Accounting Information System

Accounting Information System
Chapter 5
Accounting Information Systems
Applications
By
Andualem Ufo(PhD)
MSc Accounting and Finance Program
Ethiopian Civil Service University
The Revenue Cycle:
Sales to Cash Collections
REVENUE CYCLE BUSINESS
ACTIVITIES
 Four basic business activities are

performed in the revenue cycle:
– Sales order entry
– Shipping
– Billing
– Cash collection
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 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)
Orders 1.1
Customer Take Customer
Order
Rej
ect
e dO Orders
rde
rs
Response
Inquiries
Ac
kn 1.2
ow DFD for
l ed Approve
gm
en Credit Sales Order Entry
t
Customer Approved
Orders
1.3
1.4 Check
Sales Order Inv. Inventory
Resp. to
Avail.
Cust. Inq. Bac
k Or
ders
Sales Sales Picking
Order Order List
Ware- Purchas-
Shipping Billing
house ing
Orders 1.1
Order
Rej
ect
e dO Orders
rde
rs
Response
Inquiries
Ac
kn 1.2
ow DFD for
l ed Approve
gm
t
Customer Approved
Orders
1.3
1.4 Check
Resp. to
Avail.
Cust. Inq. Bac
k Or
ders
Sales Sales Picking
Order Order List
Ware- Purchas-
Shipping Billing
house ing
Orders 1.1
Order
Rej
ect
e dO Orders
rde
rs
Response
Inquiries
Ac
kn 1.2
ow DFD for
l ed Approve
gm
t
Customer Approved
Orders
1.3
1.4 Check
Resp. to
Avail.
Cust. Inq. Bac
k Or
ders
Sales Sales Picking
Order Order List
Ware- Purchas-
Shipping Billing
house ing
Orders 1.1
Order
Rej
ect
e dO Orders
rde
rs
Response
Inquiries
Ac
kn 1.2
ow DFD for
l ed Approve
gm
t
Customer Approved
Orders
1.3
1.4 Check
Resp. to
Avail.
Cust. Inq. Bac
k Or
ders
Sales Sales Picking
Order Order List
Ware- Purchas-
Shipping Billing
house ing
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
SALES ORDER ENTRY
 The sales order (paper or electronic) indicates:

– Item numbers ordered
– Quantities
– Prices
– Salesperson
SALES ORDER ENTRY
 To reduce human error, customers should enter

data themselves as much as possible:
– On websites
– On OCR forms
– Via phone menus
SALES ORDER ENTRY
 How IT can improve efficiency and effectiveness:

– Orders entered online can be routed directly to the
warehouse for picking and shipping.
– Sales history can be used to customize solicitations.
– Choiceboards can be used to customize orders.
• Initially popular with Dell and Gateway.

• Now used for purchases of shoes and
jeans!
SALES ORDER ENTRY
– 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.
– Laptops and handheld devices can equip
sales staff with presentations, prices,
marketing and technical data, etc.
SALES ORDER ENTRY
 Recall that one objective of the AIS is to
ensure the accuracy and reliability of the
data collected. With respect to sales order
data, the following edit checks should be
performed:
– Validity checks on the customer account and
inventory item numbers.
– Completeness test to make sure all needed
information was collected.
– Reasonableness tests comparing the quantity
Orders 1.1
Order
Rej
ect
e dO Orders
rde
rs
Response
Inquiries
Ac
kn 1.2
ow
l ed Approve
gm Credit
en
t
Customer Approved
Orders
1.3
1.4 Check
Resp. to
Avail.
Cust. Inq. Bac
k Or
ders
Sales Sales Picking
Order Order List
Ware- Purchas-
Shipping Billing
house ing
Orders 1.1
Order
Rej
ect
e dO Orders
rde
rs
Response
Inquiries
Ac
kn 1.2
ow
l ed Approve
gm Credit
en
t
Customer Approved
Orders
1.3
1.4 Check
Resp. to
Avail.
Cust. Inq. Bac
k Or
ders
Sales Sales Picking
Order Order List
Ware- Purchas-
Shipping Billing
house ing
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.
SALES ORDER ENTRY
• For customers who are:
New
–
 Credit sales should bepast-due

– Have approved before the
balances
– Are placing orders that would exceed their credi
order is processed any further.
• Specific authorization is done by the credit ma
 There are two types of credit
who reports to theauthorization:
treasurer.
– General authorization
– Specific authorization
SALES ORDER ENTRY
 How can IT improve the process?

