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APPENDIX A12.1
Financial modeling and expert systems can be used
for cash planning over longer time horizons or in special
situations. For instance, financial models can be incorporated into a decision support system (DSS) that simulates the firm’s operations over the next couple of
years. “What if ” conditions can be tried within the DSS
concerning changes in sales prices, economic factors
such as interest rates, and so on. After a series of manipulations, the DSS would likely indicate when and how
much long-term financing could be needed over the
time horizon. An expert system could be developed and
used to help decide which types of long-term financing
(e.g., stocks, bonds, bank line of credit) might be most
suitable.
2. Appropriate policies and procedures for obtaining needed funds and for investing excess funds.
Internal Controls over Cash The needed internal
8. Reconciliation of each bank account monthly by a
person not otherwise involved in cash procedures.
controls should ensure that all cash transactions are
properly authorized, recorded, and processed; that cash
is properly safeguarded and effectively used; and that
the cash balance in the balance sheet is reliable. Among
the specific needed controls (in addition to those listed
in Chapters 12 and 13) are the following:
1. Proper use of budgets and forecasts for planning
and controlling cash flows.
3. Appropriate separation of custodial, recording,
and authorization functions with respect to cash.
4. Prompt endorsement and recording of all cash
receipts, with the deposit of all cash received
daily by an authorized person.
5. Issuance of prenumbered checks for all expenditures (except petty-cash items).
6. Proper use of petty-cash funds under imprest
procedures.
7. Use of separate imprest bank accounts for payroll expenditures.
9. Adequate physical security over cash (and blank
checks), including the use of locked cash registers, lockboxes, and safes.
10. Close supervision over and restricted access to
cash and cash-related activities, including access
to electronic transfers of cash.
11. Surprise audits of cash.
APPENDIX 12.1
MANUAL PROCESSING WITHIN THE REVENUE CYCLE
This appendix provides a survey of manual processing
procedures relating to credit sales and cash receipts.
Narrative descriptions of the procedures are accompanied by document system flowcharts, which are keyed to
the narrative by circled numbers. These numbers designate key control points within the sales and cash receipts procedures. The application controls described in
the chapter are particularly needed at these points. The
accounting entries pertaining to the revenue cycle are
included at appropriate places in the narrative descriptions.
Credit Sales Procedure
Figure A12.1-1 depicts a document system flowchart of
the manual credit sales procedure.
1. Receipt of the sales order
The credit sales procedure usually begins when a customer’s purchase order is received by the sales order department. After verifying that the order is valid and
accurate, a sales order clerk prepares some type of sales
order. Three document preparation procedures are available: separate order and billing, prebilling, and incom-
plete prebilling. In the separate sales order and invoice
procedure, the invoice is prepared as a separate document only after the goods have been shipped. The sales
order in this case is used only as a shipping order. This
procedure is employed when the availability of inventory
cannot be determined or when ordered goods are often
out of stock and must be backordered. In the prebilling
procedure, the sales invoice (bill) is completely filled in,
including prices and extensions and total, as soon as the
order is approved. This procedure is feasible if all data
are known, including the availability of ordered quantities. In the incomplete billing procedure (which is depicted in the flowchart), a combined sales order-invoice
is prepared at the time the order is approved. This document shows quantities but not price extensions, freight
charges, and so on. After the order has been shipped,
the document is completed and used as the sales invoice.
