Abis, Lovely Sheen, A.

Lapinig, Jessa Lyn, G.

EXPENDITURE CYCLE

I. Overview of The Topic

We begin by describing the design of the expenditure cycle information system and
the basic controls necessary to ensure that it provides management with reliable
information to assess operational efficiency and effectiveness. The expenditure cycle is a
recurring set of business activities and related information processing operations
associated with the purchase of and payment for goods and services (Expenditure cycle
definition, 2021). This focuses on the acquisition of raw materials, finished goods, supplies,
and services. In the expenditure cycle, the primary external exchange of information is with
suppliers (vendors). Expense data also flow from the expenditure cycle to the general
ledger and reporting function for inclusion in financial statements and various
management reports. The primary objective in the expenditure cycle is to minimize the
total cost of acquiring and maintaining inventories, supplies, and the various services the
organization needs to function. In the expenditure cycle, the primary external exchange of
information is with suppliers (vendors). Information flows to the expenditure cycle from
other cycles. The revenue cycle, production cycle, inventory control, and various
departments provide information about the need to purchase goods and materials.
Information also flows from the expenditure cycle. When the goods and materials arrive,
the expenditure cycle provides information about the receipt of goods to the parties that
have requested them.

Information is provided to the general ledger and reporting function for internal and
external financial reporting. The primary objective of the expenditure cycle is to minimize
the total cost of acquiring and maintaining inventory, supplies, and services. Decisions that
must be made include: (1) what level of inventory and supplies should we carry; (2) what
vendors provide the best price and quality; (3) where should we store the goods; (4) can
we consolidate purchases across units; (5) how can IT improve inbound logistics; (6) is
there enough cash to take advantage of early payment discounts; and (7) how can we
manage payments to maximize cash flow. Management also has to evaluate the efficiency
and effectiveness of expenditure cycle processes. It requires data about events that occur,
resources affected, and agents who participate. This data needs to be accurate, reliable, and
timely.

We take a conceptual look at the expenditure cycle. We will map the sequence of
operations across two of the mechanisms that comprise the spending period for most
retail, wholesale, and manufacturing organizations using data flow diagrams (DFDs) as a
reference. There are the processes for handling payments and cash disbursements. Payroll
and fixed asset schemes, which also help with the spending period

The lesson presented also divided the revenue cycle into two parts. These are the
Purchase and Cash Disbursements Procedures and the Payroll Processing and Fixed Asset
Procedure. These two are divided during the cycle because the payroll cycle is usually kept
separate from the requisition cycle.
 II. Impression and Implication

The set of activities related to the acquisition of and payment for goods and
services include the determination of what needs to be purchased, purchasing
activities, the receipt of goods, and payments to suppliers. Much of the input to the
expenditure cycle comes from the sales cycle, where purchasing requirements are
driven by the volume and type of customer's orders. The linkages between the buyer’s
expenditure cycle activities and the seller’s revenue cycle activities have important
implications for the design of both parties’ accounting information systems.

The first major business activity in the expenditure cycle is ordering inventory,
supplies, or services. This involves first identifying what, when, and how much to
purchase, and then choosing from which supplier to purchase. Accountants and
systems professionals need to understand best practices for managing inventory. The
traditional approach to managing inventory is to maintain sufficient stock so that
production can continue without interruption even if inventory use is greater than
expected or if suppliers are late in making deliveries. This traditional approach is often
called the economic order quantity (EOQ) approach because it is based on calculating
an optimal order size to minimize the sum of ordering, carrying, and stockout costs.
Ordering costs should include all expenses associated with processing purchase
transactions. Carrying costs are those associated with holding inventory. Stockout
costs are those that result from inventory shortages. The EOQ formula is used to
calculate how much to order. The reorder point specifies when to order. All these cost
are crucial to the integrity and flow of the system in an organization

The second major business activity in the expenditure cycle is the receipt and
storage of ordered items. The receiving department is responsible for accepting deliveries
from suppliers. Information about the receipt of ordered merchandise must be
communicated to the inventory control function to update the inventory records. When a
delivery arrives, a receiving clerk compares the purchase order number referenced on the
supplier’s packing slip with the open purchase order file to verify that the goods were
ordered. The receiving report documents about each delivery, including the date received,
shipper, supplier, and purchase order number. The receiving report also contains space to
identify the persons who received and inspected the goods as well as for remarks
concerning the quality of the items received. In the case of damaged or poor-quality goods,
a debit memo is prepared after the supplier agrees to take back the goods or to grant a
price reduction. The debit memo records the adjustment being requested. The third main
activity is approving supplier invoices for payment. The accounts payable department
approves supplier invoices for payments. A legal obligation to pay suppliers arises at the
time goods are received. When a supplier’s invoice is received, the accounts payable
department is responsible for matching it with a corresponding purchase order and
receiving report. This combination of the supplier’s invoice and associated supporting
documentation creates what is called a voucher package.

As soon as receipt of goods or services is verified, all the information required to

pay the supplier is already know. The invoice less approach is called evaluated receipt
settlement (ERS). ERS replaces the traditional three-way (vendor invoice, receiving report,
and purchase order) matching process with a two-way match of the purchase order and
receiving report. The final activity is paying suppliers. The cashier, who reports to the
treasurer, is responsible for paying suppliers. Payments are made when accounts payable
sends the cashier a voucher package. Although many payments continue to be made by
check, the use of EFT and FEDI is increasing. It is often more convenient to pay for minor
purchases, such as coffee or pencils, in cash. The pretty cash fund should be set up as an
imprest fund. An imprest fund has two characteristics: it is set at a fixed amount and it
requires vouchers for every disbursement. The sum of the cash plus vouchers should equal
the preset fund balance.

