I
-''lqJ$i$
/
{
,fif ," :GwaPrrffi
'il
:r
'l ; I
.
f
Reugnl,,c-
and
,
glp:t en diiur e -' Cy rl'e Ap plic atio ns
t.
I]
T
t:
'LEAENING oBlEsrlYE?.
,C-aref.r! stuil),.of this chaPtei
t'i!,! enable you to;
"f
.tr, Disqribe the major featutes and operations in a sales orc.ier
SPPlication sYstent'
- E Descdbe the rnajqS- featpres and eperations'
in ao accounts
receivable aPPlication sYst-em'
I Describe tho major'features antl operations in a purc[rasi-ng
199!$1!ionsYstem'
:
in a payroll application
E Descrihe the major teatures and operatione
System.
ti
und 3r sepP a'LE
t'dctions be
a$ei-Tfi'e
1'rvr-Yffi;;';;ffiEffie-@tqffi A;Thffirinls
applications prL$::nte(
ffi fl
ia---,.:^- -+ r^;J Trka.r ore hhu
an .anqfvst maYpontral! a pro=
H-||;:if#:;;ffi ;i"'"fd;"+ains.tur|!ch
'
.
'i'
fo..ti.tirrgsystem.
'
"Ttlli';,,1i;";"Jn"'it*"iiolulh;ut1lTry:*:-n::1"il:i;*""'o**qChrrlptBgs z
The data flow diagrams and docume4t'nqwchqrt$presented
thanlion
-t
unaa'il;i;,'G-lbficalnecessitieso[a;399]1p!',9rt^:.yj':5
ano u tocus ult LIrtr ruEreur
these
sy.mbol,in
t.y theld<lcu.msnt
:
posed or existing sYs *9m-
taa
calli a^oomputer or,.!ailS!e data
teir-m'u'Glgphone
diagrams may bd, p;po
physical features The,infonlation rePt€s€n
iJ
i
'
,
I
''.:
,ltr;.1 --r..
-.
j
:.
.:
:-.::,:
-1.i:,.. :t.i:.! :i 1-..j _: .
..t,
,t
I
254 PART ! lntroduction toAccounting lnformatiofl Syster\.
REVEI.I U E.CYCLE APPLICATIO NS
An organization's r.9y9_4,U_e_:yqle_iqe.U.d.gll!g ftigclr!$-3_eqg!_r-qd tq q.Lgl
products or seryices with customers. Common funct6nJlnituiie ci.Adii
figure 7.1 illustrates a data flow diagrarn of a sales order application system
'sales order.application system comprises the procedures involved in
i;: ,:i t' .-'.: .-' 'a
,-
\,'
I
I
t
T
hrP
I
!i
.f
I
il
t
fl
g,
J
,j
{
*
tc
it
2
g
{
I
l-
DATAFIOWXEY
t.Otder. .
:'
g:Shipment i
@:ider
Packinli5ip,
6. Bilfing Memo
12JoumalVoubher
.
.9.56ippi1g$&'icei
Z&lesOder. ' .
&4pproYed.Sahs Order lo-tnvoice
4- Sirpping
'5.
7 Shlppin! Advice
17. Posting Memo
13. Canttollotal
FIGURE 7.1 Data Flow Diagram: Sales Ordery'pplication System5
,t.#,
.CHAPTdR 7 Revenue- and Expenditure-CycleApplicatjons
255
('9!' or: t.
' ,1 -. -':
tuiis
lro
#l-g
F
tpoo Ccdrt
Apprcral
'
-l Fhlsh€d
I oo"as
l C.opy a
-l to
I Srxbprhs
klqlo*ladg.P{n
@v
(
-,rffi1-g
I s.ro al
l"H
l-/-
ffil_g
,, gfl
FIGURE'7.2 Sales Order Application System'
:,
and shipping customer orders and itr preparing invoices that describe_Products'
servicei'anJassessments. Figure 7.2 illustrates an analytic flowchart-of a model
sales order application system. The chart illustrates a qgparate order ?nd billing
t_gu_s,to.!q9lq{49r.
iiiFrgure
fuaptions are $ales order, credit, finished goods, shipPing, billing ac-
grldgr funcliolEritiates the plocessing of customer orders with the
Si.ies o:der.,fi1e sale
ordeib"t"i"i q4-esc4p!iells_ e|plgg"$ oring -thl customer, suCE-as-..=u.e,
i[nipd6{iue @_qdai11,
eggtvn.The invoice will be prenotice.of this event.is forwarded to
r
256 PART I lntroduction toAccounting lnfornration Systems
I uaw 1s99PY.t
.l C"rr':-s r-oples
I Pe;are shiPPing
,---l uamentation
iI lsh,p'6;ri,;
I Customer
Fml
Sa/es l-
hdd t
&?ntbr
Goads
$1$ o? LaDLr
tz
o*r\'1ry -Li
'z afvP
c-ulf
3
ni
A --,Wd. :,':/,1'r'
q- ff)-o6;t''i
FIGURE 7.2 (continueQ
lri :
!^,1
i:
,'
Credit
A customer's credit standing shonlclUx ygd-g4 p-Ilqf t-o-t-h-q l[pfngn!-o-f gos{g.
For.regular customerq, the,credit check involves determining that the total amoqnt
.of creijt glanted does not exceed management's general or specific authorization.
For new..SstomerE a credit check is necfssary to establi.sh the terms of sale to the.
customeill{s-Frgure 72 illustrateq the sales ordel&[9tio-sihquld be'subjeetlqthe
oiarilndependentcreditfu nctiootogalq.tain-tbes-ep-an-tiau-a[4ud9s.
been approved, the sales order function distributes the sales
=n3..n:-i+-qq
:
$::
iordef set,as sholvo in Eigur;'72. One copy of each sales"of,tlgt'i^c forwardd to
uilfing Tbese are:trteo as.-sp9s-q-rdqrq atloy[4g th.q bi[bettqdgq fo-4qticipatq the
receipt of $atcUig&shipping_adviges frqll llq-4pping fu,nction. One copy-usually
torwarde!. tq qhipping. This copy qu-thorizes shipthe i.a:dcins sh
pinflo-fglglv9_gg,g$ from fi+lllld goods for shipping. Another copy-_usually
*py:i"
Ndthe:slgck-@gl-isfoqyar.{edtqf; qilhed.gaodsft iscopyauthanzes$isheJ
soods E-&!g-ggg'$ from i$ custody fgr shippent to cxrstomers.
In sqEC cases, a customer's orddr may ieQuiie thif a production order be is-
-sued to produce thti goods, because the goods are not in stock. $irch situations
ariitt when the order is.for a special nonstock item. They also may arise as standard-company practice due tci either the customized nature of the product or a
CHAPTER 7 Revenue' and
-.
Expenditure-CycleApplications 257
\"
..:
)
- lnvoi
ca-
I . U'/JI
Z , zi U{'t
4 -h/e
FIGU RE 7'2 (cunr:;iued)
for an-inventory of finished good* - . a'
short production cycle,n",'ilifi'"3J,hL o""a
are oot-of-sto"k and must be back ordeted"/
Such situations also occur when items
order is srgnifi-
If the time betrveen r"r"ioi"iU" 91-der-*an4 e9!u4!-SlIrngg!91-the
6 tne eustoirie-r1ir
:"-:;;;:;iil;;;";;;;;;il;"i";,t;;iar*s orae-rnffiiint
ecei*d-al4.ip-bqingprocessed'
int-o-r_r-r..-,hegqqlome,tf,"ttniiriae:hasbeen'f
Finished Goods
,.,tt
,
-
_
Finishedgoodspickstheorderasdes-gp[sboitl'"tt..:lcopyofthesales
@-!s'-Ueorder (copy f). Stocfl riio-rdsele updat"d=to
.not"a on the'stock copy of the sales
Aii"iiqd;dtitt
&nryar-4e4:to *ippioE
tue goods to shipping. As n-oted h Hgwittr"ii
order, which is.then iorwaraea
-acknowledgL
"torrg
receipt of the quantito
ureT.Z,shipping .frouia rig, ttre stoI5 copy
ties noied th"r"on from finished goods:
:
Shipping
Shippingacceptstheorderforshipmentaftermatchingthepackingslipmpy
prepared according
;";;Io order. shipping documeltad:"
ir.
to rhe stock copy
a
of
"f
lili of ledllg (see Frgto the situation' F*q;Jry,;it 'eq'i'"i ih"'p'"putution
exchanged -b-etrvpen a shipp-e5. a4{ 1
ure 7.4). A bill .f hi;;;',r'"_anrr*u4!ai;
HARECOMPANY
SALES ORDER
Order Numben
Date:
Sokl To:
Ship To:
Shipping lnstruction:
Salesperson:
Customer Order #:
QuantiV
Description UnitPrice
FIGURE 7.3 Sales Order.
ISHIPPER,S
STRAIGHT BILL oF t-ADtNG-sHoRT FoBM-oRtctNAL-Not Nesotiabte I
R€CCI\ED,s6ldttolh..ra$l66lioo.idt rlrlrhr{r.dm$.d.t dtlls.ott&gf
aUa:m-
ffi
G.&bk
KrctrPrcUGE ffi4ffilqE@tgs'&ffi
a
NO. ICARR|ER,S No.
l-^""-^'''"'
qliif?*fd_.l:!1E3l11
**::a*i9iai"Fd
ffdFftffi;drffi
ha*fldi!&rdfud
Effituffidtjrh
dJokHdqE
te!-ebEM6t
dakqTobhFa.
rir;.iln6;;ii
a
a_e @
M M
rF
EilE rcr-tu
frdtuffi.
tu tdaffi&dtu
ffi.tr.ldbyhdipFbbdffi
h p6t...*
h ft lffi
FoFrybti*,
l, e,
6 q
hhmr-U
t*r-lnffi
6OCEE
ff lsffit
b d qd,E.ryr-&r
*
L U;.z
h .ilj{;&
t.rbhfrdbE
drhtrdffi5&ffi
qbhnh#.tu
!qdlfrtud
& ai dft |hfi.rff
hdrSCtuffik
frlailffi.
lsipdrlryhhhdtud.
HcHcb.dbit;t*6kffi-
kiio-
CHAPTER7 Revenue-and Expenditure-CycleApplications
2Sg
charges and
garlel Sffch -45 ?-t-ru98i+&qomp4lly:The bill of lading'documents freight company'
the transfer of gooasTrtm ttre itripping collpany_ to !L: transportation
to the customer on the
Frequently, freight charges are paid UV tfit shippeibut billed
sales invoice.The packing slip copy of the sui"sorder is^usuaily
customer's order when it is shipped. as shown in Figure 7'2:
included with the
Billing
billing function'
Shipping forwards documentation of the shipment to the
tbesjqqLqqpy-of
u!-uatly
is
\.r This documentaiion is termed the5h!pp!4ga4]r99-ind puttiltre related open order
cepy ![ qhe uiUi["6ne. nitiing
."ry
;;d% ttren prJpa'"' tf,i..i"uoice tiv extending the
any)' and taxes (if any)'
charges for actual quantities shipped, ft"tgry="Elg-ej-Jit
in the sales journal and
reiora6a
r"volcei-are
Invoices ur"miiiaiia
"usiarnz-r..
a journal voucher is
posting copies are sent to accounts receivable. Periodically'
for
Posting to the general
prepared and forwarded to the general ledger function
'l* ;#,;;r;#;;t,
:i:;#A;;-,il;;#ih"
ledger.
Accounts Receivable and General Ledger
:'\..-'-i..'f
is importalt- t9
The distinction between billing and accounrs-_receivable
gil-!!ag:s
invoicing
resp--o4qi-b[q fq1
lndividual '':
maintain ,"p-ulion of functions.
informa-
-qales !r-an94-cliqgC
'
and acppqqt!.!qceiy--4-b--l-9 main-tii5r5-gg5togr-9t:-asounts
BiililedQ-e*E.-nQt"-h4Ye
{61and sends p-erioaic-si4epintfotec;Uflt t-o -c}$log1grs
ti."ptOs (tG reiJiviUieJtiager;' A$ tqntt*gial records
-asEerslo-t!-e-E;;!eiaf
fiu;i"m! gpgrqtion. Note inFigure,.2 that.the control toC_ilEfft'*i6'1*
sent to'the general.ledger
tal of postings io the accounts riieivaUte tedggl th3t is
j6urnai
v-oucher sglt flgrl billing to
br;;dr:"t.?""iuuUle is compared to the
di"dnction trevalidate postisg5 to the g"n"rul ledger. In ihe same'fushroq;'rthe
of accountestablishmenr
ir*".-"'rippini"u"i finistied goods ii important to the
ability;,or the rqlease of finished goods from inventory'
Types 6rf Sales Ooder SYstems
arg feal!,le-,.,
Various relationships between the order, billing and shipping functions
prepara{94.9{ the, t '
aeoending on the circurqstances.The major consideration is the
.
csmplele fnyoice is- preafis;* 7.5). In a 99lnp&!e-pf+-ittiftg -s5'stem, thethe
shipping order is usu- i
a. iri. t-tffifr[ oioerltn ttris case,
t#;;
'' ;;;;itttiqrne-iinp
invoicejs released
allv a coPY ot tfre invoice IfuSSf'Gqbgli4qgt p?.p-q5y91!'The
all invoicing
,iirr.i"'gr;la *",r,ippeA.a6-pretJpi"Ulii"El,stim req*.res.thatorder
set.This
U"tno*o .oricr to tt ir"put"tion otitr. lnvoice/ihipping
other
and
"
inu"t ioty problems. Also, freight
few back-ortlers or other
ce-ntsJor
thtseller 6r it"ttd"tdir"d (e.g.,"add.50
i+ti-i*$artil:i.
and as':itiffiy
A;d**between rhe-customer order as pr"*itt"n
i9voi99' If such sitttre Jgstrggg-o!
#;;Ud,
;;;;;
,'**.*Ji1i*Toiuq,"i";irn"r;;&ilt
shipped requgq{algtv.byoice Ana
. uations ure
"!1!g-9!gtlal
cd;;,;miiete preUiUtng is vEry i;ffcient.
--
l
As indifeJ ireniously,'Figure 7.2 illustrates a sep4-r3!q9-rde13$$ !!Lli3gfrom the
systesn. Th"rUipp,"grnOu, fi +tl tvpe of svsler.n is-pegiry-d^1iqra'tslv'
are-di&er.lLego.e-dqhaYspg?lP:r:-P:nf :!p*s"t'
a--slg9!fica-rtt
{itterA separate ora;iinETiriing ststd ii ft;il?ry ytrerr-itre:e 19
(in1ernl!
o.1a9i
1q the seller) and
on
the
thippfnf
egqg--bsttu99g,-the inf-orulation
shipping order may not be
the invoice. Foi exampre, technical rp.iin"uii"ns in the
and ourof-stock condirequired br desired on the inuoi"". E*""ssive back-order
liuld-i"".t';ffi
'
?6CI PART I lntroduction toAccouoting tnformation Systems
ctrRUS Suppt-v co.
