The Expenditure Cycle
Tutorial 5
The Expenditure Cycle
Student’s Copy
Q1
The expenditure cycle processes a recurring set of business and related
information associated with acquisition of goods and services and the payments for
them. The whole process can be seen in both the Data Flow Diagram (DFD) for
Purchases Procedures and DFD for Cash Disbursements.
Data Flow Diagram for Purchases Procedures:
Data Flow Diagram for Cash Disbursements:
INFORMATION SYSTEMS & FINANCIAL ANALYTICS (BAF2022)
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The Expenditure Cycle
Part A: Purchases system
Study the DFD for the Purchases system and related lecture notes on Purchases
system and answer the following questions:
a)
Identify the 6 major activities in the Purchases Procedures and state for
each activity :
i)
The department/function that performs the activity
ii)
The document(s) generated (if any)
iii) The accounting entries effected in the books (if any)
6 major activities: Purchase requisition, purchase order, receive goods, accounts
payable, cash payments.
b) What is the purpose of maintaining a valid vendor/supplier file?
Inventories should only be acquired from valid vendors. This control
procedure helps to deter the purchasing agent from buying inventories at
excessive costs and receiving kickbacks, or from buying from an entity in
which the purchasing agent has a relationship, such as a relative or a friend. A
valid vendor file also provides for a more efficient purchasing process when
dealing with routine purchases.
c) Differentiate between a purchase requisition and a purchase order.
A purchase requisition is completed by the inventory control department when
a need for inventory items is detected. Purchase requisitions for office
supplies and other materials may also be completed by staff departments
such as marketing, finance, accounting, and personnel. The purchasing
department receives the purchase requisitions, and if necessary, determines
the appropriate vendor. If various departments have requisitioned the same
item, the purchasing department may consolidate all requests into one order
so that any quantity discounts and lower freight charges may be taken. In any
case, the purchasing department prepares the purchase order, which is sent
to the vendor, accounts payable department, and the receiving department
(blind copy).
d) A blind copy of the purchase order is sent to the receiving department. What
is meant by “blind copy” and what purposes does it serve in the receiving
function?
The blind copy contains no quantity or price information about the products being
received. The purpose of the blind copy is to force the receiving clerk to
count and inspect inventories to complete the receiving report.
e) Most companies adopt the voucher payable system when processing
suppliers’ invoices. Briefly explain how a voucher payable system works and
why it is a good internal control procedure.
Vouchers provide improved control over cash disbursement, and they allow
firms to consolidate several payments to the same supplier on a single
voucher, thus reducing the number of checks written.
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The Expenditure Cycle
Part B: Cash Disbursements system
a)
What are the three logical steps of the cash disbursements system?
The three logical steps of the cash disbursements system are:
a) authorization of cash disbursements for payment.
b) preparation & distribution of checks, and
c) preparation of summary information by cash disbursements and accounts
payable and sent to the general ledger clerk.
b)
What three documents must accompany the payment of an invoice? State
where these three documents originate from and what each document
represents.
the purchase requisition, purchase order, and receiving report
The accounts payable department receives purchase orders and approved invoices
from the purchasing department and receiving reports from the receiving department.
As each one is received, it is filed in the pending file by vendor name. When all the
documents foran order are received, a clerk posts the payable amount to the payable
voucher for the particular vendor. A disbursement voucher is then prepared and
attached to the order, receiving report, and invoice. This package is then given to the
accounts payable managerfor review and approval. The manager gives the approved
disbursement vouchers to a second clerk. This clerk batches and totals the approved
vouchers and prepares a batch summary. The batch summary is sent to the accounting
department. A third clerk completes a two-part, prenumbered check / remittance advice
form for each disbursementvoucher. The check/remittance advicesand the
disbursement vouchers are sent to the cashier.
The cashier totals the checks and compares that total to the total of all the batches.
She then signs the checks with the treasurer's signature using a check-signing
machine that she has in her office. She then places in envelopes the first copies of the
check/remittances and sends them to the vendors. The second copy is sent to the
accounting department
c)
Explain the purpose of the following procedures:
i) The cheque that is sent to a senior personnel for signature must be
accompanied by the relevant supporting documents
Cash payment clerk receives AP packet/voucher package and reviews
it for completeness and accuracy.
ii)
The voucher package returned to the cash disbursement staff after the
cheque is signed must be stamped “PAID”
The purpose of stamping paid on the packet/package is to present the
documents from being presented again for payment.
