ACCOUNTING INFORMATION SYSTEM

WRITTEN OUTPUT

CHAPTER 13: THE EXPENDITURE CYCLE:

PURCHASING TO CASH DISBURSEMENT

WHAT IS THE EXPENDITURE CYCLE?

o Involves purchasing and paying for
goods and services.
o Highlights the exchange of
information with suppliers and
internally within the organization.

MAIN OBJECTIVE OF THE EXPENDITURE

CYCLE

o To minimize costs associated with Figure 13-2 Level 0 Data Flow Diagram for the Expenditure
Cycle
acquiring and maintaining inventories,
supplies, and services.
COMPARISON OF REVENUE AND
EXPENDITURE CYCLE
DECISIONS THAT MUST BE MADE
INCLUDE: Revenue Cycle Activity
Process Orders from
Sales Order entry
Customers.
1. What level of inventory and supplies
should we carry;
Delivered Merchandise
2. What vendors provide the best price
or services to
and quality; Shipping
customers (outbound
3. Where should we store the goods;
logistics)
4. Can we consolidate purchases
across units; Send invoices to
5. How can IT improve inbound Billing
customers.
logistics;
6. Is there enough cash to take
Process payment from
advantage of early payment Cash Collection
customers.
discounts; and
7. How can we manage payments to
maximize cash flow?
Expenditure Cycle Activity
Ordering of
Materials, Send orders to
Supplies and suppliers.
Services

Received merchandise
or services from
Receiving
supplier (Inbound
Logistics)
Figure 13-1. Context Diagram of the Expenditure Cycle
Processing Review and approve
Invoices invoices from suppliers.

Cash Process payments to

Disbursement suppliers.
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Expenditure Cycle
Reorder Point
THREATS CONTROLS
1. Inaccurate or 1.1. Data o specifies the level to which the
invalid master processing inventory balance of an item must fall
data integrity before an order to replenish stock is
controls initiated.
1.2. Restriction of
access to Material Requirements Planning (MRP)
master data.
1.3. Review of all o system schedules production based on
changes to forecasted demand, resulting in an
master data optimal quantity of finished goods
2. Unauthorized 2.1. Access controls inventory.
disclosure of 2.2. Encryption o MRP systems are effective for
sensitive products with predictable demand
information patterns.
3. Loss or
destruction of 3.1. Backup and
data disaster EXAMPLE:
recovery
Products like smartphones or
procedures.
laptops, which have relatively stable
4. Poor 4.1. Managerial
demand patterns. By analyzing
Performance reports
historical sales data and considering
factors like seasonality and market
trends, MRP systems can help
manufacturers plan their production
ORDERING MATERIALS, SUPPLIES
schedules, manage inventory levels,
AND SERVICES and avoid stock outs or excess
Identifying of What, When and How much to inventory.
Purchase

Economic Order Quantity (EOQ)

Just-in-Time (JIT) Inventory System
o The optimal Order size to minimize the
sum of ordering, carrying, and stock
out cost.
a. Ordering cost
 Includes all expenses
associated with
processing purchase
transaction
b. Carrying Cost
 are those associated
with holding inventory.
c. Stock out Cost
 are those that results
from inventory
shortage, such as lost
sale or production
delays.
o aims to minimize finished goods
inventory by purchasing and
producing goods based on actual
customer demand.
o Involve frequent deliveries of
small amounts of materials
directly to specific locations,
eliminating the need for a central
receiving and storage facility.
o JIT systems are useful for
products with short life cycles
and specific demand associated
with certain events or trends.
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EXAMPLE:
CHOOSING SUPPLIER
Fashion industry, where products
have short life cycles and demand is Are the next step after the need to
influenced by rapidly changing trends. By →
purchase are identified
adopting a JIT approach, fashion retailers
can minimize the risk of holding excess Purchasing agent (buyers) are the
→
inventory of items that may quickly go out one who perform this task.
of style. Instead, they can maintain a lean Once a supplier has been selected
inventory and quickly respond to customer for a product, the suppliers’ identity
demands by replenishing stock based on should become part of the product
→
real-time sales data and market trends. inventory master record to avoid
repeating the supplies selection
process for every subsequent order.
NOTE Factors that should be considered when
→ The choice between MRP and JIT selecting supplier
systems depends on the type of
Dependability
products a company sells. Quality of
Price in making
→ Similarities: Can reduce cost and Materials
deliveries
improve efficiency.