A risk is a kickback. Kickbacks are gifts provided by manufacturers to buying agents in

order to influence their supplier selection. Companies should bar buying agents from
receiving any gifts from prospective or current vendors to avoid kickbacks. These
proposals should extend not only to physical talents, but also to facilities.

The need to purchase goods or supplies often results in the creation of a purchase
requisition that identifies the requisitioner. The requisitioner specifies the delivery
location and date needed. It identifies the item numbers, descriptions, quantity, and price
of each item requested. One threat is that inaccurate inventory records can result in stock
outs that lead to lost sales or to carrying excess inventory that increases costs. To reduce
the risk of these problems, the perpetual inventory method should be used to ensure that
information about inventory stocks is always current. Using information technology to
eliminate the need for manual data entry can improve the accuracy of perpetual inventory
records. The next step is to select a supplier. Purchasing agents usually perform this task.
The crucial operating decision in the purchasing activity is selecting suppliers for inventory
items. Several factors should be considered: Price, Quality of materials, and Dependability
in making deliveries. Many companies maintain special purchasing arrangements with
important suppliers. A blanket purchase order is a commitment to purchase specified items
at designated prices from a particular supplier for a set time period, often one year. Vendor
managed inventory programs provide another means of reducing purchase and inventory
costs. A vendor-managed inventory program essentially outsources much of the inventory
control and purchasing function. Suppliers are given access to sales and inventory data and
are authorized to automatically replenish inventory when stocks fall to predetermined
reorder points. These are just few implications and impression we have for the topic
presented, expenditure cycle.
 III. Conclusion

After analyzing the topic, we can conclude two main points for the purchases and
cash disbursements procedures. To begin, consider how manual spending period processes
produce a large amount of paper documents. Purchasing, planning, storing, and filing actual
papers significantly increases the expense of device service. As we can see in the following
section, eliminating or reducing them is a primary goal of computer-based device
architecture. Next, certain activities, such as quality management, purchasing, AP, cash
disbursements, and the general ledger, are physically separated divisions for internal
control purposes. This time-consuming operations help boost undesired cost of system
operation. Computer programs execute these clerical functions in computer-based
applications, which is both less expensive and less vulnerable to error. Although the
traditional department structure can still remain in computer-based settings, staffing roles
have been refocused. These divisions are now engaged in financial planning and exception-
based problem solving rather than day-to-day transaction management. As a result, these
departments are smaller and more functional than their manual counterparts.

The topic centered on basic activities, operating departments, and the records,
papers, and accounts that comprise the payroll structure. The controls and common
exposures that mitigate the risks inherent in payroll practices were clarified. Fixed asset
accounting practices are divided into three categories: asset acquisition, asset maintenance,
and asset disposal. The lesson presented the fixed asset system's archives, processes, and
reports. The topic stressed the importance of principal risk and control in the system.
 IV. Real-life Example/Practices

Companies typically set the reorder point based on delivery time and desired
levels of safety stock to handle unexpected fluctuations in demand. The traditional EOQ
approach to inventory control often results in carrying significant amounts of
inventory. A retail clothes store that sells a line of men's shirts is an example of this. A
year, the shop sells 1,000 shirts. A single shirt costs the corporation Php 5 per year to
have in store, and the fixed cost to position an order is Php 2. The EOQ formula is the
square root of (2 x 1,000 shirts x Php 2 order cost) / (Php 5 keeping cost), which
equals 28.3 when rounded. To reduce costs when meeting consumer demand, the
optimal order size is slightly more than 28 shirts. (Tarver, 2021)

A just-in-time (JIT) inventory system attempts to minimize finished foods

inventory by purchasing and producing goods only in response to actual sales. JIT
systems are characterized by frequent deliveries of small amounts of materials, parts,
and supplies directly to the specific locations that require them when they are needed.
Some successful companies practicing JIT systems include Toyota, Apple and
McDonald's. Just-in-time inventory is used by fast-food restaurants to serve their
customers on a regular basis at breakfast, lunch, and dinner. Fast food stores stock
cheese, burger patties, and all the fixings and toppings, but they don't start assembling
and frying their hamburgers, sundaes, or fish sandwiches until a customer orders
them. (Brookins, 2021)

Companies have been attempting to find alternatives to the inherent issues involved
with paper-based commercial transactions. Paper transfers are clearly not adaptable and
quick enough for the modern era, from delays to inaccuracies and labor costs. Consumers
and corporate associates now want things to be completed quickly and reliably. This is
where Electronic Data Interchange comes in. This technology has been widely used in the
business industry to improve their operations. Some examples of this technology are:

 UN/EDIFACT - recommended by the UN and the only international standard

predominantly outside of North America
 GS1 EDI - developed the GS1 and predominantly used in global supply chain

 TRADACOMS - developed by the Article Number Association (now known as GS1

UK) and is predominantly applied in the UK retail industry

 ODETTE - mostly used within the European automotive industry

 VDA - predominately used within the German automotive industry

 HL7 - a semantic interoperability standard commonly used for healthcare data

 Edig@s (EDIGAS) - a standard pertaining to commerce, transport, and gas storage

((IA), n.d.)
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