ACC 100: Accounting Information System

Students Activity Sheet #8

Name: Class number:

Section: Schedule: Date:

Lesson title: The Revenue Cycle Materials:

Lesson Objectives: FLM Student Activity Sheets
1. Understanding the revenue cycle
2. Identifying the documents in revenue cycle References:
Principles of Accounting
Information Systems by James
A. Hall

“Our greatest weakness lies in giving up. The most certain way to succeed is
always to try just one more time.” – Thomas A. Edison

A. LESSON PREVIEW / REVIEW

1) Introduction
Good day! I hope that you are having fun learning ACC100! The revenue cycle is a term
used in accounting and business that describes the journey of a product or service from its
humble beginnings to its sale. Let’s begin the journey!

Please read the learning targets before you proceed to the succeeding activities. The
learning targets are your goals. Remember, you need to achieve your learning targets at
the end of the lesson.

2) Activity 1: What I Know Chart

What do you know about the Revenue Cycle? Try answering the questions below by writing
your ideas under the What I Know column. You may use key words or phrases that you
think are related to the questions.

What I Know Questions: What I Learned (Activity 4)

What is Revenue Cycle?

B. MAIN LESSON
1) Activity 2: Content Notes
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 ACC 100: Accounting Information System
Students Activity Sheet #8

Name: Class number:

Section: Schedule: Date:

Revenue Cycle Business Activities

The revenue cycle is 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.

What are the 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

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
The second basic activity in the revenue cycle – 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

Revenue Cycle – Key Decisions

 The revenue cycle’s primary objective is to provide the right product in the right place at the
right time for the right price.

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 ACC 100: Accounting Information System
Students Activity Sheet #8

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Section: Schedule: Date:

How does a company accomplish this objective?

To accomplish the revenue cycle’s primary objective, management must make the following key
decisions:
 To what extent can and should products be customized to individual customers’ needs and
desires?
 How much inventory should be carried, and where should that inventory be located?
 How should 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 should be given to individual customers?
 What credit terms should be offered?
 How can customer payments be processed to maximize cash flow?

SALES ORDER ENTRY (REVENUE CYCLE ACTIVITY 1)

This step includes all the activities involved in soliciting and processing customer orders.

Key decisions and information needs:

 decisions concerning credit policies, 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 involves three main activities:

1. Responding to customer inquiries
2. Checking and approving customer credit
3. Checking inventory available

Regardless of how customer orders are initially received, the following edit checks are necessary:
 Validity checks
 A Completeness Test
 Automatic lookup of reference data like customer address.
 Reasonableness tests
 Comparing quantity ordered to past history
 Credit approval
 General authorization
o Credit limit (for existing customers)
 Specific authorization
o Limit checks (new, have past-due balances, Exceeding)

Next, the system checks whether the inventory is sufficient to fill accepted orders.

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 ACC 100: Accounting Information System
Students Activity Sheet #8

Name: Class number:

Section: Schedule: Date:

Internally generated documents produced by sales order entry:

 sales order
 packing slip
 picking ticket

Information Needs and Procedures

 Determine inventory availability.
 Decide what types of credit terms to offer.
 Set prices for products and services.
 Set policies regarding sales returns and warranties.
 Select methods for delivering merchandise.

SHIPPING (REVENUE CYCLE ACTIVITY 2)

Documents, records, and procedures:
 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.
 A physical count is compared with the quantities on the picking ticket (Warehouse) and
packing slip (Shipping). If there are discrepancies, a back order is initiated.

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 ACC 100: Accounting Information System
Students Activity Sheet #8

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Section: Schedule: Date:

 Some spot checks are made, and a bill of lading is prepared.

The bill of lading is a legal contract that defines responsibility for goods in transit
 3 copies: (shipping, billing, and carrier)
 It identifies:
 The carrier
 The source
 The destination
 Special shipping instructions
 Who pays for the shipping?

BILLING AND ACCOUNTS RECEIVABLE (REVENUE CYCLE ACTIVITY 3)

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

 Invoicing customers
 Maintaining customer accounts

Key decisions and information needs:

 Accurate billing is crucial and requires information identifying the items and quantities
shipped, prices, and special sales terms.

