AIS Chapter 13 expenditure cycle

8/18/2019 AIS Chapter 13 expenditure cycle

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Chapter 13

The Expenditure Cycle: Purchasing to Cash Disbursements


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Learning Objecties

Explain the basic business actiities and relatedin!ormation processing operations per!ormed in theexpenditure cycle"

Discuss the #ey decisions to be made in the

expenditure cycle$ and identi!y the in!ormation neededto ma#e those decisions"

%denti!y major threats in the expenditure cycle$ andealuate the ade&uacy o! arious control procedures

!or dealing 'ith those threats"


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The Expenditure Cycle


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The Expenditure Cycle

(ctiities and in!ormation processing related to:

Purchasing and payment o!

)oods and serices

Primary objectie:

*inimi+e the total cost o! ac&uiring and maintaininginentories$ supplies$ and the arious serices theorgani+ation needs to !unction


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Expenditure Cycle (ctiities

1" Ordering materials$supplies$ and serices

," -eceiing materials$supplies$ and serices

3" (pproing supplier inoices

." Cash disbursements


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Ordering )oods$ /upplies$ and/erices

0e 'ill consider three approaches toinentory control: Economic Order uantity 2EO

4ust in Time %nentory 24%T *aterials -e&uirements Planning 2*-P


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Economic Order uantity 2EO is thetraditional approach to managing inentory" )oal: *aintain enough stoc# so that production

doesn5t get interrupted"

6nder this approach$ an optimal order si+e iscalculated by minimi+ing the sum o! seeral costs: Ordering costs

Carrying costs

/toc#out costs

The EO !ormula is also used to calculate reorderpoint$ i"e"$ the inentory leel at 'hich a ne' ordershould be placed"

Other$ more recent approaches try to minimi+e or

eliminate the amount o! inentory carried"


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Economic Order uantity 2EO

The optimal order si+e is determined by using the!ormula:

0here

D 7 Demand in units !or a speci8ed period

P 7 -eleant ordering cost per purchase order

C 7 -eleant carrying cost o! one unit in stoc# !or thetime period used !or D

/ource: http:99'''"accounting!ormanagement"com9economicorder&uantityeco"htm


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Example:

Pam runs a mail;order business !or gym e&uipment"(nnual demand !or Trico>>" The annualholding cost per unit is ?,"@> and the cost to place an

order is ?@>"

Calculate the economic order quantity (EOQ).

There!ore$ Pam5s optimal order si+e !or Trico


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Underlying Assumptions of Economic OrderQuantity

1" The ordering cost is constant"

," The rate o! demand is constant"

3" The lead time is 8xed" ." The purchase price o! the item is constant i"e" no

discount is aailable"

@" The replenishment is made instantaneouslyA the 'holebatch is deliered at once"

/ource: http:99'''"accounting!ormanagement"com9economicorder&uantityeco"htm


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*aterials -e&uirement Planning 2*-Psee#s to reduce inentory leels byimproing the accuracy o! !orecasting

techni&ues and care!ully schedulingproduction and purchasing around that!orecast"


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4ust;%n;Time 24%T systems attempt to minimi+eor eliminate inentory by purchasing orproducing only in response to actual 2as

opposed to !orecasted sales" These systems hae !re&uent$ small delieries

o! materials$ parts$ and supplies directly tothe location 'here production 'ill occur"

( !actory 'ith a 4%T system 'ill hae multiplereceiing doc#s !or their arious 'or# centers"


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Order processing typically begins 'ith a purchaserequisition

Paper or electronic !orm that identi8es

0ho is re&uesting the goods

0here they should be deliered 0hen they5re needed

%tem numbers

Descriptions

uantities

Prices ( suggested supplier

Department number 9 account to be charged


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The purchase re&uisition is receied by a purchasing agent inthe purchasing department$ 'ho typically per!orms thepurchasing actiity"

The purchasing agent is responsible !or selecting a supplier" Bey!actors to be considered:

Price

uality o! materials

Dependability in ma#ing delieries

( purchase order (!O) is then generated" ( PO is a document

or electronic !orm that !ormally re&uests a supplier to sell anddelier speci8ed products at speci8ed prices"

inding contract

Promise to pay

( "lan#et purchase order is a commitment to buy speci8editems at speci8ed prices !rom a particular supplier !or a set time


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Threats in Ordering )oods

$%&EA$ 'O. *toc#outs and+ore,cess in-entory 0hy is this a problem

%! you run out o! merchandise$ you may lose sales"

%! you carry too much merchandise$ you incur excesscarrying costs and9or hae to mar# the inentory do'n"

Controls: (ccurate inentory control and sales !orecasting systems"

6se o! the perpetual inentory method"

/upplier per!ormance reports that highlight deiations inproduct &uality$ price$ and on;time deliery"

