CH 12 THE

REVENUE CYCLE:
SALES TO CASH
COLLECTION
revenue cycle- The recurring set of business activities and data processing operations associated with providing
goods and services to customers and collecting cash in payment for those sales.
 primary external exchange of information is
with customers.
 Information about revenue cycle activities
also flows to the other accounting cycles
 revenue cycle’s primary objective: to provide
Figure 1 Context diagram of revenue cycle the right product in the right place at the right
time for the right price.
 To accomplish that objective, management must make the ff.
key decisions input to the system:
(1) To what extent can and should products be customized to
individual customers’ needs and desires?
(2) How much inventory should be carried, and where should
that inventory be located?
(3) How should merchandise be delivered to customers?
Should the company perform the shipping function itself or
outsource it to a third party that specializes in logistics?
(4) What are the optimal prices for each product or service?
(5) Should credit be extended to customers? If so, what credit
terms should be offered? How much credit should be
extended to individual customers?
(6) How can customer payments be processed to maximize
cash flow?
 four basic revenue cycle activities
1. Sales order entry 3. Billing
2. Shipping 4. Cash collections

REVENUE CYCLE INFORMATION

SYSTEM
PROCESS
AOE uses an enterprise resource planning (ERP) system.
1. AOE’s customers can place orders directly via the Internet
2. The sales department enters customer orders received over
the telephone, by fax, or by mail
3. the system quickly verifies customer creditworthiness,
checks inventory availability and notifies the warehouse
and shipping departments about the approved sale
 4. Warehouse and shipping employees enter data about their activities as soon as they are performed, updating information
about inventory status in real time.
5. Nightly, the invoice program runs in batch mode, generating paper or electronic invoices for customers who require
invoices.
6. Some customers still send checks to one of the regional banks with which AOE has established electronic lockboxes, but
an increasing number use their bank’s online bill paying service.
7. Each day, the bank sends AOE a, file containing remittance data which the cashier uses to update the company’s cash
account balances and the accounts receivable clerk uses to update customer accounts

Threats
and Controls
1. Inaccurate or invalid master data.
 Errors in customer master data could result in shipping merchandise to the wrong location, delays in collecting
payments because of sending invoices to the wrong address, or making sales to customers that exceed their
credit limits.
 Errors in inventory master data can result in failure to timely fulfill customer orders due to unanticipated
shortages of inventory, which may lead to loss of future sales.
 Errors in pricing master data can result in customer dissatisfaction due to overbilling or lost revenues due to
underbilling.
 Control:
o use the various processing integrity controls (CH10) to minimize the risk of data input errors.
o use the authentication and authorization (CH8) to restrict access to that data and configure the system
(changing the default configurations of employee roles to segregate incompatible duties)
o regularly produce a report of all changes to master data and review them to verify accuracy
2. Unauthorized disclosure of sensitive information
 pricing policies or personal information about customers.
 Control:
o configure the system to employ strong access controls that limit who can view such information (limit
employees’ ability to use the system’s built-in query capabilities to access only those specific tables and
fields relevant to performing their assigned duties)
o sensitive data should be encrypted in storage to prevent IT employees who do not have access to the
ERP system from using operating system utilities to view sensitive information.
3. loss or destruction of master data.
 Control:
o employ the backup and disaster recovery procedures (CH10).
o A best practice is to implement the ERP system as three separate instances.
 Production - used to process daily activity.
 A second is used for testing and development.
 A third instance should be maintained as an online backup to the production system to provide
near real-time recovery
4. Poor Performance.
 Control:
o Accurate master data enables management to better use an ERP system’s extensive reporting
capabilities to monitor performance
o Accountants should use their knowledge about business processes to design innovative (managerial)
reports that provide management with insights beyond those provided by traditional financial statements.
SALES ORDER ENTRY
 revenue cycle begins with the receipt of orders from customers.
