The Revenue Cycle

Objectives for Chapter 4

 Tasks performed in the revenue cycle, regardless of the technology used
 Functional departments in the revenue cycle and the flow of revenue transactions through the organization
 Documents, journals, and accounts needed for audit trails, records, decision making, and financial reporting
 Risks associated with the revenue cycle and the controls that reduce these risks
 The operational and control implications of technology used to automate and reengineer the revenue cycle

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Journal Vouchers/Entries
How do we get them?
 Billing Department prepares a journal voucher:
Accounts Receivable DR
Sales CR
 Inventory Control Dept. prepares a journal voucher:
Cost of Goods Sold DR
Inventory CR
 Cash Receipts prepares a journal voucher:
Cash DR
Accounts Receivable CR

DFD of Sales Order Process

Revenue Cycle Databases

 Master files
 customer master file
 accounts receivable master file
 merchandise inventory master file
 Transaction and Open Document Files
 sales order transaction file
 open sales order transaction file
 sales invoice transaction file
 cash receipts transaction file
 Other Files
 shipping and price data reference file
 credit reference file (may not be needed)
 salesperson file (may be a master file)
 Sales history file
 cash receipts history file
 accounts receivable reports file
 Sales Order Process Flowchart Sales Order Process Flowchart

Manual Sales Order Processing

 Begins with a customer placing an order
 The sales department captures the essential details on a sales order form.
 The transaction is authorized by obtaining credit approval by the credit department.
 Sales information is released to:
 Billing
 Warehouse (stock release or picking ticket)
 Shipping (packing slip and shipping notice)
 The merchandise is picked from the Warehouse and sent to Shipping.
 Stock records are adjusted.
 The merchandise, packing slip, and bill of lading are prepared by Shipping and sent to the customer.
 Shipping reconciles the merchandise received from the Warehouse with the sales information on the
packing slip.
 Shipping information is sent to Billing. Billing compiles and reconciles the relevant facts and issues an invoice to
the customer and updates the sales journal. Information is transferred to:
 Accounts Receivable (A/R)
 Inventory Control
 A/R records the information in the customer’s account in the accounts receivable subsidiary ledger.
 Inventory Control adjusts the inventory subsidiary ledger.
 Billing, A/R, and Inventory Control submits summary information to the General Ledger dept., which then
reconciles this data and posts to the control accounts in the G/L.

DFD of Sales Returns Sales Returns Flowchart

Sales Return Journal Entry

G/L posts the following to control accounts:

Inventory—Control DR
Sales Returns and Allowances DR
Cost of Goods Sold CR
Accounts Receivable—Control CR
DFD of Cash Receipts Processes Cash Receipts Flowchart

Manual Cash Receipts Processes

 Customer checks and remittance advices are received in the Mail Room.
 A mail room clerk prepares a cash prelist and sends the prelist and the checks to Cash Receipts.
 The cash prelist is also sent to A/R and the Controller.
 Cash Receipts:
 verifies the accuracy and completeness of the checks
 updates the cash receipts journal
 prepares a deposit slip
 prepares a journal voucher to send to G/L
 A/R posts from the remittance advices to the accounts receivable subsidiary ledger.
 Periodically, a summary of the postings is sent to G/L.
 G/L department:
 reconciles the journal voucher from Cash Receipts with the summaries from A/R
 updates the general ledger control accounts
 The Controller reconciles the bank accounts.

Summary of Internal Controls

Authorization Controls
 Proper authorization of transactions (documentation) should occur so that only valid transactions get processed.
 Within the revenue cycle, authorization should take place when:
 a sale is made on credit (authorization)
 a cash refund is requested (authorization)
 posting a cash payment received to a customer’s account (cash pre-list)

Segregation of Functions
Three Rules
1. Transaction authorization should be separate from transaction processing.
2. Asset custody should be separate from asset record-keeping.
 3. The organization should be so structured that the perpetration of a fraud requires collusion between two or
more individuals.

