The Revenue Cycle

1
Revenue Cycle Activities
 Revenue transaction split into two phases:
1) the physical phase, involving the transfer of assets or
services from the seller to the buyer; and
2) the financial phase, involving receipt of cash by seller.
Revenue cycle actually consists of two major subsystems:
 sales order processing subsystem and
 cash receipts subsystem
 Three processes that constitute the revenue cycle for most
retail, wholesale, and manufacturing organizations. These are:
1. sales order procedures,
2. sales return procedures, and
3. cash receipts procedures.
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1. Sales Order Procedures
 Sales order procedures include the tasks
involved in receiving and processing a
customer order, filling the order and shipping
products to the customer, billing the
customer at the proper time, and correctly
accounting the transaction.
 The relationships between these tasks are
presented with the DFD in the following
figure.
3
DFD of Sales Order Processing System
4
 2. Sales Return Procedures
 An organization can expect that a certain
percentage of its sales will be returned. This occurs
for a number of reasons, some of which may be:
 Shipping the wrong merchandise.
 Defective goods.
 The product damaged in shipment.
 Shipping the goods too late or delayed in transit.
 So, reversing the original transaction in the sales
order procedure required, the following figure
shows the DFD of sales return procedures. 5
DFD of Sales Return Procedures
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3. Cash Receipts Procedures
 The sales order procedure described a credit transaction
that resulted in the establishment of an account
receivable. Payment on the account is due at some future
date, which the terms of trade determine.
 Thus, cash receipts procedures apply to this future event
and involves the following tasks:
 receiving and securing the cash;
 depositing the cash in the bank;
 matching the payment with the customer and adjusting
the correct account; and
 properly accounting for and reconciling the financial
details of the transaction.
 The following figure shows the data flow diagram of
cash receipt procedures with the relationship between
the above tasks.
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DFD of Cash Receipts Procedure
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 Revenue Cycle Controls
CONTROL POINTS IN THE REVENUE SYSTEM
Control Activity Sales Processing Cash Receipts
Transactions Credit checking Remittance list (cash
authorization: the Inventory Return policy prelist): The cash
objective is to ensure prelist provides a
that only valid means for verifying
transactions are that customer checks
processed and remittance advices
match in amount.
Segregation of duties: Separate credit dep’t Separate cash receipts
ensures that no from processing; from AR and cash
single individual or separate inventory account; separate AR
dep’t processes a control dep’t from subsidiary ledger from
transaction in its warehouse; separate AR GL
entirety. subsidiary ledger from
general ledger 9
Supervision: closely Mail room: individual
supervising employees who opens the mail has
who perform potentially access both to cash (the
incompatible functions asset) and to the
remittance advice
Accounting records: Sales orders, sales Remittance advices,
audit trail to trace journals, AR Sub. L, checks, remittance list,
transactions through AR control (GL), cash receipts journal,
various stages of inventory Sub. L, AR Sub. L, AR control
processing. inventory , sales (GL) account, cash account
Access: to prevent and Physical access to Physical access to cash;
detect unauthorized and inventory; access to access to
illegal access accounting records accounting records
Independent Shipping department, Cash receipts, general
verification: to verify the billing department, ledger, bank
accuracy and general ledger reconciliation
completeness.
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Physical Systems
 The physical systems include the people,
organizational units, and documents and files
involved in the system.
 The revenue cycles can be either
 manual systems, and/or
 computer-based systems.

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a. The Manual Systems of Sales
Order Processing
 In manual systems, maintaining physical files of
source documents is critical to the audit trail.
 Using manual systems, in each department, after
completion of the assigned task, one or more
documents are filed as evidence that the task
was completed.
 The following document flowchart figure shows
the procedures and the documents typical to a
manual sales order system
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Manual Sales Order Processing Systems
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Manual Sales Order Processing Systems (continued) 14
b. Computer-Based Sales Order
Processing
 Technological innovations in AIS improve the
efficiency and effectiveness of a task that
involved in accounting processes.
 Interactive computer terminals replace many of
the manual procedures and physical documents
of the previous system. The interactive system
provides real-time input and output with batch
updating of only some master files.
 The following figure illustrates a real-time sales
order system.
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Real-Time Sales Order System 16
Advantages of Real-Time Processing
 Real-time processing greatly shortens the cash cycle
 Real-time processing can give the firm a competitive
advantage in the marketplace.
 By maintaining current inventory information, sales
staff can determine immediately whether the
inventories are on hand.
 Manual procedures tend to produce clerical errors, such
as incorrect account numbers, invalid inventory
numbers, and price–quantity miscalculations. Whereas,
real-time editing permits the identification of many
kinds of errors as they occur.
 Real-time processing reduces the amount of paper
documents in a system. 17
The Expenditure Cycle

18
 Introduction
 The objective of the expenditure cycle is to convert the
organization’s cash into the physical materials and the human
resources it needs to conduct business.
 Most business entities operate on a credit basis and do not pay for
resources until after acquiring them. The time lag between these
events splits the procurement process into two phases:
1) the physical phase, involving the acquisition of the resource &

2) the financial phase, involving the disbursement of cash.

