The Revenue and Expenditure Cycles - Chapter 7

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The Revenue and Expenditure Cycles - Chapter 7
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REVENUE CYCLE APPLICATIONS

• Sales Order Processing
• Accounts Receivable System

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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.

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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.

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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

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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

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Accounts Receivable Functions

• Cash Receipts
• Billing
• Accounts Receivable
• Credit
• General Ledger

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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.

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Types of Sales Order Systems

• incomplete prebilling
• separate order and billing
• postbilling

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incomplete prebilling

• the invoice is not completed until the goods are
  ready for shipment.

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separate order and billing

• both a sales order and an invoice are used in a
  sales order application system.

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postbilling

• the invoice is prepared or completed after
  shipment.

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blanket order

• a single order which calls for several shipments
  to the same customer over a specific time period.

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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.

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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.

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Sales Returns and Allowances

• credit memorandum a form used to document
  reductions to a customer's account due to sales
  returns or sales allowances.

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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.

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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.

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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.

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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

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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.

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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.

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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.

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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.

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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.

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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

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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

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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

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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

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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.

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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.

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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.

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Payroll

• Personnel
• Timekeeping
• Payroll

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Personnel

• responsible for placing people on the company's
  payroll, specifying rates of pay, and authorizing
  all deductions from pay.

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Timekeeping

• responsible for collecting and maintaining time
  cards or time reports, and reconciling these data
  to job time summary reports

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Payroll

• payroll department is responsible for the actual
  computation and preparation of payroll.

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Payroll register

• Details the computation of net pay (gross pay
  less deductions from pay).

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Payroll Controls

• Paychecks are sent to cash disbursements for
  signature, review, and distribution.

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Payroll Controls

• The use of a separate imprest payroll account for
  paychecks to facilitate reconciliation

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Payroll Controls

• An independent reconciliation of the payroll
  account bank statement

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independent paymaster

• the person who distributes pay is independent of
  the payroll preparation process.

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Payroll Processing Requirements

• Federal old-age, survivors', disability, and
  hospital insurance (F.I.C.A.)
• Federal unemployment insurance
• State unemployment insurance
• Income taxes withheld