Chapter 12: The Revenue Cycle Syaiful Ali, SE., MIS., Ak. 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 1
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 Objectives of the Revenue Cycle (cont..) 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 2
Credit / Customer Service 2 Shipping 3 Sales Order 1 REVENUE CYCLE (SUBSYSTEM) Cash Receipts/ Collections 6 Billing/ Accounts Receivable 4/5 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 3
DFD- Sistem Pemrosesan Order Penjualan Revenue Cycle Databases Master files customer master file accounts receivable master file merchandise inventory master file Transaction and Open Document Files sales order transaction file open sales order transaction file sales invoice transaction file cash receipts transaction file Other Files shipping and price data reference file credit reference file (may not be needed) salesperson file (may be a master file) Sales history file cash receipts history file accounts receivable reports file 4
Sales Order Process Flowchart Sales Order Process Flowchart 5
Manual Sales Order Processing Begins with a customer placing an order The sales department captures the essential details on a sales order form. The transaction is authorized by obtaining credit approval by the credit department. Sales information is released to: Billing Warehouse (stock release or picking ticket) Shipping (packing slip and shipping notice) Manual Sales Order Processing The merchandise is picked from the Warehouse and sent to Shipping. Stock records are adjusted. The merchandise, packing slip, and bill of lading are prepared by Shipping and sent to the customer. Shipping reconciles the merchandise received from the Warehouse with the sales information on the packing slip. Shipping information is sent to Billing. Billing compiles and reconciles the relevant facts and issues an invoice to the customer and updates the sales journal. Information is transferred to: Accounts Receivable (A/R) Inventory Control 6
Manual Sales Order Processing A/R records the information in the customer s account in the accounts receivable subsidiary ledger. Inventory Control adjusts the inventory subsidiary ledger. Billing, A/R, and Inventory Control submits summary information to the General Ledger dept., which then reconciles this data and posts to the control accounts in the G/L. DFD of Sales Returns 7
Sales Returns Flowchart Sistem Penerimaan Kas Pengembalian Cek Batal 8
Cash Receipts Flowchart Manual Cash Receipts Processes Customer checks and remittance advices are received in the Mail Room. A mail room clerk prepares a cash prelist and sends the prelist and the checks to Cash Receipts. The cash prelist is also sent to A/R and the Controller. Cash Receipts: verifies the accuracy and completeness of the checks updates the cash receipts journal prepares a deposit slip prepares a journal voucher to send to G/L 9
Manual Cash Receipts Processes A/R posts from the remittance advices to the accounts receivable subsidiary ledger. Periodically, a summary of the postings is sent to G/L. G/L department: reconciles the journal voucher from Cash Receipts with the summaries from A/R updates the general ledger control accounts The Controller reconciles the bank accounts. Information Output Operational Listings & Reports: Inquiry Display Screens: specific data (e.g., a request for the status of a customer s account receivable. Scheduled Managerial Reports Demand Managerial Reports: ad hoc non scheduled reports 10
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 11
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? Types of Managerial Decisions Pertaining to the Revenue Cycle (cont..) 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? 12
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? Risk Exposures in the Revenue Cycle - I Risk 1) Credit sales made to customers who represent poor credit risks Exposure 1) Losses from bad debts 2) Unrecorded or unbilled shipments 2) Losses of revenue; overstatement of inventory and understatement of accounts receivable in the balance sheet 3) Errors in preparing sales invoices 3) Alienation of customers and possible loss of future sales; losses of revenue 13
Risk Exposures in the Revenue Cycle - II Risk 4) Misplacement of orders from customers or unfilled backorders 5) Incorrect posting of sales to accounts receivable records 6) Posting of revenues to wrong accounting periods, such as premature booking of revenues Exposure 4) Losses of revenue and alienation of customers 5) Incorrect balances in accounts receivable and general ledger account records 6) Overstatement of revenue in one year (year of premature booking) and understatement of revenue in the next Risk Exposures in the Revenue Cycle - III Risk 7) Fictitious credit sales to nonexistent customers 8) Excessive sales returns and allowances with certain of the credit memos being for fictitious returns 9) Theft or misplacement of finished goods in the warehouse or on the shipping dock Exposure Overstatement of revenues and accounts receivable 8) Losses in net revenue, with the proceeds from subsequent payments by affected customers being fraudulently pocketed 9) Losses in revenue; overstatement of inventory on the balance sheet 14
Risk Exposures in the Revenue Cycle - IV Risk 10) Fraudulent write-offs of customers accounts by unauthorized persons 11) Theft (skimming) of cash receipts, especially currency, by persons involved in the processing; often accompanied by omitted postings to affected customers accounts 12) Lapping of payments from customers when amounts are posted to accounts receivable records Exposure 10) Understatement of accounts receivable; losses of cash receipts when subsequent collections on written-off accounts are misappropriated by perpetrators of the fraud 11) Losses of cash receipts; overstatement of accounts receivable in the subsidiary ledger and the balance sheet 12) Losses of cash receipts; incorrect account balances for those customers whose records are involved in the lapping Risk Exposures in the Revenue Cycle - V Risk 13) Accessing of accounts receivable, merchandise inventory, and other records by unauthorized persons 14) Involvement of cash, merchandise inventory, and accounts receivable records in natural or human-made disasters 15) Planting of virus by disgruntled employee to destroy data on magnetic media Exposure 13) Loss of security over such records, with possibly detrimental use made of the data accessed 14) Losses of or damages to assets 15) Loss of customer accounts receivable data needed to monitor collection of amounts from previous sales 15
Risk Exposures in the Revenue Cycle - VI Risk 16) Interception of data transmittal between customers and the web site 17) Unauthorized viewing and alteration of other customer account data via the Web 18) Denial by a customer that an online order was placed after the transaction is processed Exposure 16) Loss of data which may be used to the detriment of customers 17) Loss of security over customer records resulting in misstatement of accounts receivable balances 18) Loss of sales revenues Risk Exposures in the Revenue Cycle - VII Risk 19) Use of stolen credit cards to place orders via the Web 20) Breakdown of the web server due to unexpectedly high volume of transactions Exposure 19) Loss of shipped goods for which payments will not be received 20) Loss of sales revenues and alienation of customers 16
Typical Control Objectives for the Revenue Cycle All customers accepted for credit sales are creditworthy 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 Typical Control Objectives for the Revenue Cycle (cont..) 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 17
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 General Controls of the Revenue Cycle - II Documentation Controls Asset Accountability Controls Management Practice Controls Data Center Operations Controls Authorization Controls 18
General Controls of the Revenue Cycle - III 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 General Controls of the Revenue Cycle III (cont..) 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 19
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. (CBIS programmed edit checks). 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. (compared with totals computed during postings to the accounts receivable ledger and during each processing run). 20
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 Application Controls of the Revenue Cycle: Processing I (cont..) 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. 21
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 Application Controls of the Revenue Cycle: Processing II(cont..) 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 22
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. Application Controls of the Revenue Cycle: Output (cont..) 3) Prepare printed transaction listings and account summaries on a periodic basis in order to provide audit trail and a basis for review 23
Thank You! 24