Lecture 4

The
Revenue
Cycle
 Objectives for Lecture 4
 Tasks performed in the revenue cycle, regardless of the
technology used
 The functional departments involved in revenue cycle activities
and the flow of revenue transactions through the organization
 The documents, journals, and accounts that provide audit trails,
promote the maintenance of records, support decision making,
and sustain financial reporting
 Risks associated with the revenue cycle and the controls that
reduce these risks
 The operational and control implications of technology used to
automate and reengineer the revenue cycle
 S a le s O rd e r
1
C re d it / C u s to m e r
S e rv ic e R EV EN U E C Y C LE
2 (S U B S Y S T E M )
C a s h R e c e ip ts /
C o lle c tio n s
6

S h ip p in g
3

B illin g / A c c o u n ts
R e c e iv a b le
4 /5
 Journal Vouchers/Entries
How do we get them?
 Billing Department prepares a journal voucher:
Accounts Receivable DR
Sales CR
 Inventory Control Dept. prepares a journal voucher:
Cost of Goods Sold DR
Inventory CR
 Cash Receipts prepares a journal voucher:
Cash DR
Accounts Receivable CR
 Revenue Cycle (Subsystem) Databases

 Master files • Other Files

 customer master file – shipping and price data
 accounts receivable master file reference file
 merchandise inventory master – credit reference file (may not
be needed)
file
– salesperson file (may be a
 Transaction and Open master file)
Document Files – Sales history file
– cash receipts history file
 sales order transaction file
– accounts receivable reports
 open sales order transaction file
file
 sales invoice transaction file
 cash receipts transaction file
FIGURE 4-1 DFD of Sales Order Processing System
MAY 2005

Credit Customer
Customer Records Accounts

Customer
Order 2
6 AR
1 Summary
Check Update
Take Credit Accounts
Customer Sales Receivable
Order Journal Records

8
5 Customer
Sales Information

Information Post to
Sales General
3 Bill Summary Ledger
Customers
Pick
Goods

Goods Inventory
Ship

from Information
Shelf
7 Control
Accounts
Update
4 Inventory
Records Inventory
Shipping
Summary
Ship Information
Goods
Inventory
Bill Customer
Records

Page 1
 Overview of the Manual Sales Order
Processing System
 The sales process begins with a customer placing an order
via the sales department.
 The sales department captures the essential details on a

sales order form.

 The transaction is authorized by obtaining credit approval
by the credit department.
 The sales information is released to:
 billing

 warehouse (stock release or picking ticket)

 shipping (packing slip and shipping notice)

 Overview of the Manual Sales Order
Processing System
 The merchandise is picked from the Warehouse and sent to
Shipping. The stock records are adjusted.
 The merchandise is shipped. The Shipping Department reconciles
the products received from the warehouse with the sales information
received. The shipping information is sent to Billing. The goods,
along with the packing slip and a bill of lading, prepared by
Shipping, are sent to the customer.
 Billing compiles and reconciles the relevant facts and issues an
invoice to the customer and updates the sales journal. The
information is transferred to:
 accounts receivable

 inventory control
 Overview of the Manual Sales Order
Processing System
 Accounts Receivable records the information in the
customer’s account in the accounts receivable
subsidiary ledger.
 Inventory Control adjusts the inventory subsidiary
ledger.
 Periodically, Billing, Accounts, Receivable, and
Inventory Control submits summary information,
typically in the form of a journal voucher to the General
Ledger department. The General Ledger department
reconciles this data and posts to the control accounts in
the general ledger.
 DFD Cash
Figure 4-10 Receipts
System Customer
Accounts

Check and
Customer Remittance 3
Advice Update
Accounts AR Summary
Receivable
Remittance Advice Records
4
1 Post to
Sort General
Mail Ledger

