AIS Chapter 4 Revenue Cycle

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Chapter 4: The Revenue Cycle

Objectives for Chapter 4



 Tasks performed in the revenue cycle, regardlessTasks performed in the revenue cycle, regardless of the technology used

of the technology used



 Functional departmentFunctional departments in s in the revenue cyclethe revenue cycle and the flow of revenue

and the flow of revenue transactions througtransactions through theh the organization

organization



 Documents, journals, and accounts needed forDocuments, journals, and accounts needed for audit trails, records, decision making, and audit trails, records, decision making, and financial reporting

financial reporting



 Risks associated with the revenue cycle Risks associated with the revenue cycle and theand the controls that reduce these risks

controls that reduce these risks



 The operational and control implications ofThe operational and control implications of technology used to automate and reengineer technology used to automate and reengineer the revenue cycle

the revenue cycle

Journal Vouchers/Entries

How do we get them?



 Billing DepartmentBilling Department prepares a journal voucher:prepares a journal voucher: Accounts Receivable Accounts Receivable DRDR Sales Sales CR CR 

 Inventory ControlInventory Control Dept. prepares a journalDept. prepares a journal voucher:

voucher: Cost

Cost of of Goods Goods Sold Sold DRDR Inventory

Inventory CR CR



 Cash Receipts prepares a journal voucher:Cash Receipts prepares a journal voucher:

Cash DR

Accounts Rece Accounts Receivableivable

CR CR

Revenue Cycle Databases



 Master filesMaster files



 customer master filecustomer master file 

 accounts receivable master fileaccounts receivable master file 

 merchandise inventory master filemerchandise inventory master file 

 Transaction and Open Document FilesTransaction and Open Document Files



 sales order transaction filesales order transaction file •

• open sales order transaction fileopen sales order transaction file



 sales invoice transaction filesales invoice transaction file 

 cash receipts transaction filecash receipts transaction file

•

• Other FilesOther Files

–

– shipping and price data reference fileshipping and price data reference file

–

– credit reference file credit reference file (may not be(may not be

needed) needed) –

– salesperson file (may be a master file)salesperson file (may be a master file)

–

– Sales history fileSales history file

–

– cash receipts history filecash receipts history file

–

– accounts receivable reports fileaccounts receivable reports file

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(2)

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Manual Sales Order Processing System

Sales Order Processing



 Begins with a customer placing an order Begins with a customer placing an order



 The sales department captures theThe sales department captures the

essential details on a sales

essential details on a sales order form.order form.



 The transaction is authorized by obtaining creditThe transaction is authorized by obtaining credit approval by the credit

approval by the credit departmentdepartment..



 Sales information is released to:Sales information is released to:



 BillingBilling 

 Warehouse (stock release or Warehouse (stock release or pickingpicking

ticket) ticket)



 Shipping (packing slip and shippingShipping (packing slip and shipping

notice) notice)



 The merchandise is picked from the The merchandise is picked from the WarehouseWarehouse and sent to Shipping.

and sent to Shipping.



 Stock records are adjusted.Stock records are adjusted. 

 The merchandise, packing slip, and bill The merchandise, packing slip, and bill of ladingof lading are prepared by Shipping and sent to the

are prepared by Shipping and sent to the customer.

customer.



 Shipping reconciles the merchandiseShipping reconciles the merchandise

received from the Warehouse with the received from the Warehouse with the sales information on the packing slip. sales information on the packing slip.



 Shipping informatShipping information is sent to Billing. Biion is sent to Billing. Bi llinglling compiles and reconciles the relevant facts and compiles and reconciles the relevant facts and issues an invoice to

issues an invoice to the customer and updatesthe customer and updates the sales journal. Information is transferred to: the sales journal. Information is transferred to:



 Accounts Receivable (A/R)Accounts Receivable (A/R) 

 Inventory ControlInventory Control 

 A/R records the information in the A/R records the information in the customer’scustomer’s account in the

account in the accounts receivable subsidiaryaccounts receivable subsidiary ledger.

ledger.



 Inventory Control adjusts the inventory subsidiaryInventory Control adjusts the inventory subsidiary ledger.

ledger.



 Billing, A/R, and IBilling, A/R, and I nventory Control submitsnventory Control submits summary information to the General Ledger summary information to the General Ledger dept., which then reconciles this

dept., which then reconciles this data and postsdata and posts to the control accounts in the G/L.

to the control accounts in the G/L.



DFD and Flowchart of Sales Return Procedures



 Sales Return Journal EntrySales Return Journal Entry

G/L posts the following to control accounts: G/L posts the following to control accounts: Inventory

(3)



DFD and Flowchart of Cash Receipts Procedure

Cash Receipts Processes



 Customer checks and remittance advices areCustomer checks and remittance advices are received in the Mail Room.

received in the Mail Room.



