Revenue cycle sales to cash collections

Accounting Information Systems

Fourteenth Edition

Chapter 12

The Revenue Cycle: Sales to Cash Collections

Copyright © 2018 Pearson Education, Inc. All Rights Reserved

Copyright © 2018 Pearson Education, Inc.

Chapter 12: The Revenue Cycle: Sales to Cash Collections

Slide 1 - ‹#›

If this PowerPoint presentation contains mathematical equations, you may need to check that your computer has the following installed:

1) MathType Plugin

2) Math Player (free versions available)

3) NVDA Reader (free versions available)

1

Learning Objectives (1 of 2)

Describe the basic business activities in the revenue cycle and discuss the general threats to that process and the controls that can be used to mitigate those threats.

Explain the sales order entry process, the key decisions that need to be made, and threats to that process, and describe the controls that can be used to mitigate those threats.

Explain the shipping process, key decisions that need to be made, and threats to that process, and describe the controls that can be used to mitigate those threats.

Copyright © 2018 Pearson Education, Inc.

Chapter 12: The Revenue Cycle: Sales to Cash Collections

Slide 1 - ‹#›

2

Learning Objectives (2 of 2)

Explain the billing process, key decisions that need to be made, and threats to that process, and describe the controls that can be used to mitigate those threats.

Explain the cash collections process, the key decisions that need to be made, and threats to that process, and describe the controls that can be used to mitigate those threats.

Copyright © 2018 Pearson Education, Inc.

Chapter 12: The Revenue Cycle: Sales to Cash Collections

Slide 1 - ‹#›

3

Basic Revenue Cycle Activities

Sales order entry

Shipping

Billing

Cash Collections

Copyright © 2018 Pearson Education, Inc.

Chapter 12: The Revenue Cycle: Sales to Cash Collections

Slide 1 - ‹#›

At each of these four activity stages in the revenue cycle, many specific accounting information items are affected. These informational items may be directly related to the general ledger account, or just be informational only.

It is important to note that the revenue cycle is a transaction cycle from which the organization conducts business with its customers.

General threats to the revenue cycle.

4

The Revenue Cycle

12-5

Copyright © 2018 Pearson Education, Inc.

Chapter 12: The Revenue Cycle: Sales to Cash Collections

Slide 1 - ‹#›

5

General Threats and Controls to Revenue Cycle

Threats

Controls

Inaccurate or invalid master data

Unauthorized disclosure of sensitive information

Loss or destruction of data

Poor performance

1 a. Data processing integrity controls

b. Restrict access to master data

c. Review of all changes to master data

2 a. Access controls

b. Encryption

c. Tokenization of customer personal information

3 a. Backup and disaster recovery procedures

4 a. Managerial reports

Copyright © 2018 Pearson Education, Inc.

Chapter 12: The Revenue Cycle: Sales to Cash Collections

Slide 1 - ‹#›

6

Sales Order Entry Processing Steps

Take the customer order

Source document: sales order

Approve customer credit

Check inventory availability

Respond to customer inquiries

Copyright © 2018 Pearson Education, Inc.

Chapter 12: The Revenue Cycle: Sales to Cash Collections

Slide 1 - ‹#›

Key objective of the sales order processing step is to make sure that the customer sale is legitimate (authorized) and accurate.

Key information collected at this stage is information about the availability of goods, the customer sales order information, and the customers credit information. At this stage, no general ledger accounts (e.g., sales and inventory) are affected.

7

Sales Order Entry

Take order (web, EDI, sales order screen)

Check and approve credit

Existing customers

New customers

Check inventory availability

Back orders

Picking ticket (authorizes inventory to be released to shipping)

12-8

Copyright © 2018 Pearson Education, Inc.

Chapter 12: The Revenue Cycle: Sales to Cash Collections

Slide 1 - ‹#›

8

Sales Order Entry Processing

Threats

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

b. Aging of accounts receivable

4 a. Perpetual inventory system

b. RFID or bar code technology

c. Physical inventory counts

d. Sales forecast and activity reports

Copyright © 2018 Pearson Education, Inc.