– Automatic checking of credit limits and balances
– Emails or IMs to the credit manager for accounts
needing specific authorization
Orders 1.1
Order
Rej
ect
e dO Orders
rde
rs
Response
Inquiries
Ac
kn 1.2
ow
l ed Approve
gm Credit
en
t
Customer Approved
Orders
1.3
1.4 Check
Resp. to
Avail.
Cust. Inq. Bac
k Or
ders
Sales Sales Picking
Order Order List
Ware- Purchas-
Shipping Billing
house ing
Orders 1.1
Order
Rej
ect
e dO Orders
rde
rs
Response
Inquiries
Ac
kn 1.2
ow
l ed Approve
gm Credit
en
t
Customer Approved
Orders
1.3
1.4 Check
Resp. to
Avail.
Cust. Inq. Bac
k Or
ders
Sales Sales Picking
Order Order List
Ware- Purchas-
Shipping Billing
house ing
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:
– Respond to customer inquiries (may be done by
customer service or sales order entry)
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 reference a
screen displaying:
– Quantity on hand
– Quantity already committed to others
– Quantity on order
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
SALES ORDER ENTRY
 If there’s not enough to fill the order, initiate a
back order.
– For manufacturing companies, notify the production
department that more should be manufactured.
– For retail companies, notify purchasing that more
should be purchased.
SALES ORDER ENTRY
 Accurate inventory records are needed so
customers can be accurately advised of their
order status.
– Requires careful data entry in the sales and shipping
processes.
– Can be problematic in retail establishments:
 Clerks running a similar item over the scanner several times
instead of running each item
 Mishandling of sales returns such that returned merchandise
isn’t re-entered in inventory records
Orders 1.1
Order
Rej
ect
e dO Orders
rde
rs
Response
Inquiries
Ac
kn 1.2
ow
l ed Approve
gm Credit
en
t
Customer Approved
Orders
1.3
1.4 Check
Resp. to
Avail.
Cust. Inq. Bac
k Or
ders
Sales Sales Picking
Order Order List
Ware- Purchas-
Shipping Billing
house ing
Orders 1.1
Order
Rej
ect
e dO Orders
rde
rs
Response
Inquiries
Ac
kn 1.2
ow
l ed Approve
gm Credit
en
t
Customer Approved
Orders
1.3
1.4 Check
Resp. to
Avail.
Cust. Inq. Bac
k Or
ders
Sales Sales Picking
Order Order List
Ware- Purchas-
Shipping Billing
house ing
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:
– Respond to customer inquiries (may be done by
customer service or sales order entry)
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
SALES ORDER ENTRY
 Many companies use Customer Relationship
Management (CRM) systems to support this
process:
– Organizes customer data to facilitate efficient and
personalized service
– Provides data about customer needs and business
practices so they can be contacted proactively about
the need to reorder
SALES ORDER ENTRY
 The goal of CRM is to retain customers:

– Rule of thumb: It takes 5 times as much effort to
attract a new customer as it does to retain an existing
one.
– CRMs should be seen as tools to improve the level of
customer service and encourage loyalty—not as a
way to keep them off your back.
SALES ORDER ENTRY
 Transaction processing technology can be used
to improve customer relationships:
– POS systems can link to the customer master file to:
 Automatically update accounts receivable.
 Print customized coupons (e.g., if the customer just bought
yogurt, print a yogurt coupon to encourage repeat sales).
SALES ORDER ENTRY
 IT should be used to automate responses to
routine customer requests.
 Examples:
– Providing telephone menus Timex
• EXAMPLE: or websites that
includes lead
their watch ma
customers to answers
online,about
so a customer who’s missing his m
 Account balancesfind out how to reset his watch when Daylig
 Order status Savings Time rolls around. No human inte
 Frequently askedrequired.
questions (FAQs)
– Online chat or instant messaging
 These methods free up customer service reps to
deal with less routine issues.
SALES ORDER ENTRY
 The effectiveness of a website depends on its

design:
– Review records of customer interactions to identify
potential problems.
– A poorly-designed, difficult-to-use website can create
customer ill will.
– A well-designed site can provide insights that lead to
increased sales, e.g., by analyzing website traffic to
determine products of greatest interest.
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.
ACTIVITIES
 Four basic business activities are performed in

the revenue cycle:
– Shipping
– Billing
– Cash collection
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.
Shipping
Sales Picking List 2.1
Order Pick &
Entry Pack
Goods &
Sales Packing
Order List
Sales Order
2.2
Bill of Ship Inventory
Lading & Goods
Packing Slip
Billing & Goods,

Packing Slip,
Accts.
& Bill of Lading
Shipments
Rec.
Carrier
Shipping
Order Pick &
Entry Pack
Goods &
Sales Packing
Order List
Sales Order
2.2
Lading & Goods
Packing Slip
Billing & Goods,

Packing Slip,
Accts.
& Bill of Lading
Shipments
Rec.
Carrier
SHIPPING
merchandise.
order
SHIPPING
 A picking ticket is printed by sales order entry
and triggers the pick-and-pack process
 The picking ticket identifies:
– Which products to pick
– What quantity
 Warehouse workers record the quantities picked
on the picking ticket, which may be a paper or
electronic document.
 The picked inventory is then transferred to the
shipping department.
SHIPPING
 Technology can speed the movement of
inventory and improve the accuracy of perpetual
inventory records:
– Bar code scanners
– Conveyer belts
– Wireless technology so workers can receive
instructions without returning to dispatch
– Radio frequency identification (RFID) tags:
 Eliminate the need to align goods with scanner
 Allow inventory to be tracked as it moves through warehouse
 Can store up to 128 bytes of data
Order Pick &
Entry Pack
Goods &
Sales Packing
Order List
Sales Order
2.2
Lading & Goods
Packing Slip
Billing & Goods,

Packing Slip,
Accts.
& Bill of Lading
Shipments
Rec.
Carrier
Order Pick &
Entry Pack
Goods &
Sales Packing
Order List
Sales Order
2.2
Lading & Goods
Packing Slip
Billing & Goods,

Packing Slip,
Accts.
& Bill of Lading
Shipments
Rec.
Carrier
SHIPPING
merchandise.
order
SHIPPING
 The shipping department compares the following
quantities:
– Physical count of inventory
– Quantities indicated on picking ticket
– Quantities on sales order
 Discrepancies can arise if:
– Items weren’t stored in the location indicated
– Perpetual inventory records were inaccurate
 If there are discrepancies, a back order is
initiated.
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.
SHIPPING
 The clerk then records online:
– The sales• order number
The bill of lading is a legal contract that defines
– The item numbers ordered
responsibility for goods in transit
• It identifies:
– The quantities shipped
The carrier
–
 This produces– The source
– Updates the –quantity-on-hand
The destination field in the inventory
master file – Special shipping instructions
– Produces a packing slipfor the shipping
– Who pays
– Produces multiple copies of the bill of lading

