CHAPTER 11
THE REVENUE CYCLE: SALES AND CASH COLLECTIONS
SUGGESTED ANSWERS TO DISCUSSION QUESTIONS
11.1
This should generate a great deal of discussion. The basic issue concerns the willingness of
consumers to divulge the kind of information that would allow companies to personalize the sales
interaction versus concerns that such information would be misused or sold to other parties.
11.2
The Internet can certainly automate many routine calls for customer service. It will not eliminate
the need for this function entirely, however, because certain types of problems are too complex
and unique to be solved with a canned approach. Also, some customers will be willing to pay a
premium for human customer service. Similarly, the ability to browse a catalog and order on-line
will eliminate much of the mundane work currently done by a sales force. Yet, many companies
will find that they still need a sales force to make cold calls and to try to increase sales to existing
customers.
11.3
Advantages of outsourcing the shipping/logistics function include:
•
the company can concentrate on its core “value-added” activities
•
potential cost savings due to economies of scale
•
greater flexibility in scaling up/down to meet changes in demand
Disadvantages of outsourcing the shipping/logistics function include:
11.4
•
possible decline in service quality, especially if the company is a relatively minor customer of
the outsourcer
•
potential for long-run increased costs as the carrier increases fees and the company faces
considerable “start up” costs to bring the shipping function back in-house
•
increased difficulty in integrating shipping performance data with other internally-generated
data
•
greater difficulty in creating a “competitive advantage” because shipping/logistics function is
no longer proprietary
Threats include issues of non-repudiation, authentication, receipt of payment, and confidentiality.
Digital signatures and encryption are useful controls to mitigate these threats.
11-1
Ch. 11: The Revenue Cycle: Sales and Cash Collections
11.5
This is a good question to get students to explore and compare the role of middlemen and search
engines. There is considerable debate about whether the Internet will eliminate all middlemen, or
just create a new category of middlemen. Point out that “middlemen” on the Internet may
function to bring buyers and sellers together, for example. Have the class explore the value added
by this service and discuss why it is (not) useful.
11.6
Any form of electronic or digital cash has the same audit risks as physical cash: susceptibility to
theft and loss of an audit trail. In addition, digital “cash” also has risks associated with the
durability of the store of value – to what extent can the cash be recovered if the storage media
becomes defective? Another issue concerns the potential loss of privacy, because the digital
currency can be “marked” in a manner that enables tracing its path through the economy.
11-2
Accounting Information Systems
SUGGESTED ANSWERS TO THE PROBLEMS
The basic difference between legacy systems and integrated enterprise systems is that the
former rely more on human detective and corrective controls, whereas the latter rely more on
automated preventive controls. Moreover, many detective controls in integrated systems occur at
the time the event occurs, facilitating real-time correction of any errors. The following table
illustrates specific differences in how the two types of systems address various threats in the
revenue cycle.
11.1
Process/
Activity
Sales order
entry
Shipping
Legacy System Controls versus
Integrated System Controls
Threat
1. Incomplete or inaccurate
customer orders
Legacy – errors detected after event
and must be corrected; Integrated –
errors detected and corrected in real
time
2. Credit sales to customers
with poor credit
Preventive controls basically the same,
but data is more accurate and up-todate with integrated systems.
3. Legitimacy of order
No difference
4.Lost sales due to stockouts,
excessive carrying costs,
and lost revenue due to
markdowns
Legacy – greater likelihood of all these
threats not being detected quickly
5. Shipping errors:
• Wrong merchandise
• Wrong quantities
• Wrong address
Legacy – rely on human controls;
Integrated – rely on automated controls
6. Theft of inventory
No difference – both legacy and
integrated systems require physical
controls to prevent and periodic
inventory counts to detect
11-3
Ch. 11: The Revenue Cycle: Sales and Cash Collections
Process/
Activity
Billing and
accounts
receivable
Legacy System Controls versus
Integrated System Controls
Legacy – rely on human controls;
integrated – less likely as the system
can be designed to automatically bill
upon shipment
Threat
7. Failure to bill
8. Billing errors
Legacy – rely on human controls;
integrated – fewer errors due to
reduced data entry and centralized
database
9.Errors in maintaining
customer accounts
No difference
Cash
collections
10.
