Chapter 6 - Revenue Cycle
Chapter 6 - Revenue Cycle
Chapter 6 - Revenue Cycle
Cash Collections
Chapter 6
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Learning Objectives
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INTRODUCTION
• The revenue cycle is a recurring set of
business activities and related information
processing operations associated with:
▫ Providing goods and services to customers
▫ Collecting their cash payments
• The primary external exchange of information
is with customers.
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Level 0 Data
Flow
Diagram:
Revenue
Cycle
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General Revenue Cycle Threats & Controls
Threats Controls
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1. SALES ORDER ENTRY
• Sales order entry is performed by the sales
department.
• The sales department typically reports to the VP
(Vice President) of Marketing.
• Steps in the sales order entry process include:
▫ Take the customer’s order
▫ Check the customer’s credit
▫ Check inventory availability
▫ Respond to customer inquiries (may be done by
customer service or sales order entry)
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Sales Order Entry Processing Steps
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SALES ORDER ENTRY
• How IT can improve efficiency and
effectiveness:
▫ Have customers enter data themselves (OCR,
webpages, etc.)
▫ Electronic data interchange (EDI) can be used to
link a company directly with its customers to
receive orders or even manage the customer’s
inventory.
▫ Use sales history information to create
marketing messages tailored to the individual
customer
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1.1 TAKE ORDER
▫ Orders entered online can be routed directly to
the warehouse for picking and shipping.
▫ Use interactive sales Order entry systems that
allow Customer to customize product orders.
▫ Email and instant messaging are used to notify
sales staff of price changes and promotions.
▫ Laptops and handheld devices can equip sales
staff with presentations, prices, marketing and
technical data, etc.
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1.2 CREDIT APPROVAL
• Credit sales should be approved before the order
is processed any further.
• There are two types of credit authorization:
▫ General authorization
▫ Specific authorization
• How can IT improve the credit check process?
▫ Automatic checking of credit limits and balances
▫ Emails or IMs to the credit manager for accounts
needing specific authorization
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1.3 CHECKING INVENTORY AVAILABILITY
• When the order has been received and the
customer’s credit approved, the next step is to
ensure there is sufficient inventory to fill the
order and advise the customer of the delivery
date.
• The sales order clerk can usually reference a
screen displaying:
▫ Quantity on hand
▫ Quantity already committed to others customer
▫ Quantity available
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CHECKING INVENTORY AVAILABILITY
• If there are enough units to fill the order:
▫ Complete the sales order
▫ Update the quantity available field in the
inventory file
▫ Notify the following departments of the sale:
Inventory (picking ticket)
Billing
Shipping
▫ Send an acknowledgment to the customer
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CHECKING INVENTORY AVAILABILITY
• If there’s not enough to fill the order,
initiate a back order.
▫ For manufacturing companies, notify the
production department that more should be
manufactured.
▫ For retail companies, notify purchasing that
more should be purchased.
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RESPONDING TO CUSTOMER INQUIRIES
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Sales Order Entry Processing
Threats Controls
5 a. Data entry edit controls
b. Restrict access to master data
5. Incomplete/
6 a. Digital or written signatures
inaccurate orders
6. Invalid orders 7 a. Credit limits checked and if sale exceeds
7. Uncollectible accounts limit, specific authorization needed
8. Stock outs and excess 7b. Aging of accounts receivable
inventory
8 a. Perpetual inventory system
9. Loss of customers
b. RFID or bar code technology
c. Training
d. Physical inventory counts
e. Sales forecasts and activity reports
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Shipping Process
• Pick and pack
the order
▫ Source
documents:
picking ticket
• Ship the order
▫ Source
documents:
Packing slip,
Bill of lading
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PICK AND PACK THE ORDER
• Technology can speed the movement of inventory
and improve the accuracy of perpetual inventory
records:
▫ Bar code scanners
▫ Conveyer belts
▫ Wireless technology so workers can receive instructions
without returning to dispatch
▫ Radio frequency identification (RFID) tags:
Eliminate the need to align goods with scanner
Allow inventory to be tracked as it moves through warehouse
Can store up to 128 bytes of data
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2.2 SHIP THE ORDER
• The shipping department compares the
following quantities:
▫ Physical count of inventory
▫ Quantities indicated on picking ticket
▫ Quantities on sales order
• Discrepancies can arise if:
▫ Items weren’t stored in the location indicated
▫ Perpetual inventory records were inaccurate
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SHIP THE ORDER
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SHIP THE ORDER
• The shipment is accompanied by:
▫ The packing slip
▫ A copy of the bill of lading
▫ The freight bill
(Sometimes bill of lading doubles as freight bill)
• What happens to other copies of the bill of
lading?