SHIPPING
 The shipment is accompanied by:

– The packing slip
– A copy of the bill of lading
– The freight bill
 (Sometimes bill of lading doubles as freight bill)
 What happens to other copies of the bill of
lading?
– One is kept in shipping to track and confirm delivery
– One is sent to billing to trigger an invoice
– One is retained by the freight carrier
SHIPPING
 A major shipping decision is the choice of
delivery methods:
– Some companies maintain a fleet of trucks
– Companies increasingly outsource to commercial
carriers
 Reduces costs
 Allows company to focus on core business
– Selecting best carrier means collecting and
monitoring carrier performance data for:
 On-time delivery
 Condition of merchandise delivered
SHIPPING
 Another decision relates to the location of

distribution centers
– Many customers want suppliers to deliver products
only when needed
– Logistical software tools can help identify optimal
locations to:
 Minimize amount of inventory carried
 Meet customers’ needs
 Also helps optimize the use of delivery vehicles on a day-to-
day basis
SHIPPING
 Globalization makes outbound logistics more
complex:
– Distribution methods differ around the world in terms
of efficiency and effectiveness.
– Country-specific taxes and regulations affect
distribution choices.
– Logistical software can also help with these issues.
 Advanced communications systems can provide
real-time info on shipping status and thus add
value:
– If you know a shipment will be late and notify the
ACTIVITIES

the revenue cycle:
– Shipping
– Billing
– Cash collection
BILLING
 The third revenue cycle activity is billing
customers.
 This activity involves two tasks:
– Invoicing
– Updating accounts receivable
p&
Packing Sli
Sales g
Sales Order 3.1 Bill of Ladin
Order Shipping
Entry Billing
Invoice
Sales
General
Ledger &
Rept. Sys. Customer Sales Customer
s
ment
ta te
S
nthly
Mo
3.2
Billing and Maintain Mailroom
Accounts Accts. Remittance
Rec. List
Receivable
p&
Packing Sli
Sales g
Order Shipping
Entry Billing
Invoice
Sales
General
Ledger &
s
ment
ta te
S
nthly
Mo
3.2
Billing and Maintain Mailroom
Accounts Accts. Remittance
Rec. List
Receivable
BILLING
customers.
– Invoicing
BILLING
 Accurate and timely billing is crucial.
 Billing is an information processing activity
that repackages and summarizes information
from the sales order entry and shipping
activities
 Requires information from:
– Shipping Department on items and quantities
shipped
– Sales on prices and other sales terms
BILLING
 The basic document created is the sales
invoice. The invoice notifies the customer of:
– The amount to be paid
– Where to send payment
 Invoices may be sent/received:
– In paper form
– By EDI
 Common for larger companies
 Faster and cheaper than snail mail
BILLING
 When buyer and seller have accurate online
systems:
– Invoicing process may be skipped
 Seller sends an email when goods are shipped
 Buyer sends acknowledgment when goods are
received
 Buyer automatically remits payments within a specified
number of days after receiving the goods
– Can produce substantial cost savings
BILLING
 An integrated AIS may also merge the billing
process with sales and marketing by using
data about a customer’s past purchases to
send information about related products and
services with his monthly statement.
p&
Packing Sli
Sales g
Order Shipping
Entry Billing
Invoice
Sales
General
Ledger &
s
ment
ta te
S
nthly
Mo
3.2
Maintain Mailroom
Accts. Remittance
Rec. List
p&
Packing Sli
Sales g
Order Shipping
Entry Billing
Invoice
Sales
General
Ledger &
s
ment
ta te
S
nthly
Mo
3.2
Maintain Mailroom
Accts. Remittance
Rec. List
BILLING

customers.
– Invoicing
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
 Two basic ways to maintain accounts
receivable:
– Open-invoice method
–
BILLING
 OPEN-INVOICE METHOD:
– Customers pay according to each invoice
– Two copies of the invoice are typically sent to the
customer
 Customer is asked to return one copy with payment
 This copy is a turnaround document called a
remittance advice
– Advantages of open-invoice method
 Conducive to offering early-payment discounts
 Results in more uniform flow of cash collections
– Disadvantages of open-invoice method

BILLING
 BALANCE FORWARD METHOD:
– Customers pay according to amount on their
monthly statement, rather than by invoice
– Monthly statement lists transactions since the last
statement and lists the current balance
 The tear-off portion includes pre-printed information
with customer name, account number, and balance
 Customers are asked to return the stub, which serves
as the remittance advice
 Remittances are applied against the total balance
rather than against a specific invoice
BILLING
– Advantages of balance-forward method:
 It’s more efficient and reduces costs because you don’t
bill for each individual sale
 It’s more convenient for the customer to make one
monthly remittance
BILLING
 Cycle billing is commonly used with the
balance-forward method
– Monthly statements are prepared for subsets of
customers at different times.
 EXAMPLE: Bill customers according to the following
schedule:
– 1st week of month—Last names beginning with A-F
– 2nd week of month—Last names beginning with G-M
– 3rd week of month—Last names beginning with N-S
– 4th week of month—Last names beginning with T-Z
BILLING
 Advantages of cycle billing:
– Produces more even cash flow
– Produces more even workload
– Doesn’t tie up computer for several days to print
statements
BILLING
 Image processing can improve the efficiency and
effectiveness of managing customer accounts.
– Digital images of customer remittances and accounts
are stored electronically
 Advantages:
– Fast, easy retrieval
– Copy of document can be instantly transmitted to
customer or others
– Multiple people can view document at once
– Drastically reduces document storage space
BILLING
 EXCEPTION PROCEDURES: 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 manager
BILLING
 If there’s a return, the credit manager:
– Receives confirmation from the receiving dock that
the goods were actually returned to inventory
– Then issues a credit memo which authorizes the
crediting of the customer’s account
 If goods are slightly damaged, the customer may
agree to keep them for a price reduction
– Credit manager issues a credit memo to reflect that
reduction
BILLING
 Distribution of credit memos:
– One copy to accounts receivable to adjust the
customer account
– One copy to the customer
 If repeated attempts to collect payment fail, the
credit manager may issue a credit memo to write
off an account:
– A copy will not be sent to the customer
BILLING
 NOTE: Since accounts receivable handles the
customer accounts, why does someone else
have to issue the credit memos?
– EXAMPLE; An accounts receivable employee could
allow a relative or friend (or even himself) to run up an
account with the company and then simply write the
account off or credit it for returns and allowances.
 Having the credit memos issued by the credit
manager is good segregation of duties between:
– Authorizing a transaction (write-off)
ACTIVITIES
the revenue cycle:
– Shipping
– Billing
– Cash collection
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)
CASH COLLECTIONS
 Possible approaches to collecting cash:

– Turnaround documents forwarded to
accounts receivable
• The mailroom opens customer envelopes and
forwards to accounts receivable either:
– Remittance advices
– Photocopies of remittance advices
– A remittance list prepared in the mailroom
• Customers remit payments to
a bank P.O. box
• The bank sends the company:
Remittance advices
CASH COLLECTIONS
–
– An electronic list of the
remittances
– Copies of the checks
• Advantages:
– Prevents theft by company
– Turnaround documents forwarded to accounts
employees
receivable – Improves cash flow
– Lockbox arrangements management

• Lockboxes may be regional,
which reduces time in the
mail
• Checks are deposited
immediately on receipt
• Foreign banks can be utilized
for international customers
CASH COLLECTIONS
receivable
– Lockbox arrangements
• Upon receiving and scanning
– Electronic lockboxes the checks, the bank
immediately sends electronic
notification to the company,
including:
– Customer account number
– Amount remitted
CASH• COLLECTIONS
Customers remit payment electronically to the
company’s bank
• Eliminates mailing delays
• Typically done through banking system’s Automated
Clearing House (ACH) network
receivable
• PROBLEM: Some banks do not have both EDI and EFT
– Lockboxcapabilities, which complicates the task of crediting
arrangements
the customer’s account on a timely basis.
– Electronic lockboxes
– Electronic funds transfer
CASH COLLECTIONS
receivable
– Lockbox• arrangements
Integrates EFT with EDI
• Remittance data and funds transfer instructions are
– Electronicsimultaneously
lockboxes by the customer
• Requires that both buyer and seller use EDI-capable
– Financial electronic data interchange (FEDI)
CASH COLLECTIONS
receivable
• Speeds collection because credit card issuer
– Electronic funds
usually transfer
transfers funds within two days
• Typically costs 2-4% of gross sales price
– Accept credit cards or procurement cards
from customers
CASH COLLECTIONS
receivable
– Accept credit cards or procurement cards from
customers
–
REVIEW OF REVENUE CYCLE
ACTIVITIES
 Before we move on to discuss internal

controls in the revenue cycle, let’s do a
brief review of the organization chart,
including:
– Who does what in the revenue cycle
– To whom they typically report
PARTIAL ORGANIZATION CHART FOR
UNITS INVOLVED IN REVENUE CYCLE
CEO
V P o f M a r k e tin g V P o f M a n u fa c tu r in g CFO
S a le s C u s to m e r W a reh o u se S h ip p in g C o n tr o lle r T re a s u re r
O rd e r S e rv ic e
• Takes customer orders B illin g A c c o u n ts C r e d it C a s h ie r

• Authorizes credit for existing
customers in good standing
D e p t. R e c e iv a b le M anager
• Checks inventory availability
CEO
O rd er S e rv ic e
• Responds to B illin g A c c o u n ts C r e d it C a s h ie r
customer inquiries
CEO
• Picks the B illin g A c c o u n ts C r e d it C a s h ie r

order
CEO
S a le s C u s to m e r W a re h o u se S h ip p in g C o n tr o lle r T re a s u rer
• Packs the B illin g A c c o u n ts C r e d it C a s h ie r

order
• Ships the
order
CEO
S a le s C u s to m e r W a reh o u s e S h ip p in g C o n tr o lle r T re a s u re r
B illin g A c c o u n ts C r e d it C a s h ie r
• Invoices the D e p t. R e c e iv a b le M anager
customer
CEO
S a le s C u s to m e r W a re h o u s e S h ip p in g C o n tr o lle r T re a s u re r
• Maintains the customer’s

account:
– Increases customer account
when sales are made D e p t. R e c e iv a b le M anager
– Decreases account when cash
is collected
CEO
S a le s C u s to m e r W a reh o u s e S h ip p in g C o n tr o lle r T re a s u re r
• Approves credit for new
customers or existing
customers with issues B illin g A c c o u n ts C r e d it C a s h ie r
• Authorizes credits to customer D e p t. R e c e iv a b le M anager
accounts for returns,
allowances, and write-offs
CEO
S a le s C u s to m e r W a reh o u s e S h ip p in g C o n tr o lle r T re as u rer

