The Revenue Cycle:

Sales to Cash Collections

FOSTER School of Business

Acctg.320
 Introduction
The revenue cycle is a recurring set of
business activities and related information
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.
The Revenue Cycle:
Objectives
Objectives of the Cycle . . .

• Record sales orders promptly and

accurately.
• Verify credit worthiness.
• Ship products or perform services.
• Bill for products and services in a timely
manner.
Objectives of the Cycle . . .
• Record and classify cash receipts
promptly and accurately.
• Post sales and cash receipts to customers’
accounts.
• Safeguard products until shipped.
• Safeguard cash until deposited.
 AIS basic functions
There are 3 basic functions of the AIS in the
revenue cycle:
(1) capturing and processing data about
business activities,
(2) storing and organizing that data to support
decision making,
(3) providing controls: ensure reliability of data
& safeguard resources.
 Revenue Cycle Business Activities
Four basic business activities performed in the
revenue cycle:
Sales Order Entry Shipping Billing Cash collections
 Revenue Cycle Business Activities
Four basic business activities performed in the
revenue cycle:
Sales Order Entry Shipping Billing Cash collections

Sales order entry process entails four steps:

1. taking the customer’s order,
2. checking and approving customer credit,
3. checking inventory availability, and
4. Responding to Customer Inquiries
1.Taking Customer Orders
Many different ways: phone, store, field rep.,
mail, web…etc. Optical scanners can
convert hardcopy to electronic data or
customers enter data.
C allow customers to customize products to
their needs (e.g., Dell).
Use EDI (EDINT) for orders or to allow
vendors to manage inventory (vendor
managed inventory (VMI).
Software can be used to optimize selling
prices!
 2.Credit Approval
• Most business-to-business sales are made on credit.
Credit sales should be approved before they are
processed.
• Each customer will have a credit limit. Credit limit is the
maximum allowable account balance for each customer
based on the customer’s past credit history and ability to
pay.
 3.Checking Inventory Availability
• The next step is to determine if there is sufficient
inventory available to fill the order.
• When there are not sufficient items on hand to fill the
customer’s order, a back order is created.
• Once the item(s) become available, a picking ticket is
created.
• The picking ticket authorizes the inventory control
function to release merchandise to the shipping
department.
• The accuracy of inventory records is important because
customer may become justifiably upset when
unexpected delays occur in filling their orders.
4.Responding to Customer
Inquiries
• Customer services is so important that many
companies use special software packages, called
Customer Relationship Management (CRM)
systems, to support this vital process.
• The goal of customer relationship management is
to retain customers.
• This is important because a general marketing rule
of thumb is that it costs at least five times as much
to attract and make a sale to a new customer as it
does to make a repeat sale to an existing customer.
 Revenue Cycle Business Activities
Four basic business activities performed in the
revenue cycle:
Sales Order Entry Shipping Billing Cash collections

Sales order entry process entails four steps:

1. taking the customer’s order,
2. checking and approving customer credit,
3. checking inventory availability, and
4. Responding to Customer Inquiries
 Revenue Cycle Business Activities
Four basic business activities performed in the
revenue cycle:
Sales Order Entry Shipping Billing Cash collections

• The second basic activity in the revenue cycle is

filling customer orders and shipping the desired
merchandise.
• Shipping consists of the following two steps:

(1) picking and packing the order and

(2) shipping the order

 1.Pick and Pack the Order
• The picking ticket printed by sales order entry triggers
the pick and pack process.
• Some of the investments companies have an automated
warehouse system which include: computers, bar-code
scanners, conveyer belts and communications
technology. Some warehouses have no people—use
robots.
• Radio-Frequency Identification (RFID) is replacing bar
codes. The RFID tag eliminates the need to align items
with scanners; instead, the tags can be read as the
inventory moves throughout the warehouse.
 2.Ship the Order
• The shipping department compares the physical count of
inventory with the quantities indicated on the picking
ticket and with the quantities indicated on the copy of
the sales order that was sent directly to shipping from
sales order entry.
• The packing slip lists the quantity and description of
each item included in the shipment.
• The bill of lading is a legal contract that defines
responsibility for the goods in transit.
 2.Ship the Order
• If the customer is to pay the shipping charges, the
copy of the bill of lading may serve as a freight
bill, to indicate the amount the customer should
pay to the carrier.
• One major decision that needs to be made when
filling and shipping customer orders concerns the
choice of delivery method.
• Another important decision concerns the location of
distribution centers.
• RFID systems can provide real-time information on
shipping status and thus provide additional value to
customers.
 Revenue Cycle Business Activities
Four basic business activities performed in the
revenue cycle:
Sales Order Entry Shipping Billing Cash collections

• The second basic activity in the revenue cycle is

filling customer orders and shipping the desired
merchandise.
• Shipping consists of the following two steps:

(1) picking and packing the order and

(2) shipping the order

 Revenue Cycle Business Activities
Four basic business activities performed in the
revenue cycle:
Sales Order Entry Shipping Billing Cash collections

Involves two separate but related tasks:

(1) invoicing: The document created in the billing
process is the sales invoice, which notifies customers
of the amount to be paid and where to send payment.
(2) updating A/R: The accounts receivable function
uses the information on the invoice to debit the
customers’ accounts for credit purchases and credit the
customers’ accounts when payment is received.
 Billing
• Under the open-invoice method, customers normally
pay according to each invoice.
• The customer is asked to return a copy of the invoice
when mailing in their payment. This return copy is
referred to as the remittance advice. 
• Under the balance-forward method, customers
typically pay according to the amount shown on a
monthly statement. 
• A monthly statement lists all transactions, including
both sales and payments.
 Revenue Cycle Business Activities
Four basic business activities performed in the
revenue cycle:
Sales Order Entry Shipping Billing Cash collections

Involves two separate but related tasks:

(1) invoicing: The document created in the billing
process is the sales invoice, which notifies customers
of the amount to be paid and where to send payment.
(2) updating A/R: The accounts receivable function
uses the information on the invoice to debit the
customers’ accounts for credit purchases and credit the
customers’ accounts when payment is received.
 Revenue Cycle Business Activities
Four basic business activities performed in the
revenue cycle:
Sales Order Entry Shipping Billing Cash collections

• The final step in the revenue cycle is cash collections.

• The cashier handles customer remittances and deposits them
in the bank.
• A remittance list provides the names and amounts of all
customer remittances, and sends it to accounts receivable.
• Imaging technology can be used to improve the efficiency of
processing customer payments.
 Revenue Cycle Information
Needs
• Effective management of revenue cycle activities
requires timely access to accurate information
• Operational data are needed to monitor
performance and to perform recurring tasks.
• In addition, current and historical information is
needed to enable management to make strategic
decisions.
• The accounting information system must also
supply the information needed to evaluate
performance of critical processes.
ThReAtS
 1.0
Sales Order
Entry
Threats

1. Incomplete or inaccurate customer

orders.
2. Credit sales to customers with poor
credit.
3. Legitimacy of orders
4. Stockouts, carrying costs, and
markdowns.
 2.0
Shipping
Threats

5. Shipping Errors
– Wrong merchandise
– Wrong quantities
– Wrong address

6. Thefts of Inventory
 3.0
Billing
Threats

7. Failure to bill customers.

8. Billing errors.
9. Posting errors in updating accounts
receivable.
 4.0
Cash
Collections
Threats

10. Theft of cash

General
Control
Issues
Threats

11. Loss of Data

12. Poor performance