SOLD 146TCLAYSTREET
TO:
Burroughs O
PETERSBURG. WSCONSTN
CITRUS SUPPLY CO.
SHIP 146TCLAYSTREET
TO: PETERSBUHG, WISCONSIN
44444
CUTTINGIPTT-3
.00
SCREWDRIVER 6'
WELDING GLOVE#10
DSK
.38
.15
.00
5.0o/o
FIGURE 7.5 lnvoice.
tions also warrant this approach,, because
vw4sre the
ure final
rrtlat content
lul.il,Ellt of
ul the
tIIg invci
lnvclcg cann
be determined'until the goods are read5r for shipment. In many industries,
alte
r
diqsr-o-r-s.bsriiuli-qL;ffioilfi;:1'-].:Tu'#?"3;Tril#:U?1X'jTHll'Ja
pr!
In reeailing, for exampie, rtiffereni'ii.vi"i6i".i"rs *.y U.;dr;i;r;;;;;;;;
an
for clothing. The changed speciications frop the cr1,s1i.os1's ora", *urt
be
on the invoice' In other instances, severallhlprnelltsjue_ngadq_tg_lhg*samg
custpl!_q! over 4 ,spegific lime pg;ig$_under r single U11rrtgt .rd"rj1 rt
is
is 89--o-ne:to-or-19 qgrrgqpgndqn-ce-betw-gell*tfrg custo-iler o,rder and
"u.",-tt "."
the subsequent
invqlqe--q. Typically, one blanket s16s1 rJquires sevel-2[ ssparaie
each shipment made under the blanket order-
invoicir-o.r" f*
Both separate order and bitling and incomplete billing are posrbillin&-Qy_s:
in manual systemq as only oni aocube prepared. This reduces
e9!!1n-1g.qlselsy**qg.
i1
tion and thUs_iqg&ea E9f9_ ef!
CHAPTER 7 Revenue- and ExPendure-CycleApplicati'ons
251
d^ocument' The invoice' on
Note that the sales order is primarily an internal
formaliotification of the amount due for the
the other hand, ir th" ;;*"r',
and bill canbe used interchangeably' A
shipment. Note also that the terms invoice
order and billing might
bill of lading i, un in"ol"* for freight charges. separate
also be called setrtarate order and invoicing'
Accounts Receivable SYstem
the. mongy- ow--e-q!ly^gls-t'o'lqrq lplrngI-clqqqiqe
approii-mai"t, gO% of U'S' business is done on
dqcglu1Ue,gglvab[e reg19;-e41s
geiiuse
fra-o;r"*t""r;;a;r"E
the m4i9n!L9t 4q-grgagization'1
credit, accounts receivable oftel Ieplesents'
customql -q--e!r!ggd pAyfggltt
wqrklAg-cepltaf- eccounts recelvabfeiiso'malq!44!
administration of company
history _inforqqtion, which-is useful it ttioJ"tall
credit policiesptg"tg"t:.:s straightforward' A subConceptualty, the accounts receivable
i"di;;d*l accounts is maintained, wiih a conrrol account in the
sidiary ledger
\,, i
.,i
"f
generalledger.R"*itiu',""?dyl-":'Telout.qltrqlglbg-s4qhI999!p!rfung_tio-n;
#Eroutea to ttie accounts receivable
credit memos@G
Ebits ind iredii are pbsted to the indep,qrtment tlgg ltre gil!.9gl.9!1rtm:*
are prepared.and sent to customers'
dividual accounts; perioafif-fy-didtements
lr uy-produit oi sending statements' special
Aging schedutes #il;;r#
"
may also be prepared'
"rldiit"potts
There are two U*lt
openivable aooli
* t"-a" rscgUBlqIgeql..ab-lq3pPlis4llon:
"pp-""t
item and batance-forw
?:.:ri$*1:liffi:
jffi
,"r"""i,iui".ilt","r*ui"tremecustomsr'sunpaid
ir#;:;;fi
ffi,ffi cus-tomer-rernittap.ges
aft
\
thuy arg*gatcneA-to jtrg *4p-arg
.r_9ceiv-e.g,
invoices-. As
iuitgnrr'J iernittances are applied
processing,
balance;fonn*ur,.
In
invoices_.
i
against a cu9!9p9rlr'i#i;;&;l;;u"'iu""E
r"tt
"r
than againstir*gggtomeit !n-
dividual invoices'
' rable can be tedious because of the volData processing of accounts recel\
may exrtI A large insurance
that
accounts
of
number
transactionslnd
of
urne
companyorbank*uyt,,u"closetoa-millionseparate.accounts.Evenwithcom.
end'may be impossible' Many
puter processing, maiiing all statements.at month's
file is subdioir., in which rhe Srouqgi-re-ceivable
businesses ,r" u
the r"epatatio' or
"yJf"'fffiru
vided by atphuug!-gt: ufiuniit'*u"t 6iae1-1@b'I"
to H
tor eximPle'
'\have
statements-qlelth; Y/-oitilg A3V-{ 9i ttre monttr;
a
often
p
andlso on. These plans
'ffiunti
may be billed on ttr-e ibtn, t io An t-ht2gth,
pay
bills
cash flow, because'@nsumers generally
beneficial effect on-"
""t"puny's
shortly after receiving them'
receivable procedures in
Ledgerless b.";k;;i"g may be used to +trealligg
question is whether copies of sales
certain situations a" i.i.rir"i:ptqc.f.d*al
statLment' This practice is increasingly
slips are to be incluilJ tiiit ttre monitrly
itemized on the staternent' with
uncommo* Usuatty, indiriJoU transactibns are
or invoice number'A company is
supporting documentJ;;;;;Uy eittreicode
at the customer's request; this deobligated to producJ;ftprft*q dq".u-3"tr
filing source.documents Owing to the
mands careful attenioln't[ thJtetails of
rqqeivab!-q e! a
preceding procedural aspects,seruelQl[panreiseulhgilSgtltu!
-Ire;;iE
recotdaYoids
ragsqas
rn"
discoun!-lq--selleclit:l
"auea
she
uL mnsidered bythe analyst,but he or
cuson
negative'effects of factoring
must atso carefully ;;;rtd;;A;-foientiat
tomer relations.
ffieitrouta
fi;Ji
252 PART I lntroducrion to Accounting lnformation Sysrems
DATAFLOWKEY
7. Remittaneldvroes g. Joumal Voucher
2 Conttol Total
tO. CottttolTotat
3. SaIes Retam Memo tl. Wotthtess Accoufi Lisl
4. Sa/es Retum Advice lZ Statements
5. Credit Memo
lS. Totat Write-Otts
6. Writ*Otf Memo
7 Write-Off Advice
& Agted Trial Balanib
14. Write-Otf Coafirmation
lS. Write-Olf Memo
FIGURE 7.6 Data Flow Diagram: Accounts Receivable System-
Transaction Flows in an Accounts Receivable System
Figure 7.6 illustrates a data flow diagram of an 36:sorults receivable application
system- Egure 7.7 illustrates a document
flowchart of the flow of transactions in
an accounts receivable apDli€tion system.The main feature in
oiit
trati,o-qs 1he separation of the following functions..
"u"t
";;iii;
Cash Receipts
Customer remittance slips are forwarded to accounts receivable for posting
fr.om- calh receiPt& Accounts riceivable does not have access to
checks that accompany customer remittances
the cash or
Billing
Invoices, -credit memos, and other invoise adjustments are routed to accounts
for-posting to the cuito-"t r*unt*This maintains a separation of iuno
:9*t":-b-f
tions Billing,does not have direct access to the accounts reeivable records
CHAPTERT Revenue-and Expenditure-CycleApplicarions 263
Customer
Billing
Accounb Receivabli Geoetal Ledger
["-*;
I Rari"".
L-t-'
I
Approve Sales
Accept sa/es
rctums upon
approval of
the credit
manager
Prepare aN janalize credit
memo upon receipt of
approved saies retum metno
Customer
statements
mailed directly
FIGURE 7.7 .lccounts ReceivableApplication System"
;-.:.:.ji:,i*,". Accourts Receivable
.dccounts receivable is responsible for maintaining the subsidiary accounts
receivable ledger. A control account is maintained in the general ledger department. Debits and credits are posted to the customer ariounts from the posting
media-remittance advices, invoiceg and so oR-received from billing und .usf,
receipts. This maintains separation of functions Periodically, customer statements
are mailed directly to customers by the accounts receivable department. Periodic
processing also includes the preparation of an aged trial balance of the accounts
receivable subsidiary ledger for review by the credit department. Other types of
customer credit reports may be prepared based on the needs of the company.
Such reports are often preparqd as a by-product of the processing required to
send customers their statements.
264
PART
I lntroduction to Accounting lnformation Systems
Credit
Credit department functions in an accounts receivable application system include the approval of sales returns and allowances and other a-djustments to customer accounts, the revierv and approval of the aged trial balance to ascertain
customer's creditworthiness, and the initiation of write-off memos to charge accounts to bad-debt expense. These functions are discussed in what tbllowsGeneral Ledger
General ledger maintains the accounts receivable control account. Debits
and credits are posted to the accounts receivable control account from the journal
vouchers/control totals received from billing and cash receipts These amounts are
reconciled to the control totals sent to the general ledger directly from accounts
receivable. This reconciliation is an important control in the accounts receivable
appiication systemSales Returns and Allowances
Sales returns and allowances typically require careful control. Allowances occur
''
-i
when, because of damaged merchandise, shortages, clerical errors, or the like, the
customer and the seller agree to reduce the amount owed by the customer. Generally, the merchandise is retained or destroyed by the customer. The amount of
an allowance is negotiated between the customer and the sales order department
(or salesperson).The allowance should be rqu.eued-a-nd*-appfeyqd-bJa-a1r-,r-n-{ep-e-lwhen attthorized, billing issues a credit
_d.e_n_t pa.flY (usually.the credit department);
memorandum to document the reduction to the custome{:-g.g99glrt.As Figure 7.7
illustrates, s?1". .gt,rtnp.o."Art".1
Eooas i.t"a:ly iet*"ed, usually for
full credit) are typically initiatdd by the receiving department- Once goods are received and returned to inventory for proper control (this would be evidenced by
documentation), the credit manager authorizes billing to issue a credit memorandum. Note that for both returns and allowances, two independent parties are required to approve the transaction, and a third party maintains the records. This is
another example of organizational independence in the design of application
systems.
Write-Off of Accounts Receivable
Ttre principle of organizational independence also applies in the write-off of ac-
-r! counts receivable-procedure- Thqcent'ral feature in a writ'g:o'.ff procedure Q an
' . ' ag-alysis of past due accoun6 usu4l!y;-doqq-y-i!h eq aggd-trial balance. Numerous
1
I
[ ::-I
I
i
1
-i
=i
techniques are available to collect past.due accounts (e.g-, follow-up letters, collection agencies), but some accounts are'uftirnately worthle-ss In this case (as Figure 7.8 shows), the credit manager initiates a write-off, which is approved by the
'
treasurer. On approval accounts receivable is authorized to write off the account'
A copy of the authorization is also sent to an independeht third party (internal
audit in Figure 7.8) for purposes of record keeping.This is necessary because after
the write-off, accounts receivable no longer has an active record of the account.
figure 7.8 details the role of the independent third party. Note that internal audit
:. confirms write-offs directly with-the customer to ensure that no collections have
''.,: , been made on written-off accounts. An employee might intercept a customer's
,. palme[t on account and then arrange for the account to be written off, so that
the'customer does not,continue to be billed for the amount.
CHAPTER 7 Revenue- and Expendiure-CycleApplications
TteastJtbr
265
::li,iin:.::
cigdrr,
tnteiat Audit
Follow-up
r--Tl
I Write-Off
cn stow and
doubtful accounts
I lr4".no.
IL-/' --J
I
I
Periodically
'confirm posting
of worthless
accountlist
Write-Off
Memo
lndependent
agpaval
Confirmation cf
wite-off sent
directly to
customer
.
FIGURE 7.8 Write-Off of Accounts ReceivableApplication System.
Other Revenue-Cycle Application Systems
Every organization defines its own unique application systems A large organization probably has several specialized application subsystems within its overall
sales and accounts receivable application systems F:br example, a sales or orderentry application system might include a separate pricing or quotation subsystem-a'{€t of fileq documentg and procedures used to price complex produtts
silch as electrical generating equipment. Another specialiubsystem migirt maintaiq firm's product or.service catalog. The shipping ipplication might-include a
?
warehouse subsystem condeTribd with converaing so o*r rnto the Jxact storage
locations that need to be picked. An automatCd warehouse syslem might a6o
generate an optimal path for pickers to take through the warehouse to minimize
travel distance in picking the order. The shipping application might include a
shippe-r-ordering subsystem concerned with selecting strippers, grouping individual shipments to minimize freight costq and controlling aU sfripmentJThe finished goods function would maintain several inventory fileq and billing would
need its own files and procedures
Basic transaction processing systems are the source of important tactical and
strategic control information. Data for sales analyses such as product sales by territory, product sales by salesperson, sales forecasting customer credit analysii and
266 PART I lntroduction to Accounting lnformation Systems
processing apother such summarized reports are accumulated by the transaction
routine
in a compii"ution systems. Such reports an{ analyses are common and
of uppertypes
to realize that these
iuterized accounting system. It is important
data oil
the
ie'el management reports cannot be more a..urate or reliable than
which they*are based. The application'systems presented in. this chapter and in
accuChapter 8 illustrate the typei bf controd necessary to provide reliable and
rate data.
EXPENDITURE-CYCLE APPLICATIONS
required to acquire
* An organization's expenditure cycle includes the functions
its operain
conducting
" L""ai?"a services that are utilized by the organization
use in
or
fions. The expenditure cycle inclucles the acquisition of.goods f91 ysall
ihe icquisition of personnel services, and the acquisition of property
;;;";ii"",
lnd equipmenr- Co'rnmon functions include ygBdqls-e-lpcJion, reqg!gi!!!lgg!8, PP-r:
chasing, r-gceiying, aggggalq. paYable, andlgryroll 499o319ting'
This sectio; dit""d t*" important expenditure-rycle applications: purdiscussed in
chasing and payroll. Cash disbursements and iccounts payable are
Chapter 8.
