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Chapter 12: The Revenue Cycle

Syaiful Ali, SE., MIS., Ak.

Introduction

Revenue Cycles tend to be similar for all types of firms.Two subsystems perform the processing steps within the revenue cycle:

The Sales Processing SystemThe Cash Receipts Processing System

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Objectives of the Revenue Cycle

To record sales orders promptly and accuratelyTo verify that the customers are worthy of creditTo ship the products or perform the services by agreed datesTo bill for products or services in a timely and an accurate manner

Objectives of the Revenue Cycle (cont..)

To record and classify cash receipts promptly and accuratelyTo post sales and cash receipts to proper customers’ accounts in the accounts receivable ledgerTo safeguard products until shippedTo safeguard cash until deposited

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REVENUE CYCLE(SUBSYSTEM)

Sales Order

Billing/ AccountsReceivable

Cash Receipts/Collections

Shipping

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4/5

3

Credit / CustomerService

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Input Documents Pertaining to the Revenue Cycle

Customer OrderSales OrderOrder AcknowledgementPicking ListPacking SlipBill of LadingShipping NoticeSales Invoice

Remittance AdviceDeposit SlipBack OrderCredit MemoCredit ApplicationSalesperson Call ReportDelinquent NoticeWrite-off NoticeCash Register Receipts

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DFD- Sistem Pemrosesan Order Penjualan

Revenue Cycle Databases

Master filescustomer master fileaccounts receivable master filemerchandise inventory master file

Transaction and Open Document Files

sales order transaction fileopen sales order transaction file

sales invoice transaction filecash receipts transaction file

• Other Files– shipping and price data

reference file– credit reference file (may not

be needed)– salesperson file (may be a

master file)– Sales history file– cash receipts history file– accounts receivable reports

file

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Sales Order Process Flowchart

Sales Order Process Flowchart

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Manual Sales Order Processing

Begins with a customer placing an orderThe sales department captures the essential details on a sales order form.

The transaction is authorized by obtaining credit approval by the credit department.Sales information is released to:

BillingWarehouse (stock release or picking ticket)Shipping (packing slip and shipping notice)

The merchandise is picked from the Warehouse and sent to Shipping.

Stock records are adjusted.The merchandise, packing slip, and bill of lading are prepared by Shipping and sent to the customer.

Shipping reconciles the merchandise received from the Warehouse with the sales information on the packing slip.

Shipping information is sent to Billing. Billing compiles and reconciles the relevant facts and issues an invoice to the customer and updates the sales journal. Information is transferred to:

Accounts Receivable (A/R)Inventory Control

Manual Sales Order Processing

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A/R records the information in the customer’s account in the accounts receivable subsidiary ledger.Inventory Control adjusts the inventory subsidiary ledger.Billing, A/R, and Inventory Control submits summary information to the General Ledger dept., which then reconciles this data and posts to the control accounts in the G/L.

Manual Sales Order Processing

DFD of Sales Returns

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Sales Returns Flowchart

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Cash Receipts Flowchart

Manual Cash Receipts ProcessesCustomer checks and remittance advices are received in the Mail Room.

A mail room clerk prepares a cash prelist and sends the prelist and the checks to Cash Receipts. The cash prelist is also sent to A/R and the Controller.

Cash Receipts: verifies the accuracy and completeness of the checksupdates the cash receipts journalprepares a deposit slipprepares a journal voucher to send to G/L

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A/R posts from the remittance advices to the accounts receivable subsidiary ledger.

Periodically, a summary of the postings is sent to G/L.

G/L department:reconciles the journal voucher from Cash Receipts with the summaries from A/R updates the general ledger control accounts

The Controller reconciles the bank accounts.

