The Revenue Cycle:
Sales to Cash Collections
Chapter 10
FOSTER School of Business
Acctg.320
1
Questions Addressed
What are the basic business activities and
data processing operations that are
performed in the revenue cycle?
What decisions need to be made in the
revenue cycle, and what information is
needed to make these decisions?
What are the major threats in the revenue
cycle and the controls related to those
threats?
FOSTER School of Business
Acctg.320
2
Introduction
The revenue cycle is a recurring set of
business activities and related
information processing operations
associated with providing goods and
services to customers and collecting
cash in payment for those sales.
Primary external exchange of
information is with customers.
FOSTER School of Business
Acctg.320
3
Revenue Cycle Objective
The revenue cycle’s primary objective is
to provide the right product in the right
place at the right time for the right
price.
(no lefts here!)
To accomplish that objective,
management must make many key
decisions:
FOSTER School of Business
Acctg.320
4
Key Decisions: Revenue Cycle

To what extent can and should products be customized to individual
customers’ needs and desires?

How much inventory should be carried, and where should that
inventory be located?

How should merchandise be delivered to customers? Should the
company perform the shipping function itself or outsource it to a third
party that specializes in logistics?

What are the optimal prices for each product or service?

Should credit be extended to customers?

How much credit should be given to individual customers?

What credit terms should be offered?

How can customer payments be processed to maximize cash flow?
FOSTER School of Business
Acctg.320
5
AIS basic functions
There are 3 basic functions of the AIS in
the revenue cycle:
(1) capturing and processing data about
business activities,
(2) storing and organizing that data to
support decision making,
(3) providing controls: ensure reliability of
data & safeguard resources.
FOSTER School of Business
Acctg.320
6
Revenue Cycle Business
Activities
Four basic business activities
performed in the revenue cycle:

Sales order entry

Shipping

Billing

Cash collections
FOSTER School of Business
Acctg.320
7
Sales Order Entry
Sales order entry process entails four
steps:
1.
taking the customer’s order,
2.
checking and approving customer credit,
3.
checking inventory availability, and
4.
Responding to Customer Inquiries
FOSTER School of Business
Acctg.320
8
Taking Customer Orders
Many different ways: phone, store, field rep.,
mail, web…etc. Optical scanners can
convert hardcopy to electronic data or
customers enter data.
Choiceboards allow customers to customize
products to their needs (e.g., Dell).
Use EDI (EDINT) for orders or to allow
vendors to manage inventory (vendor
managed inventory (VMI).
Software can be used to optimize selling
prices!
FOSTER School of Business
Acctg.320
9
Credit Approval

Most business-to-business sales are made on
credit. Credit sales should be approved before
they are processed.

Each customer will have a credit limit. Credit limit is
the maximum allowable account balance for each
customer based on the customer’s past credit
history and ability to pay.

Figure 10-7 on Page 376 shows the information
typically available for this purpose: the customer’s
credit limit, current balance and age of any
outstanding unpaid invoices.
FOSTER School of Business
Acctg.320
10
Checking Inventory Availability
The next step is to determine if there is sufficient
inventory available to fill the order.
 When there are not sufficient items on hand to fill
the customer’s order, a back order is created.
 Once the item(s) become available, a picking
ticket is created.
 The picking ticket authorizes the inventory control
function to release merchandise to the shipping
department.
 The accuracy of inventory records is important
because customer may become justifiably upset
when unexpected delays occur in filling their
orders.

FOSTER School of Business
Acctg.320
11
Responding to Customer
Inquiries

Customer services is so important that many
companies use special software packages, called
Customer Relationship Management (CRM)
systems, to support this vital process.

The goal of customer relationship management is
to retain customers.

This is important because a general marketing rule
of thumb is that it costs at least five times as much
to attract and make a sale to a new customer as it
does to make a repeat sale to an existing
customer.
FOSTER School of Business
Acctg.320
12
Responding to Customer
Inquiries

Transaction processing technology can also be
used to improve customer relationships. For
example, many commercial POS systems can link
not only with the inventory file but also with the
customer master file.

This not only automatically updates accounts
receivable balances but provides an opportunity to
print customized coupons and personal messages
on each sales receipt, such as “Thank you.”
Web sites provide a cost-effective alternative to traditional toll-free
telephone customer support, automating that process with a list of
frequently asked questions (FAQs).
FOSTER School of Business
Acctg.320
13
Shipping



The second basic activity in the revenue cycle is
filling customer orders and shipping the desired
merchandise.
Figure 10-9 on Page 379 provides a data flow
diagram for shipping.
Shipping consists of the following two steps:
(1) picking and packing the order and
(2) shipping the order
FOSTER School of Business
Acctg.320
14
Pick and Pack the Order

The picking ticket printed by sales order entry
triggers the pick and pack process.

