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    CH 4 SIA

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    Makmur Sese

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    of 62
    The Revenue Cycle Bateson eres oe 1 v ough business processes that constitute their revenue cycle. In its simplest form, the revenue cycle is the direct exchange of finished goods or services for cash in a single transaction between a seller and a buyer. More complex revenue cycles process sales on credit. Many days or weeks may pass between the point of sale and the subsequent receipt of cash. This time lag splits the revenue transaction 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 the receipt of cash by the seller in payment of the account receivable. As a matter of processing conve- nience, most firms treat each phase as a separate transac- tion. Hence, the revenue cycle actually consists of two major subsystems: (1) the sales order processing subsystem and (2) the cash receipts subsystem, This chapter is organized into two primary sections. The first section presents the conceptual revenue cycle. It pro- vides an overview of key activities, the logical tasks, sources and uses of information, and the movement of accounting information through the organization. The sec- ond section examines physical revenue cycle systems. All physical systems are composed, to varying degrees, of tech- nology and human activity. This section reviews system options that lie at different points on the technology/ human continuum. Two objectives drive this discussion. The first is to illustrate system functionality, efficiency issues, and work flow characteristics of different technolo- gies. The second is to demonstrate how internal control issues differ between systems at various points on the techs nology/human continuum. As part of this discussion we examine in detail basic technology systems, advanced inte- grated systems, and point-of-sale systems. We conclude this chapter with an introduction to electronic data interchange (EDI) and Internet sales systems. r eee at eee ae ese Pee Soe Pee aes ore regardless of the technology in place. Peer emus cl departments involved in revenue cycle Peer t eet ana ere east eet ee Be able to specify the documents, Petar ee eee oi audit trails, promote the Peete lite rosa Mecsas and sustain finaneial reporting. Understand the risks associated with Pesos et usc aos Poets cake so Be aware of the operational and control implications of technology Pere Cr saaaica ae 147 148 PART 11 Transaction Cycles and Business Processes The Conceptual System OVERVIEW OF REVENUE CYCLE ACTIVITIES rams (DEDs) as a In this section, we examine the revenue cycle conceptually. Using data low diaghee ot guide, we will trace the sequence of activites through three processes that consis Tt cycle for most retail, wholesale, and manufacturing organizations. These af SO oi dures, sales return procedures, and cash receipts procedures. Service companies insurance companies, and banks would use different industry-specific methods, This discussion js intended to be technology-neutral In other words, the tasks “ONT AS A performed manually or by computer. At this point, our focus is on what (conceP IN Ot be done, not how (physically) it is accomplished. At various stages in the Process 1 Ui ine specific documents, journals, and ledgers as they are encountered. Ait ital (computer technology-neutral. These documents and files may be physical (hard copy) oF “He! generated). In the next section, we examine examples of physical systems. Sales Order Procedures Sales order procedures include the tasks involved in rec filling the order and shipping products to the customer, billing the cus and correctly accounting for the transaction. The relationships between with the DFD in Figure 4-1 and described in the following section. a customer order indicating the ing and processing a customer order, tomer at the proper time, these tasks are presented RECEIVE ORDER. The sales process begins with the receipt o! type and quantity of merchandise desired. At this point, the customer order is not in a standard format and may or may not be a physical document. Orders may arrive by mail, by telephone, or from a field representative who visited the customer. When the customer is also a business entity, the order is often a copy of the customer's purchase order. A purchase order is an expendi- ture cycle document, which is discussed in Chapter 5. . Because the customer order is not in the standard format that the seller's order processing system needs, the first task is to transcribe it into a formal sales order, an example of which is pre- sented in Figure 4-2. The sales order captures vital information such as the customer's name, address, and account number; the name, number, and description of the items sold; and the quantities and unit prices of each item sold. At this point, financial information such as taxes, discounts, and freight charges may or may not be included. After creating the sales order, a copy of it is placed in the customer order file for future reference. The task of filling an order and getting the product to the customer may take days or even weeks. During this period, customers may contact their suppliers to check the status of their orders. The customer order file is updated cach time the status of the order changes, such as credit approval, on back-order, and shipment. The customer order file thus enables customer service employees to respond promptly and accurately to customer questions. CHECK CREDIT. Before processing the order further, the customer’s creditworthiness needs to be established, The circumstances of the sale will determine the nature and degree of the credit check. For example, new customers may undergo a full financial investigation to establish a. line of credit. Once a credit limit is set, however, credit checking on subsequent sales may be limited to ensuring that the customer has a history of paying his or her bills and that the current sale does not exceed the preestabished limit. The credit approval process is an authorization control and should