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 ACC 100: Accounting Information System
Students Activity Sheet #8

Name: Class number:

Section: Schedule: Date:

The documents in this activity:

 The sales invoice notifies customers of the amount to be paid and where to send payment.
 A monthly statement summarizes transactions that occurred and informs customers of their
current account balance.
 A credit memo authorizes the billing department to credit a customer’s account.
 credit manager may issue a credit memo for:
 Returns
 Allowances for damaged goods
 Write-offs as uncollectible

Types of billing systems:

 In a postbilling system, invoices are prepared after confirmation that the items were shipped.
 In a prebilling system, invoices are prepared (but not sent) as soon as the order is approved.

The inventory, accounts receivable, and general ledger files are updated at this time.

Methods for maintaining accounts receivable:

 open invoice method
 balance-forward method

Open-invoice method:
 Customers 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.
 This copy is a turnaround document called a remittance advice.
 Advantages of open-invoice method:
 Conducive to offering early-payment discounts
 Results in more uniform flow of cash collections
 Disadvantages of open-invoice method:
 More complex to maintain

Balance forward method:

 Customers pay according to amount on their monthly statement, rather than by invoice.
 Monthly statement lists transactions since the last statement and lists the current balance.
 Advantages of 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.

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 ACC 100: Accounting Information System
Students Activity Sheet #8

Name: Class number:

Section: Schedule: Date:

Information Needs and Procedures

What are 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
 Sales volume in both dollars and number of customers
 Effectiveness of advertising and promotions
 Sales staff performance
 Bad debt expenses and credit policies

CASH COLLECTIONS (REVENUE CYCLE ACTIVITY 4)

Two areas are involved in this activity:
 The cashier, who reports to the treasurer, handles customer remittances and deposits them
in the bank
 The accounts receivable function

Key decisions and information needs:

 Reduction of cash theft is essential.
 The billing/accounts receivable function 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 on-line showing the customer, invoice number, and
the amount of each payment.
 The system performs a number of on-line edit checks to verify the accuracy of data entry.

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

In the revenue cycle (or any cycle), The second function of a well-designed AIS is to provide
adequate controls to ensure that the following objectives are met:
 Transactions are properly authorized.
 Recorded transactions are valid.
 Valid, authorized transactions are recorded. Don’t show Discounts higher net sales
 Transactions are recorded accurately.
 Assets (cash, inventory, and data) are safeguarded from loss or theft.
 Business activities are performed efficiently and effectively.

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 ACC 100: Accounting Information System
Students Activity Sheet #8

Name: Class number:

Section: Schedule: Date:

Threats and Applicable Control Procedures to Sales Order Entry

Threat Applicable Control Procedures
1. Incomplete or inaccurate customer orders Data entry edit checks
Credit approval by credit manager, not
2. Credit sales to customers with poor credit by sales function; accurate records of
customer account balances
Signatures on paper documents; digital
3. Legitimacy of orders signatures and digital certificates for e-
business
4. Stockouts, carrying costs and markdowns
Carrying Cost: warehousing costs such as Inventory control systems
rent, utilities and salaries

Threats and Applicable Control Procedures to Shipping

Threat Applicable Control Procedures
1. Shipping errors: Reconciliation of sales order with
 Wrong merchandise picking ticket and packing slip; bar
 Wrong quantities code scanners; data entry application
 Wrong address controls
2. Theft of inventory Restrict physical access to inventory;
Documentation of all internal transfers
of inventory; periodic physical counts of
inventory and reconciliation of counts
of recorded amounts

Threats and Applicable Control Procedures to Billing and Accounts Receivable

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

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 ACC 100: Accounting Information System
Students Activity Sheet #8

Name: Class number:

Section: Schedule: Date:

Threat and Applicable Control Procedures to Cash Collections

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

General Control Issues

Threat Applicable Control Procedures
1. Loss of Data Backup and disaster recovery
procedures; access controls (physical
and logical)
2. Poor performance Preparation and review of performance
reports

2) Activity 3: Skill Building

For good internal control, which of the following duties can be performed by the same individual?
1. Approve changes to customer credit limits
2. Sales order entry
3. Shipping merchandise
4. Billing customers
5. Depositing customer payments
6. Maintaining accounts receivable
7. Issuing credit memos
8. Reconciling the organization’s bank accounts
9. Checking inventory availability

Write your answer here:

Duty # _____ and #______
Duty # _____ and #______

3) Activity 4: What I know Chart, Part 2

Now let’s check your final understanding of Flexible Learning. I hope that everything about the
topic is clear to you. This time you must fill out the What I Learned column.

