CHP 12
Introduction to the Revenue Cycle
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Definition: The revenue cycle encompasses the recurring business activities and data
processing operations involved in selling goods or services to customers and collecting
cash payments for those sales.
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Primary Objective: Deliver the right product, to the right place, at the right time, for the
right price, ensuring customer satisfaction and business profitability.
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Key Decisions:
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Product Customization: Determining the extent to which products can be
tailored to customer needs.
o
Inventory Management: Setting appropriate inventory levels and storage
locations.
o
Shipping Methods: Deciding whether to use in-house shipping or outsource to
third-party logistics providers.
o
Pricing Strategies: Establishing competitive and profitable pricing policies.
o
Credit Policies: Defining credit terms (e.g., 2/10, net 30) and credit limits for
customers.
o
Cash Collection Processes: Choosing efficient methods for receiving payments
(e.g., checks, electronic funds transfer, lockboxes).
2. Core Activities in the Revenue Cycle
The revenue cycle consists of four primary activities, each with distinct processes and
objectives:
1. Sales Order Entry: Capturing and processing customer orders.
2. Shipping: Physically delivering goods to customers.
3. Billing: Issuing invoices to customers for shipped goods.
4. Cash Collections: Receiving and recording customer payments.
3. Revenue Cycle Information System
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Role of ERP Systems: Enterprise Resource Planning (ERP) systems integrate all revenue
cycle activities into a shared database, enabling real-time updates, improved accuracy,
and comprehensive reporting.
Benefits:
o Streamlines processes by reducing manual interventions.
o Minimizes errors through automated data validation.
o Enhances decision-making with data analytics and managerial reports (e.g.,
revenue margin, aging of accounts receivable).
General Threats and Controls Across the Revenue Cycle (★ High-Yield Topic)
Threat
Inaccurate or invalid master
data
Unauthorized disclosure of
sensitive information
Control
Data processing integrity controls (e.g., edit checks), restricted
access to master files, periodic review of changes
Access controls (e.g., passwords, biometrics), encryption,
tokenization of customer data
Loss or destruction of data
Regular backups, disaster recovery plans
Managerial reports (e.g., revenue margin, sales trends),
performance evaluations
Poor performance
4. Sales Order Entry
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Process Overview: This initial step involves receiving and processing customer orders
efficiently and accurately.
Steps:
1. Take Customer Order: Orders can be received via websites, Electronic Data
Interchange (EDI), or manual entry by sales staff.
2. Check and Approve Credit: Verify customer creditworthiness based on credit
limits and payment history.
3. Check Inventory Availability: Confirm sufficient stock is available to fulfill the
order.
Key Documents:
o Sales Order: A document recording item numbers, quantities, prices, and credit
terms.
Threats and Controls
Threat
Incomplete or
inaccurate orders
Control
Data entry edit controls (e.g., mandatory fields, automatic lookups)
Digital signatures for online orders, written signatures for manual
orders
Credit limits, specific authorization for new customers or orders
Uncollectible accounts
exceeding limits, aging of accounts receivable
Stockouts or excess
Perpetual inventory system, bar codes/RFID for tracking, sales
inventory
forecasts
Customer Relationship Management (CRM) systems, self-help
Loss of customers
websites, customer service evaluations
Invalid orders
Essential Terminology
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Credit Limit: The maximum credit amount a customer is allowed to owe.
EDI (Electronic Data Interchange): A system for the automated exchange of
standardized business documents (e.g., purchase orders, invoices) between companies.
CRM (Customer Relationship Management): A technology platform to manage
customer interactions, improve service, and retain customers.
5. Shipping
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Process Overview: This activity involves transferring goods from the warehouse to the
customer.
Steps:
o Warehouse staff use a picking ticket to retrieve items from inventory.
o Goods are packed with a packing slip and shipped with a bill of lading.
Key Documents:
o Picking Ticket: Authorizes the release of specific inventory items.
o Packing Slip: Lists the items included in the shipment for customer verification.
o Bill of Lading: A legal contract between the seller and carrier, specifying
transportation details and ownership transfer.
