenue
Cycle
 To record sales orders promptly and accurately
 To verify that the customers are worthy of credit
 To ship the products or perform the services by agreed
dates
 To bill for products or services in a timely and an
accurate manner
 To record and classify cash receipts promptly and
accurately
 To post sales and cash receipts to proper customers’
accounts in the accounts receivable ledger
 To safeguard products until shipped
 To safeguard cash until deposited
Marketing/Distribution

Marketing Management has the

objectives of
Determining and satisfying the
needs of customers
Generating sufficient revenue to cover costs
and expenses
Replacing assets
Providing an adequate return on investment
Finance/Accounting

With respect to the Revenue

Cycle, the objectives are
limited to
Cash Planning and Control
Data pertaining to sales and customer
accounts
Inventory control
Information pertaining to cash, sales, and
customers
Input Documents Pertaining to
the Revenue Cycle
Customer Order Remittance Advice
Sales Order Deposit Slip
Back Order
Order
Acknowledgement Credit Memo
Credit Application
Picking List
Salesperson Call
Packing Slip Report
Bill of Lading Delinquent Notice
Shipping Notice Write-off Notice
Sales Invoice Cash Register
Receipts
Figure 12-2
 DFD of a Sales & Receivables
Processing System
Order Data Inventory Data
Customer 1.0
Receive & Inventory Data
Credit Enter Sales 2.0
Data Order
Ship
Customer Data Goods to
Shipping Data Customers 3.0
Bill
Customer
General Ledger Order Data
Customer Account Data

Receivables Data Sales Data

Figure 12-5. See 4.0
Textbook for details Pricing Data
Prepare Customer Data
Accounting
Analyses & Sales History
Accountants & Reports
Managers
Credit Sales Processing
System
Order Entry
Customer Order
Picking List
Shipping
Bill of Lading
Billing
Preparing Analyses & Reports
Invoice Register
Accounts Receivable Summary
Handling Sales Returns & Allowances
Credit Memos
Processing Back Orders
Cash Receipts Processing
System
Remittance Entry
Remittance List
Lockbox
Depositing Receipts
Deposit Slips
Cash Receipts Transaction Listing
Posting Receipts
Balance Forward Method
Open Invoice Method
Preparing Analyses & Reports
Collecting Delinquent Accounts
Write-off Notice
Web-Based Systems

Electronic commerce
Larger customer base
Quicker processing of transactions
Less paperwork
Greater efficiency & productivity
Self-service
AICPA’s Web-Trust and competing services
Information Output

Operational Listings & Reports

Inquiry Display Screens
Scheduled Managerial Reports
Demand Managerial Reports
Operational Listings and
Reports

Monthly statement
Open orders report
Sales Invoice register
Shipping register
Cash receipts journal
Credit memo register
Scheduled Managerial
Reports
 Accounts receivable aging schedule
 Reports on critical factors
Average dollar value per order
Percentage of orders shipped on time
Average number of days between the order
date and shipping date
 Sales analyses
Salesperson
Sales region
Product lines
Customers
Markets
 Cash flow statements
Demand Managerial
Reports

Demand reports are ad hoc non-

scheduled reports
“What-if” scenarios
Types of Managerial Decisions
Pertaining to the Revenue Cycle
 Marketing decisions
Which types of markets and customers are to be served?
Which specific products are to be provided to customers,
including new products to be introduced?
What prices are to be charged, and what discounts are to be
allowed?
What after-sales services are to be offered?
What channels of distribution are to be employed?
What advertising media are to be employed, and in what mix?
What organizational units are to be incorporated within
the marketing function?
What marketing plans and budgets are to be established for the
coming year?

Figure 12-17
Types of Managerial Decisions
Pertaining to the Revenue Cycle

 Financial Decisions
What criteria are to be employed in granting credit to potential
customers?
What collection methods are to be employed in minimizing bad
debts?
What accounts receivable records are to be maintained
concerning amounts owed by customers?
What sources, other than receipts from sales, are to be
employed in obtaining needed funds for operations?
What financial plans and cash budgets are to be established for
the coming year?

