Revenue Cycle - dsdsc PDF

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REVENUE CYCLE SELF-TESTA QUESTIONS (P. 197)1. What document initiates the sales process? The sales process is initiated with the receipt of a customer order that indicates the type and quantity of merchandise desired. At this point, the customer order is not in a standard format and may or may not e...

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REVENUE CYCLE SELF-TEST A.REVIEW QUESTIONS (P. 197) 1. What document initiates the sales process? The sales process is initiated with the receipt of a customer order that indicates the type and quantity of merchandise desired. At this point, the customer order is not in a standard format and may or may not even be a physical document. 2. Distinguish between a packing slip, a shipping notice and a bill of lading. A packing slip and shipping notice are the two documents received by the shipping department before the arrival of goods and the verified stock release document. A packing slip is a document that will ultimately travel with the goods to the customer to describe the contents of the order, while a shipping notice is a document forwarded to the billing function as evidence that the customer’s order was filled and shipped. The shipping notice also conveys pertinent new facts like the date of shipment, the items and quantities actually shipped, the name of the carrier, and freight charges. Finally, a bill of lading is a formal contract between the seller and the shipping company (carrier) to transport the goods to the customer, and establishes legal ownership and responsibility for assets in transit. In summary, the difference between the three documents are their functions. A packing slip is used to describe the order, a shipping notice is an evidence of filling and shipment of an order, while a bill of lading is a formal contract that establishes legal ownership of assets in transit. 3. What function does the receiving department serve in the revenue cycle? The receiving department is where the sales return process begins. This is where personnel receive, count, inspect for damage, and send returned products to the warehouse. A return slip is prepared by the receiving clerk, which is forwarded to the warehouse for restocking and to the sales department for issuance of a credit memo. 4. The general ledger clerk receives summary data from which departments? What form of summary data? The general ledger clerk receives summary data from the billing and inventory control departments, as well as, from the accounts receivable department. Specifically, the summary data received from the billing and inventory departments are in the form of journal vouchers, and the summary data received from the accounts

receivable department are in the form of an account summary. The general ledger clerk reconciles the information and posts to the control account. 5. What are three authorization controls? The three transaction authorization controls include credit check, return policy and remittance list (cash prelist). Credit check entails ensuring the proper application of the firm’s credit policies and the principal concern is the creditworthiness of the customer. Return policy pertains to authorizing the processing of sales returns. Lastly, the remittance list provides a means for verifying that customer checks and remittance advices match in amount. 6. What are the three rules that ensure no single employee or department processes a transaction in its entirety? The first rule that ensures no single employee or department processes a transaction in its entirety is ‘Transaction authorization should be separate from transaction processing.’ This is because within the revenue cycle, the credit department is segregated from the rest of the process, which is why formal authorization of a transaction is an independent event. The importance of this is clear in the consideration of the potential conflict in objectives between a person and the business. The second rule is ‘Asset custody should be separate from the task of asset record keeping.’ This means that there is a need to separate asset custody from record keeping, because the physical assets at risk in the revenue cycle are inventory and cash. The inventory warehouse has physical custody of inventory assets, while inventory control maintains the records of inventory levels. To combine these tasks would open the door to fraud and material errors. The third and last rule is ‘The organization should be structured so that the perpetration of a fraud requires collusion between two or more individuals.’ This means that record-keeping tasks need to be carefully separated, because an individual with total record-keeping, in collusion with someone with asset custody, is said to be in a position to perpetrate fraud. 7. At which points in the revenue cycle are independent verification controls necessary? Independent verification controls are necessary at the three points. The first point is during the time where the shipping function verifies that the goods sent from the warehouse are correct in type and quantity. The stock release document and the packing slip are reconciled first before the goods are sent to the customer. The second point is during the moment the billing function reconciles the original sales order with the shipping notice to ensure that customers are billed only for the quantities shipped. The third and last point is when the

general ledger function reconciles journal vouchers and summary reports prepared independently in different function areas prior to posting to control accounts. (The billing function summarizes the sales journal. The inventory control summarizes changes in the inventory subsidiary ledger. The cash receipts function summarizes the cash receipts journal. The accounts receivable summarizes the AR subsidiary ledger.) 8. What is automation and why is it used? Automation involves the creation and application of technology in order to control and monitor the production and delivery of various goods and services, and involves the performance of tasks previously performed by humans. Automation is used in order to improve the efficiency and effectiveness of a task. It is used to achieve higher production rates and increased productivity, more efficient use of materials, better product quality, improved safety, shorter workweeks for labor, among others.