2. Check of credit acceptability
A copy of the sales order is sent to the credit department
for a check of the customer’s credit. If credit is approved,
the sales transaction is authorized by the sales order department. The customer is then sent an acknowledg-
4838 Wilkinson Apps pp 203-241 8/9/99 3:00 PM Page 225
Customer
Sales order
Credit
Billing
Customer
file
A
Purchase
procedure
1
Review order and
prepare sales
order invoice; hold
until credit
approved
Customer’s
order
1
Sales order
invoice
7
Acknowledgment
copy
1
Sales order
invoice
(cust. copy)
Open
orders
N
2
3
4
5
Credit
file
A
6
7
2
3
Pull upon
notice of
shipment
Price
list
N
2
4
Customer’s order
Approve
credit
terms
6
Customers’
orders
A
Check prices,
complete
invoices,
and mail
Sales order
invoice
2
3
Sales
invoice
1
Shipping
notice
1
Process
in batches
Sales
invoice
Enter in
sales journal
and total
5
1
Bill of
lading
Sales
invoice—
file copy
Closed
orders
N
4
2
Sales
invoice—
ledger copy
3
To accounts
receivable
Packing
slip
FIGURE A12.1-1 A document flowchart of manual procedures relating to credit sales, accounts receivable, sales returns
and allowances, and write-offs of accounts receivable.
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Billing
Finished goods warehouse
Shipping
4
Stock
request
copy
Notes goods
not available
and prepares
back order
5
Pick ordered
goods, deliver
to shipping,
and post to
inventory
records
Packing
slip
Compare copies
4 and 5;
prepare
documents
5
Stock
request
copy
Inventory
records
1
Shipping
notice
3
2
1
2
3
Bill of lading
5
1
Shipping
notice
Stock request copy 4
5
Packing slip
Stock request copy
Ship goods to customer
with packing slip
enclosed; forward
notice of shipment;
file copies
2
Sales
journal
Shipping
notice
Batch
control
total
Prepare
JV
Journal
voucher
Bill of lading
Stock
request
copy
5
2
Bill of
lading
To inventory
control
Shipping
N
To general
ledger
To carrier
FIGURE A12.1-1 (Continued)
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3
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Receiving
Credit manager
Billing
From sales
procedure
Journal
voucher (or
sales summary)
From sales
procedure
Sales invoice–
ledger copy
3
Returned goods
received
Count goods
and prepare
notice
Received in
batches
9
1
Sales return
notice
2
1
Approve
return of
goods
Sales return
notice
Prepare credit
memo and
journal
voucher
1
Sales
return
Credit
memo
N
Credit
memo
2
3
N
Journal voucher
To customer
10
Review and follow
up on doubtful
accounts
Trial
balance
C
1
Write-off
notice
2
To treasurer
FIGURE A12.1-1 (Continued)
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•
APPENDIX A12.1
Accounts receivable
General ledger
8
7
Batch
control
total
Post to customer
accounts and
total
Accounts
receivable
subsidiary
ledger
3
Sales invoice–
ledger copy
Customer
record
Post to
customer’s
account
Compare
totals
and post
Sales
summary
C
General
ledger
Post and
file
Journal
voucher
N
A
Journal
voucher
Prepare at end of
month from
ledger
Accounts
receivable
aging schedule
Customer’s
monthly
statement
To customer
FIGURE A12.1-1 (Continued)
ment. Also, the order is entered for processing, with
copies of the sales order-invoice being distributed to the
billing department (to await notice of shipment), to the
warehouse (for picking), and to the shipping department
(as prior notification). A last copy is filed by customer
name, so that it can be easily referenced to answer customer inquiries.
3. Shipping of ordered goods
The finished-goods warehouse has physical custody of
the merchandise inventory. When a stock request copy
reaches the warehouse, an employee called a picker is
assigned to assemble the ordered goods. He or she uses
the stock request copy (or a picking slip) as a reference
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APPENDIX A12.1
•
CD–229
5. Delivery of goods and invoice
in picking the goods. If certain ordered goods are not in
stock, this fact is noted on the document, which is also
initialed by the picker. Then the assembled goods, together with the stock request copy, are delivered to the
shipping department. There a shipping clerk pulls the
packing slip copy from the file, checks the quantity of
the physical goods against the copies, and prepares
the shipping-related documents. The goods are packed
for shipment, with the packing slip enclosed.
