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Accounting Information Systems

Revenue Cycle
Romney Chapter 12
Paul Sager

Basic AIS Functions

Capture (input) and process data
Store and organize (information) the data for
decisions.
Providing controls to safeguard resources
(including data).
Data
Storage
Data
Input

Data
Processing

Information
Output

INTERNAL CONTROLS

Enterprise Resource Planning (ERP) Systems

Expenditure
Cycle
(Procure to
Pay)

Revenue Cycle
(Order to
Cash)

Industry
Specific

Integrated
database

Production
Cycle

GL/Reporting

HR/Payroll
Cycle
(Hire to retire)

Different Industries
Manufacturing/Wholesale/Retail (53%* of
economy)
Financial services
Information (entertainment and media)
Hospitality (hotel, restaurants)
Professional services (consulting, outsourcing)
Transportation (freight, people)
Utilities
* 2007 US Census Economic Data

Revenue Cycle Participants

(Segregation of Duties)
CEO
V P o f M a r k e tin g
S a le s
O rd er

C u s to m e r
S e rv ic e

V P o f M a n u fa c tu r in g
W a reh o u se

S h ip p in g

CFO
C o n tr o lle r

B illin g
D e p t.

A c c o u n ts
R e c e iv a b le

T re a s u re r

C r e d it
M anager

C a s h ie r

The Revenue Cycle-Order to Cash

The end-to-end processes necessary to convert
service or product sales into cash
Give goods/services, Get cash

1.
2.
3.
4.

Take Order
Process order (deliver service or products)
Invoice
Collect cash

Revenue and Expenditure Cycles

--one party sells, the other party buys
Revenue Cycle

Expenditure Cycle

Sales opportunity

Purchase need/requisition

Sales Order (quote/negotiate,

approve)

Purchase Order (quote/negotiate,

approve)

Ship Goods (pull from inventory, pack, Receive Goods (receive, packing slip,
ship, packing slip)
unpack/inspect, add to inventory)
Invoice to customer (update sales
journal, AR ledger)

Invoice from Supplier (update

purchases journal, AP ledger)

Receive cash (match to invoice, update Pay cash (match invoice, receipt, PO,
cash journal/AR ledger)
update cash journal/AP ledger)

Technology in Revenue Cycle

E-mailmust verify sender and secure content
Digital signatures, data encryption, confirmation

Internet customer interface

Catalog, order entry, invoice, customer service

Electronic Data Interchange (EDI)

Structured data formats over secure network

Electronic Funds Transfer (EFT)

Direct transfer between bank accounts
Coupled with lockbox remittance data for
Financial EDI (FEDI)

More Technology in Revenue Cycle

Credit or debit cards
Bar codes and Radio Frequency Identification
(RFID)
Track movement in supply/distribution chain
Link with customer data (e.g., grocery store)

Voice or phone data response

Optical Character Recognition (OCR) form
processing
Document imaging for retention/retrieval of
paper documents

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RFID Retail Inventory Process

RFID in Retail (start 1:00)

http://www.youtube.com/watch?v=4eOr0PfwFgs

Apparel (start 1:30)

http://www.youtube.com/watch?v=TdGkadMZDXk&feature=PlayList&p=734A9F6AE0ED15D3&index=1

Seidensticker

http://www.youtube.com/watch?v=RbNzF_kw-Dg

How it works

http://www.youtube.com/watch?v=MAA9JpGraoU

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Revenue Cycle System Design

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The Revenue Cycle-Order to Cash

The end-to-end processes necessary to convert
service or product sales into cash
Give goods/services, Get cash

1.
2.
3.
4.

Take Order
Process order (deliver service or products)
Invoice
Collect cash

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Sales Order Process-Data Flow Diagram

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Sales Order Process

Handled by sales department
Separate from inventory, cash and accounting
Interacts with customer

Current technology uses Internet, EDI, XML

Goal is to eliminate re-keying data
Customer enters order, computer edits

Check availability of items requested/ordered

Must have accurate, perpetual inventory records

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Credit ApprovalKey Control

Credit approved by Credit Mgr/Treasurer
Obtain customer financial data and grant credit
Financial, D&B reports, past experience

Establish credit limit

General Authorization
Compare AR outstanding + new order to limit

Past due AR, exceeds limit, changes in limit

Specific Authorization

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Credit Check
Credit Manager approves $10,000 credit limit
Credit Limit
10000.00
AR Balance
2500.00
New Order
7000.00
(Over)/Under limit 500.00
Any AR balances >60 days outstanding?

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Customer Relationship Management (CRM)

Tracking information about your customers
Current and potential

Direct sales support

Salesforce.com http://www.youtube.com/watch?v=_r1H7OK8lzY

Customer support, service, upsell

Lemonade stand http://www.youtube.com/watch?v=YEa_RNSX5Xo

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Sales Order Threats and Controls

Incomplete/inaccurate orders

-Data entry edit controls

-Restrict access to master data

Invalid orders

-Digital or written signatures

-Acknowledge and confirm

Uncollectible accounts

-Credit evaluation, approval and limits

-Prepare and review AR Aging
-Aggressively pursue past due accounts

Stockouts or excess inventory

-Perpetual inventory system

-Bar-code, RFID, automated handling
-Physical counts of inventoryreconcile
-Sales forecasts integrated with production

Loss of customers

-Best in class customer service (CRM, self-help

websites, customer comes first)

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Process Order--Pick, Pack, Ship

Pick items from inventoryWarehouse Dept
Picking Ticket created from sales order
Record items picked into perpetual system

