Accounting Information Systems

The Expenditure Cycle:

Purchasing and Cash Disbursements

Expenditure Cycle:

The expenditure cycle is a recurring set of business activities and related data processing
operations associated with the purchase of and payment for goods and services.
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.

What are the three basic business activities in the expenditure cycle?
 Ordering goods, supplies and services
 Receiving and storing goods, supplies and services
 Paying for goods, supplies and services

1. Ordering Goods, Supplies And Services

 The first major business activity in the expenditure cycle is ordering inventory or
supplies.
a) The traditional inventory control method (often called economic order quantity [EOQ]):
 This approach is based on calculating an optimal order size so as to minimize the sum of
ordering, carrying, and stockout costs.
b) Alternative inventory control methods:
 MRP (material requirement planning)
This approach seeks to reduce required inventory levels by scheduling production, rather
than estimating needs.
 JIT (just in time)
JIT systems attempt to minimize both carrying and stockout costs.
What is a major difference between MRP and JIT?
o MRP systems schedule production to meet estimated sales need, thereby creating a stock
of finished goods inventory.
o JIT systems schedule production to meet customer demands, thereby virtually eliminating
finished goods inventory.

Documents and procedures:

The purchase requisition is a document that identifies the following:
 requisitioner and item number
 specifies the delivery location and date needed
 specifies descriptions, quantity, and price of each item requested
 may suggest a vendor
What is a key decision?
 determine vendor
What factors should be considered?
  price
 quality of materials
 dependability in making deliveries

Documents and procedures:

 The purchase order is a document that formally requests a vendor to sell and deliver
specified products at designated prices.
 It is also a promise to pay and becomes a contract once it is accepted by the vendor.
 Frequently, several purchase orders are generated to fill one purchase requisition.

2. Receiving and Storing Goods, Supplies and Services

 The second major business activity involves the receipt and storage of ordered items.
Key decisions and information needs:
 The receiving department has two major responsibilities:
o Deciding whether to accept a delivery
o Verifying quantity and quality
Documents and procedures:
 The receiving report documents details about each delivery, including the date received,
shipper, vendor, and purchase order number.
 For each item received, it shows the item number, description, unit of measure, and count
of the quantity received.

3. Pay for Goods and Services:

 The third activity entails approving vendor invoices for payments.
o The accounts payable department approves vendor invoices for payment
o The cashier is responsible for making the payment
o The objective of accounts payable is to authorize payment only for goods and services
that were ordered and actually received.
There are two ways to process vendor invoices:
1. Nonvoucher system
2. Voucher system
Processing efficiency can be improved by:
o Requiring suppliers to submit invoices electronically, either by EDI or via the Internet
o Eliminating vendor invoices. This “invoiceless” approach is called evaluated receipt
settlement (ERS).
Pay for Goods: Pay Approved Invoices
 The cashier approves invoices
 The combination of vendor invoice and supporting documentation is called a voucher
package.
 A key decision in the cash disbursement process is determining whether to take advantage
of discounts for prompt payment.

Control: Objectives,
 Another function of a well-designed AIS is to provide adequate controls to ensure that the
following objectives are met:
 Transactions are properly authorized.
 Recorded transactions are valid.
 Valid, authorized transactions are recorded.
 Transactions are recorded accurately.
 Assets (cash, inventory, and data) are safeguarded from loss or theft.
 Business activities are performed efficiently and effectively.

What are some threats?

 stockouts
 purchasing too many or unnecessary goods
 purchasing goods at inflated prices
 purchasing goods of inferior quality
 purchasing from unauthorized vendors
 kickbacks
 receiving unordered goods
 errors in counting goods
 theft of inventory
 failure to take available purchasing discounts
 errors in recording and posting purchases and payments
 loss of data

What are some control procedures?

 inventory control system
 vendor performance analysis
 approved purchase requisitions
 restricted access to blank purchase requisitions
 price list consultation
 budgetary controls
 use of approved vendor lists
 approval of purchase orders
 prenumbered purchase orders
 prohibition of gifts from vendors
 incentives to count all deliveries
 physical access control
 recheck of invoice accuracy
 cancellation of voucher package
Accounting Information System
The Revenue Cycle:
Sales and Cash Collections

Control: Objectives
The second function of a well-designed AIS is to provide adequate controls to ensure that the
following objectives are met:
 Transactions are properly authorized.
 Recorded transactions are valid.
 Valid, authorized transactions are recorded.
 Transactions are recorded accurately.
 Assets (cash, inventory, and data) are safeguarded from loss or theft.
 Business activities are performed efficiently and effectively.

Objectives, continued
 Valid, authorized transactions are recorded.
 Transactions are recorded accurately.
 Assets (cash, inventory, and data) are safeguarded from loss or theft.
 Business activities are performed efficiently and effectively.