Segregation of Functions
 Sales Order Processing
 credit authorization separate from SO processing
 inventory control separate from warehouse
 accounts receivable sub-ledger separate from general ledger control account
 Cash Receipts Processing
 cash receipts separate from accounting records
 accounts receivable sub-ledger separate from general ledger

Supervision
 Often used when unable to enact appropriate segregation of duties.
 Supervision of employees serves as a deterrent to dishonest acts and is particularly important in the mailroom.

Accounting Records
 With a properly maintained audit trail, it is possible to track transactions through the systems and to find where
and when errors were made:
 pre-numbered source documents
 special journals
 subsidiary ledgers
 general ledger
 files

Access Controls
 Access to assets and information (accounting records) should be limited.
 Within the revenue cycle, the assets to protect are cash and inventories and access to records such as the
accounts receivable subsidiary ledger and cash journal should be restricted.

Independent Verification
 Physical procedures as well as record-keeping should be independently reviewed at various points in the system
to check for accuracy and completeness:
 shipping verifies the goods sent from the warehouse are correct in type and quantity
 warehouse reconciles the stock release document (picking slip) and packing slip
 billing reconciles the shipping notice with the sales invoice
 general ledger reconciles journal vouchers from billing, inventory control, cash receipts, and accounts
receivable

Automating the Revenue Cycle

 Authorizations and data access can be performed through computer screens.
 There is a decrease in the amount of paper.
 The manual journals and ledgers are changed to disk or tape transaction and master files.
 Input is still typically from a hard copy document and goes through one or more computerized processes.
 Processes store data in electronic files (the tape or disk) or prepare data in the form of a hardcopy report.

Automating the Revenue Cycle

 Revenue cycle programs can include:
 formatted screens for collecting data
 edit checks on the data entered
 instructions for processing and storing the data
 security procedures (passwords or user IDs)
 steps for generating and displaying output
  To understand files, you must consider the record design and layout.
 The documents and the files used as input sources must contain the data necessary to generate the output
reports.

Computer-Based Accounting Systems

 CBAS technology can be viewed as a continuum with two extremes:
 automation - use technology to improve efficiency and effectiveness
 reengineering – use technology to restructure business processes and firm organization

Example: Automated Batch Sales

Reengineering Sales Order Processing Using Real-Time Technology

 Manual procedures and physical documents are replaced by interactive computer terminals.
 Real time input and output occurs, with some master files still being updated using batches.
 Real-time - entry of customer order, printout of stock release, packing slip and bill of lading; update of
credit file, inventory file, and open sales orders file
 Batch - printout of invoice, update of closed sales order (journal), accounts receivable and general
ledger control account

Real-time Sales Order

Advantages of Real-Time Processing

 Shortens the cash cycle of the firm by reducing the time between the order date and billing date
 Better inventory management which can lead to a competitive advantage
 Fewer clerical errors, reducing incorrect items being shipped and bill discrepancies
 Reduces the amount of expensive paper documents and their storage costs

Reengineered Cash Receipts

 The mail room is a frequent target for reengineering.
 Companies send their customers preprinted envelopes and remittance advices.
 Upon receipt, these envelopes are scanned to provides a control procedure against theft.
 Machines are open the envelopes, scan remittance advices and checks, and separate the checks.
 Artificial intelligence may be used to read handwriting, such as remittance amounts and signatures.
Automated Cash Receipts

Point-of-Sale Systems
 Point of sale systems are used extensively in retail establishments.
 Customers pick the inventory from the shelves and take them to a cashier.
 The clerk scans the universal product code (UPC). The POS system is connected to an inventory file, where the
price and description are retrieved.
 The inventory levels are updated and reorder needs can immediately be detected.
 The system computes the amount due. Payment is either cash, check, ATM or credit card in most cases.
 No accounts receivables
 If checks, ATM or credit cards are used, an on-line link to receive approval is necessary.
 At the end of the day or a cashier’s shift, the money and receipts in the drawer are reconciled to the internal
cash register tape or a printout from the computer’s database.
 Cash over and under must be recorded

Computerized POS

Reengineering Using EDI

 EDI helps to expedite transactions.
 The customer’s computer:
 determines that inventory is needed
 selects a supplier with whom the business has a formal business agreement
 dials the supplier’s computer and places the order
 The exchange is completely automated.
 No human intervention or management
EDI System

Reengineering Using the Internet

 Typically, no formal business agreements exist as they do in EDI.
 Most orders are made with credit cards.
 Mainly done with e-mail systems, and thus a turnaround time is necessary
 Intelligent agents are needed to eliminate this time lag.
 Security and control over data is a concern with Internet transactions.