Ship items to customerShipping Dept

Count/match items to picking ticket/sales order

Record items shipped/create packing slip
Pack items and ship/Create bill of lading
Record freight information

Logistics (shipping)optimize or outsource

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Automated Warehouses
Amazon Warehouse2009
https://www.youtube.com/watch?v=i6H7nfHjHtY
https://www.youtube.com/watch?v=6KRjuuEVEZs
2010: http://www.youtube.com/watch?v=Z2Bs0nqVyqs

Schaefer Systems

http://www.youtube.com/watch?v=6UXQRHObj1Q&feature=BFa&list=PL381D2CB5436E3042&lf=results_main
http://www.youtube.com/watch?v=0Pr3-84te0Q&feature=BFa&list=PL381D2CB5436E3042&lf=results_main
http://www.youtube.com/watch?v=5EjJGRKvpkc&feature=BFa&list=PL381D2CB5436E3042&lf=results_main

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Pick, Pack, Ship Threats and Controls

Pick wrong item or quantity

-Bar-code, RFID, automated handling

-Reconcile packing list to sales order

Theft of inventory

-Restrict access to physical items

-Document inventory transfersboth sides sign
-Physical counts of inventoryreconcile

Shipping errors

-Reconcile docs: sales order, picking slips,

packing slips
-Account for pre-numbered documents
-Data entry automation and edit checks
-Application control checks for duplicate orders

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Stop here

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Billing
Invoice created from sales order and items
shipped
Do not bill for items not shipped (back order)
Invoice creates accounting entry for revenue/AR
What happens if invoices are delayed?
Sales in wrong period
Mismatch with cost of sales (inventory transfer)

Use EDI, Internet or email to send invoices

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Invoice and AR Techniques

Open Invoicepay each invoice
Balance forwardpay all invoices for billing
period (eg., monthly statement)
Cycle BillingBill 25% of customers each week
Used by utilities, credit card companies

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Adjustments to Accounts Receivable

Types of Adjustments (credit memos)

Returns and refunds

Allowances/price adjustments for damaged goods
Uncollectible write-offs
Billing errors (void invoice and reissue)

Credit Manager should authorize (approve)

Billing prepares invoice
AR records entries
Credit Manager approves adjustments

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Revenue Cycle Participants

(Segregation of Duties)
CEO
V P o f M a r k e tin g
S a le s
O rd er

C u s to m e r
S e rv ic e

V P o f M a n u fa c tu r in g
W a reh o u se

S h ip p in g

CFO
C o n tr o lle r

B illin g
D e p t.

A c c o u n ts
R e c e iv a b le

T re a s u re r

C r e d it
M anager

C a s h ie r

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Billing Threats and Controls

Failure to bill

-Segregation of duties: bill, record, adjustments

-Reconcile invoice, sales order, picking tickets,
shipping documents
-Account for pre-numbered documents

Billing errors

-Use software to create invoice based on sales

order price and quantity shipped
-Restrict access to pricing data

Posting errors in AR

-Data entry edit controls

-Integrate posting with ERP/AIS software
-Mail monthly statements to customers
-Reconcile AR Subsidiary Ledger to GL

Inaccurate or invalid credit

memos

-Segregate approval to credit manager

-Application control requires evidence of return
or specific authorization

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Collect Cash
Theft of cash is a significant threat
Separate handling from recording
Cashier within Treasurers office
Use Remittance Advice, copies of checks, lists,
input/stored data to communicate to AR Dept
Lapping can occur if AR handles cash and records

Make sure all checks are deposited

Restrictively endorse immediately
Consider two people opening mail, creating lists or
entering data

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Lockboxes and Technology

Lockboxes are controlled at bank
Copies or lists of payments is sent
Can be paper or electronic

Electronic Funds Transfer (EFT)- B2B

Can be difficult to match payment to customer AR

Financial EDI combines EFT and EDI

Funds are wired between banks and AR data sent
via EDI

Credit card paymentsfees up to 4%

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Credit Card Processing

PCI Security Standards Council
Launched in 2006
Founding Payment Brands
AMEX, Discover, VISA, Mastercard, JCB
International (Japan Credit Bureau)

Sets standards and facilitates consultants and

support
Enforcement is responsibility of Payment Brands
https://www.pcisecuritystandards.org/index.php

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Cash Management

Cash is King
Whoever has the gold makes the rules
Cant collect until you send the invoice
Value of a business is future cash flows
Cash flow budget is essential management tool
Actual results reportingsome track daily!

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Cash Threats and Controls

Theft of Cash

-Segregation of Duties: cash and AR

-Reconcile bank account to GLIndependent
person
-Eliminate cash handling: EFT, FEDI, lockboxes
-Immediately endorse checks
-Count cash and compare to point of sale or
transaction reportIndependent person
-Point of sale systems
-Daily deposits at bank

Cash Flow Problems

-Cash flow budgets and actuals

-Follow-up on past due AR
-Discounts for prompt payment
-EFT, FEDI, lockboxes, credit cards

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General Threats and Controls

Invalid or inaccurate master -Restrict access-Segregation of Master File
data
changes and recording
-Data entry and processing controls
-Review all master file changes
Unauthorized disclosure of
sensitive information

-Chapters 7&8: encryption, access controls,

authorization controls

Loss of destruction of data

-Chapters 7&8: disaster recovery plan, offsite

backups, insurance

Poor performance

-Hire competent people and train them

-Performance reports to identify nonconformance

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Problems page 360

12.2
12.7
12.11