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12
Chapter
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The Expenditure Cycle:
Purchasing and Cash
Disbursements
UAA – ACCT 316 – Fall 2002
Accounting Information Systems
Dr. Fred Barbee
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The Primary Objective
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Main Objective
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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.
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Key Decisions of
the Cycle
Key Decisions
What is the optimal level of
inventory and supplies to carry?
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Which suppliers provide the best
quality and service at the best
prices?
Key Decisions
Where should inventories and
supplies be held?
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How can the organization
consolidate purchases across
units to obtain optimal prices?
Key Decisions
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How can information technology
be used to improve both the
efficiency and accuracy of the
inbound logistics function?
Key Decisions
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Is sufficient cash available to
take advantage of any discounts
suppliers offer?
How can payments to vendors be
managed to maximize cash flow?
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The Expenditure
Cycle – Defined
Defined
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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.
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The first function of a welldesigned AIS is to support
the effective performance of
the organization’s business
activities.
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The Expenditure
Cycle – Business
Activities
Business Activities
1. Order Goods
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2. Receive and Store Goods
3. Pay for Goods
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Business Activities –
Up Close and
Personal
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1.0
Order
Goods
Order Goods (Activity 1)
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The first major business activity
in the expenditure cycle involves
ordering inventory or supplies.
Order Goods (Activity 1)
What to purchase?
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When to purchase?
How much to purchase?
From what supplier?
Order Goods (Activity 1)
Inventory control methods:
EOQ
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MRP
JIT
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What is the major
difference between MRP
and JIT?
MRP Systems
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Schedule production to meet
estimated sales need, thereby
creating a stock of finished
goods inventory.
JIT Systems
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Schedule production to meet
customer demands, thereby
virtually eliminating finished
goods inventory.
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Documents and
Procedures
Order Goods
What is a key decision?
determine vendor
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What factors should be considered?
price
quality of materials
dependability in making deliveries
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2.0
Receive
and
Store
Goods
Receive and Store Goods
The receiving department has
two major responsibilities:
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Deciding whether to accept a
delivery
Verifying quantity and quality
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3.0
Pay for
Goods
Pay for Goods
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The objective of accounts
payable is to authorize payment
only for goods and services that
were ordered and actually
received.
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Key Decisions and
Information Needs
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The third function of a welldesigned AIS is to provide
useful information for
decision making.
Key Decisions
Determine when and how much
additional inventory to order.
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Select the appropriate vendors from
whom to order.
Verify the accuracy of vendor
invoices.
Key Decisions
Decide whether purchase discounts
should be taken.
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Monitor cash flow needs to pay
outstanding obligations.
Other Information Needed
Efficiency and effectiveness of
the purchasing department
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Analyses of vendor performance
such as on-time delivery, quality,
etc.
Other Information Needed
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Time taken to move goods from
the receiving dock into
production
Percentage of purchase discounts
taken
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Control Objectives,
Threats, and Procedures
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The second function of a
well-designed AIS is to
provide adequate controls to
ensure the firm meets its
objectives.
Control Objectives
Transactions are properly authorized.
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Recorded transactions are valid.
Valid, authorized transactions are
recorded.
Transactions are recorded
accurately.
Control Objectives
Assets (cash, inventory, and data) are
safeguarded from loss or theft.
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Business activities are performed
efficiently and effectively.
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Threats to the
Expenditure Cycle
Threats
Stockouts
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Purchasing too many or unnecessary
goods
Purchasing goods at inflated prices
Purchasing goods of inferior quality
Threats
Purchasing from unauthorized
vendors
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Kickbacks
Receiving unordered goods
Errors in counting goods
Threats
Theft of inventory
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Failure to take available purchasing
discounts
Errors in recording and posting
purchases and payments
Loss of data
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Expenditure Cycle
Exposures
Exposures
Production delays and lost sales
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Increased inventory costs
Cost overruns
Inferior quality of purchased goods
Inflated prices
Exposures
Violation of laws or import quotas
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Payment for items not received
Inaccurate inventory records
loss of assets
Exposures
Cash flow problems
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Overstated expenses
Incorrect data for decision making
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Expenditure Cycle
Control Procedures
Control Procedures
Inventory control system
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Vendor performance analysis
Approved purchase requisitions
Restricted access to blank purchase
requisitions
Control Procedures
Price list consultation
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Budgetary controls
Use of approved vendor lists
Approval of purchase orders
Prenumbered purchase orders
Control Procedures
Prohibition of gifts from vendors
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Incentives to count all deliveries
Physical access control
Recheck of invoice accuracy
Cancellation of voucher package