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11

The Revenue Cycle: Sales and Cash Collections

Chapter

UAA ACCT 316 Accounting Information Systems Dr. Fred Barbee

A Brief Overview of Transaction Cycles

A Transaction Cycle is . . .

. . . A group of related business activities (transactions).

Transaction Cycles for a Manufacturing Firm

Labor
Cash Fin. Goods Materials Plant
EXPENDITURE CYCLE Subsystems Purchasing & A/P Cash Disbursements Payroll CONVERSION CYCLE Subsystems Production Planning and Control Cost Accounting

Customers
Cash
REVENUE CYCLE Subsystems Sales Order Processing and Cash Receipts

Fin. Goods Cash

Transaction Cycles for a Merchandising Firm

Merchandising Shipments

Sale of Merchandise
GL & Fin Rpt Cycle Purchase of Mdse, & Labor, Etc.

Cash Receipts

PP&E, Investments

The Revenue Cycle Merchandise


Receipts

Cash Disbursements

Merchandising Shipments

Sale of Merchandise

The Expenditure Cash Receipts Cycle


GL & Fin Rpt Cycle

PP&E, Investments

Purchase of Mdse, & Labor, Etc. Merchandise Receipts

Cash Disbursements

Merchandising Shipments

Sale of Merchandise

Cash Receipts

The Finance GL & Cycle Fin Rpt


Cycle Purchase of Mdse, & Labor, Etc. Merchandise Receipts

PP&E, Investments

Cash Disbursements

GL & Financial Reporting


Sale of Merchandise

Merchandising Shipments

Cash Receipts

GL & Fin Rpt Cycle Purchase of Mdse, & Labor, Etc. Merchandise Receipts

PP&E, Investments

Cash Disbursements

The Revenue Cycle: A Definition

The Revenue Cycle . . .


. . . is a recurring set of business activities and related information processing operations associated with providing . . .

1. Goods/Services to customers; and


2. Collecting cash in payment for those sales

Merchandising Shipments

Sale of Merchandise

Cash Receipts

GL & PP&E, The Revenue Cycle Investments Fin Rpt Cycle Spans activities from Sale to Purchase of Mdse, & Labor, Etc.

Receipt of Cash.
Merchandise Sales Receipts Cash Receipts

Key

Cash Transactions:Disbursements

The major purpose of the revenue cycle is to facilitate the exchange of products or services with customers for cash.

The Revenue Cycle Business Activities

1.0 Sales Order Entry

Sales Order Entry


Key

Decisions and Information Needs

Inventory Availability Customer Credit Status

Sales Order Entry


Main

Activities

Taking customer orders Credit Approval Check inventory availability Respond to customer inquiries

2.0 Shipping

Shipping
Pick Ship

and Pack the order


the order

3.0 Billing

Billing
Billing Maintain

Accounts Receivable

4.0 Cash Collections

The Revenue Cycle: Objectives

Objectives of the Cycle . . .


Record Verify

sales orders promptly and accurately.


credit worthiness.

Ship
Bill

products or perform services.

for products and services in a timely manner.

Objectives of the Cycle . . .


Record Post

and classify cash receipts promptly and accurately.


sales and cash receipts to customers accounts. products until shipped.

Safeguard

Safeguard

cash until deposited.

The Revenue Cycle: Data Input

Sources of Input . . .
Customers Salespersons Credit

records
records

Inventory

Sources of Input . . .
Finished

goods warehouse

Suppliers Shipping

department

Forms of Input . . .
Customer Sales

order

order

Order Picking

acknowledgment
list

Forms of Input . . .
Packing Bill

slip notice

of lading invoice

Shipping Sales

Forms of Input . . .
Remittance Deposit Back

advice

slip

order
memo

Credit

Credit

application

Sales

A/R

Typical Accounts in Allowance the Revenue Cycle

Merchandising Shipments

Sale of Merchandise

Cash Receipts

GL & PP&E, Fin Rpt The Revenue Cycle Investments Cycle Spans activities from Sale to Purchase of Mdse, & Labor, Etc.

Receipt of Cash. Sales Cash Receipts

Key

Cash Transactions: Disbursements

Typical Accounts . . .
Sales Sales Sales

Returns and Allowances Discounts Receivable

Accounts

Typical Accounts . . .
Bad

Debts Expense
For Doubtful Accounts

Allowance Inventory Cash

Typical Functions of a Revenue Cycle

Obtain Cust. Order

Typical Functions of the Revenue Cycle

Check Credit

Enter Sales Order

Ready Goods Shpt.

Ship Goods

Bill Cust.

Rec. & Dep. Cash Maintain Rec. Records

Post Trans.

