Chapter 12

The Revenue Cycle: Sales to Cash Collections

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Copyright © 2012 Pearson Education

Revenue cycle involves the process and transactions from sales to cash collection.

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 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.

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 The Revenue Cycle

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What you see here is a data flow diagram. The squares are the external entities that
depict the data flowing in and out of a typical revenue cycle system.

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 The Revenue Cycle

 Provides goods and services to customers

 Collects cash in payment for those sales

 Primary Objective:
 Provide the right product
 In the right place
 At the right time for the right price

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The revenue cycle is a recurring set of business activities and related information
processing operations associated with providing goods and services to customers and
collecting cash in payment for those sales.

The revenue cycle’s primary objective is to provide the right product in the right place
at the right time for the right price.

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 Revenue Cycle Activities

1. Sales order entry

2. Shipping

3. Billing

4. Cash collections

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Here are the four basic business activities performed in the revenue cycle:
1. Sales order entry – which the revenue cycle begins with the receipt of orders
from customers. The sales order department which reports to the vice president
of marketing typically performs the sales order entry process.
2. Filling customers orders and shipping the desired merchandise
3. Billing customers and maintaining accounts receivable
4. Cash collection – the cashier who reports to the treasurer who handles customer
remittances and deposits them in the bank

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 General Revenue Cycle Threats

 Inaccurate or invalid master data

 Unauthorized disclosure of sensitive information

 Loss or destruction of master data

 Poor performance

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 General Revenue Cycle Controls

 Data processing integrity controls

 Restriction of access to master data

 Review of all changes to master data

 Access controls

 Encryption

 Backup and disaster recovery procedures

 Managerial reports

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 Sales Order Entry

1. Take order

2. Check and approve credit

3. Check inventory availability

4. Respond to customer
inquiries

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1. Taking the customers’ orders

• Customer orders may be received in many different ways: in store, by mail, by
phone, over a website, or by a salesperson in the field.

2. Checking and approving customers’ credit

• Most business to business sales are made on credit. CREDIT SALES SHOULD BE
APPROVED BEFORE THEIR PROCESS.
• That’s why we get to check and approve the credit for existing customers with
well-established payment histories.
• A formal credit check for each sale is usually unnecessary.
• Instead, the order takers have general authorization so that they could be able to
approve orders from customers in good standing (those without past due
balances).
• While specific authorization for approving credit is used for those that are new
customers or when an order exceeds the customers’ credit limit or when the
customer has outstanding past due balances. This type of authorization should be
made by the credit manager

3. Checking inventory availability

• Determine if there is sufficient inventory available to fill the order so the
customers can be informed of the expected delivery date.
• If sufficient delivery is available to fill the order, the sales order is completed so

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 you get to fill your order slip.
• The shipping, inventory control, and billing departments are notified of the
sale.
• An acknowledgment may be sent to the customer.
• If there is no sufficient inventory on hand to fill the order, a back order for
those items must be created.
• In manufacturing companies, creating a back order involves notifying the
production department, so that they will be able to initiate production
• In retail companies, the purchasing department would be notified about
the need to order (that’s why they need to create the purchase order)

1. Responding to customer inquiries

• This may be handled either by the sales order department or by a separate
customer service department
• Sometimes, these inquiries precede an order and often they occur after
orders have been placed.

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 Sales Order Threats

 Incomplete/inaccurate orders

 Invalid orders

 Uncollectible accounts

 Stockouts or excess inventory

 Loss of customers

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 Sales Order Entry Controls

 Data entry edit controls (see  Perpetual inventory control

Chapter 10) system

 Restriction of access to  Use of bar-codes or RFID

master data
 Training
 Digital signatures or written
signatures  Periodic physical counts of
inventory
 Credit limits
 Sales forecasts and activity
 Specific authorization to reports
approve sales to new
customers or sales that  CRM systems, self-help Web
exceed a customer’s credit sites, and proper evaluation
limit of customer service ratings
 Aging of accounts
receivable

