Revenue Cycle

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.

REVENUE CYCLE, DEFINED

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.

RELATIONSHIP OF REVENUE CYCLE WITH OTHER BUSINESS CYCLES

*With Expenditure and Production Cycle: receives information about sales transactions aiding them to decide on when to start production and purchase inventories

*With Human Resource Cycle: uses information about sales on calculating commissions and bonuses

*With General Ledger and Reporting Function: uses information generated by the Revenue Cycle in preparing financial statements and performance reports

REVENUE CYCLE: IN A NUTSHELL

REVENUE CYCLES BASIC BUSINESS ACTIVITIES

1. Sales Order Entry: performed by the Sales Order Department that typically reports to the VP of Marketing Steps: a. Taking customers order: can be done inside the store, by phone or mail, through the Internet or through a salesperson in field b. Checking and approving customers credit: can be General Authorization (for existing customers) or Specific Authorization (for new customers) c. Checking inventory availability d. Respond to customer inquiries through customer service *Customer Relationship Management: provides data about customer needs and business practices and its goal is RETAIN CUSTOMERS

2. Shipping: includes custody of inventory and related departments report to VP of Manufacturing Steps: a. Picking and packing the order: done by the Warehouse Department b. Shipping the order: done by the Shipping Department

3. Billing and Accounts Receivable Steps: a. Billing customers (Invoicing): summarizes information from the sales order entry and shipping activities *Invoice: notifies the customer of the amount to be paid and where to pay b. Updating accounts receivable: can be done through: - Open Invoice Method: customer pays according to his invoice - Balance Forward Method: customer pays according to his monthly statement * Exception Procedures: ADJUSTMENTS - Returns - Allowances - Write-offs A credit memo is issued by the credit manager to acknowledge the return of goods or to reflect a price reduction if a customer wishes to keep slightly damaged goods.

4. Cash Collections Steps: a. Handling customer remittances b. Deposit remittances in the bank

REVENUE CYCLES KEY DECISIONS

The primary objective of the revenue cycle is to provide the right product at the right place and at the right time for the right price, and it is the companys responsibility to accomplish this primary objective.

Key Decision Questions:

*To what extent can and should products be customized to individual customers needs and desires?

* How much inventory should be carried, and where should that inventory be located?
* How should merchandise be delivered to customers? Should the company perform the shipping function itself or outsource it to a third party that specializes in logistics?

* Should credit be extended to customers? * How much credit should be given to individual customers?

* What credit terms should be offered? * How can customer payments be processed to maximize cash flow?

MAJOR THREATS AND APPLICABLE CONTROL PROCEDURES

*A well-designed Accounting Information System must provide adequate controls.
Ob je c t i v e s 1 . Tr a n s a c t i o n s ar e p rop erly au t h o r ized . 2 . Reco r d ed t r an sact io n s ar e v alid . 3 . V alid , au t h o r ized t r an sact io n s are reco rd ed . 4 . Tr a n s a c t i o n s ar e recorded accu rat ely . P o s s i b l e Th r e a t Tr a n s a c t i o n s w o u l d g o u n a u t h o r i z e d d u e t o frau d o r m ist ak e . Tr a n s a c t i o n s t h a t d i d n o t a c t u a l l y h ap p en are reco rd ed. Tr a n s a c t i o n s t h a t a c t u a l l y o c c u r r e d w ere n ot recorded. Tr a n s a c t i o n s w e r e r e c o r d e d w i t h a w r o n g am o u n t , acco u n t an d in a d if f er en t t im e p er io d o r ch ar ged t o d iffer en t in d iv idu als Th r e a t s i n c l u d e t h e f t , d e s t r u c t i o n a n d m isu se o f dat a. A ct iv it ies m igh t be perform ed in effect iv ely an d in efficien t ly t h r o u gh p o o r m an agem en t . Th e t h r e a t i s n o n -c o m p l i a n c e w i t h law s. D isclo su r es m islead in d iv idu als w h o ar e in t er est ed in t h e f in an cial st at u s o f t h e co m p an y .