Theft of cash
Both legacy and integrated systems
require same segregation of duties to
prevent theft; integrated systems make
it easier to automate the cash collection
process via EFT and electronic
lockboxes, thereby reducing
opportunity for theft
General
11.
Loss of data
No difference
12.
Poor performance
Legacy – rely on periodic reports
(detective and corrective actions
delayed); integrated systems – provide
more timely data to enable earlier
detection and correction of anomalies.
11-4
Accounting Information Systems
11.2
Types of controls used at various steps in the revenue cycle.
Process/
Activity
Sales order
entry
Shipping
Applicable Controls
(P = Preventive, D = Detective, C =
Corrective)
Threat
1. Incomplete or inaccurate
customer orders
Various data entry edit controls P
2. Credit sales to customers
with poor credit
Proper credit approval, prior to delivery
of goods or services P; accurate,
current customer data P
3. Legitimacy of order
Authorized customer purchase order P;
digital signatures D
4. Lost sales due to stockouts,
excessive carrying costs,
and lost revenue due to
markdowns
5. Shipping errors:
•
Wrong merchandise
•
Wrong quantities
•
Wrong address
Inventory control systems P; periodic
physical inventory counts D; improved
sales forecasts P; better supply chain
management P and C
6. Theft of inventory
Billing and
accounts
receivable
Compare sales order with packing list
and shipping documents D; bar coding
P
Physical access controls P;
documentation of all inventory
movements D; periodic physical
inventory counts D
Segregation of shipping and billing
functions P; one-for-one matching of
invoices (or EDI acknowledgments)
against shipping documents D and C
7. Failure to bill
8. Billing errors
Comparison of sales orders, shipping
documents, and invoices P and C;
various edit checks D and C
9. Errors in maintaining
customer accounts
Data entry edit checks D and C; use of
remittance advices P; monthly
statements to customers D and C
11-5
Ch. 11: The Revenue Cycle: Sales and Cash Collections
Process/
Activity
Cash
collections
Threat
10. Theft of cash
General
11. Loss of data
Applicable Controls
(P = Preventive, D = Detective, C =
Corrective)
Segregation of cash handling and
accounts receivable functions P; use of
lockboxes or EFT P; bank account
reconciliation by someone not involved
in cash receipts processing D and C;
segregation of bad debt/credit memo
authorization from cash handling and
accounts receivable functions P
Backup procedures C; disaster
recovery plans P; physical and logical
access controls P
12. Poor performance
11.3
Development and periodic review of
appropriate performance metrics D and
C
a. Shipping personnel should be required to document (on paper or by computer) receipt of
goods from the finished goods storeroom. This procedure acknowledges responsibility for
custody of the goods transferred.
b. Either a redundant data check or closed loop verification could be used. If the transactions
are being entered in batches, redundant data such as the first five characters of the customer's
name could be included in each input record; after finding a match on customer account
number, the system would also verify that the name characters match before posting the
transaction. If the transactions are being entered online, the system could respond to operator
entry of the account number by retrieving and displaying the customer's name for the operator
to review.
c. Up-to-date credit records should be maintained, and credit checks should be made prior to
approval of sales orders.
d. A receiving report should be required to support the authorization of credits for sales returns.
e. Separate the function of authorizing write-offs of uncollectible accounts from the function of
handling of collections on account, in order to prevent any single individual from perpetrating
this type of fraud.
f.
Shipping personnel should be required to record the actual quantity shipped on the order
document and/or enter the quantity shipped into the sales order processing system, in order
that bills can be prepared based upon the quantity shipped rather than the quantity ordered.
11-6
Accounting Information Systems
g. Supervision of mailroom operations, limitation of authority to endorse checks to the cashier
only, and instructions to the bank to accept only those checks endorsed for deposit in the
company's account.
h. Cash receipts should be listed and totaled in the mailroom before the cashier receives the
checks. A third person compares the amount deposited as shown by a validated deposit slip
to the batch total prepared in the mailroom.
i.
11.4
All sales tickets should be prenumbered and accounted for. This would quickly spot a
missing ticket.
a. A 1:N relationship between shipping and cash collections indicates that many cash receipts
are linked to one shipping event; i.e., the company allows customers to make installment
payments on sales. An example would be a furniture company that offered its own credit.
