Chapter 4 Revenue Cycle

Chapter 4
The Revenue
Cycle
James A. Hall, Accounting Information Systems, 10th Edition. © 2019

Cengage. All Rights Reserved. May not be scanned, copied or duplicated,
or posted to a publicly accessible website, in whole or in part.
Learning Objectives
• Understand the fundamental tasks performed in the revenue cycle,
regardless of the technology in place.
• Be able to identify the functional departments involved in revenue
cycle activities and trace the flow of revenue transactions through
the organization.
• Be able to specify the documents, journals, and accounts that
provide audit trails, promote the maintenance of historical records,
support internal decision making, and sustain financial reporting.
• Understand the risks associated with the revenue cycle and
recognize the controls that reduce those risks.
• Be aware of the operational and control implications of technology
used to automate and reengineer the revenue cycle.
James A. Hall, Accounting Information Systems, 10th Edition. © 2019 Cengage. All Rights Reserved.
May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 2
The Conceptual System
• Using data flow diagrams (DFDs) you can trace the
sequence of activities through three processes that
constitute the revenue cycle for most retail, wholesale,
and manufacturing organizations.
OVERVIEW OF REVENUE CYCLE
ACTIVITIES
• Sales Order Procedures
• RECEIVE ORDER: Customer orders are documents
indicating the type and quantity of merchandise being
requested. Sales order is a source document that captures
such vital information as the name and address of the
customer making the purchase; the customer’s account
number; the name, number, and description of the product; the
quantities and unit price of the items sold; and other financial
information. The customer order file shows the status of
customer orders.
• CHECK CREDIT: Sales order (credit copy) is a copy of a
sales order sent by the receive-order task to the check-credit
task. It is used to check the creditworthiness of a customer. An
approved sales order contains sales order information for the
sales manager to review once the sales order is approved.
DFD of Sales Order Processing System
Sales Order
ACTIVITIES (continued)
• Sales Order Procedures (continued)
• PICK GOODS: A stock release is a document that identifies
which items of inventory must be located and picked from the
warehouse shelves. A back-order are records that stay on file
until the inventories arrive from the supplier. Back-ordered items
are shipped before new sales are processed. Stock records are
formal accounting records for controlling inventory assets.
• SHIP GOODS: A packing slip is a document that travels with the
goods to the customer to describe the contents of the order. A
shipping notice form is a document that informs the billing
department that the customer’s order has been filled and shipped.
A bill of lading is a formal contract between the seller and the
shipping company that transports the goods to the customer. The
shipping log specifies orders shipped during the period.
Bill of Lading
• BILL CUSTOMER: The sales order (invoice copy) is the copy
of a sales order to be reconciled with the shipping notice. It
describes the products that were actually shipped to the
customer. An S.O. pending file is used to store the sales order
(invoice copy) from the receive-order task until receipt of the
shipping notice. The sales journal is a special journal used for
recording completed sales transactions. The journal voucher
is composed of accounting journal entries into an accounting
system for the purposes of making corrections or adjustments
to the accounting data. For control purposes, all JVs should be
approved by the appropriate designated authority. The journal
voucher file is a compilation of all journal vouchers posted to
the general ledger.
Journal Voucher
• UPDATE INVENTORY RECORDS: The inventory subsidiary
ledger is a ledger with inventory records updated from the
stock release copy by the inventory control system.
• UPDATE ACCOUNTS RECEIVABLE RECORDS: The
accounts receivable (AR) subsidiary ledger is an account
record that shows activity by detail for each account type, and
contains, at minimum: customer name; customer address;
current balance; available credit; transaction dates; invoice
numbers; and credits for payments, returns, and allowances.
The ledger copy is a copy of the sales order received along
with the customer sales invoice by the billing department clerk
from the sales department.
• POST TO GENERAL LEDGER
Inventory Subsidiary Ledger
Accounts Receivable Subsidiary Ledger
• Sales Return Procedures
• PREPARE RETURN SLIP: A return slip is a document
recording the counting and inspect of items returned, prepared
by the receiving department employee.
• PREPARE CREDIT MEMO: A credit memo is a document
used to authorize the customer to receive credit for the
merchandise returned.
• APPROVE CREDIT MEMO: The approved credit memo is
issued when the credit manager evaluates the circumstances
of the return and makes a judgment to grant (or disapprove)
credit.
• UPDATE SALES JOURNAL
• UPDATE INVENTORY AND AR RECORDS
• UPDATE GENERAL LEDGER
DFD Sales Return Procedures
Credit Memo
• Cash Receipts Procedures
• OPEN MAIL AND PREPARE REMITTANCE LIST: The
remittance advice is a source document that contains key
information required to service the customers account. The
remittance list is a cash prelist, where all cash received is
logged.
• RECORD AND DEPOSIT CHECKS: The cash receipts
journals are records that include details of all cash receipts
transactions, including cash sales, miscellaneous cash
receipts, and cash received. A deposit slip is a written
notification accompanying a bank deposit that specifies and
categorizes the funds (such as checks, bills, and coins) being
deposited.
• UPDATE ACCOUNTS RECEIVABLE RECORDS
• Cash Receipts Procedures (continued)
• UPDATE GENERAL LEDGER
• RECONCILE CASH RECEIPTS AND DEPOSITS: A clerk from
the controller’s office (or an employee not involved with cash
receipts procedures) reconciles cash receipts by comparing (1)
a copy of the prelist, (2) deposit slips, and (3) related journal
vouchers.
DFD of Cash Receipts Procedure
Remittance Advice
Cash Receipts Journal
Physical Systems
• Physical accounting information systems are a
combination of computer technology and human activity.
• As a general rule, smaller businesses tend to rely less on
technology and more on manual procedures, whereas
larger companies tend to employ advanced technologies.
• Point-of-sale (POS) systems are revenue systems in
which no customer accounts receivable are maintained
and inventory is kept on the store’s shelves, not in a
separate warehouse.
BASIC TECHNOLOGY REVENUE CYCLE
• The computers used in these systems are independent

