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Accounting Information Systems: Essential Concepts and Applications Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing Chapter 12: The Revenue Cycle Slides Authored by Somnath Bhattacharya, Ph.D. Florida Atlantic University
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Fourth Edition by Wilkinson, Cerullo, Raval, and Wong … Information Systems: Essential Concepts and Applications Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing Chapter

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Page 1: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong … Information Systems: Essential Concepts and Applications Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing Chapter

Accounting Information Systems:

Essential Concepts and Applications

Fourth Edition by Wilkinson, Cerullo, Raval,

and Wong-On-Wing

Chapter 12: The Revenue

Cycle

Slides Authored by Somnath Bhattacharya, Ph.D. Florida Atlantic University

Page 2: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong … Information Systems: Essential Concepts and Applications Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing Chapter

Introduction

Revenue Cycles tend to be similar for all types of firms.

Two subsystems perform the processing steps within the revenue cycle:

The Sales Processing System

The Cash Receipts Processing System

Page 3: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong … Information Systems: Essential Concepts and Applications Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing Chapter

Objectives of the Revenue

Cycle

To record sales orders promptly and accurately

To verify that the customers are worthy of credit

To ship the products or perform the services by agreed dates

To bill for products or services in a timely and an accurate manner

To record and classify cash receipts promptly and accurately

To post sales and cash receipts to proper customers’ accounts in the accounts receivable ledger

To safeguard products until shipped

To safeguard cash until deposited

Page 4: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong … Information Systems: Essential Concepts and Applications Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing Chapter

Marketing/Distribution

Marketing Management has the objectives of

Determining and satisfying the needs of customers

Generating sufficient revenue to cover costs and expenses

Replacing assets

Providing an adequate return on investment

Page 5: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong … Information Systems: Essential Concepts and Applications Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing Chapter

Finance/Accounting

With respect to the Revenue Cycle, the objectives are limited to

Cash Planning and Control

Data pertaining to sales and customer accounts

Inventory control

Information pertaining to cash, sales, and customers

Page 6: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong … Information Systems: Essential Concepts and Applications Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing Chapter

Input Documents Pertaining to

the Revenue Cycle

Customer Order

Sales Order

Order Acknowledgement

Picking List

Packing Slip

Bill of Lading

Shipping Notice

Sales Invoice

Remittance Advice

Deposit Slip

Back Order

Credit Memo

Credit Application

Salesperson Call Report

Delinquent Notice

Write-off Notice

Cash Register Receipts

Figure 12-2

Page 7: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong … Information Systems: Essential Concepts and Applications Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing Chapter

DFD of a Sales & Receivables

Processing System

Credit Data

Customer Data

Order Data Inventory Data

Shipping Data

Inventory Data

Order Data

Sales Data

Pricing Data

Sales History

Receivables Data

Customer Data

General Ledger Account Data

Customer 1.0

Receive &

Enter Sales

Order 2.0

Ship

Goods to

Customers 3.0

Bill

Customer

4.0

Prepare

Accounting

Analyses &

Reports

Customer

Accountants &

Managers

Figure 12-5. See

Textbook for details

Page 8: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong … Information Systems: Essential Concepts and Applications Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing Chapter

Credit Sales Processing

System

Order Entry Customer Order Picking List

Shipping Bill of Lading

Billing Preparing Analyses & Reports Invoice Register Accounts Receivable Summary

Handling Sales Returns & Allowances Credit Memos

Processing Back Orders

Page 9: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong … Information Systems: Essential Concepts and Applications Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing Chapter

Cash Receipts Processing

System

Remittance Entry Remittance List Lockbox

Depositing Receipts Deposit Slips Cash Receipts Transaction Listing

Posting Receipts Balance Forward Method Open Invoice Method

Preparing Analyses & Reports Collecting Delinquent Accounts Write-off Notice

Page 10: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong … Information Systems: Essential Concepts and Applications Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing Chapter

Web-Based Systems

Electronic commerce

Larger customer base

Quicker processing of transactions

Less paperwork

Greater efficiency & productivity

Self-service

AICPA’s Web-Trust and competing services

Page 11: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong … Information Systems: Essential Concepts and Applications Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing Chapter

Information Output

Operational Listings & Reports

Inquiry Display Screens

Scheduled Managerial Reports

Demand Managerial Reports

Page 12: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong … Information Systems: Essential Concepts and Applications Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing Chapter