be performed as a function separate from the sales activity. In our conceptual system, the receive-order task sends the sales order (credit copy) to the check-eedit task for approval. The returned approved sslee ony son triggers the continuation of the sales process by releasing sales order information sim ulnrecat to various tasks, Several documents mentioned in the following sections, such as the ek wna, packing sip, shipping notice, and sales invoice, are simply special-purpose cry release, order and are not illustrated separately, tPose copies of the sales 149 The Revenue Cycle CHAPTER 4 soe Buds sowoysng, me “2010 sa enoidoy Sane Joworsng 150 PART 11 Transaction Cycles and Business Processes PKL) ci CREDIT SALE INVOICE MONTEREY PENINSULA CO-OP invoice NUMBER _——— 527 River Road Chicago, IL 60612 | (312) 555-0407 souDT0 FIRMNAME__ INVOICE DATE ———~ ATIENTIONOF~S*CS*«*REPARED BY ADDRESS. GRepmT TERMS—_——— cry. STATE __2P fF NUMBER. SHIPMENT DATE ——— DATE. SHIPPED iA ‘SIGNED BY. BOL NO. —————~ a ‘QUANTITY | PRODUCT ‘QUANTITY | UNIT GAOERED | NUMBER | DESoRIPTION| SHIPPED | PRICE | TOTAL TOTAL SALE ‘CUSTOMER ACCT.NO, VERIFICATION PICK GOODS, The receive order activity forwards the stock release document (also called the 1 ticket) to the pick goods function in the warehouse. This document identifies the items of inventory that must be located and picked from the warehouse shelves. It also provides formal authorization for warehouse personnel to release the specified items. After picking the stock, the order is verified for accuracy and the goods, along with the verified stock release document, are sent to the ship goods task. If inventory levels are insufficient to fil the order, a warehouse employee adjusts the verified stock release to reflect the amount actually going to the customer The employee then prepares a back-order record, which stays on file until the inventories arrive from the supplier (not shown in Figure 4-1). Back-ordered items are shipped before new sales are pickin processed. Finally, the warehouse employee adjusts the stock records to reflect 5 tl ‘These stock records are not the formal accounting records for controling ees a sis They are used for warehouse management purposes only. Assigning asset custody and fa ‘teoping ia CHAPTER 4 The Revenue Cycle IST the warehouse clerk would violate a Key principle of internal control. The inventory control func- tion, discussed later, maintains the formal accounting inventory records. SHIP GOODS. Before the arrival of the goods and the verified stock release document, the ship- ping department receives the packing slip and shipping notice from the receive order function. The packing slip will ultimately travel with the goods to the customer to describe the contents of the order. The shipping notice will later be forwarded to the billing function as evidence that the custo- mer’s order was filled and shipped. This document conveys pertinent new facts such as the date of shipment, the items and quantities actually shipped, the name of the carrier, and the freight charges. In some systems, the shipping notice is a separate document prepared within the shipping function. Upon receiving the goods from the warehouse, the shipping clerk reconciles the physical items with the stock release, the packing slip, and the st 1g notice to verify that the order is correct. The ship goods function thus serves as an important independent verification control point and is, the last opportunity to detect errors before shipment, The shipping clerk packages the goods, attaches the packing slip, completes the shipping notice, and prepares a bill of lading. The bill of lading, as shown in Figure 4.3, is a formal contract between the seller and the shipping company (cartier) to transport the goods to the customer. This document establishes legal ownership and responsibility for assets in transit. Once the goods are transferred to the carrier, the shipping clerk records the shipment in the shipping log, forwards the shipping notice and the stock release to the bill-customer function as proof of shipment, and updates the customer order file to reflect the “shipped” status of the transaction, BILL CUSTOMER. The shipment of goods marks the completion of the economic event and the point at which the customer should be billed. Billing before shipment encourages inaccurate record keeping and inefficient operations, When the customer order is originally prepared, some details such as inventory availability, prices, and shipping charges may not be known with certainty. In the case of back-orders, for example, suppliers do not typically bill customers for out-of-stock items. Billing for goods not shipped causes confusion, damages relations with custo- ‘mers, and requires additional work to make adjustments to the accounting records. To prevent such problems, the billing function awaits notification from shipping before it bills Figure 4-1 shows that upon credit approval, the bill-customer function receives the sales order (invoice copy) from the receive order task. This document is placed in an S.O. pending file until receipt of the shipping notice, which describes the products that were actually shipped to the cus- tomer. Upon arrival, the items shipped are reconciled with those ordered, and unit prices, taxes, and freight charges are added to the invoice copy of the sales order. The completed sales invoice js the customer’s bill, which formally depicts the charges to the customer. In addition, the billing function performs the following record-keeping tasks: + Sends the stock release document to the update inventory records task. + Forwards the ledger copy of the sales order to the update accounts receivable task. * Records the sale in the sales journal “The sales journal is a special journal used for recording completed sales transuetions. The details of sales invoices arc entered in the journal individually. At the end of the period, these entries are summarized in a sales journal voucher, which is sent to the general ledger task for posting to the following accounts: DR cR ‘Accounts Receivable—Control —- XXXX.XX. Sales XXXX.XX_ Figure 