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Transcript of AIS_expenditure cycle
THE ORDER RECEIVING THE INVENTORY RECOGNIZING THE LIABILITY MONITOR
INVENTORY RECORDS PURCHASE REQUISITION prepared and sent to the prepare purchase order function to initiate the purchase function Firms deplete their inventories by transferring raw materials into the production process (conversion cycle) and by selling finished goods to customers (revenue cycle) PREPARE PURCHASE ORDER PURCHASE ORDER - prepared for each vendor
- a copy of a PO is sent to the vendor, set-up accounts payable (AP) function for filing
temporarily in the AP pending file, and a blind copy is sent to the receive goods function
and the last copy is sent to the purchase order file The prepare purchase order function receives the purchase requisitions, which are sorted if necessary
To make the purchasing process efficient, the inventory control function will supply much of the routine order information that the purchasing department needs directly from the inventory and VALID VENDOR FILES.
The VALID VENDOR FILE contributes to both control and efficiency by listing only those vendors approved to do business with the organization. BLIND COPY PURCHASE ORDER RECEIVE GOODS RECEIVING REPORT Most firms experience TIME LAG between placing the order and receiving the inventory. During this time, the copies PO reside in temporary files in various departments.
NO ECONOMIC EVENT HAS TAKEN PLACE.
At this point, the firm has not yet received inventories and incurred no financial obligation.
Goods arriving from the vendor are reconciled with the blind copy of the PO.
The purpose of the blind copy is to force the receiving clerk to count and inspect inventories prior to completing the receiving report.
Upon completion of the physical count and inspection, the receiving clerk prepares a receiving report stating the quantity and condition of the inventories.
One copy accompanies the physical inventories to either the raw materials storeroom or finished goods warehouse fro safekeeping. Another is filed in the open/closed PO file to close out the purchase order. A third copy is sent to the AP department, where it is filed in the AP pending file. A fourth copy is sent to inventory control for updating the inventory records. And finally, a copy of the receiving report is placed in the receiving report file. UPDATE INVENTORY
RECORDS INVENTORY LEDGER Firms that use a STANDARD COST SYSTEM carry their inventories at a predetermined standard value regardless of the price actually paid to the vendor.
Posting to a standard cost inventory ledger requires only information about the quantities received.
Updating an actual inventory ledger requires additional financial information. SET UP ACCOUNTS
PAYABLE During the course of this transaction, the set up AP function has
received and temporarily filed copies of the PO and receiving report. The organization has received inventories from the vendor and has incurred (realized) an obligation to pay for the goods.
At this point in the process, however, the firm has not received the supplier’s invoice containing the financial information needed to record the transaction. The firm will thus defer recording (recognizing) the liability until the invoice arrives. This common situation creates a slight lag (a few days) in the recording process, during which time the firm’s liabilities are technically understated. To close the books, the accountant will need to estimate the value of the obligation until the invoice arrives. If the estimate is materially incorrect, an adjusting entry must be made to correct the error.
Because the receipt of the invoice typically triggers AP procedures, accountants need to be aware that unrecorded liabilities may exist at period-end closing.
When the invoice arrives, the AP clerk reconciles the financial information with the receiving report and PO in the pending file. This is called a three-way match, which verifies that what was ordered was received and is fairly priced. Once the reconciliation is complete, the transaction is recorded in the purchases journal and posted to the supplier’s account in the AP subsidiary ledger.
After recording the liability, the AP clerk transfers all source documents (PO, receiving report, and invoice) to the open AP file.
Typically, this file is organized by payment due date and scanned daily to ensure that debts are paid on the last possible date without missing due dates and losing discounts. Finally, the AP clerk summarizes the entries in the purchases journal for the period (or batch) and prepares a journal voucher for the general ledger function. the AP department uses cash disbursement
vouchers and maintains a voucher register. Vouchers Payable System the AP clerk prepares a cash disbursement voucher to approve payment (Each voucher is recorded in the voucher register) The AP clerk files the cash disbursement voucher, along with supporting source documents, in the vouchers payable file The Cash Disbursements Systems Identify Liabilities Due post to general ledger Prepare Cash Disbursement Update AP Record Expenditure Cycle Controls Purchases Subsystem
The Inventory control function continually monitors inventory levels.
Formalizing authorization process promotes efficient inventory management and ensures legitimacy of purchases transactions. Transaction Authorization Cash Disbursements Subsystem
The AP function authorizes cash disbursement via cash disbursement voucher.
A cash disbursement journal containing the voucher number authorizing each check written provides an audit trail for verifying the authenticity of each check written. Segregation of Inventory Control from the Warehouse
Within the purchases subsystem, the primary physical asset is inventory. Segregation of Duties Segregation of the General Ledger and Accounts Payable form Cash Disbursements
The asset subject to exposure in the cash disbursement subsystem is cash.
The records controlling the asset are the AP and the cash account in the general ledger. In the expenditure cycle, the area that most benefits from supervision is the receiving department. Large quantities of valuable assets flow through this area on their way to the warehouse. Supervision Inspection of Assets
- The goods arrive from the supplier, receiving clerks must inspect items for proper quantities and condition, the receiving clerk receives a blind copy of the original PO from purchasing.
- If the receiving clerks were provided with quantity information via an open PO, the may be tempted to transfer this information and the receiving department without performing a physical count. Theft of Assets
- Receiving departments are sometimes hectic and cluttered during busy periods. In this environment, incoming inventories are exposed to theft until they are securely placed in the warehouse. The control objective of accounting records is to maintain an audit trail for adequate tracing a transaction from its source documents to the FS. In addition to routine accounting records, expenditure cycle system must be designed to provide supporting information such as purchase requisition file, the PO file and receiving report file. Accounting Records a. Direct Access
b. Indirect Access Access Controls a. Independent Verification by Accounts Payable
b. Independent Verification by the General Ledger Department Independent Verification CASH DISBURSEMENTS SYSTEMS AUTOMATION COMPUTER – BASED PURCHASES AND CASH DISBURSEMENTS APPLICATIONS Involves using technology to improve the efficiency and effectiveness of a task. REENGINEERING Objective: to eliminate nonvalue-added tasks.
Involves replacing traditional procedures with innovative procedures that are often very different from those previously in place. Automating Purchases Procedures Using Batch Processing Technology Expenditure Cycle Reengineering The Purchases or
Cash Disbursement System Produce considerable savings New environment Reduce Ford’s AP staff from 500 to 125 Control Implications THE AUTOMATED SYSTEM Improved Inventory Control Better Cash Management Time Lag Purchasing Bottleneck Excessive Paper Documents THE REENGINEERED SYSTEM Improved in terms of shortens lag time eliminates routine clerical procedures reduce paper documents Segregation of Duties Accounting Records and Access Controls