CBAS Control Considerations

 Authorization - in real-time systems, authorizations are automated
 Programmed decision rules must be closely monitored.
 Segregation of Functions - consolidation of tasks by the computer is common
 Protect the computer programs
 Coding, processing, and maintenance should be separated.
 Supervision - in POS systems, the cash register’s internal tape or database is an added form of supervision
 Access Control - magnetic records are vulnerable to both authorized and unauthorized exposure and should be
protected
 Must have limited file accessibility
 Must safeguard and monitor computer programs
 Accounting Records - rest on reliability and security of stored digitalized data
 Accountants should be skeptical about the accuracy of hard-copy printouts.
 Backups - the system needs to ensure that backups of all files are continuously kept
 Independent Verification – consolidating accounting tasks under one computer program can remove traditional
independent verification controls. To counter this problem:
 perform batch control balancing after each run
 produce management reports and summaries for end users to review

PC-Based Accounting Systems

 Used by small firms and some large decentralized firms
 Allow one or few individuals to perform entire accounting function
 Most systems are divided into modules controlled by a menu-driven program:
 general ledger
 inventory control
 payroll
 cash disbursements
 purchases and accounts payable
 cash receipts
 sales order
PC Control Issues
 Segregation of Duties - tend to be inadequate and should be compensated for with increased supervision,
detailed management reports, and frequent independent verification
 Access Control - access controls to the data stored on the computer tends to be weak; methods such as
encryption and disk locking devices should be used
 Accounting Records - computer disk failures cause data losses; external backup methods need to be
implemented to allow data recovery
MONEY MARKETS
▸ It exist to transfer funds from individuals, corporations, and government units with short-term excess funds
(suppliers of funds) to economic agents who have short-term needs for funds (users of funds).

Three basic characteristics of Money Markets

(1) generally sold in large denominations
(2) have low default risk
(3) have an original maturity of one year or less

Bond Equivalent Yield

▸ It is a quoted nominal or stated rate earned on an investment over a one-year period.
▸ It does not consider the effects of compounding of interest during a less than one year investment horizon.

Effective Annual Return

▸ If interest is paid or compounded more than once per year, the true annual rate earned is the effective annual
return on an investment.

Discount Yield
 Instead of directly received interest payments over the investment horizon, the return on these securities results
from the purchase of the security at a discount from its face value and the receipt of face value at maturity.

Single-Payment Yields
 The holder receives a terminal payment consisting of interest plus the face value of the security, as we show in
the following time line. Such securities are special cases of the pure discount securities that only pay the face
value on maturity.

Money Market Instruments

(1) Treasury bills
(2) Federal funds
(3) Repurchase agreements
(4) Commercial paper
(5) Negotiable certificates of deposit
(6) Banker’s acceptances

Federal Funds
These are short-term funds transferred between financial institutions, usually for a period of one day.

Federal funds rate

The interest rate for borrowing fed funds.

Repurchase agreement
An agreement involving the sale of securities by
one party to another with a promise to repurchase the
securities at a specified price and on a specified date.

Reverse repurchase agreement

 . An agreement involving the purchase of securities by one party from another with the promise to sell them
back

Commercial Paper
An unsecured short-term promissory note issued by a company to raise short-term cash, often to finance
working capital requirements

Negotiable Certificate Of Deposit

A bank-issued, fixed maturity, interest-bearing time deposit that specifies an interest rate and maturity date and
is negotiable

Bearer Instrument
An instrument in which the holder at maturity receives the principal and interest

BOND MARKETS

Bonds
▸ These are long-term debt obligations issued by corporations and government units.
▸ Proceeds from a bond issue are used to raise funds to support long-term operations of the issuer

Bond markets
▸ These are markets in which bonds are issued and traded.
▸ They are used to assist in the transfer of funds from individuals, corporations, and government units with excess
funds to corporations and government units in need of long-term debt funding.

