Expenditure Cycle

Expenditure rung eruditeness OutcomesDescribe and controvert the business activities that relate to data processing operations that performed in the disbursal bike and identify the information undeniable to adjudge those decisions.Spot and dealing with the major threats and estimate the adequacy of various swan procedures in the expending beat.Understand and familiar with a data sham (REA diagram) of the expenditure cycle.IntroductionWhat Should You Know The Expenditure Cycle The expenditure cycle involves interactions with your providers. You buy goods or go and pay property. The routineicular objective of the expenditure cycle is to minimize the total cost of getting and maintaining armoury, supplies, and services. Also to agree that all goods and services be order as ask, receive and insist that they are in good condition as were logical. Accounting for expenditures is an dissolver for all questions related to operation in any organization. Accounting e ntities abide increased requirements due to budgetary reporting needs and the variety of several(predicate) fund types related to the expenditure cycle. The recording of expenditure related minutes must be carefully monitored and check intoled to meet these requirements.Objectives of the Expenditure CycleThe primary objective of the expenditure cycle is to minimize the total cost of acquiring and maintaining armory, supplies, and services.Other objectives related to expenditure cycleTo ensure that all goods and services are ordered as requireTo receive all ordered goods and verify that they are in good conditionTo safeguard goods until involveTo ensure that beaks pertaining to goods and services are legitimate and correctTo record and split up the expenditures promptly and accuratelyTo post obligations and cash disbursements to proper providers depends in the cards collectable ledgerTo ensure that all cash disbursements are related to authoritative expendituresTo reco rd and classify cash disbursements promptly and accuratelyFigure 3.1 background Diagram of the Expenditure CycleFigure 3.2 Level of Expenditure CycleBasic Activities for Expenditure CycleThere are three underlying activities performed in the expenditure cycle are1. swaning goods, supplies, and services the account decisions in this process involve identifying what, when, and how much to barter for from whom to get. Weaknesses in armoury control tooshie create signifi providet problems on inaccurate records amaze shortages and matchless of the key factors affecting this process is the inventory control mode to be used. We will consider three alternate processiones to inventory control economical Order Quantity (EOQ)-traditional approach to managing inventory just in Time Inventory (JIT)*-seeks to reduce inventory levels by improving the truth of forecasting techniques Materials Requirements Planning (MRP)*-to minimize or eliminate inventory by purchasing or producing onl y in response to actual gross sales The order processing typically begins with a grease ones palms request followed by the generation of a get order for inventory control system. The demanding to purchase goods or supplies is triggered by the inventory control berth or an employee noticing a shortage. For advanced inventory control systems, initiate purchase were automatically requests when mensuration falls below the reorder point. The need to purchase goods typically results in the creation of a purchase requisition. The purchase requisition is a constitution document or electronic form that identifiesWho is requesting the goodsWhere they should be deliveredWhen theyre neededItem numbers, descriptions, quantities, and pricesPossibly a suggested providerDepartment number and account number to be chargedThe purchase requisition is fork up by a purchasing buyer (Agent) in the purchasing department that typically performs the purchasing activity and the detail on the supplier s and the items purchased can be pulled from the supplier and inventory master data files. A crucial decision is the selection of supplier and grassroots considerations are price, quality and dependability. Based on this three criterias, the supplier has should selected and identify a product so its can become part of the product inventory master file so the supplier does not gestate to be carried out and repeated each time for every purchasing for products that are seldom ordered. Its in any case important to crosscut and periodically evaluate supplier performance including data on purchase prices, rework and scrap costs and supplier slant performance to read sure the process its done on time.Purchase OrderA purchase order is a document or electronic form that formally requests a supplier to sell and deliver qualify products at specified prices. The PO is both a contract and a promise to pay. It involvesNames of supplier and purchasing constituentOrder and quest delivery datesDelivery locationShipping methodDetails of the items orderedMultiple purchase orders whitethorn be completed for one purchase requisition if multiple venders will fill the request. The ordered measuring may in any case differ from the requested quantity to take advantage of quantity discounts.Blanket OrderA blanket order is a fealty to buy specified items at specified prices from a particular supplier for a set time period.Reduces buyers uncertainty nearly reliable material sourcesHelps supplier plan capacity and operations info Technology on orderingIn AIS, Information technology also can help and improve for ability and effectiveness of purchasing function based on time and cost usingElectronic data Interchange(EDI) to transmit purchase ordersvendor- shell outd inventory systemsreverse auctionspre-award auditsprocurement cards for underage purchases2. Receiving and storing these items The receiving department is responsible to accepts deliveries from vendor or suppli ers and reports it to warehouse manager that who reports to wrong President (VP) of Manufacturing. Inventory stores department typically stores the goods and also reports to warehouse manager. The pass on of goods must be communicated to the inventory control function to update inventory records. The two major responsibilities of the receiving department are deciding whether to accept delivery and verifying the quantity and quality of delivered goods.The first decision is based on whether there is a valid purchase order is accepting an confused goods wastes time, handling and storage. Verifying the quantity of delivered goods is really important so the fraternity only pays for goods received and inventory records are updated accurately Companies must an in effect and clearly communicate with their staff especially receiving shop assistant so that all deliveries counting accurately. The receiving clerk need to sign receiving report, record the quantity received and also carefull y examine each delivery for signs of obvious defame before routing the inventory to the warehouse. The