Purchasing Order
Purchase Requisition
o Purchase orders are formal
o is a document used to request the documents that request suppliers to
purchase of goods or supplies. It sell and deliver specified products at
includes information such as the designated prices.
requester’s details, delivery
location, item descriptions,
quantities, and prices. The requisition Purchasing Order includes:
also suggests a supplier.
The names of the supplier and
→
Ordering purchasing agents
THREATS CONTROLS
→ Order and requested delivery date
5. Stockouts 5.1. Perpetual
and excess inventory system
Delivery location and shipping
inventory Ordering →
method
5.2. Bar coding or RFID
tags → Information about the item ordered
5.3. Periodic physical
The main cost driver in the
counts of inventory
purchasing function is the number
6. Purchasing 6.1. Perpetual
of purchase orders processed.
items not inventory system
One way to improve the
needed 6.2. Review and
purchasing process and reduce
approval of
costs is by using Electronic Data
purchase
Interchange (EDI), which
requisitions
eliminates the paperwork
6.3. Centralized
associated with printing and
purchasing function
mailing purchase orders. EDI also
reduces the risk of running out of
stock.
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Techniques that help ensure reliable Ordering

sources of Raw materials, lower prices, THREATS CONTROLS
and identify cost-saving opportunities. 7. Purchasing 7.1. Price list
Blanket Purchase Order or Blanket Order at inflated 7.2. Competitive
A commitment to purchase prices Bidding
specified items at designated price 7.3. Review of
→
from a particular supplier for a set purchase orders
time, period, often one year. 7.4. Budgets
Reduce a buyer’s uncertainty
about reliable sources of raw 8. Purchasing 8.1. Purchasing only
→ materials and help supplier plans goods of from approved
its capacity and operation more inferior suppliers
effectively. quality 8.2. Review and
Vendor-Managed Inventory (VMI) approval of
Practice in which manufacturer purchases from
→ and distributors manage a retail new suppliers
customer’s inventory using EDI. 8.3. Holding
purchasing
The supplier accesses it’s
managers
customer’s point-of-sale in order
responsible for
to monitor inventory and
→ rework and scrap
automatically replenish products
costs
when they fall to agreed-upon
8.4. Tracking and
levels.
monitoring
product quality
by supplier
9. Unreliable 9.1. Requiring
Techniques to Reduce Purchasing – Related suppliers suppliers to
Expense. possess quality
Reverse Auction certification (e.g,
provides yet another techniques ISO 9000)
→ to reduce Purchasing-related 9.2. Collecting and
expenses. monitoring
Suppliers compete with one supplier delivery
→ another to meet Demand at performance data
lowest Price. 10. Purchasing 10.1. Maintaining I a
Pre-Award Audit from list of approved
Conducted to reduce purchasing unauthorized suppliers and
→ suppliers configuring the
related cost.
Typically used for large purchases system to permit
→ that involves formal bids by purchase orders
suppliers. only to approved
suppliers
Often identify simple
10.2. Review and
mathematical errors in complex
approval of
pricing formulas and other
→ purchases from
discrepancies that, when
new suppliers
corrected, can provide
10.3. EDI-specific
considerable savings.
controls (access,
review of orders,
encryption, policy
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11. Kickbacks 11.1. Prohibit

acceptance of
gifts from
suppliers
11.2. Job rotation and
mandatory
vacations
11.3. Requiring
purchasing agents
to disclose
financial and
personal interests
in suppliers
11.4. Supplier audits