Accounting Information Systems

9th Edition
Marshall B. Romney Paul John Steinbart

2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart

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The Expenditure Cycle: Purchasing and Cash Disbursements

Chapter 12

2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart

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Learning Objectives
1.

2.

3.

Describe the basic business activities and related data processing operations performed in the expenditure cycle. Discuss the key decisions to be made in the expenditure cycle, and identify the information needed to make those decisions. Document an understanding of the expenditure cycle activities.
2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart

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Learning Objectives
4.

5.

Identify major threats in the expenditure cycle, and evaluate the adequacy of various control procedures for dealing with those threats. Read and understand a data model (REA diagram) of the expenditure cycle.

2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart

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Introduction

Linda Spurgeon, Alpha Omega Electronics (AOE) president, asked Elizabeth Venko, the controller, to address the following issues:
What must be done to ensure that AOEs inventory records are current and accurate? What can be done to ensure timely delivery of quality components?

2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart

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Introduction
Is it possible to reduce AOEs investment in materials inventories? What must be done to ensure that available discounts are taken? How could the information system provide better information to guide planning and production? How could IT be used to reengineer expenditure cycle activities?

2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart

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Learning Objective 1

Describe the basic business activities and related data processing operations performed in the expenditure cycle.

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Expenditure Cycle: Main Objective

The expenditure cycle is a recurring set of business activities and related data processing operations associated with the purchase of and payment for goods and services. The primary objective of the expenditure cycle is to minimize the total cost of acquiring and maintaining inventories, supplies, and the various services necessary for the organization to function.
2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart

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Expenditure Cycle: Key Decisions

What is the optimal level of inventory and supplies to carry? Which suppliers provide the best quality and service at the best prices? Where should inventories and supplies be held? How can the organization consolidate purchases across units to obtain optimal prices?
2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart

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Expenditure Cycle: Key Decisions

How can information technology be used to improve both the efficiency and accuracy of the inbound logistics function? Is sufficient cash available to take advantage of any discounts suppliers offer? How can payments to vendors be managed to maximize cash flow?

2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart

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Expenditure Cycle: Business Activities

What are the three basic business activities in the expenditure cycle?
1.

2.

3.

Ordering goods, supplies and services Receiving and storing goods, supplies and services Paying for goods, supplies and services
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Ordering Goods, Supplies And Services

The first major business activity in the expenditure cycle is ordering inventory or supplies.

The traditional inventory control method (often called economic order quantity [EOQ]):
This approach is based on calculating an optimal order size so as to minimize the sum of ordering, carrying, and stockout costs.
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Ordering Goods, Supplies And Services

Alternative inventory control methods:

MRP (material requirement planning)

This approach seeks to reduce required inventory levels by scheduling production, rather than estimating needs.

JIT (just in time)

JIT systems attempt to minimize both carrying and stockout costs.

2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart

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Ordering Goods, Supplies And Services

What is a major difference between MRP and JIT?

MRP systems schedule production to meet estimated sales need, thereby creating a stock of finished goods inventory. JIT systems schedule production to meet customer demands, thereby virtually eliminating finished goods inventory.

2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart

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Ordering Goods, Supplies And Services

Documents and procedures: The purchase requisition is a document that identifies the following:

requisitioner and item number specifies the delivery location and date needed specifies descriptions, quantity, and price of each item requested may suggest a vendor
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Ordering Goods, Supplies And Services

What is a key decision?

determine vendor price quality of materials dependability in making deliveries

What factors should be considered?

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Ordering Goods, Supplies And Services

Documents and procedures: The purchase order is a document that formally requests a vendor to sell and deliver specified products at designated prices. It is also a promise to pay and becomes a contract once it is accepted by the vendor. Frequently, several purchase orders are generated to fill one purchase requisition.
2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart

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Receiving and Storing Goods, Supplies and Services

The second major business activity involves the receipt and storage of ordered items. Key decisions and information needs: The receiving department has two major responsibilities:
1 2

Deciding whether to accept a delivery Verifying quantity and quality

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Receiving and Storing Goods, Supplies and Services

Documents and procedures: The receiving report documents details about each delivery, including the date received, shipper, vendor, and purchase order number.

For each item received, it shows the item number, description, unit of measure, and count of the quantity received.
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Pay for Goods and Services: Approve Vendor Invoices

The third activity entails approving vendor invoices for payments.

The accounts payable department approves vendor invoices for payment The cashier is responsible for making the payment

2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart

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Pay for Goods and Services: Approve Vendor Invoices

The objective of accounts payable is to authorize payment only for goods and services that were ordered and actually received. There are two ways to process vendor invoices:
1. 2.

Nonvoucher system Voucher system

2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart

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Pay for Goods and Services: Improving Accounts Payable

Processing efficiency can be improved by: Requiring suppliers to submit invoices electronically, either by EDI or via the Internet Eliminating vendor invoices. This invoiceless approach is called evaluated receipt settlement (ERS).
2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart

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Pay for Goods: Pay Approved Invoices

The cashier approves invoices The combination of vendor invoice and supporting documentation is called a voucher package. A key decision in the cash disbursement process is determining whether to take advantage of discounts for prompt payment.

