Chapter 5 The Expenditure Cycle Part I: Purchases and Cash II. PREPARE PURCHASE ORDER.

Disbursements Procedures *The prepare purchase order function receives the purchase requisitions,
which are sorted by vendor if necessary.
The Conceptual System *Purchase order (PO) is prepared for each vendor
- intended to be technology-neutral * Copies of Purchase Order:
- the sequence of activities through two of the processes that o Vendor
constitute the expenditure cycle for most retail, wholesale, and o To set up A/P functions- for filing temporarily in the AP
manufacturing organizations pending file
1. purchases processing o Blind copy is sent to the receive goods function
2. cash disbursements procedures. o last copy is filed in the open/closed purchase order file.
Purchases Processing Procedures *valid vendor files
*Purchases procedures - include the tasks involved in identifying - supplied by the inventory control function along with much of
inventory needs, placing the order, receiving the inventory, and the routine ordering information that the purchasing
recognizing the liability. department needs directly from the inventory to make the
*Production planning and control function- authorize Manufacturing purchasing process efficient
firm’s purchasing decisions - contributes to both control and efficiency by listing only those
*Inventory control function - provides the purchase authorization of vendors approved to do business with the organization (helps to
Merchandising firms reduce certain vendor fraud schemes)
III. RECEIVE GOODS
I. MONITOR INVENTORY RECORDS. - Goods arriving from the vendor are reconciled with the blind
*Purchase requisition- When inventories drop to a predetermined copy of the PO
reorder point, is prepared and sent to the prepare purchase order *blind copy - contains no quantity or price information about the
function products being received
 - to force receiving clerk to count & inspect inventories bago
gumawa the receiving report.
* receiving report – prepared by the receiving clerk pagtapos of the
physical count and inspection
- stating the quantity and condition of the inventories
* Copies of Receiving 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 transaction
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 are paid on the last possible date without missing
due dates and losing discounts
* 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 a. The negotiable portion of check is mailed to supplier, & a
maintains a voucher register copy of it is attached to the voucher packet as proof of
- After the AP clerk performs the three-way match, he or she payment.
prepares a cash disbursement b. The clerk marks the documents in the voucher packets paid
voucher to approve payment and returns them to the AP clerk.
c. the cash disbursements clerk summarizes the entries made
Vouchers - provide improved control over cash disbursements and allow
to the check register and sends a journal voucher
firms to consolidate several payments to the same supplier on a
III. UPDATE AP RECORD
single voucher
- Upon receipt of the voucher packet, the AP clerk removes the liability
voucher register - Each voucher is recorded in here
- The voucher packet is filed in the closed voucher file
-reflects the AP liability of the firm
- account summary is prepared and sent to the general ledger function
vouchers payable file - The AP clerk files the cash disbursement voucher,
along with supporting source documents here
IV. POST TO GENERAL LEDGER
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
EXPENDITURE CYCLE CONTROLS
pertinent data here

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 purchase's 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 supervision
- Close supervision here reduces the chances of two types of
exposure:
(1) failure to properly inspect the assets and
(2) the theft of assets.
INSPECTION OF ASSETS
packing slip - containing quantity information that could be used
to circumvent the inspection.
process often accompanies incoming goods.
*A supervisor should take custody of the packing slip while
receiving clerks count and inspect the goods.
Accounting Records
- to maintain an audit trail adequate for tracing a
transaction from its source document to the financial
statements.
- The expenditure cycle employs the following accounting
records.
 ✓ AP subsidiary ledger 2. The receiving report, which is evidence of the physical
✓ voucher register receipt of the goods, their condition, and the quantities
✓ check register received. The reconciliation of this document with the PO
✓ general ledger signifies that the organization has a legitimate obligation.
3. The supplier’s invoice, which provides the financial
Access Controls information needed to record the obligation as an account
DIRECT ACCESS payable. The AP clerk verifies that the prices on the invoice
are reasonable compared with the expected prices on the
- Direct access controls include locks, alarms, and restricted PO.
access to areas that contain inventories and cash. - The general ledger function provides an important
independent verification in the system.
INDIRECT ACCESS.

Physical Systems
- A firm must limit access to documents that control its
physical assets. A MANUAL SYSTEM

Independent Verification Inventory Control

INDEPENDENT VERIFICATION BY ACCOUNTS PAYABLE

• copy of the requisition is sent to
1. the purchasing department,
- AP clerk must reconcile before the firm recognizes an
2. the open purchase requisition file.
obligation
Purchasing Department
INDEPENDENT VERIFICATION BY THE GENERAL LEDGER DEPARTMENT

• copies of the PO are sent to:

1. The PO, which shows that the purchasing agent ordered
1. Two sent to the vendor
only the needed inventories from a valid vendor. This
document should reconcile with the purchase requisition.
 2. inventory control - clerk files it with the open purchase THE CASH DISBURSEMENTS SYSTEMS
requisition
AP Department
3. AP for filing in the AP pending file.
4. (blind copy) receiving department- where it is filed until the - Each day, the AP clerk reviews the open vouchers payable (AP)
inventories arrive. file for items due and sends the vouchers and supporting
5. last copy along with the purchase requisition in the open PO documents to the cash disbursements department.
file.
Receiving Cash Disbursements Department