Threats and Controls
Threat
Picking wrong items or
quantities
Theft of inventory
Shipping errors (e.g., wrong
items, addresses)
Control
Bar-code or RFID technology, reconciliation of picking tickets
with sales orders
Restricted physical access to warehouse, documentation of all
inventory transfers, periodic inventory counts
Reconciliation of shipping documents (packing slip vs. sales
order), perpetual inventory updates
Memory Trigger
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"Pick, Pack, Ship": A simple phrase to remember the three core steps in the shipping
process.
6. Billing
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Process Overview: Billing ensures customers are invoiced accurately for goods shipped
and accounts receivable (A/R) are updated.
Steps:
1. Retrieve sales order and shipping data.
2. Generate an invoice.
3. Update the A/R ledger.
4. Send the invoice to the customer.
Billing Methods:
o Open-Invoice Method: Each invoice is tracked separately, allowing customers to
take discounts (e.g., 2/10, net 30).
o Balance-Forward Method: Customers receive a monthly statement showing the
total balance owed.
Threats and Controls
Threat
Failure to bill customers
Billing errors (wrong prices,
quantities)
Posting errors in accounts
receivable
Control
Prenumbered sales orders and invoices, reconciliation with
shipping documents
Standardized price lists, data entry edit checks
Batch totals, error correction reports
Threat
Inaccurate or invalid credit
memos
Control
Specific authorization for credit memos, segregation of duties
Billing Process Table
Step
Action
1
Retrieve sales and shipping data
2
Generate invoice
3
Update accounts receivable ledger
4
Send invoice to customer
7. Cash Collections
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Process Overview: This final step involves receiving customer payments and updating
financial records.
Methods:
o Payments via checks, Electronic Funds Transfer (EFT), lockboxes, or credit cards.
o Cash accounts are credited, and A/R is reduced.
Key Controls (★ High-Yield Topic):
o Segregation of Duties: Separate responsibilities for custody (handling cash),
recording (updating A/R), and authorization (approving credits or write-offs).
o Immediate deposit of cash receipts.
o Regular bank reconciliation.
Threats and Controls
Threat
Theft of cash
Cash flow
problems
Control
Segregation of duties, lockboxes, EFT, restrictive endorsements on checks,
daily deposits
Lockboxes to speed up collections, EFT, discounts for prompt payment (e.g.,
2/10, net 30), cash flow budgets
Essential Terminology
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Lockbox: A bank-managed service where customer payments are mailed directly to a
post office box, processed by the bank, reducing theft risk and speeding up deposits.
Remittance Advice: A document accompanying payment, detailing the invoices being
paid.
UPIC (Universal Payment Identification Code): A secure identifier for EFT payments,
protecting bank account details.
8. Essential Terminology Across the Revenue Cycle
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Aging of Accounts Receivable: A report categorizing unpaid invoices by the length of
time they’ve been outstanding (e.g., 0-30 days, 31-60 days).
Perpetual Inventory: A system that tracks inventory levels in real time, updated with
each sale or receipt.
FOB (Free on Board): A shipping term indicating when ownership transfers:
o FOB Shipping Point: Buyer owns goods once they leave the seller’s location.
o FOB Destination: Seller owns goods until they reach the buyer.
9. High-Yield Topics (★)
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Revenue Cycle Flow: Order → Ship → Bill → Collect – understand the sequence and
purpose of each step.
Key Controls: Focus on segregation of duties, document reconciliation, and data
accuracy measures.
Master Data Accuracy: Critical for ERP system reliability and decision-making.
Cash Collection Efficiency: Lockboxes, EFT, and prompt payment discounts improve
cash flow.
10. Additional Insights
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Customer Service and Cash Flow:
o Poor service leads to lost sales and customers.
o Slow collections cause cash flow shortages, impacting operations.
Technology in the Revenue Cycle:
o QR Codes: Enable quick access to order details or payment options (e.g.,
donations, grocery orders).
o Interactive Sales Systems: Allow customers to customize orders online, boosting
sales and optimizing inventory.
Performance Metrics:
o Revenue Margin: Calculated as gross margin minus all sales-related expenses,
reflecting profitability.
o Aging Reports: Monitor overdue accounts to adjust credit policies and improve
collections.