O rd er S e rv ic e
• Deposits cash D e p t. R e c e iv a b le M anager
received from
customers
CONTROL: OBJECTIVES,
THREATS, AND PROCEDURES
 In the revenue cycle (or any 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
 We’ll soon be discussing the threats that may
occur in the revenue cycle.
 If you understand the preceding objectives, you
probably won’t have to worry about “memorizing”
threats.
 Almost every threat represents a violation of one
of those control objectives.
 Let’s look more closely.
– A related threat
All recorded• transactions would be that a transaction
are valid
– would gotransactions
All valid and authorized through without proper authorization.
are recorded
• Such a transaction might result from either a
mistake or a fraud.
• EXAMPLE: An employee might process an
– Business activities are performed
unauthorized efficiently
write-off of his and
owneffectively
account, so
– The company is that he wouldn’twith
in compliance havealltoapplicable
pay. laws and
regulations
•– The related
All valid andthreat is thattransactions
authorized a transaction
arewould be recorded that
recorded
– isn’t valid, i.e., itare
All transactions didn’t actually
recorded occur.
accurately
• EXAMPLE 1: An employee records a return of merchandise on
his own account when the goods were never really returned.
• EXAMPLE 2: Many financial statement frauds involve companie
– The company
recording is infictitious
totally compliance with allinapplicable
revenues laws the
order to make and
regulations financial position appear more favorable than it
company’s
– actually is.
All disclosures are full and fair
• The related threat would be that a transaction that actually did
occur didn’t get recorded.

• EXAMPLE 1: An employee fails to record a sale that the
 Incompany made cycle
the revenue to him(or
so any
he won’t have
cycle), a to pay the receivable.
well-designed AIS
• EXAMPLE 2: In financial statement fraud cases, the company
often failsobjectives
following to record transactions
are met: that reduce income or net
assets, e.g., don’t record returns from customers or discounts
granted to them. This omission causes net sales to appear
All recorded
–higher transactions
than they really are. are valid
regulations
The threat would be that a transaction is
•
recorded inaccurately. Inaccurate recording
typically means that a transaction is recorded
either:
In the wrong amount
–
 In the revenue cycle (orwrong

– In the any account
cycle), a well-designed AIS
– In the wrong time period
• It could also mean that the transaction was

credited to the wrong agents or participants.
regulations
• EXAMPLES: A fraud might involve a company:
Over-recording the amount of a sale (wrong
amount)
–
–Recording an unearned revenue as an earned

 In the revenue cyclerevenue
(or any(wrong account)
cycle), a well-designed AIS
– Recording a sale earlier than it occurs (wrong
time period)
following objectives are met:the wrong salesperson for the sale
– Crediting
– All transactions are (wrong agent)
properly authorized
regulations
• The reverse side of these activities might
include:
 In the revenue cycle (or any cycle),
– Under-recording a well-designed
a sales AIS
return (wrong amount).
should provide adequate controls
– Debiting an assetto ensure
account that ofthe
instead sales
following objectives returns
are met:(wrong account)
– Recording the return later than it actually
– All transactions are occurred
properly (wrong
authorized
time period)
regulations
– All transactions are properly
• Threats authorized
in this area usually involve theft,
– destruction, are
All recorded transactions or misuse
valid of assets, including data.
regulations
• The threat is that the activities would be
performed inefficiently or ineffectively.
– Business activities are performed efficiently and
effectively
regulations
The obvious threat is non-compliance with laws
•
and regulations.
should provide adequate
• An examplecontrols to ensure
in the revenue cyclethat thebe a car
could
following objectives
dealerare met:
who:
– Sells
All transactions– are a vehicle
properly to which he doesn’t have clear title;
authorized
or
– Refuses to allow a customer to return a car in
– All valid and authorized transactions
violation arelaws.
of state lemon recorded
– All transactions are recorded
• Another exampleaccurately
might be requesting a credit
– check on afrom
Assets are safeguarded customer
loss orintheft
violation of the Fair
Credit Reporting Act (FCRA).
– The company is in compliance with all applicable laws
and regulations
All recordedThe threat is incomplete
are valid and/or misleading
•
– transactions
disclosures.
• This threat is more important in other areas,
– All transactions are recorded
particularly thoseaccurately
areas that involve liabilities
and contingencies.
– Business• activities
However, areone
performed
threat inefficiently
the revenueand cycle
effectively
could
– The company be is
misleading disclosures
in compliance about customers’
with all applicable laws and
regulations rights to return product.
 While we’re going to step through a number of

common threats in the revenue cycle, it’s a good
idea to memorize the internal control objectives
so you can think of the relevant threats on your
own.
 If you don’t like the text version, click on the
button below to see a rhyming version of the
Poet’s
Poet’s
same objectives. Corner
Corner
 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 unauthorized transaction).
 In the following sections, we’ll discuss the

threats that may arise in the four major steps
of the revenue cycle, as well as the controls
that can prevent those threats.
THREATS IN SALES ORDER ENTRY
 The primary objectives of this process:

– Accurately and efficiently process customer orders.
– Ensure that all sales are legitimate and that the
company gets paid for all sales
– Minimize revenue loss arising from poor inventory
management
• You can click on any of the threats below to get
THREATS IN SALES ORDER ENTRY
more information on:
– The types of problems posed by each threat
– The controls that can mitigate the threats.
 Threats in the sales order entry process
include:
1. THREAT 1: Incomplete or inaccurate customer or
ders
2. THREAT 2: Sales to customers with poor credit
3. THREAT 3: Orders that are not legitimate
4. THREAT 4: Stockouts, carrying costs, and markd
owns
The Expenditure Cycle:
Purchasing to Cash
Disbursements
INTRODUCTION
 The primary external exchange of information is with
suppliers (vendors).
 Information flows to the expenditure cycle from other
cycles, e.g.:
– 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
INTRODUCTION
 The primary objective of the expenditure

cycle is to minimize the total cost of acquiring
and maintaining inventory, supplies, and
services.
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.
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.
ACTIVITIES

revenue cycle.
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.
AND SERVICES
 Alternate Inventory Control Methods

