CHAPTER 5
5. The Revenue And Expenditure Cycle:
• The revenue cycle is a recurring set of
business activities and related information
processing operations associated with:
– Providing goods and services to customers
– Collecting their cash payments
• The primary external exchange of information
is with customers.
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INTRODUCTION
• Information about revenue cycle activities
flows to other accounting cycles, e.g.:
– The expenditure and production cycles
• Receive information about sales
transactions so they’ll know when
to initiate the purchase or
production of more inventory.
2
INTRODUCTION
• Information about revenue cycle activities
flows to other accounting cycles, e.g.:
– The expenditure and production cycles
– The human resources/payroll cycle
• Uses information about sales to
calculate commissions and
bonuses.
3
INTRODUCTION
• Information about revenue cycle activities
flows to other accounting cycles, e.g.:
– The expenditure and production cycles
– The human resources/payroll cycle
– The general ledger and reporting function
• Uses information produced by the
revenue cycle in preparing
financial statements and
performance reports.
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INTRODUCTION
• The primary objective of the revenue cycle:
– Provide the right product in the right place at the right
time for the right price.
• Decisions that must be made in revenue cycle :
– Should we customize products?
– How much inventory should we carry and where?
– How should we deliver our product?
– How should we price our product?
– Should we give customers credit? If so, how much and
on what terms?
– How can we process payments to maximize cash flow?
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INTRODUCTION
• Management also has to evaluate the efficiency
and effectiveness of revenue cycle processes:
– Requires data about:
• Events that occur
• Resources used
• Agents who participate
– The data needs to be accurate, reliable, and timely.
– We will see how the three basic AIS functions are
carried out in the revenue cycle,
• Capturing and processing data
• Storing and organizing the data for decisions
• Providing controls to safeguard resources (including data)6
REVENUE CYCLE BUSINESS ACTIVITIES
• Four basic business activities are performed in
the revenue cycle:
– Sales order entry
– Shipping
– Billing
– Cash collection
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SALES ORDER ENTRY
• Sales order entry is performed by the sales order
department.
• Steps in the sales order entry process include:
– Take the customer’s order
– Check the customer’s credit
– Check inventory availability
– Respond to customer inquiries (may be done by customer
service or sales order entry)
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SALES ORDER ENTRY
• Sales order entry is performed by the sales order
department.
• The sales order department typically reports to the
VP of Marketing.
• Steps in the process include:
– Take the customer’s order
– Check the customer’s credit
– Check inventory availability
– Respond to customer inquiries (may be done by customer
service or sales order entry)
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SALES ORDER ENTRY
• Take customer orders
– Order data are received on a sales order
document which may be completed and received:
• In the store
• By mail
• By phone
• On a website
• By a salesperson in the field
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SALES ORDER ENTRY
• The sales order (paper or electronic) indicates:
– Item numbers ordered
– Quantities
– Prices
– Delivery Date
– Sales person
• Orders entered online can be routed directly to the warehouse for
picking and shipping.
• Electronic Data Interchange (EDI) can be used to link a company
directly with its customers to receive orders or even manage the
customer’s inventory.
• Email and instant messaging are used to notify sales staff of price
changes and promotions.
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SALES ORDER ENTRY
• Sales order entry is performed by the sales order
department.
• The sales order department typically reports to the
VP of Marketing.
• Steps in the process include:
– Take the customer’s order
– Check the customer’s credit
– Check inventory availability
– Respond to customer inquiries (may be done by customer
service or sales order entry)
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SALES ORDER ENTRY
• Credit sales should be approved before the
order is processed any further.
• There are two types of credit authorization:
– General authorization
• For existing customers below their credit limit who
don’t have past-due balances.
• Credit limits vary by customer based on past history
and ability to pay.
• General authorization involves checking the customer
master file to verify the account and status.
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SALES ORDER ENTRY
• Credit sales should be approved before the
order is processed any further.
