Chapter 8 Textbook Notes
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Date Created: 04/06/16
Chapter 8 – Revenue Cycle The sales business process is the primary revenue cycle application in many organizations. The sales business process includes: o Inquiry (optional) The sales business process often begins when a potential customer makes an inquiry or requests a quotation. Some companies make a quotation mandatory. A quotation is a document that is prepared and sent to a potential customer to inform him or her of product prices, product availability, and delivery information. This is prepared when a potential customer has made a fairly specific request for details concerning a potential order. An inquiry is similar to a quotation, but an inquiry does not contain delivery information. o Contact creation (optional) Some companies require that contracts (legal agreements) be prepared before selling to customers as a matter of company policy. A contact is an outline agreement to provide goods or services to a customer. Specifies quantities and a general time frame for deliveries. Specific order details such as delivery dates and prices. A contract to provide goods over a period of time is sometimes called a blank order. o Order entry Order entry prepares the sales order document. The order-entry activity is essentially the same whether it is the first activity in the same business process or occurs subsequent to inquiry, contract preparation, or both. Document called a release order (call-off) may be prepared rather than a sales order, but information in these documents would be similar. Order entry usually involves pricing and availability checking. Pricing an order involves knowing the current prices of products or services, any surcharges that may apply, any discounts that may apply, and shipping costs. Enterprise resource planning (ERP) information systems enable the implementation of sophisticated and flexible customer-specific and material-specific pricing procedures in the order entry business process. Customer-specific procedures can be a significant competitive advantage in that the company can offer customers highly customized service. An order is usually blocked if a customer exceeds their credit limit. Blocked orders are listed for review by the credit department. If the goods aren’t available: The customer may wish to cancel the order. Partial delivery of the order only if the customer is willing to accept partial shipment. Hold order until all the goods are available if the customer is willing to extend the requested delivery date. o Shipping Shipping activity is initiated with the preparation of a shipping document called a delivery. A delivery document is created to arrange for the delivery of goods to the customer. All the information that is required to prepare and deliver the goods to the customer is contained in the delivery. The ERP automatically copies this information into the delivery. The ERP might preform additional checks at this point to ensure quality. Delivery documents are processed to prepare a schedule for shipping. This schedule is based on customers requested delivery dates. Actual shipment of goods out of inventory requires picking the order, packing the order, and shipment. o Picking fills the order and involves the selection of goods from the plant or warehouse to be prepared for shipment. o Packing involves packaging of the goods in the order for shipment and loading the shipment onto vehicles for transportation to the customer. A packing list is prepared to guide picking activities. A packing list is prepared for each shipment, and a copy is usually included in the shipment to document what has been shipped. A bill of lading is prepared to document the loading of goods onto vehicles for transportation to the customer. Shipping personnel post a goods issue notice (shipping advice) when goods have been shipped. o Billing Deliveries are included in the billing work schedule and are invoiced. An invoice for the shipment is prepared and issued to the customer. This is the end of the sales business process. The goods are shipped before the customer is invoiced. Invoices are forwarded to accounts receivable processing to await payment by the customer. Inquiry and contact creation are optional in a business. Sometimes they might not even occur. Orders are created when a customer – a sold-to party – requests good or services from a firm. Customer master records (files) contain all the information that pertains to a customer. o They have to be created before processing sales orders because the information in customer master records is used in sales order processing. o SAP ERP requires four types of master files: Sold-to-customer records When a customer has different locations for receiving, shipment, and/or payment, the information in these records can be changed as necessary. When a new sold-to-customer master file is created, the other three master records are created automatically using the same information. Records that must be linked to the sol-to-customer master records is known as partnering. Ship-to-customer records Bill-to-customer records Payee-customer records o Create a customer master record: Create customer: Initial Screen Uniquely identify the customer master file. Assigned internally or externally. Customer numbers are assigned externally when the person who is inputting the data selects the number. Internal assignment is performed automatically by SAP ERP, which assigns the next number in a sequence. A sales area is identified by three required fields: sales organization, distribution channel, and division. o Sales organization is the company unit that is responsible for the sale. o Distribution channel