In some firms the warehouse keeps records of the
quantities of goods on hand. If so, it is necessary to
provide an added copy of the picking slip, which would
be used to reduce the on-hand quantities in the
records. By maintaining these memorandum records,
the sales order clerk can check their status when orders
are received. Customers can be informed more
promptly when back orders are necessary. (Note that to
provide adequate organizational independence, every
firm should also maintain the “official” inventory
records within an accounting department or in its computer system.)
Shipped goods with enclosed packing slip are received
by the customer. The customer, or an agent, signs for the
shipment. If shipped by common carrier, the customer
receives a copy of the bill of lading. Shortly thereafter
the customer receives the sales invoice, usually via the
postal service. Typically, the customer will vouch the
sales invoice by comparing it to a receiving report and
purchase order. If errors are detected, the customer will
then notify the firm.
Another copy of the sales invoice is distributed to the
accounts receivable department for posting. Also, a copy
of the sales invoice (or order document) should be sent
to the inventory control department.
6. Recording sale in inventory records
Assuming that the perpetual inventory method is employed, the inventory control department maintains
records for each merchandise inventory item. A document containing the quantities shipped of each item (either the sales invoice, shipping notice, or notated stock
request copy) is used to update the inventory records.
Figure A12.1-2 presents a merchandise inventory ledger
card, one record in a subsidiary ledger. As the illustration shows, a quantity of 80 lawnmowers was shipped on
December 6. This quantity is posted to the inventory
ledger card.
As indicated in the figure, often the dollar amount of
the on-hand balance is not maintained on inventory
ledger cards. At the end of the accounting period, the
cost value of the inventory sold is journalized and
posted to the general ledger control accounts. The unit
cost to apply to the quantity sold depends on the costing method adopted by the firm, for example, average
cost, first-in, first-out. A costing method must be cho-
4. Billing for goods shipped
Upon being notified of the shipment, a billing clerk compares the quantities shipped against the quantities ordered. He or she completes the sales order-invoice set,
entering the quantities shipped from the shipping document and the unit prices from a current pricing file. A
separate clerk verifies the accuracy of the billing. Other
clerks in the billing department enter the invoice
amount in the journal, accumulate sufficient invoices to
form a batch, and compute batch totals. The batch of
sales invoices is sent to the accounts receivable department for posting. A journal voucher is prepared for use
in posting to the general ledger. These posting steps are
discussed in a later section.
Merchandise Inventory Ledger Card
Item No.
L5862
Description
Lawnmower
Location
Row 8 Sector 15
Reorder point
150
Reorder quantity
180
Unit cost
$120.00
Date
Reference
11-14-99
11-24-99
12-6-99
12-9-99
P.O. 768
R.R. 309
S.O. 2681
P.O. 797
Receipts
Sales
Ordered
180
180
80
180
Supplier No.
8326
Balances
On order On hand
180
0
0
180
FIGURE A12.1-2 A portion of a merchandise inventory ledger card.
0
180
100
100
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•
APPENDIX A12.1
sen, since the unit cost of an item may change during
the course of an accounting period. The posting to reflect the reduction of merchandise inventory due to
sales is as follows:
Dr. Cost of goods sold
XXX
Cr. Merchandise Inventory (control)
XXX
amount, which is then approved by the credit manager.
Sales allowances are then processed in the same manner as sales returns. Sales returns and allowances are
posted to the general ledger accounts based on the following entry:
Dr. Sales Returns and Allowances
XXX
Cr. Accounts Receivable
XXX
7. Posting of sales in accounts receivable accounts
10. Processing of account write-offs
Upon receiving copies of the sales invoices from the
billing department, a clerk in the accounts receivable department posts the sales amounts to the customers’ accounts. Another clerk verifies the posting and obtains a
total of the amounts posted. This clerk then forwards the
batch total to the general ledger department.