Some of the investments companies have an
automated warehouse system which include:
computers, bar-code scanners, conveyer belts and
communications technology. Some warehouses
have no people—use robots.
Radio-Frequency Identification (RFID) is
replacing bar codes. The RFID tag eliminates the
need to align items with scanners; instead, the tags
can be read as the inventory moves throughout the
warehouse.

FOSTER School of Business
Acctg.320
15
Ship the Order

The shipping department compares the physical
count of inventory with the quantities indicated on
the picking ticket and with the quantities indicated
on the copy of the sales order that was sent directly
to shipping from sales order entry.

The packing slip lists the quantity and description
of each item included in the shipment.

The bill of lading is a legal contract that defines
responsibility for the goods in transit.
FOSTER School of Business
Acctg.320
16
Ship the Order

If the customer is to pay the shipping charges, the
copy of the bill of lading may serve as a freight
bill, to indicate the amount the customer should
pay to the carrier.

One major decision that needs to be made when
filling and shipping customer orders concerns the
choice of delivery method.

Another important decision concerns the location of
distribution centers.

RFID systems can provide real-time information on
shipping status and thus provide additional value to
customers.
FOSTER School of Business
Acctg.320
17
Billing
Involves two separate but related tasks:
(1) invoicing: The document created in the billing
process is the sales invoice, which notifies
customers of the amount to be paid and where to
send payment.
(2) updating A/R: The accounts receivable
function uses the information on the invoice to
debit the customers’ accounts for credit purchases
and credit the customers’ accounts when payment
is received.
FOSTER School of Business
Acctg.320
18
Billing

Under the open-invoice method, customers
normally pay according to each invoice.

The customer is asked to return a copy of the
invoice when mailing in their payment. This return
copy is referred to as the remittance advice.

Under the balance-forward method, customers
typically pay according to the amount shown on a
monthly statement.

A monthly statement lists all transactions,
including both sales and payments.
FOSTER School of Business
Acctg.320
19
Billing
One advantage of the open-invoice method is that it is
conducive to offering discounts for prompt payment, as
invoices are individually tracked and aged.
A disadvantage of the open-invoice method is the added
complexity required to maintain information about the
status of each individual invoice for each customers.
Under cycle billing, monthly statements are prepared for
subsets of customers at different times. For example,
the customer master file might be divided into four
parts, and each week monthly statements would be
prepared for one-fourth of the customers.
FOSTER School of Business
Acctg.320
20
Exceptions: Account
Adjustments and Write-offs

This involves either the return of merchandise by
customers for credit or the write-off of customers
who do no pay their bill.

After repeated attempts (at least three attempts in
a three month period) to collect payment have
failed, it may be necessary to write off a customer’s
account. In such cases, the credit manager issues
a credit memo to authorize the write-off.
FOSTER School of Business
Acctg.320
21
Cash Collections




The final step in the revenue cycle is cash
collections.
The cashier handles customer remittances and
deposits them in the bank.
A remittance list provides the names and amounts
of all customer remittances, and sends it to
accounts receivable.
Imaging technology can be used to improve the
efficiency of processing customer payments.
FOSTER School of Business
Acctg.320
22
Cash Collections




A lockbox is a postal address to which customers send their
remittances. The participating bank picks up the checks from
the post office box and deposits them to the company’s
account.
Under an electronic lockbox arrangement, the bank
electronically sends the company information about the
customer account number and the amount remitted as soon
as it receives and scans those checks.
With electronic funds transfer (EFT), customers send their
remittances electronically to the company’s bank and thus
eliminate the delay associated with the time the remittance is
in the mail system.
EFT is usually accomplished through the banking system’s
Automated Clearing House (ACH) network.
FOSTER School of Business
Acctg.320
23
Cash Collections

Electronic date interchange (EDI) is the use of
computerized communication to exchange business data
electronically in order to process transactions.

EFT only involves the transfer of funds. Although every bank
can do EFT through the ACH system, not every bank
possesses the EDI capabilities necessary to process the
related remittance data. Many companies have to separate
the EFT and EDI components of processing customer
payments.

Financial electronic data interchange (FEDI) integrated the
exchange of electronic funds transfer (EFT) with the
exchange of the remittance data; electronic data
interchange (EDI).
FOSTER School of Business
Acctg.320
24
Information Processing
Procedures
Many organizations have replaced their accounting
information systems with an integrated Enterprise
Resource Planning (ERP) system.
ERP key improvements are as follows:



Real-time order entry detects errors, such as missing data,
as the order is being entered, and when it is easiest to correct
those errors.
Credit approval decisions can be made at the time the
customer places the order. If special approval is required, the
credit manager is notified by e-mail or IM and can
immediately make that decision.
Inventory records are more accurate and timely, enabling
sales order entry staff to provide customers accurate
information about expected delivery dates.
FOSTER School of Business
Acctg.320
25
ERP key improvements
(cont.)

