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CHAPTER 12
THE REVENUE CYCLES: SALES TO CASH COLLECTIONS
Instructor’s Manual
Learning Objectives:
1. Describe the basic business activities and related information
processing operations performed in the revenue cycle.
Questions to be addressed in this chapter include:
1. How could AOE improve customer service? What information does
marketing need to perform its tasks better?
2. How could AOE identify its most profitable customers and markets?
Introduction
The revenue cycle is a recurring set of business activities and
related information processing operations associated with
providing goods and services to customers and collecting cash in
payment for those sales.
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Revenue Cycle Business Activities
Figure 10-3 on page 372 shows the four basic business activities
performed in the revenue cycle.
1. Sales order entry
2. Shipping
Sales Order Entry
The revenue cycle begins with the receipt of orders from
customers.
Figure 12-5 on page 337 shows that the sales order entry process
entails four steps:
1. Taking the customer’s order
Taking Customer Orders
Normally, this order document is electronically displayed on a
computer monitor screen.
Orders can be received in the store, by mail, by phone,
over a Web site, or by a salesperson in the field.
Of course, once you order from a company over the Internet,
you will most likely start receiving subsequent commercials
via e–mail.
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Figure 12-6 on page 338 provides a typical sales order entry
screen.
Credit Approval
Most business-to-business sales are made on credit. Credit
sales should be approved before they are processed.
Checking Inventory Availability
The next step is to determine if there is sufficient
inventory available to fill the order.
Figure 12-9 on page 341 shows an example of the information
that is usually available to the sales order entry clerk
When there are not sufficient items on hand to fill the
customer’s order, a back order is created
Responding to Customer Inquiries
Step 1.4 in Figure 12-5 back on page 337 shows that the
sales order entry process includes responding to customer
inquiries.
Customer services is so important that many companies use
special software packages, called Customer Relationship
Management (CRM) systems, to support this vital process.
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This not only automatically updates accounts
receivable balances but provides an opportunity to
print customized coupons and personal messages on
each sales receipt, such as “Thank you.”
Information technology can be used to automate responses to
many customer routine inquiries.
Shipping
The second basic activity in the revenue cycle is filling
customer orders and shipping the desired merchandise. Refer
to circle 2 in Figure 12-3 back on page 333.
Shipping consists of the following two steps:
2. Shipping the order
Pick and Pack the Order
The picking ticket printed by sales order entry
triggers the pick and pack process.
Ship the Order
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The shipping department compares the physical count of
inventory with the quantities indicated on the picking
ticket and with the quantities indicated on the copy of
the sales order that was sent directly to shipping from
sales order entry.
Figure 12-13 on page 347 provides a sample of a bill of
lading.
If the customer is to pay the shipping charges, the copy
of the bill of lading may serve as a freight bill, to
indicate the amount the customer should pay to the
carrier.
Billing
The third basic activity in the revenue cycle, shown in
circle 3.0 in figure 12-3 on page 333, involves billing
customers.
Figure 12-14 on page 348 provides a data flow diagram of
invoicing and accounts receivable.
Invoicing
The document created in the billing process is the
sales invoice, which notifies customers of the amount
to be paid and where to send payment.
Figure 12-15 on page 349 provides an example of an
invoice.
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Maintain Accounts Receivable
The accounts receivable function uses the information
on the invoice to debit the customers’ accounts for
credit purchases and credit the customers’ accounts
when payment is received.
Under the open-invoice method, customers normally pay
according to each invoice.
A monthly statement lists all transactions, including
both sales and payments.
Bell Atlantic uses image processing to reduce the
cost of processing customer payments.
Bell Atlantic processes more than 11 million
customer remittances each month
They use a scanner for these remittances
in which they scan the checks.
A disadvantage of the open-invoice method is the
added complexity required to maintain information
about the status of each individual invoice for each
customers.
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Exceptions: Account Adjustments and Write-offs
This involves either the return of merchandise by
customers for credit or the write of customers who do
not pay their bill.