2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart

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Learning Objective 2

Discuss the key decisions that need to be made in the expenditure cycle, and identify the information needed to make those decisions.

2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart

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Information Needs
The third function of the AIS is to provide information useful for decision making. Usefulness in the expenditure cycle means that the AIS must provide the operational information needed to perform the following functions:

Determine when and how much additional inventory to order.

2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart

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Information Needs
AIS must provide the operational information needed to perform the following functions (cont): Select the appropriate vendors from whom to order. Verify the accuracy of vendor invoices. Decide whether purchase discounts should be taken. Monitor cash flow needs to pay outstanding obligations.
2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart

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Information Needs

What are examples of additional information The AIS should provide?

Efficiency and effectiveness of the purchasing department Analyses of vendor performance such as ontime delivery, quality, etc. Time taken to move goods from the receiving dock into production Percentage of purchase discounts taken
2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart

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Learning Objective 3

Document your understanding of the expenditure cycle.

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Expenditure Cycle
Reorder point Various departments Request goods Inventory control

Order goods

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Expenditure Cycle
Back Orders Order goods Purchase order Inventory

Revenue cycle
Needs Production cycle

Vendor
Receive goods

Receiving report

Receipt of goods

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Expenditure Cycle
RECEIVING

From purchasing

From suppliers

Purchase Order

Packing slip

Verify order, count, and inspect

2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart

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Expenditure Cycle
ACCOUNTS PAYABLE

From vendor

From purchasing Purchase order

From stores Receiving report

Invoice

Compare, review, verify accuracy

N
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Expenditure Cycle
From A/P

Cashier

A Batch totals

Invoice Receiving report Purchase order

Disbursement voucher Review and compute batch total

Compare and reconcile

Batch total
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2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart

Learning Objective 4

Identify major threats in the expenditure cycle and evaluate the adequacy of various control procedures for dealing with those threats.

2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart

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Control: Objectives, Threats, and Procedures

Another function of a well-designed AIS is to provide adequate controls to ensure that the following objectives are met: Transactions are properly authorized. Recorded transactions are valid. Valid, authorized transactions are recorded. Transactions are recorded accurately.

2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart

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Control: Objectives, Threats, and Procedures

Assets (cash, inventory, and data) are safeguarded from loss or theft. Business activities are performed efficiently

and effectively.

2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart

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Control: Objectives, Threats, and Procedures

What are some threats?

stockouts purchasing too many or unnecessary goods purchasing goods at inflated prices purchasing goods of inferior quality purchasing from unauthorized vendors kickbacks
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Control: Objectives, Threats, and Procedures

receiving unordered goods errors in counting goods theft of inventory failure to take available purchasing discounts errors in recording and posting purchases and payments loss of data
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Control: Objectives, Threats, and Procedures

What are some control procedures?

inventory control system vendor performance analysis approved purchase requisitions restricted access to blank purchase requisitions price list consultation budgetary controls
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Control: Objectives, Threats, and Procedures

use of approved vendor lists approval of purchase orders prenumbered purchase orders prohibition of gifts from vendors incentives to count all deliveries physical access control recheck of invoice accuracy cancellation of voucher package
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Learning Objective 5

Read and understand a data model (REA diagram) of the expenditure cycle.

2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart

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Expenditure Cycle Data Model

The REA data model integrates both traditional accounting transactions data with other operational data. What are some examples?

the date and amount of each purchase information about where items are stored vendor performance measures, such as delivery date

2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart

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Expenditure Cycle Data Model

Partial REA Diagram of the Expenditure Cycle Request goods (1, N)

Request inventory
(1, N)

(1, 1)

Fills
(1, N)

Inventory

(1, N)

Order inventory
2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart

(1, N)

Order goods
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Expenditure Cycle Data Model

The REA diagram models the relationship between the request goods and order goods events as being many-to-one. Why?

The company sometimes issues purchase orders for individual purchase requests. At other times it takes advantage of volume discounts by issuing one purchase order for a set of requests.
2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart

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Expenditure Cycle Data Model

Partial REA Diagram of the Expenditure Cycle Order goods (0, N)

Order/Receive (1, N)
(1, N) Inventory

Receive inventory

(1, N)

Receive goods
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2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart

Expenditure Cycle Data Model

Why is there a many-to-many relationship between the order goods and receive goods events?

Vendors sometimes make several separate deliveries to fill one purchase order. Other times, vendors fill several purchase orders with one delivery. Sometimes, vendors make a delivery to fill a single purchase order in full.

2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart

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Case Conclusion

What are the key points that Elizabeth Venko proposed?

1

4 5

Online terminals in each of AOEs departments JIT inventory system Use of EDI to send purchase orders to vendors Use of EFT as much as possible Implementation of a relational data base

2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart

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End of Chapter 12

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