Expenditure Cycle
Is Periodic or Perpetual Inv System more secure?
PERPETUAL *Periodic - only counts inv ONCE @ end - if inventory is not there, we assume it is SOLD but it could have really been stolen *Perpetual - cyclically counts all items of inv at least once - manager can print out a report whenever when they want to know whats exactly in their store - uses cyclical counting THROUGHOUT the period, not just once @ end
Retailer does NOT allow goods onto the receiving dock of the building without what?
PURCHASE ORDER
Step 4- If unacceptable, return goods or obtain a purchase allowance
*J/E Needed to return goods - Debit A/P - Credit Purchase Return & Allowance
A/P now has all documents to build & vouch the VOUCHER PACKAGE
- A/P needs to know they are AUTHORIZED to pay the suppliers - cash disbursement - We build the Voucher Package to support the Cash Disbursement/Payment for the goods we Purchased
Department 5 - A/P
- A/P will now match the Purch Req, Purch Order, Rec Report & Vendor Invoice - Data input on Purchase Journal, prepare and send document of journal voucher to GL - Post to A/P sub ledger & prepare purchase voucher package and send to Cash Disbursements
Department 1 - A/P
- A/P will open voucher package - They know we REQUESTED the goods, it was AUTHORIZED, we RECEIVED it and CLEARED it for payment - A/P will send voucher package to Cash Disbursements
Purchase Order (Definition)
- AUTHORIZED purchase requisition - Once the purchasing dept receives the P.R. & authorizes it - it becomes a Purchase ORDER - 4 copies are created
Treasurer - PAYS OUT CASH TO SUPPLIERS (2)
- Cash Disbursements Dept - Authorization - *check signing matrix
3 TYPES of Departments involved in Expenditure Cycle
- Controller *Head of Acctg Dept - aka Senior Manager *reports to CFO - handles day-day operations in Acctg Dep - Logistics - Treasurer *acts as check signing matrix
What are the two sub-cycles of the Expenditure Cycle?
- Credit Purchases Cycle (buying) - Cash Disbursements/Payment Cycle (paying cash) *Focus on purchasing inventory
Department 2 - Cash Disbursements
- Cut & send check w/ Remittance Advice to Vendor to pay - Record transaction in CDJ - Prepare Journal Voucher and send it to G/L Dept - Send voucher package back to A/P to keep in files & update A/P sub ledger*
Revenue cycle debits ___ and credits ___; Expenditure Cycle debits ___ and credits ___
- Debit A/R, Credit Sales - Debits Purchases, Credits A/P
If you are in charge of the inventory sub-ledger, what is your responsibility?
- Determine when a product is needed - Detect reorderer points or low-stock needs for those bulk items that are ordered by some means other than reorder point, such as visual determination
Controller - BOOKKEEPERS (5)
- General Ledger - Accounts Payable (sub-ledger responsibility) - Inventory Control (cost acctg in warehouse) - Cost Accounting - Record-keeping
Files in a computer environment
- Master Files - Transaction Files - Reference File - History
What is the function of the Expenditure Cycle?
- Obtain resources when needed at REASONABLE cost from suppliers/vendors - pay ONLY what is owed to them
Department 2 - PURCHASING
- Once the Purchase Requisition is approved, the Purchasing Dept will prepare a PURCHASE ORDER and choose the vendor
Purchase Voucher (Definition)
- Package containing a copy of the Purch Req, Purch Order, Rec Report & Vendor Invoice - Sent from A/P Dept to Cash Disbursements
Perpetual Inv System
- Physical Inv Count NOT required (still should count though) - updates records of inv after each sales & purchase so managers know what should be in inv @ all times Ex: each beep after you scan an item at Wegmans Debit COGS credit Inv - Use Cyclical Counting - randomly select inv to count THROUGHOUT the period (count high risk/dollar amounts more often, but all items at least once) - Large Business - Walmart, Target RISK: - Expensive - More maintenance required - You are not required to PHYSICALLY count it, inv system is updated automatically electronically so inv could be stolen & not there
Periodic Inv System
- Physical Inv Count REQUIRED @ end of period to determine what was sold - Inv account is the amount of Beg Inv from prior period until end of period when count is done - Cheaper - Small businesses - less to count - If it is not there, you assume it is sold
7 Documents involved in Expenditure Cycle
- Purchase Requisition - Purchase Order - Receiving Report - Bill of Lading - Vendor Invoice - Check Stub - Debit Memo (Purchase Return Memo)
Department 6 - General Ledger
- Receive Journal Voucher - Update General Ledger - File Journal Voucher
Department 4 - RECEIVING
- Receiving dept will match their copy of the PURCHASE ORDER to the shipped goods w/ packing list - Inspect Goods - RECEIVING DEPT will now generate a RECEIVING REPORT *J/E Needed when goods are RECEIVED
Standard Journal Entires
- Record Credit Purchases (@ gross or net) - Vendor Payment (within or after discount period expires) - Goods returns (must record associated reduction of A/P or cash refund)
Retailer will pay the Vendor by sending them a ____
- Retailer now sends the Vendor a CHECK STUB (Check w/ Remittance Advice) back that lists all the invoices they are paying w/ this specific check Ex: The advice may consist of a letter ("Dear Vendor/Supplier: Your shipment was received in good order; accompanying is our remittance of $52.47 per invoice No 83046" *Helps the vendor's A/R clerk match each invoice due to them with the retailer's payment
How are Expenditure & Revenue cycle mirror images of one another?