Purchasing
In some companies all prrrchas'-s of goods and services are channeled through
authority to
and controlted by a centialized purchaiing department. In others, the
decentralized
a
compa-qy
the
throughout
is
dispersed
ftu". o.a"rs wit( vendors
a
approach. eg4ralize4--pul9!4ling 1nqy_Vjg!d* iqqpqseii'g-uagtity discounts'.
- U."g"rnar}-".1-positt9ill tgt;-sgt.trpl,^b-ul-elsP-e--eializ3t!ot;a-4d the'
thei.!e1eesed.
ee.p_eee4raj1a!p;is]r_1.-t!s-ryX:iefeliug.tgF"l.{i:?gq-luseof
decentrarized buvers
5!n9qs!ffi9;-p14i;q".94'rh-9-Eiq,-aQ lis-eil Fol eianiple, of the desired goods
specifications
*e
ind
tt"t
.f
may have greater'kno;i;li#
_f
' and thereb"y maintain opti;l inventory leveh As in."ny organizational decision,
the choice is largely one of management style and philosophl''
A purchase application system includes five basic functions:
1. Someone outside the purchasing department determines that materials are needed;
a
requisition is prepared and approved2. Bids are requestg{-a vendor selected, and a purchase order issued by the purchasing department-
,
3. Wben the materials are rereived, a receiving report is prepared,by the receiving departthe ngtement- [n many caseq only a person with technical ability can adequately inspect
cases, it
In
unusual
department':';'- rials and gi.r"
the requisitioning or using
payment
is
"ssrr"rr"e-to
before
tested
received
may be disirable to have the quality of materials
part
the
as
a
of
purpose,
either
this
for
be
established
miy
made. An inspection function
i: . .i:.
',
':
'
receiving department or as a separate department'
to the purchased order and
. 4. Details of the invoice submiited by the vendor are comPared
accuracy. If everything is
mathematical
for
checked
is
invoice
to the receiving reporlThe
in order, the invoice is approvedJor payment'
A check is prepared and sent to the vendor, and all the previous documents are canciled
S.
to avoid the possibiiity of duplicate Payments
Figure 7.9 illustrates a data flow diagram of a-purchase application system'
Egure 7.10 illustrates an analytic flowchart of the flow of transactions in a pura
I
I
It
!I
i
_1.
-!
CHAPTER 7 Revenue-and Expenditure-CycleApplications 257
lir.d-€i.-
!,,ri, "1;-3 fe,
DATA FLOW KEY
l. Requisitioo
2 Acknowl@meat
APwt,ra*Oder
4-PudaseNv*n
i-ReccltvingMvi@
6. Shipinent
7. Receivittgldtice
S,Aeividg Rqrl
g' rrot*:6 oiRdeipt *
l[hw<itE
ll.Afirwedhwoie
l2iottdter-Package
13 Pryment
FIGURE 7.9 Data Flow Diagram: PurchaseApplication System.
chasing application system. The main feature in each of these illustrations is the
separation of the following functions.
i 71
v/'\
Requisitioning (Stores)
---J Requests for purchases, originate outside the purchasing department. In Fig-
originate in the stores department. Purchase req"I9 ?.10,jgglr9-ttg;sggisitlglq
uisitions
might also originate in other departments within the6-rm. Purchase reqttisitions ShoUld begpptg:y.Z!.ig-tlre_aqglea[tUg--depaglmenr.
a-1.
Purchasing
s originats it i, thlhn"tic,npffU"
glgb@-d:eg{g-elt tp elqc-!.-aJerdsr ane! artaqgb feJ. Je rms. d-delrvsry.
How this is done will depend on the rblative degree of centralization in the iomPany's purchasing function. Purchasing may at tisres override a purchase requisition due to insufficient budget,lack of authorization, or so(ne other reason. Purchase requisitions might also be altered or returned-to- the originating department
for modification.
Purchasing selects a vendor, then prepares and distributei a purchase ordef
(Figure 7.11) for the requisition. Copies are distributed to the vendor, a@ounts
268 PART I lntroduction toAccounting lnformation Syscems
fl.ffi'ffi'
Y:ijsro,'i
Review Reorder
Points ot ltems
fulupqt
R*iptof
Alrdp*Order
-t
[s,g,, to
--lr'r/otowwge-
leerx;rtot
Icooas
Furcftase
Drdq
l-"***1 [;",*zl
ww*,
I *'--";
n".*nt"
[I "".t.1/
L
u--[{
I
/
lPayabre/
tnventory
\Y.",
Bvl
Numbxl-
FIGURE 7. I 0 PurchaseApplication Systern
payablq the originating/requesting department (stores), and receiving. As indicated in Figure 7.1O the vendor may return a copy of the purchase order to the
customer to acknowledge receipt of the order. The copy of the purchase order
that is sent to the originating/requesting departrnent should be reviewed there to
verify the appropriatenes! of the purchase order.for satisfying the needs identi.
fied in the purchase requisition.
Receiving
Receiving is separate and inlependent -g! E-e-S!91ss-lg!9don. The copy of
the purchase order sent to receiving authorizes the recbiving department to ac-
I
CHAPTER 7 Revenue- 2nd F;<penditure.CycleApplications
269
I [*''
\I 4/
ti
. 1,r,.,t
Forward lo
Accounts
FIGURE 7.1 O (continued)
cept the shipment from the vendor when it
should catt for an independent count of the
receiving report.
is delivered. Receiving procedures
,rri;;;;;;
f*iil; preparation of.a
pllld pg,tol of a shipment may be obtained by not
ng_f allow-
n9.99uqg9rs-.
99uq ter-s-. tg,
39ep.qs_.tqjh.e_qqarlllqies_ghgylr.
-r!g_th-e_
to _bayq
_[ayq 3ga-eqc.
to_
ttrE prich"se
_ellgy
order. r
-o..n
5U-p€Lvlsol_c!
s-r+-4o_sv_!4.r-r,H.sre!-!r!el{!I!Llr!!QgE-f9_s9lre_o_u.lthluQre_!hQw!!-gJuh-e_p-utqhele
der audlhe-n p-r_ep-arc-s.ar_ecpiuing_rrpo" f;;
_o^r-
th{dffiG-=r.EiGa.
ived.A
e copy ofiF,e
of rhe
receiving,.ililii;;i;ffifi ffi HJlli;i,#t?Tl.lT;',"i:1:.,::,::"xJ";'JT;
Figure 7.10.
774 PART I lntroductiontoAccounting lnformationSptems
s
IF,wa
-\
E
]-'ltu**irg
Rrcfiae
I
Order
-.-
P Yz
/ lqy&f',bc
lhnuorln
--lo"*vev
[aaz verr w
R rfi6.
Paeki e€lb
n*
Count and
lnsflect
Onder
l*i**u
rbfl/
tl,tt
I art*rase
I or*rtu
I
I
I
&C"
Becelving
king Slip
Ieadrrgsr,p
r
I Reeort I
Lr
l
*.;+ig:iry, i':tli':i*+
e*"t"""a1 l-e""r xng
tuer I
---JI
I
t
Sli
ReceivlA
Report
Bvl
Nunbet
:
Pr€pare
o&xrl&r
!
-
--lm' 'r'oll
I
GooG
r ;: irr:i,:!r.,;
!El:r"
.-'-'a_
4
Good s wflfi
l-
-\.;
(
To. I - -
Stores I
I
I
I
H
i__t,
l-
leurausinS
:-
FIGURE 7. I 0 (continued)
-l"-
Stores
The stores department acknowledges receipt of the goods from receiving by
srgning the receiving report and thert forwarding the receivjng report to accounts
payable. If goods are delivered directly to,the requisitioning deprrl+cent rather
than to stores, a supervisor in the.requesting department snould acknowlerigc receipt on the receiving reoort and then scnd the.receiving report to payables- This
independent verificatiun of receiot of the purchase is a-central feature of thc purchasing applicatio: sisi;;:i illmr;1:,! !; .triorrre 7 I o
CHAPTER 7'Revenue- and ExPenditure-CycleApplicatlons 27 I
':j:: .
.!-..-.+- li,!!$:.l:i;
a ii:i.
Cairtr DisourSdjfi-entq
VenSor
9--{**""
--l
i
1r-,
Accounts
I e"yrw"
o
.--[I lvecessaa
c'/t*
uJr"or adn
,fro{ Pfotg'
Po t t+^
t
'i.
FIGURE 7. I 0 (continued)
Accounts Payable
Accounts payable is responsi ir: for.initiating-Payments torendom Four
aer"v
ror*t--pnrsfuleieEu$rlien,purshale-older"eqe$ls:Pg"I1fl9Pry*;^fl:
:
'r-*._
trarsagien- a m{or 11!1 ol over purchasin$',
i6euireaE'ffiE p!,rclias'
;
systeT.++*hryI"P
amrrmaritatinn.
er SVStem. .A. VOUChgf SVstg.m.-iigii
^^r!.,1+-, i- ;t*+ainai,t .+1,*nrrch rhe .rrca,nf a ,vrurelre-r
tron rs asdocumen'y.94prtp.'_t_q?r!s4eel_-Tr.il3l;5vieu10f
ihatdocumen-tationevidqnces
t"-J-l""EAttdthqEp.hliiitrisseli;dils'ffiin Frgure7.L0.
lttust.ated
of tt
it ;
-
;ffi
"."""ti*
"@ffii.Gpi
-, -r -rt
----a-?i6+a
*)
272 PART I lntroduction roAccounting lnformation Systems
Acrrx,titseayable
lr*^
--larr*,rsi,g
{r,o,
--leur"nuing
Match
and
Verify
raatcning
- -l Process
I
--l
l r.roro
Accounts Payabte
FiSure 8.tO
lin
FIGURE 7.1 O (contiouedl
, Approved vouctrers ar€ forwarded to cash disbursements for
voucher systems are discussed in detafl-in tire discussion of the cash
ments application system in Chapter B.
Several other fedttiics to note in rTgure 7.10 include the following:
' Purchasing.de4s,not,contpr th€ actuar gpodp nor does purchasing have comprete
. o'ier the documentation that is requfued,for Bayment.
*eceivingissiparate fronr snal cuitody6fguodsAckncwledgrnent from both recei
and custody is required before pa5rmentji authorized-
. Accounts payab[e handtes onty docrme.ntsand is not able to obtain merchandise or
,indqpendently.. ','
.-,.,'
I
t-
Y!
Iit'
|I
t:
l!
r:rPurchase r_?qukiti6ns:s!o{a_ue indepefrir6ntly reviewed outside
of purchasing This
*z
\ \ shown on the requisition and:also ensures that requisitions do noi originate in pu"rchasi
i
I
I
I
)
CHAPTERT Revenue- and Expenditure-CycleApplications
DATF
273
19-
FOR
HOWSHIP.
TERMS
T]TAXABLE ERESALE _ PERM]T No.
SHIP TO ADDRESS
ADDRESS
IMPORTANT
PtfASE IIoITFY US IMMEDIAIELY IF YOIJ ARE I'',IIAEIE TO SHIP
(srtulEl'M61
utcYEs..au
FIGURE 7.1 I rurchase Order.
. Invoices should be routed to purchasing for review and approval prior to being se..t to
accounts payable. This is particularly important if purchasing expertise is necessary to
evaluate the propriety of the invoice. Purchase terms should be reviewed for propriety orrtside the purchasing department.
This is done by accounts payable in Figure 7.L0-
.
. Inventory records should be updated to reflect the receipt of goods'
-
lntegrity of the Purchasing Application Systern
Purchase documentation simply ensures that individual orders are received as
udpected. Purchase orders, reieiving reports, ancl ttre like control individual plrchaseg but not the purchasing application itself. Control of the purghlsing apPlirelalio-l]-shiP' Bribery-kick-cation centers-s!-t[e-ilrlgg.rty-ol-lhg-bfiygLyggdbr
a ieiiiive-.or friend) are
fro."
ilUuying
brd a"d *"flr"tr-oi-i"6fiaG".h
'Duyer-vendor
that
the purchase order aprelationships
examptes of improper
plication systern must addiess Blryer=,ycndoE:elatie[ELils-el9-J,ngrq 4-mat!gr q{
tbqn p-tp.ggdure. Most comPanies have found it desirable and often neces"Lgliry
r".yA ii-uu"To.rnat *ritten policy and procedure manuals covering the purchas-
furO@Lq-s9q,e9!itjv9-Urddi!&-q!ul!y-trgP-leor-quotationtolms.
-@&iffie5dr-ir,r""gh-qeqqest-f
ing tunction.
.Eertlqqthlolgh_-qlq-ot-Legq9$:-f -oi.gUql{t-ql{9lgs-
Copies of theslformi are filedg.nd.-r-eylcyled-b1lpllrlhaq[g-11r-anagelrlent' Selectt"g tf* Lo*"st-"o.t bid ir not always an acceptable basis for selecting a vendor.
Mithods of evaluating and selecting bids based on vendor attributes (vendor rating plans) may be formalized, with decisions subject to revierv by a higher author-
77 4
PART.
I lntroduction to Accounting information Systems
ity- A policy oi rotating a buyer's responsibilities weakens buyer-vencior re
tionships but reduces possibilities for buyer specialization. Approved vendor lis
prepared by an independent function, may be used to restrict a buyer's options
those vendors rrrhc have been found rciiabie, f;nancially sound, and free of c<
flicts cf inierest.These examples are not exhaustive, but they indicate the types
controls that may be used to ensure the integrity of purchasing personnel.
Th e Attribute Rating Approach to Vendor Selection
The_ettribgJ_e ratgg.4pplo3ch to ye1dol
9ele".!.lql il appropriate whenever
a.u-obiective-,evaluation of the opinions of ieveral iiAilpgnaent evaluators is del
sired: tha! is, an amalgagnation of evpluations of the sarne system. The followin!
i
steps are involved: -t i
. . Identify and list the attributes to be included in the evaluation.
. Assign a weight to each attributg baseci on relative importance and objectivity.
. Have individual evaluators rank each vendor on each attribute, giving a numerical
on a range of 1 to 10 or some other scale-
. Total the individual evaluations by multiplying each attribute's numerical ranking by i
weight; then total all evaluations by adding the scores together.
Given that the relevant costg such as a vendor's prices or a system's
have been identified, a benefit-cost ratio can be computed for comparisons.
though this method appears to be objectivq both assignment of weights and
merical ranking are very subjective processes. Accordingly, attribute eval
techniques are most useful for screening proposals, and identifying those vr
or systems that should be subject to final considerations.
Payroll
'
.. -ii:*i-,..