Online (%/ to record changes to inentory in real time"

ar;coding or -


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$%&EA$ 'O. Orderingunnecessary items 0hy is this a problem

Excess carrying costs" Obsolete inentory that can5t be sold or has to be mar#ed

do'n"

( related problem is multiple purchases o! the same item bydierent units o! the organi+ation"

O!ten occurs 'hen dierent departments or diisionshae dierent numbering systems !or parts"

Causes company to miss out on olume discounts"

Controls: Design the (%/ to integrate the databases o! arious units"

Produce reports that lin# item descriptions to part numbers"


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$%&EA$ 'O. /!urchasing goods atinated prices 0hy is this a problem

%ncreases product costs" -educes pro8tability and9or damages competitie position"

Controls: /tore price lists !or !re&uently purchased items in master

8le"

Prices o! lo';cost items determined !rom catalogs"

ids should be solicited !or high;cost and speciali+edproducts"

-eie' POs to be sure policies hae been !ollo'ed"

udgetary controls and responsibility accounting should beutili+ed to achiee accountability !or cost oerruns"


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$%&EA$ 'O. 1!urchasing goods ofinferior quality 0hy is this a problem

Can result in costly production delays"

/crap and re'or# costs may ma#e these materials moreexpensie than high;&uality alternaties"

Controls: Compile list o! approed suppliers #no'n to proide goods

o! acceptable &uality"

-eie' purchase orders to ensure use o! approed suppliers"

Trac# and reie' supplier per!ormance"

Fold purchasing managers responsible !or the total cost o!purchases$ including re'or# and scrap costs 2this re&uiresthat the (%/ can trac# these costs"


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$%&EA$ 'O. 2!urchasing fromunauthori3ed suppliers 0hy is this a problem

*ay result in goods o! in!erior &uality" *ay cause legal issues "

Controls: -eie' purchase orders !or use o! approed suppliers"

-estrict access to approed supplier list"

Periodically reie' approed supplier list !or unauthori+edchanges"

0or# 'ith issuers o! procurement cards to control 'hichsuppliers can accept the card"


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$%&EA$ 'O. 45ic#"ac#s 0hy is this a problem

Bic#bac#s are gi!ts !rom suppliers to purchasing agents !orthe purpose o! inGuencing their choice o! suppliers" They

typically result in:

Paying inGated prices"

uying unneeded items"

uying goods o! in!erior &uality"


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$%&EA$ 'O. 45ic#"ac#s (cont.) Controls:

Prohibit purchasing agents !rom accepting gi!ts!rom suppliers"

Train employees to respond appropriately to gi!ts!rom suppliers"

-otate jobs so the same purchasing agent doesnot deal 'ith the same suppliers inde8nitely"

(udit the actiities o! purchasing agents" En!orce mandatory acations"

Fae purchasing agents reie' and sign annualconGict o! interest statements"

%nclude clauses allo'ing endor audits incontracts 'ith suppliers"


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-eceiing *aterials$ /upplies$and /erices

The primary objecties o! this processare to:

Heri!y the receipt o! ordered inentory"

/a!eguard the inentory against loss or the!t"


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Threats in -eceiing )oods

$%&EA$ 'O. 6&ecei-ing unorderedgoods 0hy is this a problem

-esults in unnecessary costs to unload$ store$ andreturn the items"

Controls:

%nstruct receiing department to accept goods

only i! there is an approed copy o! the purchaseorder"


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$%&EA$ 'O. 8Errors in countingrecei-ed goods 0hy is this a problem

Company pays !or goods that 'eren5t receied" %nentory records are inaccurate$ possibly leading

to stoc#outs and lost sales"

Controls: ar code and -


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$%&EA$ 'O. 7$heft of in-entory 0hy is this a problem

Loss o! assets

%naccurate records


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$%&EA$ 'O. 7$heft of in-entory (cont.)

Controls: /tore inentory in secure locations 'ith restricted

access"

Document all intra;company inentory trans!ers$ e"g":

)oods moing !rom receiing to 'arehouse"

)oods moing !rom 'arehouse to production Goor"

Periodic physical count o! inentory and comparison to

records" *ore critical items should be counted more !re&uently"

/egregation o! duties

/eparate those 'ho hae physical access to inentory!rom those 'ho #eep records"

/eparate both those 'ho hae custody and those 'ho


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(pproing and Paying %noices

The primary objecties o! these processes areto:

Pay only !or goods and serices that 'ere ordered andreceied"

/a!eguard cash"


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%noice Processing

Ion;Houcher Each approed inoice is posted to indiidual supplier

records in the accounts payable 8le and is then stored inan open;inoice 8le"

0hen a chec# is 'ritten to pay !or an inoice$ the inoice

is remoed !rom the open;inoice 8le$ is mar#ed paid$ andthen is stored in the paid;inoice 8le"

