AIS Chap 5 Notes

Chapter 5: The Expenditure Cycle Part I:
Purchases and Cash Disbursements Procedures
PURCHASES PROCESSING PROCEDURES

Purchases procedures include the tasks involved in identifying inventory needs, placing the
order, receiving the inventory, and recognizing the liability.
MONITOR INVENTORY RECORDS. When inventories drop to a predetermined reorder point, a
purchase requisition is prepared and sent to the prepare purchase order function to initiate the
purchase process.
PREPARE PURCHASE ORDER. The prepare purchase order function receives the purchase
requisitions, which are sorted by vendor if necessary. Next, a purchase order (PO) is prepared
for each vendor, as illustrated in Figure 5-3. A copy of the PO is sent to the vendor.
RECEIVE GOODS. Upon completion of the physical count and inspection, the receiving clerk
prepares a receiving report stating the quantity and condition of the inventories.
Blind Copy - The purpose of the blind copy is to force the receiving clerk to count and
inspect inventories prior to completing the receiving report.
UPDATE INVENTORY RECORDS. Organizations that use a standard cost system carry their
inventories at a predetermined standard value regardless of the price actually paid to the
vendor.
SET UP ACCOUNTS PAYABLE. The organization has received inventories from the vendor
and has incurred (realized) an obligation to pay forthe goods
Vouchers Payable System - Under this system, the AP department uses cash
disbursement vouchers and maintains a voucher register.
POST TO GENERAL LEDGER. The general ledger function receives a journal voucher from
the AP department and an account summary from inventory control. The general ledger function
posts from the journal voucher to the inventory and AP control accounts and reconciles the
inventory control account and the inventory subsidiary summary.
THE CASH DISBURSEMENTS SYSTEMS

The cash disbursements system processes the payment of obligations created in the
purchases system. The principal objective of this system is to ensure that only valid creditors
receive payment and that amounts paid are timely and correct.
IDENTIFY LIABILITIES DUE. The cash disbursements process begins in the AP department by
identifying items that come due.
PREPARE CASH DISBURSEMENT. For each disbursement, the clerk prepares a check and
records the check number, dollar amount, voucher number, and other pertinent data in the
check register, which is also called the cash disbursements journal.
UPDATE AP RECORD. Upon receipt of the voucher packet, the AP clerk removes the liability
by debiting the AP subsidiary account or by recording the check number and payment date in
the voucher register.
POST TO GENERAL LEDGER. The general ledger function receives the journal voucher from
cash disbursements and the account summary from AP.
EXPENDITURE CYCLE CONTROLS

1. Transaction Authorization
2. Segregation of duties
3. Supervision
4. Accounting Records
5. Access Controls
6. Independent Verification
MANUAL SYSTEM
Manual expenditure cycle systems generate a great deal of paper documentation. Buying,
preparing, transporting, and filing physical documents add considerably to the cost of system
operation
COMPUTER-BASED PURCHASES AND CASH DISBURSEMENTS APPLICATIONS
Reengineering involves replacing traditional procedures with innovative procedures that are
often very different from those previously in place.
THE AUTOMATED SYSTEM
1. Improved Inventory Control
2. Better Cash Management
3. Time Lag
4. Purchasing Bottleneck
5. Excessive Paper Documents
THE REENGINEERED SYSTEM
The improvements in this system are that
(1) It uses real-time procedures and direct access files to shorten the lag time in record keeping,
(2) It eliminates routine clerical procedures by distributing terminals to user areas
(3) It achieves a significant reduction in paper documents by using digital communications
between departments and by digitally storing records.
SUMMARY
The chapter examined procurement procedures involving the acquisition of raw materials
and finished goods. Because most organizations conduct these activities on a credit basis, the
information system needs to be designed to properly recognize and record obligations as they
arise and to discharge them when they come due. Two expenditure cycle subsystems
accomplish these tasks: the purchases system and the cash disbursements system. This
chapter focused on the following areas:
1. The processes of each subsystem and the flow of information between them.
2. The documents, journals, and accounts needed to provide audit trails, maintain historical
records, and support internal decision making and financial reporting.
3. The areas of exposure and the control techniques that reduce these risks.
The chapter examined the impact of technology on items 1, 2, and 3 in the preceding list.
From this perspective, we saw that automated systems use computers to replicate traditional
manual tasks. Reengineered systems, however, involve and require new and innovative ways of
dealing with traditional problems. Any technological solution carries control implications.
Computers remove a fundamental separation of functions between authorizing and
processing transactions. Also at risk is the integrity of accounting records. To control these
risks, systems must be designed to provide users with documents and reports that permit
independent verification and support audit trail needs.

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Chapter 5: The Expenditure Cycle Part I:

Purchases and Cash Disbursements Procedures

PURCHASES PROCESSING PROCEDURES

THE CASH DISBURSEMENTS SYSTEMS

EXPENDITURE CYCLE CONTROLS

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