Chapter 5

The Expenditure Cycle Part I: Purchases and Cash Disbursements

COPYRIGHT © 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South Western are trademarks used herein under license 1

Objectives for Chapter 5

     Tasks performed during purchases and cash disbursement processes Departments involved in purchases and cash disbursement activities and the flow of these transactions through the organization Documents, journals, and accounts that provide audit trails, promote the maintenance of records, and support decision making and financial reporting Risks associated with purchase and cash disbursements activities and the controls that reduce these risks Operational features and the control implications of technology used in purchases and cash disbursement systems

Purchase Requisition 1 Purchasing 2 PROCUREMENT CYCLE (SUBSYSTEM) Cash Disbursements 5 Receiving/ Inspection 3 Accounts Payable 4

Goals of Expenditure Cycle

 Goal of providing needed resources to organization can be broken down into several objectives:  purchase from reliable vendors  purchase high quality items  obtain best possible price  purchase only items that are properly authorized  have inventory available when needed  receive only those items ordered  ensure items are not lost, stolen, or broken  pay for the items in a timely manner  Take advantage of cash discounts

Manual Purchases System – Inventory Control & Purchasing

 Starts in Inventory Control department when Supervisor writes Memo to have Clerk check Inventory levels.  Clerk prepares purchase requisition (PR) and sends copies to Purchasing and Accounts Payable. One copy filed by # in I.C. Dept.

See next slide for flowchart 5

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Manual Purchases System – Purchasing

(continued)

 Purchasing Dept. prepares purchase order (PO) for each vendor and sends copies to Inventory Control, Accounts Payable, Receiving (blind copy), and Vendor. One copy is filed alphabetically in the Purchasing Department, along with PR.

See next slide for flowchart (yellow symbols) 7

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Manual Purchases System – Receiving

 Upon receipt of goods, Receiving Dept. counts/inspects goods.  Purpose of “blind” copy of P.O. is to force workers to count goods.  Clerk prepares Receiving Report  sends copies to Warehouse, Purchasing, Inventory Control, and Accounts Payable. One copy is filed alphabetically in Receiving Dept.

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Manual Purchases System – Accounts Payable

 Accounts Payable Dept. now has copies of purchase requisition, purchase order, and receiving report.  Upon receipt of supplier’s invoice, Accounts Payable reconciles all documents, records in purchases journal, and posts liability in AP subsidiary ledger.  All documents are sent to Cash Disbursements Dept.

See next slide for flowchart (blue symbols) 11

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Manual Purchases System (contd)

 Periodically Journal voucher is prepared by Accounts Payable and sent to General Ledger Dept. (not flowcharted) 13

Manual Cash Disbursements System

 Cash Disbursements Dept.  prepares check  records information in check register (cash disbursements journal)  forwards all documents to Treasurer for signature. [Stop here.]  periodically sends journal voucher to General Ledger. (not flowcharted) 14

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Computer-Based Systems

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Expenditure Cycle Database

 Master Files  Supplier/Vendor master file  Accounts payable master file  Inventory master file  Transaction Files  Purchase Order file  Open PO file  Supplier’s invoice file  Cash disbursements file  Other Files  Supplier reference and history file 17

CBIS Expenditure Applications--Purchases

 Incorporates Data Processing function that performs many routine accounting tasks  purchasing - computer program identifies inventory requirements and can use

one

of the following methods for authorizing and ordering inventories  system prepares POs and distributes them to Purchasing Dept. for review/signing/distributing, OR  system distributes POs directly to vendors and internal users, bypassing Purchasing department, OR  system uses EDI and electronically places order

with Vendor

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Computer-Based Purchases

 Other tasks performed automatically by the computer:  Updates inventory subsidiary file from the receiving report  calculates batch totals for general ledger update  Closes corresponding records in the open PO file to the closed PO file  Validates voucher records against valid vendor files

Computer-Based Cash Disbursements

 Tasks performed automatically by the computer:  system scans for vouchers currently due  prints checks for these vouchers  records these checks in check register  batch totals are prepared for the general ledger update procedure

Advantages of Real-Time Data Input & Processing Over Batch Processing

 Shortens time-lag in record-keeping; records are more current 

Eliminates much of routine manual

procedures, such as transcribing information onto paper documents  Eliminates much storage and shuffling of paper documents 

Reduces data entry errors

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Manual and Computer Based

CONTROLS

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Manual Authorization Controls

 Purchases of inventory should be authorized by Inventory Control department, not by purchasing agents or Warehouse clerks  Accounts Payable authorizes payments of bills, not cash disbursements clerk, who writes checks 23

CBIS Authorization Controls

 Authorizations are automated.

 Programmed decision rules must be checked for accuracy 24

Example of programmed control in G.P. (v. 7.5): maximum invoice amount for this vendor.

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CBIS

Authorization Controls

(continued)

 Automate inventory using EDI and just-in time inventory (JIT)  Incorrect inventory model can lead to over-purchasing or under-purchasing  Cash disbursements - automate check printing and signing.

 Programming logic must be error-free  Use automated signing below predetermined dollar amount (depends on business rules) 26

Segregation of Duties

 Warehouse  Inventory control  Accounts payable  General ledger  Requisitioning  Purchases  Purchases returns and allowances  Cash disbursements 27

Manual Segregation of Functions

 Custody of inventory by Warehouse must be separate from recordkeeping for inventory by Inventory Control Dept.

 Custody of cash by Cash Disbursements must be kept separate from recordkeeping for cash by Accounts Payable Dept.

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CBIS Segregation of Functions

 Computer consolidates tasks traditionally segregated in manual system  Computer programs authorize and process purchase orders  Computer programs authorize and issue checks to vendors 29

Manual Supervision

 Within expenditure cycle, supervision is of highest importance in Receiving Dept., where inventory arrives and is logged in by receiving clerk. Need to minimize:  failures to properly inspect assets  theft of assets Remember in Revenue Cycle that supervision is most important in Mailroom.

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CBIS Supervision

 Automation often changes traditional segregation of duties.

 requires different types of supervision  Supervision takes on new aspects as technology advances.

 Electronic monitoring  Supervision becomes more difficult as workplace becomes more sophisticated.

 Employees probably have more advanced IT training than their supervisors!

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Manual Accounting Records

 Must maintain adequate records for:  accounts payable  vouchers payable  checks  general ledger  subsidiary ledgers 32

CBIS Accounting Records

    Following audit trail becomes more difficult.

Accounting records rests on reliability and security of magnetically stored data.  Be skeptical about accepting, on face value, accuracy of computer-produced printouts of journals/ledgers.

System needs to ensure that backup of all files is continuously kept.

Many automated systems still have many paper documents. Good for audit trail purposes but often is inefficient. 33

Manual Access Controls

 Limit access to:  inventory  cash  accounting records 34

CBIS Access Controls

 Magnetic records are vulnerable to authorized and unauthorized exposure.

 Limit access to data files  Limit access to computer programs 35

Manual Independent Verification

 Accounts Payable Dept. verifies most transactions in expenditure cycle.  Purchase requisitions, purchase orders, receiving reports, and suppliers’ invoices are verified by Accounts Payable.

 General Ledger department verifies:  total obligations recorded = total inventories received  total reductions in accounts payable = total cash disbursements 36

CBIS Independent Verification

 Automating accounting function reduces chances of fraud/error, & therefore the need for manual independent verification.

 However, need for verification shifts computer program and programmers where fraud/error may still exist (especially in internally developed systems).

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