Acctg 432 Exam 1: Revenue Cycle Flowchart

What are the 2 criteria for revenue recognition?

1. Earned it 2. It is realizABLE, not realizED. Didn't collect it, just the expectation

What is the GAAP approach for the allowance method? What is the relationship between AR/Allow/NRV?

*Estimate BDE in the period of the sale* D: BDE C: ADA *Writing off a sale* D: ADA C: AR *If you collect a debt that was written off* D: AR C: ADA *then...* D: Cash C: AR - AR-ADA=NRV.... NRV is always the same when we write off. Example: AR=90 ADA=10 NRV=100. If you write off 5 from AR, AR=85 ADA=15 NRV=100

Explain 2/2 of the expenditure cycle

- CASH DISBURSEMENTS/PAYMENTS --- *AP Dept.* - Opens the voucher package when payment is due and sends it to the Cash Disbursements dept. *Cash Disbursements Dept.* - Verify voucher package and send it back to the AP dept. - Cut a check and send it to Vendor - Record transaction in cash disbursements journal... a voucher is prepared and created and then sent to the GL dept. *AP Dept.* - Receives the voucher package - Files voucher package by name - Updates AP subsidiary ledger *Vendor* receives check payment *GL Dept.* - Creates a journal voucher, updates GL, files journal voucher by date and updates GL by creating a journal entry.

Explain 4/4 of the revenue cycle

--- BAD DEBT --- *AR Dept.* - Creates AR Aging report and sends it to Credit dept. *Credit Dept.* - Determines who to write off - Creates a write off memo, filing 1 by date and sending 1 to treasurer *Treasurer* - Approves write off memo and sends it to AR *AR Dept.* - Prepares journal voucher and sends to GL - Updates customer account in AR subsidiary ledger - Files approved write off memo by date *GL Dept.* - Creates a journal voucher, updates GL, files journal voucher by date and updates GL by creating a journal entry.

Explain 1/2 of the expenditure cycle

--- CREDIT PURCHASES --- *Warehouse* - Prepare a purchase requisition (this initiates a purchase) that goes to 3 places: - 1 goes to Purchasing dept., 1 goes to AP Dept., and 1 is filed by number. *Purchasing Dept.* - Receives purchase requisition and prepares the purchase order - Sends purchase order 4 ways: - 1 goes to Vendor, 1 goes to Receiving dept., 1 goes to AP dept., and 1 is filed by number with the receiving report (see later on.) *Vendor* - Processes the purchase order. - Send packing list (with goods) to Receiving dept. - Send vendor invoice to AP Dept. *Receiving Dept.* - takes purchase order (from Purchasing dept.) and packing list (with goods (from Vendor)) - Inspects goods and compares it with purchase order. Prepares receiving report. - Sends receiving report 4 ways: - 1 goes to Warehouse dept. (with goods), 1 goes to Purchasing dept., 1 goes to AP dept., and 1 is filed. - The purchase order, packing list, and receiving report are all filed together by number. *Warehouse Dept.* - Gets receiving report from Receiving dept. - Stocks goods - Updates inventory subsidiary ledger and files receiving report by number *Purchasing Dept.* - As mentioned earlier, matches purchase order with receiving report and files with purchase requisition by number *AP Dept.* - Received purchase requisition, purchase order, receiving report, and vendor invoice - Matches all of these documents and journalizes - Journalized in purchase journal, creates a journal voucher and sends it to GL Dept. - Matched documents are posted to AP - Then prepare a voucherr with matched documents and send them to AP dept. *GL Dept.* - Creates a journal voucher, updates GL, files journal voucher by date and updates GL by creating a journal entry. *AP Dept.* - Receives voucher package

Explain 3/4 of the revenue cycle

--- PURELY CASH RECEIPTS -- *Mailroom* - Open customer mail and separates checks and remittance advice (which is how the customer wants their payment to be applied.) - Checks: they endorse the checks (with a stamp that says "for deposit only") and send to Cash Receipts dept. with cash receipts prelist (see below.) - Remittance advice: prepare 3 cash receipts prelists. 1 goes to Cash Receipts dept. with endorsed checks, 1 goes to AR dept. with remittance advice, 1 is filed by date. *Cash Receipts Dept.* - Separate the prelist and endorses checks - Endorsed checks: Prepare and create two deposit slips. Sends these two deposit slips and the endorsed checks to Bank. - Prelist: Journalize and file. - Journalize in cash receipts journal. Prepare and create a journal voucher and send to GL. - File by date *AR Dept.* - Receive prelist and remittance from Billing dept. - File prelist by date - File and update customer accounts from remittance. - File by name - Update AR subsidiary ledger *Bank* - Receives 2 deposit slips and checks. - Validates deposit and sends deposit slip to Internal Audit dept. *Internal Audit Dept* - Validates the deposit slip and sends it to the GL Dept. *GL Dept.* - Creates a journal voucher, updates GL, files journal voucher by date and updates GL by creating a journal entry.