Operational Listings and

Reports

Monthly statement

Open orders report

Sales Invoice register

Shipping register

Cash receipts journal

Credit memo register

Page 13: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong … Information Systems: Essential Concepts and Applications Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing Chapter

Scheduled Managerial

Reports

Accounts receivable aging schedule

Reports on critical factors Average dollar value per order

Percentage of orders shipped on time

Average number of days between the order date and shipping date

Sales analyses Salesperson

Sales region

Product lines

Customers

Markets

Cash flow statements

Page 14: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong … Information Systems: Essential Concepts and Applications Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing Chapter

Demand Managerial

Reports

Demand reports are ad hoc non-scheduled reports

“What-if” scenarios

Page 15: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong … Information Systems: Essential Concepts and Applications Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing Chapter

Types of Managerial Decisions

Pertaining to the Revenue Cycle

Marketing decisions

Which types of markets and customers are to be served?

Which specific products are to be provided to customers, including new products to be introduced?

What prices are to be charged, and what discounts are to be allowed?

What after-sales services are to be offered?

What channels of distribution are to be employed?

What advertising media are to be employed, and in what mix?

What organizational units are to be incorporated within the marketing function?

What marketing plans and budgets are to be established for the coming year?

Figure 12-17

Page 16: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong … Information Systems: Essential Concepts and Applications Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing Chapter

Types of Managerial Decisions

Pertaining to the Revenue Cycle

Financial Decisions

What criteria are to be employed in granting credit to potential customers?

What collection methods are to be employed in minimizing bad debts?

What accounts receivable records are to be maintained concerning amounts owed by customers?

What sources, other than receipts from sales, are to be employed in obtaining needed funds for operations?

What financial plans and cash budgets are to be established for the coming year?

Figure 12-17 Continued

Page 17: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong … Information Systems: Essential Concepts and Applications Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing Chapter

Typical Files Associated

with the Revenue Cycle

Master Files Customer master file Accounts receivable master file Merchandise inventory master file

Transaction & Open Document Files Sales order file Open sales order file Sales invoice transaction file Cash receipts transaction file

Other Files Shipping & Price data reference file Credit reference file Salesperson file Sales history file Cash receipts history file Accounts receivable report file

Figure 12-18

Page 18: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong … Information Systems: Essential Concepts and Applications Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing Chapter

A Layout of an Accounts

Receivable Record

CustomerAccountBalance

CustomerName

CreditLimit

BalanceBeginningof Year

Year-to-dateSales

Year-to-datePayments

CurrentAccountBalance

Figure 12-19

Page 19: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong … Information Systems: Essential Concepts and Applications Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing Chapter

Relational Data Structure for the

Sales Aspect of the Revenue Cycle

Customer Customer Customer Phone Credit Trade Account Balance Year-to-date Year-to-date

Number Name Shipping Number Limit Discount Beginning of Year Sales Payments

Address Allowed

Sales Order Expected Salesperson Customer

Order Date Delivery Code Number

Number Date

Sales Product Quantity

Order Number Ordered

Product Description Warehouse Unit of Reorder Economic Unit Name of Quantity on Quantity on

Number Location Measure Point Reorder Cost Preferred Order Hand

Quantity Supplier

Sales Customer Sales Billing Shipping Terms Total

Invoice Number Order (Invoice) Document Sales

Number Number Number Amount

Sales Product Unit Quantity Shipped

Invoice Number Price and Sold

Number

Figure 12-21

Page 20: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong … Information Systems: Essential Concepts and Applications Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing Chapter

Risk Exposures in the

Revenue Cycle - I

Risk Exposure1) Credit sales made to customerswho represent poor credit risks

1) Losses from bad debts

2) Unrecorded or unbilled shipments 2) Losses of revenue; overstatement

of inventory and understatement ofaccounts receivable in the balancesheet

3) Errors in preparing sales invoices 3) Alienation of customers andpossible loss of future sales; losses ofrevenue

Figure 12-22

Page 21: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong … Information Systems: Essential Concepts and Applications Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing Chapter

Risk Exposure4) Misplacement of orders fromcustomers or unfilled backorders

4) Losses of revenue and alienation ofcustomers

5) Incorrect posting of sales to

accounts receivable records

5) Incorrect balances in accounts

receivable and general ledger accountrecords

6) Posting of revenues to wrongaccounting periods, such as prematurebooking of revenues