9. What is the objective of reengineering? The objective of reengineering is to improve operational performance and reduce costs by identifying and eliminating non value-added tasks. This means that traditional procedures are replaced with procedures that are innovative and often very different from those that previously existed. 10. Distinguish between an edit run, a sort run, and an update run. An edit run or an edit program is the first run in the batch process. This validates transactions by testing each record for the existence of clerical or logical errors. A sort run is done at a point where the sales order file is in no useful sequence. The sort run rearranges the sales order file by order of the secondary key – account number. Finally an update run is done for various purposes. One is for AR update where the program posts to AR by sequentially matching the account number key in each sales order record with the corresponding record in the AR subsidiary master file. Another is for sort update program which sorts the sales order file on the secondary key – inventory number. There is also the inventory update program which reduces the quantity on hand field in the affected inventory records by the quantity sold field in each sales order record. Lastly, is the general ledger update run where the journal vouchers are sorted by general ledger account number and posted to the general ledger in a single run, and a new general ledger is created. 11.

What are the key features of a POS system?

A point of sale system, or POS, is the place where a customer pays for products or services in a store. Simply put, every time a customer makes a purchase in a store, they are completing a point of sale transaction. A key feature of this system is it immediately records both cash and credit transactions and the corresponding inventory changes. Other key features of a POS system include maintaining no accounts receivable, keeping inventory on the store’s shelves and not in a separate warehouse, and having customers personally pick the items they wish to buy and carry them to the checkout location, where the transaction happens. 12. How is the primary key critical in preserving the audit trail? The primary key provides the link between the magnetic records stored on a computer disk and the physical source documents as well as business events that they represent. This ensures that system resources have not been harmed by hackers, insiders, disgruntled employees, and technical problems that may arise. 13.

What are the advantages of real-time processing? Real-time processing has been shown to significantly reduce operational costs while increasing revenues. Here are the advantages of real-time processing. First, it greatly shortens the cash cycle of the firm. For instance, lags inherent in batch systems can cause delays of several days between taking an order and billing the customer. These lags can be reduced or eliminated by real-time systems with remote terminals, which can permit same-day billing of customers. Second, it can give the firm competitive advantage in the market. By maintaining current inventory information, sales staff can determine immediately whether the inventories are on hand. This enhances the firm’s ability to maximize customer satisfaction, which translates into increased sales. Third, clerical errors tend to be produced in manual procedures, like incorrect account numbers, invalid inventory numbers, and price– quantity extension miscalculations, which may not be detected in batch systems until the source documents reach data processing. By this time, damage may have already been done. In real-time processing, these errors are identified as they occur, which greatly improves the efficiency and effectiveness of operations. Fourth and last, the amount of paper documents in a system is reduced in real-time processing. The permanent storage of hardcopy documents can become a financial and operational burden, as they are expensive to produce and clutter the system. Digital documents are more efficient, effective, and adequate for audit trail purposes.

14. Why does billing receive a copy of the sales order when the order is approved but does not bill until the goods are shipped? This is because the billing before shipment encourages inaccurate record keeping and inefficient operations. When the customer order is originally prepared, some details, like inventory availability, prices and shipping charges are not known with certainty. Billing for goods not yet shipped causes confusion, damages relations with customers, and requires additional work to make adjustments to the accounting records. To prevent such problems, this is why the billing function awaits notification from shipping before it bills. 15.

Why was EDI devised? EDI was devised to expedite or to speed up routine transactions between manufacturers and wholesalers, and between wholesalers and retailers. The customer’s computer and the seller’s computer are directly connected through telephone lines. Every time the customer’s computer detects the need to order inventory, it automatically transmits an order to the seller. The order is then received by the seller’s system and is automatically processed. In this system, there is little to no need of human involvement.

16. What types of unique control problems are created by the use of PC accounting systems? For instance, one employee may have the responsibility for entering all transaction data, including sales orders, cash receipts, invoices, and disbursements. Controlling the PC environment requires a high degree of supervision, adequate management reports (such as detailed listings of all transactions), and frequent independent verification. Another is that PC systems generally provide inadequate control over access to data files. Although some applications achieve modest security through password control to files, accessing data files directly via the operating system can often circumvent this control. Solutions for dealing with the problem include data encryption, disk locks, and physical security devices. Lastly, data losses that threaten accounting records and audit trails afflict the PC environment. The primary cause of data loss is computer disk failure, wherein recovery of data stored on the disk may be impossible. This threat may be reduced considerably through formal procedures for creating backup copies of data files and programs. In the mainframe environment, backup is provided automatically. Backup of PC data files relies on a conscious action by the users, who too often fail to appreciate its importance.

17. In a manual system, after which event in the sales process should the customer be billed? A manual system is a bookkeeping system where records are maintained by hand, without using a computer system. Instead, transactions are written in journals, from which the information is manually rolled up into a set of financial statements. In a manual system, the customer should be billed after the shipping notice is sent by the shipping department to the billing department. 18.

