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Chapter 4 The Revenue Cycle

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Presentation on theme: "Chapter 4 The Revenue Cycle"— Presentation transcript:

1 Chapter 4 The Revenue Cycle
COPYRIGHT © 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license 1

2 Objectives for Chapter 4
Tasks performed in the revenue cycle, regardless of whether manual or computerized Functional departments in the revenue cycle and the flow of revenue transactions through the organization Documents, journals, and accounts needed for audit trails, the maintenance of 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 3

3 REVENUE CYCLE (SUBSYSTEMS) Sales Order Billing/ Accounts Receivable
Start here. REVENUE CYCLE (SUBSYSTEMS) Sales Order Billing/ Accounts Receivable Cash Receipts/ Collections Shipping 1 6 4/5 3 Credit / Customer Service 2 Customer Purchase Order

4 Revenue Cycle (Subsystem) Databases
Other Files Tax Details reference file Shipping and Price Data reference file Credit reference file Sales history file Cash Receipts history file Master files Customer master file Accounts Receivable master file Inventory master file Transaction Files Sales Order transaction file Open Sales Order transaction file Sales Invoice transaction file Cash Receipts transaction file

5 Manual Sales Order Processing – Sales & Credit Departments
Begins with customer placing order Sales department captures essential details on sales order form. Transaction is authorized by credit department; returned to Sales Dept. Sales information is released to: Billing Warehouse Shipping See next slide for flowchart 3

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7 Manual Sales Order Processing - Warehouse
Merchandise is picked from Warehouse and sent to Shipping, with SO. Memo to Inventory Control. Other SO filed in Warehouse. See next slide for flowchart (yellow symbols) 4

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9 Manual Sales Order Processing - Shipping
Shipping reconciles merchandise received from Warehouse with sales information on packing slip. Merchandise, packing slip (PS), and bill of lading (BOL) are prepared by Shipping and sent to Customer. Copy of BOL and SO are filed in Shipping. See next slide for flowchart

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11 Manual Sales Order Processing – Billing
Shipping information is also sent to Billing. Billing compiles and reconciles relevant facts and issues invoice to Customer and updates sales journal. See next slide for flowchart (blue symbols)

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13 Manual Sales Order Processing – Accounts Receivable
A/R records information in customer’s account in accounts receivable subsidiary ledger and files invoice. See next slide for flowchart (purple symbols) 5

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15 Manual Sales Order Processing – Inventory Control
Inventory Control adjusts inventory subsidiary ledger and files Memo. See next slide for flowchart

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17 Manual Sales Order Processing – General Ledger (not flowcharted)
Billing, A/R, and Inventory Control submits summary information to General Ledger dept., which then reconciles data and posts to control accounts in G/L.

18 Manual Cash Receipts Processes – Mail Room & Cash Receipts
Customer checks and remittance advices are received in the Mail Room. A mail room clerk prepares a list of checks (Cash Prelist) and sends the prelist and the checks to Cash Receipts. The Remittance Advices are sent to A/R. Cash Receipts: verifies the accuracy and completeness of the checks updates the cash receipts journal prepares a deposit slip, which is sent to Bank with checks files Prelist by date prepares a journal voucher to send to G/L (not flowcharted) 10

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20 Manual Cash Receipts Processes – Accounts Receivable
A/R posts from the remittance advices to the accounts receivable subsidiary ledger. Remittance advices are filed alphabetically. Periodically, a summary of the postings is sent to G/L. (not flowcharted) G/L department: (not flowcharted) reconciles the journal voucher from Cash Receipts with the summaries from A/R updates the general ledger control accounts 11

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22 Control Activities

23 Physical controls are GENERAL
Two Broad Categories Computer Controls General Application Physical Controls Access Control Accounting Records Authorization Independent Verification Segregation of Duties Supervision (compensating control) Physical controls are GENERAL

24 Examples of Access Controls (Revenue Cycle)
Limit access to assets Within revenue cycle, assets to protect are cash and inventories; restrict access to records such as accounts receivable subsidiary ledger and cash journal. Manual or CBIS 20

25 Examples of Accounting Records (Revenue Cycle)
With properly maintained audit trail, possible to track transactions through systems and find when & where errors were made: pre-numbered source documents (e.g., sales orders) special journals (Sales, Cash Receipts) subsidiary ledgers (A/R) general ledger files Manual or CBIS 17

26 Authorization Controls
Watch for difference between General Authorization and Specific Authorization Proper authorization of transactions (documentation) should occur so that only valid transactions get processed. Examples of authorization in revenue cycle: sale is made on credit (authorization) cash refund is requested (authorization) posting a cash payment received to a customer’s account (cash pre-list) Manual or CBIS 13

27 Examples of Independent Verification (Revenue Cycle)
Physical procedures & recordkeeping should be independently reviewed at various points in system to check for accuracy and completeness: Shipping verifies goods sent from Warehouse are correct in type and quantity Billing reconciles shipping notice with sales order General Ledger reconciles journal vouchers from Billing, Inventory Control, Cash Receipts, and Accounts Receivable Manual or CBIS 19

