Ch7 & Ch 17: Romney, M. B. et al. (2013). ACC200 Accounting Information Systems.
Objectives
At the completion of this topic, you should be able to: 1. describe the business processes performed in the revenue cycle; 2. discuss the key decisions that need to made in the revenue cycle and identify the
information required to support these; 3. document the business activities of the revenue cycle; and 4. identify the major threats to the revenue cycle and identify appropriate control procedures
to ameliorate those threats.
Commentary
In this topic you will apply the concepts and techniques that you have learnt in this subject to the revenue cycle. The revenue cycle refers to all events involved in the provision of goods and services to customers, and the resulting monies collected as payment from the sales.
The revenue cycle introduction
Read
Romney (pp. 205-209 Ost. pp.103-107) The text provides a useful introduction as to how theory underpins systems cycles, before moving on to describe how the revenue cycle links in with other cycles. These linkages are illustrated in Figure 7-2 below.
Note that in this subject we only cover another two cycles in detail:
a) Expenditure cycle – Topic 4 b) General Ledger financial reporting cycle – Topic 5 (Note: same as General ledger and
reporting cycle in Figure 7-2).
Revenue cycle business activities
There are four basic business activities that are performed in the revenue cycle: a) Sales order entry - process the sales order b) Shipping - pick, pack and ship the goods c) Billing and accounts receivable - invoice the customer and maintain accounts receivable d) Cash collection - receive and record payment.
How each of the activities relate to each other is illustrated in the DFD below, Figure 7-3.
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Read
Romney (pp. 210-227 Ost. pp.108-125)
Study task
Complete the following table detailing what activities take place within each business function of the revenue cycle for a retail shop, a furniture manufacturer, and a public accounting practice. How are the activities different for each type of business?
Retail shop Furniture
manufacturer Public accounting practice
process the sales order
pick, pack and ship the goods
invoice the customer and maintain accounts receivable
receive and record payment
Revenue cycle information needs and reporting
In order to provide the right product in the right place at the right time for the right price, management must make the following key decisions (Refer back to Romney p.210 Ost p.108).
• Should we customise products? • How much inventory should we carry and where? • How should we deliver our product? • How should we price our product? • Should we give customers credit? If so, how much and on what terms?
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• How can we process payments to maximise cash flow? The information needs of the revenue cycle can be separated into strategic:
• Setting prices for products/services.
• Establishing policies on returns and warranties.
• Deciding on credit terms.
• Determining short-term borrowing needs.
• Planning new marketing campaigns.
As contrasted with operational information:
• Responding to customer enquiries.
• Deciding on extending credit to a customer.
• Determining inventory availability.
• Selecting merchandise delivery methods.
The detailed information required under each category is laid out in the text.
Read
Romney (pp. 227-230 Ost. pp.125-128)
Revenue cycle: Threats and controls
Read
Romney (pp. 510-524 Ost. pp.138-152)
This portion of the text first provides an introduction to threats and control procedures in general, before moving to the revenue cycle specifically. It should be emphasised that a control should only be implemented if the benefit received from the control is greater than the cost of the control. The Benefit of control = Loss incurred × Probability of event occurring Thus the reasons why controls are introduced are to:
a) Reduce the probability of an adverse event occurring (risk). b) Reduce the loss of event once it has occurred (impact).
You will need to understand the general threats and controls for the revenue cycle, as well as the threats and controls in respect of each business activity. A useful summary of all of these is given in Table 17.2.
Conclusion
In completing this topic, you should now be able to describe the business processes and document the business activities of the revenue cycle, discuss the key decisions that need to made in the revenue cycle and supporting information required, know the major threats to the revenue cycle and be able to identify relevant controls for those threats.
Forum task
Using the answer to your Study Task above, please post comments on the following question to the ACC200 Topic 3 sub forum. What are examples of ways in which computers, technology and AIS software have improved the efficiency and effectiveness of business activities within the revenue cycle?
Self-test exercises
Attempt the following self-test questions in your text.
• Chapter 7 Discussion Question D7.2 (p.232 Ost. p.130) Some products, like music and software, can be digitised. How does this affect each of the four main activities in the revenue cycle?
• Chapter 7 Discussion Question D7.3 (p.232 Ost. p.130) Do you agree with the following statement? “Any one of the systems documentation procedures can be used to adequately document a given system.” Explain.
• Chapter 7 Problem P7.3 (p.233 Ost. p.131) Many companies use accounts receivable aging schedules to project future cash inflows and bad-debt expense. Review the information typically presented in such a report (see Figure 7.7). Which specific metrics can be calculated from those data that might be especially useful in providing early warning about looming cash flow or bad-debt problems?
