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Accounting Information Systems:
Essential Concepts and Applications
Fourth Edition by Wilkinson, Cerullo, Raval,
and Wong-On-Wing
Chapter 12: The Revenue
Cycle
Slides Authored by Somnath Bhattacharya, Ph.D. Florida Atlantic University
Introduction
Revenue Cycles tend to be similar for all types of firms.
Two subsystems perform the processing steps within the revenue cycle:
The Sales Processing System
The Cash Receipts Processing System
Objectives of the Revenue
Cycle
To record sales orders promptly and accurately
To verify that the customers are worthy of credit
To ship the products or perform the services by agreed dates
To bill for products or services in a timely and an accurate manner
To record and classify cash receipts promptly and accurately
To post sales and cash receipts to proper customers’ accounts in the accounts receivable ledger
To safeguard products until shipped
To safeguard cash until deposited
Marketing/Distribution
Marketing Management has the objectives of
Determining and satisfying the needs of customers
Generating sufficient revenue to cover costs and expenses
Replacing assets
Providing an adequate return on investment
Finance/Accounting
With respect to the Revenue Cycle, the objectives are limited to
Cash Planning and Control
Data pertaining to sales and customer accounts
Inventory control
Information pertaining to cash, sales, and customers
Input Documents Pertaining to
the Revenue Cycle
Customer Order
Sales Order
Order Acknowledgement
Picking List
Packing Slip
Bill of Lading
Shipping Notice
Sales Invoice
Remittance Advice
Deposit Slip
Back Order
Credit Memo
Credit Application
Salesperson Call Report
Delinquent Notice
Write-off Notice
Cash Register Receipts
Figure 12-2
DFD of a Sales & Receivables
Processing System
Credit Data
Customer Data
Order Data Inventory Data
Shipping Data
Inventory Data
Order Data
Sales Data
Pricing Data
Sales History
Receivables Data
Customer Data
General Ledger Account Data
Customer 1.0
Receive &
Enter Sales
Order 2.0
Ship
Goods to
Customers 3.0
Bill
Customer
4.0
Prepare
Accounting
Analyses &
Reports
Customer
Accountants &
Managers
Figure 12-5. See
Textbook for details
Credit Sales Processing
System
Order Entry Customer Order Picking List
Shipping Bill of Lading
Billing Preparing Analyses & Reports Invoice Register Accounts Receivable Summary
Handling Sales Returns & Allowances Credit Memos
Processing Back Orders
Cash Receipts Processing
System
Remittance Entry Remittance List Lockbox
Depositing Receipts Deposit Slips Cash Receipts Transaction Listing
Posting Receipts Balance Forward Method Open Invoice Method
Preparing Analyses & Reports Collecting Delinquent Accounts Write-off Notice
Web-Based Systems
Electronic commerce
Larger customer base
Quicker processing of transactions
Less paperwork
Greater efficiency & productivity
Self-service
AICPA’s Web-Trust and competing services
Information Output
Operational Listings & Reports
Inquiry Display Screens
Scheduled Managerial Reports
Demand Managerial Reports
Operational Listings and
Reports
Monthly statement
Open orders report
Sales Invoice register
Shipping register
Cash receipts journal
Credit memo register
Scheduled Managerial
Reports
Accounts receivable aging schedule
Reports on critical factors Average dollar value per order
Percentage of orders shipped on time
Average number of days between the order date and shipping date
Sales analyses Salesperson
Sales region
Product lines
Customers
Markets
Cash flow statements
Demand Managerial
Reports
Demand reports are ad hoc non-scheduled reports
“What-if” scenarios
Types of Managerial Decisions
Pertaining to the Revenue Cycle
Marketing decisions
Which types of markets and customers are to be served?
Which specific products are to be provided to customers, including new products to be introduced?
What prices are to be charged, and what discounts are to be allowed?
What after-sales services are to be offered?
What channels of distribution are to be employed?
What advertising media are to be employed, and in what mix?
What organizational units are to be incorporated within the marketing function?
What marketing plans and budgets are to be established for the coming year?
Figure 12-17
Types of Managerial Decisions
Pertaining to the Revenue Cycle
Financial Decisions
What criteria are to be employed in granting credit to potential customers?
What collection methods are to be employed in minimizing bad debts?
What accounts receivable records are to be maintained concerning amounts owed by customers?
What sources, other than receipts from sales, are to be employed in obtaining needed funds for operations?
What financial plans and cash budgets are to be established for the coming year?
