The Revenue CycleThe Revenue Cycle

Yan XiongYan XiongMerle P. MartinMerle P. Martin

College of BusinessCollege of BusinessCSU SacramentoCSU Sacramento

3/11/033/11/03

AgendaAgenda Major Business Activities and Key Decisions Major Business Activities and Key Decisions

in the Revenue Cyclein the Revenue Cycle Using Information Technology in the Revenue Using Information Technology in the Revenue

CycleCycle The Major Threats and the Related Control The Major Threats and the Related Control

Procedures in the Revenue Cycle.Procedures in the Revenue Cycle. REA Diagram for the Revenue CycleREA Diagram for the Revenue Cycle

Revenue Cycle Business ActivitiesRevenue Cycle Business Activities What are the four basic revenue cycle business activities?What are the four basic revenue cycle business activities?1 Sales order entry Sales order entry 2 ShippingShipping3 Billing and accounts receivableBilling and accounts receivable4 Cash collectionsCash collections

1. Sales Order Entry 1. Sales Order Entry

This step includes all the activities involved in soliciting and This step includes all the activities involved in soliciting and processing customer orders.processing customer orders.

Key decisions and information needs:Key decisions and information needs:– decisions concerning credit policies, including the approval of creditdecisions concerning credit policies, including the approval of credit– information about inventory availability and customer credit status information about inventory availability and customer credit status

from the inventory control and accounting functions, respectivelyfrom the inventory control and accounting functions, respectively

Sales Order Entry (Cont)Sales Order Entry (Cont) The sales order entry function involves three main activities:The sales order entry function involves three main activities:1 Responding to customer inquiriesResponding to customer inquiries2 Checking and approving customer creditChecking and approving customer credit3 Checking inventory availableChecking inventory available

Sales Order Entry (Cont)Sales Order Entry (Cont) Regardless of how customer orders are initially received, the following edit checks are necessary:Regardless of how customer orders are initially received, the following edit checks are necessary:

Validity checksValidity checks A Completeness testA Completeness test Reasonableness testsReasonableness tests Credit approvalCredit approval

General authorizationGeneral authorization Credit limitCredit limit Specific authorizationSpecific authorization

– Limit checks

Sales Order Entry Sales Order Entry Next, the system checks whether the inventory is sufficient to fill Next, the system checks whether the inventory is sufficient to fill

accepted orders.accepted orders. Internally generated documents produced by sales order entry:Internally generated documents produced by sales order entry:

– sales ordersales order– packing slippacking slip– picking ticketpicking ticket

Information Needs and ProceduresInformation Needs and Procedures(Sales Order Entry)(Sales Order Entry)

Respond to customer inquires about account balances Respond to customer inquires about account balances and order status.and order status.

Decide whether to extend credit to a customer and what Decide whether to extend credit to a customer and what types of credit terms to offer.types of credit terms to offer.

Determine inventory availability.Determine inventory availability. Set prices for products and services.Set prices for products and services. Set policies regarding sales returns and warranties.Set policies regarding sales returns and warranties. Select methods for delivering merchandise.Select methods for delivering merchandise.

2. Shipping 2. Shipping Warehouse workers are responsible for filling customer orders by Warehouse workers are responsible for filling customer orders by

removing items from inventory.removing items from inventory. Key decisions and information needs:Key decisions and information needs:

Determine the delivery method.Determine the delivery method.– in-housein-house– outsourceoutsource

Shipping ( Continued)Shipping ( Continued) Documents, records, and procedures:Documents, records, and procedures:

The picking ticket printed by the sales order The picking ticket printed by the sales order entry triggers the shipping process and is entry triggers the shipping process and is used to identify which products to remove used to identify which products to remove from inventory.from inventory.

A physical count is compared with the A physical count is compared with the quantities on the picking ticket and packing quantities on the picking ticket and packing slip.slip.

Some spot checks are made and a bill of Some spot checks are made and a bill of lading is prepared.lading is prepared.

3. Billing and Accounts Receivable 3. Billing and Accounts Receivable Two activities are performed at this stage of Two activities are performed at this stage of

the revenue cycle:the revenue cycle:1 Invoicing customersInvoicing customers2 Maintaining customer accountsMaintaining customer accounts

Key decisions and information needs:Key decisions and information needs: Accurate billing is crucial and requires Accurate billing is crucial and requires

information identifying the items and information identifying the items and quantities shipped, prices, and special quantities shipped, prices, and special sales terms.sales terms.

Billing and Accounts Receivable (Cont)Billing and Accounts Receivable (Cont) The sales invoice notifies customers of the amount to be paid and The sales invoice notifies customers of the amount to be paid and

where to send payment.where to send payment. A monthly statement summarizes transactions that occurred and A monthly statement summarizes transactions that occurred and

informs customers of their current account balance.informs customers of their current account balance. A credit memo authorizes the billing department to credit a customer’s A credit memo authorizes the billing department to credit a customer’s

account.account.

