The

LECTURE 5
Revenue
Cycle
Objectives for Chapter 4
■ Tasks performed in the revenue cycle, regardless of the technology
used
■ The functional departments involved in revenue cycle activities and
the flow of revenue transactions through the organization
■ The documents, journals, and accounts that provide audit trails,
promote the maintenance of records, support decision making, and
sustain financial reporting
■ Risks associated with the revenue cycle and the controls that reduce
these risks
■ The operational and control implications of technology used to
automate and reengineer the revenue cycle
 S a le s O rd e r
1
C re d it / C u s to m e r
S e rv ic e R EV EN U E C Y C LE
2 (S U B S Y S T E M )
C a s h R e c e ip ts /
C o lle c tio n s
6

S h ip p in g
3

B illin g / A c c o u n ts
R e c e iv a b le
4 /5
Journal Vouchers/Entries
How do we get them?
■ Billing Department prepares a journal voucher:
Accounts Receivable DR
Sales CR
■ Inventory Control Dept. prepares a journal
voucher:
Cost of Goods Sold DR
Inventory CR
■ Cash Receipts prepares a journal voucher:
Cash DR
Accounts Receivable CR
Revenue Cycle (Subsystem) Databases
■ Master files • Other Files
– customer master file – shipping and price data
– accounts receivable master reference file
file
– merchandise inventory – credit reference file (may
master file not be needed)
– salesperson file (may be a
■ Transaction and Open master file)
Document Files – Sales history file
– sales order transaction file
– cash receipts history file
■ open sales order
transaction file – accounts receivable reports
– sales invoice transaction file
file
– cash receipts transaction
file
DFD of Sales Order Process
 Overview of the Manual Sales
Order Processing System
■ The sales process begins with a customer
placing an order via the sales department.
– The sales department captures the essential details on a
sales order form.
■ The transaction is authorized by obtaining
credit approval by the credit department.
■ The sales information is released to:
– billing
– warehouse (stock release or picking ticket)
– shipping (packing slip and shipping notice)
Overview of the Manual Sales Order
Processing System
■ The merchandise is picked from the Warehouse and sent to
Shipping. The stock records are adjusted.
■ The merchandise is shipped. The Shipping Department
reconciles the products received from the warehouse with the
sales information received. The shipping information is sent to
Billing. The goods, along with the packing slip and a bill of
lading, prepared by Shipping, are sent to the customer.
■ Billing compiles and reconciles the relevant facts and issues an
invoice to the customer and updates the sales journal. The
information is transferred to:
– accounts receivable
– inventory control
Overview of the Manual Sales Order
Processing System

■ Accounts Receivable records the information in the

customer’s account in the accounts receivable
subsidiary ledger.
■ Inventory Control adjusts the inventory subsidiary
ledger.
■ Periodically, Billing, Accounts, Receivable, and
Inventory Control submits summary information,
typically in the form of a journal voucher to the
General Ledger department. The General Ledger
department reconciles this data and posts to the
control accounts in the general ledger.
DFD of Cash Receipts Process
Overview of the Manual Cash
Receipts System
■ The customer’s checks and remittance advices are
received in the Mail Room. A mail room clerk prepares
a cash prelist and sends the list along with the checks
to Cash Receipts. A copy of the cash prelist is sent to
Accounts Receivable and the Controller.
■ The Cash Receipts department verifies the accuracy
and completeness of the checks, updates the cash
receipts journal, prepares a deposit slip, and prepares
a journal voucher and sends to General Ledger.
Overview of the Manual Cash
Receipts System
■ The Accounts Receivable department posts from
the remittance advices to the accounts
receivable subsidiary ledger. Periodically, a
summary of the postings is sent to General
Ledger.
■ The General Ledger department reconciles the
journal voucher from Cash Receipts with the
summaries from accounts receivable and
updates the general ledger control accounts.
■ The Controller reconciles the bank accounts.
Summary of Internal
Controls
Authorization Controls