Threats and Applicable Control Procedures to Sales Order Entry

 Threat Applicable Control Procedures
1. Incomplete or inaccurate customer orders Data entry edit checks

2. Credit sales to customers with poor credit
3. Legitimacy of orders
Credit approval by credit manager, not by sales
function; accurate records of customer account
balances
Signatures on paper documents; digital
signatures and digital certificates for e-business

4. Stockouts, carrying costs and markdowns Inventory control systems

Threats and Applicable Control Procedures to Shipping

Threat Applicable Controll Procedure

1. Shipping errors: Reconciliation of sales order with picking ticket
 Wrong merchandise and packing slip; bar code scanners; data entry
 Wrong quantities application controls
 Wrong address
2. Theft of inventory Restrict physical access to inventory;
Documentation of all internal transfers of
inventory; periodic physical counts of inventory
and reconciliation of counts of recorded
amounts
 Threat Applicable Control Procedure
1. Failure to bill customers Separation of shipping and billing functions;
Prenumbering of all shipping documents and
periodic reconciliation to invoices;
reconciliation of picking tickets and bills of
lading with sales orders
Billing errors Data entry edit control
Price lists
3. Posting errors in updating accounts Reconciliation of subsidiary accounts
receivable receivable ledger with general ledger; monthly
statements to customers

Threats and Applicable Control Procedures to Billing and Accounts Receivable

Threat and Applicable Control Procedures to Cash Collections

Threat Applicable Control Procedure

1. Theft of Cash Segregation of duties; minimization of cash
handling; lockbox arrangements; prompt
endorsement and deposit of all receipts
Periodic reconciliation of bank statement with
records by someone not involved in cash
receipts processing

General Control Issues

Threat Applicable Control Procedure

1. Loss of Data Backup and disaster recovery procedures;
access controls (physical and logical)
2. Poor Performance Preparation and review of performance reports.
The Conceptual Fixed Asset System

The specific objectives of the fixed asset system are to:

 Process the acquisition of fixed assets as needed and in accordance with formal
management approval and procedures.
 Maintain adequate accounting records of asset acquisition, cost,description, and physical
llocation in the organization.
 Maintain accurate depreciation records for depreciable assets in accordance with
acceptable methods.
 Provide management with information to help plan for future fixed asset investments.
 Properly record the retirement and disposal of fixed asset.

Asset Acquisition
  usually begins with the departmental manager (user) recognizing the need to obtain a new
asset or replace an existing one
 Authorization and approval procedures over the transaction will depend on the asset’s
value.
 Department managers typically have authority to approve purchases below a certain
materiality limit
 Capital expenditures above the limit will require approval from the higher management
levels.
 Once the request is approved and a supplier is selected
 The receiving department delivers the asset into the custody of the user/manager rather
than a central store or warehouse
 The fixed asset department, not inventory control, performs the record-keeping function.
Asset Maintenance
 Asset maintenance involves adjusting the fixed asset subsidiary account balances as the
assets (excluding land) depreciate over time or with usage
 Asset maintenance also involves adjusting asset accounts to reflect the cost of physical
improvements that increase the asset’s value or extend its useful life
 The fixed asset system must promote accountability by keeping track of the physical
location of each asset
 A depreciation schedule shows when and how much depreciation to record.
 It also shows when to stop taking depreciation on fully depreciated assets.
 This information in a management report is also useful for planning asset retirement and
replacement
Asset Disposal
 When an asset has reached the end of its useful life or when management decides to
dispose of it, the asset must be removed from the fixed asset subsidiary ledger
 It begins when the responsible manager issues a request to dispose of the asset. Like any
other transaction, the disposal of an asset requires proper approval
 A disposal report describing the final disposition of the asset is sent to the fixed asset
accounting department to authorize its removal from the ledger

Computer-Based Fixed Asset System

Acquisition Procedures
 The process begins when the fixed asset accounting clerk receives a receiving report and
a cash disbursement voucher.
 These documents provide evidence that the firm has physically received the asset and
show its cost.
 From the computer terminal, a clerk creates a record of the asset in the fixed asset
subsidiary ledger
 Fixed asset status report showing the cost, the accumulated depreciation (if any), and
residual value for each of the firm’s fixed assets
 Based on the depreciation parameters contained in the fixed asset records, the system
prepares a depreciation schedule for each asset when its acquisition is originally recorded
  The schedule is stored on computer disk to permit future depreciation calculations.

Asset Maintenance
 The fixed asset system uses the depreciation schedules to record end-of-period
depreciation transactions automatically
 The specific tasks include
 Calculating the current period’s depreciation,
 Updating the accumulated depreciation and book value fields in the subsidiary records,
and
 Posting the total amount of depreciation to the affected general ledger accounts
(depreciation expense and accumulated depreciation),

Disposal Procedures
 The disposal report formally authorizes the fixed asset department to remove from the
ledger an asset disposed of by the user department
 When the clerk deletes the record from the fixed asset subsidiary ledger, the system
automatically:
 (1) posts an adjusting entry to the fixed asset control account in the general ledger,
 (2) records any loss or gain associated with the disposal,
 A fixed asset status report containing details of the deletion is sent to the fixed asset
department for review.

Controlling the Fixed Asset System

Authorization Controls
 Fixed asset acquisitions should be formal and explicitly authorized. Each transaction
should be initiated by a written request from the user or department.
 In the case of high-value items, there should be an independent approval process that
evaluates the merits of the request on a cost-benefit basis
Supervision Controls
 Because capital assets are widely distributed throughout the organization, they are more
susceptible to theft and misappropriation than inventories that are secured in a warehouse.
 Supervisors must ensure that fixed assets are being used in accordance with the
organization’s policies and business practices
 For example, microcomputers purchased for individual employees should be secured in
their proper location and should not be removed from the premises without explicit
approval.
Supervision Controls
 Company vehicles should be secured in the organization’s motor pool at the end of the
shift and should not be taken home for personal use unless authorized by the appropriate
supervisor