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Revenue Cycle in Accounting Information System
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Sales to Cash Collections
recurring set of business activities and related
information processing operation associated
with: Providing goods and services to customer
Collecting their cash payments
Primary exchange of information: customers
Primary Objective: provide the right product in
the right place at the right time for the right
price.
Two Phases of Revenue Cycle:
Physical Phase Goods are transferred to the buyer
Handled by the Sales Order Processing
Subsystem
Financial Phase
Cash is received from the buyer
Handled by the Cash Receipts Subsystem
Three basic functions of AIS in Revenue Cycle:
Capturing and processing data about business activities
Storing and organizing that data to support
decision making
Providing controls: ensure reliability of data
and safeguard resources
Context diagram
LOWER LEVEL
DIAGRAM
Sales to Cash Collections 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 are the optimal prices for each product or service?
What credit terms should be offered?
How can customer payments be processed to maximize cash flow?
Sales to Cash Collections Threats and Applicable Control
Procedures
Inaccurate or invalid master data
Unauthorized disclosure of sensitive information
Loss or destruction of master data
Poor performance
Data processing
integrity controls
Restriction of access
to master data
Review of all
changes to master
data
Access controls
Encryption
Backup and disaster
recovery procedures
Managerial reports
Sales to Cash Collections Revenue Cycle Business Activities
1. Sales Order Entry
2. Shipping
3. Billing and Accounts Receivable
4. Cash Collections
Sales Order Entry performed by the sales order department
(reports to the VP of marketing)
1.Taking the customers order 2.Checking and approving the customers
credit
3.Checking inventory availability
Sales Order Entry
1. Taking the customers order
Order data are received on a
In the store
By mail
By phone
On a Website
By a salesperson in the field
Paper or electronic
Item numbers ordered, quantities, price and salesperson
sales order document
Sales Order Entry
1. Taking the customers order
Electronic data interchange (EDI)- used to linked
the company with its customers to receive orders
How IT can improve efficiency and effectiveness:
Orders entered online can be routed directly to
the warehouse for picking and shipping.
Sales history can be used to customize
solicitations.
Choiceboards can be used to customize orders.
Sales Order Entry
2. Checking and approving customers credit
Credit sales should be approved before the
order is processed any further
Each customer will have
maximum allowable
account balance for
each customer based on the customers past credit
history and ability to pay
credit limit
Sales Order Entry
2. Checking and approving customers credit
Two Types of Credit Authorization
1. General Authorization- for existing customers
below their credit limit who dont have past-
due balances
2. Specific Authorization- for customers who
are new, have past-due balances, and are
placing orders that would exceed their
credit limit
Sales Order Entry
2. Checking and approving customers credit
How can IT improve the process?
Automatic checking of credit limits and
balances
Emails or IMs to the credit manager for
accounts needing specific authorization
Sales Order Entry
3. Check inventory availability
ensure there is sufficient inventory to fill the order
and advise the customer of the delivery date
the sales order clerk can usually reference a
screen displaying quantity on hand, quantity
already committed to others, and quantity on
order
Sales Order Entry
3. Check inventory availability
If there are enough units to fill the order Complete the sales order.
Update the quantity available field in the inventory file.
If theres not enough units to fill the order, initiate
a back order. For manufacturing companies, notify the production
department that more should be manufactured. For retail companies, notify purchasing that more should
be purchased.
*If the item(s) become available, picking ticket is created.
Sales Order Entry
3. Check inventory availability
*If the item(s) become available, is created. picking ticket
authorizes the inventory
control function to
release merchandise to
the shipping department
Sales Order Entry
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
Sales Order Entry
The AIS should provide the operational information
needed to perform the following functions:
Respond to customer inquires about account
balances and order status.
Decide whether to extend credit to a customer.
Sales Order Entry
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.
Sales Order Entry
HOME
THREAT APPLICABLE CONTROL PROCEDURES
1. Incomplete or inaccurate customer orders
Data entry edit checks
2. Credit sales to customers with poor credit
Credit approval by credit manager, not by sales function; accurate records of customer account balances
3. Legitimacy of orders Signatures on paper documents; digital signatures and digital certificates for e- business
4. Stock outs, carrying costs and markdowns
Inventory control systems
Shipping Filling customer orders and shipping the desired
merchandise
1.Picking and packing the order
2.Shipping the order
Warehouse Department- picks the order
Shipping Department- packs and ships the order
reports to VP of Manufacturing
Shipping
1. Picking and packing the order
The printed by the sales order entry triggers the shipping process and is used to
identify which products to remove from
inventory.
picking ticket
Shipping
2. Shipping the order
Shipping Department
Physical Count
of Inventory
Quantities in
the Picking
Ticket
Quantities in
the Sales Order
*If there are discrepancies, back order is initiated.