 The sales department typically performs the sales order entry process,
but increasingly customers are themselves entering much of this data
through forms on a company’s Web site storefront.
 sales order entry process entails three steps:
1) taking the customer’s order
2) checking and approving customer credit
3) checking inventory availability
 responding to customer inquiries - handled either by the sales order department or by a separate customer service
department (which typically also reports to the vice president of marketing):

1) taking the customer’s order

o sales order - document created during sales order entry listing the item numbers, quantities, prices, and terms of
the sale
- usually an electronic form displayed on a computer monitor screen or data entry screens
o Process:
- customer orders were entered into the system by employees, with IT, customers can do data entry themselves.
Examples:
a. customers can complete a form on the company’s Web site (e.g., amazon, Lazada).
b. electronic data interchange (EDI) - The use of computerized communications and a standard
coding scheme to submit business documents ELECTRONICALLY in a format that can be
automatically processed by the recipient’s information system
- used by customers to submit the order electronically in a format compatible with the
company’s sales order processing system.
- Both techniques:
- improve efficiency and cut costs by eliminating the need for human involvement in the sales order entry
process.
- enables use of sales history information to improve sales
- Ex. marketing messages tailored to individual customer, customized electronic coupons to encourage
additional purchases, allow customers to customize products to meet exact needs
- help improve cash flow in two ways.
(1) First, because many sales are built to order, less capital needs to be tied up in carrying a large
inventory of finished goods.
(2) Second, the build to order model allows companies to collect all or part of the payment in
advance, possibly even before they have to pay for the raw materials.
- effectiveness of a Web site depends largely on its design: A hard-to-use Web site may hurt sales by
frustrating customers and creating ill will while a well-designed Web site can provide useful insights
- companies continue to employ a sales staff in addition to using a Web site storefront, because of the benefits
associated with face-to-face contact with existing and prospective business customers
- Technology also enhances the quality of sales presentation
o Threats and Controls
5. order will be either missing or inaccurate
a. Creates inefficiencies
b. negatively affect customer perceptions and, thereby, adversely affect future sales
 Control:
o data entry edit controls (e.g. completeness checks, reasonableness test)
o restrict access to the integrated database to prevent unauthorized changes that could
destroy the integrity of the data
6. legitimacy of orders
a. company ships merchandise to a customer then the latter denies the order, there is a
potential loss of assets.
 Control:
o customer order is established by the customer’s signature which provide assurance of
legitimacy as the evidence to support nonrepudiation for electronic transactions
2) Credit Approval
o Most business-to-business sales are made on credit.
7. making sales that later turn out to be uncollectible.
 Control: Requiring proper authorization for each credit sale
o Do not increase the customer’s total account balance beyond credit limit
 credit limit - The maximum allowable credit account balance for each customer,
based on past credit history and ability to pay
o someone other than the sales representative should specifically approve extension of
credit (credit approval)
 sales order entry clerks - read-only access to information about individual
customer credit limits
 credit manager - ability to actually change credit limits
 To be effective, credit approval MUST OCCUR before the goods are
released from inventory and shipped to the customer.
 careful monitoring of accounts receivable
o accounts receivable aging schedule - A report listing customer account balances by
length of time outstanding.
 - projecting the timing of future cash inflows related to sales, deciding whether
to increase the credit limit for specific customers, and for estimating bad debts
3) Checking Inventory Availability
o Process:
- information typically available to the sales order staff: quantity on hand, quantity already committed to other
customers, and quantity available.
- If sufficient inventory is available to fill the order, the sales order is completed, and the quantity-available
field in the inventory file for each item ordered is reduced by the amount ordered.
 The shipping, inventory control, and billing departments are then notified of the sale, and an
acknowledgment may be sent to the customer.
- If there is not sufficient inventory on hand to fill the order, a back order is created.
 back order - A document authorizing the purchase or production of items that is created when there is
insufficient inventory to meet customer orders.
