Professional Documents
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AIS Lecture
AIS Lecture
Learning Objectives
• Explain the basic business activities and related
information processing operations in the
expenditure cycle.
• Discuss the key decisions to be made in the
expenditure cycle, and identify the information
needed to make those decisions.
• Identify major threats in the expenditure cycle,
and evaluate the adequacy of various control
procedures for dealing with those threats.
Introduction
The expenditure cycle is a
recurring set of business
activities and related
information processing
operations associated with the
purchase of and payment for
goods and services.
Context Diagram of the
Expenditure Cycle
• The focus of discussion is on the acquisition of
raw materials, finished goods, supplies, and
services.
• In the expenditure cycle, the primary external
exchange of information is with
suppliers/vendors.
• Within the organization, information about the
need to purchase goods and materials flows to
the expenditure cycle from the revenue and
production cycles, inventory control, and
various departments.
Introduction
The primary objective in the
expenditure cycle is to minimize
the total cost of acquiring
and maintaining inventories,
supplies, and the various
services the organization needs
to function.
Introduction
To accomplish this objective, management
must make the following key decisions:
• What is the optimal level of inventory and
supplies to carry?
• Which suppliers provide the best quality
and service at the best prices?
• How can the organization consolidate
purchases across units to obtain optimal
prices?
Introduction
• How can information technology (IT) be
used to improve both the efficiency and
accuracy of the inbound logistics function?
• How can the organization maintain
sufficient cash to take advantage of any
discounts suppliers offer?
• How can payments to vendors be
managed to maximize cash flow?
Level 0 Data Flow Diagram:
Expenditure Cycle
The answers to
these questions
guide how an
organization
performs the four
basic expenditure
cycle activities
Expenditure Cycle Information System
• The activities in the expenditure cycle are
mirror images of the basic activities
performed in the revenue cycle.
• That is, the expenditure cycle of the buyer
is the revenue cycle of the seller.
Expenditure Cycle Information System
• The changes in one company’s operations may
necessitate corresponding changes in the
operations of other companies with which it does
business.
• One example of this is Walmart.
• It requires their suppliers to transmit invoices via
electronic data interchange (EDI), or they will not
do business with them.
• Consequently, those suppliers must modify their
accounting information systems to incorporate
the use of EDI.
Expenditure Cycle Process
• Although the inventory control department has
primary responsibility for ensuring an adequate
quantity of materials and supplies, any
department can submit a request to purchase
items.
• Once a purchase request has been approved, the
system searches the inventory master file to
identify the preferred supplier for that item.
• The system then creates a purchase order
document that is mailed to the supplier or via
EDI.
Expenditure Cycle Process
• The receiving department has access to the open
purchase order file so that it can plan for and
verify the validity of deliveries.
• Accounts payable is notified of orders so that it
can plan for pending financial commitments.
• The department that generated the purchase
requisition is also notified that its request has
been approved.
• Major suppliers send electronic notification of
coming deliveries, which enables the company to
plan to have adequate staffing to process
incoming shipments at its warehouses.
Expenditure Cycle Process
• When a shipment arrives, the receiving-dock
workers use the inquiry processing system to
verify that an order is expected from that
supplier.
• Most suppliers bar-code or RFID (radio frequency
identification) tag their products to facilitate the
counting of the goods.
• Receiving-dock workers inspect the goods and use
an online terminal to enter information about the
quantity and condition of items received.
Expenditure Cycle Process
• The system checks that data against the open
purchase order, and any discrepancies are
immediately displayed on the screen so that they
can be resolved.
• The exact time of the delivery is also recorded to
help evaluate supplier performance.
• Upon transfer of the goods to the warehouse, the
inventory clerk verifies the count of the items and
enters that data in the system.
Expenditure Cycle Process
• For suppliers who do not send invoices, the
system automatically schedules a payment
according to the terms agreed upon when the
order was placed.
• Accounts payable clerks enter information from
suppliers who send EDI, and sometimes paper,
invoices.
• The system then compares the supplier invoice
with the information contained in the purchase
order and receiving report to ensure accuracy and
validity.
Expenditure Cycle Process
• For purchases of supplies or services that do not
usually involve purchase orders and receiving
reports, the invoice is sent to the appropriate
supervisor for approval.
• The supplier invoice itself is also checked for
mathematical accuracy.
• The system automatically schedules invoices for
payment by due date.
• Most companies uses batch processing to pay its
suppliers.
Expenditure Cycle Process
• Each day, the treasurer uses the inquiry
processing system to review the invoices that are
due and approves them for payment.
• The company use check payments to smaller
suppliers and FEDI for larger suppliers.
• When an electronic funds transfer (EFT) payment
is authorized or a check is printed, the system
updates the accounts payable, open-invoice, and
general ledger files.
Expenditure Cycle Process
• For each supplier, the totals of all vouchers are
summed, and that amount is subtracted from the
balance field in that supplier’s master file record.
• The relevant purchase orders and receiving
reports are flagged to mark that those
transactions have been paid.
• The invoices that are paid are then deleted from
the open-invoice file.
