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The Expenditure Cycle: Purchasing and Cash Disbursements

The Expenditure Cycle: Purchasing and Cash Disbursements. 12. UAA – ACCT 316 – Fall 2002 Accounting Information Systems Dr. Fred Barbee. Chapter. The Primary Objective. Main Objective.

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The Expenditure Cycle: Purchasing and Cash Disbursements

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  1. The Expenditure Cycle: Purchasing and Cash Disbursements 12 UAA – ACCT 316 – Fall 2002 Accounting Information Systems Dr. Fred Barbee Chapter

  2. The Primary Objective

  3. Main Objective • The primary objective of the expenditure cycle is to minimize the total cost of acquiring and maintaining inventories, supplies, and the various services necessary for the organization to function.

  4. Key Decisions of the Cycle

  5. 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?

  6. Key Decisions • Where should inventories and supplies be held? • How can the organization consolidate purchases across units to obtain optimal prices?

  7. Key Decisions • How can information technology be used to improve both the efficiency and accuracy of the inbound logistics function?

  8. Key Decisions • Is sufficient cash available to take advantage of any discounts suppliers offer? • How can payments to vendors be managed to maximize cash flow?

  9. The Expenditure Cycle – Defined

  10. Defined • The expenditure cycle is a recurring set of business and related information processing operations associated with the purchase of and payment for goods and services.

  11. The first function of a well-designed AIS is to support the effective performance of the organization’s business activities.

  12. The Expenditure Cycle – Business Activities

  13. Business Activities • Order Goods • Receive and Store Goods • Pay for Goods

  14. Business Activities – Up Close and Personal

  15. 1.0 Order Goods

  16. Order Goods (Activity 1) • The first major business activity in the expenditure cycle involves ordering inventory or supplies.

  17. Order Goods (Activity 1) • What to purchase? • When to purchase? • How much to purchase? • From what supplier?

  18. Order Goods (Activity 1) • Inventory control methods: • EOQ • MRP • JIT

  19. What is the major difference between MRP and JIT?

  20. MRP Systems • Schedule production to meet estimated sales need, thereby creating a stock of finished goods inventory.

  21. JIT Systems • Schedule production to meet customer demands, thereby virtually eliminating finished goods inventory.

  22. Documents and Procedures

  23. Order Goods • What is a key decision? • determine vendor • What factors should be considered? • price • quality of materials • dependability in making deliveries

  24. 2.0 Receive and Store Goods

  25. Receive and Store Goods • The receiving department has two major responsibilities: • Deciding whether to accept a delivery • Verifying quantity and quality

  26. 3.0 Pay for Goods

  27. Pay for Goods • The objective of accounts payable is to authorize payment only for goods and services that were ordered and actually received.

  28. Key Decisions and Information Needs

  29. The third function of a well-designed AIS is to provide useful information for decision making.

  30. Key Decisions • Determine when and how much additional inventory to order. • Select the appropriate vendors from whom to order. • Verify the accuracy of vendor invoices.

  31. Key Decisions • Decide whether purchase discounts should be taken. • Monitor cash flow needs to pay outstanding obligations.

  32. Other Information Needed • Efficiency and effectiveness of the purchasing department • Analyses of vendor performance such as on-time delivery, quality, etc.

  33. Other Information Needed • Time taken to move goods from the receiving dock into production • Percentage of purchase discounts taken

  34. Control Objectives, Threats, and Procedures

  35. The second function of a well-designed AIS is to provide adequate controls to ensure the firm meets its objectives.

  36. Control Objectives • Transactions are properly authorized. • Recorded transactions are valid. • Valid, authorized transactions are recorded. • Transactions are recorded accurately.

  37. Control Objectives • Assets (cash, inventory, and data) are safeguarded from loss or theft. • Business activities are performed efficiently and effectively.

  38. Threats to the Expenditure Cycle

  39. Threats • Stockouts • Purchasing too many or unnecessary goods • Purchasing goods at inflated prices • Purchasing goods of inferior quality

  40. Threats • Purchasing from unauthorized vendors • Kickbacks • Receiving unordered goods • Errors in counting goods

  41. Threats • Theft of inventory • Failure to take available purchasing discounts • Errors in recording and posting purchases and payments • Loss of data

  42. Expenditure Cycle Exposures

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