Chapter 12 The Revenue Cycle: Sales to Cash Collections 12-1

Chapter 12

The Revenue Cycle: Sales to Cash Collections12-1

INTRODUCTION

The revenue cycle is a recurring set of business activities and related information processing operations associated with: Providing goods and services to customers Collecting their cash payments

The primary external exchange of information is with customers.

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INTRODUCTION

Information about revenue cycle activities flows to other accounting cycles, e.g.: The expenditure(acquisition) and

production(conversion) cycles

• Receive information about sales transactions so they’ll know when to initiate the purchase or production of more inventory.

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INTRODUCTION

Information about revenue cycle activities flows to other accounting cycles, e.g.: The expenditure and production cycles The human resources/payroll cycle

• Uses information about sales to calculate commissions and bonuses.

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INTRODUCTION

Information about revenue cycle activities flows to other accounting cycles, e.g.: The expenditure and production cycles The human resources/payroll cycle The general ledger and reporting function

• Uses information produced by the revenue cycle in preparing financial statements and performance reports.

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The Revenue Cycle

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Revenue Cycle Activities

1. Sales order entry

2. Shipping

3. Billing

4. Cash collections

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Overview of ERP System to Support Revenue Cycle

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General Revenue Cycle Threats/Controls

Inaccurate or invalid master data Controls

Data processing integrity controls Restriction of access to master

data Review of all changes to master

data

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Unauthorized disclosure of sensitive information Controls

Access controls Encryption

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Loss or destruction of master data Controls

Backup and disaster recovery procedures

Poor performance Controls

Managerial reports

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Sales Order Entry

1. Take order

2. Check and approve credit

3. Check inventory availability

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Sales Order Threats/Controls

THREAT NO. 5—Incomplete or inaccurate customer order (Table 12-1) Why is this a problem?

It’s inefficient. The customer has to be re-contacted, and the order has to be re-entered.

Causes customer dissatisfaction and may impact future sales.

Controls Data entry edit controls (see Chapter 10) Restriction of access to master data

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THREAT NO. 6—Orders that are not legitimate Why is this a problem?

You can’t make good credit decisions or collect from a customer you haven’t properly identified.

Traditionally, legitimacy of customer orders is established by receipt of a signed purchase order from the customer.

Digital signatures and digital certificates provide similar control for electronic business transactions.

Online credit card transactions with retail customers are fraught with issues. Authentication issues Repudiation issues

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THREAT NO. 6—Orders that are not legitimate Controls

Digital signatures or written signatures For online credit card transactions(card

holder not present) See next slide

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Some actions companies are taking with online or phone-order retail customers(cardholder not present transactions): Requiring the three-digit code on the back of

the credit card for confirmation that the customer physically possesses the card.

Billing zip code Checking to see if billing address and shipping

address are the same Sending emails to the customer to confirm the

transaction. Verified by Visa/ MasterCard secure

Addresses authentication and non repudiation issue12-16


THREAT NO. 7—Uncollectible accounts (Sales to customers with poor credit) Why is this a problem?

Results in lost assets or revenues.

Controls Credit limits Specific authorization to approve sales to new

customers or sales that exceed a customer’s credit limit

Aging of accounts receivable


THREAT NO. 8—Stockouts, carrying costs, and markdowns Why is this a problem?

If you run out of merchandise, you may lose sales. Can’t sell empty shelf space

If you carry too much merchandise, you incur excess carrying costs and/or have to mark the inventory down to sell it.


THREAT NO. 8—Stockouts, carrying costs, and markdowns Controls

Perpetual inventory control system Use of bar-codes or RFID Training Periodic physical counts of

inventory Sales forecasts and activity reports

Sales Order Threats

THREAT NO. 9—Loss of Customers

Why is this a problem? Rule of thumb: It takes 5 times as

much effort to attract a new customer as it does to retain an existing one.

Controls CRM systems, self-help Web sites,

and proper evaluation of customer service ratings

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Shipping

1. Picking and packing the order

2. Shipping the order

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Shipping Threats/Controls

THREAT NO. 10 & 12—Picking Wrong Items/Quantities, Shipping errors Why is this a problem?

Customer dissatisfaction and lost sales may occur if customers are shipped the wrong items or there are delays because of a wrong address.

Shipping to the wrong address may also result in loss of the assets.

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THREAT NO. 10 & 12—Picking Wrong Items/Quantities, Shipping errors Controls

Bar-code and RFID technology Reconciliation of picking lists to sales order details Reconciliation of shipping documents with sales orders,

picking lists, and packing slips Use RFID systems to identify delays Data entry via bar-code scanners and RFID Data entry edit controls (if shipping data entered on

terminals) Configuration of ERP system to prevent duplicate

shipments

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Shipping Threats

THREAT NO. 11—Theft of Inventory Why is this a problem?

Loss of assets. Inaccurate inventory records (because

thieves don’t generally record the reduction in inventory).

Controls Restriction of physical access to inventory Documentation of all inventory transfers RFID and bar-code technology Periodic physical counts of inventory and

reconciliation to recorded quantities12-24


Additional Threat. —Damage/Lost in transit Why is this a problem?