Figure 12-17 Continued
Typical Files Associated
with the Revenue Cycle
Master Files Customer master file Accounts receivable master file Merchandise inventory master file
Transaction & Open Document Files Sales order file Open sales order file Sales invoice transaction file Cash receipts transaction file
Other Files Shipping & Price data reference file Credit reference file Salesperson file Sales history file Cash receipts history file Accounts receivable report file
Figure 12-18
A Layout of an Accounts
Receivable Record
CustomerAccountBalance
CustomerName
CreditLimit
BalanceBeginningof Year
Year-to-dateSales
Year-to-datePayments
CurrentAccountBalance
Figure 12-19
Relational Data Structure for the
Sales Aspect of the Revenue Cycle
Customer Customer Customer Phone Credit Trade Account Balance Year-to-date Year-to-date
Number Name Shipping Number Limit Discount Beginning of Year Sales Payments
Address Allowed
Sales Order Expected Salesperson Customer
Order Date Delivery Code Number
Number Date
Sales Product Quantity
Order Number Ordered
Product Description Warehouse Unit of Reorder Economic Unit Name of Quantity on Quantity on
Number Location Measure Point Reorder Cost Preferred Order Hand
Quantity Supplier
Sales Customer Sales Billing Shipping Terms Total
Invoice Number Order (Invoice) Document Sales
Number Number Number Amount
Sales Product Unit Quantity Shipped
Invoice Number Price and Sold
Number
Figure 12-21
Risk Exposures in the
Revenue Cycle - I
Risk Exposure1) Credit sales made to customerswho represent poor credit risks
1) Losses from bad debts
2) Unrecorded or unbilled shipments 2) Losses of revenue; overstatement
of inventory and understatement ofaccounts receivable in the balancesheet
3) Errors in preparing sales invoices 3) Alienation of customers andpossible loss of future sales; losses ofrevenue
Figure 12-22
Risk Exposure4) Misplacement of orders fromcustomers or unfilled backorders
4) Losses of revenue and alienation ofcustomers
5) Incorrect posting of sales to
accounts receivable records
5) Incorrect balances in accounts
receivable and general ledger accountrecords
6) Posting of revenues to wrongaccounting periods, such as prematurebooking of revenues
6) Overstatement of revenue in oneyear (year of premature booking) andunderstatement of revenue in the next
Figure 12-22 (continued)
Risk Exposures in the
Revenue Cycle - II
Risk Exposure7) Fictitious credit sales to nonexistentcustomers
Overstatement of revenues andaccounts receivable
8) Excessive sales returns andallowances with certain of the creditmemos being for fictitious returns
8) Losses in net revenue, with theproceeds from subsequent paymentsby affected customers beingfraudulently pocketed
9) Theft or misplacement of finishedgoods in the warehouse or on theshipping dock
9) Losses in revenue; overstatementof inventory on the balance sheet
Figure 12-22 (continued)
Risk Exposures in the
Revenue Cycle - III
Risk Exposure10) Fraudulent write-offs ofcustomers’ accounts by unauthorizedpersons
10) Understatement of accountsreceivable; losses of cash receiptswhen subsequent collections onwritten-off accounts aremisappropriated by perpetrators of thefraud
11) Theft (skimming) of cash receipts,especially currency, by personsinvolved in the processing; oftenaccompanied by omitted postings toaffected customers’ accounts
11) Losses of cash receipts;overstatement of accounts receivablein the subsidiary ledger and thebalance sheet
12) Lapping of payments fromcustomers when amounts are postedto accounts receivable records
12) Losses of cash receipts; incorrectaccount balances for those customerswhose records are involved in thelapping
Figure 12-22 (continued)
Risk Exposures in the
Revenue Cycle - IV
Risk Exposures in the
Revenue Cycle - V
Risk Exposure13) Accessing of accounts receivable,merchandise inventory, and otherrecords by unauthorized persons
13) Loss of security over such records,with possibly detrimental use made ofthe data accessed
14) Involvement of cash, merchandiseinventory, and accounts receivablerecords in natural or human-madedisasters
14) Losses of or damages to assets
15) Planting of virus by disgruntledemployee to destroy data on magneticmedia
15) Loss of customer accountsreceivable data needed to monitorcollection of amounts from previoussales
Figure 12-22 (continued)
Risk Exposures in the
Revenue Cycle - VI
Risk Exposure16) Interception of data transmittalbetween customers and the web site
16) Loss of data which may be used tothe detriment of customers
17) Unauthorized viewing andalteration of other customer accountdata via the Web
17) Loss of security over customerrecords resulting in misstatement ofaccounts receivable balances
18) Denial by a customer that anonline order was placed after thetransaction is processed
18) Loss of sales revenues
Figure 12-22 (continued)
Risk Exposures in the
Revenue Cycle - VII
Risk Exposure19) Use of stolen credit cards to placeorders via the Web
19) Loss of shipped goods for whichpayments will not be received
20) Breakdown of the web server dueto unexpectedly high volume oftransactions
20) Loss of sales revenues andalienation of customers
Figure 12-22 (continued)
Typical Control Objectives
for the Revenue Cycle
All customers accepted for credit sales are credit-worthy All ordered goods are shipped, and all services are