 In manufacturing companies, creating a back order involves notifying the production department to
initiate the production of the requested items.
 In retail companies, the purchasing department would be notified about the need to order the required
items.
- system then generates a picking ticket
 picking ticket - A document that lists the items and quantities ordered and authorizing the inventory
control function to release that merchandise to the shipping department
 traditionally a paper document, picking tickets today are often electronic forms
 To improve efficiency, the picking ticket often lists the items by the sequence in which they are stored
in the warehouse, rather than in the order listed on the sales order.
o Threats and Controls
8. stockouts and excess inventory
a. Stockouts may result in lost sales if customers are not willing to wait and instead purchase from
another source.
b. excess inventory increases carrying costs and may even require significant markdowns that
reduce profitability.
 Control:
o perpetual inventory method - however error-prone in retail establishments
o Replacing bar codes with radio-frequency identification (RFID) tags
- tags can be read as the inventory moves throughout the warehouse
o training and regular reminders - reduce the frequency of the undesired behavior
o periodic physical counts of inventory - verify the accuracy of recorded amounts.
o Sales forecasts - better predict inventory needs thereby reduce the risk of stockouts or
carrying excess inventory
 Responding to Customer Inquiries - extremely important to a company’s long-run success.
o Threat and Control
9. retain customers - satisfying customers and creating loyalty.
 Control:
o customer relationship management (CRM) systems - Software that organizes information
about customers in a manner that facilitates efficient and personalized service.
 facilitate more efficient and more personalized service
 Web sites designed to provide customer service should include an IM or chat feature
to enable customers to obtain real-time expert assistance and advice for dealing with
special issues the FAQ list does not satisfactorily address.
 important for accountants to design reports that will assist managers in properly
evaluating the performance of customer service

SHIPPING
two steps: (1) picking and packing the order (by
warehouse department)
(2) shipping the order
(shipping department)
 Pick and Pack the Order - removing the
correct items from inventory and packaging them for delivery
o Process:
- picking ticket by the sales order entry process triggers the
pick and pack process.
- Warehouse workers use the picking ticket to identify which
products, and the quantity of each product, to remove
from inventory.
 - Warehouse workers record the quantities of each item actually picked, either on the picking ticket itself (if a
paper document is used) or by entering the data into the system (if electronic forms are used).
- The inventory is then transferred to the shipping department.
 automated warehouse systems (e.g., computers, bar-code scanners, conveyer belts) reduce the time and
cost of moving inventory into and out of the warehouse while also improving the accuracy of perpetual
inventory systems.
 Wireless technology increases warehouse productivity by eliminating the need for workers to
repeatedly return to a centralized dispatch center to receive printed instructions.
 RFID tags improve the efficiency and accuracy of tracking inventory movement.
o Threats and Controls
10. risk of picking the wrong items or in the wrong quantity
a. automated warehousing technologies minimize the chance of such errors
 Control:
o Bar-code and RFID scanners virtually eliminate errors by automatically compare the
items and quantities picked by warehouse workers on sales orders
11. theft of inventory - makes inventory records inaccurate
 Control:
o inventory should be kept in a secure location to which physical access is restricted
o all inventory transfers within the company should be documented
- Inventory should be released to shipping employees based ONLY ON APPROVED
SALES ORDERS.
- Both warehouse and shipping employees should sign the document accompanying
the goods at the time the goods are transferred from inventory to shipping
o use of wireless communications technologies and RFID tags - real-time tracking of
inventory in transit
o recorded amounts of inventory should be periodically reconciled with physical counts of
inventory on hand
 Ship the Order
o Process
- shipping department should compare the physical count of inventory with the quantities indicated on the
picking ticket and sales order.
- Discrepancies can arise either: items were not stored in the location indicated on the picking ticket or
because the perpetual inventory records were inaccurate.
o In such cases, the shipping department needs to initiate the back ordering of the missing items and
enter the correct quantities shipped on the packing slip.
