f 017461565

7/28/2019 f 017461565

1/45

2003 Prentice Hall Business Publishing,Accounting Information Systems, 9/e, Romney/Steinbart 11-1

AccountingInformation

Systems

9th Edition

Marshall B. Romney

Paul John Steinbart

7/28/2019 f 017461565

2/45


The Revenue Cycle:Sales and Cash

Collections

Chapter 11

7/28/2019 f 017461565

3/45


Learning Objectives

1. Describe the major business activities and relateddata processing operations performed in therevenue cycle.

2. Discuss the key decisions that need to be made in

the revenue cycle and identify the informationneeded to make those decisions.

3. Document your understanding of the revenuecycle.

4. Identify major threats in the revenue cycle and

evaluate the adequacy of various controlprocedures for dealing with those threats.

5. Read and understand a data model (REA diagram)of the revenue cycle.

7/28/2019 f 017461565

4/45


Introduction

Alpha Omega Electronics (AOE) is a

manufacturer of consumer electronic

products.

For three years, AOE lost market share.

7/28/2019 f 017461565

5/45


Introduction

Elizabeth Venko, the controller, Trevor, and Ann

were asked to investigate several issues:

How could AOE improve customer service? What

information does Marketing need to perform its tasks

better? How could AOE identify its most profitable customers

and markets?

How can AOE improve its monitoring of credit

accounts? How would any changes in credit policy

affect both sales and uncollectible accounts? How could AOE improve its cash collection

procedures?

7/28/2019 f 017461565

6/45


Learning Objective 1

Describe the major business activities

and related data processing

operations performed in the revenuecycle.

7/28/2019 f 017461565

7/45


Revenue Cycle

Business Activities

The first functionof the AIS is tosupport the performance of theorganizations business activities.

The revenue cycle is a recurring set ofbusiness and related informationprocessing operations associated with

providing goods and services tocustomers and collecting cashpayment for those sales.

7/28/2019 f 017461565

8/45


Revenue Cycle

Business Activities

What are the four basic revenue cycle

business activities?

1 Sales order entry2 Shipping

3 Billing and accounts receivable

4 Cash collections

7/28/2019 f 017461565

9/45



Discuss the key decisions that need to

be made in the revenue cycle and

identify the information needed tomake those decisions.

7/28/2019 f 017461565

10/45


Sales Order Entry (Activity 1)

This step includes all the activities involved

in soliciting and processing customer

orders.

Key decisions and information needs:

decisions concerning credit policies,

including the approval of credit

information about inventory availability andcustomer credit status from the inventory

control and accounting functions,

respectively

7/28/2019 f 017461565

11/45



The sales order entry function

involves three main activities:

1 Responding to customer inquiries2 Checking and approving customer

credit

3 Checking inventory available

7/28/2019 f 017461565

12/45


Information Needs and

Procedures

The AIS should provide the

operational information needed to

perform the following functions: Respond to customer inquires about

account balances and order status.

Decide whether to extend credit to acustomer.

7/28/2019 f 017461565

13/45



Regardless of how customer orders areinitially received, the following edit checksare necessary:

Validity checks A Completeness test

Reasonableness tests

Credit approval

General authorization Credit limit

Specific authorization

Limit checks

7/28/2019 f 017461565

14/45

2003 Prentice Hall Business Publishing,

Accounting Information Systems, 9/e, Romney/Steinbart 11-14


Next, the system checks whether the

inventory is sufficient to fill accepted

orders. Internally generated documents

produced by sales order entry:

sales order

packing slip

picking ticket

7/28/2019 f 017461565

15/45




Procedures

Determine inventory availability.

Decide what types of credit terms to

offer. Set prices for products and services.

Set policies regarding sales returns

and warranties. Select methods for delivering

merchandise.

7/28/2019 f 017461565

16/45



Shipping (Activity 2)

Warehouse workers are responsible

for filling customer orders by removing

items from inventory. Key decisions and information needs:

Determine the delivery method.

in-house

outsource

7/28/2019 f 017461565

17/45



Shipping (Activity 2)

Documents, records, and procedures:

The picking ticket printed by the sales order

entry triggers the shipping process and is used

to identify which products to remove frominventory.

A physical count is compared with the

quantities on the picking ticket and packing

slip. Some spot checks are made and a bill of

lading is prepared.

7/28/2019 f 017461565

18/45



Billing and Accounts

Receivable (Activity 3)

Two activities are performed at this stageof the revenue cycle:

1 Invoicing customers

2 Maintaining customer accounts


Accurate billing is crucial and requires

information identifying the items andquantities shipped, prices, and specialsales terms.

7/28/2019 f 017461565

19/45





The sales invoice notifies customers of the

amount to be paid and where to send

payment.

A monthly statement summarizes

transactions that occurred and informs

customers of their current account balance.

A credit memo authorizes the billingdepartment to credit a customers account.

7/28/2019 f 017461565

20/45





Types ofbilling systems:

In apostbillingsystem, invoices are

prepared after confirmation that the items

were shipped.