(nonnetworked) personal computers (PCs).
• In addition, in such systems, maintaining physical files of
source documents is critical to the audit trail.
BASIC TECHNOLOGY SALES ORDER
PROCESSING SYSTEM
• Sales Department
• Credit Department Approval
• Warehouse Procedures
• The Shipping Department
• The Billing Department
• Accounts Receivable, Inventory Control, and General
Ledger Departments
Basic Technology Sales Order Processing System
Basic Technology Sales Order Processing System
(continued)
Structures for AR and Inventory Subsidiary Files
BASIC TECHNOLOGY CASH RECEIPTS
SYSTEM
• Mail Room
• Cash Receipts
• Accounts Receivable
• General Ledger Department
• Controller’s Office
Basic Technology Cash Receipts System
ADVANCED TECHNOLOGY REVENUE
CYCLE
• Advanced technologies allow systems designers to
integrate accounting and other business functions through
a common information system.
• The objective of integration is to improve operational
performance and reduce costs by identifying and
eliminating nonvalue-added tasks.
INTEGRATED SALES ORDER
PROCESSING SYSTEM
• Sales Procedures
• The process begins with sales clerks receiving customer
orders, which may be hard-copy documents or may be
received via e-mail, fax, or phone.
• Using a computer terminal connected to a central sales order
system, the clerk enters the sales order.
Integrated Sales Order System
INTEGRATED CASH RECEIPTS SYSTEM
• Mail Room
• Cash Receipts Department
• Automatic Data Processing Procedures
• Controller’s Office
Integrated Cash Receipts System
REVENUE CYCLE RISKS AND INTERNAL
CONTROLS
• Risk of Selling to Un-Creditworthy Customers
• Physical Controls
• TRANSACTION AUTHORIZATION
• SEGREGATION OF DUTIES
• IT Controls
• AUTOMATED CREDIT CHECKING
CONTROLS (continued)
• Risk of Shipping Customers Incorrect Items or Quantities
• INDEPENDENT VERIFICATION
• IT Controls
• SCANNER TECHNOLOGY
• AUTOMATED INVENTORY ORDERING
• Risk of Inaccurately Recording Transactions in Journals
and Accounts
• ACCOUNTING RECORDS
• Prenumbered documents are documents (sales orders,
shipping notices, remittance advices, and so on) sequentially
numbered by the printer that allow every transaction to be
identified uniquely.
• SPECIAL JOURNALS
• SUBSIDIARY LEDGERS
• GENERAL LEDGERS
• FILES
• INDEPENDENT VERIFICATION
• Risk of Inaccurately Recording Transactions in Journals
and Accounts (continued)
• IT Controls
• DATA INPUT EDITS
• AUTOMATED POSTING TO SUBSIDIARY AND GL
ACCOUNTS
• FILE BACKUP
• Risk of Misappropriation of Cash Receipts and Inventory
• SUPERVISION
• ACCESS CONTROLS
• IT Controls
• MULTILEVEL SECURITY
• Risk of Unauthorized Access to Accounting Records and
Reports
• ACCESS CONTROLS
• IT Controls
• PASSWORDS.
• MULTILEVEL SECURITY: Multilevel security employs
programmed techniques that permit simultaneous access to a
central system by many users with different access privileges
but prevent them from obtaining information for which they lack
authorization.
• Risk of Unauthorized Access to Accounting Records and
Reports (continued)
• IT Controls (continued)
• MULTILEVEL SECURITY (continued): The access control list
(ACL) is a list containing information that defines the access
privileges for all valid users of the resource. An access control
list assigned to each resource controls access to system
resources such as directories, files, programs, and printers.
The role-based access control (RBAC) is a formal technique
for grouping users according to the system resources they
require to perform their assigned tasks. A role is a formal
technique for grouping users according to the system
resources they require to perform their assigned tasks.
Summary of Revenue Cycle Risks and Controls
POINT-OF-SALE (POS) SYSTEMS
• POS systems are used extensively in grocery stores,
department stores, and other types of retail organizations.
• Inventory is kept on the store’s shelves, not in a separate
warehouse.
Point of Sale System
DAILY PROCEDURES
• The Universal Product Code (UPC) is a label containing
price information (and other data) that is attached to items
purchased in a point-of-sale system.
• When all the UPCs are scanned, the system automatically
calculates taxes, discounts, and the total for the
transaction.
• The clerk enters the transaction into the POS system via
the register’s keypad, and a record of the sale is added to
the sales journal in real time.
• At the end of the clerk’s shift, a supervisor unlocks the
register and retrieves the internal tape.
END-OF-DAY PROCEDURES
• At the end of the day, the cash receipts clerk prepares a
three-part deposit slip for the total amount of the cash
received.
• One copy is filed and the other two accompany the cash
to the bank.
• Because cash is involved, armed guards are often used to
escort the funds to the bank repository.
POINT-OF-SALE CONTROL ISSUES
• Authorization
• Supervision
• Access Control
• Accounting Records
• Independent Verification
REENGINEERING USING EDI
• Doing Business via EDI
• Electronic data interchange (EDI) is the intercompany
exchange of computer-processable business information in
standard format.
• EDI is more than just a technology.
• EDI poses unique control problems for organizations.
REENGINEERING USING THE INTERNET
• Doing Business on the Internet

