Acct 316 Acct 316 Acct 316 The Expenditure Cycle: Purchasing and Cash Disbursements 12 UAA – ACCT 316 – Fall 2002 Accounting Information Systems Dr. Fred Barbee Chapter

Acct 316 Acct 316 Acct 316 The Primary Objective

Acct 316 Acct 316 Acct 316 Main Objective The primary objective of the expenditure cycle is to minimize the total cost of acquiring and maintaining inventories, supplies, and the various services necessary for the organization to function.

Acct 316 Acct 316 Acct 316 Key Decisions of the Cycle

Acct 316 Acct 316 Acct 316 Key Decisions What is the optimal level of inventory and supplies to carry? Which suppliers provide the best quality and service at the best prices?

Acct 316 Acct 316 Acct 316 Key Decisions Where should inventories and supplies be held? How can the organization consolidate purchases across units to obtain optimal prices?

Acct 316 Acct 316 Acct 316 Key Decisions How can information technology be used to improve both the efficiency and accuracy of the inbound logistics function?

Acct 316 Acct 316 Acct 316 Key Decisions Is sufficient cash available to take advantage of any discounts suppliers offer? How can payments to vendors be managed to maximize cash flow?

Acct 316 Acct 316 Acct 316 The Expenditure Cycle – Defined

Acct 316 Acct 316 Acct 316 Defined The expenditure cycle is a recurring set of business and related information processing operations associated with the purchase of and payment for goods and services.

Acct 316 Acct 316 Acct 316 The first function of a well- designed AIS is to support the effective performance of the organization’s business activities.

Acct 316 Acct 316 Acct 316 The Expenditure Cycle – Business Activities

Acct 316 Acct 316 Acct 316 Business Activities 1.Order Goods 2.Receive and Store Goods 3.Pay for Goods

Acct 316 Acct 316 Acct 316 Business Activities – Up Close and Personal

Acct 316 Acct 316 Acct Order Goods

Acct 316 Acct 316 Acct 316 Order Goods (Activity 1) The first major business activity in the expenditure cycle involves ordering inventory or supplies.

Acct 316 Acct 316 Acct 316 Order Goods (Activity 1) What to purchase? When to purchase? How much to purchase? From what supplier?

Acct 316 Acct 316 Acct 316 Order Goods (Activity 1) Inventory control methods: EOQ MRP JIT

Acct 316 Acct 316 Acct 316 What is the major difference between MRP and JIT?

Acct 316 Acct 316 Acct 316 MRP Systems Schedule production to meet estimated sales need, thereby creating a stock of finished goods inventory.

Acct 316 Acct 316 Acct 316 JIT Systems Schedule production to meet customer demands, thereby virtually eliminating finished goods inventory.

Acct 316 Acct 316 Acct 316 Documents and Procedures

Acct 316 Acct 316 Acct 316 Order Goods What is a key decision? determine vendor What factors should be considered? price quality of materials dependability in making deliveries

Acct 316 Acct 316 Acct Receive and Store Goods

Acct 316 Acct 316 Acct 316 Receive and Store Goods The receiving department has two major responsibilities: Deciding whether to accept a delivery Verifying quantity and quality

Acct 316 Acct 316 Acct Pay for Goods

Acct 316 Acct 316 Acct 316 Pay for Goods The objective of accounts payable is to authorize payment only for goods and services that were ordered and actually received.

Acct 316 Acct 316 Acct 316 Key Decisions and Information Needs

Acct 316 Acct 316 Acct 316 The third function of a well- designed AIS is to provide useful information for decision making.

Acct 316 Acct 316 Acct 316 Key Decisions Determine when and how much additional inventory to order. Select the appropriate vendors from whom to order. Verify the accuracy of vendor invoices.

Acct 316 Acct 316 Acct 316 Key Decisions Decide whether purchase discounts should be taken. Monitor cash flow needs to pay outstanding obligations.

Acct 316 Acct 316 Acct 316 Other Information Needed Efficiency and effectiveness of the purchasing department Analyses of vendor performance such as on-time delivery, quality, etc.

Acct 316 Acct 316 Acct 316 Other Information Needed Time taken to move goods from the receiving dock into production Percentage of purchase discounts taken

Acct 316 Acct 316 Acct 316 Control Objectives, Threats, and Procedures

Acct 316 Acct 316 Acct 316 The second function of a well-designed AIS is to provide adequate controls to ensure the firm meets its objectives.

Acct 316 Acct 316 Acct 316 Control Objectives Transactions are properly authorized. Recorded transactions are valid. Valid, authorized transactions are recorded. Transactions are recorded accurately.

Acct 316 Acct 316 Acct 316 Control Objectives Assets (cash, inventory, and data) are safeguarded from loss or theft. Business activities are performed efficiently and effectively.

Acct 316 Acct 316 Acct 316 Threats to the Expenditure Cycle

Acct 316 Acct 316 Acct 316 Threats Stockouts Purchasing too many or unnecessary goods Purchasing goods at inflated prices Purchasing goods of inferior quality

Acct 316 Acct 316 Acct 316 Threats Purchasing from unauthorized vendors Kickbacks Receiving unordered goods Errors in counting goods

Acct 316 Acct 316 Acct 316 Threats Theft of inventory Failure to take available purchasing discounts Errors in recording and posting purchases and payments Loss of data

Acct 316 Acct 316 Acct 316 Expenditure Cycle Exposures

Acct 316 Acct 316 Acct 316 Exposures Production delays and lost sales Increased inventory costs Cost overruns Inferior quality of purchased goods Inflated prices

Acct 316 Acct 316 Acct 316 Exposures Violation of laws or import quotas Payment for items not received Inaccurate inventory records loss of assets

Acct 316 Acct 316 Acct 316 Exposures Cash flow problems Overstated expenses Incorrect data for decision making

Acct 316 Acct 316 Acct 316 Expenditure Cycle Control Procedures

Acct 316 Acct 316 Acct 316 Control Procedures Inventory control system Vendor performance analysis Approved purchase requisitions Restricted access to blank purchase requisitions

Acct 316 Acct 316 Acct 316 Price list consultation Budgetary controls Use of approved vendor lists Approval of purchase orders Prenumbered purchase orders Control Procedures

Acct 316 Acct 316 Acct 316 Prohibition of gifts from vendors Incentives to count all deliveries Physical access control Recheck of invoice accuracy Cancellation of voucher package Control Procedures