■ Proper authorization of transactions

(documentation) should occur so that only
valid transactions get processed.
■ Within the revenue cycle, authorization
should take place when:
– a sale is made on credit (authorization)
– a cash refund is requested (authorization)
– posting a cash payment received to a customer’s
account (cash pre-list)
Segregation of Functions
Three Rules

1. Transaction authorization should be

separate from transaction processing.
2. Asset custody should be separate from asset
record-keeping.
3. The organization should be so structured
that the perpetration of a fraud requires
collusion between two or more individuals.
Segregation of Functions
■ Sales Order Processing
– credit authorization separate from SO processing
– inventory control separate from warehouse
– accounts receivable sub-ledger separate from
general ledger control account
■ Cash Receipts Processing
– cash receipts separate from accounting records
– accounts receivable sub-ledger separate from
general ledger
Supervision
■ Supervision of
employees serves
as a deterrent to
dishonest acts and
is particularly
important in the
mailroom.
Accounting Records
■ With a properly maintained audit trail,
it is possible to track transactions
through the systems and to find where
and when errors were made:
– pre-numbered source documents
– special journals
– subsidiary ledgers
– general ledger
– files
 Access Controls

■ Access to assets and information (accounting

records) should be limited.
■ Within the revenue cycle, the assets to protect
are cash and inventories and access to records
such as the accounts receivable subsidiary
ledger and cash journal should be restricted.
Independent Verification
■ Physical procedures as well as record-keeping should be
independently reviewed at various points in the system to
check for accuracy and completeness:
– shipping verifies the goods sent from the warehouse are
correct in type and quantity
– warehouse reconciles the stock release document (picking
slip) and packing slip
– billing reconciles the shipping notice with the sales
invoice
– general ledger reconciles journal vouchers from billing,
inventory control, cash receipts, and accounts receivable
Automating the Revenue
Cycle
■ Authorizations and data access can be performed
through computer screens.
■ There is a decrease in the amount of paper.
■ The manual journals and ledgers are changed to
disk or tape transaction and master files.
■ Input is still typically from a hard copy document
and goes through one or more computerized
processes.
■ Processes store data in electronic files (the tape
or disk) or prepare data in the form of a hardcopy
report.
 Automating the Revenue
Cycle
■ Revenue cycle programs can include:
– formatted screens for collecting data
– edit checks on the data entered
– instructions for processing and storing the
data
– security procedures (passwords or user IDs)
– steps for generating and displaying output
■ To understand files, you must consider the record
design and layout.
■ The documents and the files used as input sources
must contain the data necessary to generate the
output reports.
Example: Automated Batch Sales
Large-Scale Computer-
Based Accounting Systems
■ Two different types of CBAS:
– automation involves using
technology to improve the efficiency
and effectiveness of a task.
– reengineering greatly reduces the
cost of business by identifying and
streamlining tasks. Must rethink
business processes and firm
organization.
Case In Point: Wal-Mart

■ At Wal-Mart, whenever a customer

makes a purchase, the information goes
directly to the supplier. Sales are
automatically converted into
manufacturing schedules and delivery
instructions.
– Is this automation or re-
engineering?
Case In Point: Wal-Mart

