Ch. 12: The Revenue Cycle: Sales to Cash Collections
CHAPTER 12
THE REVENUE CYCLE: SALES TO CASH COLLECTIONS
SUGGESTED ANSWERS TO DISCUSSION QUESTIONS
12.1 Customer relationship management systems hold great promise, but their usefulness
is determined by the amount of personal data customers are willing to divulge. How
can companies encourage customers to share useful personal information?
The basic issue concerns the willingness of consumers to divulge the kind of information
that would allow companies to personalize the sales interaction versus concerns that such
12.2 Some products, like music and software, can be digitized. How does this affect each
of the four main activities in the revenue cycle?
Digitized products do not change the four basic business activities of the revenue cycle.
12.3 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 12-8). 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 categorized by days past due would alert
Reporting by customer can help to identify chronic “slow paying” customers so that
The company may have a threshold for each category of past due accounts either in
12.4 Table 12-1 suggests that restricting physical access to inventory is one way to reduce
the threat of theft. How can information technology help accomplish that objective?
Possibilities include:
Electronic locks on all entrances and exits to the inventory area.
Smart card technology where employees must scan their ID card prior to
12.5 Invoiceless pricing has been adopted by some large businesses for B2B transactions.
What are the barriers, if any, to its use in B2C commerce?
Many companies are trying to incent their customers to sign up for automatic bill-pay.
12.6 If AOE decides to begin selling directly to individual customers, what changes will it
need to make in its business processes?
If AOE begins selling to retail customers directly, it will need to make the following
changes in almost every business process. Some of the necessary changes include:
Sales order entry – probably have to purchase a CRM system to effectively manage the
mass of data about individual customers. Will probably also need to train its customer
Shipping – will become more complex as the volume of orders/shipments is likely to
Billing – if AOE does not sell on credit, little or no change is required. But if it decides to
Cash receipts – if it accepts customer payments via online banking, this will become
SUGGESTED ANSWERS TO THE PROBLEMS
12.1 Match the term in the left column with its definition in the right column.
1. __d__ CRM system a. Document used to authorize reducing the balance in a customer
account
l. Document used to establish responsibility for shipping goods via
a third party
m. Document that authorizes removal of merchandise from
inventory
n. Turnaround document returned by customers with payments
12.2 What internal control procedure(s) would provide protection against the following
threats?
a. Theft of goods by the shipping dock workers, who claim that the inventory
shortages reflect errors in the inventory records.
Inventory clerks should count and document goods (on paper or by computer) as they
leave inventory storage. Shipping personnel should be required to count and
b. Posting the sales amount to the wrong customer account because a customer
account number was incorrectly keyed into the system.
If the transactions are being entered online, closed loop verification could be used.
If the transactions are being entered in batches, redundant data such as the first five
Note that a validity check would only tell you if a valid customer number was
c. Making a credit sale to a customer who is already four months behind in making
payments on his account.
Up-to-date credit records must be maintained to control this problem. During the
credit approval process, the credit manager should review the accounts receivable
aging schedule to identify customers with past-due balances to prevent additional
A credit limit check would not be sufficient, because a customer could have a balance
below the credit limit but be past due. A computer system could be programmed to
d. Authorizing a credit memo for a sales return when the goods were never actually
returned.
A receiving report should be required before a credit for sales returns is issued. The
e. Writing off a customer’s accounts receivable balance as uncollectible to conceal
the theft of subsequent cash payments from that customer.
The problem usually occurs because the same individual writes off accounts and
processes cash payments. Therefore, the best control procedure to prevent this
f. Billing customers for the quantity ordered when the quantity shipped was
actually less due to back ordering of some items.
Shipping personnel should be required to record the actual quantity shipped on the
order document and/or enter the quantity shipped into the accounting system, in order
g. Theft of checks by the mailroom clerk, who then endorsed the checks for deposit
into the clerk’s personal bank account.
