Chapter 4 The Revenue Cycle PDF

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Summary

THE REVENUE CYCLE Direct exchange of finished goods or services for cash in a single transaction between a buyer and a seller  Economic enterprises generate revenue through business processes that constitute their revenue cycleThe Revenue Cycle Subsystems Sales Order Processing  Cash ReceiptsTHE...

Description

THE REVENUE CYCLE  

Direct exchange of finished goods or services for cash in a single transaction between a buyer and a seller Economic enterprises generate revenue through business processes that constitute their revenue cycle

The Revenue Cycle Subsystems  

Sales Order Processing Cash Receipts

THE CONCEPTUAL SYSTEM Trace the sequence of activities through three processes that constitute the revenue cycle for most retail, wholesale, and manufacturing organizations. These processes are: 1. Sales Order procedures 2. Sales Return procedures 3. Cash Receipts procedures

SALES ORDER PROCEDURES Include the tasks involved in receiving and processing a customer order, filling the order and shipping products to the customer, billing the customer at the proper time, and correctly accounting for the transaction. 1. Receive Order - The salea process begins with a receipt of a customer order indicating the type and quantity of merchandise desired. 2. Check Credit - Before processing the order further, the customer 's creditworthiness needs to be established. 3. Pick Goods - The receive order activity forwards the stock release document (picking ticket) to the pick goods function in the wearhouse.

4. Ship Goods - The shipping department receives the packing slip and shipping notice from the receive order function. 5. Bill Customer - The shipment of goods marks the completion of the economic event and the point at which the customer should be billed. 6. Update Inventory Records - The inventory control function updates inventory subsidiary ledger accounts from information contained in the stock release document. 7. Update Accounts Receivable Records - Customer records in the AR subsidiary ledger are updated from information provided by the sales order. 8. Post to General Ledger

SALES RETURN PROCEDURES - Certain percentage of a company's sales may be returned when:    

The company shipped the customer the wrong merchandise The goods were defective The product was damaged in shipment Late delivery of goods

1. Prepare Return Slip - When items are returned, the receiving department employee counts, inspects, and prepares a return slip describing the items. 2. Prepare Credit Memo - Upon receipt of the return slip, the sales employee prepares a credit memo. 3. Approve Credit Memo - The credit manager evaluates the circumstances of the return and makes a judgement to grant (or disapprove) credit. 4. Update Sales Journal - Upon receipt of the approved credit memo, the transaction is recorded in the sales journal as a contra entry. 5. Update Inventory and AR Records - The inventory control function adjusts the inventory records and forwards the credit memo to accounts receivable, where the customer's account is also adjusted. 6. Update General Ledger - Upon receipt of the journal voucher and account summary information, the general ledger function reconciles the figures and posts to the following control accounts.

 CASH RECEIPTS PROCEDURES 1. Open Mail and Prepare Remittance List - A mail room employee open envelopes obtaining customer's payments and remittance advices.

2. Record and Deposit Checks - A cash receipts employee verifies the accuracy and completeness of the checks against the prelist. 3. Update AR Records - The remittance advices are used to post to the customer's account in the AR Subsidiary Ledger. 4. Update General Ledger - Upon receipt of the journal voucher and account summary, the GL function reconciles the figures, post to the cash and AR control accounts, and files the journal voucher. 5. Reconcile Cash Receipts and Deposits - A clerk reconciles cash receipts by comparing the following documents: copy of the prelist, deposit slips received from the bank, and related journal vouchers.

PHYSICAL SYSTEMS Physical accounting information systems are a combination of computer technology and human activity. The objectives of this section are:  

To illustrate AIS functionality and workflow patterns under different levels of technology and; To demonstrate how the internal control profile changes as the technology/human mix changes.

BASIC TECHNOLOGY REVENUE CYCLE 1. Basic Technology Sales Order Processing System 2. Basic Technology Cash Receipts System

BASIC TECHNOLOGY SALES ORDER PROCESSING SYSTEM

Sales Department - The sales department clerk manually records the essential details on a sales order.

Credit Department Approval - The credit department clerk verifies the customer's creditworthiness by using the department computer to review the customer's credit history in the customer records file.

Warehouse Procedures - The warehouse clerk receives the stock release copy of the sales order and uses this to locate the inventory.

The Shipping Department - The shipping clerk reconciles the products received from the warehouse with the shipping notice copy of the sales order received earlier. The Billing Department - Upon receipt of the shipping notice and stock release, the billing clerk uses the department PC to compile the relevant facts about the transaction and bills the customer.