• There are two types of credit authorization:
– General authorization
– Specific authorization
• For customers who are:
– New
– Have past-due balances
– Are placing orders that would exceed their credit limit
• Specific authorization is done by the credit manager, who
reports to the treasurer. 14
SALES ORDER ENTRY
• Sales order entry is performed by the sales order
department.
• The sales order department typically reports to the
VP of Marketing.
• Steps in the process include:
– Take the customer’s order
– Check the customer’s credit
– Check inventory availability
– Respond to customer inquiries (may be done by customer
service or sales order entry)
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SALES ORDER ENTRY
• When the order has been received and the
customer’s credit approved, the next step is to
ensure there is sufficient inventory to fill the
order and advise the customer of the delivery
date.
• The sales order clerk can usually refer a screen
displaying:
– Quantity on hand
– Quantity already committed to others
– Quantity on order
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SALES ORDER ENTRY
• If there are enough units to fill the order:
– Complete the sales order
– Update the quantity available field in the inventory
file
– Notify the following departments of the sale:
• Shipping
• Inventory
• Billing
– Send an acknowledgment to the customer
• If there’s not enough to fill the order, initiate a
back order. 17
SALES ORDER ENTRY
• Sales order entry is performed by the sales order
department.
• The sales order department typically reports to the
VP of Marketing.
• Steps in the process include:
– Take the customer’s order
– Check the customer’s credit
– Check inventory availability
– Respond to customer inquiries (may be done by customer
service or sales order entry)
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SALES ORDER ENTRY
• Another step in the sales order entry process is
responding to customer inquiries:
– May occur before or after the order is placed
– The quality of this customer service can be critical to
company success
• Many companies use Customer Relationship
Management (CRM) systems to support this
process:
– Organizes customer data to facilitate efficient and
personalized service.
• The goal of CRM is to retain customers
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SALES ORDER ENTRY
• Sales order entry involved the steps of:
– Taking the customer’s order
– Checking the customer’s credit
– Checking inventory availability
– Responding to customer inquiries
• We have now completed sales order entry and
are ready to move to the next step.
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REVENUE CYCLE BUSINESS ACTIVITIES
• Four basic business activities are performed in
the revenue cycle:
– Sales order entry
– Shipping
– Billing
– Cash collection
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SHIPPING
• The second basic activity in the revenue cycle is filling
customer orders and shipping the desired merchandise.
• The process consists of two steps
– Picking and packing the order
– Shipping the order
• The warehouse department typically picks the order
• The shipping departments packs and ships the order
• Both functions include custody of inventory and
ultimately report to the VP of Manufacturing.
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SHIPPING
• The clerk then records online:
– The sales order number
– The item numbers ordered
– The quantities shipped
• This process:
– Updates the quantity-on-hand field in the inventory master file
• Produces a packing slip
• The packing slip lists the quantity and description of
each item in the shipment.
• The shipment is accompanied by:
– The packing slip and The freight bill
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REVENUE CYCLE BUSINESS ACTIVITIES
• Four basic business activities are performed in
the revenue cycle:
– Sales order entry
– Shipping
– Billing
– Cash collection
Billing involves two tasks:
- Invoicing
- Updating accounts receivable
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BILLING
• The third revenue cycle activity is billing customers.
• This activity involves two tasks:
– Invoicing
– Updating accounts receivable
Requires information from:
Shipping Department on items and quantities shipped
Sales on prices and other sales terms
The basic document created is the sales invoice. The invoice
notifies the customer :
The amount to be paid
Where to send payment
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BILLING
• The third revenue cycle activity is billing
customers.