;-:
'.
A payrolvpersonnel system involves all phases of payroll processing and persc
nelreporting.@Ar-r_s_o_f
p_{9_rlplly--qgdggcur4tety-payi
paylg[Iqporrs, and S_qpplying 1nqtag_eglql
Lnf_oq!4!io n. fte_p rocessiag s.ho q l!_. UrctUdq_
-C_!0pl9y_e-es, gqlg1-ating thp_UecS:Sary
with t he re qui rq d _e_1qp!gy9e_!&L[t
ttr
\.i
i
n ,'' ,-.a
.'U
.'1
r
L
;
c!: r=
ts-
8,.,
_
d,eduetion .I-ar wi_thhal-ding _.taxes-_sp.p-sia-lizBd dc-dustl_ojrs, ggyernmen! r-ep-qti
and_lllefnal p_-e,gsgnngl-I9_qUireme=qts. An efficient system is necessary to establi
and maintain good employer-employee relationships
Payroll processing is extremely complex. In a large organization, it is often
the-most-eomplex-pioEeaureln oF-enritm-ffiis-is-because of the social significance payroils have assumed over the last few decades All levels oflgovernment
impose payroll taxes of one sort or another; regulations and rates are constantly
changed, with the result that a payroll system usually has a relatively short life.
Tle strategy here is to provide an overview of a typicai'pifrou procedure and discuss factors influencing the actual calculation of payroll. No attempt is made to
provide current rates: tax laws are arbitrary and change quite rapidly. payroil processing is one area in which the law imposes not only a fine but i
lait senten"j fot
willful negligence in maintaining adequate records As with any liw, ignorance is
no excuse.The responsibility is on the systems analyst to keep current in this areaFigure 7.12 illustrates a data flow's diagram of a payroil application systemFigure 7.13 illustrates a document flowchart of the flow of tranlictions in a payroll application system. The main feature in each of these illustrations is the separation of the follorving functions.
,
CHAPTER 7 Revenue- and Expenditure-Cycle Applications 27 S
DATA FLOW KEY
l. Authorizations
2 Job Time Surnmary '
3.Time Cards
4. Job Time Report
5. Paytoll Register
& Paychecks '.
9. Voucber
9. .,lauma!'tfoucher
1O. PaYehecks
11. Voucher Ch*k
12 Canceled Checks
13. Bank Statement
7-VoucherCheck
FIGURE 7.12 Data Flow Diagram: PayrollApplication System-
Personnel
The personnel (employment) office is responsible for placing people on the
company's payroll, specifying rates of pay, and authorizing all deductions tiom
pay. Atl changes, such as adding-or-#eting employeeg'sh2nging pay rbics5 or
ihanging levels of deductions from pay,must be authori-*d by the personnel office. 'lle_pepq!-Be!_Ign9!iqlr- is-g[lEinct -tgEllllnekdg}|il13 ag5!.^f1om. tlg_payroll
,pn}.P3latlgr-r{grrpJion.
- I rmekeePlng
n and control of
The limeke-qplqg-iUngtlg iq r-eqpgnsible=fgl tle p a
time reports-ana-iob Eme tigkels ln a manufacturing nrrn;an tiouily eqrploy;e
job. At the end o{ a pay period, the employee,s
time caid (or time report) indicates the amount of time that the employee.was on
the job and the time that he or she-ery-ecls to'receive pay for- Timekeeping is responsible for collecting and maintainin! time cards or time reports, and reloncil-
o>r
L6
l-E
NE
o,
10
Ic
eo
c
o
o
t6
[?
EA
-o,E
tt
E
i," ::",9
ir'o
..:6
.o
r':()
!
,'F
tr
o
tr
at
e
a
.a
E
co
os
:
{
.a E
C
o-
3
s
i'*Q
.EiESg
oso-<
276
gl
G
f
o
rL
CHAPTER 7 Revenue- and Expenditure-CycleApplications
277
ing iirese data to job time summary rcports iliat are received from production'
to in
Job time summary reports indicate thelobs that employees were assigned
job
summary
time
related
the
pioauction.ltimekeeping reconciles time reports to
deieport receive,J from prlduction and then for'-1;ards time cards to the payroll
partrnent.
E ---
?t Lt
Salaried emplqy-e--e-9 typlga.Uy .{o {'ol clock ,o.4- 41{ trff the
job in the same
.mannffiIfnoaccountingtortimejsrequired,asupervisor's
employees
ippr"rii ii "iuuify friiiied to initiate payroll processing- If salaried
is
straightforward'
7'13
uiJi"quir"a to sutmit'time reports, the inalogyto Figure
Payroll
and
qrepa:
The pavrolldgpq:lfne1rt iq-rs9po-4pip-1-9-tgt the.actu-A! -cpr4pglatioq
preparation of
the
of
i"aependent
pJyioit
ii
pi"piri"g
ut
it
N6t"
rqlion oddr-oi|
data' PersonitJi"prt?iii on which payis based, the-.li*9-r-epqrts and pgrsoq4el
are received from
nel data are received frtm the pet.o.,.t"l offiie; time reports
(gross pay
timekeeping.The payroll register details the computation of net Pay
for sier1l
less deductions froni p"V). fuy9!998q-gl9-l9glloi3!!r (lgbursgments
accounts
to
register is sent
iqtl, reri"*, 4qg!ilt-gb"ii"*;e "apy;mn" payrollpavroll'
piiiuii to iniiiaitth;;;oiding of a voucher for the
.
Several other features to iote in Egure 7.13 include the following:
rr
. The use of a separate imprest payroll account for paycheck* to facilitate reconciliations
. An independent reconciliation of the payroll account bank statement
. The use of an independent paymastec The person who d,istribute; the pay is independelt
office, the
of personnel, timJteeping, ai-rd payro, pieparation. Neither the personnel
once
timekecp;.3 dep"rt*"nt,-,ror ttre payrolidepartmen'h".Tt9:,:t:.,the Palehecks
I
they havc been drawn-
'j
Payrotl Processing Requirements
employee informaNdmerous files must be maintained in a payroll system. Basic
to prepare a
necessary
is
deductions,
pay,
and
tion, such as name, address, rate of
actu,al paydocument
to
maintained
be
payioff.$ pgytolfggt:11t o1joq1-ai niust
penprocesing'
in
tables-used
;n;ltsfXaa}erdfiing tb government reports,tai
information
of
examples
are
plans
fi"rpii"rir?riori plans, and similar
#;;i;,
required to support a payroll procedure' .
tax legislation impose four taxes based on nayrolls:
Social selurity uiJ'",t
"i
'i'
(F-r.c.A.)
1. Fed"rjrtli:Jj), ,,r*i.,rorr', disability, and hospital insurance
2. Federal unemployment insurance
3. State une'rploYment insurance
4. Income t.D.es withheld
employees
rhele&la!]$gtg"ce Q+Jributigll! 49t (E I:C'.1"1 P.rovides that
to fu"as foi'oitl uge, t[-*iuors', disability, and hospital insurcontribuie
families' The contribu"q*ffy
ance benefits for certain individuats aid rnembers of their
tion
---- is based on a tax rate applied to gross wages'amount of E'I'C'A' tax from each
ft" employer ir: i"q"it"O to dEduct thJ
reQuired to match these
employee,s puv Lu.n-puv period. The emoloyer is then
depository. A penalty
deductions and deposit the entire u*o,rrrf in u government
when
is levied for failure, without reasonable cuus"Jo make-required'deposits
claim credit on the record of federal tax deposits for
due.Thxpayers who
wilily
278
PART
I lntroduction toAccounting lnformation Systems
deposit act made are subject to fine and/or other criminal penalties. The employer is responsible for the full amount of the tax even when he or she fails to
withhold contributions from employees.
lltre Federal Social Secuyity A ct and the Federal Urrernployment Thx zrct
provide for the establishrrent of unemployment insurance plans. Employers with
covered workers employeci in each of 20 weeks during a ialendar yeais are affected. Payment to the federal government is required qua.terly. unlmployment
benefits are provided by the systems created by the individual states. Revenles of
the federal government under the acts are used to rneet the cost of administering
state and federal unemployment plans as well as to provide supplemental uneml
ployment benefits.
Unemployment comPensation laws are not the same in all states, but all
states participate in the federal-state unemployment insurance program.In most
stateq laws provide for taxes only on employers The federal tegiilati,on applies to
allemployers of one oI more employees.Thx payment is generilly required on or
before the last day of the month following Lath calenJar quaiter. Most states
have a merirrating plan that permits a reduction in the tax rate for employers
who establish a record of stable employment.
Federal income taxes on wages of an individual are collected in the period in
*li"h the wages are paid. our "pay-as-you-go" system requires
to
withhold a portion of the earnings of their employies. The amount"*pl,oy"r,
wiitrtrlta aepends on the amount of the earnings and on the number of exemptions allowed
the employee. A withholding exemption ceriificate must be prepared by each empioyee.The certificate states the number of exemptions to which the employ:e is
entitled. This certificate is given to the employer io that she or Fre rvill Ue at te to
compute the.prgpe!_4rnounr qf tax Jq,. be wi th h eld.
- curreniresut{'&*ri rrovide?[iaar:ated system of withhotding designed to
make the amount of tax withheld closely approximate the rates ,..? in c"ompur
ing the individual's tax liability at the end of the year.
Emplqyers engaged in interstate commerce are required by the Federal Fair
Labor Standards Act (also known as the wages and Hours I.aw) to pay overtime
at a minimum rate of one and one-half times the regular rate for hours-worked in
exc€ss of 40 per week. Many compa-nies also pay overtime premium rates for
night shifts and for work on Sundays and holidays.
Employers must take care to deduct payroll taxes from all employees. A distinction is drawn between employees and independent contractors. irublic accountants' architectE attorncys, and other people who renrlel services to a_business for a
fee but are not controlled or directed by the client.are not employeei brt independent contractorg and the amounts paid to thernare not subject to payroll taxes
At the close of
quarter an employ,.-eLj: requireo to nt" a quarterly re-e1ch
turn of Form 941 or 94LE
and pay the baldnCEtf undepositeci taxes. If the taxes
were deposited in full, 10 additional days are allowed. This return covers income
tax withheld and EI.CA. tax for aII employees.
on or before January 31, each employer is required to give each employee a
completed Form w-2 wage and rhx statement. Th; employir is required to
for_
ward a copy ofthesew-2 forms with a Form w-3 on or befJre February 2g
to the
government. AIso on or before January 31, employers must file Form 940, Employer's Annual Federal Unemployment Thx Return.
The basic information about.what ,n" g.5.:government requiies with respect
to payroll is outlined in the Department of Tieasury Internal -Revenues Service
publication Circular E Employers Tax Guide. This publication contains all the lat-
F,:-.
k+-<_-
CHAPTER 7 Renenue-and Expenditure-CycleApplications 279
Evenl
January 31
January 31
Form W-2 (Wage andTir-x Statement) to be furnished to employees
Form 941 (Employer's Quarterly Federal Tax Retum) due for 4th quarter of
preceding calendar year
January 31
Form 1099-Misc. (U.S. InformationReturn for Recipiens of Miscellaneous
Income) to be furnished to consultants paid directly
Form W-3 (Tiansmittal of Wage and Tax Statements) due with Copy' A of each
Form W-2; Form 1096 (Tiansmittal) with each 1099-Misc.
Duplicate of Form 1096 due with State Copy of Form 1099-Misc.
Frle Form 1120 or 1120-5 (Federal Corporate IncomeThx Return for calendar
year)
Form 941 due for 1st quarter
Form 941 due for2nd quarter
Form 941 drre for 3rd quarter
February 28
February 28
March L5
April30
July 31
October 31
est information on new laws and detailed information for employers. It tells how
to fill out aU the forms and reports required, how to compute employment taxes,
how and when to make deposits and payments, and lists the invaluable tax tables
If an employer does not have this publication or access to the information contained in-it, ihe or he will sooner or later make an error in payroll procedure that
will cost a penalty.
Thble-7.l contains a schedule of payroll-related deadlines that illustrates some
qf thg processi-ng and infor:nation that a typical payroll system must provide.
Other Expenditure-Cycle Application Systems
A large organization will have many specialized application subsystems in its ex-
-ycleEach of these subsystems processes data against files, uses forms
pendiiure
and other documer,tation, and requires'segregation of duties and other controls
to ensure reliable operation. Examples of expenditurti-cycle subsystems that are
specialized in most organizations include the fgllowing:
Vendor se_l_e_ctio_n
Receiving
-B@:!lrg:$ne
Monitorsandconsolidqle!,qs,qf .1-e,qq,e--qts
for purchases.
Accep6evaluates, selectt an-d reviews lhe
firm's approved vendor list.
Identifiessoods received and conducts
ingpgction procedgrc+
Cversees capital budgeting systems' major
maintenance accounting, research and
develropment accounting and computer
system project accounting.
aq-.organized lirting of all j,ob
-Maintainl
pesds$3gIi!&4-e-[ry-
Employee profile
ustrtatseierydiEllltlgr{i9l o n
Fr!g-!Sg"!E administration
Maintains the required files to administer
Insurance and/or accident claims
Processes data relevant to such claims
9r{rpl_oygel
@-
'I
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, -It
280 PART I lntroduction toAccounting lnformation Systems
Each of these subsystems provides data relevant to the strategic and tacti
management of the firrn. The discussion of the purchasing and payroll applica
systems has been directed at basic internal control considerations Such consid
ations must be included in anv expenditure-cycle subsystem to ensure that d
prwided to upper-level managernent and outsiders are accurate and reliable.
SUMMARY
Sales order processing is a common revenue-cycle application system. A sales
der application system comprises the procedures invoived in accepting and shi
ping customer orders and in preparing invoices that describe products,
and assessments. A model sales order application system includes a separation
the following functions: sales order processing, credit 4uthorizations, custody
fiaished goodg shipping, billing, aeeounts receivable, and the general ledger.
Accounts receivable processing is another common revenue-cycle applicati
system. An accounts receivable application system is conceptually strai
Debits and credits are posted to customer accounts; statements are periodically
pared and mailed to customersA model accounts receivable application system i
cludes a separation of the following functions: cash receiptg credit authorizati
billing, accounts receivablg and the general ledger. Procedures that handle sales
turns and-allowances and procedures used to write off accounts receivable requi
careful design and control.