An N:1 relationship, in contrast, indicates that one customer remittance pays for a number of
invoices; i.e., the company does not allow installment sales but does sell on credit. An
example would be American Express.
A M:N relationship between shipping and cash collections indicates that the company makes
some cash sales, some installment sales, and that some customers pay for a set of sales in full
with one periodic remittance. An example would be the revolving credit offered by most instore credit cards (e.g., Sears, JC Penney, etc.).
b. A 1:1 relationship between inventory and sales (the shipping entity in Fig. 11.13) indicates
that each kind of inventory is sold only once—meaning it must be a unique good. It also
means each sale only involves one item of inventory—suggesting that it is expensive and that
customers only buy one at a time. House sales would be an example.
c. The relationship between sales and customers can never be 1:N or M:N because a sale must
be made to some specific customer who is responsible for paying for that purchase.
d. The minimum cardinality FROM cash receipts to the shipping event would become 0, and the
minimum cardinality FROM the shipping event to cash receipts would become 1.
e. The cardinalities FROM the manager to the event would be the standard (0,N). Employees
are a master file, so at the beginning of any new fiscal year would be linked to zero events; in
addition, new credit managers will not yet have participated in any events. Over time,
however, most credit managers would participate in many events. The cardinalities FROM
the event to the manager would be (0,1) because not every order requires specific approval,
only those that exceed the customer’s credit limit – but one, and only one, credit manager
would be held responsible for any such decisions.
11-7
Ch. 11: The Revenue Cycle: Sales and Cash Collections
f.
11.5
An explicit relationship between salespeople and customers can be created. The cardinality
FROM salespeople to customers would be (0,N) because new sales people would not have
any customers yet, but any given salesperson is likely to be assigned several customers. The
cardinality FROM customers to salespeople depends on the policy. If every customer is
assigned to a salesperson, then the cardinality would be (1,1); if only preferred customers are
assigned to salespeople, the cardinality would be (0,1).
a. Modifications to Figure 11.13 would include:
1.
2.
3.
4.
The relationship between sales and cash collections would be changed to (0,1):(1,N).
The relationship between sales and cash collections would be changed to (0,N):(1,N).
The relationship between orders and shipments would be (0,1):(1,1).
A new event would be added, customer inquiries. This event would be linked to
customers and customer service representatives as (1,1):(0,N).
5. A new event would be added, sales returns. It would be linked to inventory and to the
shipping event.
6. A new resource called “Services” would be added and linked to the sales event. The
cardinality FROM sales to this resource would be (0,N); the cardinality from sales to
inventory would also become (0,N). Both links have zero minimums because a sale may
involve either, or both, types of resources.
b. One possible solution would be to generate a number for each customer inquiry and use it as
the primary key. Other attributes to include in this table would be the time of the inquiry, the
time required to resolve the inquiry, and the nature of the inquiry. Foreign keys would include
the customer number and the customer service representative number.
c. The primary key would be sales return number. Foreign keys would include the customer
number, employee who authorized the return, employee accepting the return, and original
sales number. This event would be linked in a M:N relationship with inventory.
11.6
a. - c.
Table
Inventory
Inventory-Sales
Cash Collections
Primary Key
Part number
Part number/invoice
number
Remittance number
Sales
Invoice number
Salesperson
Customer
Salesperson number
Customer number
11-8
Foreign Key(s)
none
none
Entity Type
resource
relationship
Invoice number and
customer number
Customer number and
salesperson number
none
none
event
event
agent
agent
Accounting Information Systems
d. The solution appears below. The only cardinalities that need explanation are those linking the
two events. The minimum cardinality from Sales to Cash Collections is zero because the sales
event happens first. The maximum cardinality is suggested as being 1, but N is also defensible
(although the nature of the inventory items makes it unlikely that the store will allow customers to
pay in installments). The minimum cardinality from Cash Collections to Sales is 1 because this
event happens second. The maximum cardinality is also 1, because the Cash Collections table
includes invoice number as a foreign key. This can only occur if each cash collection is related to
at most 1 sale. A maximum cardinality of N would require either a separate M:N table (if you
assume a maximum cardinality of N from Sales to Cash Collections) or the Remittance number as
a foreign key in the Sales table (if the maximum cardinality from Sales to Cash Collections is 1).