Questions
1. Which activity is part of the sales order entry process?
a. setting customer credit limits
b. preparing a bill of lading
c. checking customer credit
d. approving sales returns
2. Which document often accompanies merchandise shipped to a customer?
a. picking ticket
b. packing slip
c. credit memo
d. sales order
3. Which method is most likely used when a company offers customers discounts for
prompt
payment?
a. open-invoice method
b. balance-forward method
c. accounts receivable aging method
d. cycle billing method
4. Which of the following techniques is the most efficient way to process customer
payments and update accounts receivable?
a. EFT
b. UPIC
c. FEDI
d. ACH
5. Which of the following revenue cycle activities can potentially be eliminated by
technology?
a. sales order entry
b. shipping
c. billing
d. cash collections
6. The integrated database underlying an ERP system results in which of the following
general threats to the revenue cycle?
a. inaccurate or invalid master data
b. unauthorized disclosure of sensitive
information
c. loss or destruction of data
d. all of the above
7. Which document is used to authorize the release of merchandise from inventory control
(warehouse) to shipping?
a. picking ticket
b. packing slip
c. shipping order
d. sales invoice
8. Which of the following provides a means both to improve the efficiency of processing
customer payments and also to enhance control over those payments?
a. CRM
b. lockboxes
c. aging accounts receivable
d. EDI
9. For good internal control, who should approve credit memos?
a. credit manager
b. sales manager
c. billing manager
d. controller
10. For good internal control over customer remittances, the mailroom clerk should
separate the checks from the remittance advices and send the customer payments to which
department?
a. billing
b. accounts receivable
c. cashier
d. sales
CHP 13
Introduction to the Expenditure Cycle
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Definition: The expenditure cycle encompasses the recurring business activities and
information processing operations related to purchasing goods and services and making
payments.
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Primary Objective: To minimize the total cost of acquiring and maintaining inventories,
supplies, and services necessary for organizational operations.
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Key Decisions (★ High Yield for Exams):
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What is the optimal level of inventory and supplies to maintain?
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Which suppliers offer the best quality, service, and prices?
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How can purchases be consolidated across units for better pricing?
o
How can information technology (IT) enhance the efficiency and accuracy of
inbound logistics?
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How can sufficient cash be maintained to leverage supplier discounts?
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How can payments to vendors be optimized to improve cash flow?
Mnemonic: O-S-C-I-C-P
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Optimal inventory
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Supplier selection
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Consolidate purchases
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IT efficiency
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Cash for discounts
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Payment management
Expenditure Cycle Information System
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Overview: In large organizations, the expenditure cycle is managed via an Enterprise
Resource Planning (ERP) system, integrating data across departments like inventory
control, purchasing, receiving, accounts payable, and cash disbursements.
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Information Flow:
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Purchase requests originate from any department.
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The system selects preferred suppliers and generates purchase orders.
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Receiving and accounts payable departments are notified for verification and
payment planning.
o
Payments are scheduled and executed via Electronic Data Interchange (EDI),
Electronic Funds Transfer (EFT), or checks.
General Threats and Controls (★ High Yield)
Threat
Controls
1. Inaccurate or invalid master data (e.g.,
incorrect supplier or inventory records)
- Data validation checks. - Restricted access to
master data. - Regular audits of data changes.
2. Unauthorized disclosure of sensitive
- Strong access controls (e.g., passwords,
information (e.g., supplier pricing, banking
biometrics). - Encryption of sensitive data.
details)
3. Loss or destruction of data
- Regular backups. - Disaster recovery plans (e.g.,
redundant ERP instances).
4. Poor performance (e.g., inefficient
purchasing or inventory management)
- Performance monitoring via ERP reports (e.g.,
Inventory Turnover = Cost of Goods Sold /
Inventory on Hand).
Ordering Materials, Supplies, and Services
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Activity: Determine what to purchase, when, and in what quantities, and select a
supplier.