Activity 5: Check for Understanding and Keys to Correction

Independent Practice

Select the letter of your choice.

1. The revenue cycle consists of
a. one subsystem–order entry
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 ACC 100: Accounting Information System
Students Activity Sheet #8

Name: Class number:

Section: Schedule: Date:

b. two subsystems–sales order processing and cash receipts

c. two subsystems–order entry and inventory control
d. three subsystems–sales order processing, credit authorization, and cash receipts

2. The reconciliation that occurs in the shipping department is intended to ensure that
a. credit has been approved
b. the customer is billed for the exact quantity shipped
c. the goods shipped match the goods ordered
d. inventory records are reduced for the goods shipped

3. The adjustment to accounting records to reflect the decrease in inventory due to a sale occurs in the
a. warehouse
b. shipping department
c. billing department
d. inventory control department

4. Which document triggers the revenue cycle?

a. the sales order
b. the customer purchase order
c. the sales invoice
d. the journal voucher

5. Copies of the sales order can be used for all of the following except
a. purchase order
b. credit authorization
c. shipping notice
d. packing slip

6. The purpose of the sales invoice is to

a. record reduction of inventory
b. transfer goods from seller to shipper
c. bill the customer
d. select items from inventory for shipment

7. The customer open order file is used to

a. respond to customer queries
b. fill the customer order
c. ship the customer order
d. authorize customer credit

8. The stock release copy of the sales order is not used to

a. locate and pick the items from the warehouse shelves
b. record any out-of-stock items
c. authorize the warehouse clerk to release custody of the inventory to shipping
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 ACC 100: Accounting Information System
Students Activity Sheet #8

Name: Class number:

Section: Schedule: Date:

d. record the reduction of inventory

9. The shipping notice

a. is mailed to the customer
b. is a formal contract between the seller and the shipping company
c. is always prepared by the shipping clerk
d. informs the billing department of the quantities shipped

10. The billing department is not responsible for

a. updating the inventory subsidiary records
b. recording the sale in the sales journal
c. notifying accounts receivable of the sale
d. sending the invoice to the customer

C. LESSON WRAP-UP
1) Activity 6: Thinking about Learning
A. Work Tracker
You are done with this session! Let’s track your progress. Shade the session number you just
completed.
P1 P2 P3
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

B. Think about your Learning

1. Please read again the learning targets for the day. Were you able to achieve those learning
targets? If yes, what helped you achieve them? If no, what is the reason for not achieving them?
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

2. What question(s) do you have as we end this lesson?

___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

KEY TO CORRECTIONS:
Activity 3:
ANS:
Duty 2 and 9
Duty 4 and 6

Activity 5:
1. B 2. C 3. D 4. B 5. A
6. C 7. A 8. D 9. D 10. A
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 ACC 100: Accounting Information System
Students Activity Sheet #8

Name: Class number:

Section: Schedule: Date:

Rationalization:
1. The revenue cycle consists of two subsystems–sales order processing and cash receipts.
2. The reconciliation that occurs in the shipping department is intended to ensure that the goods
shipped match the goods ordered.
3. The inventory control department keeps and maintains the inventory record.
4. The customer purchase order triggers the revenue cycle.
5. Copies of the sales order can be used for all of the following except purchase order.
6. The purpose of the sales invoice is to bill the customer.
7. The customer open order file is used to respond to customer queries
8. All of the options are the uses except D.
9. The shipping notice informs the billing department of the quantities shipped
10. Updating the inventory subsidiary records is the responsibility of the inventory control department.

FAQs
1. Some products, like music and software, can be digitized. How does this affect each of the four
main activities in the revenue cycle?

ANS:
Digitized products do not change the four basic business activities of the revenue cycle. For all
products, whether digitized or not, an order must be taken, the product shipped, the customer billed,
and cash collected. The only thing that digitized products change is inventory management as products
do not need to be removed from a warehouse to be delivered. However, a copy of a product must be
shipped (usually electronically, but in some cases it may need to be burned on a DVD and then
shipped).

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