• A remittance advice is prepared for each supplier,
which lists each invoice being paid and the
amounts of any discounts or allowances taken.
Expenditure Cycle Process
• For purchases of supplies or services that do not
usually involve purchase orders and receiving
reports, the invoice is sent to the appropriate
supervisor for approval.
• The supplier invoice itself is also checked for
mathematical accuracy.
• The system automatically schedules invoices for
payment by due date.
• Most companies uses batch processing to pay its
suppliers.
Expenditure Cycle Process
• Each day, the treasurer uses the inquiry
processing system to review the invoices that are
due and approves them for payment.
• The company use check payments to smaller
suppliers and FEDI for larger suppliers.
• When an electronic funds transfer (EFT) payment
is authorized or a check is printed, the system
updates the accounts payable, open-invoice, and
general ledger files.
• For each supplier, the totals of all vouchers are
summed, and that amount is subtracted from the
balance field in that supplier’s master file record.
Expenditure Cycle Process
• The relevant purchase orders and receiving
reports are flagged to mark that those
transactions have been paid.
• The invoices that are paid are then deleted from
the open-invoice file.
• A remittance advice is prepared for each supplier,
which lists each invoice being paid and the
amounts of any discounts or allowances taken.
• For payments made by EFT, the remittance data
accompany the EFT payment as part of the FEDI
package.
Expenditure Cycle Process
• For payments made by check, the printed
remittance advice accompanies the signed check.
• After all disbursement transactions have been
processed, the system generates a summary
journal entry, debiting accounts payable and
crediting cash, and posts that entry to the general
ledger.
• The cashier reviews checks against the supporting
documents and then signs them.
• Checks above a specified amount also require a
second signature by the treasurer or another
authorized manager.
Expenditure Cycle Process
• The cashier then mails the signed checks and
remittance advices to the suppliers.
• EFT transactions are also performed by the
cashier and reviewed by the treasurer.
• The easy access to up-to-date, accurate
information enables managers to closely monitor
performance.
• However, the quality of decisions depends upon
the accuracy of the information in the database.
General
System Flowchart of the
Expenditure Cycle
•ordering from unapproved suppliers,
•purchasing materials of inferior quality,
Supplier •untimely deliveries,
Master File •sending payments to the wrong address, and
•fraudulent disbursements
Excess • Additional
Inventory carrying cost
Bar coding or RFID
tags
#2
Review and approval of
purchase requisition
Selecting Suppliers
Once the need to purchase has
been identified, the next step is
to select a supplier. Purchasing
agents (sometimes called
buyers) usually perform this
task.
Factors to consider when selecting
suppliers
• Price
• Quality of materials
• Dependability in making
deliveries
Not only prices. . . but also costs
Supplier Audit
Level 1 Data
Flow
Diagram:
Receiving
Segregation of
Periodic inventory
duties: custody and
and reconciliation
receiving
The third main
activity in the
expenditure cycle is
approving supplier
invoices for
payment
Approving Supplier Invoice Process
• The accounts payable department approves
supplier invoices for payment.
• A legal obligation to pay suppliers arises at
the time goods are received.
• When a supplier’s invoice is received, the
accounts payable department is responsible
for matching it with a corresponding
purchase order and receiving report.
• This combination of the supplier invoice and
supporting documentation creates what is
called a voucher package.
Approving Supplier Invoice Process
• Once the approver has verified that the
company received what it had ordered, the
invoice is approved for payment.
• There are two ways to process supplier
invoices, referred to as non-voucher or
voucher systems.
• In a non-voucher system, each approved
invoice (along with the documentation) is
posted to individual supplier records in the
accounts payable file and is then stored in an
open-invoice file.
Approving Supplier Invoice Process
• When a check is written to pay for an invoice,
the voucher package is removed from the
open-invoice file, the invoice is marked paid,
and then the voucher package is stored in the
paid-invoice file.
• In a voucher system, an additional document
called a disbursement voucher is also created
when a supplier invoice is approved for
payment.
Approving Supplier Invoice Process
• The disbursement voucher identifies the
supplier, lists the outstanding invoices, and
indicates the net amount to be paid after
deducting any applicable discounts and
allowances.
#1
Restriction of
Verification of
access to supplier
invoice accuracy
master data
#2
Data entry edit
control
Reconciliation of AP
subsidiary ledger with GL
control account.
The final activity in
the expenditure
cycle is paying
suppliers
Cash Disbursement Process
• The cashier, who reports to the treasurer, is
responsible for paying suppliers.
• This segregates the custody function,
performed by the cashier, from the
authorization and recording functions,
performed by the purchasing and accounts
payable departments, respectively.
• Payments are made when accounts payable
sends the cashier a voucher package.
#1
Filing of invoices
by due date for
discounts
Cash flow
budget
#2
Requiring that all supplier invoices be
matched to supporting documents that
are acknowledged by both receiving and
inventory control
Use of corporate
Requiring receipts
credit cards for
for travel expenses
travel expenses Budgets
#3
Requiring a complete voucher
package for all payments