Shipping
1. Picking and packing the order
Packing Slip
Copy of the Bill of Lading
Freight Bill
Retained in the shipping
Send to billing
Retained by the
freight carrier
Shipping
Determine the delivery method.
In-house
Outsource
Shipping
HOME
THREAT APPLICABLE CONTROL PROCEDURES
1.Shipping errors: Wrong merchandise Wrong quantities Wrong address
Reconciliation of sales order with picking ticket and packing slip; bar code scanners; data entry application controls
2. Theft or 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
Billing information processing activity that repackages
and summarizes information from the sales order entry and shipping activities
1.Invoicing 2.Updating accounts receivable
Billing
1. Invoicing
INVOICING
Shipping Department:
items and quantities
shipped
Sales: price and other
sales term SALES
INVOICE
Billing
2. Updating Accounts Receivable
Two ways to maintain accounts receivable
1.Open- invoice method
2.Balance forward method
To obtain a more uniform flow of cash
receipts, many companies use a process
called cycle billing.
Conducive to offering
early-payment discounts,
as invoices are individually
tracked and aged
Results in more uniform flow
of cash collections
More efficient and reduces
costs because you dont bill
for each individual sale
More convenient for the
customer to make one
monthly remittance
Billing
ADVANTAGES
Billing
2. Updating Accounts Receivable
Exception Procedures: Account adjustments
and write offs
Adjustments are handled by the credit
manager
Billing
Accurate billing is crucial and requires
information identifying the items and quantities
shipped, prices, and special sales terms.
Billing 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 customers account.
Billing Types of billing systems:
1.In a postbilling system, invoices are prepared
after confirmation that the items were shipped.
2.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.
Billing What are examples of additional information the
AIS should provide?
response time to customer inquires
time required to fill and deliver orders
percentage of sales that require back orders customer satisfaction
analysis of market share and trends
profitability analyses by product, customer, and
sales region
Billing
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 Date entry edit control Price lists
3. Posting errors in updating accounts receivable
Reconciliation of subsidiary accounts receivable ledger with general ledger; monthly statements to customers
HOME
Cash Collections The cashier, who reports to the treasurer,
handles customer remittances and deposits in the bank
1.Handling customer remittances 2.Depositing remittance in the bank
1.Cashier
2.Accounts Receivable function
Cash Collections
1.Turnaround documents forwarded to accounts
receivable
2.Lockbox arrangements
3.Electronic lockboxes
4.Electronic funds transfer and bill payment
5.Financial Electronic Data Interchange (FEDI)
6.Accept credit cards or procurement of cards
from customers
Cash Collections
1.Turnaround documents forwarded to accounts receivable The mailroom opens customer envelopes and
forwards to accounts receivable either
remittance advices, photocopies of remittance
advices, or a remittance list prepared in the
mailroom.
Cash Collections
2. Lockbox arrangements A lockbox is a postal address to which
customers send their remittances.
The participating bank picks up the checks from the post office box and deposits them to
the companys account.
Cash Collections
3. Electronic lockboxes
Upon receiving and scanning the checks, the
bank immediately sends electronic
notification to the company, including customer account number and the amount
remitted as soon as it receives and scans
those checks.
Cash Collections
4.Electronic funds transfer and bill payment
Customers send their remittances
electronically to the companys bank and
thus eliminate the delay associated with the time the remittance is in the mail system.
Cash Collections
5. Financial electronic data interchange (FEDI)
integrated the exchange of electronic funds
transfer (EFT) with the exchange of the
remittance data Electronic data interchange (EDI) is the use of
computerized communication to exchange
business data electronically in order to
process transactions
Cash Collections
6.Accept credit cards or procurement cards from
customers
Speeds collection because credit card issuer
usually transfers funds within two days.
Cash Collections
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.
Cash Collections
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.
Cash Collections
HOME
THREAT APPLICABLE CONTROL PROCEDURES
1.Theft of Cash Segregations 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