THE EXPENDITURE CYCLE

THE EXPENDITURE CYCLE

• The receiving department accepts deliveries from suppliers.

>Reports to warehouse manager, who reports to vice president of manufacturing

• Inventory stores typically stores the goods

>Also reports to warehouse manager

• The receipt of goods must be communicated to the inventory control function to update inventory records
• The twp major responsibilities of the receiving department are:

>Deciding whether to accept delivery

• >Verifying the quantity and quality of delivered goods

Purchasing to Cash Disbursements

CONCLUSION

EXPENDITURE CYCLE INFORMATION NEEDS

• Four basic business activities in the expenditure cycle

>Ordering materials, supplies and services

>Receiving materials, supplies and services

>Approving supplier invoices

>Cash disbursement

• IT can help to improve the efficiency and effectiveness of these processes
• Any major threats can be controls

• Information that needed in expenditure cycle are:

>Deciding when and how much inventory to order'

>Deciding on appropriates suppliers

>Determining if vendor invoices are accurate

>Deciding whether to take purchases discounts

>Determining whether adequate cash is available to meet current obligations

• Information needs to provide information:

>Purchasing efficiency and effectiveness

>Supplier performance

>Time taken to move goods from receiving to production

>Percent of purchase discount taken

THREATS & CONTROLS

• Failure to take advantage of discounts for prompt payment

>Filling of invoices by due date for discounts

>Cash flow budgets

• Paying for items not received

>Matched invoices with supporting document

>Use of corporate credit cards for travel expenses

• Duplicate payments

>Policy to pay only from original copies of suppliers invoices

>Canceling all supporting documents when payment is made

• When the AIS integrates information from the various cycles, sources and types, the reports that can be generated are unlimited. They include reports on:

>Supplier performance

>Outstanding invoices

>Performance of expenditure cycle employees

>Number of POs processed by purchasing agent

>Number of invoices processed by A/P clerk

>Number of deliveries handled by receiving clerk

>Number of inventory moves by warehouse worker

>Inventory turnover

>Classification of inventory based on contribution to profitability

CASH DISBURSEMENTS

THREATS AND CONTROLS

• To purchase goods typically results in the creation of a purchase requisition
• Purchase requisition is a paper documents or electronic from identifies:

>Who is requesting the goods?

>Where they should be delivered?

>When they are needed?

>Items numbers, descriptions, quantities, and prices

>Department number and account number to be charged

• Every small business needs a cash disbursement system that efficiently and securely handles a company's cash payments
• Accounts payable (A/P) is closely tied to cash disbursements and most transaction are processed through A/P when a cash payment is made
• Proper documentation is part of an effective cash disbursement function, and all cash disbursements must be recorded on the company's financial records
• The presence of good internal controls is important in cash disbursement and helps ensure that cash is paid for legitimate transactions.

• Inaccurate inventory records

>Using RFID technology rather than bar codes as it is more efficient and do not need for a human to align the code on the product

• Purchasing items that are not needed

>Supervisors need to review and approve purchase requisitions that employees initiate

• Unreliable performance by suppliers

>Require that suppliers be certified as meeting international quality standard

• Purchasing from unauthorized suppliers

>Using EDI for purchase orders requires additional control procedures

>EDI system should be controlled and limited to authorized personnel through the use od passwords, user IDs, access control matrices and physical access controls

• Alternate inventory control methods:

>Economic Order Quantity (EOQ)

-Traditional approach to managing inventory

-Maintain enough stock

-Optimal order size is calculated by:

~Ordering costs

~Carrying costs

~Stock-out costs

• Materials Requirements Planning (MRP)

>To reduce inventory levels by improving the accuracy of forecasting techniques and carefully scheduling production and purchasing around that forecast

• Just in Time Inventory (JIT)

>To minimize or eliminate inventory by purchasing or producing only in response to actual

>Have frequent, small deliveries of materials, parts, and supplies directly to the location where production will occur

• IT can helps improve efficiency and effectiveness of purchasing function

>Major cost driver is the number of purchases orders processed

>Time and cost can be cut by:

-EDI to transmit purchase orders

-Vendor-managed inventory systems

-Reverse auctions

-Pre-award audits

ORDERING MATERIALS, SUPPLIES AND SERVICES

RECEIVING MATERIAL, SUPPLIES AND SERVICES

• A purchase order is a document or electronic form that formally requests a supplier to sell and deliver specified products at specified prices
• The PO is both a contract and a promise to pay. It includes:

>Names of supplier and purchasing agent

>Order and requested delivery dates

>Delivery location

>Shipping method

>Details of the items ordered

• Multiple purchase orders may be completed for one purchase requisition if multiple vendors will fill the request
• The ordered quantity may also differ from the requested quantity to take advantage of quantity discounts
• A blanket order is a commitment to buy specified items at specified prices from a particular supplier for a set time period

>Reduce buyer's uncertainty about reliable material sources

>Helps supplier plan capacity and operations

• The first decision is based on whether there is a valid purchases order

>Accepting un-ordered goods wastes time, handling and storage

• Verifying the quantity of delivered goods is important so:

>The company only pays for goods received

>Inventory records are updated accurately

• The receiving report is the primary document used in this process:

>It documents the date goods received, shipper, supplier and Purchases Order (PO) number.

