What Is the Revenue Cycle PDF

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Accounting Information System Definition -Is the process of recording business transactions (data) classifying and summarizing the accounting information and communicating the same accounting information to the relevant users or interested parties. Users of Accounting Information and their Interests 1. Management -The management require information of all times to make important decisions regarding the business as a whole and /or its segments. 2. Current investors / shareholders - They are interested in both short-term and long-term survival of business. They are interested in the current profitability and value of their wealthy both now and future. 3. Financial Institutions and banks (Creditors) - Financial institutions are the current and potential vendors .– current creditors of finance implies that they have lent money to the business while potential ones implies that the business is ones seeking the funding from these financial institutions Their interest is liquidity i.e the ability to service the principal amount and interest charged. They are also interested in the long-term survival of the enterprise. 4. Potential Investors -They are interested in the long-term viability and survival of the business. They need first hand information regarding how stable the business is before investing their resources into that business. 5. Employees -Interested in the going concern of the business. The persons are concerned with the payslip (ability to pay the remuneration when due and terminal benefits) 6. Customers - Interested in the continued service by the organizations i.e regular provision of goods and services. 7. Government and its departments -Interested in taxes and economic surveys. 8. Trade Suppliers -Interested in the liquidity of the business in order to make decisions regarding credit facilities 9. Consumers organization

-Interested in the assessment of the fairness in the pricing policies. 10. Trade Unions -Interested in the agreements based on pay hikes from the accounting information made available Information -This is processed data. Data refers to the raw facts. -For the data to be processed into information it must pass through system . Information when available is used for decision making. A system -A system is a set of interdependent components some of which may be sub-systems in their own right which collectively accomplish certain objectives. Example A business organization is a system. It is a system since it has the objectives to accomplish which include profit organization, wealth maximization ,corporate social responsibility (CSR). -in order to achieve these objectives , the business organizations is divided into functional units/ departments which we can refer to as components. Information Systems -An information system differs from other systems in that its objectives is to monitor and document the operations of some other system referred to as the target system. No information system can exist of its own without the target system e.g production activities would be the target system for the production scheduling information system. The Human Resource Activities are the target system of Human Resource Information System. REVENUE CYCLE It represents the primary source of most companies operational cash flow and therefore needs to be protected, managed and monitored using financial internal controls. Revenue Cycle Procedures 1. Sales Order Entry Procedure The first accounting revenue cycle procedure you should utilize deals with your sales order. All customer orders will be processed in an efficient and organized manner to ensure accurate and prompt shipments. The company should summarize the preparation of documents, paperwork flow, and responsibilities by individuals and departments for obtaining a sales order from a customer through shipping and billing the customer.

2. Point-Of-Sale Orders Procedure The Company should provide POS Point-Of-Sales procedures for ensuring that all sales are proper and collectible and the effect on inventory and cash is posted correctly. There should be proper transaction controls over sales and proper reviews and authorizations by the store manager. This applies to all cashiers and cash handlers. 3. Customer Credit Approval and Terms Procedure To reduce potential collection problems, new customer accounts or credit limit increases will be properly evaluated and approved prior to extending credit. The company should outline the activities and responsibilities involved in obtaining credit approval for a potential customer before sales orders are consummated. These credit procedures are to be followed for all credit approvals requested by the Sales departments. 4. Sales Order Acceptance Procedure To ensure the highest customer services levels and reduce potential order problems, sales orders will be properly evaluated and approved prior to entry into the accounting system and fulfillment by the company. The company should outline the activities and responsibilities involved in verifying the acceptability of all sales orders received. 5. Shipment of Goods Procedure All products and services should be delivered in an organized manner in order to maintain the highest customer service quality levels possible and to ensure compliance with existing laws. The company should outline the steps for the packaging, safe storage, control and delivery of all products and services shipped by the company. This applies to all products and services distributed by the company, sales, customer service and shipping personnel. 6. Invoicing and Accounts Receivable Procedure Accounting is responsible for the timely preparation and distribution of invoices to optimize cash flow and customer payments. Accounting should also maintain accurate records over Accounts Receivable and abide by proper internal controls. The company should explain the methods for the preparation of invoices and accounts receivable records processing. This applies to all product sales and services provided by the company. 7. Account Collections Procedure All open accounts receivable with late or delinquent payment activity will be handled in a timely and effective manner to ensure maximum account collections and an optimum accounts receivable turnover ratio. The company should provide the actions and methods for processing late or delinquent payments. This applies to the Credit Department involved with collection of past due accounts receivable. 8. Customer Returns Procedure

