The Revenue Cycle: Sales to Cash

Collections
Chapter 12

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 Learning Objectives
• Describe the basic business activities and related information
processing operations performed in the revenue cycle.
• Discuss the key decisions that need to be made in the revenue
cycle, and identify the information needed to make those
decisions.
• Identify major threats in the revenue cycle, and evaluate the
adequacy of various control procedures for dealing with those
threats.

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 Basic Revenue Cycle Activities

• Sales order entry

• Shipping
• Billing
• Cash Collections

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 Sales Order Entry Processing Steps

• Take the customer order

▫ Source document: sales order
• Approve customer credit
• Check inventory availability
• Respond to customer inquiries

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 Sales Order Entry Processing

Threats Controls
1. Incomplete/inaccurate orders 1 a. Data entry edit controls
2. Invalid orders b. Restrict access to master data to
3. Uncollectible accounts maintain accuracy
4. Stockouts and excess inventory 2 a. Signature to authorize sale
5. Loss of customers 3 a. Credit limits checked and if sale exceeds
limit, specific authorization needed
4 a. Perpetual inventory system
b. RFID or bar code technology
c. Physical inventory counts

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 Shipping Process

• Pick and pack the order

▫ Source documents: picking ticket
• Ship the order
▫ Source documents: Packing slip, Bill of lading

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 Shipping Process

Threats Controls
1. Picking wrong item or quantity to ship 1 a. Bar code technology
2. Theft b. Reconcile picking list to sales order
3. Fail to ship the goods 2 a. Restrict physical access to inventory
4. Ship to wrong address b. Document inventory transfers
c. Physical counts of inventory and
reconcile to quantities recorded
3 a. Reconcile shipping documents to sales
orders, picking lists, and packing slips
4 a. Data entry edit controls

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 Billing Process

• Invoicing the customer

▫ Source document: sales invoice
• Updating accounts receivable
▫ Source document: credit memo and monthly statements

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 Billing Process

Threats Controls
1. Failure to bill customer 1 a. Reconcile invoices with sales orders and
2. Billing errors shipping documents
3. Posting errors in accounts receivable b. Separate shipping and billing functions
4. Inaccurate or invalid credit memos 2 a. Data entry edit controls
b. Configure system for automatically
enter price data
3 a. Reconcile subsidiary accounts receivable
balance to the amount for accounts
receivable in the general ledger
4 a. Segregation of authorization and
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 Cash Collection Process

• Process customer payment and update their account balance

▫ Remittance
• Deposit payments to the bank

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 Cash Collection Process

Threats Control
1. Theft of cash 1 a. Proper segregation of cash handling and
2. Cashflow problems posting to customer accounts, authorize
credit memos, or reconcile bank account
b. Use lockbox
c. Deposit all cash receipts daily

2 a. Lockbox
b. Discounts for early payment
c. Cash flow budgeting

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 Key Terms
• Revenue cycle • Remittance advice
• Sales order • Balance-forward method
• Electronic data interchange (EDI) • Monthly statement
• Credit limit • Cycle billing
• Accounts receivable aging report • Credit memo
• Back order • Remittance list
• Picking ticket • Lockbox
• Customer relationship management • Electronic lockbox
systems (CRM) • Electronic funds transfer (EFT)
• Packing slip • Financial electronic data interchange
• Bill of lading (FEDI)
• Sales invoice • Universal payment identification code
• Open-invoice method (UPIC)
• Cash flow budget
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