• Chapter 17 Problem P17.16 (Appendix p.566-567 Ost. p.586-587)
P7.2 EXCEL PROJECT. (Hint: For help on steps b and c, see the article “Dial a Forecast,” by James A. Weisel, in the December 2006 issue of the Journal of Accountancy. The Journal of Accountancy is available in print or online at the AICPA’s web site: www.aicpa.org
Required:
a. Create a 12-month cash flow budget in Excel using the following assumptions:
• Initial sales of $5 million, with forecasted monthly growth of 1%
• 40% of each month’s sales for cash; 30% collected the following month; 20% collected 2 months later; 8% collected 3 months later; and 2% never collected
• Initial cash balance of $350 000
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Formulas (the formulas for June – December are similar to those shown in the column for April and May)
b. Add a ‘spinner’ to your spreadsheet that will enable you to easily change forecasted monthly sales growth to range from 0.5% to 1.5% in increments of 0.1%.
A ‘spinner’ is a tool that enables the user to easily alter the values of a variable by clicking on the ‘spinner’ rather than having to type in a new value. The spinner tool then displays how changing that variable changes the spreadsheet. As shown below, if you search for the word ‘spinner’ in the built-in Excel help function, you will be directed to help for creating and using either a scroll bar or a spin button. Clicking on either the ‘Add a spin button’ or ‘Add a scroll bar’ entries in the Help Screen will walk you through the steps for how to add these tools to your spreadsheet.
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In part b, we will create a spin button to change the assumed sales growth rate. Step 1: Click on the ‘Developer’ tab and then click on the ‘Insert’ button as shown:
Step 2: In the drop-down menu that appears when you click on ‘Insert’, click on the ‘Spin button’ option from the Active X
controls choices (move your mouse over the various Active X choices to reveal their names – the Spin button is the larger pair of arrows)
Then click on a cell that is two cells to the right of the one that contains your initial assumption for the sales growth rate (i.e., cell F5) which will result in the following:
Step 3: Now we have to link the spin button tool to the cell that we wish to manipulate. In this case, the objective is to be able
to vary the sales growth rate (in cell D5) from 0.5% to 1.5%. However, the spin button tool can only increment variables in whole units, not percents. Therefore, we will change the value of the cell containing the monthly sales growth rate (cell D5) so that it equals cell E5 divided by 1000. Then we will be able to use the spin button to vary the sales growth rate from 5 to 15, which when divided by 1000 yields 0.5% to 1.5% as desired. After entering the value of 10 in cell E5 the spreadsheet will now look like this:
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Step 4: Now right-click on the spin button, then select ‘Properties’ and enter the following values: Linked cell = E5 Max = 15 Min = 5 Smallchange = 1
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Step 5: Click the ‘Design Mode’ option in the tool bar to exit Design Mode. You can now click on the spin button and change the value of the sales growth rate. Notice how all of the values in the spreadsheet change simply by clicking the spin button arrows – no need to repeatedly type in the new sales growth rate value.
c. Add a scroll bar to your spreadsheet that will let you modify the amount of initial sales to vary from $4 million to $6 million in increments of $100 000.
A scroll bar is another spinner tool. The difference between a scroll bar and a spin button is that a scroll bar has a space between its arrows. This allows you to see how close you are to the upper and lower limits for the variable you are manipulating. The process of creating a scroll bar is very similar to that for creating a spin button. Step 1: In Developer Tab, click on Design Mode to get back into Design Mode. Then click on Insert. Select the scroll bar option from the Active X choices that appear. (As before, moving your mouse over the choices reveals their names. The scroll bar option is the smaller pair of arrows). Move to cell F4 and click to enter the scroll bar there. Your spreadsheet should now look like this:
Step 2: Click on one corner of the scroll bar and drag it so that it fills cell F5 horizontally. Your spreadsheet should now look like this:
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Step 3: As with the spin button, we have to link the scroll bar to the cell that will display the values we wish to vary. Our goal is to vary sales from $4 million to $6 million in increments of $100 000. The spinner tool, however, cannot work with such large values. Therefore, we will change cell D5 so that it equals our cell E5 times 1000. After changing the value of cell D5 and entering the value of 5000 in cell E5, your spreadsheet should now look like this:
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Step 4: Now right-click on the scroll bar tool in cell F5, select properties, and enter the following values: LinkedCell = E4 Max = 6000 Min = 4000 SmallChange = 100
Step 5: You can now click on the left and right arrows in the scroll bar to vary the amount of initial sales and see the effects ripple through the spreadsheet – without having to retype new initial sales values.
ACC200 Study Guide
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Self test answers
Discussion questions Ch 7 D7.2 Some products, like music and software, can be digitised. How does this
affect each of the four main activities in the revenue cycle? Digitised products do not change the four basic business activities of the revenue
cycle. For all products, whether digitised or not, an order must be taken, the product shipped, the customer billed, and cash collected.
The only thing that digitised products change is inventory management as products
do not need to be removed from a warehouse to be delivered. However, a copy of a product must be shipped (usually electronically, but in some cases it may need to be burned on a DVD and then shipped).
