1. Acquisition/Payment Process
Chapter 12
Acquisition/Payment Process
McGraw-Hill/Irwin
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Outline Objectives Acquisition / payment steps Documents
Internal controls
Information technology
12-2

3. Objectives When you finish this chapter, you should be able to:
Explain the role and purpose of the acquisition / payment process
List and discuss, in order, the steps in the process
Identify and describe documents commonly used in the process
Suggest and evaluate internal controls associated with it
Explain the role of information technology in the process
Create and interpret systems documents
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4. Acquisition / payment steps
Request goods / services based on monitored need
Authorize a purchase
Purchase goods / services
Receive goods / services
Disburse cash
Process purchase returns as necessary
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5. Acquisition / payment steps
Inventory database
Inventory information
1.0
Requisition inventory.
2.0
Prepare purchase order.
Requisition data
Vendor database
Vendor information
vendor
Purchase order
3.0
Receive inventory.
Order information
Receiving information
4.0
Disburse cash.
Authorization information
A / P database
Payment information
Purchase information
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6. Documents Purchase requisition Purchase order
Requests that the purchasing department order goods / services
Originates in an operating department
Terminates in the purchasing department
Purchase order
Specifies items ordered, shipping terms and other information about the purchase
Originates in the purchasing department
Terminates with vendor
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7. Documents Receiving report Vendor invoice Check
Ensures that ordered goods have been received in good condition
Originates in receiving department
Terminates in various departments
Vendor invoice
Requests payment from buying organization
Originates with vendor
Terminates in accounting department of buyer
Check
Pays the vendor
Originates in accounting
Terminates with vendor
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8. Internal controls Inventory monitoring system
Justification for unusual goods
Conflict of interest policy
Criteria for supplier reliability and quality of goods
Strategic alliances
Document matching
Receiving reports with purchase orders
Receiving reports and purchase orders with invoices
Insurance and bonding
Internal audit department
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9. Internal controls
Separation of duties: custody, recordkeeping, authorization
Employee monitoring systems
“Paid” stamps
Information technology, such as radio frequency identification (RFID)
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10. Information technology
Online vendor payments
Bar codes
Vendor lists
Inventory status checks
Transaction recording in the AIS
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11. The time lag splits the expenditure transaction cycle into two phases
physical phase (purchasing cycle)
financial phase (cash disbursements)
The payroll cycle is typically kept separate from the other cash disbursements

12. Goals of the Expenditure Cycle
The goal of providing needed resources to organization can be broken down into several objectives:
purchase from reliable vendors (more important than price?)
purchase high quality items
obtain best price possible
purchase only items that are properly authorized
have resources available when needed
receive only those items ordered
ensure items are not lost, stolen, or broken
pay for the items in a timely manner 2

13. A Manual Purchases System
The purchases cycle begins in the Inventory Control department when inventory levels drop to reorder levels or when some other authorized person fills out a purchase requisition.
After all required signatures are obtained the requisition goes to the Purchasing department.
The Purchasing department prepares a purchase order for each vendor and sends copies to Inventory Control, Accounts Payable, Receiving (blind copy), and the vendor. (Note: some companies use credit cards for small purchases) 3

14. A Manual Purchases System
Upon receipt of the goods, the Receiving department counts and inspects the goods.
One of the purposes of the blind copy of the purchase order is to force the workers to count the goods.
A worker then prepares the receiving report and sends copies to the raw materials storeroom, Purchasing, Inventory Control, and Accounts Payable. 4

15. A Manual Purchases System
The Accounts Payable department has now received copies of the purchase order, and receiving report.
Upon receipt of the supplier’s invoice, Accounts Payable reconciles all documents, posts to the purchases journal (inventory), and records the liability in the accounts payable subsidiary ledger.
Periodically, the entries in the purchases journal are summarized in a journal voucher which is sent to the General Ledger department. 5

16. A Manual Purchases System
The journal voucher is prepared by Accounts Payable and sent to the General Ledger department:
Inventory DR
Accts Payable CR
Accounts Payable also prepares a cash disbursements voucher and posts it in the voucher register. 6

17. A Manual Purchases System
The General Ledger department:
posts from the accounts payable journal voucher to the general ledger
reconciles the inventory amount with the account summary received from inventory control 7

18. Manual Purchases System

19. Manual Cash Disbursements System
Periodically, usually daily, Accounts Payable searches the open vouchers payable file for items with payments due:
AP sends the voucher and supporting documents to Cash Disbursements
AP updates the accounts payable subsidiary ledger 8