Te last revenue cycle procedure your company should make sure to have is the customer returns procedure. The company should outline the steps and documents to be used for customers returning goods in order to provide adequate control of inventory and timely refunds to customers. Objectives of AIS in Revenue cycle activities AIS must provide adequate controls so that the following objects are met: (1) Transactions are properly authorized. (2) Recorded transactions are valid. (3) All valid, authorized transactions are accurately recorded. (4) Assets are safeguarded from loss or theft. (5) Business activities are performed efficiently and effectively. The following help achieve the above: • Simple, easy-to-complete documents with clear instructions. • Appropriate application controls (e.g., validity or field checks). • Signature space for persons responsible for completion and review of documents. • Pre-numbering of the documents. Revenue Cycle—Major threats & control procedures (1) Sales to customers with poor credit—(uncollectable sales and losses due to bad debts). Prevention—independent credit approval function and good customer accounting. (2) Shipping errors—wrong quantities, items, or address: bad customers. Prevention—reconcile shipping notices and picking tickets, bar code scanners, data entry controls. (3) Theft of inventory—loss of assets , inaccurate records. Prevention—Secure inventory and document transfers, good accountability for picking and shipping, and frequently reconcile records with physical count. (4) Failure to bill customers—loss of inventory, and erroneous data about: sales, inventory, and receivables. Prevention—Separate shipping and billing. Prenumber of shipping documents and reconciliation of all sales documents. (5) Billing errors—pricing mistakes, overbilling for items not shipped or back ordered—loss assets and mad customers. Prevention—reconciliation of picking tickets and bills of lading with sales orders, data entry edit controls, and price lists. (6) Theft of cash—loss of assets and overstated accounts receivables Prevention—separation of duties: handling cash and posting to customer accounts; handling cash and authorizing credit memos & adjustments; issuing credit memos and maintaining customer accounts. Use lockboxes and EFT. Mail customer statements monthly. Use cash registers in retail. Deposit cash intact daily in the bank. Bank reconciliation done by non cash handler.

(7) Accounts receivable incorrectly posted—bad debts customers, incorrect records, and poor decisions. Prevention—reconcile subsidiary accounts receivable ledgers with general ledger, monthly statements to customers, and edit and batch totals controls. (8) Loss of data—loss of confidential information and poor decision making. Prevention—regular on-site & off-site backup, logical and physical access controls to prevent leakage of data to competitors. (9) Poor performance—inefficient and ineffective operations. Prevention—sales and profitability analysis, accounts receivable aging analysis, and cash budgets to track operations. REVENUE CYCLE INFROMATION NEEDS & DATA MODEL AIS needs to provide useful information about: • Customer inquiries about account balances and order status. • Extension of credit to specific customers. • Inventory availability to meet customers orders • Credit terms offered to customers • Prices charged for the products or services • Sales returns and warranty policies. • Alternative merchandise delivery methods. • Strategic and performance evaluation information. REA revenue cycle data model: • Resources—cash and inventory. • Events—orders, shipments, billing, and cash collections. • Agents—primary external agent is the customer, various internal agents. Benefits of the data model: • Integration of traditional accounting data and operational data. • Additional data such as the time of day of a sale can be collected, analyzed and used in decision making. • Links of internal and external information (e.g., credit ratings) is possible. • Flexible/powerful query by SQL if relational DB. • Data mining for target marketing.

Internal control and databases: • Foreign key and referential integrity ensures the existence of primary key records in related tables. • Effective access controls are very important in a database environment. • REA diagrams highlight incompatible functions and system can be programmed to reject any attempt to perform incompatible functions by a single employee. When multiple roles are performed, auditors can check for compensating controls. • Use of DBMS makes backup and disaster recovery procedures essential. Internal Controls over Revenues and Cash Receipts

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Is one individual responsible to receive payments in the mail and receive over the counter receipts? All office personnel should not receive payments. Have safeguards been provided to prevent employees or officials from cashing cheques payable to the governmental entity? Are monies received by one employee and deposited by another employee? Is a list of cash receipts maintained that can be reconciled to the accounting records? Is the individual handling cash different from the individual handling the accounting records? Are sequentially numbered receipts used? Is the accounts receivable system capable of producing an aged listing of receivables? Are subsidiary receivable ledgers reconciled with the general ledger on a regular basis? Are controls in place for the proper authorization of credit memos and adjusting journal entries to the control accounts? Does the governmental entity have a policy regarding the write-off of delinquent accounts? Are billing, collection, and posting performed by separate individuals or departments?

EXPENDITURE CYCLE An expenditure cycle is a set of purchasing decisions and actions. It's the repetitive process of creating purchase orders and ordering goods and services, receiving these items, approving the invoices for these items and services, and paying the invoices. -The expenditure cycle is a recurring set of business activities and related data processing operations associated with the purchases and payments for the goods and services. - The primary objective of expenditure cycle is to minimize the total cost of acquiring and maintaining inventory supplies and the various services necessary for organization functions

Key decisions made 1 what is the optimal level of inventory and supplies to be carried by the entity. 2 Which supplies pride the best quality goods and services and the best prices 3 Where should the inventories and supplies to be held i.e location of inventory 4 How should the organization consolidate purchases across the units to obtain optimal prices 5 How can IT be used to improve the efficiency and accuracy of inbound logistic function 6 Is sufficient cash available to take advantage of any discounts offered by the suppliers 7 How can payments to the suppliers to be managed to maximise the cash flows

Expenditure cycle business activities

1. Ordering Materials Pricing goods and services is the next step in the cycle. Terms and conditions, delivery times and return policies are other factors that affect an order. The company agent places the order with the supplier, filling out the proper paperwork or completing the order online. Companies might use a manual or computer tracking system to follow a purchase from order to final delivery. a) Use of Economic order quantity- this approach is used to calculate the optimal order size so as to minimize the sum of ordering, carrying and stockout costs. b) Material requirement planning – it seeks to reduce required inventory level by scheduling production ruther than estimating the needs c) Just in time – it attempts to minimise both the carrying and stockout costs by acquiring the supplies when needed.

