Sales/Collection Process Chapter 11 Sales/Collection Process McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

Outline Objectives Porter’s value chain Steps in the sales / collection process Documents Internal controls Information technology 11-2

Objectives When you finish this chapter, you should be able to: Explain the elements of Porter’s value chain Explain the role and purpose of the sales / collection process List and discuss, in order, the steps in the process Identify and describe documents commonly used in the process Suggest and evaluate internal controls associated with sales / collection activities Explain how information technology can make the sales / collection process more effective and efficient Create and interpret systems documents related to sales and collections 11-3

Porter’s value chain A way of conceptualizing common activities organizations use to create value for their stakeholders Two parts Primary activities Support activities 11-4

Porter’s value chain Primary activities Support activities Inbound logistics: transporting raw material and inventory from a supplier Operations: transforming that material into goods for sale Outbound logistics: shipping the goods to the point of sale Marketing and sales: motivating customers to buy the goods Service: following up after the sale Support activities Information technology: computers and other IT that support the organization Human resource management: managing the people in the organization Infrastructure: organizational structure, control systems and culture Procurement: the purchasing function 11-5

Steps in the sales / collection process Take customer order Approve customer credit Fill the order based on approved credit Ship the product Bill the customer Collect payment Process uncollectible receivables as necessary 11-6

Steps in the sales / collection process Figure 8.2 Sales / collection DFD 1.0 Take order. Customer Order info 2.0 Check credit. Order total Credit info 3.0 Fill & ship order Approved credit Delivered goods 4.0 Bill client. Billing info 5.0 Receive payment Payment 11-7

Documents Customer order Picking list Summarizes items ordered and prices Originates in sales department Terminates in warehouse Picking list Guides selection of items from warehouse Originates in warehouse Terminates in shipping department 11-8

Documents Packing list Bill of lading Specifies contents of shipment Originates in shipping department Terminates with customer Bill of lading Specifies freight terms FOB destination or shipping point Freight prepaid or collect Originates in shipping department Terminates with common carrier 11-9

Documents Customer invoice Customer check Remittance advice Bills client Originates in billing department Terminates with customer Customer check Remits payment Originates with customer Terminates with cash receipts department Remittance advice Provides source document for AIS Originates with customer Terminates with accounting Deposit slip Transmits cash receipts to bank Originates with cash receipts department Terminates with bank 11-10

Internal controls Establishing a formal credit approval process Maintaining adequate inventory Incorporating independent order checking Insuring goods in transit Matching documents prior to billing Separating duties: authorization, custody, recordkeeping Endorsing checks restrictively Reconciling the bank statement 11-11

Information technology Maintain customer lists Generate sequentially-numbered forms Look up inventory status Identify unpaid and past-due invoices Record transactions in the accounting information system Report financial information with XBRL 11-12

IN AIS SALES/COLLECTION PROCESS = OE/S + B/AR/CR 11-14

OE/S PROCESS The order entry/sales (OE/S) process includes the first four steps in the order-to-cash process pre-sales activities sales order processing picking and packing the goods shipping

Horizontal View OE/S 1. Customer places order

Horizontal View OE/S 2. Sales order department requests credit approval from the credit department

Horizontal View OE/S 3. Credit department informs sales order department of disposition of credit request

Horizontal View OE/S 4. Sales order department acknowledges order to the customer

Horizontal View OE/S 5. Sales order department notifies shipping department of sales order

Horizontal View OE/S 6. Sales order department notifies warehouse and B/AR/CR process of shipment

Horizontal View OE/S 7. Warehouse sends completed picking ticket to shipping

Horizontal View OE/S 8. Shipping department informs sales order department of shipment

Horizontal View OE/S 9. Shipping department informs carrier, B/AR/CR process, and general ledger process of shipment

Control Matrix for OE/S

OE/S Control Matrix, Cont’d.

B/AR/CR PROCESS Shipping informs A/R (billing) of shipment A/R send invoice to customer A/R informs GL that invoice sent to customer Customer may default, sending message to credit Credit changes CR limit; informs sales dept. to terminate sales to customer Cont..

A/R informs GL of write-off Customer makes payment on account B/AR/CR PROCESS A/R informs GL of write-off Customer makes payment on account Cashier informs A/R of payment Cashier informs GL of payment