Billing and Accounts Receivable (Cont)Billing and Accounts Receivable (Cont) Types ofTypes of billing systems:billing systems:

In a In a postbillingpostbilling system, invoices are prepared after confirmation that the items system, invoices are prepared after confirmation that the items were shipped.were shipped.

In a In a prebillingprebilling system, invoices are prepared (but not sent) as soon as the order is system, invoices are prepared (but not sent) as soon as the order is approved.approved.

The inventory, accounts receivable, and general ledger files are updated at this timeThe inventory, accounts receivable, and general ledger files are updated at this time..

Billing and Accounts Receivable (Cont)Billing and Accounts Receivable (Cont) Methods for maintaining accounts receivable:Methods for maintaining accounts receivable:

– open invoice methodopen invoice method– balance-forward methodbalance-forward method

To obtain a more uniform flow of cash receipts, many To obtain a more uniform flow of cash receipts, many companies use a process called cycle billing.companies use a process called cycle billing.

Billing and Accounts Receivable Billing and Accounts Receivable Information Needs and ProceduresInformation Needs and Procedures

What are examples of additional information What are examples of additional information the AIS should provide?the AIS should provide?– response time to customer inquiresresponse time to customer inquires– time required to fill and deliver orderstime required to fill and deliver orders– percentage of sales that require back orderspercentage of sales that require back orders– customer satisfactioncustomer satisfaction– analysis of market share and trendsanalysis of market share and trends– profitability analyses by product, customer, profitability analyses by product, customer,

and sales regionand sales region

4. Cash Collections 4. Cash Collections Two areas are involved in this activity:Two areas are involved in this activity:

1 The cashierThe cashier2 The accounts receivable functionThe accounts receivable function

Cash Collections (Cont)Cash Collections (Cont) Key decisions and information needs:Key decisions and information needs:

Reduction of cash theft is essential.Reduction of cash theft is essential. The billing/accounts receivable function should not have physical access to The billing/accounts receivable function should not have physical access to

cash or checks.cash or checks. The accounts receivable function must be able to identify the source of any The accounts receivable function must be able to identify the source of any

remittances and the applicable invoices that should be credited.remittances and the applicable invoices that should be credited.

Cash Collections (Cont)Cash Collections (Cont) Documents, records, and procedures:Documents, records, and procedures:

Checks are received and deposited.Checks are received and deposited. A remittance list A remittance list is prepared and entered on-line showing the customer, is prepared and entered on-line showing the customer,

invoice number, and the amount of each payment.invoice number, and the amount of each payment. The system performs a number of on-line edit checks to verify the accuracy The system performs a number of on-line edit checks to verify the accuracy

of data entry.of data entry.

Agenda 2Agenda 2 Using Information Technology in the Using Information Technology in the

Revenue CycleRevenue Cycle

Opportunities for Using Opportunities for Using Information TechnologyInformation Technology

What are some opportunities of using What are some opportunities of using information technology for information technology for sales order entry sales order entry (Activity 1)?(Activity 1)?– on-line processing of sales orders with e-mail on-line processing of sales orders with e-mail – electronic data interchange (EDI)electronic data interchange (EDI)– linking EDI with customers’ point-of-sale linking EDI with customers’ point-of-sale

(POS)(POS)– optical character recognition (OCR)optical character recognition (OCR)– the Internetthe Internet

Opportunities for Using Opportunities for Using Information TechnologyInformation Technology

What are some opportunities of using information technology for What are some opportunities of using information technology for shipping (Activity shipping (Activity 2)?2)?– automated warehouse systems consisting of:automated warehouse systems consisting of:

– computerscomputers– bar-code scannersbar-code scanners– conveyer beltsconveyer belts– forkliftsforklifts

Opportunities for Using Opportunities for Using Information TechnologyInformation Technology What are some opportunities of using information technology for What are some opportunities of using information technology for billing billing

and accounts receivable (Activity 3)?and accounts receivable (Activity 3)?– on-line processing of invoiceson-line processing of invoices– electronic data interchange (EDI)electronic data interchange (EDI)– imaging to create and store digital versions of all paper relating to a imaging to create and store digital versions of all paper relating to a

customer’s account.customer’s account.

Opportunities for Using Opportunities for Using Information TechnologyInformation Technology What are some opportunities of using information technology forWhat are some opportunities of using information technology for cash cash

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

remittances)remittances) The bank picks up the checks from the post office box and deposits The bank picks up the checks from the post office box and deposits

them to the company’s account.them to the company’s account.

Opportunities for Using Opportunities for Using Information TechnologyInformation Technology– electronic lockboxelectronic lockbox– electronic funds transfer (EFT)electronic funds transfer (EFT)– financial electronic data interchange (FEDI)financial electronic data interchange (FEDI)

Agenda 3Agenda 3 The major threats and the related The major threats and the related

control procedures in the Revenue control procedures in the Revenue Cycle.Cycle.

