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The Expenditure Cycle: Purchasing and Cash Disbursements
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UAA – ACCT 316 – Fall 2002Accounting Information
SystemsDr. Fred Barbee
Chap
ter
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The Primary Objective
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Main Objective
The primary objective of the expenditure cycle is to minimize the total cost of acquiring and maintaining inventories, supplies, and the various services necessary for the organization to function.
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Key Decisions of the Cycle
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Key Decisions
What is the optimal level of inventory and supplies to carry?
Which suppliers provide the best quality and service at the best prices?
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Key Decisions
Where should inventories and supplies be held?
How can the organization consolidate purchases across units to obtain optimal prices?
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Key Decisions
How can information technology be used to improve both the efficiency and accuracy of the inbound logistics function?
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Key Decisions
Is sufficient cash available to take advantage of any discounts suppliers offer?
How can payments to vendors be managed to maximize cash flow?
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The Expenditure Cycle – Defined
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Defined
The expenditure cycle is a recurring set of business and related information processing operations associated with the purchase of and payment for goods and services.
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The first function of a well-designed AIS is to support the effective performance of the organization’s business activities.
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The Expenditure Cycle – Business Activities
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Business Activities
1. Order Goods
2. Receive and Store Goods
3. Pay for Goods
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Business Activities – Up Close and Personal
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1.0Order Goods
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Order Goods (Activity 1)
The first major business activity in the expenditure cycle involves ordering inventory or supplies.
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Order Goods (Activity 1)
What to purchase?
When to purchase?
How much to purchase?
From what supplier?
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Order Goods (Activity 1)
Inventory control methods:
EOQ
MRP
JIT
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What is the major difference between MRP and JIT?
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MRP Systems
Schedule production to meet estimated sales need, thereby creating a stock of finished goods inventory.
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JIT Systems
Schedule production to meet customer demands, thereby virtually eliminating finished goods inventory.
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Documents and Procedures
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Order Goods
What is a key decision?
determine vendor
What factors should be considered?
price
quality of materials
dependability in making deliveries
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2.0Receive
and Store Goods
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Receive and Store Goods
The receiving department has two major responsibilities:
Deciding whether to accept a delivery
Verifying quantity and quality
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3.0Pay for Goods
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Pay for Goods
The objective of accounts payable is to authorize payment only for goods and services that were ordered and actually received.
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Key Decisions and Information Needs
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The third function of a well-designed AIS is to provide useful information for decision making.
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Key Decisions
Determine when and how much additional inventory to order.
Select the appropriate vendors from whom to order.
Verify the accuracy of vendor invoices.
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Key Decisions
Decide whether purchase discounts should be taken.
Monitor cash flow needs to pay outstanding obligations.
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Other Information Needed
Efficiency and effectiveness of the purchasing department
Analyses of vendor performance such as on-time delivery, quality, etc.
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Other Information Needed
Time taken to move goods from the receiving dock into production
Percentage of purchase discounts taken
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Control Objectives, Threats, and Procedures
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The second function of a well-designed AIS is to provide adequate controls to ensure the firm meets its objectives.
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Control Objectives
Transactions are properly authorized.
Recorded transactions are valid.
Valid, authorized transactions are recorded.
Transactions are recorded accurately.
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Control Objectives
Assets (cash, inventory, and data) are safeguarded from loss or theft.
Business activities are performed efficiently and effectively.
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Threats to the Expenditure Cycle
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Threats
Stockouts
Purchasing too many or unnecessary goods
Purchasing goods at inflated prices
Purchasing goods of inferior quality
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Threats
Purchasing from unauthorized vendors
Kickbacks
Receiving unordered goods
Errors in counting goods
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Threats
Theft of inventory
Failure to take available purchasing discounts
Errors in recording and posting purchases and payments
Loss of data
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Expenditure Cycle Exposures
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Exposures
Production delays and lost sales
Increased inventory costs
Cost overruns
Inferior quality of purchased goods
Inflated prices
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Exposures
Violation of laws or import quotas
Payment for items not received
Inaccurate inventory records
loss of assets
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Exposures
Cash flow problems
Overstated expenses
Incorrect data for decision making
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Expenditure Cycle Control Procedures
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Control Procedures
Inventory control system
Vendor performance analysis
Approved purchase requisitions
Restricted access to blank purchase requisitions
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Price list consultation
Budgetary controls
Use of approved vendor lists
Approval of purchase orders
Prenumbered purchase orders
Control Procedures
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Prohibition of gifts from vendors
Incentives to count all deliveries
Physical access control
Recheck of invoice accuracy
Cancellation of voucher package
Control Procedures