includes direct sales, retail sale, and wholesale. o Division is a code the identifies a subgroup in the sales organization. Create customer: Address Screen This section is primarily text. Field is used to input a phrase that can be can be used to search for the company when the company number is required for input. o Input fields are provided for street, post office box, city etc. These inputs are necessary. Create customer: Control Data Screen The transport zone field is the only required field. It identifies the regional zone where the ship- to party is located. Create Customer: Marketing Screen Input statistical and demographic data concerning the customer. Create Customer: Payment Transactions Screen This screen is used to input the customer’s banking information. Create Customer: Unloading Points Screen This screen is used to input where the customer unloads received goods and the customer’s factory calendar, which specifies what days and hours the customer accepts deliveries. Create Customer: Foreign Trade Screen Used for data relating to export controls. Create Customer: Contact Person Screen Used for data relating to a contact person or persons. Fields are provided for name, telephone number, form of address etc. Create Customer: Account Management Screen Used to specify account reconciliation data. A reconciliation account is a general ledger account that is updated parallel to account receivable postings. It is a control account used for reconciliation. Create Customer: Payment Transaction Screen This screen collects data for payment transactions, including automatic payment transactions. The payment terms field specifies cash discount terms and the payment periods that comprise overall terms of payment. Create Customer: Correspondence Screen A dunning procedure is the action taken to collect payments from customers who are late in making payments on their accounts. Create Customer: Insurance Screen The screen is used to input data relating to export credit insurance. Create Customer: Sales Screen This screen is used to identify areas within the company that are responsible to the customer. Data is entered for geographic sales region or district, sales office, sales group etc. Pricing procedure which is a SAP ERP term for the type and sequence of pricing conditions used to price a sales order. Price list type – wholesale vs retail The product proposal number field is used for defaulting products into the customers’ orders if the customer routinely orders the same products. Create Customer: Shipping Screen Specify shipping details. A shipping conditions code is input to select general shipping strategy from those that have been defined by the company. Create Customer: Billing Screen Used to input data concerning billing. Create Customer: Taxes Screen This is used to input data concerning the customer’s tax liability. Create Customer: Output Screen Used to change the default output specifications for various documents that can be produced for the customer. Create Customer: Partner Functions Screen When a sold-to-customer record is created, SAP ERP automatically creates bill-to, payer, and ship-to master records for the same customer using the same information. A dummy is used for a one-time or infrequent customers. Standard order processing is a term that describes the sales business process in which customer orders are filled from an inventory of finished goods. o A quotation must first be issued to the customer. If there is no quotation, then an order is created when a customer requests delivery of goods or services. A standard sales order contains information about prices, qualities, and dates. After an order has been created and processed, a delivery document is created. Standard Order Processing o Create Sales Order: Initial Screen This is used it input information for the sales area. There are three mandatory fields: Sales organization field identifies the unit responsible for the sale. Distribution channel field classifies the order as direct sales, retail sale, or wholesale. Division code field is used to identify a subgroup in the sales organization. A query is a request for information in a database. The order-entry function initiates the processing of the customer orders with the preparation of the sales order document. o The sales order contains descriptions of the products ordered, their prices, and descriptive data. o The sales order is primarily an internal document. The invoice, or bill, is a separate document that is usually prepared after the goods have been shipped and notice of shipment is forwarded to billing. Inventory picks the order as described on a picking list. o The picking list is prepared from the delivery document that is prepared by the order database process the approved order. o Inventory records are updated to reflect the actual quantities picked and to be forwarded to shipping. Shipping accepts the order for shipment after matching the order as described on the picking list that accompanies the goods to the order database. The order information contained in the packing list is prepared independently because it is based on the orders prepared by the order-entry function and approved by the credit function. Shipping documentation is prepared, and the order database is updated for the shipment. Shipping typically prepares a bill of lading for the delivery. A bill of lading is the documentation exchanged between a shipper and a carrier. The customer purchase order, the sales order, and the shipping report are necessary to process a completed sales transaction. Billing completes the order process by preparing invoices for orders that appear on the billing list The billing list is prepared from the information concerning