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 Shipping

1. Picking and packing the order

2. Shipping the order

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The second basic activity in the revenue cycle is filling customer orders and shipping the desired
merchandise.
1. Picking and packing the order
• The picking ticket printed by the sales order entry triggers the pick and pack process.
• Warehouse workers use the picking ticket to identify which products and the quantity of
each product to remove from the inventory.
• The inventory is then transferred to the shipping department.
2. Shipping the order
• The shipping department then compares the physical count of the inventory with the
quantities indicated in the picking ticket and the quantities indicated on the copy of the
sales order that was sent directly to shipping from the sales order entry.
• Next is the production of a packing slip and multiple copies of the Bill of Lading (a legal
contract that defines responsibility for the goods in transit so this identifies the carrier
and a source, a destination, and any special shipping instructions and it indicates who
must pay the carrier)
• The packing slip lists the quantity and description of each item included in the shipment
(it could be a copy of a picking list)

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 Shipping Threats

 Picking the wrong items or the wrong quantity

 Theft of inventory

 Shipping errors (delay or failure to ship, wrong quantities,

wrong items, wrong addresses, duplication)

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 Shipping Controls

 Bar-code and RFID  Reconciliation of shipping

technology documents with sales orders,
picking lists, and packing
 Reconciliation of picking lists slips
to sales order details
 Use RFID systems to identify
 Restriction of physical delays
access to inventory
 Data entry via bar-code
 Documentation of all scanners and RFID
inventory transfers
 Data entry edit controls (if
 RFID and bar-code shipping data entered on
technology terminals)

 Periodic physical counts of  Configuration of ERP system

inventory and reconciliation to prevent duplicate
to recorded quantities shipments

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 Billing

1. Invoicing

2. Updating accounts receivable

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In practice, these two functions are performed by two separate functions within the
accounting department.
The basic document created in the billing process is the sales invoice

The 2 basic ways to maintain accounts receivable are:

1. Open invoice method
• This is where customers typically pay according to each invoice
2. Balance forward method
• This is where customers typically pay according to amount shown on a
monthly statement
• A monthly statement is given to these customers rather than by individual
invoices

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 Billing Threats

 Failure to bill

 Billing errors

 Posting errors in accounts receivable

 Inaccurate or invalid credit memos

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 Billing Controls
 Separation of billing and
shipping functions
 Periodic reconciliation of
invoices with sales orders,
picking tickets, and shipping
documents
 Configuration of system to
automatically enter pricing data
 Restriction of access to pricing
master data
 Data entry edit controls
 Reconciliation of shipping
documents (picking tickets, bills
of lading, and packing list) to
sales orders
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 Data entry controls
 Reconciliation of batch totals
 Mailing of monthly statements to
customers
 Reconciliation of subsidiary
accounts to general ledger
 Segregation of duties of credit
memo authorization from both
sales order entry and customer
account maintenance
 Configuration of system to block
credit memos unless there is
either corresponding
documentation of return of
damaged goods or specific
authorization by management
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 Cash Collection Process

1. Process customer payment and update their account

balance
 Remittance

2. Deposit payments to the bank

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The cashier who reports to the treasurer typically handles customer remittances and
deposits them in the bank.

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 Cash Collections Threats

1. Theft of cash

2. Cash flow problems

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 Cash Collection Controls
 Separation of cash handling function from accounts receivable and credit functions

 Regular reconciliation of bank account with recorded amounts by someone

independent of cash collections procedures

 Use of EFT, FEDI, and lockboxes to minimize handling of customer payments by

employees

 Prompt, restrictive endorsement of all customer checks

 Having two people open all mail likely to contain customer payments

 Use of cash registers

 Daily deposit of all cash receipts

 Lockbox arrangements, EFT, or credit cards

 Discounts for prompt payment by customers

 Cash flow budgets

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