ERWIN

Revenue Cycle Business Activities

A recurring set of business activities and related information processing Operations associated with
providing goods and services to customers and collecting cash in Payment for those sales.

four basic revenue cycle business activities

1. Sales order entry

2. Filling customer orders and Shipping
3. Billing and accounts receivable
4. Cash collections

Sales Order Entry

The sales order entry process entails three steps:

1. Taking the customer’s order

2. Checking and approving the customer’s credit
3. Checking inventory availability

Shipping

Filling customer orders and shipping the desired Merchandise entails two steps:

1. Picking and packing the order

2. Shipping the order

Billing and Accounts Receivable

The third basic activity in the revenue cycle involves:

1. Billing customers
2. Updating accounts receivable

Cash Collections

The fourth step in the revenue cycle is cash collections. It involves:

1. Handling customer remittances

2. Depositing remittances in the bank
CHARLES

How does a company accomplish these objectives?

 To what extent can and should be customized to an individual’s needs and desires?
 How much inventory should be carried, and where should that inventory be located?
 How should the merchandise be delivered to customers? Should the company perform the
shipping function itself or outsource it to a third party that specializes in logistics?
 Should credit be extended to customers?
 How much credit terms should be given to individual customers?
 What credit terms should be offered?
 How can customer payments be processed to maximize cash flow?

KEN

Sales order entry - actions needed to record a customer's order into the seller's handling system.

Key decision and information needs

* Decision concerning credit policy, including the approval of credit

* Information about inventory availability and customer credit status from the inventory control and
accounting functions, respectively

The sales order entry function:

1. Responding to customer inquiries

2. Checking and approving customer credit

3. Checking inventory available

4. Responding the inquiries

ABI

Regardless of how customer orders are initially received, the following edit checks are necessary:

 Validity checks
  Completeness test
 Reasonableness test
 Credit approval
 General Authorization
 Specific Authorization

MARJ

MAX

SHIPPING (REVENUE CYCLE ACTIVITY 2)

The picking ticket printed by the sales order entry triggers the shipping process and is used to identify
which products to remove from inventory and the quantities.
The packing slip lists the quantity and description of each item in the shipment.

2 shipping documents:

 Packing slip
 Bill of lading

CARL

The flow of shipping consists of 2 major parts:

 Picking and Packing the order

 Shipping the order
KATE

The bill of lading is a legal contract that defines responsibility for goods in transit

 3 copies (shipping, billing, and carrier)

 It identifies:
o The carrier
o The source
o The destination
o Special shipping instructions
o Who pays for the shipment?

CARL

Billing and Accounts Receivable (Revenue Cycle)

 Two activities are performed at this stage of the revenue cycle:

o Invoice customers
o Maintaining customer accounts

KATE
Types of billing systems:

 Postbilling system
 Prebilling System

PJ

Methods for Maintaining Accounts Receivable

 Open Invoice Method

 Balance-forward Method

Open Invoice Method:

This is where:

•Costumer Pay According to each invoice

•Two copies of the invoice are typically sent to the customer

-Customer is asked to return one copy with payment

- The other copy is for the customer to keep as a turnaround document called remittance advice.

•Advantages of the Open Invoice Method:

-Conductive to offering early payment

- Result in more uniform flow cash collection

• Disadvantage of the Open Voice Method

-More Complex to Maintain

Balance Forward Method:

•Costumer pays according to the amount on their monthly statement, rather than by invoice

•Monthly Statement list transaction since the last statement and lists the current balance.

•Advantages of the Balance-Forward Method:

-It’s more efficient and reduces costs because you don't bill for each individual sale.

-It’s more convenient for the customer to make one monthly remittance.

FERDINE-ARNIE
INFORMATION NEEDS AND PROCEDURES

Some examples of additional information the AIS should provide:

✓ Respond time to customer inquiries

✓ Time required to fill and deliver orders

✓ Percentage of sales that required back orders

✓ Customer satisfaction rates and trends

✓ Profitability analyses by product, customer, and sales region

✓ Effectiveness of advertising and promotions

✓ Sales staff performance

✓ Bad debt expenses and credit policies

CASH COLLECTIONS

• The final activity in the revenue cycle is collecting cash from customers

• The cashier, who reports to the treasurer, handles customer remittances and deposits them in
the bank

• Because cash and checks are highly vulnerable, controls should be in place to discourage theft

TWO AREAS INVOLVED IN THIS ACTIVITY:

• The cashier

• The accounts receivable function

KEY DECISIONS AND INFORMATION NEEDS:

• Reduction of cash theft is essential

• The billing/ accounts receivable should not have physical access to cash or checks

• The accounts receivable function must be able to identify the source of any remittances and
the applicable invoices that should be credited.

DOCUMENTS, RECORDS, AND PROCEDURES:

• Checks are received and deposited

• A remittance list is prepared and entered online showing the customer, invoice number, and
the amount of each payment

• The system performs a number of online edit checks to verify the accuracy of data entry

POSSIBLE APPROACHES TO COLLECTING CASH:

• Turn around documents forwarded to accounts receivable

• Lockbox arrangements

• Electronic funds transfer

• Electronic bill payment

PHILIP
CONTROL: OBJECTIVES, THREATS, AND PROCEDURES IN THE REVENUE CYCLE

 Transactions are properly authorized.

 Recorded transactions are valid.
 Valid, authorized transactions are recorded.
 Transactions are recorded accurately.
 Assets are safeguarded from loss or theft.
 Business activities are performed efficiently and effectively.
 All disclosures are full and fair.

CARL

Threats and Applicable Control Procedures to Sales Order Entry

Threats Applicable Control Procedures

1. Incomplete and inaccurate customer orders. Data entry edit checks.

2. Credit sales to customers with poor credit.
3. Legitimacy of orders.
4. Stockouts carrying costs and markdowns
Carrying Costs: warehousing costs such as rent,
utilities, and salaries.
Credit approval by credit manager, not by sales
function; accurate records of customer account
balances.
Signatures on paper documents; digital
signatures and digital certificates for e-business.
Inventory control systems.

ROMMER

Threats and Applicable Control Procedures to Shipping

Threats Applicable Control Procedures

1. Shipping Errors:
Reconciliation of sales orders with picking tickets
 Wrong merchandise
and packing slips; bar code scanner; data entry
 Wrong quantities
application controls.
 Wrong address
Restrict physical access to inventory;
documentation of all internal transfers of
2. Theft of inventory. inventory; periodic physical counts of inventory
and reconciliation of counts of recorded
amounts.

Threats and Applicable Control Procedures to Billing and Accounts Receivable

Threats Applicable Control Procedures

1. Failure to bill customers. Separation of shipping and billing functions;

2. Billing errors.
3. Posting errors in updating accounts receivable
prenumbering of all shipping documents and
periodic reconciliation to invoices; reconciliation
of picking tickets and bills of lading with sales
orders.
Data entry edit control price-lists
Reconciliation of subsidiary accounts receivable
ledger with general ledger; monthly statements
to customers

JP

Threats and Applicable Control Procedures to Cash Collections

Threats Applicable Control Procedures

Segregation of duties; minimization of cash
handling; lockbox arrangements; prompt
1. Theft of Cash endorsement and deposit of all receipts; Periodic
reconciliation of bank statement with records by
someone not involved in cash receipts
processing.

General Control Issues

Threats Applicable Control Procedures

1. Loss of Data Backup and disaster recovery procedures; access
controls
2. Poor Performance Preparation and review of performance reports