Figure 12-17 on page 352 provides an example of a
credit memo.
Cash Collections
The final step in the revenue cycle is cash
collections. Refer to circle 4.0 in Figure 12-3 back
on page 333.
Under an electronic lockbox arrangement, the bank
electronically sends the company information about
the customer account number and the amount remitted
as soon as it receives and scans those checks.
EFT is usually accomplished through the banking
system’s Automated Clearing House (ACH) network.
EFT only involves the transfer of funds. Although
every bank can do EFT through the ACH system, not
every bank possesses the EDI capabilities necessary
to process the related remittance data. As shown in
the top panel of Figure 12-18 on page 355, many
companies have to separate the EFT and EDI components
of processing customer payments.
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Figure 12-18 on page 355 provides a picture of the
difference between EDI and EFT and FEDI.
When dealing with customers who are not FEDI capable, or
with individual consumers, companies can also speed the
collection process by accepting credit cards or procurement
cards (a special type of credit card discussed in Chapter
13).
Multiple Choice 1
The three basic functions of the AIS in the revenue cycle include:
a. capturing and processing data about business activities
Multiple Choice 2
The following is the business activities performed in the revenue
cycle:
1. shipping
The correct sequence in which these activities are performed is:
a. 3, 2, 1, and 4
b. 3, 4, 1, and 2
c. 3, 1, 4, and 2
d. 3, 4, 2, and 1
Multiple Choice 3
The sales order department report to the
a. credit manager of finance
Multiple Choice 4
The following technique allows customers to customize products to meet
their exact needs:
a. monthly statement
b. choice boards
c. EFT
d. ERP
Multiple Choice 5
The following lists the quantity and description of each item included
in the shipment:
a. picketing ticket
b. bill of lading
c. sales order
d. packing slip
Multiple Choice 6
The National Association of Convenience Stores found that switching
from paper to electronic invoices resulted in an annual savings in
costs of more than
a. $330,000
b. $4.5 million
c. $100,000
d. $1.2 billion
To accomplish that objective, management must make the
following key decisions:
1. To what extent can and should products be customized
to individual customers’ needs and desires?
2. How much inventory should be carried, and where
should that inventory be located?
3. How should merchandise be delivered to customers?
Should the company perform the shipping function
itself or outsource it to a third party that
specializes in logistics?
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8. How can customer payments be processed to maximize
cash flow?
Control Objectives, Threats, and Procedures
In the revenue cycle, a well-designed accounting information
system should provide adequate controls to ensure that the
following objectives are met:
2. All recorded transactions are valid (actually occurred).
4. All transactions are recorded accurately.
6. Business activities are performed efficiently and
effectively.
Table 10-1 on page 392 lists the major threats in the revenue
cycle and the appropriate control procedures that should be in
place to mitigate them.
Sales Order Entry
The primary objectives of the sales order entry process are
to accurately and efficiently process customer orders,
Threat 1: Incomplete or Inaccurate Customer Orders
Incomplete or inaccurate information about the customer and
their order could prove embarrassing because most likely
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Threat 2: Credit Sales to Customers with Poor Credit
A second threat in sales order entry is the possibility of
making sales that later turn out to be uncollectible.
Segregation of duties:
Credit manager sets credit policies and approves
extension of credit to new customers and increases
the credit limit for existing customers.
Threat 3: Legitimacy of Orders
Threat 4: Stockouts, Carrying Costs, and Markdowns
Sales could be lost due to stock outs.
Shipping
The primary objective of the shipping function is to fill
customer orders efficiently and accurately, and to
safeguard inventory.
Threat 5: Shipping Errors
Shipping the wrong items or quantities of merchandise and
shipping to the wrong locations are serious errors because
they can significantly reduce customer satisfaction and
thus future sales.
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Threat 6: Theft of Inventory
This is the threat that an employee or customer could steal
the merchandise.
Also, inventory can be stolen in transit. The losses are
estimated to be approximately $10 billion each year.