The warehouse and shipping departments can better plan
activities to minimize the time required to fill customer orders.

The system compares data that the shipping department
entered with the sales order file, thereby detecting and
facilitating correction of any errors prior to shipment.

Cash receipts are processed more quickly, improving cash
flow.

Reports and performance measures are timelier, enhancing
management’s ability to monitor and improve efficiency and
effectiveness.
FOSTER School of Business
Acctg.320
26
Control Objectives, Threats
and Procedures
In the revenue cycle, a well-designed accounting
information system should provide adequate
controls to ensure that the following objectives are
met:
 All transaction are properly authorized.
 All recorded transactions are valid (actually
occurred).
 All valid, authorized transactions are recorded.
 All transactions are recorded accurately.
 Assets, (cash, inventory and data) are safeguarded
from loss or theft.
 Business activities are performed efficiently and
effectively.
FOSTER School of Business
Acctg.320
27
Control Objectives, Threats
and Procedures
Table 10-1 on Page 392 lists the major
threats in the revenue cycle and the
appropriate control procedures that should
be in place to mitigate them.
FOSTER School of Business
Acctg.320
28
Control Objectives, Threats
and Procedures

Sales Order Entry Threats

The primary objectives of the sales order entry
process are to accurately and efficiently process
customer orders, ensure that the company gets
paid for all credit sales and that all sales are
legitimate, and to minimize the loss of revenue
arising from poor inventory management.
FOSTER School of Business
Acctg.320
29
Sales Order Entry Threats:
Threat 1: Incomplete or Inaccurate customers Orderhave to call customer to get correct info.
Threat 2: Credit Sales to Customers with Poor Credit
Threat 3: Legitimacy of Orders
Threat 4: Stockouts, Carrying Costs and
Markdowns-lost sales, excess inventory = carrying
costs & markdowns.
FOSTER School of Business
Acctg.320
30
Shipping Threats
The primary objective of the shipping
function is to fill customer orders efficiently
and accurately, and to safeguard inventory.
Threat 5: Shipping Errors
Threat 6: Theft of Inventory: by employees or

in shipment.
Inventory "shrinkage," a combination of employee theft,
shoplifting, vendor fraud and administrative error, cost the
nation's retailers $31.3 billion last year, according to the just
released National Retail Security Survey, which analyzed
theft incidents from 118 of the largest U.S. retail chains.
FOSTER School of Business
Acctg.320
31
Billing & A/R Threats
The primary objectives of the billing and accounts
receivable functions are to ensure that customers
are billed for all sales that invoices are accurate
and that customer accounts are accurately
maintained.
 Threat 7: Failure to Bill Customers
 Threat 8: Billing Errors
 Threat 9: Error in Maintaining Customer
Accounts-validity checks, closed-loop verification,
field checks.

FOSTER School of Business
Acctg.320
32
Cash Collections Threats
The primary objective of the cash collections function
is to safeguard customer remittances.

Threat 10: Theft of Cash
The following segregation of duties should be used
to reduce this risk:
Handling cash or checks and posting remittances to
customer accounts.
Handling cash or checks and authorizing credit memos.
Issuing credit memos and maintaining customer accounts.
FOSTER School of Business
Acctg.320
33
General Control Issues

Two general objectives pertaining to all revenue
cycle activities are: (1) that accurate data be
available when needed and (2) that all activities be
performed efficiently and effectively.

Threat 11: Loss, Alteration or Unauthorized
Disclosure of Data.

Threat 12: Poor Performance
In addition to ensuring accuracy and safeguarding assets,
another objective of internal controls is to encourage efficient
and effective performance of duties.
FOSTER School of Business
Acctg.320
34
Revenue Cycle Information
Needs

Effective management of revenue cycle activities
requires timely access to accurate information
Operational data are needed to monitor
performance and to perform recurring tasks.
 In addition, current and historical information is
needed to enable management to make strategic
decisions.
 The accounting information system must also
supply the information needed to evaluate
performance of critical processes.

FOSTER School of Business
Acctg.320
35
New Metric: Revenue Margin
One example of a new type of metric designed specifically to
provide a leading indicator of revenue cycle performance.
 Revenue Margin equals gross margin* minus all selling
costs:
Payroll
Commissions
Salesforce travel expense reimbursements
Customer service and support costs
Warranty expenses
Marketing and advertising expenses
Distribution and delivery expenses
* Net sales minus cost of goods sold = gross margin
 The value of revenue margin as a metric/measurement is that
it integrates the effects of changes in sales, pricing and the
costs associated with generating sales on overall company
operating profits.

FOSTER School of Business
Acctg.320
36
Conclusion
Accountants have to continually refine and
improve performance measures/reports. In
order to do this, accountants must develop
a better understanding of business
processes.
FOSTER School of Business
Acctg.320
37