In order to cover up this theft, the mailroom clerk has to be able to alter the accounts
receivable records. Otherwise, a customer who is subsequently notified that they are
If accounts receivable updates the records based on a cash receipts pre-list instead of
the actual checks, the mailroom clerk could conceivably lap payments. To prevent
h. Theft of funds by the cashier, who cashed several checks from customers.
In order to cover up this theft, the cashier has to be able to alter the accounts
receivable records. Otherwise, a customer who is subsequently notified that they are
One way to control cash receipts is shown below. The mailroom creates a cash prelist,
sends a copy to a 3rd party, and sends the checks to the cashier. The cashier prepares
i. Theft of cash by a waiter who destroyed the customer sales ticket for customers
who paid cash.
In a manual system, all sales tickets should be prenumbered and accounted for so
management can detect missing sales tickets.
In many restaurant systems, waiters cannot get food out of the kitchen without
These systems also are capable of some reasonableness tests such as:
Beginning inventory of food
Food used in the sales orders that day
The ending inventory of food is counted and compared to the projected ending
j. Shipping goods to a customer but then failing to bill that customer.
To prevent this from occurring deliberately, it is necessary to segregate the shipping
and billing functions.
To prevent this from happening by accident, the system needs to automatically bill
k. Lost sales because of stockouts of several products for which the computer
records indicated there was adequate quantity on hand.
Regular physical inventory counts need to be made, the results compared to recorded
l. Unauthorized disclosure of buying habits of several well-known customers.
Access to customer information should be restricted using User IDs, passwords, and
m. Loss of all information about amounts owed by customers in New York City
because the master database for that office was destroyed in a fire.
Data: Regular backups with copies being stored off-site.
n. The company’s Web site was unavailable for seven hours because of a power
outage.
A UPS can power a system for a time, but most are unlikely to be able to power a
Two better options are
Backup power generators capable of running the web site for seven hours
o. Interception and theft of customers’ credit card numbers while being sent to the
company’s Web site.
Encryption of credit card information prior to transmitting over the Internet. Typically
p. A sales clerk sold a $7,000 wide-screen TV to a friend and altered the price to
$700.
All product prices and sales discounts maintained in the system
q. A shipping clerk who was quitting to start a competing business copied the
names of the company’s 500 largest customers and offered them lower prices
and better terms if they purchased the same product from the clerk’s new
company.
Shipping clerks should not have access to customer account information.
r. A fire in the office next door damaged the company’s servers and all optical and
magnetic media in the server room. The company immediately implemented its
disaster recovery procedures and shifted to a backup center several miles away.
The company had made full daily backups of all files and stored a copy at the
backup center. However, none of the backup copies were readable.
Periodically practicing and testing the backup and restoration process would verify its
12.3 For good internal control, which of the following duties can be performed by the
same individual? Explain your answer.
1. Approve changes to customer credit limits
2. Sales order entry
3. Shipping merchandise
4. Billing customers
5. Depositing customer payments
6. Maintaining accounts receivable
7. Issuing credit memos
8. Reconciling the organization’s bank accounts
9. Checking inventory availability
Cells with an “X” indicate duties that can be performed by the same individual:
Duty 1 2 3 4 5 6 7 8 9
1
2
3
4
5
6X
7
8
9X
For sound internal control, most of these duties need to be performed by different people.
There are two exceptions:
The same person can take customer orders and check inventory availability because
this combination does not provide any way to commit and conceal a theft.
Key duties to segregate include:
Approving changes to customer credit and sales order entry. If both duties are
performed by the same person, they could authorize sales to friends that are
Shipping and billing. If the same person performs both duties, they could ship
Depositing customer payments and maintaining accounts receivable. If the same
Depositing customer payments and issuing credit memos. If the same person
Depositing customer payments and reconciling the bank account. If the same
Maintaining accounts receivable and issue credit memos. If the same person
The remaining combinations are not desirable because they involve tasks that require