 A mail room clerk prepares a cash prelistA mail room clerk prepares a cash prelist

and sends the prelist and the c

and sends the prelist and the c hecks tohecks to Cash Receipts.

Cash Receipts.



 The cash prelist is also sent to A/R andThe cash prelist is also sent to A/R and

the Controller. the Controller.



 Cash Receipts:Cash Receipts:



 verifies the accuracy and completenessverifies the accuracy and completeness

of the checks of the checks



 updates the cash receipts journalupdates the cash receipts journal 

 prepares a deposit slipprepares a deposit slip 

 prepares a journal voucher to send toprepares a journal voucher to send to

G/L G/L



 A/R posts from the remittance advices to theA/R posts from the remittance advices to the accounts receivable subsidiary ledger. accounts receivable subsidiary ledger.



 Periodically, a summary of the postings isPeriodically, a summary of the postings is

sent to G/L. sent to G/L.



 G/L department:G/L department:



 reconciles the journal voucher from Cashreconciles the journal voucher from Cash

Receipts with the summaries from A/R Receipts with the summaries from A/R



 updates the general ledger controlupdates the general ledger control

accounts accounts



 The Controller reconciles the bank accounts.The Controller reconciles the bank accounts.

Summary

Summary of

of Internal

Internal Controls

Controls

Authorization

Authorization Controls

Controls



 Proper authorization of Proper authorization of transactionstransactions (documenta

(documentation) should occur so tion) should occur so that only validthat only valid transactions get processed.

transactions get processed.



 Within the revenue cycle, Within the revenue cycle, authorization shouldauthorization should take place when:

take place when:



 a sale is a sale is made on credit (authorization)made on credit (authorization) 

 a cash refund is requesteda cash refund is requested

(authorization) (authorization)



 posting a cash payment received to aposting a cash payment received to a

customer’s account (cash pre customer’s account (cash pre-list)-list)

Segregation of Functions

Three Rules Three Rules

1.

Transaction Transaction authorization authorization should should be be separateseparate from transaction processing.

from transaction processing.

2.

Asset custody should be separate from assetAsset custody should be separate from asset record-keeping.

record-keeping.

3.

The organization should be so structured that theThe organization should be so structured that the perpetration of a fraud requires collusion

perpetration of a fraud requires collusion between two or more individuals

(4)

Segregation of Functions



 Sales Order ProcessingSales Order Processing



 credit authorization separate from SOcredit authorization separate from SO

processing processing



 inventory control separate frominventory control separate from

warehouse warehouse



 accounts receivable sub-ledgeraccounts receivable sub-ledger

separate from general ledger control separate from general ledger control account

account



 Cash Receipts ProcessingCash Receipts Processing



 cash receipts separate from accountingcash receipts separate from accounting

records records



 accounts receivable sub-ledgeraccounts receivable sub-ledger

separate from general ledger separate from general ledger

Supervision



 Often used when Often used when unable to enact appropriateunable to enact appropriate segregation of duties.

segregation of duties.



 Supervision of employees serves as a Supervision of employees serves as a deterrent todeterrent to dishonest acts and is

dishonest acts and is particularly important in theparticularly important in the mailroom

mailroom..

Accounting Records



 With a properly maintained audit trail, it iWith a properly maintained audit trail, it i ss possible to track

possible to track transactions through the systemstransactions through the systems and to find where and when e

and to find where and when e rrors were made:rrors were made:



 pre-numbered source pre-numbered source documentdocumentss 

 special journalsspecial journals 

 subsidiary ledgerssubsidiary ledgers 

 general ledger general ledger 

 filesfiles

Access Controls



 Access to assets Access to assets and information (accountingand information (accounting records) should be limited.

records) should be limited.



 Within the revenue cycle, Within the revenue cycle, the assets to protectthe assets to protect are

are cashcash and and inventoriesinventories and access to records and access to records such as the

such as the accounts receivable subsidiaryaccounts receivable subsidiary ledger

ledger and and cash journalcash journal should be restricted. should be restricted.

Independent Verification



 Physical procedures as well as record-keepingPhysical procedures as well as record-keeping should be independently reviewed at various should be independently reviewed at various points in the system to check

points in the system to check for accuracy andfor accuracy and completeness:

completeness:



 shipping verifies the goods sent from theshipping verifies the goods sent from the

warehouse are correct in type and warehouse are correct in type and quantity

quantity



 warehouse reconciles the stock releasewarehouse reconciles the stock release

document (picking slip) and packing slip document (picking slip) and packing slip



 billing reconciles the shipping notice withbilling reconciles the shipping notice with

the sales invoice the sales invoice 

 general ledger reconciles journalgeneral ledger reconciles journal vouchers from billing, i

vouchers from billing, inventorynventory control,control, cash receipts, and accounts receivable cash receipts, and accounts receivable

Automating the Revenue Cycle



 Authorizations and data access can beAuthorizations and data access can be performed through computer screens. performed through computer screens.



