1 chapter 4 the revenue cycle copyright © 2007 thomson south-western, a part of the thomson...

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

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

REVENUE CYCLE(SUBSYSTEMS)

Sales Order

Billing/ AccountsReceivable

Cash Receipts/Collections

Shipping

1

6

4/5

3

Credit / CustomerService

2

Customer Purchase Order

Customer Purchase Order

Start here.Start here.

4

Revenue Cycle (Subsystem) Databases

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

Other Files Tax Details reference file Shipping and Price Data

reference file Credit reference file Sales history file Cash Receipts history file

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


Merchandise is picked from Warehouse and sent to Shipping, with SO.

Memo to Inventory Control. Other SO filed in Warehouse.

Manual Sales Order Processing - Warehouse


(yellow symbols)


(yellow symbols)

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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.



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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.


(blue symbols)


(blue symbols)

A/R records information in customer’s account in accounts receivable subsidiary ledger and files invoice.

Manual Sales Order Processing – Accounts Receivable


(purple symbols)


(purple symbols)

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Manual Sales Order Processing – Inventory Control

Inventory Control adjusts inventory subsidiary ledger and files Memo.



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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.

Manual Cash Receipts Processes – Mail Room & Cash ReceiptsCustomer 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)

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

Manual Cash Receipts Processes – Accounts Receivable

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Control Activities

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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

Physical controls are GENERAL

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Examples of Access Controls (Revenue Cycle)

Limit access to assetsWithin revenue cycle, assets to

protect are cash and inventories; restrict access to records such as accounts receivable subsidiary ledger and cash journal.

Manual or CBISManual or CBIS

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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 CBISManual or CBIS

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Authorization Controls

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)

Watch for difference

between General Authorization

and Specific

Authorization

Watch for difference

between General Authorization

and Specific

Authorization


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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


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Segregation of FunctionsThree Rules

1. Transaction authorization should be separate from transaction processing.

2. Asset custody should be separate from asset recordkeeping.

3. The organization should be structured so that fraud requires collusion between two or more individuals. ManualManual

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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

ManualManual

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Examples of Supervision (Revenue Cycle)

Supervision of employees serves as deterrent to dishonest acts -particularly important in mailroom. Manual or CBISManual or CBIS

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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


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Automating Revenue Cycle

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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.

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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

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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

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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.

Point-of-Sale SystemsPoint 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.

Point-of-Sale SystemsSystem 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

Author’s Example of Computerized POS

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

EDI System

PurchasesSystem

EDI TranslationSoftware

EDI TranslationSoftware

CommunicationsSoftware

CommunicationsSoftware

OtherMailbox

OtherMailbox

Wal-Mart’smailbox

Our Company’smailbox

Sales OrderSystem

ApplicationSoftware

ApplicationSoftware

Direct Connection

VAN

Wal-Mart Our Company

Many Transactions

FewTransactions

Reengineering Using the Internet

Typically, no formal business agreements Unlike EDI, where formal agreements

existMost orders require credit cards.Mainly done with e-mail 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.

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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

44* Destructive backup means newer files write over the older files.


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 *

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Authorization - in real-time systems, authorizations are automated: programmed decision rules must be closely monitored.

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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

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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.

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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

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Microcomputer Control IssuesAccess 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

1 chapter 4 the revenue cycle copyright © 2007 thomson south-western, a part of the thomson...

Documents

flowchart slide

general slide

flowcharted slide

revenue cycle slide

cbis slide

license slide

sales order form

cash journal