Several control procedures can reduce the risk of inventory
theft:
1. Inventory should be kept in a secure location and
2. All inventory transfers should be documented.
4. Both warehouse and shipping employees should sign
the transfer document when goods are transferred
from the warehouse to shipping.
Inventory “shrinkage,” a combination of employee theft,
shoplifting, vendor fraud, and administrative error, cost the
nation’s retailers $31.3 billion last year, according to the just
released National Retail Security Survey, which analyzed theft
incidents from 118 of the largest U.S. retail chains.
Billing and Accounts Receivable
Threat 7: Failure to Bill Customers
Failure to bill customers for items shipped results in the
loss of assets and erroneous data about sales, inventory,
and accounts receivable.
Threat 8: Billing Errors
Billing errors, such as pricing mistakes and billing
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Threat 9: Error in Maintaining Customer Accounts
The following edit checks should be used to ensure accuracy
in updating customer accounts:
1. Validity checks on the customer and invoice numbers
Note to Instructor: The following is a personal experience
of the writer of this instructor’s manual.
Previously on an audit, we encountered a bookkeeper that
made several errors in accounts receivable. This resulted
in several accounts in which the organization could not
collect because of the inaccurate records. It ended up that
Cash Collections
The primary objective of the cash collections function is
to safeguard customer remittances.
Threat 10: Theft of Cash
The following segregation of duties should be used to
reduce this risk:
1. Handling cash or checks and posting remittances to
customer accounts
In general, the handling of money and checks within the
organization should be minimized.
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Segregating the recording and custody functions as follows
provides additional control:
1. Only the remittance data should be sent to the
accounts receivable department
2. With customer payments being sent to the cashier
Retail stores and organizations that receive cash directly
from customers should use cash registers that automatically
produce a written record of all cash received.
General Control Issues
Two general objectives pertaining to all revenue cycle
activities are that accurate data be available when needed
and that all activities be performed efficiently and
effectively.
Threat 11: Loss, Alteration, or Unauthorized Disclosure of
Data
Loss of all accounts receivable data could threaten a
company’s continued existence.
Threat 12: Poor Performance
In addition to ensuring accuracy and safeguarding assets,
another objective of internal controls is to encourage
efficient and effective performance of duties.
Multiple Choice 7
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The applicable control procedure for the threat of incomplete or
inaccurate customer orders is:
a. data entry edit checks
b. segregation of duties
Multiple Choice 8
Theft while inventory is in transit is estimated to be approximately
____ billion each year.
a. $4.5
b. $3.5
c. $10
d. $15
Revenue Cycle Information Needs
Effective management of revenue cycle activities requires
timely access to accurate information.
Operational data are needed to monitor performance and to
perform the following recurring tasks:
1. Respond to customer inquiries about account balances
and order status.
In addition, current and historical information is needed
to enable management to make the following strategic
decisions:
1. Setting prices for products and services
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The accounting information system must also supply the
information needed to evaluate performance of the following
critical processes:
1. Response time to customer inquiries
5. Analyses of market share and sales trends
6. Profitability analyses by product, customer, and
sales region
9. Sales staff performance
10. Bad-debt expenses and credit policies
Figure 12-8 on page 341 provides a sample of an accounts
receivable aging report.
Of the total accounts receivable of $198,900, 74 percent
are current. However, only 36 percent of Baker’s total
Revenue margin equals gross margin minus all selling
costs:
1. Payroll
2. Commissions
3. Salesforce travel expense reimbursements
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7. Distribution and delivery expenses
Net sales minus cost of goods sold = gross margin
Support costs includes such departments and activities as
accounting and human resources.
Multiple Choice 9
Operational data is needed to monitor performance and to perform the
following recurring tasks:
a. Respond to customer inquiries about account balances and order
status.
b. Select methods for delivering merchandise.
c. Determine inventory availability.
d. B and C
e. All of the above
Multiple Choice 10
Aging of accounts receivable is based on the
a. sales order date
b. picking ticket date
c. invoice date
d. bill of lading date