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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

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

P R O C U R E M E N T C Y C L E(S U B S Y S T E M )

P u rch as in g

A cco u n ts P ayab le

R ece iv in g /In sp ec tio nC ash D isb u rsem en ts

P u rch ase R eq u is itio n

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Start here.Start here.

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

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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

See next slide for flowchart

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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)

See next slide for flowchart

(yellow symbols)

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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)

See next slide for flowchart

(blue symbols)

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Manual Purchases System (contd)

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

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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)

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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

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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 inventoriessystem 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

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

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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

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CBIS Authorization Controls

Authorizations are automated. Programmed decision rules must be checked for

accuracy

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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-purchasingCash disbursements - automate check

printing and signing. Programming logic must be error-free Use automated signing below

predetermined dollar amount (depends on business rules)

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Segregation of Duties

WarehouseInventory controlAccounts payableGeneral ledgerRequisitioningPurchasesPurchases returns and allowancesCash disbursements

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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

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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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ManualAccounting Records

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

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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.

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Manual Access Controls

Limit access to: inventory cash accounting records

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CBIS Access Controls

Magnetic records are vulnerable to authorized and unauthorized exposure. Limit access to data files Limit access to computer programs

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ManualIndependent 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

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CBIS Independent Verification

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

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

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