6) Overstatement of revenue in oneyear (year of premature booking) andunderstatement of revenue in the next

Figure 12-22 (continued)

Risk Exposures in the

Revenue Cycle - II

Page 22: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong … Information Systems: Essential Concepts and Applications Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing Chapter

Risk Exposure7) Fictitious credit sales to nonexistentcustomers

Overstatement of revenues andaccounts receivable

8) Excessive sales returns andallowances with certain of the creditmemos being for fictitious returns

8) Losses in net revenue, with theproceeds from subsequent paymentsby affected customers beingfraudulently pocketed

9) Theft or misplacement of finishedgoods in the warehouse or on theshipping dock

9) Losses in revenue; overstatementof inventory on the balance sheet

Figure 12-22 (continued)

Risk Exposures in the

Revenue Cycle - III

Page 23: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong … Information Systems: Essential Concepts and Applications Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing Chapter

Risk Exposure10) Fraudulent write-offs ofcustomers’ accounts by unauthorizedpersons

10) Understatement of accountsreceivable; losses of cash receiptswhen subsequent collections onwritten-off accounts aremisappropriated by perpetrators of thefraud

11) Theft (skimming) of cash receipts,especially currency, by personsinvolved in the processing; oftenaccompanied by omitted postings toaffected customers’ accounts

11) Losses of cash receipts;overstatement of accounts receivablein the subsidiary ledger and thebalance sheet

12) Lapping of payments fromcustomers when amounts are postedto accounts receivable records

12) Losses of cash receipts; incorrectaccount balances for those customerswhose records are involved in thelapping

Figure 12-22 (continued)

Risk Exposures in the

Revenue Cycle - IV

Page 24: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong … Information Systems: Essential Concepts and Applications Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing Chapter

Risk Exposures in the

Revenue Cycle - V

Risk Exposure13) Accessing of accounts receivable,merchandise inventory, and otherrecords by unauthorized persons

13) Loss of security over such records,with possibly detrimental use made ofthe data accessed

14) Involvement of cash, merchandiseinventory, and accounts receivablerecords in natural or human-madedisasters

14) Losses of or damages to assets

15) Planting of virus by disgruntledemployee to destroy data on magneticmedia

15) Loss of customer accountsreceivable data needed to monitorcollection of amounts from previoussales

Figure 12-22 (continued)

Page 25: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong … Information Systems: Essential Concepts and Applications Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing Chapter

Risk Exposures in the

Revenue Cycle - VI

Risk Exposure16) Interception of data transmittalbetween customers and the web site

16) Loss of data which may be used tothe detriment of customers

17) Unauthorized viewing andalteration of other customer accountdata via the Web

17) Loss of security over customerrecords resulting in misstatement ofaccounts receivable balances

18) Denial by a customer that anonline order was placed after thetransaction is processed

18) Loss of sales revenues

Figure 12-22 (continued)

Page 26: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong … Information Systems: Essential Concepts and Applications Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing Chapter

Risk Exposures in the

Revenue Cycle - VII

Risk Exposure19) Use of stolen credit cards to placeorders via the Web

19) Loss of shipped goods for whichpayments will not be received

20) Breakdown of the web server dueto unexpectedly high volume oftransactions

20) Loss of sales revenues andalienation of customers

Figure 12-22 (continued)

Page 27: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong … Information Systems: Essential Concepts and Applications Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing Chapter

Typical Control Objectives

for the Revenue Cycle

All customers accepted for credit sales are credit-worthy All ordered goods are shipped, and all services are

performed by dates that are agreeable to all parties All shipped goods are authorized and accurately billed

within the proper accounting period All sales returns and allowances are authorized and

accurately recorded and based on actual return of goods All cash receipts are recorded completely and accurately All credit sales and cash receipts transactions are posted

to proper customers’ accounts in the accounts receivable ledger

All accounting records, merchandise inventory, and cash are safeguarded

Page 28: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong … Information Systems: Essential Concepts and Applications Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing Chapter

General Controls of the

Revenue Cycle - I

Organizational Controls

Units with custodial functions should be kept separate from each other

Custodial functions should furthermore be segregated from record-keeping functions

For computerized systems, systems development should be kept separate from systems operations

Page 29: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong … Information Systems: Essential Concepts and Applications Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing Chapter