4. illustrates a journal voucher. Fach journal voucher represents a general journal entry and indicates the general ledger accounts affected. Summaries of transactions, adjusting entries, and closing ‘entries are all entered into the general ledger via this method. When properly approved, journal vou- ‘chers are an effective control against unauthorized entries to the general ledger. The journal voucher "System eliminates the need for a formal general journal, whichis replaced by a journal voucher fie 4 i = a ll 152 PART LL Transnetion Cycles and Busines SS UNIFORM STRAIGHT BILL OF LADING — Domestic Monterey Poninsula Co-Op Document No 527 Rivor Road Chicago, 1L 60612 (312) 556-0407 Shippor No___—— Cartior No. Dato_$__—__— To: Consignoo Stroot Gity/Stato — enon Guyisinig Name of Carron) Zip Coda Frotes — fo i Todo pact, 1 Shipping! description of articles, ' Units} spacial marks and exceptions Weight! ato | Charges I I 1 TOTAL CHARGES $ The agreed or declared value ofthe | IF WITHOUT RECOURSE: property is hereby specfialy stated by ! Tho carior shall not make delivery of the shippertobe not excoeding: | this shipment without payment of freight $ _ per. | ignatare of Consignon FREIGHT CHARGES | Signature Below signs hat the goods | ‘Check appropriate box | descrbved above are in apparent good | 1) Freight propeid | order, excopt as noted. Shipper hereby | [ ] Collect | cores that ho is familiar wit all the Bil | [1 Bilto shipper | of lading terms and agrees with them. | {1 Biltoshinper__ ollacing rms and agrees with them, | SHIPPER Monterey Peninsula Co-op | CARRIER 1 PER PER DATE Pep PER ATE (This bil of lading is tobe signed by the shipper and agent of the carrer issuing same.) CONSIGNEE © Caen leona CHAPTER 4 The Revenue Cycle 153 ree Number: ¥6-03) Journal Voucher Date: _sa/ztaors. ‘Account ‘Amount Number | AccountName | OR. CA. / 20100 Aecsunts hecinable | $,000 5020 Soles 4000 [ Explanation: do rad dtl ond ales fon 10/7201 Approved by: ft Posted by: Adi? UPDATE INVENTORY RECORDS. The inventory control function updates inventory subsidiary ledger accounts from information contained in the stock release document. In a perpetual inventory system, every inventory item has its own record in the ledger containing, at a minimum, the data depicted in Figure 4-5. Each stock release document reduces the quantity on hand of one or more inventory accounts, When the quantity on hand falls below the reorder point, a record is added to the purchase requisition file, which will trigger the reordering process. Periodically, the financial value of the total reduction in inventory is summarized in a journal voucher and sent to the general ledger function for posting to the following accounts: DR cR Cost of Goods Sold XXX.XX Inventory—Control UPDATE ACCOUNTS RECEIVABLE RECORDS. Customer records in the accounts receivable (AR) subsidiary ledger are updated from information provided by the sales order (ledger copy). Every XXX.XX poe) ea mec Porpotal Inventory Record Item # 58229 item Units [Unis |Qntyon [Reorder] [Ontyon | Purch | Vendor | Standara | Totalinven.] | | eateMion | Date |Raconed | Sold | Hand’ | Point | €00| “Order | Orders |Number| Cost | Cost FP Aalg | 9115 wo | 90 | 20 |rom] — = 2 7,300 | ae so | ex 1,300 90 ro | 20 1100 | slat xo | 20 500 ‘ar ro | 140 | 200 | ooo] x00 | a0 | a | 2 300 lke rorr| 000 1100 : 200 || ee ——= ae 154 PART IL Transaction Cyeles and Business P SG CO aCUTE erg ety ‘Account Number /42% Name: nd Sap ply across: 127 Hops Cone aan es [a planation | umber Balance | Limit | Credit saaas | oad Paling | 72137 00.00 Phas) 0.00 Customer has an account record in the AR subsidiary ledger containing, at minimum, the following data: customer name; customer address; current balance; available credit; transaction dates; invoice numbers; and credits for payments, returns, and allowances. Figure 4-6 presents an example of an AR subsidiary ledger record. Periodically, the individual account balances are summarized in a report that is sent to the general ledger. The purpose for this is discussed next. POST TO GENERAL LEDGER. By the close of the transaction processing period, the general ledger function has received journal vouchers from the billing and inventory control tasks and an account summary from the AR function. This information set serves two purposes. First, the general ledger uses the journal vouchers to post to the following control accounts: DR cR Accounts Receivable Control XXXX.XX. Cost of Goods Sold XXX.XX Inventory Control XXX.XX Sales XXXX.XX Because general ledger accounts are used to prepare financial statements, they contain only suramary figures (no supporting detail) and require only summary posting information. Second, this informa- tion supports an important independent verification control. The AR summary, which the AR function independently provides, is used to verify the accuracy of the journal vouchers from billing. The AR summary figures should equal the total debits to AR reflected in the journal vouchers for the transaction period. By reconciling these figures, the general ledger function can detect many types of errors. We examine this point more fully in a later section dealing with revenue cycle controls. 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 are as follows: + The company shipped the customer the wrong merchandise. * The goods were defective. * The product was damaged in shipment. * ‘The buyer refused delivery because the seller shipped the goods too late or they were delayed in transit When a return is necessary, the buyer requests credit for the unwanted products. This involves reversing the previous transaction in the sales order procedure. Using the DFD in Figure 47. let’s now review the procedures for approving and processing returned items, CHAPTER A ‘Tho Revenue Cycle 155 156 PART 11 Transaction Cycles and Business Processes Credit Memo Monterey Peninsula Co-Op Customer 527 River Road Invoice # ———— Chicago, IL 60612 (312) 555-0407 Received from Reason for Return Address. Cty State Quantity | Unit Description Returned | Prive ‘Approved By” PREPARE RETURN SLIP. When items are returned, the receiving department