20. Manual Cash Disbursements System
The Cash Disbursements department
prepares the check
records the information in a check register (cash disbursements journal)
Sends the check and supporting documentation to the treasurer for signing
sends a journal voucher to General Ledger:
Accounts Payable DR
Cash CR 9

21. Manual Cash Disbursements System
Treasurer:
Reviews the supporting documentation and compares to the check ($ amount, vendor details etc.)
Hand or machine signs the check
Mails the check directly to the vendor (never return it to anyone in accounting)
Stamps supporting documentation “paid” and returns it to accounts payable

22. Manual Cash Disbursements System
The General Ledger department receives:
the journal voucher from cash disbursements
a summary of changes to the accounts payable subsidiary ledger from Accounts Payable
The journal voucher is used to update the general ledger accounts impacted (reduce cash, reduce accounts payable)
The change in the accounts payable control account is reconciled to the change in the accounts payable subsidiary ledger. 10

23. Cash Disbursements System

24. The Expenditure Cycle
The time lag splits the expenditure transaction cycle into two phases:
physical phase (purchasing cycle)
financial phase (cash disbursements) 2

25. Expenditure Cycle Files
Master Files
supplier (vendor) master file
accounts payable master file
merchandise inventory master file
Transaction and Open Document Files
purchase order file
open purchase order file
supplier’s invoice file
open vouchers file
cash disbursements file
Other Files
supplier reference and history file
buyer file
accounts payable detail file 2

26. The Purchase Requisition
A need for an item starts the expenditure cycle
based on reorder point or reorder quantity or by the action of an authorized person
manual: to initiate a credit purchase, someone in the organization recognizes a need for a good or service; an authorized person requests the good or service using a purchase requisition form
computerized: to initiate a credit purchase, someone in the organization recognizes a need for a good or service; an authorized person requests the good or service using a terminal and a purchase requisition screen 2

27. Computer-Based Expenditure Applications--Purchases
Incorporates a data processing department which performs many of the routine accounting tasks
purchasing - a computer program identifies inventory requirements and can use one of the following methods for authorizing and ordering inventories
the system prepares the POs and sends them to the purchasing department for review, signing, and distributing
the system distributes the POs directly to the vendors and internal users, bypassing the purchasing department
the system uses EDI and electronically places the order 18

28. Computer-Based Expenditure Applications--Purchases
Other tasks performed by the computer:
updates the inventory subsidiary file from the receiving report, calculates batch totals for the general ledger update procedure and then closes the corresponding records in the open PO file to the closed PO file
a program validates the voucher records against the valid vendor file, adds them to the voucher register, and prepares batch totals for posting to the general ledger 19

29. Computer-Based Expenditure Applications--Cash Disbursements
Tasks performed by the computer:
the system scans for vouchers currently due
prints checks for these vouchers
records the disbursements in a computer-based check register (transaction file)
batch totals are prepared for the general ledger update procedure 20

30. Levels of Automating and Re-Engineering Ordering
Computer in inventory control generates a purchase requisition and the
purchasing department manually generates purchase order
Computer generates purchase order (no P.R. needed)
not sent until manually reviewed
Computer-generated P.O. is automatically sent
EDI--no P.O. 2

31. EDI Goods CUSTOMER (PURCHASES CYCLE) SELLER (REVENUE CYCLE)
Internal Data Flows
External Data Flows
External Data Flows
Internal Data Flows
Purchase
Order
Customer
Order
Sales
Order
Receiving
Report
Shipping
Documents
Goods
Notice that you are now getting rid of the paper flow between the companies. Depending on the automation and reengineering, you can also get rid of the paper within the two companies to varying degrees.
Vendor’s
Invoice
Sales
Invoice
Check
Check
or EFT
or EFT

32. Advantages of Real-Time Data Input & Processing Over Batch Processing
Shortens the time-lag in record-keeping; hence, records are more current
Eliminates much of the routine manual procedures, such as transcribing information onto paper documents
Eliminates much of the storage and shuffling of paper documents
Reduces data entry correction procedures
In cash disbursements it can result in faster payments, discounts for prompt payment and vendor good will 2

33. Summary of Internal Controls

34. General Internal Controls
Organization controls
segregation of duties
Documentation
Asset Accountability Controls
Management Practices
Data Center Operations Controls
Authorization Controls
Access Controls 2