Chapter 12: The Revenue Cycle: Sales to Cash Collections

Slide 1 - ‹#›

Controls to mitigate loss of customers include

CRM systems, self-help websites, and proper evaluation of customer service ratings

9

Shipping

Picking and packing the order

JC Penny uses radio communication terminals to inform drivers about next order location.)

RFID tags

Shipping the order

Bill of Lading

Packing slip

12-10

Copyright © 2018 Pearson Education, Inc.

Chapter 12: The Revenue Cycle: Sales to Cash Collections

Slide 1 - ‹#›

10

Shipping Process (1 of 2)

Pick and pack the order

Source documents: picking ticket

Ship the order

Source documents: Packing slip, Bill of lading

Copyright © 2018 Pearson Education, Inc.

Chapter 12: The Revenue Cycle: Sales to Cash Collections

Slide 1 - ‹#›

Key objective is to make sure that the customer order has the correct inventory item and the correct quantity.

At this stage, because inventory is leaving the warehouse, the general ledger account is affected (inventory is decreased once it is shipped). The other side of the entry of course is that cost of sales general ledger account has increased.

At this point, it may be interesting to examine the source documents from the first two stages: sales order, picking list, packing slip, and bill of lading. What information is similar and what informational elements are unique to the source documents?

11

Shipping Process (2 of 2)

Threats

Controls

Picking wrong item or quantity to ship

Theft

Shipping errors (fail to ship the goods, wrong quantities, wrong items, ship to wrong address, duplication)

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

b. Data entry edit controls

Copyright © 2018 Pearson Education, Inc.

Chapter 12: The Revenue Cycle: Sales to Cash Collections

Slide 1 - ‹#›

12

Billing

Invoicing

Bill of lading* defines who has responsibility for goods in transit

Packing slip* is a list of goods shipped (note: will not detect goods not ordered)

* Always include with merchandise shipment to customer

Updating accounts receivable

Remittance list is a list of checks received

12-13

Copyright © 2018 Pearson Education, Inc.

Chapter 12: The Revenue Cycle: Sales to Cash Collections

Slide 1 - ‹#›

13

Billing Process (1 of 2)

Invoicing the customer

Source document: sales invoice

Updating accounts receivable

Source document: credit memo and monthly statements

Copyright © 2018 Pearson Education, Inc.

Chapter 12: The Revenue Cycle: Sales to Cash Collections

Slide 1 - ‹#›

Key objective here is to make sure that the customer is invoiced for items shipped and that the invoice is accurate (customer is billed only for those items ordered and shipped as well as quantity).

14

Billing Process (2 of 2)

Threats

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

c. Data entry edit controls

d. reconciliation of shipping documents to sales orders

3 a. Reconcile subsidiary accounts receivable balance to the amount for accounts receivable in the general ledger

b. Mail monthly statements to customers

4 a. Segregation of authorization and recording function for credit memos

Copyright © 2018 Pearson Education, Inc.

Chapter 12: The Revenue Cycle: Sales to Cash Collections

Slide 1 - ‹#›

15

Cash Collection Process (1 of 2)

Process customer payment and update their account balance

Remittance

Deposit payments to the bank

Copyright © 2018 Pearson Education, Inc.

Chapter 12: The Revenue Cycle: Sales to Cash Collections

Slide 1 - ‹#›

Key objective for this activity is to reduce the risk of theft and to make sure that the customer account is properly updated with the payment.

16

Cash Collection Process (2 of 2)

Threats

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. Immediately open mail, prompt

endorsement and deposit all cash

receipts daily

d. Use cash registers

2 a. Lockbox

b. Discounts for early payment

c. Cash flow budgeting

Copyright © 2018 Pearson Education, Inc.

Chapter 12: The Revenue Cycle: Sales to Cash Collections

Slide 1 - ‹#›

17

Key Terms

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

Open-invoice method

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

Copyright © 2018 Pearson Education, Inc.

Chapter 12: The Revenue Cycle: Sales to Cash Collections

Slide 1 - ‹#›

18

Copyright © 2018 Pearson Education, Inc.

Chapter 12: The Revenue Cycle: Sales to Cash Collections

Slide 1 - ‹#›

19