Control Objectives,Control Objectives,Threats, and ProceduresThreats, and Procedures The The second functionsecond function of a well-designed AIS is to provide adequate of a well-designed AIS is to provide adequate

controls to ensure that the following objectives are met:controls to ensure that the following objectives are met: Transactions are properly authorized.Transactions are properly authorized. Recorded transactions are valid.Recorded transactions are valid. Valid, authorized transactions are recorded.Valid, authorized transactions are recorded. Transactions are recorded accurately.Transactions are recorded accurately.

Control Objectives,Control Objectives,Threats, and ProceduresThreats, and Procedures

Assets (cash, inventory, and data) are Assets (cash, inventory, and data) are safeguarded from loss or theft.safeguarded from loss or theft.

Business activities are performed efficiently Business activities are performed efficiently and effectively.and effectively.

Control Objectives,Control Objectives,Threats, and ProceduresThreats, and Procedures

What are some What are some threats?threats?– credit sales to customers with poor creditcredit sales to customers with poor credit– shipping errorsshipping errors– theft of cash and inventorytheft of cash and inventory– failure to bill customersfailure to bill customers– billing errorsbilling errors– loss of dataloss of data

Control Objectives,Control Objectives,Threats, and ProceduresThreats, and Procedures

What are some What are some exposures?exposures?– uncollectible sales and losses due to bad debtsuncollectible sales and losses due to bad debts– customer dissatisfactioncustomer dissatisfaction– loss of assets and overstated assetsloss of assets and overstated assets– loss of revenue and inventoryloss of revenue and inventory– incorrect records and poor decision makingincorrect records and poor decision making– loss of confidential informationloss of confidential information

Control Objectives,Control Objectives,Threats, and ProceduresThreats, and Procedures What are some What are some control procedures?control procedures?

– credit approval by credit manager and sales functioncredit approval by credit manager and sales function– reconciliation of sales order with picking ticket and packing slipreconciliation of sales order with picking ticket and packing slip– restriction of access to inventory and datarestriction of access to inventory and data– lockbox arrangementlockbox arrangement– segregation of dutiessegregation of duties

Agenda 4Agenda 4 The REA diagram The REA diagram

for the revenue for the revenue cycle.cycle.

Revenue Cycle Data ModelRevenue Cycle Data Model The REA data model provides one method for designing a database The REA data model provides one method for designing a database

that efficiently integrates both financial and operating data.that efficiently integrates both financial and operating data. A simplified REA data model for the revenue cycle of a manufacturing A simplified REA data model for the revenue cycle of a manufacturing

company should include the following information:company should include the following information:– the two major resources (cash and inventory) used in the revenue the two major resources (cash and inventory) used in the revenue

cyclecycle

Revenue Cycle Data ModelRevenue Cycle Data Model– the four major business events in the revenue cycle the four major business events in the revenue cycle

(orders, filling the orders, shipping [sales], and cash (orders, filling the orders, shipping [sales], and cash collections)collections)

– the primary external agent (customer) as well as the the primary external agent (customer) as well as the various internal agents involved in revenue cycle activitiesvarious internal agents involved in revenue cycle activities

Revenue Cycle Data ModelRevenue Cycle Data ModelPartial REA Diagram of the Revenue Cycle

CashDeposits in

Collectscash

(1, N)

(1, 1)

byCashier

(1, N)(1, 1)

Topics DiscussedTopics Discussed Major Business Activities in the Revenue Major Business Activities in the Revenue

Cycle and the Key Decisions in the Cycle and the Key Decisions in the Revenue CycleRevenue Cycle

Using Information Technology in The Using Information Technology in The Revenue CycleRevenue Cycle

The Major Threats and the Related The Major Threats and the Related Control Procedures in the Revenue Cycle.Control Procedures in the Revenue Cycle.

REA Diagram for the Revenue CycleREA Diagram for the Revenue Cycle

CT7CT7Preventive:Preventive:1.Timesheets are pre-numbered.1.Timesheets are pre-numbered.2. Segregation of duties.2. Segregation of duties.Detective:Detective: Payroll Supervisor review the timesheets for Payroll Supervisor review the timesheets for

completeness.completeness. Payroll clerk sorts the timesheets.Payroll clerk sorts the timesheets. A second payroll clerk verifies the accuracy A second payroll clerk verifies the accuracy

of the first clerk’s entries.of the first clerk’s entries. Payroll clerk compares the vacation days Payroll clerk compares the vacation days

recorded on the time sheets with the recorded on the time sheets with the accumulated vacation days for the employeesaccumulated vacation days for the employees

CT7CT7Corrective:Corrective: Payroll supervisors reconcile the Payroll supervisors reconcile the

missing timesheet numbers with missing timesheet numbers with applicable department supervisors.applicable department supervisors.

Payroll supervisors reconciles Payroll supervisors reconciles timesheets where vacation days timesheets where vacation days recorded exceed vacation days recorded exceed vacation days accumulated.accumulated.

Payroll supervisors reconciles any Payroll supervisors reconciles any errors detected by the second payroll errors detected by the second payroll clerk’s review.clerk’s review.