1. The Expenditure Cycle: Purchasing to Cash Disbursements
Chapter 13

2. Learning Objectives
Explain the basic business activities and related information processing operations performed in the expenditure cycle.
Discuss the key decisions to be made in the expenditure cycle, and identify the information needed to make those decisions.
Identify major threats in the expenditure cycle, and evaluate the adequacy of various control procedures for dealing with those threats.

3. Basic Expenditure Cycle Activities
Order materials, supplies, and services
Receive materials, supplies, and services
Approve supplier (vendor) invoice
Cash disbursement

4. Order Goods (Materials/Supplies) or Services Processing Steps
Identify what, when, and how much to purchase
Source document: purchase requisition
Choose a supplier
Source document: purchase order

5. Ordering Goods/Services
Threats
Controls
Stockouts and excess inventory
Purchasing items not needed
Purchasing items at inflated prices
Purchasing goods of poor quality
Unreliable suppliers
Purchasing from unauthorized suppliers
Kickbacks
1 a. Perpetual inventory system b. Bar-coding, RFID 2 a. Review and approval of purchase requisitions 3 a. Price lists b. Competitive bids 4 a. Use approved suppliers 5 a. Monitor supplier performance b. Require quality certification 6 a. Purchase from approved suppliers 7 a. Supplier audits b. Prohibit gifts

6. Receiving Process Goods arrive
Verify goods ordered against the purchase order (what, how much, quality)
Source document: receiving report

7. Receiving Goods or Services
Threats
Controls
Accepting unordered items
Mistakes in counting
Verifying receipt of services
Inventory theft
1 a. Authorized purchase orders needed before receiving goods 2 a. Bar codes or RFID 3 a. Budget controls and audits 4 a. Restrict physical access to inventory b. Document all inventory transfers c. Segregate custody vs. receiving of inventory

8. Approve Supplier Invoice and Cash Disbursements
Match the supplier invoice to:
Purchase order
Receiving report
supplier invoice + purchase order + receiving report = voucher
Approve supplier invoice for payment
Source document: disbursement voucher
Pay vendor

9. Approve Supplier Invoice
Threats
Control
Errors in supplier invoice
Mistakes in posting to accounts payable
1 a. Verify invoice accuracy 2 a. Data entry edit controls b. Reconcile detailed accounts payable records to the general ledger accounts payable account

10. Cash Disbursements Failure to take discounts
Threats
Controls
Failure to take discounts
Pay for items not received
Duplicate payments
Theft of cash
Check alteration
Cash flow problems
1 a. File invoices by due date to take advantage of discounts 2 a. Match supplier invoice to supporting documents (purchase order, receiving report) 3 a. Pay only original invoices b. Cancel supporting document when payment is made 4 a. Physical security of checks b. Separation of duties c. Reconcile bank accounts 5 a. Check Protection machines 6 a. Cash flow budget

11. Key Terms Expenditure cycle Economic order quantity (EOQ)
Reorder point
Materials requirement planning (MRP)
Just-in-time (JIT) inventory system
Purchase requisition
Purchase order
Blanket purchase order
Vendor-managed inventory
Kickbacks
Receiving report
Debit memo
Voucher package
Nonvoucher system
Voucher system
Disbursement voucher
Evaluated receipt settlement (ERS)
Procurement card
Imprest fund