In aprebillingsystem, invoices are prepared

(but not sent) as soon as the order is

approved.

The inventory, accounts receivable, and

general ledger files are updated at this time.

7/28/2019 f 017461565

21/45





Methods for maintaining accounts

receivable:

open invoice method balance-forward method

To obtain a more uniform flow of cash

receipts, many companies use aprocess called cycle billing.

7/28/2019 f 017461565

22/45




Procedures

What are examples of additional information

the AIS should provide?

response time to customer inquires

time required to fill and deliver orders

percentage of sales that require back orders

customer satisfaction

analysis of market share and trends profitability analyses by product, customer,

and sales region

7/28/2019 f 017461565

23/45



Cash Collections (Activity 4)

Two areas are involved in this activity:

1 The cashier

2 The accounts receivable function

7/28/2019 f 017461565

24/45





Reduction of cash theft is essential.

The billing/accounts receivablefunction should not have physicalaccess to cash or checks.

The accounts receivable function must

be able to identify the source of anyremittances and the applicableinvoices that should be credited.

7/28/2019 f 017461565

25/45




Documents, records, and procedures:

Checks are received and deposited.

A remittance listis prepared andentered on-line showing the customer,invoice number, and the amount ofeach payment.

The system performs a number of on-line edit checks to verify the accuracyof data entry.

7/28/2019 f 017461565

26/45




Document your understanding of the

revenue cycle.

7/28/2019 f 017461565

27/45



Opportunities for Using

Information Technology

What are some opportunities of using

information technology forsales order entry

(Activity 1)?

on-line processing of sales orders with e-mail

electronic data interchange (EDI)

linking EDI with customers point-of-sale (POS)

optical character recognition (OCR) the Internet

7/28/2019 f 017461565

28/45





What are some opportunities of usinginformation technology forshipping(Activity 2)?

automated warehouse systemsconsisting of: computers

bar-code scanners

conveyer belts

forklifts

7/28/2019 f 017461565

29/45






information technology forbilling and

accounts receivable (Activity 3)? on-line processing of invoices

electronic data interchange (EDI)

imaging to create and store digital

versions of all paper relating to a

customers account.

7/28/2019 f 017461565

30/45






information technology forcash

collections (Activity 4)? lockbox (a postal address to which

customers send their remittances)

The bank picks up the checks from

the post office box and deposits themto the companys account.

7/28/2019 f 017461565

31/45





electronic lockbox

electronic funds transfer (EFT)

financial electronic data interchange(FEDI)

7/28/2019 f 017461565

32/45




Identify major threats in the revenue

cycle and evaluate the adequacy of

various control procedures for dealingwith those threats.

7/28/2019 f 017461565

33/45

7/28/2019 f 017461565

34/45

7/28/2019 f 017461565

35/45



Control Objectives,

Threats, and Procedures

What are some threats?

credit sales to customers with poor

credit shipping errors

theft of cash and inventory

failure to bill customers

billing errors

loss of data

7/28/2019 f 017461565

36/45



Control Objectives,


What are some exposures?

uncollectible sales and losses due tobad debts

customer dissatisfaction

loss of assets and overstated assets

loss of revenue and inventory

incorrect records and poor decisionmaking

loss of confidential information

7/28/2019 f 017461565

37/45



Control Objectives,


What are some control procedures?

credit approval by credit manager andsales function

reconciliation of sales order withpicking ticket and packing slip

restriction of access to inventory and

data lockbox arrangement

segregation of duties

7/28/2019 f 017461565

38/45




Read and

understand a data

model (REA

diagram) of therevenue cycle.

7/28/2019 f 017461565

39/45



Revenue Cycle Data Model

The REA data model provides one method

for designing a database that efficiently

integrates both financial and operating data.

A simplified REA data model for the

revenue cycle of a manufacturing company

should include the following information:

the two major resources (cash and

inventory) used in the revenue cycle

7/28/2019 f 017461565

40/45




the four major business events in the

revenue cycle (orders, filling the

orders, shipping [sales], and cashcollections)

the primary external agent (customer)

as well as the various internal agents

involved in revenue cycle activities

7/28/2019 f 017461565

41/45


Partial REA Diagram of the Revenue Cycle

Inventory

(0, N)

Inventory order

Inventoryfill order

Inventory ship

(0, N)

(0, N)

7/28/2019 f 017461565

42/45




Partial REA Diagram of the Revenue Cycle

Cash

Deposits in Collectscash

(1, N)

(1, 1)

byCashier

(1, N)

(1, 1)

7/28/2019 f 017461565

43/45

7/28/2019 f 017461565

44/45


Accounting Information Systems, 9/e, Romney/Steinbart11-44

Case Conclusion, cont

3. Work with major customers to obtain

access to their POS data.

4.

Periodically survey customers abouttheir satisfaction with AOEs

products and performance.

5. Improve the efficiency of cash

collections by encouraging EDI-capable customers to move to FED.

7/28/2019 f 017461565

45/45

2003 Prentice Hall Business Publishing, 11-45

End of Chapter 11