The Expenditure Cycle Purchasing to Cash Disbursements Chapter

The Expenditure Cycle: Purchasing to Cash Disbursements Chapter 13 Copyright © 2015 Pearson Education, Inc. 13 -1

Learning Objectives • Explain the basic business activities and related information processing operations performed in the expenditure cycle. • Discuss the key decisions to be made in the expenditure cycle, and identify the information needed to make those decisions. • Identify major threats in the expenditure cycle, and evaluate the adequacy of various control procedures for dealing with those threats. Copyright © 2015 Pearson Education, Inc. 13 -2

Basic Expenditure Cycle Activities • • Order materials, supplies, and services Receive materials, supplies, and services Approve supplier (vendor) invoice Cash disbursement Copyright © 2015 Pearson Education, Inc. 13 -3

Order Goods (Materials/Supplies) or Services Processing Steps • Identify what, when, and how much to purchase ▫ Source document: purchase requisition • Choose a supplier ▫ Source document: purchase order Copyright © 2015 Pearson Education, Inc. 13 -4

Ordering Goods/Services Threats Controls 1. 1 a. Perpetual inventory system b. Bar-coding, RFID 2 a. Review and approval of purchase requisitions 3 a. Price lists b. Competitive bids 4 a. Use approved suppliers 5 a. Monitor supplier performance b. Require quality certification 6 a. Purchase from approved suppliers 7 a. Supplier audits b. Prohibit gifts 13 -5 2. 3. 4. 5. 6. 7. Stockouts and excess inventory Purchasing items not needed Purchasing items at inflated prices Purchasing goods of poor quality Unreliable suppliers Purchasing from unauthorized suppliers Kickbacks Copyright © 2015 Pearson Education, Inc.

Receiving Process • Goods arrive ▫ Verify goods ordered against the purchase order (what, how much, quality) ▫ Source document: receiving report Copyright © 2015 Pearson Education, Inc. 13 -6

Receiving Goods or Services Threats Controls 1. 2. 3. 4. 1 a. Authorized purchase orders needed before receiving goods 2 a. Bar codes or RFID 3 a. Budget controls and audits 4 a. Restrict physical access to inventory b. Document all inventory transfers c. Segregate custody vs. receiving of inventory 13 -7 Accepting unordered items Mistakes in counting Verifying receipt of services Inventory theft Copyright © 2015 Pearson Education, Inc.

Approve Supplier Invoice and Cash Disbursements • Match the supplier invoice to: ▫ Purchase order ▫ Receiving report supplier invoice + purchase order + receiving report = voucher • Approve supplier invoice for payment ▫ Source document: disbursement voucher • Pay vendor Copyright © 2015 Pearson Education, Inc. 13 -8

Approve Supplier Invoice Threats Control 1. Errors in supplier invoice 2. Mistakes in posting to accounts payable 1 a. Verify invoice accuracy 2 a. Data entry edit controls b. Reconcile detailed accounts payable records to the general ledger accounts payable account Copyright © 2015 Pearson Education, Inc. 13 -9

Cash Disbursements Threats Controls 1. 2. 3. 4. 5. 6. 1 a. File invoices by due date to take advantage of discounts 2 a. Match supplier invoice to supporting documents (purchase order, receiving report) 3 a. Pay only original invoices b. Cancel supporting document when payment is made 4 a. Physical security of checks b. Separation of duties c. Reconcile bank accounts 5 a. Check Protection machines 6 a. Cash flow budget 13 -10 Failure to take discounts Pay for items not received Duplicate payments Theft of cash Check alteration Cash flow problems Copyright © 2015 Pearson Education, Inc.

Key Terms • Expenditure cycle • Economic order quantity (EOQ) • Reorder point • Materials requirement planning (MRP) • Just-in-time (JIT) inventory system • Purchase requisition • Purchase order • Blanket purchase order Copyright © 2015 Pearson Education, Inc. • • • Vendor-managed inventory Kickbacks Receiving report Debit memo Voucher package Nonvoucher system Voucher system Disbursement voucher Evaluated receipt settlement (ERS) • Procurement card • Imprest fund 13 -11