Manual Cash Receipts Processes

Information Output

Operational Listings & Reports:Inquiry Display Screens: specific data (e.g., a request for the status of a customer’s account receivable.Scheduled Managerial ReportsDemand Managerial Reports: ad hoc non scheduled reports

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Operational Listings and Reports

Monthly statementOpen orders reportSales Invoice registerShipping registerCash receipts journalCredit memo register

Scheduled Managerial ReportsAccounts receivable aging scheduleReports on critical factors

Average dollar value per orderPercentage of orders shipped on timeAverage number of days between the orderdate and shipping date

Sales analysesSalespersonSales regionProduct linesCustomersMarkets

Cash flow statements

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Types of Managerial Decisions Pertaining to the Revenue Cycle

Marketing decisionsWhich types of markets and customers are to be served?Which specific products are to be provided to customers, including new products to be introduced?What prices are to be charged, and what discounts are to be allowed?What after-sales services are to be offered?

Types of Managerial Decisions Pertaining to the Revenue Cycle (cont..)

What channels of distribution are to be employed?What advertising media are to be employed, and in what mix?What organizational units are to be incorporated withinthe marketing function?What marketing plans and budgets are to be established for the coming year?

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Types of Managerial Decisions Pertaining to the Revenue Cycle

Financial DecisionsWhat criteria are to be employed in granting credit to potentialcustomers?What collection methods are to be employed in minimizing bad debts?What accounts receivable records are to be maintained concerning amounts owed by customers?What sources, other than receipts from sales, are to be employed in obtaining needed funds for operations?What financial plans and cash budgets are to be established for the coming year?

Risk Exposures in the Revenue Cycle - I

Risk Exposure 1) Credit sales made to customers who represent poor credit risks

1) Losses from bad debts

2) Unrecorded or unbilled shipments 2) Losses of revenue; overstatement of inventory and understatement of accounts receivable in the balance sheet

3) Errors in preparing sales invoices 3) Alienation of customers and possible loss of future sales; losses of revenue

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Risk Exposure4) Misplacement of orders fromcustomers or unfilled backorders

4) Losses of revenue and alienation ofcustomers

5) Incorrect posting of sales toaccounts receivable records

5) Incorrect balances in accountsreceivable and general ledger accountrecords

6) Posting of revenues to wrongaccounting periods, such as prematurebooking of revenues

6) Overstatement of revenue in oneyear (year of premature booking) andunderstatement of revenue in the next

Risk Exposures in the Revenue Cycle - II

Risk Exposure7) Fictitious credit sales to nonexistentcustomers

Overstatement of revenues andaccounts receivable

8) Excessive sales returns andallowances with certain of the creditmemos being for fictitious returns

8) Losses in net revenue, with theproceeds from subsequent paymentsby affected customers beingfraudulently pocketed

9) Theft or misplacement of finishedgoods in the warehouse or on theshipping dock

9) Losses in revenue; overstatementof inventory on the balance sheet

Risk Exposures in the Revenue Cycle - III

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Risk Exposure10) Fraudulent write-offs ofcustomers’ accounts by unauthorizedpersons

10) Understatement of accountsreceivable; losses of cash receiptswhen subsequent collections onwritten-off accounts aremisappropriated by perpetrators of thefraud

11) Theft (skimming) of cash receipts,especially currency, by personsinvolved in the processing; oftenaccompanied by omitted postings toaffected customers’ accounts

11) Losses of cash receipts;overstatement of accounts receivablein the subsidiary ledger and thebalance sheet

12) Lapping of payments fromcustomers when amounts are postedto accounts receivable records

12) Losses of cash receipts; incorrectaccount balances for those customerswhose records are involved in thelapping

Risk Exposures in the Revenue Cycle - IV

Risk Exposures in the Revenue Cycle - V

Risk Exposure13) Accessing of accounts receivable,merchandise inventory, and otherrecords by unauthorized persons

13) Loss of security over such records,with possibly detrimental use made ofthe data accessed

14) Involvement of cash, merchandiseinventory, and accounts receivablerecords in natural or human-madedisasters

14) Losses of or damages to assets

15) Planting of virus by disgruntledemployee to destroy data on magneticmedia

15) Loss of customer accountsreceivable data needed to monitorcollection of amounts from previoussales

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Risk Exposures in the Revenue Cycle - VI

Risk Exposure16) Interception of data transmittalbetween customers and the web site

16) Loss of data which may be used tothe detriment of customers

17) Unauthorized viewing andalteration of other customer accountdata via the Web

17) Loss of security over customerrecords resulting in misstatement ofaccounts receivable balances

