Accounting information system an overview 9e bodnar and hopwood 2015 chapter 12

The Revenue Cycle: Sales to Cash Collections
Chapter 12

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Learning Objectives

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Describe the basic business activities and related information processing operations performed in the revenue
cycle.

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Discuss the key decisions that need to be made in the revenue cycle, and identify the information needed to make
those decisions.

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Identify major threats in the revenue cycle, and evaluate the adequacy of various control procedures for dealing
with those threats.

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Basic Revenue Cycle Activities

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Sales order entry
Shipping
Billing
Cash Collections

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Sales Order Entry Processing Steps

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Take the customer order

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Source document: sales order

Approve customer credit
Check inventory availability
Respond to customer inquiries

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Sales Order Entry Processing

Threats

1.
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5.

Controls

Incomplete/inaccurate orders
Invalid orders
Uncollectible accounts
Stockouts and excess inventory
Loss of customers

1 a. Data entry edit controls
b. Restrict access to master data to
maintain accuracy

2 a. Signature to authorize sale
3 a. Credit limits checked and if sale exceeds
limit, specific authorization needed
4 a. Perpetual inventory system
b. RFID or bar code technology

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c. Physical inventory counts

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Shipping Process

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Pick and pack the order

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Source documents: picking ticket

Ship the order

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Source documents: Packing slip, Bill of lading

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Shipping Process

Threats

1.
2.
3.
4.

Controls

Picking wrong item or quantity to ship
Theft
Fail to ship the goods
Ship to wrong address

1 a. Bar code technology
b. Reconcile picking list to sales order
2 a. Restrict physical access to inventory
b. Document inventory transfers
c. Physical counts of inventory and
reconcile to quantities recorded
3 a. Reconcile shipping documents to sales
orders, picking lists, and packing slips

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4 a. Data entry edit controls

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Billing Process

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Invoicing the customer

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Updating accounts receivable

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Source document: sales invoice

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Source document: credit memo and monthly statements

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Billing Process

Threats

1.
2.
3.
4.

Controls

Failure to bill customer
Billing errors
Posting errors in accounts receivable
Inaccurate or invalid credit memos

1 a. Reconcile invoices with sales orders and
shipping documents
b. Separate shipping and billing functions
2 a. Data entry edit controls
b. Configure system for automatically
enter price data
3 a. Reconcile subsidiary accounts receivable
balance to the amount for accounts
receivable in the general ledger
4 a. Segregation of authorization and

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recording function for credit memos

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Cash Collection Process

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Process customer payment and update their account balance

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Remittance

Deposit payments to the bank

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Cash Collection Process

Threats

1.
2.

Control

Theft of cash
Cashflow problems

1 a. Proper segregation of cash handling and
posting to customer accounts, authorize
credit memos, or reconcile bank account
b. Use lockbox
c. Deposit all cash receipts daily

2 a. Lockbox
b. Discounts for early payment
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c. Cash flow budgeting

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Key Terms
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Revenue cycle
Sales order
Electronic data interchange (EDI)
Credit limit
Accounts receivable aging report
Back order
Picking ticket
Customer relationship management systems (CRM)
Packing slip
Bill of lading
Sales invoice

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Remittance advice

Balance-forward method
Monthly statement
Cycle billing
Credit memo
Remittance list
Lockbox
Electronic lockbox
Electronic funds transfer (EFT)
Financial electronic data interchange (FEDI)
Universal payment identification code (UPIC)
Cash flow budget

Open-invoice method

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