Note also that the answer includes the other entities associated with the tables listed in the
problem.
Inventory
(0,N)
(1,N)
Sales
(1,1)
(0,N)
Employee
(1,1)
(0,1)
(0,N)
Customer
(0,N)
(1,1)
(1,1)
Cash
(0,N)
(1,1)
Cash
Receipts
11-9
(1,1)
(0,N)
Employee
Ch. 11: The Revenue Cycle: Sales and Cash Collections
11.7
a. Criteria for approving customers for guaranteed delivery:
•
Average size of orders.
•
Total volume of business.
•
Location (within a limited geographic range).
b. Input Transactions: Customer orders
Output Documents: (1) Shipping orders
(2) Delivery schedules
(3) Customer invoices
c.
The suggested REA solution appears below. Most cardinalities and relationships are
straightforward. Warehouses are included because the company has six of them and
needs to know how much of each inventory item is stored in each warehouse. The
minimum cardinality from Inventory to Warehouses is 1 because each inventory item
must be stored somewhere. The minimum cardinality from Warehouses to Inventory is
zero to allow for the possibility of building or acquiring new warehouses. The maximum
cardinality from Deliver Orders to Take Orders is N to allow for the possibility that a
contractor might call in several orders during the morning, all of which would be
delivered to the site that afternoon in one large shipment. The maximum cardinality from
Deliver Orders to Cash Receipts is 1 on the assumption that contractors cannot make
installment payments (if students assume they can, the maximum should be N). The
maximum cardinality from Cash Receipts to Deliver Orders is N because the problem
states that customers are billed monthly for all sales the prior month.
11-10
Accounting Information Systems
Inventory
(0,N)
(1,N)
Take
Order
(1,1)
(0,N)
Employee
(Salesperson)
(1,1)
(1,N)
(0,1)
(0,N)
(0,N)
Customer
(0,N)
(1,N)
(0,N)
(1,N)
(1,1)
Deliver
Orders
Warehouse
(1,1)
(0,N)
Employee
(Delivery
Person)
(0,N)
Employee
(Cashier)
(0,N)
Customer
(0,1)
(1,N)
Cash
(0,N)
(1,1)
Cash
Receipts
11-11
(1,1)
(1,1)
Ch. 11: The Revenue Cycle: Sales and Cash Collections
d. Students should generate many potentially useful reports. Some of the more likely answers
include:
•
Accounts Receivable Aging
•
Percentage of orders filled on time
•
Deliveries by customer, by delivery person, by geographic area, and by product
•
Dollar value of deliveries over time
•
Orders by time of day
•
Deliveries by time of day
To produce these reports, proper data will need to be collected such as sales order amounts
and dates; billing amounts and dates; cash collection amounts and dates; delivery dates,
times, and delivery person; and estimated delivery dates and times. Each of the data groups
should include the customer involved.
Chapter 8 discusses the application controls that should be in place to ensure complete,
accurate, and valid reports. These would include access controls, validity checks, and
completeness tests.
e. See next page.
f.
Refer to Table 11.1 in the text for a list of threats and related controls.
Next page:
e. Systems flowchart of order entry and dispatching system:
11-12
Accounting Information Systems
Sales Order
Data Entry
Display
Inventory
Master
File
Online
Order Entry
System
Sales Order
Data Entry
Order
Transactions
Customer
Master
File
Order
Processing
System
Shipping
Documents
Order
Transactions
Delivery
Schedules
Billing
System
Customer
Invoices
Customer
Master
File
Summary
Report
11-13
Ch. 11: The Revenue Cycle: Sales and Cash Collections
11.8
(CMA Examination, adapted)
a. O'Brien Corporation: Internal control weaknesses and recommended improvements:
Weaknesses and Potential Problem(s)
Recommendation(s) to Correct Weaknesses
1. Orders received over the telephone are not
confirmed by customers in writing. This could
result in errors or in filling bogus orders.
Require a written customer purchase order as
confirmation of telephone orders.
2. Customer credit histories are not checked
before approving orders. This is resulting in
excessive late collections and uncollectible
accounts.
Customers’ credit should be checked and no
sales should be made to those that do not meet
credit standards.
3. Sales orders are filed by date in the
Establish customer files and file sales orders by
Marketing Department. This leads to difficulty customers.
in handling customer questions and complaints.