D7.3 Many companies use accounts receivable aging schedules to project future
cash inflows and bad-debt expense. Review the information typically presented in such a report (see Figure 7.7). Which specific metrics can be calculated from those data that might be especially useful in providing early warning about looming cash flow or bad-debt problems?
The accounts receivable aging report shows dollar amounts outstanding by number of days past due by customer and by invoice. The following metrics can provide useful early warnings about looming cash flow or bad-debt problems. • The percentage of total accounts receivable categorised by days past due would
alert management of categories that are increasing. This could also be reported by customer and by invoice. This way if a particular invoice was not being paid, the company could more quickly identify the invoice, contact the customer, and potentially resolve any problems or disputes about the particular invoice.
• Reporting by customer can help to identify chronic ‘slow paying’ customers so that corrective action could be taken such as offering discounts for quick payment, changes in terms, and notifying the credit manager to restrict credit for this particular customer.
• The company may have a threshold for each category of past due accounts either in percentages or absolute dollars. A metric could be calculated and presented that highlights the categories exceeding that threshold.
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Problems Ch 7 P7.3 For each of the following activities identify the data that must be entered by
the employee performing that activity and list the appropriate data entry controls: a. Sales order entry clerk taking a customer order
Data that must be entered User ID Password Customer number Delivery method Desired delivery date Item number Item quantity
b. Shipping clerk completing a bill of lading for shipment of an order to a
customer Data that must be entered User ID Password Carrier name Customer name (consigned to) Number of packages Description Weight Class or rate
Note: All other fields on the sample bill of lading (see Figure 12-11) can be completed by the system.
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Problems Ch 17 P17.16. The Family Support Centre is a small charitable organisation. It has only four full-time
employees: two staff, an accountant and an office manager. The majority of its funding comes from two campaign drives, one in Spring and one in Autumn. Donors make donations over the telephone. Some donors pay their donation by credit card during the telephone campaign, but many prefer to pay in monthly instalments by cheque. In such cases, donations are recorded during telephone campaigns, and donors are then mailed donation cards. Donors mail their contributions directly to the charity. Most donors send a cheque, but occasionally some send cash. Most donors return their donation card with their cheque or cash donation, but occasionally the Family Support Centre receives anonymous cash donations. The procedures used to process donations are as follows:
Sarah, a staff member who has worked for the Family Support Centre for 12 years,
opens all mail. She sorts donations from other mail and prepares a list of all donations, indicating the name of the donor (or anonymous), amount of the donation, and the donation number (if the donor returned the donation card). Sarah then sends the list, cash and cheques to the accountant.
The accountant enters data from the list into the computer to update the Family
Support Centre’s files. The accountant then prepares a deposit slip (in duplicate) and deposits all cash and cheques into the charity’s bank account at the end of each day. No funds are left on the premises overnight. The validated deposit slip is then filed by date. The accountant also mails an acknowledgement letter thanking each donor. Monthly, the accountant retrieves all deposit slips and uses them to reconcile the Family Support Centre’s bank statement. At this time, the accountant also reviews donation files and sends a follow-up letter to those people who have not yet fulfilled their donations.
Each employee has a computer workstation that is connected to the internal
network. Employees are permitted to surf the web during lunch hours. Each employee has full access to the charity’s accounting system, so that anyone can fill in for someone else who is sick or on vacation. Each Friday, the accountant makes a backup copy of all computer files. The backup copy is stored in the office manager’s office.
Required a. Identify two major control weaknesses in the Family Support Centre’s cash receipts
procedures. For each weakness you identify, suggest a method to correct that weakness. Your solution must be specific—identify which specific employees should do what. Assume that no new employees can be hired.
1. Weakness - Sarah opens all mail and prepares a list of donations (cash and
cheques). Sarah could misappropriate anonymous cash donations.
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Control - Mail should be opened by both Sarah and the other staff member. The use of lockboxes would also eliminate this problem, but would cost the charity money to implement.
2. Weakness - The donations and donation list are sent to the accountant for recording
and to prepare the bank deposit. Therefore, the accountant has custody of the donation and records the donation.
Weakness - Bank reconciliation is performed by the accountant, who also makes
the bank deposit. Control - The donations should be sent to the office manager for deposit and the
donation list sent to the accountant for recording. This corrects both weaknesses. 3. Weakness - Each employee has full access (create, read, update, delete) to the
accounting system. Control - Only the accountant and the office manager should have full access to the
accounting system. b. Describe the IT control procedures that should exist in order to protect the Family
Support Centre from loss, alteration or unauthorised disclosure of data.
a. The weekly backup should be stored off-site, not in the manager's office. b. The files both on-site and off-site should be password protected and encrypted to
guard against alteration and unauthorised disclosure. c. The backup files should be kept locked in a secure place.