receiving report is the primary document used in this processIt documents the date goods received, shipper, supplier, and Purchase Order (PO) numberShows item number, description, social unit of measure, and quantity for each itemProvides space for signature and comments by the person who received and inspectedReceipt of services is typically documented by supervisory approval of the suppliers invoice. When goods arrive a receiving clerk compares the PO number on the packing slip with the open PO file to verify the goods were ordered.Then counts the goodsExamines for damage before routing to warehouse or manufactoryThree possible exceptions in this processThe quantity of goods is different from the metre orderedThe goods are damagedThe goods are of inferior qualityIf one of these exceptions occurs, the purchasing agent resolves the situation with the supplier and typically all ows adjustment to the invoice for quantity discrepancies. If goods are damaged or inferior, a debit memorandum is prepared after the supplier agrees to accept a return or grant a discount.One copy goes to supplier, who returns a credit memo in acknowledgment and other copy to accounts collectible to adjust the account payable and other one go to shipping to be returned to supplier with the actual goods.IT can help improve the efficiency and effectiveness of the receiving activityBar-codingRFIDEDI and satellite technologyAudits3. Paying for these items There are two basic sub-processes involved in the payment processApproval of vendor invoices-by the accounts payable department, which reports to the controller. The legal obligation to pay rescinds when goods are received and the basic approach for processing vendor invoices are non-voucher system and voucher system certain payment of the invoices-Payment of the invoices is done by the cashier, who reports to the treasurer.The cas hier receives a voucher package, which consists of the vendor invoice and supporting documentation, such as purchase order and receiving report. inwrought Control for Expenditure CycleBefore we move on to discuss internal controls in the expenditure cycle, lets do a brief review of the organization chart, includingWho does what in the expenditure cycleTo whom they typically reportPurchasing selects suitable suppliers and issues purchase orders. Receiving decides whether to accept deliveries and counts and inspects deliveries. Inventory Stores stores goods that have been delivered and accepted. Account Payable approves invoices for payment Cashier Issues payment to vendors.Figure 3.3 overtone organization chart for units involved in expenditure cycleIn the expenditure cycle, Accounting Information System (AIS) should provide internal and out-of-door controls to ensure that the chase objectives are met on the whole minutes are right authorizedAll recorded transactions are validAl l valid and authorized transactions are recordedAll transactions are recorded accuratelyAssets are safeguarded from loss or stealingBusiness activities are performed efficiently and effectivelyThe company is in entry with all applicable laws and regulationsAll disclosures are full and fair affright and ControlThere are several actions a company can take with respect to any cycle to reduce threats of errors or irregularities. These takeUsing simple, easy to complete documents with clear instructionsUsing permit application controls, such as validity checks and field checksProviding space on forms to record who completed and who reviewed the formPre-numbering documents to encourages recording of valid and only valid transactions.Restricting access to blank documents (reduces risk of unauthorized transaction).The threats that may arise in the three major steps of the expenditure cycle, as hearty as general threats, Electronic Data Interchange (EDI) related threats, and threats rel ated to purchases of services. Before we discuss specific threats, it may be helpful to have some background on a form of occupational spoof and abuse which is broadly referred to as corruption. Corruption cases often involve arrangements in the midst of a companys purchasing agent and a sales vocalization for one of the companys vendors. The vendors representative may try to induce the purchasing agent to buy goods that are over-priced, inferior quality. Arent nonetheless needed and also arent even delivered. In exchange, the vendors rep typically offers the purchasing agent something of value. That something might be money, payment of a debt, a job offer, an high-priced vacation, or anything the purchasing agent might value.According to the hoax testers Manual published by the Association of Certified Fraud Examiners, these schemes usually take four formsBriberyConflict of interestEconomic extortionIllegal gratuitiesInformation Needs for Expenditure CycleInformation is neede d for the following operational tasks in the expenditure cycle, includingDeciding when and how much inventory to orderDeciding on appropriate suppliersDetermining if vendor invoices are accurateDeciding whether to take purchase discountsDetermining whether adequate cash is available to meet current obligationsInformation is also needed for the following strategic decisions based on setting prices for products/services, establishing policies on returns and warranties, deciding on credit terms, determining short-term borrowing needs and planning spic-and-span marketing campaigns. The AIS needs to provide information to evaluate purchasing efficiency and effectiveness, supplier performance, time taken to move goods from receiving to production and percent of purchase discounts taken.Both financial and operating information are needed to manage and evaluate these activities. Both external and internal information are needed when the AIS integrate information from the various cycles, so urces, and types, the reports that can be generated are unlimited. They include reports onSupplier performanceOutstanding invoicesPerformance of expenditure cycle employeesNumber of POs treat by purchasing agentNumber of invoices processed by A/P clerkNumber of deliveries handled by receiving clerkNumber of inventory moves by warehouse workerInventory overthrowClassification of inventory based on contribution to profitabilityWe also know that an accountant should continually refine and improve these performance reports sum-upIn this subtopic, we really learned about the basic business activities and data processing operations that are performed in the expenditure cycle on Ordering goods, supplies, and services Receiving and storing them Approving invoices and paying for them We also learned how IT can improve the efficiency and effectiveness of these processes and learned about decisions that need to be made in the expenditure cycle and what information is required to provoke the se decisions. This subtopic also discuss about the major threats that present themselves in the expenditure cycle and the controls that can mitigate those threats