• copy of receiving report

- For each disbursement, the clerk prepares a three-part check
1. storeroom- accompanies the physical inventories
and records the check
2. purchasing department - reconciles it with the open PO
number, dollar amount, voucher number, and other pertinent
o closed PO file- clerk closes the open PO by filing
data in the check register.
the purchase requisition, the PO,
and the receiving report here AP Department
3. inventory control - the inventory subsidiary ledger is
- Upon receipt of the voucher packet, the AP clerk removes the
updated
liability by recording the check number in the voucher register
4. AP department, where it is filed in the AP pending file.
and filing the voucher packet in the closed voucher file.
5. receiving department.
AP Department General Ledger Department

- After recording the liability, the AP clerk transfers the source Computer-Based Purchases and Cash Disbursements Applications
documents (PO, receiving report, and invoice) to the open
Reengineering
vouchers payable (APOK) file.

General Ledger Department

 - involves replacing traditional procedures with innovative
procedures that are often very different from those previously in
place.
- to eliminate nonvalue–added tasks.
AUTOMATING PURCHASES PROCEDURES USING BATCH
PROCESSING TECHNOLOGY
Data Processing Department: Step 1
- When inventories are reduced by sales to customers or usage in
production, the system determines if the affected items in the
inventory subsidiary file have fallen to their reorder points
- If reached reorder point, recordis created in the open purchase
requisition file
- the system sorts the open purchase requisition file by vendor
number
- vendor mailing information is retrieved from the valid vendor
file to produce hard copy purchase requisition documents
Purchasing Department
- receive purchase requisition, prepares a multipart PO
- copies are sent to the vendor, AP, receiving, data processing,
and the purchasing department’s file.
- A computer program identifies inventory requirements and
prepares traditional purchase requisitions,
- 3 alternative approaches for authorizing and ordering
inventories
1. system automatically prepares the PO documents and sends
them to the purchasing department for review and signing.
The purchasing agent then mails the approved POs to the
vendors and distributes copies to other internal users.
2. distributing the POs directly to the vendors and internal
users, thus bypassing the purchasing department
completely. system produces a transaction list of items
ordered for the purchasing agent’s review.
3. electronic data interchange - computer systems of both the
buying and selling companies are connected via a dedicated
telecommunications link
Data Processing Department: Step 2
- copy of the PO is sent to data processing and used to create a
record in the open PO file.
- The associated requisitions are then transferred from the open
purchase requisition file to the closed purchase requisition file.
Receiving Department
- When the goods arrive from vendors, the receiving clerk
prepares a receiving report and sends copies to the stores (with
the goods), purchasing, AP, and data processing.
Data Processing Department: Step 3
 - The data processing department creates the receiving report file
from data provided by the receiving report documents.
- batch program updates the inventory subsidiary file from the
receiving report file.
- The program removes the ‘‘On Order’’ flag from the updated
inventory records and calculates batch totals of inventory
receipts
Accounts Payable
- AP clerk receives the supplier’s invoice, he or she reconciles it
with the supporting documents that were previously placed in
the AP pending file
- clerk then prepares a voucher, files it in the open voucher file
- sends a copy of the voucher to data processing.
Data Processing Department: Step 4
- The voucher file is created from the voucher documents
- batch program validates the voucher records against the valid
vendor file and adds them to the voucher register
- batch totals are prepared for subsequent posting to the AP
control account
CASH DISBURSEMENTS PROCEDURES
Data Processing Department
- system scans the DUE DATE field of the voucher register for
items due.
- The check number is recorded in the voucher register to close
the voucher and transfer the items to the closed AP file
Cash Disbursements Department
- reconciles the checks with the transaction listing and submits
the negotiable portion of the checks to management for signing
- Copy of checks: AP, cash disbursements(w/ transaction listing)
Accounts Payable Department
- AP clerk matches them with open vouchers and transfers these
now closed items to the closed voucher file.
REENGINEERING THE PURCHASES/CASH DISBURSEMENTS SYSTEM
CONTROL IMPLICATIONS
The Automated System
➢ IMPROVED INVENTORY CONTROL
- 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 (3) it achieves a significant reduction in paper
about inventory purchases, inventory turnover, spoilage, documents by using digital communications
and slow-moving items between departments and by digitally storing
➢ BETTER CASH MANAGEMENT records.
- automate check signing, which is more efficient when check
*control implications of The Reengineered System
volume is high. This, naturally, injects risk into the process
✓ set a materiality threshold for check writing ➢ SEGREGATION OF DUTIES
➢ TIME LAG o system removes the physical separation between
- When sales clerks do not know the current status of inventory, authorization and transaction processing
sales may be lost. ➢ ACCOUNTING RECORDS AND ACCESS CONTROLS
➢ PURCHASING BOTTLENECK o Advanced systems maintain accounting records on
- In this automated system, the purchasing department is directly digital storage media, with little or no hard-copy backup
involved in all purchase decisions. For many firms this creates
additional 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.