Cash Receipts
Summary
Check
2

Update Control
Bank Deposit Checks
Cash Accounts
Receipts
Records

Customer
Account Cash
Receipts
Journal
 Overview of the Manual Cash
Receipts System
 The customer’s checks and remittance advices
are received in the Mail Room. A mail room clerk
prepares a cash prelist and sends the list along
with the checks to Cash Receipts. A copy of the
cash prelist is sent to Accounts Receivable and the
Controller.
 The Cash Receipts department verifies the
accuracy and completeness of the checks, updates
the cash receipts journal, prepares a deposit slip,
and prepares a journal voucher and sends to
General Ledger.
 Overview of the Manual Cash
Receipts System
 The Accounts Receivable department posts from the
remittance advices to the accounts receivable
subsidiary ledger. Periodically, a summary of the
postings is sent to General Ledger.
 The General Ledger department reconciles the journal
voucher from Cash Receipts with the summaries from
accounts receivable and updates the general ledger
control accounts.
 The Controller reconciles the bank accounts.
Summary of Internal Controls
 Authorization Controls
 Proper authorization of transactions (documentation) should
occur so that only valid transactions get processed.
 Within the revenue cycle, authorization should take place
when:
 a sale is made on credit (authorization)

 a cash refund is requested (authorization)

 posting a cash payment received to a customer’s account

(cash pre-list)
 Segregation of Functions
Three Rules
1. Transaction authorization should be
separate from transaction processing.
2. Asset custody should be separate from asset
record-keeping.
3. The organization should be so structured
that the perpetration of a fraud requires
collusion between two or more individuals.
 Segregation of Functions

 Sales Order Processing

 credit authorization separate from SO processing

 inventory control separate from warehouse

 accounts receivable sub-ledger separate from general ledger

control account
 Cash Receipts Processing
 cash receipts separate from accounting records

 accounts receivable sub-ledger separate from general ledger

 Supervision
 Supervision of
employees
serves as a
deterrent to
dishonest acts
and is
particularly
important in the
mailroom.
 Accounting Records
 With a properly maintained audit trail, it is
possible to track transactions through the
systems and to find where and when errors
were made:
 pre-numbered source documents
 special journals
 subsidiary ledgers
 general ledger
 files
 Access Controls
 Access to assets and information (accounting
records) should be limited.
 Within the revenue cycle, the assets to protect
are cash and inventories and access to records
such as the accounts receivable subsidiary
ledger and cash journal should be restricted.
 Independent Verification
 Physical procedures as well as record-keeping should be
independently reviewed at various points in the system to check
for accuracy and completeness:
 shipping verifies the goods sent from the warehouse are

correct in type and quantity

 warehouse reconciles the stock release document (picking

slip) and packing slip

 billing reconciles the shipping notice with the sales invoice

 general ledger reconciles journal vouchers from billing,

inventory control, cash receipts, and accounts receivable

 Automating the Revenue Cycle
 Authorizations and data access can be performed
through computer screens.
 There is a decrease in the amount of paper.
 The manual journals and ledgers are changed to disk
or tape transaction and master files.
 Input is still typically from a hard copy document and
goes through one or more computerized processes.
 Processes store data in electronic files (the tape or
disk) or prepare data in the form of a hardcopy report.
 Automating the Revenue Cycle
 Revenue cycle programs can include:
 formatted screens for collecting data

 edit checks on the data entered

 instructions for processing and storing the

data
 security procedures (passwords or user

IDs)
 steps for generating and displaying output

 To understand files, you must consider the

record design and layout.
 The documents and the files used as input
sources must contain the data necessary to
generate the output reports.
FIGURE 4-15 Batch Sales Order System

Sales Credit Computer Department Warehouse Shipping

Customer Shipping
Credit Notice
File Copy
Copy
Customer Shipping
Order Notice
Check Keystroke Stock Packing Slip
credit Release Stock
Release
Prepare
Sales Sales Order
Order Credit File
Copy Pick Goods Reconcile
and send to Goods and
Cutomer shipping Document,
Order Edit Run sign Shipping
Credit Copy AR Notice, and
Stock Rel File Prepare BOL
Stock
Packing Slip
Release
Shipping Edited SO
Notice Inventory Files Shipping
File Copy File Notice
Customer Direct
Order Access
GL Update BOL File Copy
File
BOL Stock
Packing Release
Management Sales
File Management Slip
Reports Journal BOL