>Shows item number, description, unit of measure, and quantity for each item

>Provides space for signature and comments by the person who received and inspected

• Receipt of services is typically documented by supervisory approval of the supplier's invoice
• When goods arrive, a receiving clerk compares the PO number on the packing slip with the open PO file to verify the goods were ordered

>Counts the goods

>Examines for damage before routing to warehouse or factory

• Three possible exceptions in this process:

>The quantity of goods is different from the amount ordered

>The goods are damaged

>The goods are of inferior quality

• If one of these exceptions occurs, the purchasing agent resolves the situation with the supplier

>Supplier typically allows adjustment to the invoice for quantity discrepancies

>If goods are damaged or inferior, a debit memo is prepared after the supplier agrees to accept a return or grant a discount

-One copy goes to supplier, who return a credit memo in acknowledgment

-One copy to accounts payable to adjust the account payable

-One copy to shipping to be returned to supplier with the actual goods.

THREATS AND CONTROL

INTRODUCTION

APPROVING SUPPLIER INVOICES

• Definition

>A recurring set of business activities and related information processing operations associated with the purchased of and payment for goods and services

• Main focus

>Acquisition of raw materials, finished goods, supplies and services

• Primary objectives

>To minimize the total cost of acquiring and maintaining inventories, supplies, and the various services the organization needs to function

IT can help improve the efficiency and effectiveness of the receiving activity:

a) Bar-Coding

-Requiring suppliers to bar-code products speeds the counting process and improves accuracy

b) RFID

-Radio Frequency Identification (RFID) tags eliminate the need for bar codes to be in the line of sight

c) EDI and satellite technology

-Make it possible to track the exact location of incoming shipments and have receiving staff on hand to unload trucks

-Enable drivers to be directed to specific loading docks where goods will be used

THREATS

• Accepting unordered items
• Mistakes in counting
• Verifying receipt of services
• Theft of inventory

• Third process in expenditure cycle is approving supplier invoice for payment
• Approval of vendor invoices is done by the accounts payable department, which reports to the controller
• The legal obligation to pay arises when goods are received

>Most companies pay only after receiving and approving the invoice

>The timing is difference may necessitate adjusting entries at the end of a fiscal period

• Objective of accounts payable:

>Authorize payment only for goods and services that were ordered and actually received

• Requires information from:

>Purchasing - existence of valid purchase order

>Receiving - for receiving report indicating goods were received

• Failing to catch error in vendor invoices

>Why is this a problem?

-Overpaying for merchandise

>Control:

-Check mathematical accuracy of invoices

-Obtain receipts from procurement card users and verify monthly statement accuracy

• Paying for goods not received

>Why is this a problem?

-Increased costs

>Control:

-Compares quantities on invoices with quantities reported by receiving and inventory control departments

-Have tight budgetary controls and provide careful review of departmental expenses

• Paying the same invoice twice

>Why is this a problem?

-Reduces profitability

>Controls:

-Only pay on original copies of invoices

-Approve invoices for payment only when accompanied by a complete voucher package (PO & receiving report)

CONTROLS

• Requiring existence of approval purchase order prior to accepting any delivery
• Require receiving employees to sign receiving report
• Use of bar-codes and RFID tags
• Segregation of duties
• Documentation of all transfers of inventory between receiving and inventory employees

• Referred to as Evaluated Receipt Settlement

>Payment are issued based on what is ordered and received

>Requires that:

-Suppliers quotes accurate prices when orders are placed

-Receiving personnel count accurately and inspect merchandise received

Typically, incorporates very timely communications about shipments and receipts

• There are two basic approaches to processing vendor invoices:

>Non-voucher system

-Each invoice is stored in an open invoice file

-When a check is written, the invoices marked "paid" and then stored in a paid invoice file

>Voucher system

-A disbursement voucher is prepared which lists:

~Outstanding invoices for the supplier

~Net amount to be paid after discounts and allowances

• Processing efficiency can be improved by:

>Requiring suppliers to submit invoices by EDI

>Having the system automatically match invoices to POs and receiving reports

>Eliminating vendor invoices

>Using procurement card for non-inventory purchases

>Using company card for non-inventory purchases

>Preparing careful cash budget to take advantage of early payment discount

>Using FEDI to pay supplier