Figure 12-17 Continued

 Typical Files Associated
with the Revenue Cycle
 Master Files
Customer master file
Accounts receivable master file
Merchandise inventory master file
 Transaction & Open Document Files
Sales order file
Open sales order file
Sales invoice transaction file
Cash receipts transaction file
 Other Files
Shipping & Price data reference file
Credit reference file
Salesperson file
Sales history file
Cash receipts history file
Accounts receivable report file
Figure 12-18
 A Layout of an Accounts
Receivable Record

Customer Customer Credit Balance Year-to- Year-to- Current

Account Name Limit Beginning date date Account
Balance of Year Sales Payments Balance

Figure 12-19
Relational Data Structure for the
Sales Aspect of the Revenue Cycle
Customer Customer Customer Phone Credit Trade Account Balance Year-to-date Year-to-date
Number Name Shipping Number Limit Discount Beginning of Year Sales Payments
Address Allowed

Sales Product Quantity Sales Order Expected Salesperson Customer

Order Number Ordered Order Date Delivery Code Number
Number Date

Product Description Warehouse Unit of Reorder Economic Unit Name of Quantity on Quantity on
Number Location Measure Point Reorder Cost Preferred Order Hand
Quantity Supplier

Sales Customer Sales Billing Shipping Terms Total

Invoice Number Order (Invoice) Document Sales
Number Number Number Amount

Sales Product Unit Quantity Shipped

Invoice Number Price and Sold
Number
Figure 12-21
 Risk Exposures in the
Revenue Cycle - I
Risk
1) Credit sales made to customers
who represent poor credit risks
2) Unrecorded or unbilled shipments
3) Errors in preparing sales invoices
Figure 12-22
Exposure
1) Losses from bad debts
2) Losses of revenue; overstatement
of inventory and understatement of
accounts receivable in the balance
sheet
3) Alienation of customers and
possible loss of future sales; losses of
revenue
 Risk Exposures in the
Revenue Cycle - II

Risk Exposure
4) Misplacement of orders from 4) Losses of revenue and alienation of
customers or unfilled backorders customers
5) Incorrect posting of sales to 5) Incorrect balances in accounts
accounts receivable records receivable and general ledger account
records
6) Posting of revenues to wrong 6) Overstatement of revenue in one
accounting periods, such as premature year (year of premature booking) and
booking of revenues understatement of revenue in the next

Figure 12-22 (continued)

 Risk Exposures in the
Revenue Cycle - III
Risk
7) Fictitious credit sales to nonexistent Overstatement of revenues and
customers
8) Excessive sales returns and
allowances with certain of the credit
memos being for fictitious returns
9) Theft or misplacement of finished
goods in the warehouse or on the
shipping dock
Figure 12-22 (continued)
Exposure
accounts receivable
8) Losses in net revenue, with the
proceeds from subsequent payments
by affected customers being
fraudulently pocketed
9) Losses in revenue; overstatement
of inventory on the balance sheet
 Risk Exposures in the
Revenue Cycle - IV
Risk Exposure
10) Fraudulent write-offs of 10) Understatement of accounts
customers’ accounts by unauthorized receivable; losses of cash receipts
persons when subsequent collections on
written-off accounts are
misappropriated by perpetrators of the
fraud
11) Theft (skimming) of cash receipts, 11) Losses of cash receipts;
especially currency, by persons overstatement of accounts receivable
involved in the processing; often in the subsidiary ledger and the
accompanied by omitted postings to balance sheet
affected customers’ accounts
12) Lapping of payments from 12) Losses of cash receipts; incorrect
customers when amounts are posted account balances for those customers
to accounts receivable records whose records are involved in the
lapping
Figure 12-22 (continued)
 Risk Exposures in the
Revenue Cycle - V
Risk
13) Accessing of accounts receivable,
merchandise inventory, and other
records by unauthorized persons
14) Involvement of cash, merchandise
inventory, and accounts receivable
records in natural or human-made
disasters
15) Planting of virus by disgruntled
employee to destroy data on magnetic
media
Figure 12-22 (continued)
Exposure
13) Loss of security over such records,
with possibly detrimental use made of
the data accessed
14) Losses of or damages to assets
15) Loss of customer accounts
receivable data needed to monitor
collection of amounts from previous
sales
 Risk Exposures in the
Revenue Cycle - VI

Risk
16) Interception of data transmittal
between customers and the web site
17) Unauthorized viewing and
alteration of other customer account
data via the Web
18) Denial by a customer that an
online order was placed after the
transaction is processed
Exposure
16) Loss of data which may be used to
the detriment of customers
17) Loss of security over customer
records resulting in misstatement of
accounts receivable balances
18) Loss of sales revenues

Figure 12-22 (continued)

 Risk Exposures in the
Revenue Cycle - VII

Risk
19) Use of stolen credit cards to place
orders via the Web
20) Breakdown of the web server due
to unexpectedly high volume of
transactions
Exposure
19) Loss of shipped goods for which
payments will not be received
20) Loss of sales revenues and
alienation of customers