Customer
Customer Customer File
Invoice
 Large-Scale Computer-Based
Accounting Systems
 Two different types of CBAS:
 automation involves using technology to

improve the efficiency and effectiveness

of a task.
 reengineering greatly reduces the cost of

business by identifying and streamlining

tasks. Must rethink business processes and
firm organization.
 Case In Point: Wal-Mart
 At Wal-Mart, whenever a customer makes a
purchase, the information goes directly to the
supplier. Sales are automatically converted
into manufacturing schedules and delivery
instructions.
 Is this automation or re-engineering?
 Case In Point: Wal-Mart
 Directly linking sales and expenditure cycles
 Cut-out wholesale suppliers between
manufacturers and Wal-Mart--saved 20-30%
on retail price
 Requires real-time recording, communications,
and processing
 Criticisms of Large Computer
Systems
 Multiple overlapping systems ?
large number of separate applications in each
functional area, e.g., production, marketing, and
finance (aka “stovepiping”)
 Subset of the process?

Each application captures and processes data about

one aspect of the business events.
no integrated organization-wide view
 Criticisms of Large Computer
Systems
 Data too aggregated?
Data is captured at and stored in too high a level of summarization.
 Only one view per user?
Users are restricted to only one view of the business--the financial
view.
 Processing delays?
Data is not captured or processed in real time, causing significant
and costly delays.
Reengineering Sales Order Processing Using
Real-Time Technology
 Manual procedures and physical documents are
replaced by interactive computer terminals.
 Real time input and output occurs, with some master
files still being updated using batches.
 real-time - entry of customer order, printout of

stock release, packing slip and bill of lading;

update of credit file, inventory file, and open sales
orders file
 batch - printout of invoice, update of closed sales

order (journal), accounts receivable and general

ledger control account
FIGURE 4-17 Real-Time Sales Order System May 2005

Customer Sales Computer Operations Warehouse Shipping

Terminal /
Terminal / Printer
Customer Inventory Printer
Data Subsidiary
Customer Packing
Order Slip
Sales Order
System
Terminal
Reconcile
Stock Release
Goods
with
Open Sales Packing
Order slip and
Prepare
Bill of
Batch Lading
Process

Closed Sales
Orders Terminal /
GL Update and (Journal) Printer
Invoice Billing System

GL Control Stock Release

Accounts PS
BOL
Management
Report Bill of
Lading
Common
Carrier
File
Management

Page 1
 Advantages of Real-Time
Processing
 Shortens the cash cycle of the firm by reducing
the time between the order date and billing date
 Better inventory management which can lead
to a competitive advantage
 Fewer clerical errors, reducing incorrect items
being shipped and bill discrepancies
 Reduces the amount of expensive paper
documents and their storage costs
 Reengineered Cash Receipts
Process
 The mail room is a frequent target for reengineering.
 Companies send their customers preprinted envelopes and
remittance advices.
 Upon receipt, these envelopes are set aside and information on
the envelope is scanned and provides a control procedure
against theft.
 Machines are also available to open the envelopes and scan the
remittance advices and checks and separate the checks.
 Artificial intelligence may be used to read handwriting, such as
remittance amounts and signatures.
FIGURE 4-18 Automated Cash Receipts System May 2005

Mail room Cash Receipts Accounts Receivable Data Processing Controller Office

Customer Cheque Cheque

A B Remittance
Remittance Remittance List
List List

Cheque Data Entry

A B Program
Bank
Remittance
Advice Record
Update
Cash
AR Ledger
Receipt Terminal Terminal
Cash Rec Journal
Reconciles Trans File Vouchers Deposit
Cheque with Remittance List Slip
Deposit Slip
the RA and
Prepares Deposit Slip Remittance
Remittance Advice
Master File
List Deposit Slip Account
Update Run
Receivable

Review
Remittacne List
Cheque Transaction Gen Ledger Clerk Reconciles
Remittance List
Listing of AR Accounts Deposit slip from
Remittance Update bank and Cash
Remittance Transaction
List Receipts
List Listing of AR
Update
Cash Rec
Management Journal
Cheque Report
Remittance File
Advice Bank
File