• This activity involves two tasks:
– Invoicing
– Updating accounts receivable
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BILLING
• The accounts receivable function reports to the
controller
• This function performs two basic tasks
– Debits customer accounts for the amount the customer is
invoiced
– Credits customer accounts for the amount of customer
payments
• Account Adjustments and Write-offs:
– Adjustments to customer accounts may need to be
made for:
• Returns
• Allowances for damaged goods
• Write-offs as uncollectible
– These adjustments are handled by the credit manager27
REVENUE CYCLE BUSINESS ACTIVITIES
• Four basic business activities are performed in
the revenue cycle:
– Sales order entry
– Shipping
– Billing
– Cash collection
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CASH COLLECTIONS
• The final activity in the revenue cycle is collecting
cash from customers
• The cashier, who reports to the treasurer, handles
customer remittances and deposits them in the
bank
• Because cash and checks are highly vulnerable,
controls should be in place to discourage theft
– Accounts receivable personnel should not have access
to cash (including checks)
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CASH COLLECTIONS
• Possible approaches to collecting cash:
– Lockbox arrangements
• Customers remit payments to a bank P.O. box
• The bank sends the company:
– Remittance advices
– An electronic list of the remittances
– Copies of the checks
• Advantages:
– Prevents theft by company employees
– Improves cash flow management
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CASH COLLECTIONS
• Possible approaches to collecting cash:
– Lockbox arrangements
– Electronic lockboxes
• Upon receiving and scanning the checks, the bank
immediately sends electronic notification to the company,
including:
– Customer account number
– Amount remitted
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CASH COLLECTIONS
• Possible approaches to collecting cash:
– Lockbox arrangements
– Electronic lockboxes
– Electronic funds transfer
• Customers remit payment electronically to the
company’s bank
• Eliminates mailing delays
• Typically done through banking system’s Automated
Clearing House (ACH) network
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CASH COLLECTIONS
• Possible approaches to collecting cash:
– Lockbox arrangements
– Electronic lockboxes
– Electronic funds transfer
– Accept credit cards or procurement cards from
customers
• Speeds collection because credit card issuer
usually transfers funds within two days
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CONTROL: OBJECTIVES
• In the revenue cycle, a well-designed AIS should provide
adequate controls to ensure that the following objectives are
met:
– All transactions are properly authorized
– All recorded transactions are valid
– All valid and authorized transactions are recorded
– All transactions are recorded accurately
– Assets are safeguarded from loss or theft
– Business activities are performed efficiently and effectively
– The company is in compliance with all applicable laws and
regulations
– All disclosures are full and fair
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5. 2 The Expenditure Cycle:
• The expenditure cycle involves interactions with the
suppliers.
• The primary objective of the expenditure cycle is to
minimize the total cost of acquiring and maintaining
inventory, supplies, and services.
• Information flows to the expenditure cycle from other cycles,
– The revenue cycle, production cycle, inventory control, and various
departments provide information about the need to purchase goods
and materials.
• Information also flows from the expenditure cycle:
– When the goods and materials arrive, the expenditure cycle provides
information about their receipt to the parties that have requested them.
– Information is provided to the general ledger and reporting function for
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internal and external financial reporting.
INTRODUCTION
• Decisions that must be made include:
– What level of inventory and supplies should we carry?
– What vendors provide the best price and quality?
– Where should we store the goods?
– Can we consolidate purchases across units?
– How can IT improve inbound logistics?
– Is there enough cash to take advantage of early
payment discounts?
– How can we manage payments to maximize cash
flow?
36
INTRODUCTION
• Management also has to evaluate the efficiency
and effectiveness of expenditure cycle processes.
– These evaluations require data about:
• Events that occur
• Resources affected
• Agents who participate
– This data needs to be accurate, reliable, and timely.
37
EXPENDITURE CYCLE BUSINESS ACTIVITIES
• The three basic activities performed in the
expenditure cycle are:
– Ordering goods, supplies, and services
– Receiving and storing these items
– Paying for these items
• These activities mirror the activities in the
revenue cycle.
