The Revenue Cycle: Sales to Cash Collections

1. The Revenue Cycle: Sales to Cash Collections Chapter 12

2. Learning Objectives Describe the basic business activities and related information processing operations performed in the revenue cycle. Discuss the key decisions that need to be made in the revenue cycle, and identify the information needed to make those decisions. Identify major threats in the revenue cycle, and evaluate the adequacy of various control procedures for dealing with those threats.

3. Basic Revenue Cycle Activities Sales order entry Shipping Billing Cash Collections

4. Sales Order Entry Processing Steps • Take the customer order • Source document: sales order • Approve customer credit • Check inventory availability • Respond to customer inquiries

5. 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 4 a. Perpetual inventory system b. RFID or bar code technology c. Physical inventory counts

6. Shipping Process • Pick and pack the order • Source documents: picking ticket • Ship the order • Source documents: Packing slip, Bill of lading

7. Shipping Process Threats Controls • Picking wrong item or quantity to ship • Theft • Fail to ship the goods • Ship to wrong address 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 4 a. Data entry edit controls

8. Billing Process • Invoicing the customer • Source document: sales invoice • Updating accounts receivable • Source document: credit memo and monthly statements

9. Billing Process 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 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

10. Cash Collection Process • Process customer payment and update their account balance • Remittance • Deposit payments to the bank

11. Cash Collection Process 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. Deposit all cash receipts daily 2 a. Lockbox b. Discounts for early payment c. Cash flow budgeting

12. 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