Chapter 4

The
Revenue
Cycle

Objectives for Chapter 4

Tasks performed in the revenue cycle, regardless of the

technology used
The functional departments involved in revenue cycle
activities and the flow of revenue transactions through
the organization
The documents, journals, and accounts that provide
audit trails, promote the maintenance of records,
support decision making, and sustain 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

S a le s O rd e r
1
C re d it / C u s to m e r
S e rv ic e
2

R EV EN U E C Y C LE
(S U B S Y S T E M )

S h ip p in g
3
B illin g / A c c o u n ts
R e c e iv a b le
4 /5

C a s h R e c e ip ts /
C o lle c tio n s
6

Journal Vouchers/Entries
How do we get them?

Billing Department prepares a journal

voucher:
Accounts Receivable
Sales
CR

Inventory Control Dept. prepares a journal

voucher:
Cost of Goods Sold
Inventory

DR

DR
CR

Cash Receipts prepares a journal voucher:

Cash

DR
Accounts Receivable

CR

Revenue Cycle (Subsystem) 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

DFD of Sales Order Process

Overview of the Manual Sales Order

Processing System

The sales process begins with a customer placing

an order via the sales department.
The sales department captures the essential
details on a sales order form.
The transaction is authorized by obtaining
credit approval by the credit department.
The sales information is released to:
billing
warehouse (stock release or picking ticket)
shipping (packing slip and shipping notice)

Overview of the Manual Sales Order

Processing System

The merchandise is picked from the Warehouse and sent

to Shipping. The stock records are adjusted.
The merchandise is shipped. The Shipping Department
reconciles the products received from the warehouse with
the sales information received. The shipping information
is sent to Billing. The goods, along with the packing slip
and a bill of lading, prepared by Shipping, are sent to the
customer.
Billing compiles and reconciles the relevant facts and
issues an invoice to the customer and updates the sales
journal. The information is transferred to:

accounts receivable

inventory control

Overview of the Manual Sales Order

Processing System

Accounts Receivable records the information in

the customers account in the accounts
receivable subsidiary ledger.
Inventory Control adjusts the inventory
subsidiary ledger.
Periodically, Billing, Accounts, Receivable, and
Inventory Control submits summary information,
typically in the form of a journal voucher to
the General Ledger department. The General
Ledger department reconciles this data and
posts to the control accounts in the general
ledger.

DFD of Cash Receipts Process

Overview of the Manual Cash

Receipts System

The customers checks and remittance

advices are received in the Mail Room. A mail
room clerk prepares a cash prelist and sends
the list along with the checks to Cash Receipts. A
copy of the cash prelist is sent to Accounts
Receivable and the Controller.
The Cash Receipts department verifies the
accuracy and completeness of the checks,
updates the cash receipts journal, prepares a
deposit slip, and prepares a journal voucher
and sends to General Ledger.

Overview of the Manual Cash

Receipts System

The Accounts Receivable department posts

from the remittance advices to the accounts
receivable subsidiary ledger. Periodically,
a summary of the postings is sent to General
Ledger.
The General Ledger department reconciles the
journal voucher from Cash Receipts with the
summaries from accounts receivable and
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
customers account (cash pre-list)

Segregation of Functions
Three Rules
1.

2.

3.

Transaction authorization should be

separate from transaction
processing.
Asset custody should be separate
from asset record-keeping.
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

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.

Example: Automated Batch Sales

Large-Scale Computer-Based
Accounting Systems

Two different types of CBAS:

automation involves using technology
to improve the efficiency and
effectiveness of a task.
reengineering greatly reduces the
cost of business by identifying and
streamlining tasks. Must rethink
business processes and firm
organization.

Case In Point: Wal-Mart

At Wal-Mart, whenever a customer

makes a purchase, the information
goes directly to the supplier. Sales are
automatically converted into
manufacturing schedules and delivery
instructions.

Is this automation or re-engineering?

Case In Point: Wal-Mart

Directly linking sales and expenditure

cycles
Cut-out wholesale suppliers between
manufacturers and Wal-Mart--saved
20-30% on retail price
Requires real-time recording,
communications, and processing

Criticisms of Large Computer

Systems

Multiple overlapping systems ?

large number of separate applications in each
functional area, e.g., production, marketing,
and finance (aka stovepiping)
Subset of the process?
Each application captures and processes data
about one aspect of the business events.
no integrated organization-wide view

Criticisms of Large Computer

Systems

Data too aggregation?

Data is captured at and stored in too high a level of
summarization.
Only one view per user?
Users are restricted to only one view of the business-the financial view.
Processing delays?
Data is not captured or processed in real time, causing
significant and costly delays.

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

Process

The mail room is a frequent target for reengineering.

Companies send their customers preprinted envelopes
and remittance advices.
Upon receipt, these envelopes are set aside and
information on the envelope is scanned and provides a
control procedure against theft.
Machines are also available to open the envelopes and
scan the 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.

Point-of-Sale Systems

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 online link to receive approval is necessary.
At the end of the day or a cashiers shift, the
money and receipts in the drawer are reconciled
to the internal cash register tape or a printout
from the computers database.

cash over and under must be recorded

Computerized POS

Reengineering Using EDI

EDI helps to expedite transactions.

The customers computer:

determines that inventory is needed

selects a supplier with whom the business
has a formal business agreement
dials the suppliers computer and places
the order

The exchange is completely automated.

no human intervention or management

EDI System
Company B

Company A
Application
Software

Purchases
System

Sales Order
System

EDI
Translation
Software

EDI
Translation
Software

Direct Connection
Communications
Software

Communications
Software
Other
Mailbox
Company
As mailbox

VAN
Other
Mailbox

Company
Bs mailbox

Application
Software

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.

Control Considerations for

Computer-Based Systems

Authorization - in real-time systems,

authorizations are automated:
programmed decision rules must be
closely monitored
Segregation of Functions - some
consolidation of tasks by the
computer; protect the computer
programs--coding, processing and
maintenance should be separated

Control Considerations for

Computer-Based Systems

Supervision - in POS systems, the cash

registers 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

Control Considerations for

Computer-Based Systems

Accounting Records - rest on reliability

and security of magnetically stored data.
The accountant should be skeptical
about accepting the accuracy of hardcopy printouts of journals and ledgers.
Backup is a concern for direct access
files, and the system needs to ensure
that backup of all files is continuously
kept.

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

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