38
EXPENDITURE CYCLE BUSINESS ACTIVITIES
• The three basic activities performed in the
expenditure cycle are:
– Ordering goods, supplies, and services
– Receiving and storing these items
– Paying for these items
• These activities mirror the activities in the
revenue cycle.
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ORDERING GOODS, SUPPLIES, AND SERVICES
• Key decisions in this process involve identifying
what, when, and how much to purchase and from
whom.
• Weaknesses in inventory control can create
significant problems with this process:
– Inaccurate records cause shortages.
• One of the key factors affecting this process is the
inventory control method to be used.
• Inventory Control Methods
• Economic Order Quantity (EOQ)
• Just in Time Inventory (JIT)
• Materials Requirements Planning (MRP) 40
ORDERING GOODS, SUPPLIES, AND SERVICES
• EOQ is the traditional approach to managing inventory.
-Under this approach, an optimal order size is calculated by
minimizing the sum of several costs:
-Ordering costs, Carrying costs, Stock out costs
-Goal: Maintain enough stock so that production doesn’t get
interrupted.
• MRP seeks to reduce inventory levels by improving
the accuracy of forecasting techniques and carefully
scheduling production and purchasing around that
forecast.
• JIT systems attempt to minimize or eliminate inventory by
purchasing or producing only in response to actual (as
opposed to forecasted) sales. 41
ORDERING GOODS, SUPPLIES, AND SERVICES
• Whatever the inventory control system, the order
processing typically begins with a purchase request
followed by the generation of a purchase order.
• A request to purchase goods or supplies is triggered by
either:
– The inventory control function; or
– From stores - noticing a shortage.
• Advanced inventory control systems automatically
initiate purchase requests when quantity falls below the
reorder point.
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ORDERING GOODS, SUPPLIES, AND SERVICES
• The need to purchase goods typically results in the
creation of a purchase requisition. The purchase
requisition is a paper document or electronic form that
identifies:
– Who is requesting the goods
– Where they should be delivered
– When they’re needed
– Item numbers, descriptions, quantities, and prices
– Possibly a suggested supplier
• Most of the detail on the suppliers and the items
purchased can be pulled from the supplier and inventory
master files.
43
ORDERING GOODS, SUPPLIES, AND SERVICES
• The purchase requisition is received by a
purchasing agent (buyer) in the purchasing
department, who typically performs the
purchasing activity.
• A crucial decision is the selection of supplier.
• Key considerations are:
– Price
– Quality
– Dependability
Dependability is Especially important in JIT systems
because late or defective deliveries can bring the 44
ORDERING GOODS, SUPPLIES, AND SERVICES
• Once a supplier has been selected for a product,
their identity should become part of the product
inventory master file so that the selection process
does not have to be carried out for every
purchase.
– A list of potential alternates should also be
maintained.
– For products that are seldom ordered, the selection
process may be repeated every time.
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ORDERING GOODS, SUPPLIES, AND SERVICES
• It’s important to track and periodically evaluate
supplier performance, including data on:
– Purchase prices
– Rework and scrap costs
– Supplier delivery performance
• The purchasing function should be evaluated and
rewarded based on how well it minimizes total
costs, not just the costs of purchasing the goods.
46
ORDERING GOODS, SUPPLIES, AND SERVICES
• A purchase order is a document or electronic
form that formally requests a supplier to sell and
deliver specified products at specified prices.
• The PO is both a contract and a promise to pay. It
includes:
– Names of supplier and purchasing agent
– Order and requested delivery dates
– Delivery location
– Shipping method
– Details and Quantities of the items ordered
47
EXPENDITURE CYCLE BUSINESS ACTIVITIES
• The three basic activities performed in the
expenditure cycle are:
– Ordering goods, supplies, and services
– Receiving and storing these items
– Paying for these items
• These activities mirror the activities in the
revenue cycle.
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RECEIVING AND STORING GOODS
• The receiving department accepts deliveries from suppliers.