 There is a decrease in the amount of paper.There is a decrease in the amount of paper.



 The manual journals and ledgers are changed toThe manual journals and ledgers are changed to disk or tape transaction and master files.

disk or tape transaction and master files.



 Input is still typically frInput is still typically from a hard copy documentom a hard copy document and goes through one or more c

and goes through one or more c omputerizedomputerized processes.

processes.



 Processes store data in electronic fiProcesses store data in electronic fi les (the tapeles (the tape or disk) or prepare data in

or disk) or prepare data in the form of athe form of a hardcopy report.

hardcopy report.



 Revenue cycle programs can include:Revenue cycle programs can include:



 formatted screens for collecting formatted screens for collecting datadata 

 edit checks on the data enterededit checks on the data entered 

 instructions for processing and storing theinstructions for processing and storing the

data data



 security procedures (passwords or usersecurity procedures (passwords or user

IDs) IDs)



 steps for generating and steps for generating and displayingdisplaying

output output



 To understand files, you must consider the reTo understand files, you must consider the re cordcord design and layout.

design and layout.



 The documents and the files used The documents and the files used as inputas input sources must contain the data necessary to sources must contain the data necessary to generate the output reports.

generate the output reports.

Computer-Based Accounting Systems



 CBAS technology can be viewed as CBAS technology can be viewed as a continuuma continuum with two extremes:

with two extremes:



 automationautomation - - use technology to improveuse technology to improve

efficiency and effectiveness efficiency and effectiveness



 reengineeringreengineering – – use technology to use technology to

restructure business processes and firm restructure business processes and firm organization

organization 



Example: Automated Batch Sales

Reengineering Sales Order Processing Using

Real-Time Technology



 Manual procedures and physical documents areManual procedures and physical documents are replaced by interactive c

(5)



 Real-time - entry of customer order,Real-time- entry of customer order,

printout of stock release, packing slip printout of stock release, packing slip and bill of lading; update of credit file, and bill of lading; update of credit file, inventory file, and open sales orders file inventory file, and open sales orders file



 BatchBatch - printout of invoice, update of- printout of invoice, update of

closed sales order

closed sales order (journal)(journal), accounts, accounts receivable and general ledger control receivable and general ledger control account

account

Real-Time Sales Order System

Advantages of Real-Time Processing



 Shortens the cash cycle of Shortens the cash cycle of the firm by reducingthe firm by reducing the time between the order date and

the time between the order date and billing datebilling date



 Better inventory management which can lead toBetter inventory management which can lead to a competitive advantage

a competitive advantage



 Fewer clerical errors, reducing incorrect itemsFewer clerical errors, reducing incorrect items being shipped and bill discrepancies

being shipped and bill discrepancies



 Reduces the amount of expensive paperReduces the amount of expensive paper documents and their storage costs

documents and their storage costs

Reengineered Cash Receipts



 The mail room is a frequent target forThe mail room is a frequent target for

reengineering. reengineering.



 Companies send their customers preprintedCompanies send their customers preprinted

envelopes and remittance advices. envelopes and remittance advices.



 Upon receipt, these envelopes are scanned toUpon receipt, these envelopes are scanned to

provides a control procedure against theft. provides a control procedure against theft.



 Machines are open the envelopes, scanMachines are open the envelopes, scan

remittance advices and checks, and

remittance advices and checks, and separateseparate the checks.

the checks.



 Artificial intelligence may be used to readArtificial intelligence may be used to read

handwriting, such as remittance amounts and handwriting, such as remittance amounts and signature

signature

..

Automated Cash Receipts

Point-of-Sale Systems



 Point of sale systems are used ePoint of sale systems are used e xtensively in retail establishments.xtensively in retail establishments.



 Customers pick the inventory from the shelves and take them tCustomers pick the inventory from the shelves and take them t o a cashier o a cashier .. 

 The clerk scans the universal product code (UPC). The clerk scans the universal product code (UPC). The POS system is connected to an inventory file, where theThe POS system is connected to an inventory file, where the price and description are retrieved.

price and description are retrieved.



 The inventory levels are updated The inventory levels are updated and reorder needs can immediately be detectedand reorder needs can immediately be detected.. 