employee counts, inspects, and prepares a return slip describing the items. The goods, along with a copy of the return slip, go to the warehouse to be restocked. The employce then sends the second copy of the return slip to the sales function to prepare a credit memo. PREPARE CREDIT MEMO. Upon receipt of the return slip, the sales employee prepares a credit memo. This document is the authorization for the customer to receive credit for the mer- Chandise returned, Note that the credit memo illustrated in Figure 4-8 is similar in appearance to ‘sales order, Some systems may actually use a copy of the sales order marked credit memo. in cases in which specific authorization is required (ic., if the amount of the return exceeds or the circumstances surrounding the return needs the sales employee's general authority to approve). the eredit memo goes to the credit manager for approval. However, ifthe clerk has sufficient gen tral authority to approve the return, the credit memo is sent directly to the billing function, where the customer sales transaction is reversed, 7 APPROVE CREDIT MEMO. The credit manager evaluates the circumstances of the return and makes a judgment to grant (or disapprove) credit, The manager then returns the approved credit memo to the sales department, CHAPTER 4 ‘The Revenue Cycle 187 UPDATE SALES JOURNAL. Upon receipt of the approved credit memo, the transaction is recorded in the sales journal as a contra entry. The credit memo is then forwarded to the inven- tory control function for posting. At the end of the period, total sales returns are summarized in ‘a journal voucher and sent to the general ledger department. UPDATE INVENTORY AND AR RECORDS. The inventory control function adjusts the inven- tory records and forwards the credit memo to accounts receivable, where the customer's account is also adjusted. Periodically, inventory control sends a journal voucher summarizing the total value of inventory returns to the update general ledger task. Similarly, accounts receivable submits an AR account summary to the general ledger function. UPDATE GENERAL LEDGER. Upon receipt of the journal voucher and account summary infor- mation, the general ledger function reconciles the figures and posts to the following control accounts: DR cr Inventory-Control XXX.XX Sales Returns and Allowances XXXX.XX Cost of Goods Sold XXX Accounts Receivable-Control XXXX.XX 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. Cash receipts procedures apply to this future event. They involve 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 DFD in Figure 4-9 shows the relationship between these tasks. They are described in detail in the following section. OPEN MAIL AND PREPARE REMITTANCE LIST. A mail room employee opens envelopes containing customers’ payments and remittance advices. Remittance advices (see Figure 4-10) con- tain information needed to service individual customers’ accounts, This includes payment date, account number, amount paid, and customer check number. In this example, only the portion above the perforated line is the remittance advice, which the customer removes and returns with the payment. The lower portion of the document in Figure 4-10 is the customer statement, which the billing department sends out periodically. In other cases, the customer invoice, which was described in the sales order procedures, serves as the remittance advice and statement. ‘The remittance advice is a form of a turnaround document, as described in Chapter 2. Its impor- tance is most apparent in firms that process large volumes of cash receipts daily. For example, pro- cessing a check from John Smith with no supporting details would require a time-consuming and costly search through perhaps thousands of records to find the correct John Smith, This task is greatly simplified when the customer provides the necessary account number and posting informa- tion, Because of the possibility of transcription errors and omissions, however, sellers do not rely on their customers to provide this information directly on their checks. Errors are avoided and oper- ational efficiency is greatly improved when using remittance advices. Mail room personnel route the checks and remittance advices to an administrative clerk who endorses the checks “For Deposit Only” and reconciles the amount on each remittance advice with the corre- sponding check. The clerk then records each check on a form called a remittance list (or cash pre-list), ‘here all cash received is logged. In this example, the clerk prepares three copies of the remittance list. The original copy is sent with the checks to the record and deposit checks function, The second copy 20es with the remittance advices to the update AR function. The third goes to a reconciliation task. RECORD AND DEPOSIT CHECKS. A cash receipts employee verifies the accuracy and com- Pleteness of the checks against the prelist. Any checks possibly lost or misdirected between the Mail room and this function are thus identified. After reconciling the prelist to the checks, the owe 9 ‘Transaction Cycles and Business Processes PARTI 158 se6pa7 Averpisans uy Coe ENF] CHAPTERS The Revenue Cycle Fe as Send To: MONTEREY PENINSULA CO-OP Page: 1 527 River Road Chicago, IL 60612 (812) 855-0407 Remitance Advice: Date Customer No, Amount Pd. Check No. joats | — etigo1 | reson | 2002 Please return the upper portion with your payment — Thank You John Smith To: A.D #2, Box312 Due Date Customer No. Amount Due Prunedale, CA 09278-5704 tonons | aii9o1 | 125.00 Invoice Number Description Amount Due orans | erans Cleaning Supplies “Thank you for giving Montorey Peninsula the opportunity to serve you og Previous Bal 300.00 Payments 300.00 Sales 125.00 Late Fees = Tax = Ending Bal 125.00 159 Cao eaiag™ PART 11 Transaction Cycles and Bu les and Business Processes 4-11 Cash Recewrs Journat Cash Receipts Journal ‘Account Check | Gash [Sales Discounts Ret |x | Acct ¥ 101 | acct. # 420, (Oebiy —_|(Oebin eaptad Sixt | sor || a0 races Cnt Spotl! Ser 2970 2, [Horan Ca st || 1000 — ransactions, including unt, are recorded in the cash ‘each type of transaction. Notice employee records