35. Manual Authorization Controls
Purchases of inventory should be authorized by the Inventory Control department or another authorized person, not by purchasing agents
Accounts Payable authorizes the payments of bills, not the cash disbursements clerk, who writes the checks
How do these controls change in a Computer-Based environment? 11

36. Computer-Based Authorization Controls
Authorizations are automated.
programmed decision rules must be debugged
Automating inventory in EDI and JIT
faulty inventory model can lead to over-purchasing or under-purchasing. Inventory assumptions must be reviewed periodically (need for items in light of current customer orders and future plans)
Cash disbursements may automate check printing and signing.
Secure control of unissued check stock and signature plate
Some companies automate check signing only below a dollar threshold 2

37. Segregation of Duties Warehouse (stores)-–custody of inventory
Inventory control--inventory record keeping
Accounts payable--authorization for payment
General ledger--reviews accuracy of accounts payable and cash disbursement clerks
Requisitioning--inventory control or authorized user
Purchasing department--only order what authorized people request
Purchases returns and allowances
Cash disbursements-only for expenditures authorized by accounts payable and only with proper supporting documentation 2

38. Manual Segregation of Functions
Custody of the asset, inventory, by the Warehouse must be separate from recordkeeping for the assets by the Inventory Control department
Ability to generate checks to pay vendors by Cash Disbursements must be kept separate from recordkeeping for the asset by the Accounts Payable department 12

39. Computer-Based Segregation of Functions
Extensive consolidation by the computer of tasks traditionally segregated
computer programs authorize and process purchase orders or EDI requests for resupply
computer programs authorize and issue checks to vendors or generate electronic fund transfers 2

40. Manual Supervision
Within the expenditure cycle, supervision is of highest importance in the Receiving department, where the inventory arrives and is logged in by a receiving clerk. Need to minimize:
failures to properly inspect the assets
theft of the assets How do these controls change in a CB environment? 13

41. Computer-Based Supervision
Incoming Goods may be scanned electronically by receiving (bar code readers etc.) and an electronic receiving report generated
Supervision because more difficult as the workplace becomes more sophisticated.
employees may need to have advanced IT training 2

42. Elimination of the Central Receiving Function
Many companies no longer have a central receiving function
Goods are send directly to the requisitioner or requisitioning department (especially if JIT inventory techniques used)
Accounts payable must contract the recipient to verify receipt before payment. Various facsimiles accepted in place of traditional, prenumbered receiving reports

43. Manual Accounting Records
Must maintain adequate records for:
accounts payable
vouchers payable
checks
general ledger
subsidiary ledgers
How do these controls change in a CB environment? 14

44. Computer-Based Accounting Records
Maintaining an audit trail becomes more difficult.
Accounting records rests on reliability and security of magnetically stored data.
Be skeptical about accepting, on face value, the accuracy of computer produced hard-copy printouts of journals and ledgers.
The system needs to ensure that backup of all files is continuously kept.
Traditional automated systems still have a lot of paper documents. This is good for audit trail purposes but is often inefficient. 2

45. Manually based Access Controls
Access to:
inventories (direct)
cash (direct)
accounting records (indirect)
How do these controls change in a CB environment? 15

46. Computer-Based Access Controls
Magnetic records are vulnerable to both authorized and unauthorized exposure and should be protected
System security must restrict access to inventory and cash disbursements and to related accounts and transaction programs
Backup regularly and review logs for unauthorized attempts to access the system and for unusual transactions 2

47. Manual Independent Verification
The Accounts Payable department verifies much of the work done within the expenditure cycle.
Purchase requisitions, purchase orders, receiving reports, and suppliers’ invoices must be checked and verified by Accounts Payable.
The General Ledger department verifies:
the total obligations recorded equal the total inventories received
the total reductions in accounts payable equal the total disbursements of cash
How do these controls change in a CB environment? 16

48. Computer-Based Independent Verification
Automating the accounting function reduces the need for verification by reducing the chances of fraud and error in the expenditure cycle. (Very hard to generate a payment to a vendor unless paying for goods received via an approved P.O)
Fraud and error may still be present if unauthorized users/programmers can access the system. 2

49. Common forms of fraud in the expenditure cycle (non payroll)
Employees ordering/purchasing unauthorized items (company pays)
Employees steal inventory/supplies etc. before processed by receiving
Employees steal inventory/supplies etc. from storerooms and other areas
Employees pad expense accounts
Employees steal refunds from vendors

50. 12-50