– We will consider three alternate approaches to
inventory control:
 Economic Order Quantity (EOQ)
 Just in Time Inventory (JIT)
 Materials Requirements Planning (MRP)
AND SERVICES
 EOQ is the traditional approach to managing
inventory.
– Goal: Maintain enough stock so that production doesn’t get
interrupted.
– Under this approach, an optimal order size is calculated by
minimizing the sum of several costs:
 Ordering costs
 Carrying costs
 Stockout costs
– The EOQ formula is also used to calculate reorder point,
i.e., the inventory level at which a new order should be
placed.
– Other, more recent approaches try to minimize or eliminate
AND SERVICES
 Materials Requirements Planning (MRP)
 MRP seeks to reduce inventory levels by
improving the accuracy of forecasting
techniques and carefully scheduling
production and purchasing around that
forecast.
AND SERVICES
 JIT systems attempt to minimize or eliminate

inventory by purchasing or producing only in
response to actual (as opposed to forecasted) sales.
 These systems have frequent, small deliveries of
materials, parts, and supplies directly to the location
where production will occur.
 A factory with a JIT system will have multiple
receiving docks for their various work centers.
AND SERVICES
 Similarities and differences between MRP
and JIT:
– Scheduling production and inventory
accumulation
• MRP schedules production to meet estimated sales and
creates a stock of finished goods inventory to be available
for those sales.
• JIT schedules production in response to actual sales and
virtually eliminates finished goods inventory, because
goods are sold before they’re made.
AND SERVICES
and JIT:
accumulation
– Nature of products
• MRP systems are better suited for products that have
predictable demand, such as consumer staples.
• JIT systems are particularly suited for products with
relatively short life cycles (e.g., fashion items) and for
which demand is difficult to predict.
AND SERVICES
and JIT:
accumulation
– Costs and efficiency
• Both can reduce costs and improve efficiency over
traditional EOQ approaches.
AND SERVICES
and JIT:
accumulation
– Costs and efficiency
– Too much or too little
• In either case, you must be able to:
– Quickly accelerate production if there is unanticipated
demand
– Quickly stop production if too much inventory is accumulating.
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
– An employee noticing a shortage.
 Advanced inventory control systems automatically
initiate purchase requests when quantity falls below
the reorder point.
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
– Department number and account number to be charged
 Most of the detail on the suppliers and the items
purchased can be pulled from the supplier and
AND SERVICES
 The purchase requisition is received by a

purchasing agent (aka, buyer) in the
purchasing department, who typically
performs the purchasing activity.
– In manufacturing companies, this function usually
reports to the VP of Manufacturing.
AND SERVICES
 A crucial decision is the selection of supplier.
 Key considerations are:
– Price
– Quality
– Dependability
 Especially important in JIT systems because late or
defective deliveries can bring the whole system to a
halt.
 Consequently, certification that suppliers meet ISO
9000 quality standards is important. This certification
recognizes that the supplier has adequate quality
control processes.
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.
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.
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
AND SERVICES
 Multiple purchase orders may be completed for one
purchase requisition if multiple vendors will fill the
request.
 The ordered quantity may also differ from the
requested quantity to take advantage of quantity
discounts.
 A blanket order is a commitment to buy specified
items at specified prices from a particular supplier
for a set time period.
– Reduces buyer’s uncertainty about reliable material
sources
– Helps supplier plan capacity and operations
AND SERVICES
 IT can help improve efficiency and

effectiveness of purchasing function.
– The major cost driver is the number of
purchase orders processed. Time and cost
can be cut by:
 Using EDI to transmit purchase orders
AND SERVICES
• In a vendor-managed inventory (VMI) program:
 IT can help improve
Inventory
– control andefficiency and to a
purchasing are outsourced
supplier
effectiveness of has
The supplier
– purchasing
access to POS andfunction.
inventory data and
automatically replenishes inventory
– The major
–
cost driver is the number of
This approach:
purchase orders processed.
Reduces amount
• Time and cost
of inventory carried
Eliminates costs of generating purchase orders
•
can be– cut by:
Requires good controls to ensure accuracy of inventory
 Using EDI to
transmit purchase orders
records
 Using vendor-managed inventory systems

AND SERVICES
purchase orders
• Suppliers competeprocessed.
with each other toTime and cost
meet demand at the
can be cut
lowest by:
price
• Best suited to commodities, rather than critical
 Using EDI to where
components, transmit purchase
quality, ordersand delivery
vendor reliability,
performance
 Using are not crucial
vendor-managed inventory systems
 Reverse auctions
AND SERVICES
can
• be
Usedcut by: purchases that involve formal bids
for large
 Using EDI
• Internal to transmit
auditor visits eachpurchase orders
potential supplier in final cut to
verify accuracy of their bid
 Using vendor-managed inventory systems
• May identify mathematical errors in bid which can produce
 Reverse auctions
considerable savings
 Pre-award audits
AND SERVICES
can be cut here by:
• A corporate credit card can be used with specific
 Using EDI to transmit purchase orders
suppliers for specific types of purchases
 Using vendor-managed
• Spending limits can be setinventory systems
 Reverse
• Accountauctions
numbers on cards can be mapped to general
ledger accounts
 Pre-award audits
 Procurement cards for small purchases
ACTIVITIES

revenue cycle.
RECEIVING AND STORING GOODS
 The receiving department accepts deliveries
from suppliers.
– Normally reports to warehouse manager, who
reports to VP of Manufacturing.
 Inventory stores typically stores the goods.
– Also reports to warehouse manager.
 The receipt of goods must be communicated
to the inventory control function to update
inventory records.
 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.
 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.
 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
 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.
 IT can help improve the efficiency and
effectiveness of the receiving activity:
– Bar-coding
• Requiring suppliers to bar-code products speeds the
counting process and improves accuracy.