• The two major responsibilities of the receiving department
are:
– Deciding whether to accept delivery
– Verifying the quantity and quality of delivered goods
• The first decision is based on whether there is a valid
purchase order.
– Accepting un-ordered goods wastes time, handling and storage.
• Inventory stores typically stores the goods.
• The receipt of goods must be communicated to the
inventory control function to update inventory records.
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RECEIVING AND STORING GOODS
• Verifying the quantity of delivered goods is important so:
– The company only pays for goods received
– Inventory records are updated accurately
• The receiving report is the primary document used in this process:
– It documents the date goods received, shipper, supplier, and PO
number
– Shows item number, description, unit of measure, and quantity for
each item
– Provides space for signature and comments by the person who
received and inspected
• Receipt of services is typically documented by supervisory approval
of the supplier’s invoice.
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RECEIVING AND STORING GOODS
• When goods arrive, a receiving clerk compares the PO
number on the packing slip with the open PO file to
verify the goods were ordered.
– Then counts the goods
– Examines for damage before routing to warehouse or factory
• Three possible exceptions in this process:
– The quantity of goods is different from the amount ordered
– The goods are damaged
– The goods are of inferior quality
51
RECEIVING AND STORING GOODS
• If one of these exceptions occurs, the purchasing agent
resolves the situation with the supplier.
– Supplier typically allows adjustment to the invoice for quantity
discrepancies.
– If goods are damaged or inferior, a debit memo is prepared after
the supplier agrees to accept a return or grant a discount.
• One copy goes to supplier, who returns a credit memo in
acknowledgment.
• One copy to accounts payable to adjust the account payable.
• One copy to shipping to be returned to supplier with the actual
goods.
52
EXPENDITURE CYCLE BUSINESS ACTIVITIES
• The three basic activities performed in the
expenditure cycle are:
– Ordering goods, supplies, and services
– Receiving and storing these items
– Paying for these items
• These activities mirror the activities in the
revenue cycle.
53
PAYING FOR GOODS AND SERVICES
• There are two basic sub-processes involved
in the payment process:
– Approval of vendor invoices
– Actual payment of the invoices
54
Approval of Vendor Invoices
• Approval of vendor invoices is done by the
accounts payable department.
• The legal obligation to pay arises when goods
are received.
– But most companies pay only after receiving and
approving the invoice.
– Authorize payment only for goods and services that
were ordered and actually received.
• Requires information from:
– Purchasing—about existence of valid purchase order
– Receiving—for receiving report indicating goods
were received
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Actual Payment of The Invoices
• Payment of the invoices is done by the cashier, who
reports to the treasurer.
• The cashier receives a voucher package, which
consists of the vendor invoice and supporting
documentation, such as purchase order and
receiving report.
• Payments are done based the Materials
Received Report on what is ordered and
received materials based on Purchase order
details such as quantity ordered, price quoted
and the specification of the materials. 56
CONTROL AND PROCEDURES
• In the expenditure cycle, a well-designed AIS should provide
adequate controls to ensure that the following objectives are
met:
– All transactions are properly authorized
– All recorded transactions are valid
– All valid and authorized transactions are recorded
– All transactions are recorded accurately
– Assets are safeguarded from loss or theft
– Business activities are performed efficiently and effectively
– The company is in compliance with all applicable laws and
regulations
– All disclosures are full and fair
57
CONTROL AND PROCEDURES
• There are several actions a company can take with
respect to any cycle to reduce threats of errors or
irregularities. These include:
– Using simple, easy-to-complete documents with clear
instructions (enhances accuracy and reliability).
– Using appropriate application controls, such as validity
checks and field checks (enhances accuracy and
reliability).
– Providing space on forms to record who completed and
who reviewed the form (encourages proper
authorizations and accountability).
– Pre-numbering documents (encourages recording of
valid and only valid transactions).
– Restricting access to blank documents (reduces risk of
58
unauthorized transaction).