performed by dates that are agreeable to all parties All shipped goods are authorized and accurately billed
within the proper accounting period All sales returns and allowances are authorized and
accurately recorded and based on actual return of goods All cash receipts are recorded completely and accurately All credit sales and cash receipts transactions are posted
to proper customers’ accounts in the accounts receivable ledger
All accounting records, merchandise inventory, and cash are safeguarded
General Controls of the
Revenue Cycle - I
Organizational Controls
Units with custodial functions should be kept separate from each other
Custodial functions should furthermore be segregated from record-keeping functions
For computerized systems, systems development should be kept separate from systems operations
Documentation Controls
Asset Accountability Controls
Management Practice Controls
Data Center Operations Controls
Authorization Controls
General Controls of the
Revenue Cycle - II
Access Controls
Assigned passwords that authorized clerks must enter to access
accounts receivable and other customer-related files, in order to
perform their strictly defined tasks
Terminals that are restricted in the functions they allow to be
performed with respect to sales and cash receipts transactions
Logging of all sales and cash receipt transactions upon their
entry into the system
Frequent dumping of accounts receivable and merchandise
inventory master files onto magnetic tape backups
Physically protected warehouses and safes
A lockbox collection system in situations where feasible
General Controls of the
Revenue Cycle - III
Application Controls of the
Revenue Cycle: Input - I
1) Prepare pre-numbered and well-designed documents relating to sales, shipping, and cash receipts, with each prepared document being approved by an authorized person 2) Validate data on sales orders and
remittance advices as the data are prepared and entered for processing. In computer-based systems, validation should be performed by means of programmed edit checks. When data are keyed into computer-readable medium, key verification is also appropriate
Application Controls of the
Revenue Cycle: Input - II
3) Correct errors that are detected during data entry and before the data are posted to the customer and inventory records 4) Precompute batch control totals
relating to key data on sales invoices (or shipping notices) and remittance advices. These precomputed batch control totals should be compared with totals computed during postings to the accounts receivable ledger and during each processing run. In the case of cash receipts, the total on remittance advices should also be compared with the total on deposit slips
Application Controls of the
Revenue Cycle: Processing - I
1) Move ordered goods from the finished goods warehouse and ship the goods only on the basis of written authorizations such as stock request copies 2) Invoice customers only on notification by the
shipping department of the quantities that have been shipped 3) Issue credit memos for sales returns only
when evidence (i.e. receiving report) has been received that the goods were actually returned 4) Verify all computations on sales invoices
before mailing and postings to proper customers’ accounts. Also, compare the sales invoices against shipping notices and open orders, in order to ensure that the quantities ordered reconcile with the orders shipped and back-ordered
Application Controls of the
Revenue Cycle: Processing - II
5) Verify that total amounts posted to the accounts receivable accounts from batches of transactions agree with precomputed batch totals, and post the total amounts to the appropriate general ledger accounts 6) Deposit all cash received intact and with a
minimum of delay, thus eliminating the possibility of cash receipts being used to pay employees or to reimburse petty cash funds 7) Correct errors that are made during
processing steps, usually by reversing erroneous postings to accounts and entry of correct data. The audit trail concerning accounts being corrected should show the original errors, the reversals, and the corrections
Application Controls of the
Revenue Cycle: Output
1) Prepare monthly statements, which should be mailed to all credit customers, especially if the balance forward approach is employed 2) File copies of all documents pertaining to
sales and cash receipts transactions by number, with the sequence of numbers in each file being periodically checked to see if gaps exist. If transactions are not supported by preprinted documents, as often is the case in online computer-based systems, assign transaction numbers to the transactions 3) Prepare printed transaction listings and
account summaries on a periodic basis in order to provide audit trail and a basis for review
Web Security Procedures
Authentication
Authorization
Use of an Access Control List
Accountability
Data Transmission
Disaster Contingency & Recovery Plan
Copyright © 2000 John Wiley & Sons, Inc. All rights reserved.
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Accounting Information Systems:
Essential Concepts and Applications
Fourth Edition by Wilkinson, Cerullo,
Raval, and Wong-On-Wing