8. Posting to general ledger accounts
In the general ledger department, a clerk compares the
total posted to the accounts receivable ledger to the precomputed batch total amount, as shown on a summary
journal voucher prepared in the billing department. If
they agree, the clerk posts the totals to the general
ledger accounts. If they disagree, the clerk locates discrepancies, corrects the errors, notifies the accounts receivable clerk of posting errors, and then completes the
general ledger postings. The posting to reflect sales is as
follows:
Dr. Accounts Receivable
XXX
Cr. Sales
XXX
Another type of adjustment is the write-off of customer
account balances. Upon reviewing an accounts receivable aging schedule and other evidence, the credit manager makes a decision concerning which accounts are
uncollectible. Then he or she prepares a write-off notice.
After the treasurer or other designated manager approves the notice, it is processed in the same manner as
sales returns and allowances. If bad debts have been anticipated by the prior establishment of an allowance account, the posting for written-off accounts is:
Dr. Allowance for Doubtful Accounts XXX
Cr. Accounts Receivable
XXX
Cash Receipts Procedure
Figure A12.1-3 shows a document system flowchart of a
procedure involving the receipts of cash related to credit
sales. The principal control points involve the receipt of
cash, the processing of the cash deposit, and the posting of cash amounts to the ledgers.
1. Receipt of cash
9. Processing of sales returns and allowances
Adjustments must be made for sales returns and allowances. The typical procedure is as follows. Upon requests from customers to return goods or to be given
allowances, a manager must authorize the transaction. If
a return is involved, the returned goods are received in
the receiving department. There they are counted by a
clerk and listed on a sales return notice (or special receiving report). If prior authorization was not obtained,
the receiving department then forwards a copy to the
credit manager for approval.
The approved notice (or a return notification, if issued) is transmitted to the billing department, where
the prices are checked against the original sales invoice.
Then a prenumbered credit memo is prepared, with
copies being sent to the accounts receivable department
for posting and to the customer. A clerk in the billing department also prepares a journal voucher for the general
ledger department, which posts the sales return transaction. Allowances on sales are granted for damaged
goods, shortages, or similar deficiencies. In such cases
the sales order department or salesperson settles the
The cash receipts procedure begins with the daily receipt
of mailed cash and remittance advices from customers.
An authorized person, such as a mail room clerk, ensures that the amount of the checks matches that on the
remittance advices (and prepares advices when none are
received). The remittance advices are then sent to accounts receivable for posting. The mail room clerk also
endorses the checks “For Deposit Only,” enters their
amounts on a prenumbered remittance list, and computes a total of the batch received. One copy of the remittance list is sent to the cashier with the checks; a
second copy is sent to the internal audit department (if
any) for later reviews; the third copy is filed.
2. Processing of the cash deposit
A person who is authorized to handle the cash, such
as the cashier, prepares a deposit slip in triplicate. All
checks from customers, as well as cash received from
other sources that day, are listed on the deposit slip. After the cashier compares the computed deposit total
with that shown on the remittance list, he or she deliv-
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Customer
From cash
disbursements
Remittance
advice
Mailroom
Cash receipts (or cashier)
1
Checks
Checks
(in batches)
Open mail, endorse
check, compare
remittance advice
and check, and
enter on
remittance list
1
Deposit
slip
Remittance
list
Check
2
Prepare deposit
slip, compare
to remittance
list, enter in
journal and
prepare
journal
voucher
Cash
receipts
journal
Deposit
slip
C
Remittance
list
Journal
voucher
Remittance
advice
1
Remittance
list
2
3
Remittance
list
C
FIGURE A12.1-3 A document flowchart of a manual cash receipts transaction processing procedure.