Three types of Bond Markets

(1) Treasury notes and bonds
(2) Municipal bonds
(3) Corporate bonds

Treasury Bonds Issued to finance the national debt and other federal government expenditure
STRIPS (Separate Trading of Registered Interest and Principal Securities)
▸ A Treasury security in which the periodic interest payment is separated from the final principal payment.

Municipal Bonds These are issued by state and local governments to fund the construction of schools, highways,
housing, sewer systems, and other important public projects

Two types of municipal bonds

(1) General obligation (GO) bonds - are backed by the full faith and credit of the issuer—that is, the state or local
government promises to use all of its financial resources (e.g., its taxation powers) to repay the bond.
(2) Revenue bonds - are sold to finance a specific revenue-generating project and are backed by cash flows from
that project.

Ways of Trading for Municipal Bonds

(1) Firm commitment underwriting
(2) Best-efforts offering
(3) Private Placement
(4) Secondary Market Trading
(5)
Corporate Bonds
▸ Corporations may issue bonds to fund a large capital investment or a business expansion.
▸ Corporate bonds tend to carry a higher level of risk than government bonds, but they generally are associated
with higher potential yields.
Bond Indenture
▸ It is the legal contract that specifies the rights and obligations of the bond issuer and the bond holders.
▸ It contains a number of covenants associated with a bond issue.

Bond Characteristics

(1) Bearer Bonds

(2) Registered
(3) Term Bonds
(4) Serial Bonds
(5) Mortgage Bonds
(6) Equipment Trust Certificates
(7) Debentures
(8) Subordinated Debentures
(9) Convertible Bonds
(10)Stock Warrants
(11)Callable Bonds
(12)Sinking Fund Provisions

Major Issuers Of Debt Market Securities

(1) federal / state
(2) local governments
(3) corporations

Major Purchasers Of Capital Market Securities

(1) Households
(2) Businesses
(3) government units
(4) foreign investors.

International bond markets

Those markets that trade bonds that are underwritten by an international syndicate, offer bonds to investors in
different countries, issue bonds outside the jurisdiction of any single country, and offer bonds in unregistered form.

Mortgage Markets

Mortgages
Loans to individuals or businesses to purchase home, land, or other real property

Reasons for examining Mortgage Markets separately from bonds and Stock Markets
1. mortgages are backed by a specific piece of real property
2. there is no set size or denomination for primary mortgages
3. primary mortgages generally involve a single investor

Four basic categories of mortgages are issued by financial institutions

1. Home
2. Multifamily dwelling
3. Commercial
4. Farm

Mortgage Characteristics
1. Collateral
 2. Down Payment
3. Insured vs Conventional Mortgages
4. Mortgage Maturities
5. Interest rates

Interest Rates
a. Fixed-rate Mortgages
- A mortgage that locks in the borrower’s interest rate and thus the required monthly payment
over the life of the mortgage, regardless of how market rates change
b. Adjustable-rate Mortgage
- A mortgage in which the interest rate is tied to some market interest rate. Thus, the required
monthly payments can change over the life of the mortgage
c. Discount Points
- Interest payments made when the loan is issued (at closing). One discount point paid up front is
equal to 1 percent of the principal value of the mortgage

Other fees directly related to Mortgage Contracts

1. Application fee
2. Title search
3. Title insurance
4. Appraisal fee
5. Loan origination fee
6. Closing agent and review fees
7. Other costs

Mortgage Refinancing
- Occurs when a mortgage borrower takes out a new mortgage and uses the proceeds obtained
to pay off the current mortgage

Mortgage Amortization
- the fixed monthly payment made by a mortgage borrower generally consists partly of
repayment of the principal borrowed and partly of the interest on the outstanding (remaining)
balance of the mortgage

Other Types of Mortgage

1. Jumbo Mortgage
2. Subprime Mortgages
3. Alt-A Mortgages
4. Option ARMs
5. Second Mortgages
6. Reverse-Annuity Mortgages