– Bar-coding
– RFID
• Passive radio frequency identification (RFID) tags
eliminate the need to scan bar codes.

– Bar-coding
– RFID
– EDI and satellite technology
• EDI and satellite technology make it possible to track the
exact location of incoming shipments and have receiving
staff on hand to unload trucks.
• Also enables drivers to be directed to specific loading
docks where goods will be used.

– Bar-coding
– RFID
– EDI and satellite technology
– Audits
• Audits can identify opportunities to cut freight costs and
can ensure that suppliers are not billing for transportation
costs they are supposed to assume.
ACTIVITIES

revenue cycle.
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
SERVICES

SERVICES
 Approval of vendor invoices is done by the
accounts payable department, which reports to
the controller.
 The legal obligation to pay arises when goods
are received.
– But most companies pay only after receiving
and approving the invoice.
– This timing difference may necessitate
adjusting entries at the end of a fiscal period.
SERVICES
 Objective of accounts payable:

– 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
SERVICES
 There are two basic approaches to

processing vendor invoices:
– Non-voucher system
• Each invoice is stored in an open invoice file.
• When a check is written, the invoice is marked “paid” and
then stored in a paid invoice file.
SERVICES
– Voucher system
• A disbursement voucher is prepared which lists:
– Outstanding invoices for the supplier
– Net amount to be paid after discounts and allowances
• The disbursement voucher effectively shows which
accounts will be debited and credited, along with the
account numbers.
SERVICES

– Voucher system
• Advantages of a voucher system:
– Several invoices may be paid at once, which reduces number
of checks written
– Vouchers can be pre-numbered which simplifies the audit trail
for payables
– Invoice approval is separated from invoice payment, which
makes it easier to schedule both to maximize efficiency
SERVICES

SERVICES
 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.
 This voucher package authorizes issuance of
a check or EFT to the supplier.
SERVICES
Referred to as Evaluated Receipt Settlement.

 Processing
•
efficiency can be improved
• Payments are issued based on what is ordered and
by: received.
• Requires that:
– Requiring suppliers to submit invoices by
– Suppliers quote accurate prices when orders are placed.
EDI – Receiving personnel count accurately and inspect

merchandise received.
– Having the system
• Typically automatically
incorporates match about
very timely communications
invoices to POs
shipments and receiving reports
and receipts.
– Eliminating vendor invoices

SERVICES
 Processing efficiency can be improved by:

– Requiring suppliers to submit invoices by EDI
– Having the system automatically match
invoices to POs and receiving reports
– Using procurement cards for non-
inventory purchases
SERVICES
– Having the system automatically match invoices
to POs and receiving reports
– Using procurement cards for non-inventory
purchases
– Using company credit cards and electronic
forms for travel expenses
SERVICES
– Having the system automatically match invoices
to POs and receiving reports
purchases
– Using company credit cards and electronic forms
for travel expenses
– Preparing careful cash budgets to take
advantage of early-payment discounts
SERVICES
– Having the system automatically match invoices to
POs and receiving reports
purchases
– Using company credit cards and electronic forms
for travel expenses
– Preparing careful cash budgets to take advantage
of early-payment discounts
REVIEW OF EXPENDITURE CYCLE
ACTIVITIES
 Before we move on to discuss internal

controls in the expenditure cycle, let’s
do a brief review of the organization
chart, including:
– Who does what in the expenditure cycle
– To whom they typically report
PARTIAL ORGANIZATION CHART FOR UNITS
INVOLVED IN EXPENDITURE CYCLE
CEO
V P o f M a n u fa c tu r in g CFO
P u r c h a s in g R e c e iv in g In v e n to r y C o n tr o lle r T re a s u re r
S to re s
• Selects suitable suppliers A c c o u n ts C a s h ie r

• Issues purchase orders
P a y a b le
CEO
P u r c h a s in g R e c e iv in g In v e n to r y C o n tr o lle r T re a s u rer
S to re s
• Decides whether to accept A c c o u n ts C a s h ie r

deliveries
• Counts and inspects deliveries
P a y a b le
CEO
S to re s
• Stores goods that A c c o u n ts C a s h ie r

have been delivered
and accepted
P a y a b le
CEO
S to re s
• Approves invoices A c c o u n ts C a s h ie r
for payment
P a y a b le
CEO
P u r c h a s in g R e c e iv in g In v e n to r y C o n tr o lle r T re a s u re r
S to r e s
A c c o u n ts C a s h ie r
P a y a b le
• Issues payment to
vendors
 In the expenditure cycle (or any cycle), a well-designed
AIS should provide adequate controls to ensure that the
regulations
 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 unauthorized transaction).
 In the following sections, we’ll discuss the

threats that may arise in the three major steps
of the expenditure cycle, as well as general
threats, EDI-related threats, and threats
related to purchases of services.
CRIME TIME
 Before we discuss specific threats, it may be

