Chapter 5 The Expenditure Cycle Part I: Purchases and Cash Disbursements Procedures

The Conceptual System

- intended to be technology-neutral
- the sequence of activities through two of the processes that constitute the expenditure cycle for
most retail, wholesale, and manufacturing organizations
1.  purchases processing
2. cash disbursements procedures.
Purchases Processing Procedures
procedures - include the tasks involved in identifying inventory needs, pla cing the order,
*Purchases procedures -
receiving the inventory, and recognizing the liability.
*Production planning and control function-
function- authorize Manufacturing firm’s purchasing decisions
*Inventory control function
control function - provides the purchase authorization of Merchandising firms

I. MONITOR INVENTORY RECORDS.

requisition- When inventories drop to a predetermined reorder point, is prepared and sent to
*Purchase requisition-
the prepare purchase order function

II. PREPARE PURCHASE ORDER.

*The prepare purchase order function receives the purchase requisitions, which are sorted by vendor if
necessary.
*Purchase order (PO) is prepared for each vendor
* Copies of Purchase Order:
o Vendor
o To set up A/P functions- for filing temporarily in the AP pending file
o Blind copy is sent to the receive goods function
o last copy is filed in the open/closed purchase order file.
*valid vendor files
- supplied by the inventory control function
function along with much of the routine ordering information
that the purchasing
purchasing department needs
needs directly from the inventory to make the purchasing
 process efficient
- contributes to both control and efficiency
efficie ncy by listing only those vendors approved to do business
with the organization (helps to reduce certain vendor fraud schemes)
III. RECEIVE GOODS
- Goods arriving from the vendor are reconciled with the blind copy of the PO
* receiving report –  prepared by the receiving clerk  pagtapos of the physical count and inspection
- stating the quantity and condition of the inventories
* Copies of Receving Report
o accompanies the physical inventories
o open/closed PO file- to close out the PO
o AP department, where it is filed in the AP pending file
o inventory control
o in the receiving report file
IV. UPDATE INVENTORY RECORDS
standard cost system -carry their inventories at a predetermined standard value regardless of the price
actually paid to the vendor
actual cost inventory ledger - requires additional financial information, such as a copy of the supplier’s
invoice when it arrives.
V. SET UP ACCOUNTS PAYABLE.
- -At this point in the process, however, the firm has not received the supplier’s invoice
containing the financial information needed to record the transaction.

Three-way match - When the invoice arrives, the AP clerk reconciles the financial information with
the receiving report and PO in the
 pending file
- verifies that what was ordered was received and is fairly priced
AP subsidiary ledger - Once the reconciliation is complete, the tr ansaction is recorded in the purchases
 journal and posted to the supplier’s
account

inventory valuation method - will determine how inventory control will have recorded the receipt of
inventories
- If the firm is using the actual cost method, the AP clerk would send a copy of the
supplier’s invoice to
inventory control
Open AP file - after recording the liability, the AP clerk transfers all source documents here
- organized by payment due date and scanned daily to ensure that debts a re paid on the last
* Finally, the AP clerk summarizes the entries in the purchases journal for the period (or batch) and
 prepares a journal voucher for the general ledger function

Vouchers Payable System

- the AP department uses cash disbursement vouchers and maintains a voucher register
- After the AP clerk performs the three-way match, he or she prepares a cash disbursement
voucher to approve payment

Vouchers - provide improved control over cash disbursements and allow firms to consolidate several
 payments to the same supplier on a
single voucher
voucher register - Each voucher is recorded in here
-reflects the AP liability of the firm
vouchers payable file - The AP clerk files the cash disbursement voucher, along with supporting source
documents here
I. IDENTIFY LIABILITIES DUE

voucher packet - Each day, the AP function reviews the open AP file (or vouchers payable file) for such

items and sends payment approval in this form

II. PREPARE CASH DISBURSEMENT

check register- also called the cash disbursements journal

- For each disbursement, the clerk prepares a check and records the check number, dollar
amount, voucher number, and other pertinent data here

a. The negotiable portion of check is mailed to supplier, & a co py of it is attached to the

voucher packet as proof of payment.
 b. The clerk marks the documents in the voucher packets paid and returns them to the AP
clerk.
c. the cash disbursements clerk summarizes the entries made to the check register and sends a
 journal voucher
III. UPDATE AP RECORD
- Upon receipt of the voucher packet, the AP clerk removes the liabili ty
- The voucher packet is filed in the closed voucher file
IV. POST TO GENERAL LEDGER

EXPENDITURE CYCLE CONTROLS

Transaction Authorization

 PURCHASES SUBSYSTEM

- Unauthorized purchasing can result in excessive inventory levels for some items

CASH DISBURSEMENTS SUBSYSTEM

*A cash disbursements journal  (check register) containing the voucher number authorizing

each check provides an audit trail for verifying the authenticity of each check written.

Segregation of Duties

SEGREGATION OF INVENTORY CONTROL FROM THE WAREHOUSE 

- Within the purchases subsystem, the primary physical asset is inventory

- Inventory control keeps the detailed records of the asset, while the warehouse has custody

SEGREGATION OF THE GENERAL LEDGER AND ACCPAYABLE FROM CASH DISBURSEMENTS.

The asset subject to exposure in the cash disbursements subsystem is cash

Supervision

- In the expenditure cycle, the receiving department is the area that most benefits from
 - Program errors or flawed inventory models can cause firms to find themselves suddenly
inundated with inventories or desperately short of stock.
  provide management with adequate summary reports about inventory purchases, inventory

turnover, spoilage, and slow-moving items

 BETTER CASH MANAGEMENT

- automate check signing, which is more efficient when check volume is high. This, naturally,
injects risk into the process
 set a materiality threshold for check writing
 TIME LAG
- When sales clerks do not know the current status of inventory, sales may be lost.
 PURCHASING BOTTLENECK
- In this automated system, the purchasing department is directly involved in all purchase
decisions. For many firms this creates a dditional work, which extends the time lag in the
ordering process.
 EXCESSIVE PAPER DOCUMENTS

The Reengineered System

*improvements in this Reengineered System are that

(1) it uses real-time procedures and direct access files to shorten the lag time in record
keeping
(2) it eliminates routine clerical procedures by distributing terminals to user areas
(3) it achieves a significant reduction in paper documents by using digital
communications between departments and by digitally storing records.

*control implications of The Reengineered System

 SEGREGATION OF DUTIES
o system removes the physical separation between authorization and transaction
 processing
 ACCOUNTING RECORDS AND ACCESS CONTROLS
o Advanced systems maintain accounting records on digital storage media, with little or
no hard-copy backup