• Thousands of organizations worldwide have home pages on
the Internet to promote their products and solicit sales.
• Typically, Internet sales are credit card transactions that are
sent to the seller’s e-mail file.
• Unlike EDI, which is exclusively a B2B arrangement between
trading partners, Internet sales are both B2B and business-to-
consumer (B2C) transactions.
• Connecting to the Internet exposes the organization to threats
from computer hackers, viruses, and transaction fraud.
• Most organizations take these threats seriously and implement
controls, including password techniques, message encryption,
and firewalls, to minimize their risk.
Appendix – Sales Return System
• Receiving Department
• Sales Department
• Processing the Credit Memo
Basic Technology Sales Returns System
Appendix - Legacy Systems
• Batch Processing Using Sequential Files
• DATA ENTRY
• EDIT RUN
• SORT RUN
• AR UPDATE AND BILLING RUN
• SORT AND INVENTORY UPDATE RUNS
• GENERAL LEDGER UPDATE RUN
• Batch Processing Using Direct Access Files
• KEYSTROKE
• EDIT RUN
• FILE UPDATE RUN
Batch Processing with Sequential Files
Update of Accounts Receivable from Sales
Orders
Update of Inventory from Sales Orders
Batch Sales Order System
Direct Access Update for AR and Inventory
Files Concurrently

Chapter 4 Revenue Cycle

Uploaded by

Copyright:

Available Formats

You might also like

Chapter 4 Revenue Cycle

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chapter 4 Revenue Cycle

Uploaded by

Copyright:

Available Formats

Chapter 4

James A. Hall, Accounting Information Systems, 10th Edition. © 2019

• The computers used in these systems are independent

• Doing Business on the Internet

You might also like