Accounts Receivable, Inventory Control, and General Ledger Departments - Upon receipt of the documents from the billing department, the AR and inventory control clerks update their respective subsidiary ledgers.

BASIC TECHNOLOGY CASH RECEIPTS SYSTEM

Mail Room - Customer Payments and remittance advices arrive at the mail room, where a clerk opens the envelopes, reconciles the checks and remittance advices, endorses the checks, gathers the remittance advices and checks into batches, and prepares a remittance list.

Cash Receipts - The cashier records the checks in the cash receipt journal and promptly sends them to the bank, accompanied by two copies of the deposit slip.

Accounts Receivable - The AR department uses the remittance advices to reduce the customers' account balances consistent with the amount paid.

General Ledger Department - Upon receipt of the journal voucher and account summary from cash receipt and AR, respectively, the general ledger clerk reconciles the information and post to the control accounts.

Controller's Office - Performs a bank reconciliation by comparing deposit slips returned from the bank, account summaries used to post to the accounts, and journal vouchers.

ADVANCE TECHNOLOGY REVENUE CYCLE Advance technologies allow system designers to integrate accounting and other business functions through a common information system. Integration improves operational performance and reduce costs by identifying and eliminating nonvalue-added tasks.  

INTEGRATED SALES ORDER PROCESSING SYSTEM INTEGRATED CASH RECEIPTS SYSTEM

RISK

PHYSICAL CONTROL

IT CONTROL

Sales to un-creditworthy customers

Transaction authorization— credit check

Automated credit check

Segregation of duties—separate credit and sales functions Shipping wrong items/quantities

Inaccurate record keeping

Independent verification— shipping department reconciles shipment with order

Scanner technology

Transaction authorization — remittance list

Input data edits

Accounting records — audit trail documents, journals, accounts and files

Automated inventory ordering

Automated posting to accounts File backup

Independent verification — shipping, billing and GL Misappropriation of assets

Transaction authorization —

Multilevel security to achieve

remittance list

segregation of duties

Supervision — mail room Access control — warehouse security, daily deposit of cash, night deposit box, and locked safes Segregation of duties — cash receipts, general ledger, AR function, warehouse and inventory records Unauthorized access to data

Access control — source documents, journals, and ledgers

Password control Multilevel security to prevent unauthorized access to data

Segregation of duties — sub ledgers, GL and asset custody

POINT OF SALE (POS) SYSTEMS  

Business exchange goods directly for cash in a transanction that is consummated at the point of sale. POS Systems are used extensively in grocery stores, department stores, and other types of retail organizations.

Daily Procedures 

The checkout clerk scans the Universal Product Code (UPC) label on the items being purchased with a laser light scanner.

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The POS system is connected online to the inventory file from which it retrieves product price data, and it displays the data on the clerk's terminal. When all the UPCs are scanned, the system automatically calculates taxes, discounts and the total for the transaction. The clerk enters the transaction into the POS System via the register's keypad, and a record of the sale is added to the sales journal in real time. At the end of the clerk's shift, a supervisor unlocks the register and retrieves the internal tape. The cash drawer is removed and replaced with a new cash drawer containing a known amount of start-up cash (float) for the next clerk. The cash drawer containing cash and credit card vouchers are reconciled against the amount recorded on the internal tape.

END-OF-DAY PROCEDURES   

The cash receipts clerk prepares a three-part deposit slip for the total amount of cash received. One copy is filed and the other two accompany the cash to the bank. A hatch program summarizes the sale and cash receipts journals, prepares a journal voucher, and post to the GL accounts.

POINT OF SALE CONTROL ISSUES

Authorization - involves validating credit card charges and establishing that the customer is the valid user of the card. Supervision - supervision using surveillance cameras and shop floor security can reduce risk. Access control – the organization must restrict access to cash assets. Accounting records – only the clerk's supervisor should have access to the internal tape. Independent verification – the cash drawer should contain cash and credit card voucher equal to the amount recorded on the tape.

Reengineering Using EDI

ELECTRONIC DAT INTERCHANGE (EDI) 

EDI technology was devised to expedite routine transactions between manufacturers and wholesalers, and between wholesalers and retailers.

Reengineering using the Internet 

Internet sales are both B2B and business-consumer ( B2C ) transaction. The internet opens an organization's doors to thousands of potential business partners with whom it has no formal agreement....