Inventory Management Approaches (★ High Yield):
o Economic Order Quantity (EOQ): Calculates the optimal order size to
minimize ordering, carrying, and stockout costs.
o Materials Requirements Planning (MRP): Schedules purchases based on
production forecasts and sales needs.
o Just-in-Time (JIT): Purchases goods only after actual sales, minimizing
inventory levels.
Clarification:
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EOQ focuses on how much to order.
Reorder point (not an inventory system) determines when to order.
Common Mistake: Confusing EOQ with reorder point.
Supplier Selection: Use an approved supplier list, evaluated for quality, reliability, and
cost.
Key Documents:
o Purchase Requisition: Internal request to procure goods or services.
o Purchase Order: Formal contract sent to the supplier to order goods or services.
o Blanket Purchase Order: Agreement for multiple deliveries over time at set
prices.
Threats and Controls in Ordering (★ High Yield)
Threat
Controls
- Perpetual inventory system (real-time tracking). - MRP
5. Stockouts and excess inventory
or JIT systems.
6. Purchasing items not needed
7. Purchasing at inflated prices
8. Purchasing inferior quality
goods
9. Unreliable suppliers
10. Purchasing from
unauthorized suppliers
11. Kickbacks (bribes to
purchasing agents)
- Approval required for purchase requisitions.
- Competitive bidding processes. - Pre-negotiated price
lists or contracts.
- Use of approved suppliers only. - Quality inspections
upon receipt.
- Track supplier performance (e.g., delivery times, defect
rates).
- Limit access to supplier master file. - Approval process
for new suppliers.
- Enforce ethical policies. - Require disclosure of financial
interests in suppliers.
Receiving Materials, Supplies, and Services
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Process: Verify deliveries against purchase orders, inspect goods for quantity and
quality, and update inventory records.
Key Document: Receiving Report – records details of goods received (quantity,
condition).
Technology: Bar-coding and Radio Frequency Identification (RFID) enhance accuracy
and efficiency in counting and tracking.
Threats and Controls in Receiving (★ High Yield)
Threat
12. Accepting unordered
items
13. Mistakes in counting
14. Not verifying receipt of
services
15. Theft of inventory
Controls
- Match deliveries to open purchase orders.
- Independent counts by receiving staff. - Bar-coding or RFID
for automation.
- Supervisor approval or signed documentation. - Budget
comparisons for services.
- Secure storage (e.g., locked warehouses). - Periodic physical
inventory counts.
Approving Supplier Invoices
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Process: Verify supplier invoices for accuracy by matching them to purchase orders and
receiving reports, then approve for payment.
Key Controls:
o Three-way match: Confirms the invoice aligns with the purchase order and
receiving report.
o Voucher System: Uses a voucher package (purchase order, receiving report,
invoice) to authorize payments.
Mnemonic: TIM
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Three-way match: Invoice, Purchase Order, Receiving Report.
Threats and Controls in Approving Invoices (★ High Yield)
Threat
Controls
16. Errors in supplier invoices (e.g.,
wrong price or quantity)
17. Mistakes in posting to accounts
payable
- Three-way match verification. - Automated
invoice checking via ERP.
- Data entry validation checks. - Monthly
reconciliation of accounts payable.
Common Mistake: Assuming all purchases (e.g., services) have receiving reports. Services
require alternative verification methods like supervisor sign-off.
VI. Cash Disbursements
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Process: Pay suppliers, update accounts payable records, and optimize cash flow.
Payment Methods: Checks, EFT, or EDI.
Key Controls:
o Segregation of Duties: Separate check preparation, signing, and bank
reconciliation roles.
o Imprest Funds: Fixed-amount funds (e.g., petty cash) replenished periodically to
limit exposure.
Threats and Controls in Cash Disbursements (★ High Yield)
Threat
18. Failure to take discounts
(e.g., 2/10, net 30)
19. Paying for items not received
20. Duplicate payments
21. Theft of cash
22. Check alteration
23. Cash flow problems
Controls
- File invoices by due date. - Prepare cash flow budgets.
- Three-way match for goods. - Budgets or receipts for
services.
- Voucher system to track payments. - Cancel supporting
documents post-payment.
- Secure storage of blank checks. - Segregation of duties. Bank reconciliations.