Management

Page 1
 Point-of-Sale Systems
 Point of sale systems are used extensively in retail
establishments.
 Customers pick the inventory from the shelves and take
them to a cashier.
 The clerk scans the universal product code (UPC).
The POS system is connected to an inventory file,
where the price and description are retrieved.
 The inventory levels are updated and reorder needs can
immediately be detected.
 Point-of-Sale Systems
 The system computes the amount due. Payment is either
cash, check, ATM or credit card in most cases.
 no accounts receivables
 If checks, ATM or credit cards are used, an on-line link to
receive approval is necessary.
 At the end of the day or a cashier’s shift, the money and
receipts in the drawer are reconciled to the internal cash
register tape or a printout from the computer’s database.
 cash over and under must be recorded
 FIGURE 4-20 May 2005

PC Accounting
System Modules

General
Ledger
Module

Sales Inventory
Order Control
Module Module

Cash
Menu-Driven Payroll
Receipts
Control Program Module
Module

Purchases and Cash

Accounts Payable Disbursement
module Module

Page 1
 FIGURE 4-19 Point-of-Sale System May 2005

Customer Sales Department Computer Operations Treasury

A Cash
Credit Card
Credit Voucher
Cash Approval Inventory T
a Reconcile
p Cash with
Credit Card e Register Tape
and Prepare
Deposit Slip
Register Update
Inventory
Reconciliation
and Record Employee
Form
sale

Receipt Sales Cash

Journal Deposit
Credit Card
Credit Card Voucher Slip
Voucher Record Cash T
Credit Card Receipts a
Voucher p
e
T End-of-Day Process
a Batch Cash
p Update Receipts
e Register
Journal
Cash
Reconciliation Enter
Form Cash Deposit
General Deposit Receipts Slip
A Ledger Slip T
a
p
e
Journal
Vouchers Bank
File

Page 1
 Reengineering Using EDI
 EDI helps to expedite transactions.
 The customer’s computer:
 determines that inventory is needed
 selects a supplier with whom the business has a
formal business agreement
 dials the supplier’s computer and places the order
 The exchange is completely automated.
 no human intervention or management
 EDI System
Company A Company B
Application Purchases Sales Order Application
Software System System Software

EDI EDI
Translation Translation
Software Software
Direct Connection
Communications Communications
Software Software

Other
Mailbox

Company VAN Company

A’s mailbox B’s mailbox

Other
Mailbox
 Reengineering Using the Internet
 Typically, no formal business agreements
exist as they do in EDI.
 Most orders are made with credit cards.
 Mainly done with e-mail systems, and thus a
turnaround time is necessary
 Intelligent agents are needed to eliminate this
time lag.
 Security and control over data is a concern
with Internet transactions.
 Control Considerations for
Computer-Based Systems
 Authorization - in real-time systems,
authorizations are automated: programmed
decision rules must be closely monitored
 Segregation of Functions - some
consolidation of tasks by the computer;
protect the computer programs--coding,
processing and maintenance should be
separated
 Control Considerations for
Computer-Based Systems
 Supervision - in POS systems, the cash register’s
internal tape or database is an added form of
supervision
 Access Control - magnetic records are vulnerable
to both authorized and unauthorized exposure and
should be protected
 must have limited file accessibility
 must safeguard and monitor computer programs
 Control Considerations for
Computer-Based Systems
 Accounting Records - rest on reliability and
security of magnetically stored data. The
accountant should be skeptical about accepting
the accuracy of hard-copy printouts of journals
and ledgers.
 Backup is a concern for direct access files, and
the system needs to ensure that backup of all
files is continuously kept.
 PC-Based Accounting Systems
 Used by small firms and some large decentralized firms
 Allow one or few individuals to perform entire accounting
function
 Most systems are divided into modules
 general ledger
 inventory control
 payroll
 cash disbursements
 purchases and accounts payable
 cash receipts
 sales order
 PC Control Issues
 Segregation of Duties - tend to be inadequate and
should be compensated for with increased supervision,
detailed management reports, and frequent independent
verification
 Access Control - access controls to the data stored on
the computer tends to be weak; methods such as
encryption and disk locking devices should be used
 Accounting Records - computer disk failures cause
data losses; external backup methods need to be
implemented to allow data recovery