28 Segregation of Functions Three Rules
Transaction authorization should be separate from transaction processing. Asset custody should be separate from asset recordkeeping. The organization should be structured so that fraud requires collusion between two or more individuals. Manual 14

29 Examples of Segregation of Functions (Revenue Cycle)
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 Manual 15

30 Examples of Supervision (Revenue Cycle)
Supervision of employees serves as deterrent to dishonest acts -particularly important in mailroom. Manual or CBIS 16

31 Supervision in Revenue Cycle
Supervision of employees serves as deterrent to dishonest acts -particularly important in mailroom. Mailroom is first point-of-contact in organization for customer payments Manual or CBIS 16

32 Automating Revenue Cycle

33 Characteristics of Automated Revenue Cycle
Authorizations and data access can be performed through computer screens. Reduced paper documents. Manual journals and ledgers are changed to electronic transaction and master files. Input is still frequently from hard copy documents and goes through one or more computerized processes. Processes store data in electronic files or prepare data in the form of a printed report.

34 Advantages of Real-Time Processing
Shortens cash cycle of firm by reducing time between order date and billing date Fewer clerical errors, reducing incorrect items being shipped and bill discrepancies Reduces amount of expensive paper documents and storage costs Better inventory management - can lead to competitive advantage 28

35 Example of Reengineered Sales Order/Invoice Processing in Revenue Cycle
Manual procedures & physical documents replaced by interactive computer terminals. Real time input/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 27

36 Reengineered Cash Receipts Process
Mail room is frequent target for reengineering. Companies send customers preprinted envelopes and remittance advices. Upon receipt, preprinted envelopes are set aside and information on envelope is scanned – providing control procedure against theft. Machines are also available to open envelopes, scan remittance advices and checks, and separate checks. 30

37 Point-of-Sale Systems
Point of sale systems are used extensively in retail establishments. Customers pick inventory from shelves and take to cashier. Clerk scans universal product code (UPC). POS system is connected to inventory file, where price and description are retrieved. Inventory levels are updated and reorder needs can immediately be detected. 31

38 Point-of-Sale Systems
System computes amount due. Payment is either cash, check, debit or credit card in most cases. No accounts receivables If checks, debit or credit cards are used, on-line link to receive approval is necessary. At end of day or cashier’s shift, money and receipts in drawer are reconciled to internal cash register tape or printout from computer’s database. Cash over and under must be recorded 32

39 Author’s Example of Computerized POS

40 Reengineering Using Electronic Data Interchange (EDI)
EDI helps to expedite transactions. The customer’s computer: Determines inventory is needed Selects supplier with whom business has a formal business agreement Dials supplier’s computer and places order Exchange is completely automated. No human intervention or management 35

41 EDI System Wal-Mart Our Company VAN Application Software Sales Order
Purchases System EDI Translation Software EDI Translation Software Many Transactions Direct Connection Communications Software Communications Software Other Mailbox Few Transactions Wal-Mart’s mailbox VAN Our Company’s mailbox Other Mailbox 14

42 Reengineering Using the Internet
Typically, no formal business agreements Unlike EDI, where formal agreements exist Most orders require credit cards. Mainly done with systems, and thus some turnaround time is necessary “Intelligent agents” needed to eliminate this time lag. Security and control over data is big concern with Internet transactions. 36

43 Control Considerations for CBISs
Access Control - magnetic records are vulnerable to both authorized/ unauthorized exposure and should be protected. Must limit access to data files Must limit access to computer programs 37

44 Control Considerations for CBISs
Accounting Records - rest on reliability and security of magnetically stored data. Accountant/auditor should be skeptical about accepting accuracy of printouts of journals and ledgers. Backup is concern for direct access files; system must ensure backup of all files is continuously kept because of “destructive backup” issues with direct access files * * Destructive backup means newer files write over the older files. 39

45 Control Considerations for CBISs
Authorization - in real-time systems, authorizations are automated: programmed decision rules must be closely monitored.

46 Control Considerations for CBISs
Independent Verification – consolidating accounting tasks under one computer program can remove traditional independent verification controls. These controls help: perform batch control balancing after each computer run Produce reports and summaries for end users and management to review

47 Control Considerations for CBISs
Segregation of Functions - some consolidation of tasks by computer; protect computer programs--coding, processing and maintenance should be separated (internally developed systems). Supervision - in POS systems, cash register’s internal tape or database is a type of supervision. 38

48 Microcomputer-Based Accounting Systems
Used by small firms & some large, decentralized firms Frequently, one (or few) individuals perform entire accounting function Most systems are divided into modules controlled by menu-driven program: general ledger inventory control payroll cash disbursements purchases and accounts payable cash receipts sales order/invoicing 40

49 Microcomputer Control Issues
Access Control - access controls to data tend to be weak; consider encryption and/or disk locking devices to compensate Accounting Records - computer disk failures cause data losses; maintain periodic backups and off-site storage Segregation of Duties – tend to be inadequate should be compensated for with increased supervision, detailed management reports, frequent independent verification 41

50 The End


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