4. Only two copies of sales orders are prepared.
This is not enough to insure a proper matching
in the Billing Department.
Prepare, at a minimum, a three-part sales order,
sending one to Shipping and one to Billing.
Billing should match its copy with a signed
copy from Shipping before preparing a sales
invoice.
5. Items that are out of stock are merely noted.
Inaction in these cases could cause lost sales.
Establish procedures to schedule production
for back orders and to ship and bill the product
once it is available.
6. There is no reconciliation of inventory
amounts shipped with billings. This could
result in undetected underbilling.
Billing and shipping records should be
integrated on the computer system to provide
for reconciliation of inventory amounts
shipped and billed.
11-14
Accounting Information Systems
7. The Receiving Department and the Shipping
Department share a computer terminal. In
addition, the personnel in both departments
have access to the physical inventory and can
update the perpetual inventory records through
the terminal. This could result in theft of
inventory with no means of tracing the theft.
Each department should have its own terminal
and the terminals should be for inquiry
purposes only. The physical custody and
recordkeeping of inventory should be separated
(perpetual records should be updated on the
computer by Purchasing/Accounts Payable and
Billing). Access to the physical inventory
should be limited to Receiving; it would add
incoming goods to the physical inventory and
select the goods from the warehouse for
shipping.
8. The Receiving Department does not
compare incoming deliveries to purchase
orders. This may lead to the acceptance of
unordered goods.
Copies of purchase orders without quantity
information should be sent to Receiving.
Receiving should match the shipment to the
purchase order and indicate the quantity
received.
9. A complete inventory listing is printed only
once a year. Errors in the perpetual inventory
records may remain undetected for too long a
time period.
Inventory listings should be printed
periodically throughout the year, and physical
counts compared to the listing on a cycle basis.
b.
How O'Brien Corporation could use its new computer system to improve control and
efficiency:
• Maintain an online master file for customer account and credit data in addition to inventory
data.
• Use online terminals to enter sales order data into the system as orders are received.
• Have the system check inventory availability as order data are entered; if the customer is on
the phone at this time, inventory availability may be confirmed directly to the customer.
• Have the system perform a credit check as order data are entered, and reject orders from
customers who are not credit-worthy.
• Immediately following approval of a sales order, have the system (1) print or display a
shipping order for Shipping Department use, (2) print a packing slip and mailing label for
use in shipping the goods to the customer.
• Once the order has been shipped, the system should generate a customer invoice.
• Maintain order data online to facilitate response to customer inquiries re order status.
• Use password access controls to restrict access to the customer and inventory files, and the
operations that can be performed on these files, to appropriate personnel.
11-15
Ch. 11: The Revenue Cycle: Sales and Cash Collections
11.9
(CPA Examination, November 1989, Auditing Question 5)
1. Weakness: The employees who perform services are permitted to approve credit without an
external credit check. Threat: Sales could be made that turn out to be uncollectible. Control:
Someone other than the employees performing services should do a credit check.
2. Weakness: There is no independent verification of the billing process. Threat: Fees earned
and accounts receivable might be understated because not all services performed might be
reported for billing. Fees earned and accounts receivable might be either over- or under-stated
because of errors in prices or service data. Control: Billing should be done by someone
independent of performing services. There should also be prenumbered documents for all
services and these should be periodically accounted for and reconciled to invoices.
3. Weakness: The employees who approve credit also approve the write-off of uncollectible
accounts. Threat: Accounts receivable could be understated and bad debts expense
overstated because write-offs of accounts could be approved for accounts that are, in fact,
collectible. Accounts receivable could be overstated and bad debt expense understated
because write-offs may not be initiated for accounts that are uncollectible. Control: Separate
the duties of approving credit and approving the write-off of accounts receivable.
4. Weakness: Credit is not granted on the basis of established limits. Threat: Uncollectible
sales. Control: Establish and use credit limits when granting credit.
5. Weakness: The employee who initially handles cash receipts also prepares billings. Threat:
Fees earned and cash receipts or accounts receivable could be understated because of omitted
or inaccurate billing. Control: Segregate the functions of cash receipts handling and billing.