5 . A sset s ( cash , in v en t o r y , an d d at a) ar e saf egu ard ed f r o m lo ss or t h eft . 6 . Bu s i n e s s act iv it ies are perform ed efficien t ly an d effect iv ely . 7 . Th e c o m p a n y i s i n c o m p l i a n c e w it h all ex ist in g an d ap p licable law s. 8 . A ll d isclo su r es ar e fu ll an d fair .

*Controls Applicable to Sales Order Entry

Th reat 1. In com p let e or in accu rat e cu st om er orders 2. Credit sales t o cu st om ers w it h p oor credit

A p p licable Con t rol Procedu res Dat a en t ry edit ch eck s Credit ap p rov al by credit m an ager, n ot by sales fu n ct ion ; accu rat e records of cu st om er accou n t balan ces Sign at u res on p ap er docu m en t s; digit al sign at u res an d digit al cert ificat es for e bu sin ess In v en t ory con t rol sy st em s

3. Legit im acy of orders 4. St ock ou t s, carry in g cost s an d m ark dow n s

* Controls Applicable to Shipping

Th r e at 1 . S h ip p in g e r r o r s : Wr o n g m er ch an d is e Wr o n g q u an t it ie s Wr o n g ad d r e s s 2 . Th e f t o f in v e n t o r y A p p lic ab le Co n t r o l P r o c e d u r e s Re c o n c iliat io n o f sale s o r d e r w it h p ic k in g t ic k e t an d p ac k in g slip ; b ar c o d e sc an n e r s ; d at a e n t r y ap p lic at io n c o n t r o ls Re s t r ic t p h y s ical acce s s t o in v en t o r y ; D o cu m e n t at io n o f all in t e r n al t r an s f er s o f in v e n t o r y ; p er io d ic p h y s ic al c o u n t s o f in v e n t o r y an d r e c o n c iliat io n o f c o u n t s o f r e c o r d e d am o u n t s

*Controls Applicable to Billing and Accounts Receivable

Th r e at 1 . Failu r e t o b ill cu st o m e r s A p p lic ab le Co n t r o l P r o c e d u r e s S e p ar at io n o f s h ip p in g an d b illin g fu n ct io n s ; P r e -n u m b er in g o f all s h ip p in g d o cu m en t s an d p e r io d ic r e c o n c iliat io n t o in v o ic e s; r e c o n c iliat io n o f p ick in g t ic k et s an d b ills o f lad in g w it h s ale s o r d e r s D at a e n t r y e d it c o n t r o l ; P r ic e lis t s Re c o n c iliat io n o f su b s id iar y ac c o u n t s r e c e iv ab le le d g e r w it h g en e r al le d g e r ; m o n t h ly s t at e m e n t s t o c u s t o m e r s

2 . Billin g e r r o r s 3 . P o s t in g er r o r s in u p d at in g ac c o u n t s r e c e iv ab le

* Controls Applicable to Cash Collections

Th r eat 1 . Th eft o f Cash

A p p licable Co n t r o l Pr o cedu r es Segr egat io n o f du t ies; m in im izat io n o f cash h an d lin g; lo ck bo x arr an gem en t s; p r o m p t en d o r sem en t an d d ep o sit o f all r eceip t s Per io d ic r econ ciliat io n o f ban k st at em en t w it h r ecor d s by so m eo n e n o t in v o lv ed in cash r eceip t s p r o cessin g

*General Control Issues

Th r eat 1. Lo ss, alt erat io n d isclo su r e o f d at a 2 . Po o r p erfo r m an ce A p p licable Co n t r o l Pr o ced u r es an d Back u p an d d isast er r eco v er y p r o ced u r es; access co n t r o ls ( p h y sical an d lo gical) Pr ep arat io n an d r ev iew o f p erfo rm an ce r ep o r t s

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