Chapter 5 Slides

Chapter 5
The Expenditure
Cycle Part I:
Purchases and
Cash Disbursements
Procedures
James A. Hall, Accounting Information Systems, 10th Edition. © 2019 Cengage. All Rights
Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in
whole or in part.
Learning Objectives
• Recognize the fundamental tasks that constitute the purchases and cash disbursements
process.
• Be able to identify the functional areas involved in purchases and cash disbursements
activities, and trace the flow of these transactions through the organization.
• Be able to specify the documents, journals, and accounts that provide audit trails, promote
the maintenance of historical records, and support internal decision making and financial
reporting.
• Understand the risks associated with purchases and cash disbursements activities and be
familiar with the controls that reduce these risks.
• Be aware of the operational features and the control implications of technologies used in
purchases and cash disbursements systems.
James A. Hall, Accounting Information Systems, 10th Edition. © 2019 Cengage. All Rights Reserved.
May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 2
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The Conceptual System
• Using data flow diagrams (DFDs) you can trace the sequence of activities
through the purchases processing and cash disbursements procedures.
OVERVIEW OF PURCHASES AND CASH

DISBURSEMENTS ACTIVITIES
• Purchases Processing Procedures
• MONITOR INVENTORY RECORDS: A purchase requisition is a document that
authorizes a purchase transaction. A valid vendor file is a file containing vendor mailing
information.
• PREPARE PURCHASE ORDER: A purchase order (PO) is a document based on a
purchase requisition that specifies items ordered from a vendor or supplier. The
open/closed purchase order file is the last copy that is filed while preparing a purchase
order.
• RECEIVE GOODS: Blind copy is a purchase order copy that contains no price or quantity
information. The receiving report is a report that lists quantity and condition of the
inventories received. The AP pending file is the file containing supporting documents
needed to set up an account payable. The receiving report file is the file in which a copy
of the receiving report (stating the quantity and condition of the inventories) is placed.
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DFD For Purchase System
Purchase Requisition
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Purchase Order
Blind Copy Purchase Order
4
Receiving Report

DISBURSEMENTS ACTIVITIES (continued)
• Purchases Processing Procedures (continued)
• UPDATE INVENTORY RECORDS: Standard cost system is used in organizations
that carry their inventories at a predetermined standard value regardless of the price
actually paid to the vendor. An actual cost inventory ledger is a ledger that records
inventory values based on actual costs rather than standard costs.
• SET UP ACCOUNTS PAYABLE: The supplier’s invoice is the bill sent from the seller
to the buyer showing unit costs, taxes, freight, and other charges. An AP packet
consists of reconciled AP supporting documents (PO, receiving report, and
invoice).The AP subsidiary ledger is a set of records controlling the exposure in the
cash disbursements subsystems.
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• Vouchers Payable System
• A vouchers payable system is a system under which the AP department uses cash
disbursement vouchers and maintains a voucher register.
• Cash disbursement vouchers provide improved control over cash disbursements
and allow firms to consolidate several payments to the same supplier on a single
voucher, thus reducing the number of checks written.
• The voucher register is a register that reflects a firm’s accounts payable liability.
• The vouchers payable file is equivalent to the open AP file.
• POST TO GENERAL LEDGER
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Inventory Subsidiary Ledger Using Standard Cost
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Relationship between Purchase Journals, AP Subsidiary Ledgers,
and Journal Vouchers
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Cash Disbursement Voucher
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Voucher Register
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• The Cash Disbursements System
• IDENTIFY LIABILITIES DUE
• PREPARE CASH DISBURSEMENT: The check register is a record of all cash
disbursements. The cash disbursements journal contains the voucher number
authorizing each check and provides an audit trail for verifying the authenticity of each
check written.
• UPDATE AP RECORD: The closed AP file is a record of all accounts payable that
have been discharged by making payment to the creditors.
• POST TO GENERAL LEDGER
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DFD For Cash Disbursements System
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Cash Disbursements Journal (Check Register)
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Physical Systems
• The mix of possible technology/human options creates a continuum.
• At one end are minimal technology systems that rely heavily on human
involvement and manual procedures.
• At the other end of the continuum are advanced technology systems, which
replace human activity with automated processes.
• Systems at different points on the continuum operate differently and present
different internal control issues.
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BASIC TECHNOLOGY EXPENDITURE CYCLE
• Basic Technology Purchases Processing System

• INVENTORY CONTROL: The purchase requisition file comprises purchase requisitions.
It is created during the sales activity when the inventories drop to their predetermined
reorder point. The open purchase requisition file contains a copy of purchase
requisitions.
• PURCHASING DEPARTMENT: The open purchase order file contains the last copy of
the multipart purchase order along with the purchase requisition.
• RECEIVING
• AP DEPARTMENT
• GENERAL LEDGER DEPARTMENT
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BASIC TECHNOLOGY EXPENDITURE CYCLE (continued)
• Basic Technology Cash Disbursements System