the check in the eash receipts journal. All cash receipts | cash sales, miscellaneous cash receipts, and cash received on acco receipts journal. Figure 4-11 illustrates this with an example of that cach check received from a customer is listed as a separate line item, ‘Next, the clerk prepares « bunk deposit slip shoving the amount of the day's reeipts and forwards this along with the checks tothe bank. Upon deposit ofthe Funds, the bank teller validates the deposit lip and returns it to the company for reconciliation. At the end of the day, the cash receipts employee summarizes try to the general ledger function. the journal entries and sends a journal voucher with the following ent DR cR Cash XXXX.XX XXXX.XX ‘Accounts Receivable Control UPDATE ACCOUNTS RECEIVABLE RECORDS. The remittance advices are used to post to the customers’ accounts in the AR subsidiary ledger. Periodically, the changes in account balances are summarized and forwarded to the general ledger function. UPDATE GENERAL LEDGER. Upon receipt of the journal voucher and the account summary, the general ledger function reconciles the figures, posts to the cash and AR contro} accounts, and files the journal voucher. ym the controller's RECONCILE CASH RECEIPTS AND DEPOSITS. Periodically, a clerk fro ‘an employee not involved with the cash receipts procedures) reconciles cash receipts by }) a copy of the prelist, (2) deposit slips received from the office (or comparing the following documents: (1 bank, and (3) related journal vouchers. Physical Systems Physical accounting information systems area combination of computer technology and human actt~ ity, This technology/human mix creates a continuum of alternative design options. At one end ofthe continunm are systems that employ minimal technology and rely heavily on human involvement a” ranual procedures. At the other end are advanced technology systems, which, to a great extent replace human activity with automated processes. As a general rule, smaller businesses tend t0 rely CHAPTER 4 ‘The Revenue Cycle tess on technology and more on manual procedures, whereas larger companies tend to employ auvanced technologies, The nature of the technology/human mix employed in a particular system has ‘adiroct bearing on the nature of internal controls needed to control the system, ‘The objectives of this section are to: 1) illustrate AIS functionality and work flow patterns under lifferent levels of technology, and 2) demonstrate how the internal control profile changes as the teclnology/human mix changes, To accomplish this we review examples of systems at different points on the technology continuum, The first example is a basic technology system that employs independent PCs, which function primarily as record keeping devices. The second example is an advanced technology system that integrates all business functions through a centralized computer application, Next, we review the key features of point-of-sale (POS) systems that are commonly used in department stores and supermarkets. Finally, we examine electronic data interchange (EDI) and the Internet as alternative techniques for reengineering the revenue cycle. The appendix to this chapter presents an example of a sales return system and examples of batch processing technologies ‘that are associated with older legacy systems, which, although rare, are still in operation. BASIC TECHNOLOGY REVENUE CYCLE This section presents examples of basic technology revenue eyele systems. The computers used in these systems are independent (non-networked) PCs, Therefore, information flows between depart- ments are communicated via hard-copy documents, In addition, in such systems, maintaining Physical files of source documents is critical to the audit trail. As we walk through the various, Nowcharts notice that in many departments, after an individual completes his or her assigned task, documents are filed as evidence that the tasks were performed. BASIC TECHNOLOGY SALES ORDER PROCESSING SYSTEM The system flowchart in Figure 4-12 shows the processes, documents, and data files of a basic technology sales order system. The following sections outline the key activities in this system. Sales Department The sales process begins with a customer contacting the sales department by telephone, mail, e-mail, fax, or in person. The sales department clerk manually records the essential details on a sales order, This multipart document will later trigger many tasks, but for the moment itis filed while one copy of it is sent to the credit department for approval Credit Department Approval To provide independence to the credit authorization process, the credit department is organiza- tionally and physically segregated from the sales department. The credit department clerk verifies the customer's credit worthiness by using the department computer to review the customer's credit history in the Customer Records file, Alternatively, for new customers the clerk may access an online credit bureau. When credit is approved, the sales department clerk pulls the various copies ofthe sales orders from the pending file and releases them to the billing, warehouse, and shipping departments. The customer order and credit approval are then placed in the customer order file. Warehouse Procedures The next step is to ship the merchandise. The warehouse clerk receives the stock release copy of the sales order and uses this to locate the inventory, The inventory items and stock release are then sent to the shipping department. Finally, the warchouse clerk uses the department PC to ecord the inventory reduction in the stock records file. The Shipping Department The shipping clerk reconciles the products received from the warehouse with the shipping notice Copy of the sales order received earlier. As discussed previously, this reconciliation is an important 16 16: The Revenue Cycle CHAPTER 4 \ SiqeN9904 sunosoy lonuog Aioquenyy Cae) 4 64 uantities t0 the cus. he correct products a amd the products are of ladins ag ‘then .5 the department The ing nue am stock release PART 11 Transaction Cycles and Business Processes control , Which ensures that the firm sends 1 