- Revenue Cycle - customers send us purchase orders to purchase our goods - Expenditure Cycle - we (retailer) send vendors/suppliers purchase orders to purchase their goods
What are the 5 Control Objectives?
- Safeguard Inventory (when received & when in stock) - Safeguard Cash (disburse for only VALID transactions-A/P & only TO legitimate suppliers) - Authorize all purchase transactions (purchases of inv only made when needed & only FROM legitimate suppliers) - Record transactions promptly & accurately - Safeguard all Accounting Records
What is the sub-ledger control account for inventory?
- The G/L Account for INVENTORY Control account is on the GL - lists the totals of the A/R, A/P & INV balances at the end of each day - the sub ledger lists each GL account more detailed - when transactions occur, items were purchased, how much, when etc. - the sub ledger totals are transferred & added to their specific control accounts on the GL - Balance in the Control Account (listed on GL) should match balance of their related detailed sub ledger
Check Signing Matrix
- Treasurer is normally referred to as the Check Signing Matrix - If you are writing a check above a certain dollar amount, you need a second signature to show authorization from the check signing matrix aka Treasurer - helps put controls over cash
Department 3 - VENDOR
- VENDOR will process the order using the PURCHASE ORDER - Will pack goods in shipment box w/ packing list - Create a Vendor Invoice *Usually NO J/E needed
Department 3 & 4 - Vendor & General Ledger
- Vendor will receive the check from CD dept -G/L Dept will receive Journal Voucher - Update General Ledger - File Journal Voucher
Logistics - CUSTODY (5)
- Warehouse (controls inv sub-ledger) - Shipping - Receiving - Purchasing - Asset Custody
Positive Count
- Warehouse manager gives employee a list of all the items of inventory the warehouse should have & lists the # that should be there for each item *LESS RELIABLE - emp can just be lazy & not count & just lie about what's there
Blind Count
- Warehouse manager gives employee a list of all the items of inventory the warehouse should have but does not list the # that should be there *BLANK LINE *MORE RELIABLE - employee must count & determine the total
Transaction Files
- contains ACTIVITY data to update master files - info changes day to day * such as sales orders, purchase orders, cash receipts, and accounts payable invoices
Master Files
- contains BALANCE DATA - essentially permanent information about customers, inventory items, salesmen, vendors, and general ledger accounts as of a certain time/current status *Exp Cycle- includes inv, A/P & vendor (supplier)
History
- contains INACTIVE/historical data - include records pertaining to past sales or completed transactions *Exp Cycle- vendor history file on delivery times, % order filled etc.
Reference File
- contains REPETITIVE data that is sought - tables or lists of data needed for calculations or checking the accuracy of data inputs *Exp Cycle- includes tax tables, inv lists, product price or customer lists
Cash Disbursement Cycle (Definition)
- payment/cash disbursements to suppliers
Purchase Requisition (Definition)
- document created by WAREHOUSE to request a product to fulfill inventory - 3 copies are created
Debit Memo aka Purchase Return Memo (Definition)
- document describing the purchaser/retailer's return of goods to vendor - reduces retailer's inventory - reverse transaction on General Ledger * Credit Purchase Return & Allowances * Debit A/P
Vendor Packing List (Definition)
- document listing the goods contained in the shipment box
Subsidiary Ledger
- lists in detail components of G/L accounts Ex: A/R, A/P & Inventory Sub Ledgers
Vendor Invoice (Definition)
- purchaser/retailer's bill for goods they purchased from vendor/supplier - lists products received, quantity & agreed upon price they owe
Credit Purchases Cycle (Definition)
- purchasing goods & services - merchandise inv
Electronic Data Interchange (EDI)
- secure communication method - connects vendor & retailer electronically (customer) - Both can exchange documents electronically (purch orders, invoices etc.) - Retailers can order from the vendors by going into the vendor's system using their own log in - Vendor invoice will be sent to retailer electronically
Expenditure Cycle (Definition)
- the cycle dealing w the purchase of goods & services from SUPPLIERS and the payment of the money owed to them
Basic Steps in Expenditure Cycle
1) Determine when product is NEEDED - Responsibility of warehouse & whoever maintains inventory sub-ledger 2) ACQUIRE the product 3) RECEIVE & INSPECT goods 4) RETURN goods if unacceptable or obtain a purchase allowance - Responsibility of Receiving Group to decide 5) VALIDATE the order 6) PAY cash to the vendor
What documents are included in a Voucher Package? (5)
1) Purchase Requisition 2) Purchase Order 3) Receiving Report 4) Vendor Invoice 5) Check Stub (Check w Remittance Advices) *Auditors will VOUCH - go through each doc in reverse order - backwards - to verify each of these doc exist *Start with Check Stub --> Vendor Invoice --> etc.