Purchasing is a common expenditure-cy-cJe application system. A purchasi
application system comprises the proceduibs'involvbd in vendor selection, req
sitioning, purchasing, receiving, and authorizi_4g psyrrent to riendcii.s. A rn,
purchasing application system includes a sepaiation of the following functi
requisitioning purchasing, receiving, stores, accounts pqyable, and the gene
ledger. Adequate vendor selection procedures are an important factor in t
overall integrity of a purchasing application system. '"
Payroll is another common expenditure-cycle application system. A
rolupersonnel application system comprises the procedures involved in promp
and accurately paying employeeg generating the necessary payroll reportq i
supplying management with the required employee skills information. A
payrolUpersonnel application system includes a separation of the following fur
tions: personnel (employment), timekeeping, payroll accounting, and the ge
,e.;al ledger An independent bank reconciliation is an important contrcrl inpayrolupersonnel application system, as it is in any expenditure-cycle applicati
system.
apprcved vendor list a list of .vendors approved
for use by the purchasing function.
attribute rating: an approach to vendor selection
that identifieq listq and evaluates several different aspects concerning a vendor.
balance-forward processing: a customer,s remittances are applied.against a customer,s outstanding
balance rather than against individual invoices
I
E_
bill: a synonym for invoice.
bill of lading: the invoice received from a
for shipments.
blanket.order: a single order that calls for seve
shipments to the same customer over a
time period.
blind count counters in receiving do not have
cess to quantities shown on purchase orders.
CHAPTERT Revenue- and Expenditure-CycleApplications 28 I
complete prebilling: the complete invoice is prepared at the same time as the shipping order.
credit memorandum: a foim used to document
reductions to a customer's accourt due to sales
returns or sales allowances.
eyele billing: the processing of accounts receivable
is subdivided by alphabet or account number in
order to distribute the preparation of statements
over the working daYs of the monthfactoring: the selling of accounts receivable at a
discount to atollection agency.
incomplete prebilling: the invoice is not completed until thc goods are ready for shipmgn-tindependent paymaster: the person who distributes pay is independent of the payroll preparation process.
invoics the document that informs a customer of
charges for goods or services rendered.
matching pnocess: the review of purc{rasing documentation prior to authorizing payment to vendors
open-item processing: a customer's remittances
are applied against irdividua! invoices rather
organizatlonal independence: the separation of
functions in the design of application systems.
partiat billing: synonym for incomplete billing.
postbilling: the invoice is prepared or completed
after shipment.
purchase order: form issued to a vendor to initiate
a purchase.
purchase requisition: form used to document a request for a purchasereceiving repore a form prepared to document the
receipt of shipments from vendors.
request-forquotation: forms used to request competitive bids &om vendors
sales orden a document prepared to initiate the
shipment of goods to a customer.
separate order and billing: both a sales order and
an invoice are used in a sales order application
system.
shipping advice: documentation that is forwarded
to the billing function to evidence a shipment to a
cusiomer.
than a eustomer's orrtstanding balance.
Cbaptr Quiz
Answers to the chapter quiz appear on page 300'
1. Which of the following documents is used to post sales on a8count to customers in the
accounts receivable ledger?
(a) purchase orders
,(b)-invoices
(c) remittance advices
(d) bills of lading
2. Which of the following departments should _ryralrch slUpElng*{q.}ryilt. with open
sale-s orders and prepare daily sales summarie6?
gf ainiry
'(b) sales order
(c) accounareceivable
(d) shipping
":-::'--,
3. In an incomplete prebilling sales order system, the invoice iS
(a) -completld when payment is received from the customer-
l)lf comoleted when ihe goods have been shipped'("i co-'pl"ted when the iales order is approved by the credit manager.
(d) completed when the customer has acknowledged receipt of the shipment.
4. h9 billing function should normally report to which of the follorving?
f'{) conttoller
(b) treasurer
(c) Airector of internal auditing
(d) vice president of sales
I
i
781 PART I lntroducdon to Accounting lnformation Systems
:. Which of the following departments should normally be responsible for the
upon the receipt of 4p_proved.sales[on ana journatizingof cre
memos to authorize a reduction in customer account balances because of re
goods?
(a) receiving
(b) accounts receivable
(c) credit
"
Ji) bitting
6. In a purchase application system, which of the following departments should
be responsible for the preparation of pJrrc_hggr lggqigll1-ons?
(a) cash disbursements
(b) purchasing
(c)- ieceiving
JdI stores
7 . Ia a purchasg application system, urhich of the following departments should
be responsibie for the preparation of Brrchase olders?
(a) cash disbursements
..(b) purchasing
(c) accountspayable
(d) stores
8. In order to provide accountability for purchasing,
should be sent to
(a) the vendor.
(b) cash disbursements"
:
llf accounts payable.
, (d) receiving.
9. [n a payroll applicatibn,system., which of the followrng should be responsible for
oreoaration of the navriili'rccister /
(d) timekeepingdepartment
10. In a payroll application system, which of the following should be responsible for
of oav rates for emnlorrees?
personnel department
(b) payrolt department '
(c) cash disbursements department
(d) timekeeping department
You have been engaged by the maq4gement of .rriden, Inc. to review its internal
trol over the purchase, receipt, stdiii,eiand issue of rzw materials You have prel
the following comments that describe Alden's procedures
Raw nraterialq which consist mainly of high-cost electronic componentq
kept in a locked storeroom. Storeroom personnel include a supervisor and four cle
All are well trained, competent, and adequately bonded. Raw materials are re
from the storeroom only upon written or oral authorization of one of the p
foremenNo perpetual inventory records are kept; hence, the storeroom clerks do
keep records of goods received or issued- To compensate for the lack of perpe
records, a physical inventory count is taken monthly by the storeroom cterks,
are well supervised. Appropriate procedures are followed in taking the inven
count.
I
ft-u
1-
284
PART
I lntroduccion toAccounting lnformation Systems
Raw Materials
{9:l'lr:
'P,odrt&fii'
DATA FLOW KEY
1. Written or Oral Authoriation
2 Monthly Physic.al Count
3- Reotder Levels
4. Mateials Requisition Ust
5. Purchase Order
6. Bill of Lading
7. Receiving Repofis
Key
L lssue materials uPon writtan
verbal request of foreman-
Suoer.isor
'iiems
point-
ccfiipares count d
to o'edetirmine reonls
C. Prepare purchase order for
item lor the predetermined
reorder quantity.
D. Select the vendot froin w
item was last purchased.
E. Count the shipment and i
count to the bill of lading.
the bill of lading, date it, and
as a receiving'report.
FIGURE 7.14 Solution to Review Problem.
The accountipayable clerk handles both
the purchasing function and payment of
invoicesThis is not a satisfactory separation of duties
Raw materials are always purchased from
the same vendor.
There is no receiving department or receiving report. For proper separation of
dutieq the individuals responsible for
receiving should be separate from the
storeroom clerks
...
h,F
i
!1 :
!:- ,
l.
F.
L
5;
The purchasiag functioa should be centr
lized in a separate department. Prenumbered purchase orders should originate
from and be controlled by this department.A copy of the purchas6-o..,gder
should be sent to the accounting and
receiving departments Consideration
should be given to whether the receiving
copy should show quantities
The purchasingdepartment should be required to obtain competitive bids on all
purchases over a sPecified amount.
6. A receiving department should be estabblished. Personnel in this department
should count or weigh all goods received
and prepare a prenumbered receiving
report.These reports should be signed,
CHAPTER 7 Revenue- and Expenditure-CycleApplicadons 285
7. There is no inspection department' Be- are
cause high-cost electronic components
usually rlquired to meet certarn specifications, ihey should be tested for these requirements when received'
dated, and controlled. A copy should be
sent to the accounting department'
purchasing department, and storeroom.
7. An inspection department should be established to inspect goods as they are received. Prenumbered inspection report:
should be prepared and accounted for. A
copy of these reports should be sent to the
accountiug department-
Reoiew Questions
consideration in the
1. what are several factors that make internal control an important
design of business Procedures?
production order
2. In what circumstances might a customer order require the use of a
prior to a sliiPPing order?
in a sales order pro3. Distinguish between the bilting and accounts receivable functions
cedure.
procedures:
4. Briefly describe and contrast the foltowing types of sales order
(a) seParate order and billing
fU) iniomPtete Prebilling
(c) comPlete Prebilling
activities of a sales-order
s. ,irirat uoouniing jourial entry or entries summarize the
procedure?
cycle billing'
O. Uffrat is cycle billing? State two advantages of using
l
7. When is ii desirable to use an acknowledgment copy of a sales
proceallr;wance
and
in a sales return
the major f119;ts of inlunaf
order?
B. Outline
.gontral
dure.
9. What functions are seryed by periodic staternents of account?
10. Identify the two major aspects of a purchasing application
system'
the issuance of a purchase order?
11. What accounting entry if any, is necessitated by
12. Define and indicate the purpose of the following forms:
(a) requisition
(b) purchase order
(c) invoice
(d) receiving rePort
13. What is the matching Process?
of the procuf,emprt^function'
14. ldentify several controls directed at ensuring th-e integrity
function? Give spepurchasing
the
over
L5. How might budgetary control be exercised
. t_
cific examPles.
the irnplementation of an ap16. What factors or qualifications might be considered in
proved vendors'list?
"
L7. What are the objectives of a payroll system?
requirements with respect
1g. What is the basic source of information concerning federal
tc paYroll Processing?
tS. laeniify the major controls in a payroll procedure'
20. tdentify each of the following forms:
(a) Form 941
(b) Form W-2
(c) Form W-3
(d) Form i099-Misc(e) Earnings statement
>rt'*eR
CHAPTER 8
P ro duction - and F inal4ce -CYcle
Applications
LEARNTNG OBJECTIVES
Careful study of this chapter will enable you to:
IDescribethemajorfeaturesofaproductioncontrolsystem.
I Describe the major features of a property accounting application
sYstem-
IDescribethemajorfeaturesandcontrolsinacashreceipts
aPPlication system.
I Describe the major features and controls in a cash disbursements
aPPlication system.
':
:<--
,"
*=
---,Y-
:*
"
in an organizaThis chapter discusses accounting application systems found
applicaillustrated
of
the
feature
tion's production and finance cycles. The tintral
independence'
organizational
iio"tii the segregation of dutiei to achieve
PRODUCTION-CYCLE APP LICATIONS
accounting @
Produciion control, inventory control, cost accounting, and property
l9w il anv
are typical functions in the iroduction cycle,of manufacturiug,firms'
in nonmanufacturing firms,
froAuttion-cycle activities eiist ", sepuritt -!gnc1!g-ns
sor'ne
but to some extent, most organizatio-ns hold fomC inventories and manage
pri4g.1pte1of
the
;-:. 1,-,,,,typ€ of productive activity, sich as selling goods or services.Thus'
' ' ptlaua:ion control
r"i"uunt to most organizationl
' This section provides
"r"
an overview of the.transaction flows necessary to support
control, inventory control, and cost accounting within a
the functions
nim.me discussiog pf produdiotr-cycle applications also includes an
manufacturing"6;;r"ii.n
systems'
overview of tt U"ri" factors relevant tb pppErty accgunting application
"
\:tlt Production Control Q
fo"u, on the mahlse1nelt 9f T1'ulT:liTi]'1":t^"j1."-':
"*. fwr;, and finishld goods'
J"!.":'l':s^:: l,It T::.",9::
requires a
in which costs are aiririirl,ia to iarticular jobs ir productig{gfders
o)
production order control system.
301
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f.
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t
;-.
E:
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E ._,-
302 PARr
\i
I
I
lntroducdon to Accounting Information Sptems ' .t
process or department accounts by
In pro""r, costingr costs are
"l/rrr.oin
periods (day, week, or month). At the end of each period, the cost of each process
is divided by the uniB produced to determine the average cost per unit. Process
costing is uied where ii is not possible or desirable to identify successive jobs or
produition lots. A classification of processes or departments may be set up for
toth cost distribution and production reporting Purposes This classification
serves the purposes of process cost accounting and repctitive order production
control. Coits in either job or process costing may be actual costs or predetermined (i.e., standard) costs
Figure 8.1 is a iata florv diagram of a production control application system.
Figure 5.2 i. u document flos,chart of the transaction flows essential to a manufactuiing company. Cost accounting systems encompass b6th produq"T.""g inventory lontroi; Uottr are closely related to order-entry, billing, payroll, shipping' and
,-ourchasins orocedures
n \ Inte.-nat control over inventories and pro{uction is based on separation of
and basic records and documentatioly'such as production orders, mater\]drnctions
'-ial requisition
forms, and labor time cards. Pro,/ection of inventories from physical
theft involves security and access provisions as well as periodic physical counts
and tests against independent records
1. Production Ocder
2 Production Order
7. Completed Production
8-Completed Prcduction Orders
3. Material Authorizations 9. Materfal Costs
4 Material lssuances 10. Cost of Goods Completed
5. Material Requisitions ll. Cost of Ptoduction Repod
6. JobTime Cards
FIGURE 8.1 Daa Flow Diagram: Production ControlApplication.
.-
8 Production- and Fimnce-CycleApplications 303
Prcduction
@ntol
Ptoduction
Depaftments
i,F*,ffiiianto,v
;;dax";cp!t/'g,
ry
f l"r".t
Status
RaYv Materials
FrxshedGoods
Post to
WtPRe@in.ds
Jounal
Voucier
Matillals Placed
h Paduction
:. .,r:1;;;a:;a'ijsatit*,lik'ti.i.:,i..1.j
FIGURE 8.2 Transaction Flow in a Producti'on ControlApplication'
304 PART I lntroduction toAciounting lnformation $ystems
Files and
Reports
:.
.: .
Production control involves planning which products to produce and sched-,--r
uling production to make optimal use of resources Basic production requirdq l.,
ments are provided by thc bill of materials and master operations list Detailed
material specific4tions for a product are recorded on the bill of materials The bill
of materials lists all required parts and their descriptions in subassembly order.
The bill can be used as a ready reference for replacement parts as an aid in troubleshooting subassemblies, or as a parts list for the end user. Bv distributing copies
of bills to all affected departmentq management can ensure uniform access to
accurate, up-to-date information at every operational level. A master operations
Iist is similar to a bill of materials Detailed labor operationg their sequencing, and
their related machine requirements are specified in the master operations list
for a product. The bill of materials and the master operations list are used extensively in the production control function- In a standard-cost s!'stem, the standard
material and labor costs might be included on the bill of materials and master operations list.