tomer. When the order is determined correct, # il cam packaged and shipped via common carrier to the VS! je Peete t ord the tmansaction in the shipping log and sends Ok, document to the billing department. trigger document that the billing clerk uses stock release handling charges, The Billing Department 1e product has been shit enters the transaction The stipping notice provides proof that cA ae ea (es the billing process. Upon receipt of the shipping the department PC 7 compile the evant facts about the transaction (prot freight, taxes, and discount terms) and bills the custome’, The billing cle* resales order t0 the inventory into the sales journal file and distributes stock rele and ledger copies 0! he sales ‘department where it is control and AR departments, respectively. The shi g notice is sent tO ‘od ically, the clerk prints out a Fa eae ee aareitic ta elect the orders shipped status. Pen department hard-copy journal voucher reflecting total sales and sends it to the gener artments Accounts Receivable, Inventory Control, and General Ledger ee ao Upon receipt ofthe documents from the billing department, the AR and inven oy and Inve thr respective subsidiary ledgers, Figure 4-13 shows the file struct of the AR sos earch ther tory Subsidiary file in relation to the sales order docur ipdate Cae ers into theit com- respective files for the correct records by entering prima Control clerk enters the puter systems. The AR clerk enters the customer number, C esting records. The AR inventory number. The systems search their respective files an he dat into Clerk updates the current balance field in the AR record by enteriie the sales Orie a from the sales the system. Similarly, the inventory control clerk updates the quantity-on-hand ficl 4-13 Pe PC ena Number Inventory Unit Gast CHAPTER 4 The Revenue Cycle 165 order quantity value. As each inventory item is updated, the inventory control clerk’s system automatic cally checks to see ifthe quantity on hand has fallen below the reorder point. If this isthe case. the inven. ‘ory record is Ragged “on order” to prevent it from being ordered again before the inventory i replaced through the purchases process. A flag can be set in a numberof ways in this example the quantity to be ardered (EOQ) is placed in the on-order flag field. Next, a record is added to the purchase requisition fk, which Wiggers the purchases procedures (covered in Chapter 5). Petiodicaly, the AR and inventory control clerks prepare hard-copy journal vouchers and account summaties, which they send to the general ledger department for reconciliation and posting to the GL accounts, BASIC TECHNOLOGY CASH RECEIPTS SYSTEM Figure 4-14 presents a system flowchart depicting the cash receipts procedures, which begin in the ‘mail room. Mail Room Customer payments and remittance advices arrive at the mail room, where a clerk opens the envel- opes, reconciles the checks and remittance advices, endorses the checks, gathers the remittance advioes and checks into batches, and prepares remittance list. Next the clerk sends the checks and a copy of the remittance list to the cashier in the cash receipts department. The remittance advices and a copy of the remittance list are sent to the AR department. Cash Receipts The cashier records the checks in the cash receipts journal and prompily sends them to the bank, accompanied by two copies of the deposit slip. Periodically, the employee prepares a journal voucher and sends it to the general ledger department. Accounts Receivable The AR department uses the remittance advices to reduce the customers’ account balances consis- tent with the amount paid. The AR clerk prepares a summary of changes to account balances, which is sent to the general ledger department, General Ledger Department Upon receipt of the journal voucher and account summary from cash receipts and AR, respec- tively, the general ledger clerk reconciles the information and posts to the control accounts. Controller's Office Because cash is a liquid asset and subject to misappropriation, someone from the controller’s office periodically performs a bank reconciliation by comparing deposit slips returned from the bank, account summaries used to post to the accounts, and journal vouchers, ADVANCED TECHNOLOGY REVENUE CYCLE Advanced technologies allow systems designers to integrate accounting and other business functions through a common information system. The objective of integration is to improve operational Performance and reduce costs by identifying and eliminating nonvalue-added tasks, This involves replacing traditional procedures with procedures that are very different. In this section we see how advanced technologies can significantly alter and simplify the revenue cycle, compared to the bavie technology system presented in the previous section. We begin by reviewing the operational features of an integrated sales order system and then we examine an integrated cash receipts system. INTEGRATED SALES ORDER PROCESSING SYSTEM The flowchart in Figure 4-15 illustrates an integrated sales order system. Compare this flowchart to the basic technology system presented in Figure 4-12. Notice that the functions of credit checking, i es CHAPTER 4 ‘The Revenue Cycle accounts receivable updating, customer billing, inventory updating, and posting to the general ledger are performed automatically by the central computer system illustrated in Figure 4-15, These labor- intensive activities add greatly to operating costs and contribute to human error. In the advanced technology system, computer programs perform these tasks, which is cheaper and far less prone to error, Although these traditional departments still exist in the advanced technology environment, their responsibilities are refocused on exception-based problem solving, rather than on day-to-day clerical tasks. As a result, these departments are smaller and more efficient than their basic technol- ogy counterparts. Each phase of this reengineered system is described next. Sales Procedures The process begins with sales clerks receiving customer orders, which may be hard-copy documents as illustrated in Figure 4-15 or may be received via e-mail, fax, or phone. Using a computer terminal con- nected to a central sales order system, the clerk enters the sales order and initiates the following tasks: 1. The system accesses the inventory subsidiary file and checks the availability of the inventory items requested. It then performs a credit check by reviewing the customer's credit record in the credit history file. This file contains information such as the customer's credit limit, cur- rent balance, date of last payment, and current credit status. Based on programmed criteria, the customer's request for credit is either approved or denied. 