 Four major subsystems of the expenditure cycle:

1) the purchases processing subsystem,
2) the cash disbursements subsystem,
3) the payroll processing subsystem &
4) the fixed assets subsystem.

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The Conceptual Expenditure Cycle Activities
 Using data flow diagrams (DFDs) as a guide, we will
trace the sequence of activities through four of the
processes that constitute the expenditure cycle for most
retail, wholesale, and manufacturing organizations.
These are:
 purchases processing,
 cash disbursements,
 payroll and
 fixed asset systems procedures.

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 Purchases Processing Procedures
 Purchases procedures include the tasks involved in
 identifying inventory needs,
 placing the order,
 receiving the inventory, and
 recognizing the liability.
 The relationships between these tasks are presented in
the following figure of Data Flow Diagram.

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DFD for Purchase System
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 The Cash Disbursements Systems
 The cash disbursements system processes the payment
of obligations created in the purchases system.
 The objective is to ensure that only valid creditors
receive payment and that amounts paid are timely and
correct.
 If the system makes payments early, the firm forgoes interest
income that it could have earned on the funds.
 If obligations are paid late, however, the firm will lose purchase
discounts or may damage its credit standing.
 The following data flow diagram figure conceptually
depicts the information flows and key tasks of the cash
disbursements system.
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DFD for Cash
Disbursements System

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 The Payroll Processing System
 Payroll processing is a special-case purchases system in
which the organization purchases labor rather than raw
materials or finished goods.
 The nature of payroll processing creates the need for
specialized procedures, for the following reasons:
 Payroll procedures differ greatly among classes of employees.
E.g., different procedures required for hourly employees,
salaried employees, etc. Also, it requires special accounting
procedures for employee deductions.
 Payroll activities are discrete events in which disbursements to
employees occur weekly, biweekly, or monthly.
 Writing checks to employees requires special controls.
 The following DFD depicts the general tasks of the
payroll system in a manufacturing firm. 25
DFD of Payroll Procedures
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 The Fixed Asset System
 A firm’s fixed asset system processes transactions
pertaining to the acquisition, maintenance, and disposal
of fixed assets. Specific objectives of the fixed asset
system are to:
1) Process the acquisition of fixed assets as needed and in
accordance with formal management approval.
2) Maintain adequate accounting records of asset
acquisition, cost, description, and physical location.
3) Maintain accurate depreciation records for depreciable
assets in accordance with acceptable methods.
4) Provide management with information to help plan for
future fixed asset investments.
5) Properly record the retirement and disposal of fixed
assets.
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Cont’d
 The fixed asset system processes non-routine
transactions for a wider group of users in the
organization.
 Fixed asset accounting systems include cost allocation
and matching procedures that are not part of routine
expenditure systems.
 Fixed asset system involves three categories of tasks:
 asset acquisition,
 asset maintenance, and
 asset disposal.
 The following DFD presents the general logic of the
fixed asset system.
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DFD for Fixed Asset System 29
The Conversion Cycle

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The conversion cycle
 A company’s conversion cycle transforms (converts) input
resources, such as raw materials, labor, and overhead, into
finished products or services for sale.
 The conversion cycle exists conceptually in all
organizations, including those in service and retail
industries. It is most formal and apparent, however, in
manufacturing firms, which is the focus of this chapter.
 We begin with a review of batch production model, which
consists of four basic processes: (1) plan and control
production, (2) perform production operations, (3)
maintain inventory control, and (4) perform cost
accounting.
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The Manufacturing Environment
 The conversion cycle consists of both physical and
information activities related to manufacturing products
for sale.
 The following data flow diagram (DFD) illustrates the
central role of the conversion cycle and its interactions
with other business cycles.

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 Depending on the type of product being manufactured, a company
will employ one of the following production methods:
1) Continuous processing: creates a homogeneous product through a
continuous series of standard procedures. Cement and chemicals
are produced by this manufacturing method. Typically, under this
approach firms attempt to maintain finished-goods inventory at
levels needed to meet expected sales demand.
2) Make-to-order processing: involves the fabrication of discrete
products in accordance with customer specifications. This process is
initiated by sales orders rather than depleted inventory levels.
3) Batch processing: produces discrete groups (batches) of product.
Each item in the batch is similar and requires the same raw
materials and operations. This is the most common method of
production and is used to manufacture products such as
automobiles, household appliances, canned goods, automotive tires,
and textbooks.
 The discussion in this chapter is based on a batch processing
environment. 34
Batch Processing System
 The following DFD provides a conceptual overview
of the batch processing system, which consists of
four basic processes:
 plan and control production,
 perform production operations,
 maintain inventory control, and
 perform cost accounting.
 The figure also depicts the primary information
flows (documents) that integrate these activities
and link them to other cycles and systems.

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DFD of Batch Production Process

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