Chapter 5
The Expenditure Cycle Part 1: Purchases and Cash Disbursements Procedures
Objectives for Chapter 5
 Fundamental tasks performed during purchases and cash disbursement processes
 Functional areas involved in purchases and cash disbursements and the flow of these transactions through the
organization
 Documents, journals, and accounts that provide audit trails, promote the maintenance of records, and support
decision making and financial reporting
 Risks associated with purchase and cash disbursements activities and the controls that reduce these risks
 Operational features and the control implications of technology used in purchases and cash disbursement
systems
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Goals of the Expenditure Cycle

 The goal of providing needed resources to organization can be broken down into several objectives:
 purchase from reliable vendors
 purchase high quality items
 obtain best possible price
 purchase only items that are properly authorized
 have resources available when they are needed
 receive only those items ordered
 ensure items are not lost, stolen, or broken
 pay for the items in a timely manner
DFD of Purchases System

A Manual Purchases System

 Begins in Inventory Control when inventory levels drop to reorder levels

 A purchase requisition (PR) is prepared and copies to sent to Purchasing and Accounts Payable (A/P)
 Purchasing prepares a purchase order (PO) for each vendor and sends copies to Inventory Control, A/P, and
Receiving
 Upon receipt, Receiving counts and inspects the goods.
 A blind copy of the PO is used to force workers to count the goods.
 A receiving report is prepared and copies sent to the raw materials storeroom, Purchasing, Inventory Control,
and A/P.
 A/P eventually receives copies of the PR, PO, receiving report, and the supplier’s invoice.
 A/P reconciles these documents, posts to the purchases journal, and records the liability in the accounts payable
subsidiary ledger.
 A/P periodically summarizes the entries in the purchases journal as a journal voucher which is sent to the
General Ledger (G/L) department.
 Inv-Control or Purchases DR
Accts Payable-Control CR
 A/P also prepares a cash disbursements voucher and posts it in the voucher register.
 G/L department:
 posts from the accounts payable journal voucher to the general ledger
 reconciles the inventory amount with the account summary received from inventory control

manual purchase flowchart

DFD of cash Disbursement System

Manual Cash Disbursements System

 Periodically, A/P searches the open vouchers payable file for items with payments due:
 A/P sends the voucher and supporting documents to Cash Disbursements
 A/P updates the accounts payable subsidiary ledger
 Cash Disbursements:
 prepares the check
 records the information in a check register (cash disbursements journal)
 returns paid vouchers to accounts payable, mails the check to the supplier
 sends a journal voucher to G/L:
Accounts Payable DR
Cash CR

 G/L department receives:

  the journal voucher from cash disbursements
 a summary of the accounts payable subsidiary ledger from A/P
 The journal voucher is used to update the general ledger.
The accounts payable control account is reconciled with the subsidiary summary

Computer-Based Accounting Systems

 CBAS technology can be viewed as a continuum with two extremes:

 automation - use technology to improve efficiency and effectiveness
 reengineering – use technology to restructure business processes and firm organization

Levels of Automating and Reengineering Ordering

 Computer generates PR
 Purchases manually generates PO
 Computer generates PO (no PR needed)
 PO not sent until manually reviewed
 Computer-generated PO is automatically sent without manual review
 Electronic Data Interchange (EDI)
 Computer-to-computer communication without PO
Expenditure Cycle Database
 Master Files
 supplier (vendor) master file
 accounts payable master file
 merchandise inventory master file
 Transaction and Open Document Files
 purchase order file
 open purchase order file
 supplier’s invoice file
 open vouchers file
 cash disbursements file
 Other Files
 supplier reference and history file
 buyer file
 accounts payable detail file

Computer-Based Purchases
 A Data Processing dept. performs routine accounting tasks.
 Purchasing - a computer program identifies inventory requirements
 The following methods are used for authorizing and ordering inventories:
 the system prepares POs and sends them to Purchases for review, signing, and distributing
 the system distributes POs directly to the vendors and internal users, bypassing Purchases
 the system uses electronic data interchange (EDI) and electronically places the order without POs
 Other tasks performed automatically by the computer:
 updates the inventory subsidiary file from the receiving report
  calculates batch totals for general ledger update
 closes the corresponding records in the open PO file to the closed PO file
 validates the voucher records against valid vendor files