helpful to have some background on a form
of occupational fraud and abuse which is
broadly referred to as corruption.
 Corruption cases often involve arrangements
between a company’s purchasing agent and
a sales representative for one of the
company’s vendors.
CRIME TIME
 The vendor’s representative may try to induce the
purchasing agent to buy goods that:
– Are over-priced
– Are of inferior quality
– Aren’t even needed
– Aren’t even delivered
 In exchange, the vendor’s rep typically offers the
purchasing agent something of value. That
“something” might be money, payment of a debt, a
job offer, an expensive vacation, or anything the
purchasing agent might value.
CRIME TIME
 According to the Fraud Examiner’s Manual
published by the Association of Certified
Fraud Examiners, these schemes usually
take four forms:
– Bribery
• Typically involves the vendor offering a kickback
(something of value) to the buyer to buy inflated,
substandard, un-needed, or un-delivered goods, etc.
• Alternately, may involve an inducement to the buyer to rig
a competitive bidding process so that the vendor gets the
bid.
CRIME TIME
take four forms:
– Bribery
– Conflict of interest
• In conflict of interest cases, the purchasing agent is
usually arranging for his employer to make purchases
from a company in which he has a concealed interest.
• For example, perhaps his wife owns the vendor company.
CRIME TIME
• Economic extortion is basically the reverse of a bribe.
• Instead of the vendor making an offer of something of
take four
valueforms:
to the purchasing agent, the purchasing agent may
– tell the vendor that he must provide something of value to
Bribery
the purchasing agent if he wants to continue to do
business with his employer.
– Economic extortion
CRIME TIME
Fraud• Examiners, these
Illegal gratuities involve schemes
gifts that are givenusually
to the
purchasing
take four forms: agent by a vendor after the vendor has been
selected.
– Bribery
• There was no intent by the vendor to influence the
selection process; the gift was provided after the fact.
• But the problem is that the gift is too likely to impact future
decisions by the purchasing agent.
– Illegal gratuities
CRIME TIME
take four forms:
– Bribery
– Illegal gratuities
 How do you think these activities relate to
the Foreign Corrupt Practices Act?
• You can click on any of the threats below to get
more information on:
– The types of problems posed by each threat
– The controls that can mitigate the threats.
THREATS IN ORDERING GOODS
 Threats in the process of ordering goods
include:
– THREAT 1: Stockouts and/or Excess Inventory
– THREAT 2: Ordering Unnecessary Items
– THREAT 3: Purchasing Goods at Inflated Prices
– THREAT 4: Purchasing Goods of Inferior Quality
– THREAT 5: Purchasing from Unauthorized Suppli
ers
– THREAT 6: Kickbacks
– EDI-Related Threats
– Threats Related to Purchases of Services
EXPENDITURE CYCLE
INFORMATION NEEDS
 Information is needed for the following

operational tasks in the expenditure cycle,
including:
– Deciding when and how much inventory to order
– Deciding on appropriate suppliers
– Determining if vendor invoices are accurate
– Deciding whether to take purchase discounts
– Determining whether adequate cash is available to
meet current obligations
EXPENDITURE CYCLE
INFORMATION NEEDS
 Information is also needed for the following
strategic decisions:
– Setting prices for products/services
– Establishing policies on returns and warranties
– Deciding on credit terms
– Determining short-term borrowing needs
– Planning new marketing campaigns
EXPENDITURE CYCLE
INFORMATION NEEDS
 The AIS needs to provide information to evaluate
the following:
– Purchasing efficiency and effectiveness
– Supplier performance
– Time taken to move goods from receiving to
production
– Percent of purchase discounts taken
 Both financial and operating information are
needed to manage and evaluate these activities
 Both external and internal information are
needed
EXPENDITURE CYCLE
INFORMATION NEEDS
 When the AIS integrates information from the
various cycles, sources, and types, the reports
that can be generated are unlimited. They
include reports on:
– Supplier performance
– Outstanding invoices
– Performance of expenditure cycle employees
– Number of POs processed by purchasing agent
– Number of invoices processed by A/P clerk
– Number of deliveries handled by receiving clerk
EXPENDITURE CYCLE
INFORMATION NEEDS
– Number of inventory moves by warehouse worker

– Inventory turnover
– Classification of inventory based on contribution to
profitability
 Accountants should continually refine and
improve these performance reports
End of the chapter
Thank You!

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Accounting Information System

 Four basic business activities are

 Take customer orders

 The sales order (paper or electronic) indicates:

 To reduce human error, customers should enter

 How IT can improve efficiency and effectiveness:

• Initially popular with Dell and Gateway.

 Credit sales should bepast-due

 How can IT improve the process?

 The goal of CRM is to retain customers:

 The effectiveness of a website depends on its

 Sales order entry involved the steps of:

 Four basic business activities are performed in

Billing & Goods,

Billing & Goods,

Billing & Goods,

Billing & Goods,

– Produces multiple copies of the bill of lading

 The shipment is accompanied by:

 Another decision relates to the location of

 Four basic business activities are performed in

 The third revenue cycle activity is billing

– Disadvantages of open-invoice method

 Possible approaches to collecting cash:

– Lockbox arrangements management

 Before we move on to discuss internal

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THREATS, AND PROCEDURES

 In the revenue cycle (orwrong

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–Recording an unearned revenue as an earned

 While we’re going to step through a number of

 In the following sections, we’ll discuss the

 The primary objectives of this process:

 The primary objective of the expenditure

 Management also has to evaluate the

– This data needs to be accurate, reliable, and

 The three basic activities performed in the

 The three basic activities performed in the

 Alternate Inventory Control Methods

 JIT systems attempt to minimize or eliminate

 The purchase requisition is received by a

 It’s important to track and periodically evaluate

 IT can help improve efficiency and

 Using vendor-managed inventory systems

 The three basic activities performed in the

 If one of these exceptions occurs, the purchasing

 IT can help improve the efficiency and

 IT can help improve the efficiency and

 IT can help improve the efficiency and

 The three basic activities performed in the

 There are two basic sub-processes

 There are two basic sub-processes

 Objective of accounts payable:

 There are two basic approaches to