What are the TWO GOALS of the Expenditure Cycle?
1- Define level of QUALITY & then find best deal 2- Maintain "Adequate"/appropriate Inv Level using forecasts
How many copies of the Purchase Requisition are created and where do they go?
3 copies - Warehouse - filed - A/P - to add to voucher package for authorization - Purchasing
How many copies of the Purchase Order are created and where do they go?
4 copies - Purchase Dept - filed in purchase order file - Receiving Dept - authorization for receiving dock - so they know what they ordered & what they're supposed to receive - Vendor - so they know what to ship - packing list - A/P - to add to voucher package for authorization
How many copies of the Receiving Report are created?
4 copies - filed/stays in Receiving - A/P - add to voucher package - Warehouse - to update inv records/sub ledger of what inv was received** - Purchasing - to add to closed purchase order file**
What is the correct order of departments involved in the Cash Disbursements sub-cycle of the Expenditure Cycle?
A/P Cash Disbursements Vendor G/L
The Vendor will ship the vendor invoice to ___
A/P Dept
How does the Retailer's A/P Dept receive the Vendor Invoice - shows what they owe to the vendor for the goods they ordered
A/P receives the Vendor Invoice from the vendor's A/R DEPT
Who controls the A/R or A/P sub-ledger?
A/R or A/P Departments
Net Method
Assumes we take the discount right away *Only make additional adjusting J/E if one ends up not taking the discount
When we (retailer) wants to return goods to the supplier, the journal entry would be debit ___ & credit ___
Debit - A/P Credit - Purchase returns & Allowances
Managers that run a Perpetual Inventory Systems can check the amount of inv they currently have by initiating a ___ or ___ count
Blind or Positive Count
How are cash payments controlled?
By check & balances
What is the MOST important part of the Expenditure Cycle? WHY?
CASH DISBURSEMENTS - Everything we do in the Expenditure Cycle is to build a VOUCHER PACKAGE to authorize the Cash Disbursements Sub-Cycle
Higher quality goods = __ risk & Lower quality goods = ___
Higher quality goods = Low risk Lower quality goods = High risk
Every step in the Exp Cycle that has Authorization needs =
Documentation
Expenditure vs Expense
Expenditure= outflow of CASH/when you pay for it Expense= use of resources/services - listed on I/S - Advertising Expense, Dep Expense etc. *Accrual accounting allows the separation between expenditure & expense - Plumber provides services to customer in May and leaves invoice (Expense) but customer does not pay until June (Expenditure) ACCRUAL = method of accounting that counts income/expenses at the time they are earned/incurred (EXPENSE) - when money is received or paid out is irrelevant (EXPENDITURE)
Why are discounts offered by vendors?
In order to motivate retailers to pay earlier, vendors offer discounts so they get their money sooner *Retailers would rather pay slowly & on credit so they can verify the order and ensure they are properly receiving exactly what they ordered
If the retailer believes the goods sent from the vendor are UNacceptable, the retailer will return the goods to the vendor. What form is needed to return goods back to the vendor?
RMA - Returned Merchandise Authorization *Retailers require goods to have a PURCHASE ORDER before accepting purchases on their receiving dock *Vendors require goods to have an RMA before accepting returned goods on their receiving dock
The Vendor will ship the goods w/ packing list to the ___
Receiving Dept
Gross Method
Records the purchase at the sale price WITHOUT the discount *If customer doesn't usually take advantage of the discount period, use the Gross Method
How is inventory safeguarded/secured?
Supply Chain
What is the correct order of departments involved in the Credit Purchases sub-cycle of the Expenditure Cycle?
Warehouse Purchasing Vendor Receiving Dep A/P G/L
Validate the Order
Vendors will now generate a VENDOR INVOICE which shows what goods the retailer purchased & received from them & the amount the retailer owes *No J/E needed
Who controls the inventory sub-ledger?
WAREHOUSE
Department 1 - WAREHOUSE
WAREHOUSE generates a purchase requisition when they need & want to request a new product order *NO J/E neeeded