Computer-Based Cash Disbursements

 Tasks performed automatically by the computer:
 the system scans for vouchers currently due
 prints checks for these vouchers
 records these checks in the check register
 batch totals are prepared for the general ledger update procedure

Automated Batch Purchases

Advantages of Real-Time Data Input & Processing Over Batch Processing

 Shortens the time-lag in record-keeping; hence, records are more current
 Eliminates much of the routine manual procedures, such as transcribing information onto paper documents
 Eliminates much of the storage and shuffling of paper documents
 Reduces data entry correction procedures

Reengineered Purchases/Cash Disbursements

Summary of Intern al Controls

General Internal Controls
 Organization controls
 segregation of duties
 Documentation
 Asset Accountability Controls
 Management Practices
 Data Center Operations Controls
 Authorization Controls
 Access Controls

Manual Authorization Controls

 Purchases of inventory should be authorized by the Inventory Control department, not by purchasing agents
 Accounts Payable authorizes the payments of bills, not the cash disbursements clerk, who writes the checks
How do these controls change in a CBAS?

Computer-Based Authorization Controls

 Authorizations are automated.
 programmed decision rules must be debugged
 Automating inventory in EDI and JIT
 faulty inventory model can lead to over-purchasing or under-purchasing
 Cash disbursements may automate check printing and signing.
 programming logic must be flawless
 automated signing only below a dollar threshold

Traditional Segregation of Duties

 Warehouse (stores)
 Inventory control
 Accounts payable
 General ledger
 Requisitioning
 Purchases
 Purchases returns and allowances
 Cash disbursements

Manual Segregation of Functions

 Custody of the asset, inventory, by the Warehouse must be separate from recordkeeping for the assets by the
Inventory Control.
  Custody of the asset, cash, by Cash Disbursements must be kept separate from recordkeeping for the asset by
A/P.
How do these controls change in a CBAS?

Computer-Based Segregation of Functions

 Extensive consolidation by the computer of tasks traditionally segregated
 computer programs authorize and process purchase orders
 computer programs authorize and issue checks to vendors

Manual Supervision
 Within the expenditure cycle, supervision is of highest importance in the Receiving department, where the
inventory arrives and is logged in by a receiving clerk. Need to minimize:
 failures to properly inspect the assets
 theft of the assets
How do these controls change in a CBAS?

Computer-Based Supervision
 Automation often leads to a collapsing of the traditional segregation of duties.
 requires greater supervision
 Supervision takes on new aspects as technology advances.
 electronic monitoring
 Supervision because more difficult as the workplace becomes more sophisticated.
 employees may have advanced IT training

Manual Accounting Records

 Must maintain adequate records for:
 accounts payable
 vouchers payable
 checks
 general ledger
 subsidiary ledgers
How do these controls change in a CBAS?

Computer-Based Accounting Records

 Automation often leads to a collapsing of the traditional segregation of duties.
 requires greater supervision
 Supervision takes on new aspects as technology advances.
 electronic monitoring
 Supervision because more difficult as the workplace becomes more sophisticated.
 employees may have advanced IT training

Manual Accounting Records

 Must maintain adequate records for:
 accounts payable
 vouchers payable
 checks
 general ledger
 subsidiary ledgers

Computer-Based Accounting Records

 Accounting records rest on the reliability and security of stored digitalized data.
 Accountants should be skeptical about the accuracy of hard-copy printouts.
  Backups - the system needs to ensure that backups of all files are continuously kept
 Most automated systems still have a lot of paper documents.
 This is good for audit trail purposes but is often inefficient.
 As the system becomes increasing paperless, maintaining an audit trail becomes more difficult.

Manual Access Controls

 Access to:
 inventories (direct)
 cash (direct)
 accounting records (indirect)
How do these controls change in a CBAS?

Computer-Based Access Controls

 Magnetic records are vulnerable to both authorized and unauthorized exposure and should be protected
 must have limited file accessibility
 programs must be safeguarded and monitored

Manual Independent Verification

 A/Payable dept. verifies much of the work done within the expenditure cycle.
 PR, PO, receiving reports, and suppliers’ invoices must be checked and verified by A/P.
 G/Ledger dept. verifies:
 the total obligations recorded equal the total inventories received
 the total reductions in accounts payable equal the total disbursements of cash

Computer-Based Independent Verification

 Automating the accounting function reduces the need for verification by reducing the chances of fraud and error
in the expenditure cycle.
 However, the need for verification shifts to the computer program and the programmers where fraud and error
may still be present.