18) Denial by a customer that anonline order was placed after thetransaction is processed

18) Loss of sales revenues

Risk Exposures in the Revenue Cycle - VII

Risk Exposure19) Use of stolen credit cards to placeorders via the Web

19) Loss of shipped goods for whichpayments will not be received

20) Breakdown of the web server dueto unexpectedly high volume oftransactions

20) Loss of sales revenues andalienation of customers

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Typical Control Objectives for the Revenue Cycle

All customers accepted for credit sales are credit-worthyAll ordered goods are shipped, and all services are performed by dates that are agreeable to all partiesAll shipped goods are authorized and accurately billed within the proper accounting periodAll sales returns and allowances are authorized and accurately recorded and based on actual return of goods

Typical Control Objectives for the Revenue Cycle (cont..)

All cash receipts are recorded completely and accuratelyAll credit sales and cash receipts transactions are posted to proper customers’ accounts in the accounts receivable ledgerAll accounting records, merchandise inventory,and cash are safeguarded

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General Controls of the Revenue Cycle - I

Organizational ControlsUnits with custodial functions should be kept separate from each otherCustodial functions should furthermore be segregated from record-keeping functionsFor computerized systems, systems development should be kept separate from systems operations

Documentation ControlsAsset Accountability ControlsManagement Practice ControlsData Center Operations ControlsAuthorization Controls

General Controls of the Revenue Cycle - II

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Access ControlsAssigned passwords that authorized clerks must enter to access accounts receivable and other customer-related files, in order to perform their strictly defined tasksTerminals that are restricted in the functions they allow to be performed with respect to sales and cash receipts transactions

General Controls of the Revenue Cycle - III

General Controls of the Revenue Cycle – III (cont..)

Logging of all sales and cash receipt transactions upon their entry into the systemFrequent dumping of accounts receivable and merchandise inventory master files onto magnetic tape backupsPhysically protected warehouses and safesA lockbox collection system in situations where feasible

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Application Controls of the Revenue Cycle: Input - I

1) Prepare pre-numbered and well-designed documents relating to sales, shipping, and cash receipts, with each prepared document being approved by an authorized person.

2) Validate data on sales orders and remittance advices as the data are prepared and entered for processing. (CBIS programmed edit checks).

Application Controls of the Revenue Cycle: Input - II

3) Correct errors that are detected during data entry and before the data are posted to the customer and inventory records.

4) Precompute batch control totals relating to key data on sales invoices (or shipping notices) and remittance advices. (compared with totals computed during postings to the accounts receivable ledger and during each processing run).

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Application Controls of the Revenue Cycle: Processing - I

1) Move ordered goods from the finished goods warehouse and ship the goods only on the basis of written authorizations such as stock request copies

2) Invoice customers only on notification by the shipping department of the quantities that have been shipped

Application Controls of the Revenue Cycle: Processing – I (cont..)

3) Issue credit memos for sales returns only when evidence (i.e. receiving report) has been received that the goods were actually returned

4) Verify all computations on sales invoices before mailing and postings to proper customers’ accounts.

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Application Controls of the Revenue Cycle: Processing - II

5) Verify that total amounts posted to the accounts receivable accounts from batches of transactions agree with precomputed batch totals, and post the total amounts to the appropriate general ledger accounts

6) Deposit all cash received intact and with a minimum of delay, thus eliminating the possibility of cash receipts being used to pay employees or to reimburse petty cash funds

Application Controls of the Revenue Cycle: Processing – II(cont..)

7) Correct errors that are made during processing steps, usually by reversing erroneous postings to accounts and entry of correct data. The audit trail concerning accounts being corrected should show the original errors, the reversals, and the corrections

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Application Controls of the Revenue Cycle: Output

1) Prepare monthly statements, which should be mailed to all credit customers, especially if the balance forward approach is employed

2) File copies of all documents pertaining to sales and cash receipts transactions by number, with the sequence of numbers in each file being periodically checked to see if gaps exist.

Application Controls of the Revenue Cycle: Output (cont..)

3) Prepare printed transaction listings and account summaries on a periodic basis in order to provide audit trail and a basis for review

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Thank You!