Explain 1/4 of the revenue cycle

--- PURELY CREDIT SALES --- *Customer* - Begins with a purchase order from Customer. Send it to Sales dept. *Sales Order Dept* - Sales dept. prepares a sales order and sends it to 4 places... 1. The customer to approve 2. Sales dept. sends sales order to the Credit dept. to obtain credit approval 3. Sales dept. sends sales order to Warehouse dept. to pick goods 4. Sales dept. sends sales order to Billing dept. *Customer* - Customer approves sales order *Credit Dept.* - Approve sales order and send back to Sales Order dept. *Sales Order Dept.* - Files the approved sales order by number *Warehouse* - Receives sales order from Sales Order dept. and files it by number. - Picks goods from Pick list and sends sales order & goods to Shipping dept. - Updates inventory subsidiary ledger *Shipping dept.* - Receives sales order from Warehouse dept. and prepares a bill of lading (which is a list of shipment of goods.) - Gives 1 copy of bill of lading to Billing dept., 1 copy to Carrier, and 1 copy to Customer (w/ matching sales order) *Billing Dept.* - Receives sales order from Sales Order dept. and bill of lading from shipping dept. - Matches these and prepares the bill - Creates an invoice, 1 copy goes to Customer, 1 copy to AR dept., and 1 copy is journalized and filed. - Posted to sales journal, prepares journal voucher and sends to GL dept. - File invoice, sales order, and bill of lading by number. *AR Dept.* - Receives invoice from Billing dept., posts invoice to Customer account and sends customer statement to Customer. - Updates AR subsidiary ledger *GL Dept.* - Creates a journal voucher, updates GL, files journal voucher by date and updates GL by creating a journal entry.

Explain 2/4 of the revenue cycle

--- RETURNS --- *Customer* - Returns goods to Receiving dept. *Receiving Dept.* - Receives goods and prepares an RMA and sends it to the Credit dept. *Credit Dept.* - Approves RMA and sends back to Receiving dept. *Receiving Dept.* - Sends RMA and goods to Warehouse dept. and Billing dept. *Warehouse Dept.* - Receives RMA and goods, restocks goods and updates inventory subsidiary ledger. Files RMA by #. *Billing Dept.* - Receives RMA - Prepares 2 credit memos, sends one to AR dept. and files the other with RMA. - Prepares a journal voucher and sends it to GL Dept. *AR Dept.* - Receives credit memo and posts to customers account. - Files credit memo by name *GL Dept.* - Creates a journal voucher, updates GL, files journal voucher by date and updates GL by creating a journal entry.

There are 6 basic steps in the expenditure cycle. What are they, and what document is used for each?

1. Determine when a product is needed *purchase requisition* 2. Acquire a product *purchase order* 3. Receive the goods and inspect them *receiving report* 4. Return goods if they are not acceptable *RMA* 5. Validate the order *vendor invoice* 6. Pay the vendor *proof of payment*

There are 6 basic steps in the revenue cycle. What are they, and what document is used for each?

1. Check customer credit and accept customer order *Credit Application & Purchase Order* 2. Process customer order *Sales Order, Pick List + Pack List* 3. Send goods *Sales Invoice, Shipping Report, Bill of Lading* 4. Return unacceptable goods *RMA* 5. Collect payment *Proof of Payment, Remittance Advice* 6. Write off uncollectible accounts *Journal Voucher, Write-off Memo*

What two sub-cycles is the expenditure cycle split into?

1. Credit Purchases 2. Cash Disbursements/Payments

What are the two revenue sub-cycles?

1. Credit Sales 2. Cash Receipts

What are the 2 revenue cycle sub-cycles?

1. Credit Sales Cycle 2. Cash Receipts Cycle

What are the 2 expenditure cycle sub-cycles?

1. Credit purchases 2. Cash payments

What does the Voucher Package consist of? 4 things...

1. Purchase Requisition 2. Purchase Order 3. Receiving Report 4. Vendor Invoice All of these documents are sent to the AP Department. They put the Voucher Package together and send it the the Cash Disbursements department so they can make the payments. Ends in AP Department.

What are the two revenue plug-ins?

1. Returns (in Credit Sales sub-cycle) 2. Bad Debt (in Cash Receipts sub-cycle)

What are the 2 revenue cycle plug-in cycles?

1. Returns cycle 2. Bad debt cycle

What are the control objectives of the expenditure cycle and revenue cycle?