Chapter 5
The Expenditure Cycle Part 1:
Purchases and Cash Disbursements Procedures
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A c c o u n ts P a y a b le
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Goals of the Expenditure Cycle

 The goal of providing needed resources to organization can be broken down into several objectives:
 purchase from reliable vendors
 purchase high quality items
 obtain best possible price
 purchase only items that are properly authorized
 have resources available when they are needed
 receive only those items ordered
 ensure items are not lost, stolen, or broken
 pay for the items in a timely manner

DFD of Purchases System

A Manual Purchases System

 Begins in Inventory Control when inventory levels drop to reorder levels
 A purchase requisition (PR) is prepared and copies to sent to Purchasing and Accounts Payable (A/P)
 Purchasing prepares a purchase order (PO) for each vendor and sends copies to Inventory Control, A/P, and
Receiving
 Upon receipt, Receiving counts and inspects the goods.
 A blind copy of the PO is used to force workers to count the goods.
 A receiving report is prepared and copies sent to the raw materials storeroom, Purchasing, Inventory Control,
and A/P.
 A/P eventually receives copies of the PR, PO, receiving report, and the supplier’s invoice.
 A/P reconciles these documents, posts to the purchases journal, and records the liability in the accounts payable
subsidiary ledger.
 A/P periodically summarizes the entries in the purchases journal as a journal voucher which is sent to the
General Ledger (G/L) department.
Inv-Control or Purchases DR
Accts Payable-Control CR
 A/P also prepares a cash disbursements voucher and posts it in the voucher register.
 G/L department:
 posts from the accounts payable journal voucher to the general ledger
 reconciles the inventory amount with the account summary received from inventory control
Manual Purchases Flowchart
DFD of Cash Disbursements System

Manual Cash Disbursements System

 Periodically, A/P searches the open vouchers payable file for items with payments due:
 A/P sends the voucher and supporting documents to Cash Disbursements
 A/P updates the accounts payable subsidiary ledger
 Cash Disbursements:
 prepares the check
 records the information in a check register (cash disbursements journal)
 returns paid vouchers to accounts payable, mails the check to the supplier
 sends a journal voucher to G/L:
Accounts Payable DR
Cash CR
 G/L department receives:
 the journal voucher from cash disbursements
 a summary of the accounts payable subsidiary ledger from A/P
 The journal voucher is used to update the general ledger.
 The accounts payable control account is reconciled with the subsidiary summary.

Cash Disbursements System

Computer-Based Accounting Systems

  CBAS technology can be viewed as a continuum with two extremes:
 automation - use technology to improve efficiency and effectiveness
 reengineering – use technology to restructure business processes and firm organization

Levels of Automating and Reengineering Ordering

 Computer generates PR
 Purchases manually generates PO
 Computer generates PO (no PR needed)
 PO not sent until manually reviewed
 Computer-generated PO is automatically sent without manual review
 Electronic Data Interchange (EDI)
 Computer-to-computer communication without PO

Expenditure Cycle Database

 Master Files
 supplier (vendor) master file
 accounts payable master file
 merchandise inventory master file
 Transaction and Open Document Files
 purchase order file
 open purchase order file
 supplier’s invoice file
 open vouchers file
 cash disbursements file
 Other Files
 supplier reference and history file
 buyer file
 accounts payable detail file

Computer-Based Purchases
 A Data Processing dept. performs routine accounting tasks.
 Purchasing - a computer program identifies inventory requirements
 The following methods are used for authorizing and ordering inventories:
 the system prepares POs and sends them to Purchases for review, signing, and distributing
 the system distributes POs directly to the vendors and internal users, bypassing Purchases
 the system uses electronic data interchange (EDI) and electronically places the order without POs
 Other tasks performed automatically by the computer:
 updates the inventory subsidiary file from the receiving report
 calculates batch totals for general ledger update
 closes the corresponding records in the open PO file to the closed PO file
 validates the voucher records against valid vendor files

