The Expenditure Cycle: Purchasing to Cash Disbursements

1. The Expenditure Cycle: Purchasing to Cash Disbursements Chapter 13

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

3. Basic Expenditure Cycle Activities Order materials, supplies, and services Receive materials, supplies, and services Approve supplier (vendor) invoice Cash disbursement

4. Order Goods (Materials/Supplies) or Services Processing Steps • Identify what, when, and how much to purchase • Source document: purchase requisition • Choose a supplier • Source document: purchase order

5. Ordering Goods/Services Threats Controls • Stockouts and excess inventory • Purchasing items not needed • Purchasing items at inflated prices • Purchasing goods of poor quality • Unreliable suppliers • Purchasing from unauthorized suppliers • Kickbacks 1 a. Perpetual inventory system b. Bar-coding, RFID 2 a. Review and approval of purchase requisitions 3 a. Price lists b. Competitive bids 4 a. Use approved suppliers 5 a. Monitor supplier performance b. Require quality certification 6 a. Purchase from approved suppliers 7 a. Supplier audits b. Prohibit gifts

6. Receiving Process • Goods arrive • Verify goods ordered against the purchase order (what, how much, quality) • Source document: receiving report

7. Receiving Goods or Services Threats Controls • Accepting unordered items • Mistakes in counting • Verifying receipt of services • Inventory theft 1 a. Authorized purchase orders needed before receiving goods 2 a. Bar codes or RFID 3 a. Budget controls and audits 4 a. Restrict physical access to inventory b. Document all inventory transfers c. Segregate custody vs. receiving of inventory

8. Approve Supplier Invoice and Cash Disbursements • Match the supplier invoice to: • Purchase order • Receiving report supplier invoice + purchase order + receiving report = voucher • Approve supplier invoice for payment • Source document: disbursement voucher • Pay vendor

9. Approve Supplier Invoice Threats Control • Errors in supplier invoice • Mistakes in posting to accounts payable 1 a. Verify invoice accuracy 2 a. Data entry edit controls b. Reconcile detailed accounts payable records to the general ledger accounts payable account

10. Cash Disbursements Threats Controls • Failure to take discounts • Pay for items not received • Duplicate payments • Theft of cash • Check alteration • Cash flow problems 1 a. File invoices by due date to take advantage of discounts 2 a. Match supplier invoice to supporting documents (purchase order, receiving report) 3 a. Pay only original invoices b. Cancel supporting document when payment is made 4 a. Physical security of checks b. Separation of duties c. Reconcile bank accounts 5 a. Check Protection machines 6 a. Cash flow budget

11. Key Terms • Expenditure cycle • Economic order quantity (EOQ) • Reorder point • Materials requirement planning (MRP) • Just-in-time (JIT) inventory system • Purchase requisition • Purchase order • Blanket purchase order • Vendor-managed inventory • Kickbacks • Receiving report • Debit memo • Voucher package • Nonvoucher system • Voucher system • Disbursement voucher • Evaluated receipt settlement (ERS) • Procurement card • Imprest fund