6. Weakness: The employee who makes bank deposits also reconciles bank statements.
Threat: The cash balance per books may be overstated because all cash is not deposited (i.e.
theft). Control: Bank reconciliation should be done by an employee with no other cash
handling responsibilities.
7. Weakness: Uncollectible accounts are not determined on the basis of established criteria.
Threat: Accounts can be written off to cover theft of cash. Control: Establish and use
criteria for writing off accounts receivable. Write off should be authorized by someone who
does not have access to cash.
8. Weakness: Trial balances of the accounts receivable subsidiary ledger are not prepared
independently of, or verified and reconciled to, the accounts receivable control account in the
general ledger. Threat: Any of fees earned, cash receipts, and uncollectible accounts expense
could be either understated or overstated because of undetected differences between the
subsidiary ledger and the general ledger. Also, fees earned and cash receipts or accounts
receivable could be understated because of failure to record billings, cash receipts, and writeoffs accurately. Control: Periodic reconciliation of the subsidiary accounts receivable ledger
to the general ledger control account for accounts receivable.
11-16
Accounting Information Systems
11.10
(CPA Examination, May 1988, Auditing Question 4, adapted)
Weakness
Exposure
Recommendation
No credit approval.
Uncollectible sales.
Separate credit approval
Warehouse clerk initiates
posting to inventory records by
preparing shipping advice
Failure to prepare would
result in inaccurate inventory
records; could release goods
to friends with no invoice.
Inventory posting should be
done by sales clerk once sales
approved.
Warehouse clerk releases
merchandise prior to credit
approval.
Loss of inventory to
customers who do not pay.
Do not release goods until
notified of credit approval.
Warehouse clerk does not retain
copy of shipping advice.
Cannot easily identify loss if
carrier has accident.
Use 4-copy shipping advice
and retain one copy in
warehouse.
Bookkeeper A authorizes
customer credit and prepares
source documents for posting to
customer accounts.
Sales to friends that exceed
credit limit.
Credit manager should
approve all credit.
Bookkeeper A prepares
invoices without notification
about what was shipped and
when.
Billing mistakes.
Prepare invoice only after
receive copy of shipping
advice indicating quantities
shipped and date.
Bookkeeper A authorizes writeoffs of customer accounts and
approves credit.
Can approve sales to friends
and later write them off.
Someone else should authorize
write-off of customer
accounts.
11-17
Ch. 11: The Revenue Cycle: Sales and Cash Collections
Bookkeeper B does not
periodically verify that all sales
orders and shipping advices
have been invoiced.
Failure to bill customers.
Periodically verify that all
sales orders and shipping
advices have been invoiced.
Bookkeeper C does not
reconcile subsidiary A/R with
general ledger.
Potential imbalances due to
posting errors.
Reconcile subsidiary A/R
ledger with the general ledger.
Bookkeeper C maintains
journals and posts to ledgers.
No independent check on
accuracy of recording
process.
Bookkeeper B should record in
journals and Bookkeeper C
post to ledgers.
Collection Clerk directly
receives and records customer
checks.
Theft of checks.
Have all checks endorsed and
listed in mail room prior to
delivery to collection clerk and
send a copy of the remittance
list to Bookkeeping.
Collections Clerk does not
deliver postdated checks and
checks with errors to an
employee independent of the
bank deposit for review and
disposition.
Possible theft of checks.
Deliver all checks not
deposited to another employee
who has no bank
deposit/reconciliation duties.
Collection Clerk initiates
posting of receipts to subsidiary
accounts receivable ledger and
has initial access to cash
receipts.
Theft by lapping.
Have one of the Bookkeepers
record customer checks, using
a copy of the check or a
remittance listing.
Cash collection clerk does not
deposit checks promptly.
Possible loss of checks; loss
of interest.
Deposit all receipts promptly.
Cash collection clerk reconciles
bank statement and has initial
access to cash receipts.
Can cover up theft by
“fudging” the bank
reconciliation.
Have bank reconciliation
performed by an employee
with no other involvement in
cash receipts processing.