Computer-Based Cash Disbursements

 Tasks performed automatically by the computer:
 the system scans for vouchers currently due
 prints checks for these vouchers
 records these checks in the check register
 batch totals are prepared for the general ledger update procedure

Automated Batch Purchases

Automated Batch Purchases

Advantages of Real-Time Data Input & Processing Over Batch Processing

 Shortens the time-lag in record-keeping; hence, records are more current
 Eliminates much of the routine manual procedures, such as transcribing information onto paper documents
 Eliminates much of the storage and shuffling of paper documents
 Reduces data entry correction procedures

Reengineered Purchases/Cash Disbursements

Summary of Internal Controls

General Internal Controls
 Organization controls
 segregation of duties
 Documentation
 Asset Accountability Controls
 Management Practices
 Data Center Operations Controls
 Authorization Controls
 Access Controls

Manual Authorization Controls

 Purchases of inventory should be authorized by the Inventory Control department, not by purchasing agents
 Accounts Payable authorizes the payments of bills, not the cash disbursements clerk, who writes the checks
 How do these controls change in a CBAS?

Computer-Based Authorization Controls

 Authorizations are automated.
 programmed decision rules must be debugged
 Automating inventory in EDI and JIT
 faulty inventory model can lead to over-purchasing or under-purchasing
 Cash disbursements may automate check printing and signing.
 programming logic must be flawless
 automated signing only below a dollar threshold

Traditional Segregation of Duties

 Warehouse (stores)
 Inventory control
 Accounts payable
 General ledger
 Requisitioning
 Purchases
 Purchases returns and allowances
 Cash disbursements
Manual Segregation of Functions
 Custody of the asset, inventory, by the Warehouse must be separate from recordkeeping for the assets by the
Inventory Control.
 Custody of the asset, cash, by Cash Disbursements must be kept separate from recordkeeping for the asset by
A/P.

Computer-Based Segregation of Functions

 Extensive consolidation by the computer of tasks traditionally segregated
 computer programs authorize and process purchase orders
 computer programs authorize and issue checks to vendors

Manual Supervision
 Within the expenditure cycle, supervision is of highest importance in the Receiving department, where the
inventory arrives and is logged in by a receiving clerk. Need to minimize:
 failures to properly inspect the assets
 theft of the assets
 How do these controls change in a CBAS?

Computer-Based Supervision
 Automation often leads to a collapsing of the traditional segregation of duties.
 requires greater supervision
 Supervision takes on new aspects as technology advances.
 electronic monitoring
 Supervision because more difficult as the workplace becomes more sophisticated.
 employees may have advanced IT training

Manual Accounting Records

 Must maintain adequate records for:
 accounts payable
 vouchers payable
 checks
 general ledger
 subsidiary ledgers

Computer-Based Accounting Records

 Accounting records rest on the reliability and security of stored digitalized data.
 Accountants should be skeptical about the accuracy of hard-copy printouts.
 Backups - the system needs to ensure that backups of all files are continuously kept
 Most automated systems still have a lot of paper documents.
 This is good for audit trail purposes but is often inefficient.
 As the system becomes increasing paperless, maintaining an audit trail becomes more difficult.

Manual Access Controls

 Access to:
 inventories (direct)
 cash (direct)
 accounting records (indirect)
 How do these controls change in a CBAS?

Computer-Based Access Controls

 Magnetic records are vulnerable to both authorized and unauthorized exposure and should be protected
 must have limited file accessibility
 programs must be safeguarded and monitored
Manual Independent Verification
 A/Payable dept. verifies much of the work done within the expenditure cycle.
 PR, PO, receiving reports, and suppliers’ invoices must be checked and verified by A/P.
 G/Ledger dept. verifies:
 the total obligations recorded equal the total inventories received
 the total reductions in accounts payable equal the total disbursements of cash

Computer-Based Independent Verification

 Automating the accounting function reduces the need for verification by reducing the chances of fraud and error
in the expenditure cycle.
 However, the need for verification shifts to the computer program and the programmers where fraud and error
may still be present.