What is a bill of lading? A bill of lading is a formal contract between the seller and the shipping company (carrier) to transport the goods to the customer. This document establishes legal ownership and responsibility for assets in transit. The bill of lading is a legally binding document providing the driver and the carrier all the details needed to process the freight shipment and invoice it correctly.

19.

What document initiates the billing process? The shipping notice is the document that serves as a proof that the customer’s order was filled and shipped. This is the document that the billing function awaits before it bills. This is the trigger document that initiates the billing process.

20. Where in the cash receipts process does supervision play an important role? Supervision plays an important role in the mail room, which is a point of risk in most cash receipts system. Here, the individual opening the mail has access to both the cash (the asset) and the remittance advice (the record of the transaction). This opportunity can be used to steal the check, cash it and destroy the remittance advice, thus leaving no evidence of the transaction.

B.DISCUSSION QUESTIONS (P. 198)

1. Why do firms have separate departments for warehousing and shipping? What about warehousing and inventory control? Doesn’t this just create more paperwork? The reason why firms have separate departments for warehousing and shipping is because both are focused on different tasks. The main task of the warehousing department is to offer appropriate space to stock merchandise safely from the elements. While the shipping department focuses mainly on movement of inventory that is both incoming and outgoing. The separation of the two assists in the segregation of duties, and enhances the efficiency and effectiveness of handling assets during the revenue cycle. The warehouse maintains the inventory section of inventory control, and the two main approaches applicable for inventory control under emergency situations which are reorder level policy and reorder cycle policy. Another key difference is that the warehousing responsibility is separated from record-keeping functions. Keeping the accounting records of the items in the inventory is the responsibility of the inventory control department. This does create additional paperwork, however this is considered as a minor and a necessary cost for the added benefit of control over the inventory. This process mitigates opportunities for theft and deception in the business. 2. Distinguish between the sales order, billing, and AR departments. Why can’t the sales order or AR departments prepare the bills? The sales order department’s function is to take the order from customers and process it into a specific format. This department stores information like the name of customer, address, a/c no, quantities and units of each product, discounts, etc. and helps in determining the possible shipping date. The billing department is the one that receives a copy of the sales order from the sales order department. As soon as it receives the shipping notice and the stock release document, it then starts preparing the sales invoice, which is the bill of the customer that charges them for shipping other than tax and discounts. The AR department’s function is to receive the sales order from the sales department and enter it into the accounts receivable subsidiary ledger. Upon receiving payment suggestions, these will be noted down to the customer’s account in the accounts receivable subsidiary ledger. The sales order department should not prepare the bills as there could be chances of collaboration with customers and a lower amount could be negotiated with them. AR department should also not prepare the bills as billing could be postponed or amount charged could be reduced by the department for the customers favored by the staff.

Finally, since both sales order and AR departments are in direct contact with customers, it is appropriate that they are segregated from the billing function. 3. Explain the purpose of having mail room procedures. These procedures are important because mail room procedure in relation with cash receipts involves proper recording of cash and checks received from accounts receivables which are sent through mails. The purpose of this procedure is to minimize and reduce possible errors and frauds in relation with the received payment. The checks received in payment for accounts receivable are a crucial asset for the firm. These checks must be protected from individuals who might try to deposit these checks into their own accounts. The process of having a member of the mail room personnel open the mail and record all checks received before they are routed to the cashier or the accounts receivable department is to ensure that the accounts receivable personnel do not engage in such activities as lapping the accounts receivable accounts. 4. In a manual accounting system, what advantage does the journal voucher system have over the traditional general journal system? The function of the traditional general journal system is to record nonrecurring, infrequent, and dissimilar transactions. General journals only have columns that are not specific, which permit the recording of any type of transaction that are arranged not by account, but chronologically. On the other hand, a journal voucher is a special source document that contains single journal entries that specify what accounts are affected. These are used to record summaries of routine and non-routine transactions which makes it more convenient. Because of this, the need for the formal general journal is eliminated by the journal voucher system.

5. How could an employee embezzle funds by issuing an unauthorized sales credit memo if the appropriate segregation of duties and authorization controls were not in place? If the appropriate segregation of duties and authorization controls are not in place, an employee may embezzle funds by generating debt under the name of someone else, and steal/take the money for himself. An employee may also buy goods as this false person, then consequently return the goods and issue a credit memo, and afterwards eventually intercept the checks.

6. What task can the AR department engage in to verify that all customers’ checks have been appropriately deposited and recorded? An account summary, listing invoices and amounts paid by check number and date, should be sent by the company to each customer periodically or perhaps monthly. This form permits the customer to check and verify the accuracy of the records. In case there are unrecorded payments, the company will then be notified by the customer of the discrepancy. The accounts receivable clerk or the cashier should not handle these reports. 7. Why is access control over revenue cycle documents just as important as the physical control devices over cash and inventory? The reason why access control to the billing and accounts receivable records that are part of the revenue cycle is just as important as...