11-18
Accounting Information Systems
Some ways that Newton could use IT to improve efficiency include:
•
•
•
•
On-line data entry by sales staff. The system should include credit checks on customers
as well as check inventory availability
Email notification of each department (shipping, billing, etc.) whenever another
department performs an action (e.g., billing is notified whenever shipping enters data
indicating that an order has been released)
EDI billing of customers
Establishment of electronic lockboxes with banks so that customer payments go directly
to company’s account
Controls that should be implemented in the new system include:
• Passwords to limit access to authorized users, and to restrict the duties each employee may
perform and which files they may access
• A variety of input edit checks (limit checks, range checks, reasonableness tests, etc.) to
ensure completeness of data entry and accuracy
11-19
11.11.
REVENUE CYCLE
Contact
Customer
Accounting
Transaction
Journal
Entry
Documents
Customer
Agrees to
Sale
Approve
Credit
Transfer
Goods
Bill
Customer
Sale
Call sheet
Receive
Remittance
Credit
Accounts
Receivable
Deposit
Cash
Cash Receipt
Dr. A/R
Cr. Sales
Invoice
Remittance
advice;
remittance list
Dr. Cash
Cr. A/R
Remittance
Advice
Data
Collected
ΧName
ΧAddress
ΧContact
person
Department
Sales
Purchase
order from
customer
All items
needed to
complete the
order
Sales
Sales order;
picking list
Packing slip,
shipping
advice
ΧCurrent balance
ΧCredit limit
ΧCarrier
ΧItems & Qty.
shipped
ΧAmount due
ΧName
ΧAmount
ΧName
ΧInvoice*
ΧAmount
ΧTotal
deposit
Credit
Shipping
Accounting
Mail
Accounting
Cashier
Control
Issues
Follow
company
policy and
strategy
Do not violate
laws or
company
policy
Only
approved
customers get
credit
Information
Required
Information
Generated
Effect of
Automation
*
*
*
Ship only
what was
ordered;
document all
shipments
*
Bill for every
shipment; bill
accurately
Prevent theft
of checks or
cash
Theft
*
*
Prevent
lapping;
properly credit
customer
accounts
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
Deposit
slip
*
*-a lot of information is potentially required and generated at each step. The key point to look for in student answers is whether they have
identified non-financial information needs and data from external sources. Similarly, there are countless potential answers to the effect of
automation.
11-20
SUGGESTED ANSWERS TO THE CASES
11.1
Answers will depend on the students’ experience and the nature of the company selected.
Be sure that the students thoroughly address all issues raised in the case.
11.2
The suggested REA Diagram appears on the following page. Each advertisement is assumed
to list many different books for sale. An advertisement might be linked to multiple orders
from the same customer over time, but to evaluate the effectiveness of advertising, each order
is linked to just the one last advertisement that attracted a new customer. The solution
assumes that Elite fills and ships each order as it comes in (it does not make sense to assume
that it waits to receive multiple orders from a customer before shipping any; if you want to
allow for partial shipments and back orders, then the maximum cardinality from order to
delivery should be N). The solution assumes that customers are not allowed to pay in
installments, nor are they allowed to “run a tab” and periodically pay for all orders during a
specified time period.
Suggested attributes in tables:
Table Name
Books
Primary Key(s)
Book number
Cash
Cash account number
Advertisements
Advertisement number
Orders
Order number
Shipments
Invoice number
Cash Receipts
Remittance number
Employees
Employee number
Customers
Customer number
Advertisements – Books
Advertisement number
Book number
Order number
Book number
Invoice number
Book number
Orders – Books
Shipments – Books
11-21
Other Attributes (foreign keys
in italics, others in normal font)
ISBN#, cost, list price, quantity
on hand, title
Bank number, account name,
type of account, balance
Employee placing ad, customer
number, date placed, media, cost,
first appearance date, last
appearance date
Employee number, customer
number, advertisement number,
date, total amount of order
Employee number, customer
number, order number, date
shipped, total number of books,
type (free or purchase)
Employee number, customer
number, invoice number, cash
account number, total amount
received, date received
Name, date hired, date of birth,
salary, address
Name, ship-to-address, bill-toaddress
Offering price
Quantity ordered
Actual sales price
Quantity shipped
Ch. 11: The Revenue Cycle: Sales and Cash Collections
Advertisements
(1,N)
(1,1)
(0,N)
Employee
(1,1)
(0,N)
(0,N)
(0,N)
Customer
(0,N)
(0,1)
Books
(0,N)
(1,N)
(0,N)
Take
Orders
(1,1)
(1,1)
(0,N)
Employee
(0,1)
(0,N)
(1,N)
(1,1)
Ship
Books
(1,1)
(1,1)
(0,N)
Customer
(0,1)
(0,N)
(1,1)
(1,1)
Cash
(0,N)
(1,1)
Cash
Receipts
11-22
(1,1)
(0,N)
Employee
Accounting Information Systems
2. Input transactions include:
• Enrollment forms and orders placed by new members
• Orders from regular members
• Orders for free books
• Member payments on account
• Receipts of books from publishers
• Transactions with advertising media
Output documents include:
• Order form with list of current selections
• Order form for free book orders
• Member bills (invoices)
• Member statements of account for past due accounts
Output reports include:
• Book inventory turnover report
• Accounts receivable aging schedule
• Advertising media effectiveness analysis
3.