Determining what products to manufacture requires an integration of the
demand for a product, the product requirementq and the production resources
available to the firm- Resources available for production are communicated to the
production control function through inventory status reports and factor availability reports. A few material status report details the material resoures in inventory that are available for production. A factor availability report communicates
the availability of labor and machine resources. Demand requiremens for a product depend on,whether it is custom-manufactured' per customer order or routirrely manufactured for inventory. If the product is riranufactured for inventory
production tcquirements depend on a sales-fpr&Ga&t;--nryhich--raav he sent to production control from the sales or marketing departfuerit. Sales forecasts rnust be
related to the amount of a product held in inventoryThis information is provided
in a finished goods status report, which lists the quantities of products in inventory. The integration of all these factors results in a production plan for the organization. The production plan is embodied in a production schedule and production order(s). These documents originate the flow of production data processing.
Transaction Flows
?:,j
The production order serves as authorization for the production departments to make certain products Materials requisitions are issued for each production order to authorize the inventory department to.release materialsto the
production departments. The items and quantities shown od a materials requisition are determined from the specifications fui-the product's bill of materials Note
flow of the materials requisition and production order in Ftgure 8-2. Qe.gp5t
:-r,w6$e
' .i:'iri. aAounting
function receives a copy of the production order directly from produCtion control and also from the production departments when the production order is complete. In similar fashion, cost accounting receives copies of materials
requisitions from both the inventory control function and the production departments This distribution of documents implements an adequate segregation of duties and provides accountability for the production departments
Labor operations are recorded on job time cards These cards are posted to
production orders and forwarded to the cost accounting department.The periodic
reconciliation of time cards to production labor reports is an important internal
control function. This function was detailed in the discussion of payroll processing
in Chapter 7.
l{r*-*
CHAPTER
I Production- rral)nrn..-cycleAppliations 3Os
Production status repoflts are periodically sent from the production department to the production control function. A production status report details the
work completed on individual production orders as they move through the production p.o""ss. It is usei{ to monitor the status of open production orders and to
revise the departmental production schedules as necessary.
The central document in the foregoing process is the production order. A
copy of the production order is sent to the cost accounting function to establish a
WIP record for each job.
CostAccounting
The cost a@ounting department is responsible for maintaining a file of WIP
cost records New records aie added to this file upon receipt of new production
orders, initiated by production control. Materials costs are posted to this file from
copies of materiais requisitions. Direct labor costs are -posted from job time.ticketi Overhead costs are often applied on the basis of direct labor hours or direct
labor costs and, therefore, are posted at the same time as labor costs. Cost accounting initiates a journal voucher reflecting each batch of job time tickets
posted ihat contains a debit to WIP and credis to payroll and manufacturing
bverhead.This journal voucher is transmitted and posted to the general ledgerAs produition orders are completed and goods are transferred to inventory,
several documents must be updated. Production control removes the production
order from its file of open prbduction orders Coqt^accounting closes the related
WIP record, summarizis this activity, and commun'igates a completed production
cost surrmary 1o various managers. The finished g6-ods inventory recordsare updaterl to reflect the availability of the product.
Control of production efficiency require'icomparisens of actual produetinr"i
with scheduled pioduction and'hnAiffi-y6ft'" fEiifteO varjances- Productioi::control also requirei a comparison and analysis of other factors, including budgeted
cost versus actual cost for individual production orders and/or departments, and
facility usage versus facility availability by department. The control of inventory
loss and thJ maintenance of optimal inventory levels are also important to overall
production control.
lnventory Control
;
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The control of inventories is u""o*pl\h"d through a series of inventory records
and reports that provide such informdpion as.inventory use, inventory balanceq
and minimum and maximum levels of }tock- Reorder polnts and'proce$ures are
established. A reorder point is the level of inventory at which it is desirable to- order or produce additional items to avoid an out-of-itock condition. The development o? reorder points requires an analysiS of product deB?Ed,Ordering or production setup costq uenaoi or production lead'tinae; invenftiifliio-lOine.cos^t1 3r:d
the costs u.ro"i"t"d with an oui-of-stock condition such as lost sales or inefficient
use of production facilities
B^ecause inventory control aims at minimizing total inventory costs, a1 important decision to be made is the size of each purchase order quantity, that iq the
most economic order quantity (EOQ). The reorder quantity must balanee two
systems costs-totat carryingiosts and total ordering costs. A formula for calculating the EOQ is
\.
EOQ:
1
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306 PART I lntroducdon toAccounting lnformation Systems
where
EOQ : economic order quantity (units)
R : requirements for the itein this period (units)
$ = purchasing cost Per order
P: unit cost
1: inventory carrying cost per period, expressed as a percentage of the period
inventory value
once the EoQ has been calculated, the timing of the order must be decided;
that is, the reorder point must be determined. If the order lead time and the inventory usage rate are known, determining the reorder point is straightforward.
Lead time iJthe time between placing an order and the receipt of the goods- The
inventory usage rate is the quantity of the goods used over a-period of time' The
reorder point"stroutd be whlre thi invento.y_1"-".J reaches the number of units
that woutd be consumed during the lead tirne' In a formula:
Reorder point : lead time x average inventory usage rate
perpetual inventory records are the best source of the inventory information
n""".r"ry to calculate the EOQ. The units in the beginning inventory on order,
receiptq-issues, and balance on hand, should be included in these records' Appropriati controllover inventories requires periodic verification of items on hand.
This can be done o1a rotating basis when perpetual inventory records exist, or it
can be done with a periodic physical count.:An.importani part oi inventory control is thc evaluation of inventory
furnover'to determinq the age, condition, and status of stock. special controls
should be established;to'write down obsolete and slow-moving inventory-it9t'lS,-,
;htta"tffi'fl5.J'th"'6uhnce to an appropriately established -inventory level. A:'1",
stock status report showing detailed use by period is especially helpful in maintaining the invintory at aProper level and controlling slow-moving itemsfuntrol or"t it u".riory includes methods of storing and handling' Items
need to be classified and properly identified so that ttrey can be located appropriately and so that proper verification and reporting are_possible- The storage and
hanafing of items muit provide security against embezzlement, protection against
of obsolescence, and assuranoe of proper coltrol'
damagJor spoilage,
"uoid"n"e
inventory is a substantial investment. An inventory control system should
provide statuireports on each active product so that the company can reasonably
meet customer dlmandsBecause of the large number of inventory itcms and the
variety of transactions affecting them, it is difficult to keep inventory and production information up-to-date with manual systems A comPuterized inventory control system can result in a -substantial redubtion in inventory investment. These
savings- include a reduptioriiffffieatory without a corresponding decrease in service, ietermination of'economic order quantities and order pointq establishment
of adequate safety stocks, and forecasts of future demand based on current and
past iniormation. Usage recordg turnover and obsolescsnce analyses, reorder
points and quantities, ind other statistics relevant to inventory control are difficult to generate in purely manual systems.
Just-in-Time (JlT) Production
Just-in-time (JIT) production is a term rsed'to describe a production system-in
which parts are protuced only as,they are required in.subsequent operations. JIT
.yrt".i differ from conventional production systems in that inventories of work-
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CHAPTER I Production- and Finance.CycleApplications 307
FIGURE 8.3 Just-in-Time (JlT) Production.
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in-process, raw materials, and finished goods are minimized or totally eliminated.
The JIT concept is illustrated in Figure 8-3. The raw materials inventory work-inprocess inventory and finished goods inventory are shown within dashed-line
boxes to indicate that they are eliminated to the extent possible in JIT produc-
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tion. The terms minimum inventory production system (MIPS), material as
needed (MAN), and zero inventory production system (ZIPS) also describe this
concept of minimizing inventories
Inventories serye as a buffef between different operations. Inventories are
eliminated by carefully analyzing operations to yield a constant production rate
that will balance input and output at the various stages of production. JIT production also emphasizes quality control. Because inventories are minimized, defective production has to be corrected immediately if the constant flow of production is to be sustained.Vendors guarantee timely delivery of defect-free parts that
may be placed immediately into production rather than fust being placed into
inventory.
The financial benefits of JIT production stem primarily from the overall re. duction in inventory levels. This reduces a firrn's total investment in inyentories.
Costs such as handling and storing materials, obsolescence, storage spac€, and financing"charges on total inventory cost are reduced, perhaps significantly. Other
I
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r aw materials
:--
constant-flow pro&uction, quantity disounts from vendors who in retuni receive
long-term contractsi and increased emphasis on quality production and the corresponding reduction in the cost of waste and spoilage-
Property Accounting Applications
Property accounting applications concern an organization's fixed assets and investments. An important element of effective internal control is the aecurzite and
timely processing of information relating to fixed assets and investments. Such
processing is accomplished through the use of special accounting applications that
provide for accounting, operational, and management infOrmation needs (see Hg-
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ure 8.4).
FixedAssets
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There ara fiiiii objectives o-{ fixed asset of investment accounting applica-
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tions:
I
L Maintain adequate records that identi$ assets with description, cost, and physical loca-
I
tion.
2- Provide for appropriate depreciation and/or amortization calcutations for book and tax
purpose&
3. Provide for reevaluation for insurance and replacement cost purposes
4. Provide management with reports for planning and controlling the individual asset items.
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Fixed assets are tangible properties such: as land' buildingg machinery
equipment, and furniture that are usid in the normal conduct of a"business These
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308
PART I lntroduction toAicounting lnformation Systems
FIGURE 8.{ Properry Accannting Application Syssern
.
.iij:;1ai"ii!:!.
items are. reldtiv€ly. pefinanent and often represert a companyt largest investment" Tiansactions that change the amount,of ,investmcnt in fixed ,rssets tend to
o,rur infiUqrkntly and usua[y involve relat-ivEty"Iarge'aixounts of money.
A company accumulates many assdts over the life oi the businese ciisposes
of assets (by retirement, sale, or other means), moves assets from one location to
another, and matches the costs (other than land) to reveirues by means of peri-
-+
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t-
_.-
odic depreciation charges over the estiinated useful life of the aset- To aciomplish these tasks efficiently and to provide adequate control an automated system
is frequently required.
Every organization, including those on a cash basis, should keep a ledger of
fixed assets as an aid to effective controt. A fixed-asset register is a systematic listing of an orgaaization's fixed assets A separate section of the fxed-asset register
is usually kept for each major category of asset. Thisarcgorization shouid be
consistent with the general ledger account descriptions hi examplg anorganization may have separate ledger accounts for buildings, futniture and fixtureg and
automobiles. There would be a separate sei:tion for each of these categories.
Assets themselves should be labeled with idehtifiers linked ro
Uf+-. .fixsd-asset
reglster
when each asset is acquired, it should be tagged and entered in the fixedasset register.The total dollar arneunt shown in the iegister should agree with the
general ledger coutrol accounts For this reason, entries must be made in the
fixed-asset register not only to record additions but also to rmrd asset sales or
other dispositions.
Several entries must be made when an asset is disposed of The first records
the date of disposal.The second entry removOs the origing!,cost of the asset in the
current period. A third entry removes the a-ccumulateii=-tepreciation taken io
date. A fixed-asset register functions as a subsidiary ldger to the corresponding
general ledger control accounts.
!
CHAPTER I Production- and Finance-CycleApplications 309
lnvestments
Investments, like fixed assets, require separate records; typically, an investment register is used tb provide accounting control over investments' As with all
other aslets, custody cf investments should be separate and distinct from record
keeping. The investment register should contain all relevant information, such as
certificate numbers and thJpar value of securitieq to facilitate identification and
control. All investment traniactions shoutd be duly authorized and documentedA common control practice with respect to the physical handling of investment
box
securities is to require two people to be present when the firm's safe deposit
or other depository is entered.
lnternal Accounting Control Practices
The following questions suggest the internal accounting control procedures
that would be expected in a properfy application system'
A. Do procedures require authorization by an official or committee for expenditures (possibly over certain amounts) for
1. capital assets?
2. repairs and maintenance?
B. Are actual expenditures compared to budgets and additional approvals required if budget authorization is exceeded?
C Do written procedures exist that provide for distinguishing between capital additions and
repair and maintenance?
li. Do procedures require formal authorization for thesale, retirement, or scrappir,g of capi
.
E. Are property and eqiriprnent-,accouitts supported by adeq'uate detailed 'ecordl?. ;
..
E Are these records maintaiirea by people other than those who are responsible for the
property?
G. Are the detailed records balanced at least annually with the general ledger controls?
H. Are physical inventories of property taken periodically under the supervision of employees who are not resPonsible for the custody or recording of such
properties?
L Are periodic appraisals of property made for insurance purposes?
J. Are significant discrepincies between book records and physical inventories reported to
management?
.
K. With regard to small tools:
1. .A.re these physically safeguarded and is responsibility for them clearly'defined?
2. Are they issued only upon written "r,no*tto"' ..,,-.
HNANEE.CYCLE APPLICATIONS
CapiFinance-cycle applications concern the acquisitiol an-d- use of capital funds
longwell-as
as
resources)
liquid
tal ftrnds include working capital (cash and other
discusses
section
This
stock.
term funds such as bonas, investmentq and capital
are
cash receipt and cash disbursement applicatioirs because these applications
cornmon to all organizations
Cash Receipts: Basic Considerations
;1'r'r
to rigid controls'
Cash, the most liquid of all assetg has historically been- subject
most businesseg
Iri
checks'
as
such
papers
negotiable
Cash includes currency and
I
3 I O PART I lntroduction to Accounting lnformation Systems
i
checks constitute the bulk of cash volume. Cash transactions mav be totallv elec-
.. tronic, involving neither currency nor
:
'',
I
checks
I
The basic objective in any cash receipt application is to minimize exposure I
. to loss. Procedures such as immediate deposit of receips intact, centralizaiion of I
cash handling, maintenance of minimal cash balances, and immediate recordins I
of cash transactions are fundamental control techniques. Physical safeguards suct I
of checkq and rimited access
to
::,r::"::ri::?"""?li;;#;:,tiff:,"10"?i'"-"nt
IT
\"i.i The most critical phase of cash receipts is the initial documentation evidenc I
-. 'i '-ing a receipt. Once a record
has been prepared, cash is subject to accounting con- I
.}':J,Ti'S,'.::t[fl::]lii:::H':
'
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recorded? It is possible that the clerk simply pockets the cash and releases the I
I
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of misappropriation.
t
Several techniques and devices are useful in establishing an initial record. I
Customer audit is a general term used to describe procedurei in which the cus- I
tomer acts as a control over the initial documentation of a transaction. Pricins I
items at 99 cents rather than $L.00 is a customer audit technique m *"ll;.;;;;:
I
keting technique. This forces the recording of a sale, because ihe customer gener- I
ally expects change. Techniques relating to sales invoices, such as awardingl cusomer a free gql"l91of ice cream if his or her receipt has a red star or other
symbol, are intendeitr to have the customer audit the recording of the sale. The
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:, :'r*::!;a,=ioTil,:g?r::J,!fIffii.tff:i,q:'ffi:jl""#:j;f""J;i1':'r:T#,1[liil:J::=J
'
register. I
.*,:*'- :tomer's attention is drawn
to the imounl actually being rung-on the
*f '1f"fi:lj'l;:'i:#ff l:,'fff.T::,(T,,f i""*mx'n:1;:.'i_l[fl ,ffi I
ffi.",urn
with their payments) are common examples of customer audit tech-
I
Supervision includes direct supervision over clerical work, as in a mailroom I
,:
x$tffi: j::,ffi i1"."'!ili3;l' j[:Ji:x*::T":""#t'::T:::* ji',]'ff
::I
of observing the recording of transactions. Supervision also includes the use of
ai+:i* :"i:xs"3fl::;:iHtrT:ffiffi:i:lr*ffiffi1;i,.tr;#il*5Jr,:ffJ;lf:
I
I
ity of error rate of the person's work.