- clerk counts the goods delivered from the warehouse, the sales order number, item number(s), and
quantities are entered using online terminals.
o packing slip - A document listing the quantity and description of each item included in a
shipment.
o bill of lading - A legal contract that defines responsibility for goods while they are in transit
- identifies the carrier, source, destination, and any special shipping instructions,
and it indicates who (customer or vendor) must pay the carrier
- If the customer is to pay the shipping charges, this copy of the bill
of lading may serve as a freight bill
- choice of delivery method. Traditionally, company own truck fleets for deliveries.
- Outsourcing deliveries reduces costs and allows manufacturers to concentrate on their core business
activity (the production of goods). however, it requires collecting and monitoring information about
carrier performance
- location of distribution centers. suppliers and manufacturers must use logistics software tools to identify
the optimal locations to store inventory to minimize the total amount of inventory carried and to meet
each customer’s delivery requirements.
o Threats and Controls
12. shipping errors
a. Shipping the wrong items or quantities of merchandise and shipping to the wrong
location can cause customer dissatisfaction, resulting in the loss of future sales.
b. Shipping errors may also result in the loss of assets if customers do not pay for goods
erroneously shipped
 Control:
o Regular reconciliation of information about shipments with sales orders for timely
detection of delay or failure to ship goods to customers
o RFID systems can provide real-time information on shipping status
o bar codes and RFID tags - reduce data entry errors by shipping employee
o field checks, limit or range checks, and completeness tests - if shipping data must be
ENTERED MANUALLY
 o “block” the line items on sales orders once shipping documents are printed - prevent
using that same sales order
 sequentially prenumbering all shipping documents reduce the risk of duplicate
shipment

BILLING
 Invoicing - information processing activity that repackages and summarizes information from the sales order entry and
shipping activities.
o Process:
- sales invoice notifies customers of the amount to be paid and where to send payment
 sales invoice - A document
notifying customers of the
amount of a sale and where
to send payment
- Larger customers, receive invoices
via EDI.
 EDI eliminates printing and
postage costs, and labor
involved in performing those tasks.
- well-designed accounting system can entirely eliminate the need to create and store invoices
- invoice indicates the quantity of each item sold and the price charged for that item
 price is usually set at the time the order is placed
 actual quantity sold is known at the time the
merchandise is shipped to the customer
- if both companies have accurate transaction processing
systems, it is possible to establish an agreement in which the
buyer will automatically remit payments within a specified
number of days after receiving the merchandise
 invoiceless billing is that it saves both the seller and
buyer considerable amounts of time and money by
eliminating the need to perform a traditional business
process (invoicing) that does not provide any new
information
o Threats and Controls
13. failure to bill customers - loss of assets and erroneous
data about sales, inventory, and accounts receivable.
 Control:
o Segregating the shipping and billing functions
o ERP systems need to be configured to regularly compare sales orders, picking tickets, and
shipping documents with sales invoices to produce reports of shipments for which an
invoice has not been created
14. Billing errors
a. pricing mistakes - Overbilling can result in customer dissatisfaction, and underbilling
results in the loss of assets. Incorrect calculation of sales taxes can result in fines and
penalties.
b. billing customers for items not shipped or on back order
 Control:
o retrieve the appropriate data from the pricing master file
o by restricting the ability of employees to make changes to that data
o If billing data is entered manually, use data entry edit controls to minimize errors
o reconciling the quantities listed on the packing slips with those on the sales order
 Maintain Accounts Receivable
o Process:
- open-invoice method - Method for maintaining accounts receivable in which customers typically pay according
to each invoice.
 two copies of the invoice are mailed to the customer, who is requested to return one copy (a turnaround
document called a remittance advice) with the payment
 remittance advice - A copy of the sales invoice returned with a customer’s payment that indicates the
invoices, statements, or other items being paid.
 Advantages: conducive to offering discounts for prompt payment and results in a more uniform flow
of cash collections throughout the month.