2. If eredit is approved, the system adds a record to the sales invoice file, transmits a digital stock release document to the warehouse, and sends a digital copy of the packing slip to the shipping department. ood 67 of the electroni- Transaction Cycles and Business Processes ends them 0 the te parrat 4. ‘The warehouse clerk's t foe ; clerk's terminal immediately produces a hard-copy pri accompanied by 2 copy of the stock release Pes goods with the packing he shipping department Te i lepartment performs its usual tisk of reconciling the rare shippe slip, an co the goods are shipped, the “setice to signal that the paring them for shipment, and selecting & shipping clerk accesses the system and transmits digital shipping transaction is complete 5. Upon receipt of the shipping notice, the accounting tasks: + Upulates the customer's eredit history record to refl Reduces the quantity-on-hand field in the inventory subsidiary sold to present an accurate and current picture of inventory of * Determines if the inventory quantity on-hand has fallen below the £60! adds a record to the purchase requisition fle. Places an “on-order” Mag in the inventory record, as previously described : icate the order's status. Many companies ed in busincseto ust (B2B) transactions use the sales invoice file as # susie for the traditional sales Journal snd account receivable subsidiary ledger. The shipped sles fuer ithe fila poctitice chronological ess! of eoual ae for tive Patna (al Sem te iles journal), aad the unpaid shipped invoices at any point in time consticute the able. wccounts are updated in real time, activity may be per- accounts re accounts. In this example, the GL a ation’s transaction volume, however, this general ledger records is from Chapter 2 that batch updating of gen efficiency in high-volume transaction processing systems, arious management reports, such as sales ts. Management stem automatic ct the salle. ; ecords by the quantities of items hand and available for sale der point and, if so, te rts a shipped date in sales invoice record to indi organization * Updates the general led; Depending upon an organiza formed in batch mode. Reca done to achieve operation: + Finally, the system produces and distributes summaries, inventory status reports, and general ledger change report reports are discussed in detail in Chapter 8. INTEGRATED CASH RECEIPTS SYSTEM stem. By comparison to the basic technology Figure 4-16 illustrates an integrated cash receipts sy Si hit away from clerical activities through the use system presented in Figure 4-14, we again see a s and the discussion below assumes an organization in which customers al checks that are mailed to the company. Organizations that of automation. customer payments employ different proczdures that The system presented here make payments on account with physi use electronic funds transfer (EFT) to receive re described in Chapter 12. Mail Room The mail room clerk oj endorses the checks for de and prepares a remittance are sent to the cash receipts department. ypens the envelopes containing the checks and remittance advices and posit only. The clerk then reconciles the checks and remittances advices list. The checks, remittance advices, and a copy of the remittance list Cash Receipts Department The cash receipts clerk reconciles the checks and the remittance advices with the remittance list ips. Via terminal, the clerk accesses the cash receipts system and creates a k and prepares deposit sli aerond in the remittance file (cash receipts journal) for each remittance advice received. The clet files the remittance list, remittance advices, and one copy of the deposit slip. At the end of the a member of the security group deposits the checks in the bank. day, FA 4 Ey Fa A U A ‘ Controller Office Computer Operations CHAPTER 4 The Revenue C} fou tty 9 1 ae 0 PART 11 Transaction Cycles and Business Pri Automatic Data Processing Procedures i ically performs the following tasks; When the eash receipts data entry is complete, the system automa + Closes the sates invize that ae covered bythe customer checks BY DIMES eustomer cheek number and payment date in the invoice record. * Posts to the GL accounts. * Prepares and distributes various management reports (out of balance) reports, and general ledger change reports. Controller's Office aes a clerk in the controller's office periodically performs & reco! sank deposit slips, cash receipts journal, and the GL cash account REVENUE CYCLE RISKS AND INTERNAL CONTROLS ; An objective of internal control is to mitigate the risk from errors and fraud. The following are the primary risks associated with revenue cycle transactions: ansaction listings. diserepancy including tr neitiation of remittance lists, * Selling to un-creditworthy customers * Shipping customers the wrong items or incorrect quantities * Inaccurately recording sales and cash receipts transactions in journals and accounts * Misappropriation of cash receipts and inventory + Unauthorized access to accounting records and confidential reports Chapter 3 defined internal control activities as consisting of two malt categories: 1) physical con- daaeeretd 2) IT controls, The purpose of physical controls is 10 contro! the actions of people. These consist of six classes of internal control activities: transaction ‘nuthorization, segregation of duties, Supervision, accounting records, access control, and independent verification. IT controls are com- prised of general controls and application controls. General controls are not