Houcher Disbursement oucher is also created 'hen a supplier

inoice is approed !or payment"

%denti8es the supplier$ lists the outstanding inoices$and indicates the net amount to be paid a!terdeducting any applicable discounts and allo'ances"

0hat are the adantages to the Houcher method

13;,J


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(dantages o! Houcher /ystem

1" -educe number o! chec#s

," Can utili+e pre;se&uential;numbered oucher control

3" (llo's !or separation o! inoice approal !rom inoice

payment

13;,K

h i i d i


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Threats in (pproing and Paying%noices

$%&EA$ 'O. 0 ailing to catcherrors in -endor in-oices 0hy is this a problem

Oerpaying !or merchandise"

Controls:

Chec# mathematical accuracy o! inoices"

Obtain receipts !rom procurement card users and

eri!y monthly statement accuracy" (dopt Ealuated -eceipt /ettlement 2 E-/

approachi"e"$ pay !or goods 'hen receied atthe price stated in the purchase order"

Th i ( i d P i


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$%&EA$ 'O. !aying for goodsnot recei-ed 0hy is this a problem

%ncreased costs"

Controls:

Compare &uantities on inoice 'ith &uantitiesreported by receiing and inentory control

departments" 6se E-/"

0ith respect to serices$ hae tight budgetarycontrols and proide care!ul reie' o!departmental expenses"

Th i ( i d P i


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$%&EA$ 'O. ailing to ta#ea-aila"le purchase discounts 0hy is this a problem

-educes pro8tability"

Controls:


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$%&EA$ 'O. / !aying same in-oicet9ice 0hy is this a problem

-educes pro8tability" Can create a cash crunch i! a large inoice is paid

t'ice"

Controls:

(pproe inoices !or payment only 'henaccompanied by a complete oucher pac#age2PO M receiing report"

Only pay on original copies o! inoices"

Cancel the inoice once the chec# is signed" %n inoice;less accounts a able s stems control

Th t i ( i d P i


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$%&EA$ 'O. 1 &ecording andposting errors to accounts paya"le 0hy is this a problem

*ay result in disgruntled suppliers" Causes errors in 8nancial and per!ormance

reports"

Controls: (ppropriate data entry and processing controls$

such as comparing the dierences in endorbalances be!ore and a!ter processing chec#s 'iththe total amount o! inoices processed"

-econcile supplier balances 2or unpaid ouchers'ith the accounts payable control account"

Th t i ( i d P i


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$%&EA$ 'O. 2 :isappropriatingcash; chec#s; or E$s 0hy is this a problem

Loss o! assets" Potentially misleading 8nancial statements i!

the!t is large enough"

Controls:

-estrict access to cash$ blan# chec#s$ and chec#signing machines"

Fae chec#s numbered se&uentially andperiodically accounted !or by the cashier"

Th t i ( i d P i


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$%&EA$ 'O. 2 :isappropriating cash;chec#s; or E$s (cont.)

To preent schemes 'here an employees causeshis employer to issue a !raudulent chec#: 6se proper segregation o! duties:

(ccounts payable authori+es payment"

The treasurer or cashier signs and mails chec#s"

-e&uire t'o signatures !or chec#s oer a certain amount"

-estrict access to the approed supplier listA haechanges reie'ed and approed"

Cancel all documents in the oucher pac#age 'henpayment is made"

Fae an independent party 2e"g"$ internal auditingreconcile the ban# statements"

Th t i ( i d P i


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$%&EA$ 'O. 2 :isappropriatingcash; chec#s; or E$s (cont.)

To preent chec# alteration and !orgery:

6se chec# protection machines that imprintamounts"

6se in#s that are diNcult to alter"

Print chec#s on 'atermar#ed paper"

/et up a positie pay arrangement 'ith the

ban#" The company proides the ban# 'ith a list o!

chec#s it has 'ritten"

The ban# 'ill only honor chec#s that are onthat list"

Do ban# reconciliations promptly"

Th t i ( i d P i


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$%&EA$ 'O. 2 :isappropriatingcash; chec#s; or E$s (cont.)

%! a petty cash !und is needed:

%t should be handled by an employee 'hohas no other cash;handling or accountingresponsibilities"

%t should be set up as an imprest !und28xed amount that gets replenished on

presentation o! ouchers" Houchers should be canceled 'hen the

!und is replenished" Periodic surprise counts should be made

and the custodian should be heldresponsible !or shortages"

Th t i ( i d P i


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$%&EA$ 'O. 2 :isappropriating cash; chec#s;or E$s (cont.)

Electronic !unds trans!er re&uires additional controlprocedures$ including: /trict physical and logical access controls

Pass'ords and user %Ds to monitor employees

Log location o! originating terminal

Transactions should be encrypted

Transactions should be time stamped and numbered

( control group should monitor the transactions and theE

Documents

AIS Chapter 13 expenditure cycle