orders that have been shipped to customers. Billing verifies the order and prepares the invoice. A journal voucher is prepared to summarize sales, and this information is forwarded to the general ledger function for posting to the general ledger. The distinction between billing and accounts receivable is important to maintain separation of functions. o Billing is responsible for invoicing individual orders. o Accounts receivable posts invoices prepared by billing to the accounts receivable ledger. o Billing does not have access to the financial records ( the accounts receivable ledger) The Sarbanes-Oxley Act of 2002 requires that companies maintain an adequate internal control structure over the business processes that support financial reporting. Effective internal control over financial reporting provides reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes. Risk assessment of the sales business process will be necessary for compliance with SOX Risk assessment should evaluate whether the company’s controls sufficiently address identified risks of material misstatement due to fraud and controls intended to address the risk of management override of these controls. The customer account management business process includes accounts receivable processing through the collection of customer payments on account. Accounts receivable represents the money owed by customers for merchandise sold or services rendered on account. Accounts receivable often represents the majority of an organizations working credit Accounts Receivable Procedure: o A subsidiary ledger of individual accounts is maintained, with a control account in the general ledger. o Remittance advices are routed from the cash receipts function o Credit memos and other invoice adjustments are routed to the A/R department from the billing department. o Debits and credits are posted to the individual accounts. o An aging schedule (aged trial balance) reports outstanding customer account balances classified by their “age”. Two basic approaches to an A/R application: o Open item processing – a separate record is maintained in the accounts receivable system for each of the customer’s unpaid invoices. Maintains a complete invoice history that supports inquiry into any invoice and supports detail or summary sales analysis. o Balance-forward processing – a customer’s remittances are applied against the customers total outstanding balance rather than against the customer’s individual invoices. The total amount due from a customer is the total of all invoices due from the customer, and the payments are simply applied against their totals. o A cycle billing plan – the processing of A/R is subdivided by alphabet or account number in order to distribute the preparation of statements over the working days of the month. o Factoring – the selling of accounts receivable at a discount to a collection agency. Separation of functions: o Cash receipts Customer remittance slips are forwarded to the A/R for posting from cash receipts. A/R does not have access to the cash or checks that accompany customer remittances. o Billing Invoices, credit memos, and other invoice adjustments are routed to account receivable for posting to the customer accounts. Billing does not have access to the A/R records. o Accounts Receivable A/R is responsible for maintaining the subsidiary account receivable ledger. o Credit Approval of sales returns and allowances and other adjustments to customer accounts, the review and approval of the aged trial balance to ascertain the creditworthiness of customers, and the initiation of write off memos to charge accounts to bad-debt expense. o General Ledger Maintains the A/R control account. Sales Returns and Allowances o Allowances occur when, because of damaged merchandise, shortages in shipments, clerical errors, or the like, the customer and the seller agree to reduce the amount owed by the customer. o After an allowance has been authorized and approved, billing issues a credit memo to document the reduction to the customer’s account. o A sales return occurs when a customer actually returns goods that have been shipped. Separation of functions is essential in a business process to write-off accounts receivable. o Done with an aged trial balance. Cash Received on Account Business Process: o Used when there is an existing customer account balance. o Customer payments should always be acknowledged o Customer remittances on account are received in the mailroom A remittance list that documents the payments received is prepared. o Checks received from the mailroom are combined with cash receipts from cash sales and a deposit slip is prepared. o The remittance advices are posted to A/R ledger. o The journal voucher from cash receipts and the control total received from A/R are compared o The bank accepts the deposit and validates a copy of the deposit slip o Internal audit receives the periodic bank statement Lock-box deposit system – Customer remittances are sent directly to a bank and are credited to a company’s account before they are posted to customer accounts. o Reduces float by having the checks deposited to a firms account before the firm processes them. Float – the time between the signing of the payment check by the customer and the moment the firm has use of the funds. Customer audit is a general term used to describe procedures in which the customer acts as a control over the initial documentation of a transaction. Professional shoppers are people hired to purchase goods in a retail environment for the specific purpose of observing the recording of transactions. Imprest techniques are used to control cash receipts in the same manner that they are used to control petty cash disbursements.