■ Directly linking sales and expenditure

cycles
■ Cut-out wholesale suppliers between
manufacturers and Wal-Mart--saved 20-
30% on retail price
■ Requires real-time recording,
communications, and processing
 Reengineering Sales Order Processing
Using Real-Time Technology
■ Manual procedures and physical documents are replaced
by interactive computer terminals.
■ Real time input and output occurs, with some master
files still being updated using batches.
– real-time - entry of customer order, printout of stock
release, packing slip and bill of lading; update of
credit file, inventory file, and open sales orders file
– batch - printout of invoice, update of closed sales
order (journal), accounts receivable and general
ledger control account
Real-time Sales Order
Advantages of Real-Time
Processing
■ Shortens the cash cycle of the firm by reducing the
time between the order date and billing date
■ Better inventory management which can lead to a
competitive advantage
■ Fewer clerical errors, reducing incorrect items
being shipped and bill discrepancies
■ Reduces the amount of expensive paper documents
and their storage costs
Reengineered Cash Receipts
Process
■ The mail room is a frequent target for reengineering.
■ Companies send their customers preprinted envelopes and
remittance advices.
■ Upon receipt, these envelopes are set aside and
information on the envelope is scanned and provides a
control procedure against theft.
■ Machines are also available to open the envelopes and
scan the remittance advices and checks and separate the
checks.
■ Artificial intelligence may be used to read handwriting,
such as remittance amounts and signatures.
Automated Cash Receipts
Point-of-Sale Systems
■ Point of sale systems are used extensively in retail
establishments.
– Customers pick the inventory from the shelves and
take them to a cashier.
■ The clerk scans the universal product code (UPC).
The POS system is connected to an inventory file,
where the price and description are retrieved.
– The inventory levels are updated and reorder needs
can immediately be detected.
Point-of-Sale Systems
■ The system computes the amount due. Payment is
either cash, check, ATM or credit card in most cases.
– no accounts receivables
■ If checks, ATM or credit cards are used, an on-line
link to receive approval is necessary.
■ At the end of the day or a cashier’s shift, the money
and receipts in the drawer are reconciled to the
internal cash register tape or a printout from the
computer’s database.
– cash over and under must be recorded
Computerized POS
Reengineering Using EDI
■ EDI helps to expedite transactions.
■ The customer’s computer:
– determines that inventory is needed
– selects a supplier with whom the business has a formal
business agreement
– dials the supplier’s computer and places the order
■ The exchange is completely automated.
– no human intervention or management
 EDI System
Company A Company B

Application Purchases Sales Order Application

Software System System Software

EDI EDI
Translation Translation
Software Software
Direct Connection
Communications Communications
Software Software

Other
Mailbox

Company VAN Company

A’s mailbox B’s mailbox

Other
Mailbox
Reengineering Using the
Internet
■ Typically, no formal business agreements exist
as they do in EDI.
■ Most orders are made with credit cards.
■ Mainly done with e-mail systems, and thus a
turnaround time is necessary
– Intelligent agents are needed to eliminate
this time lag.
■ Security and control over data is a concern with
Internet transactions.
 Control Considerations for
Computer-Based Systems
■ Authorization - in real-time systems, authorizations
are automated: programmed decision rules must be
closely monitored
■ Segregation of Functions - some consolidation of
tasks by the computer; protect the computer
programs--coding, processing and maintenance
should be separated
Control Considerations for
Computer-Based Systems
■ Supervision - in POS systems, the cash register’s
internal tape or database is an added form of supervision
■ Access Control - magnetic records are vulnerable to
both authorized and unauthorized exposure and should
be protected
– must have limited file accessibility
– must safeguard and monitor computer programs
 Control Considerations for
Computer-Based Systems
■ Accounting Records - rest on reliability and security
of magnetically stored data. The accountant should
be skeptical about accepting the accuracy of hard-
copy printouts of journals and ledgers.
■ Backup is a concern for direct access files, and the
system needs to ensure that backup of all files is
continuously kept.
PC-Based Accounting Systems
■ Used by small firms and some large decentralized firms
■ Allow one or few individuals to perform entire
accounting function
■ Most systems are divided into modules
– general ledger
– inventory control
– payroll
– cash disbursements
– purchases and accounts payable
– cash receipts
– sales order
PC Control Issues
■ Segregation of Duties - tend to be inadequate and
should be compensated for with increased
supervision, detailed management reports, and
frequent independent verification
■ Access Control - access controls to the data stored
on the computer tends to be weak; methods such as
encryption and disk locking devices should be used
■ Accounting Records - computer disk failures cause
data losses; external backup methods need to be
implemented to allow data recovery
 END OF
LECTURE 5