- Use check-protection machines. - "Positive Pay" (bank
verifies checks).
- Maintain a cash flow budget.
Special Topics in the Expenditure Cycle
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Evaluated Receipt Settlement (ERS): A two-way match (purchase order and receiving
report) that eliminates supplier invoices, speeding up payments.
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Procurement Cards: Credit cards for small, non-inventory purchases, reducing
paperwork.
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Vendor-Managed Inventory (VMI): Suppliers monitor and replenish inventory, easing
the buyer’s burden.
Mnemonic: E-P-V
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ERS, Procurement Cards, VMI (IT enhancements).
VIII. Summary of Key Activities
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Four Core Activities (★ High Yield):
1. Ordering materials, supplies, and services.
2. Receiving materials, supplies, and services.
3. Approving supplier invoices.
4. Cash disbursements.
Mnemonic: ORAC
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Ordering, Receiving, Approving, Cash Disbursements.
Key Terminology
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Purchase Requisition: Internal request to buy goods or services.
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Purchase Order: Formal contract sent to the supplier.
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Blanket Purchase Order: Agreement for multiple deliveries over time.
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Receiving Report: Records goods received (quantity, condition).
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Debit Memo: Adjusts accounts payable for returned goods.
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Voucher Package: Documents (purchase order, receiving report, invoice) for payment
approval.
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Nonvoucher System: Pays each invoice individually.
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Voucher System: Groups invoices with a disbursement voucher.
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Imprest Fund: Fixed petty cash fund replenished periodically.
Mnemonics for Key Concepts
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O-S-C-I-C-P: Key decisions (Optimal inventory, Supplier selection, Consolidate purchases,
IT efficiency, Cash for discounts, Payment management).
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TIM: Three-way match (Invoice, Purchase Order, Receiving Report).
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ORAC: Activities (Ordering, Receiving, Approving, Cash Disbursements).
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E-P-V: IT enhancements (ERS, Procurement Cards, VMI).
Questions
1. Which of the following inventory control methods is most likely to be used for a product
for which sales can be reliably forecast?
a. JIT
b. EOQ
c. MRP
d. ABC
2. Which of the following matches is performed in evaluated receipt settlement (ERS)?
a. the vendor invoice with the receiving report
b. the purchase order with the receiving report
c. the vendor invoice with the purchase order
d. the vendor invoice, the receiving report, and the purchase order
3. Which of the following is true?
a. It is easier to verify the accuracy of invoices for purchases of services than invoices
for purchases of raw materials.
b. Setting up petty cash as an imprest fund violates segregation of duties.
c. The EOQ formula is used to identify when to reorder inventory.
d. A voucher package usually includes a debit memo.
4. Which document is used to establish a contract for the purchase of goods or services from
a supplier?
a. vendor invoice
b. purchase requisition
c. purchase order
d. disbursement voucher
5. Which method would provide the greatest efficiency improvements for the purchase of
noninventory items such as miscellaneous office supplies?
a. bar-coding
b. EDI
c. procurement cards
d. EFT
6. Which of the following expenditure cycle activities can be eliminated through the use of
IT or reengineering?
a. ordering goods
b. approving vendor invoices
c. receiving goods
d. cash disbursements
7. What is the best control procedure to prevent paying the same invoice twice?
a. Segregate check-preparation and check-signing functions.
b. Prepare checks only for invoices that have been matched to receiving reports and purchase
orders.
c. Require two signatures on all checks above a certain limit.
d. Cancel all supporting documents when the check is signed.
8. For good internal control, who should sign checks?
a. cashier
b. accounts payable
c. purchasing agent
d. controller
9. Which of the following procedures is designed to prevent the purchasing agent from
receiving kickbacks?
a. maintaining a list of approved suppliers and requiring all purchases to be made from
suppliers on that list
b. requiring purchasing agents to disclose any financial investments in potential suppliers
c. requiring approval of all purchase orders
d. prenumbering and periodically accounting for all purchase orders
10. Which document is used to record adjustments to accounts payable based on the return
of
unacceptable inventory to the supplier?
a. receiving report
b. credit memo
c. debit memo
d. purchase order