Figure 12-22 (continued)

Typical Control Objectives
for the Revenue Cycle
 All customers accepted for credit sales are credit-worthy
 All ordered goods are shipped, and all services are
performed by dates that are agreeable to all parties
 All shipped goods are authorized and accurately billed
within the proper accounting period
 All sales returns and allowances are authorized and
accurately recorded and based on actual return of goods
 All cash receipts are recorded completely and accurately
 All credit sales and cash receipts transactions are posted
to proper customers’ accounts in the accounts receivable
ledger
 All accounting records, merchandise inventory,
and cash are safeguarded
General Controls of the
Revenue Cycle - I

Organizational Controls
Units with custodial functions should be kept
separate from each other
Custodial functions should furthermore be
segregated from record-keeping functions
For computerized systems, systems
development should be kept separate from
systems operations
General Controls of the
Revenue Cycle - II

Documentation Controls
Asset Accountability Controls
Management Practice Controls
Data Center Operations Controls
Authorization Controls
General Controls of the
Revenue Cycle - III

 Access Controls
Assigned passwords that authorized clerks must enter to access
accounts receivable and other customer-related files, in order to
perform their strictly defined tasks
Terminals that are restricted in the functions they allow to be
performed with respect to sales and cash receipts transactions
Logging of all sales and cash receipt transactions upon their
entry into the system
Frequent dumping of accounts receivable and merchandise
inventory master files onto magnetic tape backups
Physically protected warehouses and safes
A lockbox collection system in situations where feasible
Application Controls of the
Revenue Cycle: Input - I
1) Prepare pre-numbered and well-
designed documents relating to sales,
shipping, and cash receipts, with each
prepared document being approved by an
authorized person
2) Validate data on sales orders and
remittance advices as the data are
prepared and entered for processing. In
computer-based systems, validation
should be performed by means of
programmed edit checks. When data are
keyed into computer-readable medium,
key verification is also appropriate
Application Controls of the
Revenue Cycle: Input - II

3) Correct errors that are detected during

data entry and before the data are posted
to the customer and inventory records
4) Precompute batch control totals
relating to key data on sales invoices (or
shipping notices) and remittance advices.
These precomputed batch control totals
should be compared with totals computed
during postings to the accounts receivable
ledger and during each processing run.
In the case of cash receipts, the total on
remittance advices should also be
compared with the total on deposit slips
Application Controls of the
Revenue Cycle: Processing - I
1) Move ordered goods from the finished goods
warehouse and ship the goods only on the basis
of written authorizations such as stock request
copies
2) Invoice customers only on notification by the
shipping department of the quantities that have
been shipped
3) Issue credit memos for sales returns only
when evidence (i.e. receiving report) has been
received that the goods were actually returned
4) Verify all computations on sales invoices
before mailing and postings to proper
customers’ accounts. Also, compare the sales
invoices against shipping notices and open
orders, in order to ensure that the quantities
ordered reconcile with the orders shipped and
back-ordered
Application Controls of the
Revenue Cycle: Processing - II
5) Verify that total amounts posted to the
accounts receivable accounts from batches of
transactions agree with precomputed batch
totals, and post the total amounts to the
appropriate general ledger accounts
6) Deposit all cash received intact and with a
minimum of delay, thus eliminating the
possibility of cash receipts being used to pay
employees or to reimburse petty cash funds
7) Correct errors that are made during
processing steps, usually by reversing erroneous
postings to accounts and entry of correct data.
The audit trail concerning accounts being
corrected should show the original errors, the
reversals, and the corrections
Application Controls of the
Revenue Cycle: Output
1) Prepare monthly statements, which should be
mailed to all credit customers, especially if the
balance forward approach is employed
2) File copies of all documents pertaining to
sales and cash receipts transactions by number,
with the sequence of numbers in each file being
periodically checked to see if gaps exist. If
transactions are not supported by preprinted
documents, as often is the case in online
computer-based systems, assign transaction
numbers to the transactions
3) Prepare printed transaction listings and
account summaries on a periodic basis in order
to provide audit trail and a basis for review
Web Security Procedures

Authentication
Authorization
Use of an Access Control List
Accountability
Data Transmission
Disaster Contingency & Recovery Plan
 Accounting Information Systems:
Essential Concepts and Applications
Fourth Edition by Wilkinson, Cerullo,
Raval, and Wong-On-Wing

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