 Disadvantage: complexity to maintain information about the status of each individual invoice for each
customer
  typically used by business whose customers are primarily other businesses (small number of individual
while amounts of those transactions is high)
- balance-forward method - Method of maintaining accounts receivable in which customers typically pay
according to the amount shown on a monthly statement, rather than by individual invoices. Remittances are
applied against the total account balance, rather than specific invoices.
 monthly statement - A document listing all transactions that occurred during the past month and
informing customers of their current account balance
 used by large numbers of customers who make many SMALL PURCHASES EACH MONTH
 cycle billing - Producing monthly statements for subsets of customers at different times
- Image processing technology - digital images of customer remittances and invoices can be stored electronically
and then be easily retrieved, manipulated, and integrated with other images and data to produce various types of
output.
- Adjustments to a customer’s account are sometimes necessary (e.g., sales return and allowances)
 credit memo - A document, approved by the credit manager, authorizing the billing department to
credit a customer’s account
o Threats and Controls
15. Errors in maintaining customer accounts - loss of future sales and may indicate theft of cash.
 Controls:
o Data entry edit checks
o batch totals - provide additional means to detect posting errors.
- reconciliations should be performed by someone other than the individual involved
in processing the original transactions because
(1) it is easier to catch someone else’s mistakes than one’s own,
(2) it provides a means to identify possible cases of fraud
o Mailing monthly account statements to every customer - additional independent review
of posting accuracy
o reconciling the subsidiary accounts receivable records with the general ledger
16. employee may issue credit memos to write-off account balances for friends or to cover up the theft of
cash or inventory
 Controls:
o Proper segregation of duties
o system configured to block credit memos w/o validated documentation that the goods
have been returned by the customer
CASH COLLECTIONS
o Process:
- accounts receivable function (treasurer) responsible for recording customer remittances, should not have physical
access to cash or checks (cashier)
 Using open-invoice method, remittance advice is then routed to accounts receivable, and the actual customer
payment is sent to the cashier
 remittance list - A document listing names and amounts of all customer payments received in the mail.
- lockbox - A postal address to which customers send their remittances.
 participating bank picks up the checks from the Post Office box and deposits them in the company’s account.
- electronic lockbox - A lockbox arrangement in which the bank electronically sends the company information about the
customer account number and the amount remitted as SOON AS IT RECEIVES PAYMENTS.
o Lockbox arrangements, however, eliminate only those delays
- electronic funds transfer (EFT) - The transfer of funds through use of online banking software.
 need additional data about each remittance, such as invoice numbers and discounts taken.
- financial electronic data interchange (FEDI) - The combination of EFT and EDI that enables both remittance data and
funds transfer instructions to be included in one electronic package
o Threats and Controls
17. cash is so easy to steal
 Controls:
o Segregation of duties - most effective control
procedure
1. Handling cash or checks and posting remittances to customer accounts
2. Handling cash or checks and authorizing credit memos
3. Handling cash or checks and reconciling the bank statement.
o bank lockbox arrangement or the use of EFT,
FEDI, or credit cards for customer payments
o universal payment identification code (UPIC) - A
number that enables customers to remit payments
via an ACH credit without requiring the seller to
divulge detailed information about its bank
account.
  costs of these arrangements must be weighed against the benefits of reduced
internal processing costs and faster access to customer payments.
o list of all checks received should be prepared immediately after opening the mail
o checks should also be restrictively endorsed at that time
o Retail stores receive cash directly from customers should use cash registers that
automatically produce a written record of all cash received
o All customer remittances should be deposited, intact, in the bank each day
18. cash flow problems are a serious concern
 Controls:
o use of lockbox arrangements, EFT, credit cards,
o offering discounts for early payment can speed up cash collections
o cash flow budget - A budget that shows projected cash inflows and outflows for a
specified period
- BEST CONTROL PROCEDURE