Added costs Customer dissatisfaction and lost sales

may occur if goods are damaged

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SHIPPING Threats/Controls

A major shipping decision is the choice of delivery methods: Some companies maintain a fleet of trucks. Companies increasingly outsource to

commercial carriers. Reduces costs. Allows company to focus on core business.

Selecting best carrier means collecting and monitoring carrier performance data for: On-time delivery. Condition of merchandise delivered.

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Billing

1. Invoicing

2. Updating accounts receivable

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BILLING

This function performs two basic tasks: Debits customer accounts for the amount

the customer is invoiced. Credits customer accounts for the amount

of customer payments.

Two basic ways to maintain accounts receivable: Open-invoice method Balance forward method

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BILLING

Open-invoice method: Customers pay according to each invoice. Two copies of the invoice are typically sent

to the customer. Customer is asked to return one copy with

payment. This copy is a turnaround document called a

remittance advice. Advantages of open-invoice method:

Conducive to offering early-payment discounts Results in more uniform flow of cash collections

Disadvantages of open-invoice method: More complex to maintain

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BILLING

Balance forward method: Customers pay according to amount on

their monthly statement, rather than by invoice.

Monthly statement lists transactions since the last statement and lists the current balance. The tear-off portion includes pre-printed

information with customer name, account number, and balance

Customers are asked to return the stub, which serves as the remittance advice.

Remittances are applied against the total balance rather than against a specific invoice. 12-30

BILLING

Advantages of balance-forward method: It’s more efficient and reduces costs

because you don’t bill for each individual sale.

It’s more convenient for the customer to make one monthly remittance.

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BILLING

Cycle billing is commonly used with the balance-forward method. Monthly statements are prepared for

subsets of customers at different times. EXAMPLE: Bill customers according to the

following schedule: 1st week of month—Last names beginning with A-F 2nd week of month—Last names beginning with G-M 3rd week of month—Last names beginning with N-S 4th week of month—Last names beginning with T-Z

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BILLING

Advantages of cycle billing: Produces more even cash flow. Produces more even workload. Doesn’t tie up computer for several days to

print statements.

Billing Threats/Controls

Failure to bill

Billing errors

Customer account errors Posting errors in accounts receivable Inaccurate or invalid credit memos

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THREAT NO. 13—Failure to bill customers Why is this a problem?

Loss of assets and revenues. Inaccurate data on sales, inventory, and

accounts receivable. Controls

Separation of billing and shipping functions

Periodic reconciliation of invoices with sales orders, picking tickets, and shipping documents

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THREAT NO. 14—Billing errors Why is this a problem?

Loss of assets if you under-bill. Customer dissatisfaction if you over-bill.

Controls 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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THREAT NO. 15 &16—Errors in maintaining customer accounts/Inaccurate or invalid credit memos Why is this a problem?

Leads to customer dissatisfaction and loss of future sales.

May indicate theft of cash.

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Billing Threats/Controls THREAT NO. 15 &16—Errors in

maintaining customer accounts/Inaccurate or invalid credit memos Controls

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 COLLECTIONS

The final activity in the revenue cycle is collecting cash from customers.

Because cash and checks are highly vulnerable, controls should be in place to discourage theft.

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CASH COLLECTIONS

Possible approaches to collecting cash: Turnaround documents forwarded to

accounts receivable.• The mailroom opens customer envelopes and

forwards to accounts receivable either:– Remittance advices.– Photocopies of remittance advices.– A remittance list prepared in the mailroom.

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CASH COLLECTIONS


accounts receivable. Lockbox arrangements.

• Customers remit payments to a bank P.O. box.

• The bank sends the company:– Remittance advices.– An electronic list of the

remittances.– Copies of the checks.

• Advantages:– Prevents theft by company

employees.– Improves cash flow

management.• Lockboxes may be regional,

which reduces time in the mail.• Checks are deposited

immediately on receipt.• Foreign banks can be utilized

for international customers.

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CASH COLLECTIONS


accounts receivable. Lockbox arrangements. Electronic lockboxes.

• Upon receiving and scanning the checks, the bank immediately sends electronic notification to the company, including:– Customer account number– Amount remitted

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CASH COLLECTIONS


accounts receivable. Lockbox arrangements. Electronic lockboxes. Electronic funds transfer and bill

payment.

• Customers remit payment electronically to the company’s bank.

• Eliminates mailing delays.• Typically done through banking system’s Automated

Clearing House (ACH) network.• PROBLEM: Some banks do not have both EDI and EFT

capabilities, which complicates the task of crediting the customer’s account on a timely basis.

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CASH COLLECTIONS


accounts receivable. Lockbox arrangements. Electronic lockboxes. Electronic funds transfer and bill payment. Financial electronic data interchange

(FEDI).• Integrates EFT with EDI.• Remittance data and funds transfer instructions are sent

simultaneously by the customer.• Requires that both buyer and seller use EDI-capable banks.

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Cash Collections Threats/Controls

THREAT NO. 17—Theft of cash Why is this a problem?

Loss of cash. 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

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Cash Collections Threats/Controls

THREAT NO. 18—cash flow problems Why is this a problem?

Inability to pay bills, buy resources etc. Controls

Lockbox arrangements, EFT, or credit cards

Discounts for prompt payment by customers

Cash flow budgets

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Documents

Chapter 12 The Revenue Cycle: Sales to Cash Collections 12-1