J
Imprest technigues are used to controt cash receipts in the same manner t
rfJ,l,:x:[Ij::]iiaf T]??l*?jH,"ffi Hf,ff "3:T:, j::.Iffi
/
-.-.__
ll'*tl
iprofit or retail sales analysis) is eisentially an impresitechnique. Although"such I
controls cannot be effective inough to reriove po.*iuititi". of manipulaiil?";;:
I
CHAPTER 8 Production- and Finance-CycleApplications 3 I I
DATA FLOW KEY
LCasftSa&
2 Sales SIrp
3 Sabs 9ip
4. Sares
Receipt
5. Goods fileleased
6. Journal Voucher
9. Clpcks
lO. Remiltane Adtrices' '-:.. ,,
ll. Contrcl Total-Mail Receipts
12 Joumal Voucher
'13- Deposit
-
U. Depos;it Slii
7. Contrcl Total-Cash Sales 15. Bank Statement
& Mail Receipts
FIGURE 8.5 Data Flow Diagram: Cash Receipc Application System.
docurnentation is controlled by supervision or one of the other methods previ-
ously discussed.
instance the customer should hane-the paymbht aclmowle-dEed.1{Eoi she should
receive
and a rneurutysratemint showing amounts paid. This customer
audit is a significant control in a cashJEEi?ed-on-aaount application system.The
recorded receivable that exists on the books prior to payment enhanies control
ov€r payments f.€ceived. In the event that a customer's payment is not acknowledged on his or her next statement, the customer will Iikely notify th-e company
and inquire as to the reason.
y@pt
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PART I lntroduction toAccounting lnformationSystems
n{ailffim
-":::':"F-';'"']
:1#r*ir.
't1.:-: -::.
FIGURE 8.6 Cash-Received-on-Account Application Sysrem (conuhud on pog*
3t3-3tr.
l:... :.qr-+
;: Lf
Egure 8.6 is an- anatytiqfuwchart of a cash-received-on-account application
system- The major fe)-fuE of thisystem is the sep:ration of the following func-
tions
J'tailroom
Customer remittances on account are received in the mailroom. The mail is
opened 6nd the cqecks and remittanqe adytegs are separated. Checks are restric-, -.
tively endorsed and totatet-. a:iEffittance list-that documents the paJrments re- '\
-t'..
ceivedjs:pr€pared. The remittance list, is
received, and the agreemen! of these_.?mounts is approved. A copy of the remit.
uaunffik,
's-
CHAFTGR 8 Production- and Finance-CycleApplications 3 I 3
.i
Sales
--lwz, G),__|,ffi**
Cash
Checks
3t
Remil tance I
4-
-t{^
From
Cash
u stl
,..----.-)
;r
J
l*"*ri
I rotat
--F-
I
Prepare
Deposit
slip I
,
Remittance
' Ust
-{,
ru;l
1
Deposit
Slip
I neceipts /
--e
IA
I Jouma /
Post Feceipts
and Prepare,
Approve
1 Deposit
lsipl
I Joumd I
I voucrer I
,
l.Z
r.rEl"
slip
eontrol
Total
----r'--
Remittance
List
Deposit
Receiots
\
r
tntaa /
llr
rro vt
c )-- -[aant
4-
Joumal
Voucher
. -r{Forward to
General
lv
I Ledser f
late
D
FIGURE 8.6 (contioued)
tglgplist-and ee remittance advitdi"'hie-.forwarded to sccounts receivable. The
ffi* and a ditrot'tbal ire forwarded to cash receipts for dsposir A copy of
tG reilittance iist ena tne coiitroltotal are nted by data
Cash Receipts
Ghqqkq recejved frorn thq-rrra:Ltg>op$-are combined with cash receipts-and.a
deposirsl$-il-prepared- in thr-ee-.copies TIie rerfrItaliceIGf and control total re-
ceived trom ttrl nr.itroo* are balanced to the degosit slip, and the agreemgnt of
these amounts is approved.The remittance tist isthen T9d t9. Pos}.the lpount of
the payments received from the. mailroom into the cash receipts journa-I..-{ journal voucher is prepared and forwarded to the general ledger. The remittance list,
F
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PART I tntroduction toAccounting lnformatiori Systems
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FIGURE 8.6 (contrnucd)
;1
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-.ail :"'-;i'j;'
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"
control jolat, and-a goPy of the deposit slip are,filed by data The deposit
is forwardedintacttothebank.
Accounts Receivable
The remittance advices
ggrt"d 1o 99 a@ounrs receivable ledger. The
postings tothe ledger are totaled.The contritliotal
is balanced to.theremittance
f":
!- ,
list- The agreement of these amounts is approved. The remittance advices
are
sorted and filed by custombr. The rernittance list and a,copy of the control total
of,.,,
postings are filed by date. A copy of the control total is forwarded to the general
ledger.
CHAPTER 8 Production- and Finance-CycleApplications 315
:: r:+ t r1_+:r :,:..'.:i
4\, 4- -
FIGURE 8.6 (contirued)
-i r..r.r . .
General Ledger
T ejorq$l voucher from cas! r.e.sqip6.-aed the control total receiviJd from
accouuts receilabE arb compared. The amounts are then posted to the general
ledger. The source of posting the general l,edger is the cashier's journal voucher
notification of the amount of the deposit of the payments received. This amount
must agree with the total of items posted to the accounts receivable ledger. The
journal voucher and the control total are filed by date.
Bank
Thg-'.b4nk aqqgpts tlg depmit and-valida-tes:4-cqPy-.gf
lhe depgqil slip. The
audit.
The validated devalidated copy of the deposit slip is returned to'interndl
posit slip is filed by date.
316 pARr lntroduction to Accounting lnformation Sy*ems
I
lnternalAudit
Iqlernal aglit
lecglves the periodic bank starement- An independent bank
reconciliatiiin B a significant
control in a cash-re;;;;-o"-uccount
apprication
system.
To control incoming cash received through the mail, it
is important that no
one in the mailroom (where the correspondenJe is
opened;, in tnJcastiier', orn""
(where the money is summarized and a aeposit pr"f"r"ay,
or in the ,"o** ,."_
ceivable section (where the asset reduction is iecordeai
rrm
controt
over the transaction
that is sent to a
Jn ma-ny systems, the invoice or statement"o*pi"t"
ctlstomer is prepared in
such a way that the portion with the name and address
of
the customer is returne$ wiltr the payment.This is commgn
with telephone, utility,
and department store invoices, and provides good documentation
for the payment (Figure 8.7)The source
9f p":ti"g the general ledger is the journal voucher notification
issued by the cashier indiiatinglhe agrouoi of the alposit
of cash r"c"ipts mi,
amount must agree with the accumulatect total of thi items
posted to itre suusidiary receivable fiIe- validated copies of the aeposiisup go
to the intern;iauditor, who uses them when reconciling the bank account.ihE
control of actual cash
(as opposed to checks) received by irail relies
largely on direct supervision.-Lock-Box Collection Systems
I
.
In collecting accounts receivablg time is moley. Even if a firrn cannot
persuade
its customers to pay their accounts
rapidly, using a t.r_gp-95-a__p-rrffir_* _
Srore
=* can usually reouce -float-_the-tirne-betrreeu'rteiigruA
9l-tb=e=p-4ytrLq-41-glppk-oy
,' +eg*9ryLa&iltnamsrLeul_rl" qr,0ja.-rsirf. d;;d;:.{ Giiil;;Fi"; *_
. duces the floa&that,,usuailyoE&.6ecause the bank does not allow the firm to
have use of out-of.srate-checks until they trave ueen-"L;;
;h;;;g; ,h":",
tomer's bank. This process can take ,rp to u week. A
lock-box system i"au"". trr"
float by h_aving the checks deposited t'o a firm,s account-befor"
ih" fi;;;;;;*",
them' A firm in I-os Angeles might have its eastern
U.S. customers forward their
payments to a lock-box in a post of0ce in New York
City and anange wittr a New
Circle Utility Company
N0v2S.1999
129
l!E4qE_14$L TH|S ADVICE WnH YOUR PAYMENT
BRING ENTIRE BILL FoR necEiCrlF FAiliid},r='iLnsorv
.:r
r{i
/t
.CUStrOMER.T{iAME ''
CUSTOMERADDRESS
.
MAKE cHEcKS P4YABLE To'oBcLE
FIGURE 8.7 Remicance A&ice-
uTIUTy.
qnee unr_nvcoMPANY
BOX1000
AAIYWHERE. USA
q0e5170000005q?t
CHAPTER 8 Production- and Finance-Cycte Applications 3 I 7
York City bank to pick up these checkg credit them to the firm's account, and advise the firm as to the names of customerg check amounts, and other payment details. Payments can then be processed after the checks are on their way through
the clearing process. Savings nf lost interest can be considerable, especially when
interest rates are high. A bank will usually require a fee plus a compensating deposit-one on which the firm cannot draw-to provide lock-box services. But the
value of net funds freed by float reduction and additional benefits, such as learn-
ing of dishonored checks sooner, will generally justify one or more lock-box regional collection systems for a firm whose customers are geographically ividespread- An illustrative calculation follows assuming average daily collections of
$500,000, seven days' float without a regional lock-box, and two days' float in a regional lock-box collection system.
Float in central system
$35oo,ooo
I-ess: Float in regional system
$1,000,000
Gross funds freed
$25oo,ooo
[*ss: Required compensating balance
$ s00,000
Net funds freed
$2,000,000
Fees and expenses: $150,000
Cost of net funds freed : $150,000 :7.5o/o
$2.ooo,ooo
Cash SalesApplication System
The siguificant difference between a cash sales epplication system and a cashreceived-crr:?ccolllLspplieation systern is t*rat there is no previous asset record
(customer accourit balance) in a cash sales system.The generation of initial docu:
mentation is thus the focal point of the control system. Once a record has been
prepared, cash sales are subject to accounting control. Figure 8-8 is an analytic
flowchart of a cash sales application system. The major feature of this system is
the separation of the following functions:
Finished Goods
The finished goods department has custody of the assets that are available
for sale to customers Sales to custorners are docurnented on sales orders A sales
order indicates the amount due for the purchase as well as the inventory control
numbers of the items being sold.
Cash
Receipts
.-
The customer takes q,,qgpy of the sales *rder to cash leceipts The cash receipts department records the sale in a cash re€i$ter or other secure devicq accepts
the customer's paSment, and issues a sales receipt (trvo copies) to the customer.The
sales.order is fled by number.At the end of the day,the daily'cash srunmary is generated and includes a control total of the day's cash sales One copy of this total is
forwarded to the general ledger;the othercopy is filed by date.
Billing
Sales orders are reviewed by reasonableness and posted to the sales journal.
Any inventory control information contained on sales orders eould.be processed
at this point. A journal voucher is prepared to summarize cash sales. The sales orders are filed bydate.Thejournal voucher is forwarded to general ledger.
3I8
PART I lntrodustion toAccoungin.g tnformation Systems
r:'j ...
.-
j:Crisfonrer
,
Daity
Cash
Summary
tz
Belease
Goods with
Sales
Recer'pt
Conirol I
Totd I
:rft'l'\
Cash
AD€posit
Deily
lntact
w
Fonrvard to
General
r
Ledger /
I
I
to ccasn /
IReter
|Reter to
(e
'----l?eceiptsin
lReceipts i
lFigure
8.6
l
FIGURE 8.8 Cash Sales Application System (conthwd
on poge j t9).
I
I
,:
General
-+.1F.
l
"j-
Lerlger
j
-
.
.--,,..n.
:'::#ii*.=r- The jounral voucher
from the biuing depart*"ot and the controi
cgived from the cashreceipts_departnaent are
compared. The amounts are theu
post€d to the general ted.gei. Note qhat.the
:oylce "if"rd"g ttre geneial i"Jg", i,
the
amount of sales orders
iour-n{ Youcher noti[cation uy ulu"g inatatin!'trre
received'This amount must agree-with tf,e total
of"the cash received from customers by cash receipts Goodi are not released
by finished goods uotl th"
tomer returns from the cash receipts department
wittr u ,ur"s
are releaged with the sales receiptla copy of the sales
receipt is-filed in the fin::;
;;jil
r"""i;tfi;;;.
' ished.goorls departmenl
;;-
I
I
I
I
i
I
I
!
I
I
I
:
I
i
l
l
l
I
I
I
I
l
I
I
l
CHAPTER 8 Production: and Finance'Cycle Applications
-
*
3t9
-,' "''ca*?rq{f,.,r.. :.
B
z
Cnnlral
Total
T----\
Cornpare
r andPost
r
Itorcaeerl
/eroor
' leosk /
,../
-
Cash Disburcements Application Syitem
Figure &9 illustrates a data flow diagrfi of a cash aisUriH[fitns applicatiou systern. Cash disbursement systems ar.e designed-to co$Lql checF disbursements As
f
t. TYPicallY, checks are used for
,dra11rn
disbUfsjmggtS*with -efirrency disbqrsements-restriefed-lo-.small-amorrnts
nd.The main concern of this secfrgts and gcouetable to a-petty
tion is with check disbursements; imprest funds will be discussed briefly but not
t
cash
illustratedThe imprest fund concept is not restricted to petty cash control; imprest payroll funds and imprest charge or expense funds are common in sy'stems design- An
320
PART I lntroducrion toAccounting lnformation Sfstems
EIEEIEEE@
B p"y."nt
LiT_
r\
Accounts
Payable
it \/
2
,{\
Payee
4
Cash
)isbursemen
\t
Expense
Ledger
V
r\
General
Leclg€t
\/
DATA FLOW KEY
1. Voucher Check
2 Distribution Details
.. &_Joumal Voucher
4. Check
a.. : :*::.-:::a: :.