Documentation Controls

Asset Accountability Controls

Management Practice Controls

Data Center Operations Controls

Authorization Controls

General Controls of the

Revenue Cycle - II

Page 30: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong … Information Systems: Essential Concepts and Applications Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing Chapter

Access Controls

Assigned passwords that authorized clerks must enter to access

accounts receivable and other customer-related files, in order to

perform their strictly defined tasks

Terminals that are restricted in the functions they allow to be

performed with respect to sales and cash receipts transactions

Logging of all sales and cash receipt transactions upon their

entry into the system

Frequent dumping of accounts receivable and merchandise

inventory master files onto magnetic tape backups

Physically protected warehouses and safes

A lockbox collection system in situations where feasible

General Controls of the

Revenue Cycle - III

Page 31: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong … Information Systems: Essential Concepts and Applications Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing Chapter

Application Controls of the

Revenue Cycle: Input - I

1) Prepare pre-numbered and well-designed documents relating to sales, shipping, and cash receipts, with each prepared document being approved by an authorized person 2) Validate data on sales orders and

remittance advices as the data are prepared and entered for processing. In computer-based systems, validation should be performed by means of programmed edit checks. When data are keyed into computer-readable medium, key verification is also appropriate

Page 32: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong … Information Systems: Essential Concepts and Applications Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing Chapter

Application Controls of the

Revenue Cycle: Input - II

3) Correct errors that are detected during data entry and before the data are posted to the customer and inventory records 4) Precompute batch control totals

relating to key data on sales invoices (or shipping notices) and remittance advices. These precomputed batch control totals should be compared with totals computed during postings to the accounts receivable ledger and during each processing run. In the case of cash receipts, the total on remittance advices should also be compared with the total on deposit slips

Page 33: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong … Information Systems: Essential Concepts and Applications Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing Chapter

Application Controls of the

Revenue Cycle: Processing - I

1) Move ordered goods from the finished goods warehouse and ship the goods only on the basis of written authorizations such as stock request copies 2) Invoice customers only on notification by the

shipping department of the quantities that have been shipped 3) Issue credit memos for sales returns only

when evidence (i.e. receiving report) has been received that the goods were actually returned 4) Verify all computations on sales invoices

before mailing and postings to proper customers’ accounts. Also, compare the sales invoices against shipping notices and open orders, in order to ensure that the quantities ordered reconcile with the orders shipped and back-ordered

Page 34: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong … Information Systems: Essential Concepts and Applications Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing Chapter

Application Controls of the

Revenue Cycle: Processing - II

5) Verify that total amounts posted to the accounts receivable accounts from batches of transactions agree with precomputed batch totals, and post the total amounts to the appropriate general ledger accounts 6) Deposit all cash received intact and with a

minimum of delay, thus eliminating the possibility of cash receipts being used to pay employees or to reimburse petty cash funds 7) Correct errors that are made during

processing steps, usually by reversing erroneous postings to accounts and entry of correct data. The audit trail concerning accounts being corrected should show the original errors, the reversals, and the corrections

Page 35: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong … Information Systems: Essential Concepts and Applications Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing Chapter

Application Controls of the

Revenue Cycle: Output

1) Prepare monthly statements, which should be mailed to all credit customers, especially if the balance forward approach is employed 2) File copies of all documents pertaining to

sales and cash receipts transactions by number, with the sequence of numbers in each file being periodically checked to see if gaps exist. If transactions are not supported by preprinted documents, as often is the case in online computer-based systems, assign transaction numbers to the transactions 3) Prepare printed transaction listings and

account summaries on a periodic basis in order to provide audit trail and a basis for review

Page 36: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong … Information Systems: Essential Concepts and Applications Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing Chapter

Web Security Procedures

Authentication

Authorization

Use of an Access Control List

Accountability

Data Transmission

Disaster Contingency & Recovery Plan

Page 37: Fourth Edition by Wilkinson, Cerullo, Raval, and Wong … Information Systems: Essential Concepts and Applications Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-Wing Chapter

Copyright © 2000 John Wiley & Sons, Inc. All rights reserved.

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Section 117 of the 1976 United States Copyright Act without the express

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the use of these programs or from the use of the information contained

herein.

Accounting Information Systems:

Essential Concepts and Applications

Fourth Edition by Wilkinson, Cerullo,

Raval, and Wong-On-Wing