1. Safeguard assets, most specifically, inventory and cash. 2. Safeguard accounting records. Done through voucher system

Which two questions are asked (and answered) when using the allowance method?

1. What is BDE for the period (I/S effect) 2. What is the ending allowance balance? (B/S effect)

What does it means to obtain resources at a reasonable cost?

1. to buy products frugally for the quality that you want 2. to have the correct amount of inventory

Explain how the expenditure cycle is split into 2 parts

1/2 - Credit purchases 2/2 - Cash disbursements/payments

Explain how the revenue cycle is split into 4 parts.

1/4 - Purely credit sales 2/4 - Returns plug-in 3/4 - Purely cash receipts 4/4 - Bad Debt plug-in

Formula for % of A/R Method:

A/R @ YE x Bad Debt % = Estimated Bad Debt

What is the Revenue Cycle?

An accounting cycle dealing with selling goods and services and collecting cash for them

What is the expenditure cycle?

An accounting cycle that deals with the purchasing of goods and service -- and paying for them.

What are the 2 approaches (3 methods) of estimating BDE?

Approach #1: I/S Approach - % of Sales Method Approach #2: B/S Approach - % of A/R Method - Aging of A/R Method

Formula for % of Sales Method:

Current period sales x Bad Debt % = Estimated Bad Debt

At the end of its first year of operations, Barton Co. estimates that $3,000 of its accounts receivable will prove uncollectible. The total accounts receivable balance at December 31, 2009, is $278,000 What is the journal entry? What is NRV?

D: BDE $3,000 C: ADA $3,000 NRV = AR - ADA NRV = $278,000 - $3,000 NRV = $275,000

What is the difference between an expense and an expenditure?

Expense - the use of a resource (typically cash) Expenditure - the amount of resources used (typically cash payment)

What is the difference between the gross method and net method?

Gross Method - Assumes the purchase is at the full amount, no discount Net Method - Assumes the purchase is at the discount price

Gross Method vs. Net Method question.... Jamery & Associates buys $10,000 worth of goods from a supplier who offers a 2% discount if paid within 10 days. Show the accounting under the gross method

Gross Method: *When purchased* D: Purchase $10,000 C: AP 10,000 *If paid within the discount period* D: AP 10,000 C: Cash $9,8000 C: Purchase discounts $200 *If paid after the discount period* D: AP $10,000 C: Cash $10,000 *If goods are returned* D: AP $10,000 C: Purchase returns and allowances $10,000

Gross Method vs. Net Method question.... Jamery & Associates sells $10,000 worth of goods and offers a 2% discount if paid within 10 days. Show the accounting under the gross method

Gross Method: *When sold* D: AR $10,000 C: Sales $10,000 *If paid within the discount period* D: Cash $9,800 C: Sales Discount $200 AR: $10,000 *If paid after the discount period* D: Cash $10,000 C: AR $10,000 *If goods are returned* D: Sales returns and allowance $10,000 C: AR $10,000

Why is the allowance method used?

It follows the matching principal

Gross Method vs. Net Method question.... Jamery & Associates buys $10,000 worth of goods from a supplier who offers a 2% discount if paid within 10 days. Show the accounting under the net method

Net Method: *When purchased* D: Purchases $9,800 C: AP $9,800 *If paid within the discount period* D: AP $9,800 C: Cash $9,800 *If paid after the discount period* D: AP $9,800 D: Purchase Discounts Lost $200 C: Cash $10,000 *If goods are returned* D: AP $9,800 C: Purchase returns and allowances $9,800

Gross Method vs. Net Method question.... Jamery & Associates sells $10,000 worth of goods and offers a 2% discount if paid within 10 days. Show the accounting under the net method

Net Method: *When sold* D: AR $9,800 C: Sales $9,800 *If paid within the discount period* D: Cash $9,800 C: AR $9,800 *If paid after the discount period* D: Cash $10,000 C: Interest revenue $200 C: AR: 9,800 *If goods are returned* D: Sales returns and allowance $9,800 C: AR $9,800

What is the difference between periodic and perpetual inventory? Which method is a higher risk?

Periodic Method - Account for inventory at the end of the period by taking a physical inventory count. If an item isn't in the physical inventory, it, theoretically, should be in COGS Perpetual Method - Account for inventory continuously as purchases are made PERIODIC IS A HIGHER RISK.

Formula for Aging of A/R Method

There are A/R Buckets with a % of how much is uncollectible in each bucket. Find each bucket's Estimated Bad Debt and add them altogether.

What does the company have to consider when establishing a customer credit policy?

Too make sure the leash is not too big or too short. Too big = customer spends more than they can pay back Too short = Customer cannot spend as much as they want to