specific to a particu- y. Computer application iar evele or subsystem and thus do not apply to revenue cycle risks direct e controls consist of: input controls, ‘d output controls. The discussion that processing controls, an rt 0 follows, examines and compare show physical and IT control “echniques apply in both basic tech- nology and advanced technology systems to ‘dentified above. Table 4-1 at the end reduce the risks i of the section provides a summary of this material. Risk of Selling to Un-Creditworthy Customers Iy vetted can lead to excessive bad debt omers who have not been proper ‘compensated on a com- “apparent in organizations whose sales staff are ie potential conflict in objectives between the salesperson, whose com- d the organization. In such cases, the sales adequately consider the credit- Selling on credit to cust losses. This risk is more Consider t dividual sales performance, ant sales volume and thus may not mission basis. pensation is based on in staff have an incentive to maximizé ‘of prospective customers. worthiness Physical Controls TRANSACTION AUTHORIZATION. Th that only valid transactions are processed. ¢ objective of transaction authorization is to ensure The authorization process in the sales function isa credit check of the customer. This task is @ function of the credit department, which has respons bility for ensuring the proper application of the firm’s credit policies. Determining the creditwor- thiness of the customer is the principal concern of this function. In making this judgment, the credit department may shniques and tests. The complexity of credit procedures will vary depending on t employ various tec! he organization, its relationship with the customer, and the materiality of the transaction. Credit approval for tation jth an outside credit bureau. In con! first-time customers may take time and involve consul v trast, credit decisions about existing customers that involve ensuring only that the current transaction does not exceed the customer’s credit limit may be, — CHAPTER 4 ‘The Revenue Cycle dealt with very quickly. Whatever level of test is deemed necessary by company policy, the sales transaction should not proceed further until credit is approved. SEGREGATION OF DUTIES. An objective of segregation of duties as stated in chapter 3 is to separate Transaction authorization from transaction processing. To provide independence to the credit authorization process, the credit function should be orga- aizationally and physically segregated from the sales function, This will help ensure that the task of reviewing prospective customers is objectively performed and that the credit function is uncon- strained in detecting risky transactions and disallowing poor and irresponsible sales decisions. IT Controls AUTOMATED CREDIT CHECKING. Credit checking may be performed automatically by the system as a programmed process control. The system logic, not a human being, makes the deci- sion to grant or deny credit based on the customer's credit history contained in the credit history file. If credit is denied, the sales clerk should not be able to force the transaction to continue. To allow for operational flexibility in unusual circumstances, however, systems will typically provide a management override option that may only be performed by a supervisor. Any such overrides should be fully documented in the credit history record and in management reports. Risk of Shipping Customers Incorrect Items or Quantities Shipping customers the wrong items or incorrect quantities may result in damaged customer rela- tions, excessive sales returns, lost future sales, and accounting errors. These risks may be due to human errors in the process of picking up items from the inventory warehouse or because of unan- ticipated inventory shortages known as stock-outs. Physical Controls INDEPENDENT VERIFICATION. The shipping function verifies that the goods sent from the Warehouse are correct in type and quantity. The stock release document and the packing slip should be reconciled before the goods are sent to the customer. IT Controls SCANNER TECHNOLOGY. Product code scanners in the warehouse and shipping depart. ment will reduce the risk of human error in picking and shipping incorrect products, When scanned by the warehouse and/or shipping clerk the system will verify that the items selected match those on the sales order. AUTOMATED INVENTORY ORDERING. When an inventory record is updated to reflect a sale, the computer logic should check to determine ifthe reduction in inventory drops the inventory quan. tity on hand to a point below the inventory reorder point. When this is the case, the organization needs to reorder inventory to avoid a stock out. The system logic should create a purchase requisition record, Which is added to the purchase requisition file. Once an item is on order, however, a control should be in place to ensure that itis not ordered again until the original order has been received from the sup- plier. One method of accomplishing this is to “flag” the inventory item “on order” by entering a value (€¢g,, the number of items ordered) in the on-order field of the inventory record. This field has a value of zero when the item in question is not on order. The following pseudo code illustrates how the com. uter logic should function to test for and control a low stock condition: If Quantity-on-Hand < Reorder Point AND On-Order field = zero Then create a purchase requisition record and place the quantity ordered in the inventory On-Order field Else Do Nothing Under this logic, the first time the low stock condition is detected, the on-order field is zero, and a Purchase requisition will be created. The computer program then places a nonzero quantity value in m im PART A 11 Transaction C; action Cycles and Business Processes the on-order fi 5 feat fon ried ae inventory item in question continues to be sold te to teen owisoei an will determine with each subsequent safe that ust OO" below the the ee Vy ugrermine with each subsequent sale ho value the “AND” condition in ie Peed cee o ore mtine yn

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