▫ One is kept in shipping to track and confirm
delivery
▫ One is sent to billing to trigger an invoice
▫ One is retained by the freight carrier
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Shipping Process
Threats Controls
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3. Billing Process
• Invoicing the
customer
▫ Source document:
sales invoice
• Updating accounts
receivable
▫ Source document:
credit memo and
monthly
statements
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BILLING
• Accurate and timely billing is crucial.
• Billing is an information processing activity
that repackages and summarizes information
from the sales order entry and shipping
activities
• Requires information from:
▫ Shipping Department on items and quantities
shipped
▫ Sales on prices and other sales terms (discounts,
etc)
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3.1INVOICING
• The basic document created is the sales
invoice. The invoice notifies the customer
of:
▫ The amount to be paid
▫ Where to send payment
• Invoices may be sent/received:
▫ In paper form
▫ By EDI
Common for larger companies
Faster and cheaper than snail mail
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INVOICING
• When buyer and seller have accurate online
systems:
▫ Invoicing process may be skipped
Seller sends an email when goods are shipped
Buyer sends acknowledgment when goods are received
Buyer automatically remits payments within a specified
number of days after receiving the goods
▫ Can produce substantial cost savings
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3.2 MAINTAIN ACCOUNTS RECEIVABLE
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MAINTAIN ACCOUNTS RECEIVABLE
• Image processing can improve the efficiency and
effectiveness of managing customer accounts.
▫ Digital images of customer remittances and accounts
are stored electronically
• Advantages:
▫ Fast, easy retrieval
▫ Copy of document can be instantly transmitted to
customer or others
▫ Multiple people can view document at once
▫ Drastically reduces document storage space
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MAINTAIN ACCOUNTS RECEIVABLE
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MAINTAIN ACCOUNTS RECEIVABLE
• If there’s a return, the credit manager:
▫ Receives confirmation from the receiving dock
that the goods were actually returned to
inventory
▫ Then issues a credit memo which authorizes
the crediting of the customer’s account
• If goods are slightly damaged, the
customer may agree to keep them for a
price reduction
▫ Credit manager issues a credit memo to
reflect that reduction
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MAINTAIN ACCOUNTS RECEIVABLE
• Distribution of credit memos:
▫ One copy to accounts receivable to adjust the
customer account
▫ One copy to the customer
• If repeated attempts to collect payment
fail, the credit manager may issue a credit
memo to write off an account:
▫ A copy will not be sent to the customer
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Billing Process
Threats Controls
1. Failure to bill customer 1 a. Reconcile invoices with sales
orders and
2. Billing errors shipping documents
3. Posting errors in accounts b. Separate shipping and billing
functions
receivable 2 a. Data entry edit controls
4. Inaccurate or invalid credit b. Configure system for automatically
memos 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
recording function for credit
memos
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4. CASH COLLECTIONS
• The final activity in the revenue cycle is
collecting cash from customers
• The cashier, who reports to the treasurer,
handles customer remittances and deposits
them in the bank
• Because cash and checks are highly
vulnerable, controls should be in place to
discourage theft
▫ Accounts receivable personnel should not have
access to cash (including checks)
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Cash Collection Process
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CASH COLLECTIONS
• Possible approaches to collecting cash:
▫ Turnaround documents forwarded to accounts
receivable
▫ Lockbox arrangements
▫ Electronic lockboxes
▫ Electronic funds transfer (EFT)
▫ Financial electronic data interchange (FEDI)
▫ Accept credit cards or procurement cards from
customers
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Cash Collection Process
Threats 17. Theft of cash
Control 17 a. Proper segregation of cash handling and
posting to customer accounts, authorize
credit memos, or reconcile bank account
b. Use of EFT, FEDI, and lockboxes to minimize handling
of customer payments by employees
c. Obtain and use a UPIC to receive EFT and FEDI
payments from customers.
d. Immediately upon opening mail, create list of all
customer payments received
e. Prompt, restrictive endorsement of all customer checks
f. Having two people open all mail likely to contain
customer payments
g. Use of cash registers
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h. Daily deposit of all cash receipts
Cash Collection Process
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Key Terms
• Remittance advice
• Revenue cycle
• Sales order • Balance-forward method
• Electronic data interchange • Monthly statement
(EDI) • Cycle billing
• Credit limit
• Credit memo
• Accounts receivable aging report
• Back order • Remittance list
• Picking ticket • Lockbox
• Customer relationship • Electronic lockbox
management systems (CRM) • Electronic funds transfer (EFT)
• Packing slip • Financial electronic data
• Bill of lading interchange (FEDI)
• Sales invoice
• Universal payment
• Open-invoice method
identification code (UPIC)
• Cash flow budget
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Copyright © 2015 Pearson
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