Documentation in ordering for goods a) Purchase order – this document formally requests a vendor to sell and deliver specific products at designated prices. Its a promise to pay and it becomes a contract once it is accepted by the vendor. Frequently several purchase orders are designed to fill one purchase requisition b) Requisition note – the document identifies the buyer and quantity to be bought, the delivery location and the date of delivery, description of quantity and the price of each item ordered.

2. Receiving and storage of the goods ordered The receiving department will consider whether deliveries have been made and verify the quantities and quality of items delivered. The receiving report will be prepared to show the details of each item delivered, the date received, the vendors name, the purchase order number. For each item received the report should show the item number description, unit of measurement and number of quantity received.

3. Approval of suppliers invoice for payment The accounts payable department will approve the suppliers invoices for payment. The cashier is responsible for making the payment. The objective of accounts payable department is to authorize payments for goods and services that were ordered and actually received .

4. Making payments to the suppliers

The processing efficiency for payments will require that the suppliers to be paid through EFT systems.

Information needs for AIS -The AIS is to provide information useful for decision making. -The usefulness in the expenditure cycle means that AIS must provide operational information that is needed to perform the following functions: i)

Determine when and how much additional inventory to order.

ii) Select the appropriate vendor s or suppliers from whom to order. iii) Verify the accuracy of the vendor invoices. iv) Decide whether purchase discount should be taken v) Monitor the cash flow needs to pay outstanding obligations.

Examples of additional information the AIS should provide - Efficiency and effectiveness of purchasing department. - Analysis of vendor performance such as in time, quality – the time taken to move the goods from the receiving point production percentage of the purchase discount given. Control objectives of AIS in purchasing cycle 1

Transactions are properly authorised

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Recorded transactions are valid

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Only valid and authorised transactions are recorded

4. Transactions are recorded accurately 5.

The assets (cash) inventory and data are safeguarded from loss or theft

6. Business activities are performed efficiently and effectively RISKS IN EXPENDITURE CYCLE-Purchasing system 1. Preventing Stock outs and/or excess inventory

-Inventory control systems; perpetual inventory records; barcode and RFID technology; periodic counts of inventory 2 .Ordering unnecessary items -Accurate perpetual inventory records; approval of purchase requisitions 3. Purchasing goods at inflated prices -Use of price lists; soliciting competitive bids; use of approved suppliers; approval of purchase orders; budgetary controls 4. Purchasing goods of inferior quality -use of approved vendors; approval of purchase orders; monitoring vendor performance; budgetary controls 5. Purchasing from unauthorized suppliers -Approval of purchase orders; restricting access to supplier master file; restrictions on procurement card usage 6. Kickbacks -policies against accepting gifts from vendors; training; job rotations; enforced vacation for purchasing agents; requiring purchasing employees to disclose financial interests in suppliers; supplier audits 7. Receiving unordered goods -Requiring receiving dock employees to verify existence of valid purchase order 8. Making errors in counting goods received -using barcode and RFID technology; documenting employee performance; incentives for accurate counts 9. Theft of inventory -physical access controls; periodic counts of inventory and reconciliation of physical counts to records; documenting all transfers of inventory; proper segregation of duties 10. Failing to catch errors in vendor invoices -double-checking invoice accuracy; training of accounts payable staff; using ERS 11. Paying for goods not received Only paying invoices supported by original receiving reports; using ERS; budgetary controls 12. Failing to take available purchase discounts -proper filing; cash flow budgets 13. paying the same invoice twice -only paying invoices supported by original voucher package; cancellation of voucher package upon payment; using ERS; controlling access to supplier master file 14. Recording and posting errors in accounts payable Various data entry and processing edit controls; periodic reconciliation of accounts payable subsidiary accounts with general ledger 15. Misappropriating cash, checks, or EFTs -restricting access to blank checks, check-signing machine, and EFT transfer terminals; segregation of duties of accounts payable and cashier; reconciliation of bank account by someone independent of cash disbursements process; check protection measures; regular review of EFT transactions 16. Loss, alteration, or unauthorized disclosure of data -Use of file labels; backup and disaster recovery plans; physical and logical access controls; configuration of ERP systems to enforce proper segregation of duties; encryption; data transmission controls 17. Performing poorly in purchasing. -Development and periodic review of appropriate performance reports THE HUMAN RESOURCES MANAGEMENT/ PAYROLL CYCLE INTRODUCTION •

Questions to be addressed in this chapter include:

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What are the basic business activit...