Answers will vary; one possible solution is as follows:
Process #1: Order form preparation:
Preparation
of Order
Forms
Member
File
Member Order
Forms
Mail to Members
11-23
Ch. 11: The Revenue Cycle: Sales and Cash Collections
Process #2: Processing of enrollment forms and orders received from new members:
New Member
Enrollment &
Order Forms
New Member
Data Entry
Display
New Member
Data Entry
Process
New Member
Data Entry
New Member
Enrollment &
Order Records
Member
File
Orders
Enrollment
and Order
Processing
Book
Inventory
File
New Member
Welcome
Letter
To New Members
11-24
Accounting Information Systems
Process #3: Processing of regular and free book orders:
Regular
Member Orders
OCR Input
Process
Order
Transactions
Free Book
Orders
Sort By
Member Number
Order
Transactions
Order
Processing
Member
File
Sales
Orders
Book
Inventory
File
Free Book
Order Forms
To Eligible
Members
11-25
Process #4: Shipping
Inventory
Sales
Orders
Edit and
Process
Shipments
Print
Picking
Ticket
2
Bill of
Lading
Picking
Ticket
Pick
Books
1
Carrier
Enter
Shipping Data
Member
Customer
11-26
Shipments
Bill of
Lading
Process #5: Billing
Bill of
Lading
Shipments
Orders
Billing
Customer
2
1
Invoice
Sales
Invoices
History
Customer
11-27
General
Ledger
Process #6: Processing of cash receipts on account:
Member
Payments
Payment
Data Entry
Display
Payment Data
Entry Process
Payment
Data Entry
Payment
Transactions
Sort By
Member Number
Payment
Transactions
Cash Receipts
Processing
Member
File
Receivables
Aging
Schedule
Member
Statements of
Account
To Credit
Manager
To Members
11-28
Accounting Information Systems
Process #7: Book inventory processing:
Book
Receipts
Records
Book Receipts
Data Entry
Display
Book Receipts
Data Entry
Process
Book Receipts
Data Entry
Book
Receipts
Data
Sort by Book
Code Number
Book
Receipt Data
Inventory
Processing
Inventory Turnover
Report
11-29
Book
Inventory
File
To
Editors
Ch. 11: The Revenue Cycle: Sales and Cash Collections
Process #8: Advertising media analysis:
Advertising
Transactions
Advertising
Transaction
Data Entry
Process
Advertising
Transactions Data
Entry Display
Advertising
Media
Transactions
Advertising
Transactions
Data Entry
Sort by Media
Code Number
Member File
Retrieve
Sales by
Media Code
Advertising
Media
Transactions
Sales by
Media
Code
Advertising
Media
Analysis
Media Performance
Analysis
To Advertising
Manager
11-30
Advertis
-ing
Media
Files
Accounting Information Systems
4.
Student answers should include controls to address each threat listed in Table 11.1;
choice of specific controls depends upon the assumptions made by the student in step
3. At a minimum, the following controls need to be in place:
a) passwords to control access
b) credit approval by credit manager for new customers
c) system checks orders from existing customers against credit limit and outstanding
balance
d) system verifies that items shipped = items ordered
e) system checks that all shipments match an invoice
f) use of lockboxes for cash receipts. If must handle cash internally, prompt endorsement
of all checks in the mailroom and routing of checks to cashier, remittance advices to
accounting.
g) periodic backup of master files and storage of second copy of backup offsite.
11-31