-.. *r+;,.,',*--'
I
5. Control Total
.-.F,1@ntrol Report
7. Canceled Checks
8- Bank Statement
I
I
j
FIGURE 8,9 Data Flow Diagram: Cesh Disbursements Application System.
l
i
rlgprest futd i-!_3 fifq{ m4i4tained at a qp,egi&dgedj.Le.giued_amoqqt,_4!eU
timestneamountolcal_o-1n"1ag$;4,"."yj,T1gg_"-pffi
CCO"qGi
ltre specinea amqu m
. perioticalry, *lrrpr"" il;ii, replenished; documented expenditures (petty cash vouchers) are riviewed and approved,
and a
check is drawn to the fund or custodian of tire fund for the amount
necessary to
bring the fund hack to its specified amount. separate checking accounts
may be
maintained f9r payroll and other expense categbrieq such as d"ividend paymints.
- Hgure 8.10 illustrates an analytic flowchart of a cash disbursements ipplication system.@9ri
are the-use of_a__uo,r"t"rsysiim
l
i
l
I
to
.sWifKu4c,s,epamtion"oraoprgyattomacualp.ay-"rrt,
n.These items
i**
I
are included in the iotiowing
olscusston-
Accounts Payable
::::I""15trnef
to
.cffi.6-A
voucher,package is 11
filed by dite.
regd_qlgvoice. These documenti are
i" ; ;,,che, pr"a"s* -rh;
the voucher package file is reviewed and voucher packages that
are due are pulled for payment. Accounts payable performs payment
process-
I
-Periodically,
I
l
1
CHAPTER 8 Production- and Finance-CycleApplications 321
c? 'rr'
FIGURE 8.10 Crsh Disbursements
Application Sy:tem . (continued on'
poga322-j24). ,
'
ing-calculating the amount due, discount (if any), and other such items. A
'voucher check is prepared for each voucher. Voucher
Ehecks are Posted to the
voucher-register. A total cf these postings is prepared. Voucher Packages are
posted'to the'4tllounts payable ledger. This posting is summarized on.ajgurnal
voucher and a distribution voucher. The voucher checks, voucher pack'ages, and
control total are approved and forwarded to the cash disbursements department.
The journal voucher is forwarded to general ledger. The distribution voucher is
forwarded to thg departmcnt managing the expense ledger.
Cash Disbursements
After the voucher checks and voucher packages are reviewed, the checks
are signed and:ihe voucher packages are canceled and filed by number.The
voucher checks are then posted to a"check register.This posting is.totaled and reconciled to the control total received from accounts payable, Voucher checks are
forwarded directLy to the payeesThe control total is forwarded to general ledger.
3V2 PART I lntroducrion to Accounting lnformation Systems
, a ts l$i.e!"--r
-r$r.r,..a
i..,
Distribtrtion
Voucher
l
To Geneal
, -Ledger
FIGURE 8.1 A (contiaued)
i-r.mnr%r,
ir
ll
t:
!'
i
To Expense
Ledger
ffiSL
Expense Ledger
I
li
'l
The distriburiol
.
,
yol-"ler'is posted ro the expense ledger and/or inventory
jfl
j
ff ::":i,,ffi:j,ffi
i;1-"'l,"Ttrsff
tribution report ,r",lld by ;;;r.; **xxj:#m#**,::,#:?':l
the distribution summary is for_
wardqd to general leoger.
"ro, ",
CHAPTER 8 Production- and finance-CycleApplications
323
FIGURE 8. I O (continued)
...!.-
,i-j:Jr=ffiS.=
General Ledger
ledger, the journal
"apgnse
cash disbursefrorn
total
control
voucher received from accounts payablg and,the
dist{bu;
ledger.The
g€neral
ments are reconcile4and the totils rue posted to the
voucher
received
the
tion summary received frorn'thp expSnse ledger,
iournal
disthe
cash
from
total
from the accounts payable department, and the cortrol
bursements department are filed by datg-
The distribution summary received frOm the
324 P|Rf I htroducrion toAccounting lnformation Systems
From Expense
Ledger
Frorn Accounts From Cash
I
t
Payable Disbursements
ll
I ha"p"na.rt
--l ofCash
lDcburcements
-lI av
Date
FIGURE 8.1 O (continued)
lnternalAudit
.-t ..
The canceled"ctre,cks.are receiveo {rom the bank along with
the bank statement' An independeiit"bahk t"*n"iu"rion is an important
control in a cash disbursements application sjrstem.
Voucher Systems
review technique. The real conrrol,o_v_er disf,*IPfcltsf--s:epir-esseutiauy-a
rovurs,f! ," a ural revlew ot.docunents evideocing the entire
transactign prior
to thEaltE-;i"ti.
r:l;i.:;i:;;*orphysicauy
vgucni:r pi"t"g": .i p*p,'ir,e (or signing)
Ii,1?rlf
:,f:Tg_.S i1 1
"
jtil?l:h"1,;."s'ste.r.ir,irrJriJ*pr3.io;;id;;;;;;'##:;;
P::@4.a$"1ryrifiAil;;;";;;;;
:lm*ij_rjn:;.A",h;;d,;,fi
:i:?^.i has been duly authorized and completed
operation
f"; ;
"""orJin!io
;i
system specifica_
CHAPTER 8 Production- and Finance-CycleApplications 325
tions It is.the review process, not the"actual signing of checkq that is the controlThis is particularly evident in computer applications where checks are "signed"
with a signature imprinter at the rate of hundreds of checks per minute.
An accounts payable system typically maintains a subsidiary ledggl of crediposiing invoices and payments on account to eaeh individual crediaccounts,
tor's
tor's account. Accounts payable generally refers to trade accountq whereas a
voucher payable system encompasses a// expenditureq including trade accounts,
expenditures, and so on. In a strict voucher payable system, indipayroll,
"upitut
viduat uc"o.rnts for creditors need not be kept. A voucher system maintains a
voucher register or, alternatively, files of voucher packages in numerical or other
order. Several vouchers may relate to the same creditor, as opposed to a single account in an accounts payable system.If information on individual creditors is desired, copies of vouchers may be used to generate this information. Numerous
voucher payable files are maintained in most systems because payable information is essential to short-run financial planning.
A voucher system centers arourid voucherg which can take several formq
ranging from a simple form or envelope to a voucher-check combination (Figure
S.li)- A voucher shbws, among other things, the name and address of the vendor,
a description of the invoice, total or net amount due, and the accounts to be
chargedldistribution)- In a computer application, most of the items in the matching frocess are coded and processed by the computer. At timeq a voucher system
miy U" implemented by rubber-stamping an invoice or purchase order with a
,oucher stamp and documenting the matching process on this original document.
ttXj fonn of ihe voucher itself is not s'rgnificant; a voucher system m-ay operate
f v.r"# Nfio".-l
Allied Seryice !nc.
2368 N. Main St
Solon, Michigan 39843
f_ rsos4e
I
186674.00
18ffi74.50
187413.59
The ABC Company
Some Place, SC 26923
".'-::]q'fr..
oooocoooooooooooooooooooooo
FTGURE 8.1 I Voucher Check
326 PART I lntroducrion to Accoundng lnformation Systems
.
without a human readable voucher. In this case, the "voucher" is an approved entry in the voucher register, typically a file on a computer disk. Refereniis to documents rather than the documents themselves are provided in the register, and
voucher entrrrs are under strict numerical control.
.
Posting of Payables
A basic question in the design of a voucher system concerns when invoices are to
be posted to vouchers payable. Specifically, when are liabilities "booked" (exclud-
ing end-of-period accruals)? After invoi@s have been approved for payment,
they may be held until the due date and formally posted at that time; alternatively, they may be booked at the time of approval (which is generally different
from the due date). Because most firms attempt to pay invoices on the due date
to maximize working capital, this question relates to whether there is a formal
record of amounts owed to creditors If invoices are booked on the due date,
there is no formal record of unpaid invoiceg because the liability is immediately
canceled by payment. If invoices are booked on the date of approval, a formal
record of liabilities exist. This advantage is gained at a cost. The voucher register
(or flle of vouchers) now must be searched or sorted by due date to facilitate payments Typically, a voucher register is used for numerical control when invoices
are booked at the time of approval. This is the only feasible alternative in a large
',
.
:
organization.
P.ef'aring vouchers for indiviciual invoices when several invqrseqrgfer.lslhe
same vendg$qthe same time
qks
to the sarne vendor in the same month.Ihis is generally inefficient. Most fir'ms att to accumulate several invoices from the same vendor and pav these invoices
rc
with a
check-
-up
r systEm"fiiflctions essentially as an accounts payable system. After invoices are approved, they are sorted and accumulated by vendor or
voucher number. Payments are made at month end or due date. A built-up
voucher procedure as just described is a full accrual system; vouchers pa),able replace accounts payable in the general ledger.
E5
l't".
Three files are necessary to maintain useful information: (i) a file of approved but unpaid invoices, with access to due date for payment; (2) a file of paid
invoiceg usually in numerical order; and (3) a vendor file showing both paid and
unpaid amounts, ordered by vendor ID. In a manual system, these files are ob'tained by filing carbon copies of vouchers. In a computer system, separate files
may be maintained, or complex processing methods may yield the same results
without having three separate files
". The voucher concept is helpful in the disburSement procedure of any organizadion when a basic record is desired and proper autherization and coritrol over
disbursemenb are important. Requiring signatures before disbursement documents knowledge and ipproval of the diibursement. Paid vouchers can be filed in
strict numerical sequence to provide documentation for every amount paid. Such
a procedure provides orderly records and good documentation and ii advantageous in establishing good stewardship of cash.
Other Finance-Cycte Applications
In addition to cash receipts and cash disbursementq a typical finance cycle includes applications dealing with accrual and payment of interest on debt and dividends on capital stock, general financial institution and investor relations-such
l--
CHAPTER 8 Production- and Finance-CycleApplications 327
as stocli4rigistiation and credit line'agreernents-and management of foreign
currencies. The finance cycle provides important inputs to upper-level financial
planning models that are concernerl with cash planning and forecasting, operatioiral bucfgeting, and capital budgeting. Many organizations use sophisticated
models that include ccmputer and/or mathematical techniques to forecast and
manage the firm's cash position. The output of such models cannot be more accurateor reliable than the basic data inputs the model uses
SUMMARY
Production control, inventory control, and property accounting are typical
production-cycle applications in manufacturing firrns. A productioa control application system plans and schedules production, and issues production orders
to authorize production activities. Materials requisition forms and job time
cards are used to trace production costs to individual production orders. A
model production control application system includes a separation cf the following functions: production control, the production departments, inventory
control, cost accounting, and the general ledger.
Inventory control is accomplished through a series of records and reports
that provide information concerning inventory use and inventory balances.
Perpetual inventory records are the best source of inventory inforrnation. The
storage and handling of inventory items must provide assurance of adequate
contrbl. .,..:
_-r.
Property':'5lc6unting applications concern an organization's fixed assets and investments Property accounting :applications maintain records that
identify an organization's fixed assets and investments, provide for appropriate depreciation and/or amortization for book and tax purposes, provide
information for insurance purposes, and provide information to management
concerning use and availability of an organization's fixed assets and invest-
*""lrnur"e-cycle
applications concern the acquisition and use of capital
funds. Capital funds include working capital as well as long-terrn funds. Cash
receipts and cash disbursements are two common finance-cycle application systems.
The basic objective in any cash receipts applicatior!. system is to minimize
exposure to loss- Supervision, customer audit procedures, and imprest fund
techniques are common controts ir6*4*c.gsh receipts application system.A model
cash receipts apptication system irrcitides a separation of the following functions: mailroom, cash receipts, accounts receivable, and the general ledger- An
incieperrdent bank reconciliation is an important control in a cash receipts application system.
Cash disbursement application syqtems are designed to control check disbursements as well as actual cash disbursements, Major controls include the
use of a voucher system to support the drawing of checks, the separation of approval from actual payment, and an independent bank reconciliation. A model
cash disbursement application system includes a separation of the following
functions: cash disbursements, accoUnts payable, the expense ledger, and the
general ledger.
:
7
n
;e
ta
3
328 PART I lnroduction toAcc'ounting lnformation Systems
Glossary
bill of materials: lists the raw materials that are
n€cessary to produce a product.
built-up voucher: the abcumulation of several invoices from the same voucher and the payment of
these invoices with a single check.
items are produced only as they are required in
subsequent operaiions
lock-box deposit system: customer remittances are
sent directly to a bank and are credited to a company's account before they are posted to customer
accounts
customer audit procedure in which the customer
acts as a control over the initial documentation of master operations lisc identifies and specifies the
sequencing of all labo: operations and/or maa transaction.
chine
operations that are necessary to produce a
economic order quantity (EOQ): the order quanproduct.
tity that minimizes total inventory cost.
faetor availability repore a report that commu- materid requisition: document that authorizes
the release of raw materials to the production
nicates the availability of labor and machine
departments"
resources.
fixed-asset register: a systematic list of fixed assets
maintained for control purpose$
float: the time between the signing of the payment
check by the customer and the moment the firm
has use of the funds.
imprest techniqu6s: a control technique in which
an item is held accountable to a specified tobal
.amount.
inventory status-*_i reporf"s: reports thdt detaii the re.1!..:
*'lbiiiHb'irvdi
a lii. ir inr,entory.
I
r
inve.stment register: a systematic list of investments
'rnaintained for control purposes
job: synonym for production order.
iob costing: production costs are assigned to production orders
io.b time cards: used to document the amount of la'tior dme that ii spent working on each production
order (job).
iust-in-time (JlT) production: a system in which
Clapter Quiz
process costing: production costs are compiled by
department rather than by job.
production order: document that authorizes the
production departmeots to make certain products
professional shopperc: people hired to purchase
goods.in a retail environment for the exPress Purpose of observing the recording of transactions
remittarlce lise a listing of customer remittances
that is prepared for control purposes. .
-i
t'in"
r;nel ;f lnn';nttfi' Affi'fri.n t I t
reorder p"i"i
desirable to order or produce additional items to
.
avoid an out-of-stock conditionvoucher: synonym for voucher package.
voucher package a collection of documents that
are reviewed and approved to authorize a disbursement.
voucher system: a system in which every organizational expenditure must be documented with an
approved voucher.
'':*--ele'r:'+l:i!'
Answers to the chapter quiz appear on page 346.
1. In a production control application system, which of the following documents serves
as authorization to release raw materials to the production department?
(a) production order '- .,i!- :'"t "
(b) job time card - - /': '' '.- '(c) journal voucher
JAf material req u i sition
2. ln a production control application system,which of the following departments should
receive copies of production orders?