• AP DEPARTMENT
• CASH DISBURSEMENTS DEPARTMENT
• AP DEPARTMENT
• GENERAL LEDGER DEPARTMENT
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Basic Technology Purchases System
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Basic Technology Cash Disbursement System
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ADVANCED TECHNOLOGY EXPENDITURE CYCLE
• The purpose of advanced technologies in AIS is to integrate accounting and

other business functions through a common information system.
• Integration improves operational performance and reduces costs by
eliminating nonvalue-added tasks.
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12
INTEGRATED PURCHASES PROCESSING SYSTEM
• The level of departmental activity is significantly lower than that of the basic
technology system.
• In the advanced technology system, computer programs perform many clerical
tasks, which is much cheaper and far less prone to error.
• Computer Operations
• Receiving Department
• Accounts Payable Department
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Integrated Purchases System
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Receiving Screen
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File Structure for AP Supporting Documents
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Virtual AP Packet
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INTEGRATED CASH DISBURSEMENTS SYSTEM
• A cash disbursements system is that in which the organization makes vendor

payments with hard-copy checks that are mailed to the vendor.
• Organizations that use electronic funds transfer (EFT) to transmit payments
employ different procedures.
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Integrated Cash Disbursement System
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EXPENDITURE CYCLE RISKS AND INTERNAL CONTROLS
• Risk of Unauthorized Inventory Purchases

• Physical Controls
• TRANSACTION AUTHORIZATION
• IT Controls
• AUTOMATED PURCHASE APPROVAL
• Risk of Receiving Incorrect Items/Quantities/Damaged Goods
• INDEPENDENT VERIFICATION
• SUPERVISION
• IT Controls
• SCANNER TECHNOLOGY
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(continued)
• Risk of Inaccurately Recording Transactions in Journals and Ledgers

• TRANSACTION AUTHORIZATION
• ACCOUNTING RECORDS
• IT Controls
• INPUT DATA EDITS
• ERROR MESSAGES
• AUTOMATED POSTINGS TO SUBSIDIARY AND GL ACCOUNTS
• FILE BACKUP
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(continued)
• Risk of Misappropriation of Cash and Inventory

• SUPERVISION
• SEGREGATION OF DUTIES—INVENTORY CONTROL FROM INVENTORY
WAREHOUSE
• SEGREGATION OF DUTIES—ACCOUNTS PAYABLE FROM CASH
DISBURSEMENTS
• IT Controls
• AUTOMATED THREE-WAY MATCH AND PAYMENT APPROVAL
• MULTILEVEL SECURITY
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(continued)
• Risk of Unauthorized Access to Accounting Records and Reports

• ACCESS CONTROL
• SEGREGATION OF DUTIES
• IT Controls
• PASSWORD CONTROL
• MULTILEVEL SECURITY
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Summary of Expenditure Cycle Risks and Controls
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REENGINEERING USING EDI
• The vendor’s invoice is a commercial document issued by a vendor to a

buyer, indicating the products or services, quantities, and agreed prices for
products or services that the vendor has already provided to the buyer. An
invoice indicates that payment is due from the buyer to the vendor, according
to the payment terms.
• EDI Control Issues
• EDI poses unique risks for organizations that need to be recognized and controlled.
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Chapter 5 Slides

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Chapter 5

OVERVIEW OF PURCHASES AND CASH

Blind Copy Purchase Order

OVERVIEW OF PURCHASES AND CASH

Inventory Subsidiary Ledger Using Standard Cost

Cash Disbursement Voucher

OVERVIEW OF PURCHASES AND CASH

Cash Disbursements Journal (Check Register)

BASIC TECHNOLOGY EXPENDITURE CYCLE

• Basic Technology Purchases Processing System

• Basic Technology Cash Disbursements System

Basic Technology Purchases System

ADVANCED TECHNOLOGY EXPENDITURE CYCLE

• The purpose of advanced technologies in AIS is to integrate accounting and

Integrated Purchases System

File Structure for AP Supporting Documents

INTEGRATED CASH DISBURSEMENTS SYSTEM

• A cash disbursements system is that in which the organization makes vendor

EXPENDITURE CYCLE RISKS AND INTERNAL CONTROLS

• Risk of Unauthorized Inventory Purchases

• Risk of Inaccurately Recording Transactions in Journals and Ledgers

EXPENDITURE CYCLE RISKS AND INTERNAL CONTROLS

• Risk of Misappropriation of Cash and Inventory

• Risk of Unauthorized Access to Accounting Records and Reports

Summary of Expenditure Cycle Risks and Controls

• The vendor’s invoice is a commercial document issued by a vendor to a

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