Perform Service

Segregation of Functions

Transaction

authorization should be separate from

transaction

processing

Transaction

Custody should be separate from

asset

Recordkeeping

The organization should be so structured that the perpetration of a fraud requires . . .

P r e s id e n t

T re a s u re r

P r o d u c t io n

S a le s

C o n t r o l le r

C r ed i t

P u r c h a s in g

P r o m o t io n

B u d g e t in g

C a s hi e r

S h i p p in g

C u s t . S e r v ic e

A c c t. M a na ge r

In s ur a n c e

R e c e i v i ng

S a l e s O rd er

B i l li n g

S to r e s

A c c ts . R e c .

P r o d u c ti on

G en . Le d ger

F in i s h e d G oods

. . . collusion between 2 or more individuals.

Organizational Independence
President
Treasurer Production Sales Controller Credit Purchasing Promotion Budgeting Cashier Shipping Cust. Service Acct. Manager Insurance Receiving Sales Order Billing

Stores

Accts. Rec.

Production

Gen. Ledger

Finished Goods

Functional Responsibility in a . . .
Sales Order Application System

Functional Responsibility
For

sales, control is achieved by separating the transactions . . .

Origination

Authorization
Recording

Execution

President

Treasurer

Production

Sales

Controller

Credit

Purchasing

Promotion

Budgeting

Cashier

Shipping

Cust. Service

Acct. Manager

Insurance

Receiving

Sales Order

Billing

Stores

Accts. Rec.

Production

Gen. Ledger

Finished Goods

President

Treasurer

Production

Sales

Controller

Credit

Purchasing

Promotion

Budgeting

Cashier

Shipping

Cust. Service

Acct. Manager

Insurance

Receiving

Sales Order

Billing

Stores

Accts. Rec.

Production

Gen. Ledger

Finished Goods

1
Originate

President

Treasurer

Production

Sales

Controller

Credit

Purchasing

Promotion

Budgeting

Cashier

Shipping

Cust. Service

Acct. Manager

Insurance

Receiving

Sales Order

Billing

Stores

Accts. Rec.

Production

Gen. Ledger

2
Authorize

Finished Goods

President

Treasurer

Production

Sales

Controller

Credit

Purchasing

Promotion

Budgeting

Cashier

Shipping

Cust. Service

Acct. Manager

Insurance

Receiving

Sales Order

Billing

Stores

Accts. Rec.

Production

Gen. Ledger

Finished Goods

Execute

President

Treasurer

Production

Sales

Controller

Credit

Purchasing

Promotion

Budgeting

Cashier

Shipping

Cust. Service

Acct. Manager

Insurance

Receiving

Sales Order

Billing

Stores

Accts. Rec.

Production

Gen. Ledger

Finished Goods

4
Record

President

Treasurer

Production

Sales

Controller

Credit

Purchasing

Promotion

Budgeting

Cashier

Shipping

Cust. Service

Acct. Manager

Insurance

Receiving

Sales Order

Billing

Stores

Accts. Rec.

Production

Gen. Ledger

2
Authorize

Finished Goods

1
Originate

4
Record

Execute

Functional Responsibility in an . . .
Accounts Receivable Application System

Functional Responsibility
For

accounts receivable, control is achieved by separating . . .


Authorization of transactions Recording of transactions Execution of transactions

1
Treasurer Credit

President

3
Sales Controller Budgeting

Production

Purchasing

Promotion

Cashier

Shipping

Cust. Service

Acct. Manager

Insurance

Receiving

Sales Order

Billing

Stores

Accts. Rec.

Production

Gen. Ledger

Finished Goods

Control Objectives, Threats, and Procedures

Control Objectives
All All All

transactions are properly authorized.


recorded transactions are valid (actually occurred). valid, authorized transactions are recorded.

Control Objectives
All

transactions are recorded accurately.


(cash, inventory, data) are safeguarded from loss or theft. activities are performed efficiently and effectively.

Assets

Business

1.0 Sales Order Entry

Threats
1. 2. 3. 4.

Incomplete or inaccurate customer orders.


Credit sales to customers with poor credit. Legitimacy of orders Stockouts, carrying costs, and markdowns.

2.0 Shipping

Threats
5.

Shipping Errors
Wrong merchandise Wrong quantities Wrong address

6.

Thefts of Inventory

3.0 Billing

Threats
7. 8. 9.

Failure to bill customers.


Billing errors. Posting errors in updating accounts receivable.

4.0 Cash Collections

Threats
10.

Theft of cash

General Control Issues

Threats
11. 12.

Loss of Data
Poor performance

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