 The system computes the amounThe system computes the amount due. t due. Payment is either cash, check, ATM or credit card in most cases.Payment is either cash, check, ATM or credit card in most cases.



 No accounts receivablesNo accounts receivables 

 If checks, ATM or credit cards are used, an on-line If checks, ATM or credit cards are used, an on-line link to receive approval is necessary.link to receive approval is necessary.



 At the end of the dayAt the end of the day or a cashier’s shift, the money and receipts in the drawer are reconciled to the internal cashor a cashier’s shift, the money and receipts in the drawer are reconciled to the internal cash register tape or a

register tape or a printout from the computer’sprintout from the computer’s database. database.



(6)

Reengineering Using EDI



 EDI helps to expedite EDI helps to expedite transactions.transactions.



 The customer’s computer:The customer’s computer:



 determines that inventory is neededdetermines that inventory is needed 

 selects a supplier with whom the businessselects a supplier with whom the business

has a formal business

has a formal business agreementagreement



 dials the supplier’s computer and placesdials the supplier’s computer and places

the order the order



 The exchange is The exchange is completely automatcompletely automated.ed.



 No human intervention or No human intervention or managemmanagementent

Reengineering Using the Internet



 Typically, no formal business agreements exist asTypically, no formal business agreements exist as they do in EDI.

they do in EDI.



 Most orders are made with creMost orders are made with cre dit cards.dit cards.



 Mainly done with e-mail systems, and thus aMainly done with e-mail systems, and thus a turnaround time is necessary

turnaround time is necessary



 Intelligent agents are needed toIntelligent agents are needed to

eliminate this time lag. eliminate this time lag.



 Security and control over data is Security and control over data is a concern witha concern with Internet transactions.

Internet transactions.

CBAS Control Considerations



 Authorization - in Authorization - in real-time systems, authorizationsreal-time systems, authorizations are automated

are automated



 Programmed decision Programmed decision rules must berules must be

closely monitored. closely monitored.



 Segregation of Functions - consolidation of tasksSegregation of Functions - consolidation of tasks by the computer is common

by the computer is common



 Protect the computer programsProtect the computer programs 

 Coding, processing, and maintenanceCoding, processing, and maintenance

should be se

should be se parated.parated.



 Supervision -Supervision - in POS systems, the cash register’sin POS systems, the cash register’s internal tape or database is an added form of internal tape or database is an added form of supervision

supervision



 Access Control - magnetic records areAccess Control - magnetic records are

vulnerable to

vulnerable to both authboth authorized and unaorized and unauthorizeduthorized exposure and should be protected

exposure and should be protected

CBAS Control Considerations



 Accounting RecordsAccounting Records - rest on reliability and - rest on reliability and security of stored digitalized data

security of stored digitalized data



 AccountantAccountants should be s should be skeptical aboutskeptical about

the accuracy of

the accuracy of hard-copy printouts.hard-copy printouts.



 BackupsBackups -- the system needs to ensurethe system needs to ensure

that backups of all files are

that backups of all files are continuouslycontinuously kept

kept



 Independent VerificationIndependent Verification – – consolidating consolidating accounting tasks under one

accounting tasks under one computer programcomputer program can remove traditional independent verification can remove traditional independent verification controls. To counter this problem:

controls. To counter this problem:



 perform batch control balancing afterperform batch control balancing after

each run each run



 produce management reports andproduce management reports and

summaries for end users to review summaries for end users to review

PC-Based Accounting Systems



 Used by small firms and some Used by small firms and some large decentralizedlarge decentralized firms

firms



 Allow one or few Allow one or few individuals to perform entireindividuals to perform entire accounting function

accounting function



 Most systems are divided into modules controlledMost systems are divided into modules controlled by a menu-driven

by a menu-driven program:program:



 general ledger general ledger 

 inventory controlinventory control 

 payrollpayroll 

 cash disbursementscash disbursements 

 purchases and accounts payablepurchases and accounts payable 

 cash receiptscash receipts 

 sales order sales order

PC Control Issues



 Segregation of DutiesSegregation of Duties - tend to - tend to be inadequatebe inadequate and should be compensated for with increased and should be compensated for with increased supervision, detailed management reports, and supervision, detailed management reports, and frequent independent verification

frequent independent verification



 Access ControlAccess Control - access - access controls to the datacontrols to the data stored on the computer tends to be

stored on the computer tends to be weak;weak; methods such as encryption and disk locking methods such as encryption and disk locking devices should be used

devices should be used



 Accounting RecordsAccounting Records - computer disk failures - computer disk failures cause data losses; external

cause data losses; external backup methodsbackup methods need to be implemented to allow data recovery need to be implemented to allow data recovery