CD–231
2
3
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Accounts receivable
General ledger
Internal audit
Bank
Checks
Deposit slip
1
Journal
voucher
4
Compare
totals
and
post
Remittance
advices
(in batches)
2
Remittance
list
3
Sort and
post to
customer
accounts
2
Accounts
receivable
subsidiary
ledger
General
ledger
Batch
control
total
Deposit
slip
Customer
records
Journal
voucher
Cash
records
A
C
C
FIGURE A12.1-3
(Continued)
CD–232
Validate
and
return
1
2
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APPENDIX13.1
ers the deposit to the bank intact. A cash receipts clerk
then enters the total amount of receipts in the cash
receipts journal. The clerk prepares a journal voucher,
which is sent to the general ledger department for
posting.
The internal audit department receives an authenticated copy of the deposit slip, which has been stamped
and initialed by a bank teller and delivered direct by the
bank. This deposit slip is compared to the remittance
list, as well as to the deposit slip in the cashier’s office
and to the general ledger posting.
3. Posting of cash amounts in accounts receivable
accounts
As noted earlier, the mail room clerk forwards the remittance advices to the accounts receivable department
for posting. Upon receipt, an accounts receivable clerk
posts the payment amounts to the customers’ accounts.
•
CD–233
As in the case of sales postings, another clerk verifies the
accuracy and obtains a total of the amounts posted. The
batch total is then forwarded to the general ledger department.
4. Posting to general ledger accounts
In the general ledger department, a clerk compares the
total posted to the accounts receivable ledger to the precomputed batch total amount, as shown on a summary
journal voucher received from the cashier. If they agree,
the clerk posts the totals to the general ledger accounts.
If they disagree, the clerk locates discrepancies, corrects
the errors, notifies the accounts receivable clerk of posting errors, and then completes the general ledger postings. The posting to reflect cash receipts is as follows:
Dr. Cash
XXX
Cr. Accounts Receivable
XXX
APPENDIX 13.1
MANUAL PROCESSING WITHIN THE EXPENDITURE CYCLE
This appendix provides a survey of manual processing
procedures relating to purchases, payables, and cash
disbursements. Narrative descriptions of the procedures
are accompanied by document system flowcharts, which
are keyed to the narrative by circled numbers. These
numbers designate key control points within the purchases, payables, and cash disbursements procedures.
The application controls described in the chapter are
particularly needed at these points. The accounting entries pertaining to the expenditure cycle are included at
appropriate places in the narrative descriptions.
Purchases Procedure
Figure A13.1-1 depicts a document flowchart of the manual procedure involving the purchases of goods on
credit. As just mentioned, numbers designate the control points within the purchases procedure—that is, the
determination that goods are needed, the preparation of
a purchase order, the receipt of ordered goods, and the
receipt of the supplier’s invoice.
1. Determination of the need for goods
In the inventory control department, a clerk examines inventory records to locate those items whose on-hand
quantities are below a preestablished reorder point.
Those items that need to be reordered are listed on a
prenumbered and well-designed purchase requisition
form. For each item, the clerk specifies a precomputed
economic order quantity. Upon approval of the requisition, perhaps by the inventory manager, copies are sent
to the purchasing department and receiving department.
2. Preparation of the purchase order
When the purchase requisition is received in the purchasing department, a buyer is assigned by the purchasing manager to handle the purchase transaction. If the
goods or circumstances are nonroutine, competitive
bids are obtained. If the needed goods are routine (or after bids have been evaluated), the buyer selects the
most suitable supplier from an approved supplier file
and prepares a prenumbered purchase order. When the
purchase order has been checked for prices and terms
and signed by an authorized person, such as the purchasing manager, the copies are distributed. Two copies
are mailed to the supplier. Other copies are forwarded to
the inventory control, receiving, and accounts payable
departments. The copy sent to inventory control (which
may actually be an amended copy of the requisition) is
used to post ordered quantities to the inventory records.
The copy for the receiving department (which has the
quantities blacked out, i.e., is “blind”) is used later to verify the authenticity of the received goods. The copy sent
to accounts payable is to provide prior notification that
an invoice is soon to be received. Also, the last copy is
filed in the open purchase order file to await the arrival
of the invoice.