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The Expenditure Cycle
Q2
In a manual purchases system, there are four documents an accounts payable clerk
should have before he can record an entry in the accounts payable ledger.
Identify the four documents, their originating department/ source and the purpose of
each. (Use the table below for your answers).
Name of
Document
Originating Department
/ Source
Purpose of document
Invoice
Accounts
department
payable To maintain a record a transaction
between a buyer and seller
Purchase
order
The
department
purchasing To procure materials for direct
consumption or for stock, procure
services, cover customer
requirements using external
resources, or procure a material that
is needed in plants from an internal
source (long-distance intra-plant
stock transfers).
Receiving
report
The
department
Purchase
requisition
The finance department, To initiate a purchase
using information from
the inventory subsidiary
ledger.
Document
1
Document
2
Document
3
Document
4
Q3
receiving To record what materials and
inventory were received by the
company.
The computerized Accounts Payable system processes the suppliers’ invoices
(as part of the voucher package) and cash disbursements to suppliers. Explain
what happens when the vouchers are used to update the Accounts Payable
system and when payments are due.
After AP function matches supplier invoice with the PO and receiving report, it prepares
a Cash Disbursement voucher or payment voucher, and assembles the 3
documents together with the payment voucher as one package. This is to ensure
that the documents are intact and also facilitates approval of the payment when it
is due.
Each voucher is recorded in the voucher register which reflects the AP liability of the
firm.
AP clerk then files the payment voucher, together with supporting documents, in the
vouchers payable file until it is due for payment.
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The Expenditure Cycle
Q4 Past Year Exam Question - Modified
The management of Omega Best Ltd, a retailer of electronic products, decided to
computerize its expenditure cycle activities. You are asked to review its purchasing,
receiving and accounts payable functions, based on the documentation of the current
manual procedures described as follows:
1.
Whenever the quantity of an item is low, the inventory supervisor phones
the purchasing department with the item description and quantity to be
ordered.
2.
A purchase order is prepared in duplicate in the purchasing department.
The original is sent to the vendor, and a copy is retained in the purchasing
department filed in numerical order.
3.
When the shipment arrives, the inventory supervisor sees that each item
received is checked off against the packing slip that accompanies the
shipment. The packing slip is used to update the inventory records.
4.
When the vendor invoice arrives, they are immediately updated to the
accounts payable ledger.
In your review, you also noted that most of the purchase orders were made to one
major supplier whom the purchasing officer owns a substantial interest in the company.
Required:
a)
Name and explain the purpose of the three (3) generated documents that would
be required to satisfy the minimum requirements of the new system.
1. purchase requisition: To initiate a purchase
2. purchase order: To procure materials for direct consumption or for stock, procure
services, cover customer requirements using external resources, or procure a material
that is needed in plants from an internal source (long-distance intra-plant stock
transfers).
3. receiving report: To record what materials and inventory were received by the
company.
b)
Identify any four (4) risks that could arise if the current procedures are allowed
to continue and recommend one control procedure to be implemented to
overcome each of the risks identified.
1. unauthorised inventory purchases
2. receiving wrong items, incorrect quantities, or damaged goods
3. inaccurately recording purchases and cash payments transactions in journals and
accounts.
4. Misappropriation of cash and inventory
One control procedure: physical control – independent verification
c)
Name any two (2) ways to ensure the integrity of the vendor selection process
when ordering goods.
Segregation of duties and access controls
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The Expenditure Cycle
d)
How can a manual purchases and cash disbursements system be changed
to increase efficiencies, be more accurate, and reduce processing costs?
By using IT control, automated purchase approval, scanner technology and input data
edits, automated posting from AP to GL file backup.
By using a computer system to automatically search the accounts
payable files, early payment discounts will not be overlooked and potentially lost.
Checks are printed, signed, and distributed. EDI partners may receive their
payments electronically reducing check printing costs. The updates to the check
register file, accounts payable files, and general ledger are automatically made,
thus cutting down on clerical work and errors
- End of Tutorial -
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