THE EXPENDITURE CYCLE

Objective: To convert he organization’s cash into the physical materials and human resources it needs to conduct
business
2 phases:
 Physical phases- involving the acquisition of the resource
 Financial phase – involving the disbursement of cash
2 major subsystem:
 Purchase processing subsystem
 Cash disbursement system
2 objectives drive from this dicussion:

 To illustrate system functionality, efficiency issues, and work flow characteristics of diff. technologies
 To demonstrate how internal control issues differ between systems at various points on the technology/ human
continuum

The Conceptual System:

Overview of purchases and cash disbursements activities
- Will be focus on what (conceptually) needs to be done, not how (physically) it is accomplished
- Technology-neutral

Purchase Processing Procedures

- Purchase procedures include tasks involved in identifying inventory needs, placing the order, Receiving the
inventory, and recognizing the liability
- These procedures apply to both manufacturing and retailing firms
- Major difference between the two business types lies in the way purchases are authorized
- Manufacturing firms purchase raw materials for production, and their purchasing decisions are
authorized by the production planning and control function
- Merchandising firms purchase finished goods for resale. Inventory control function provides the
purchase authorization for this type of firm

 MONITOR INVENTORY RECORDS

- When inventories drop to a predetermined reorder point, a purchase requisition is prepared and sent to the
prepare purchase order function to initiate the purchase process
- The task of identifying a low-level inventory condition and creating a purchase requisition is a revenue cycle
activity
- The purchase requisition contains routine ordering information taken from the inventory subsidiary ledger
and valid vendor file
- This includes the name and address of the primary supplier, the economic order quantity of the item
and the standard or expected unit cost of the item
- Providing this information to the purchasing agent: allows him to deal with routine purchases as
efficiently as good control permits and to devote his primary efforts to nonroutine problems (Ex.
Sourcing scarce, expensive, or unusual inventory items)
- Valid vendor file – provides an important control by listing only approved vendors
- Purpose: To ensure that the organization purchases inventories only from authorized vendors
 - Helps to reduce certain vendors fraud schemes
- Separate purchase requisition is prepared for each inventory item as the need is recognized’
- Often result in multiple purchases to a single vendor

 PREPARE PURCHASE ORDER

- The prepare purchase order function receives the purchase requisitions (w/c sorted by vendor if necessary)
- Purchase order is prepared for each vendor
- Copy of PO is sent to:
 the vendor
 The set up accounts payable function for filling temporarily in the AP pending file
 Blind copy is sent to receive goods function, where it is held until the inventories arrive
 Filed in the open/closed purchase order file

 RECEIVE GOODS
- Copies of PO reside in temporary files in various departments
- Often make memo entries of pending inventory receipts and associated obligations
- Goods arriving from the vendor are reconciled with the blind copy of the PO
- Blind copy – contains no quantity or price information about the products being received
- Purpose: to force the receiving clerk to count and inspect inventories prior to completing the receiving
report
- Important control in reducing risk of missing/ incorrect/ damaged items
- Shipments that are missing items or contain damaged or incorrect items must be detected before the firm
accepts and places the goods in inventory
- Upon completion of the physical count and inspection, receiving clerks prepares a receiving report
- Receiving report – stating the quantity and condition of the inventories
- Copy of receiving report:
 Accompanies the physical inventories to either the raw materials storeroom or finished goods
warehouse for safekeeping
 Filed in the open/closed PO file to close out the PO
 Sent to the account payable function, where it is filed in the AP Pending File
 Sent to inventory control for updating the inventory records
 Placed in the Receiving report file

 UPDATE INVENTORY RECORDS

- Standard cost system – carry their inventories at a predetermined standard value regardless of the price
actually paid to the vendor
- Posting to standard cost inventory ledger requires only information about the quantities received
- Because receiving report contains the quantity information, it serve this purpose
- Updating an actual cost inventory ledger requires additional financial info., such as a copy of
supplier’s Invoice when it arrives

 SET UP ACCOUNTS PAYABLE

- Set up function received and temporarily filed copies of the PO and receiving report
- The receipt of supplier’s invoice (which contains the financial info needed to record the transaction) typically
triggers AP procedures
- Three-way match – reconciles the supplier’s invoice with financial information in the receiving report and PO
in the AP pending file
- Verifies that what was ordered was received and is fairly priced
- AP Packet – consists of the supporting documents (PO, receiving report & invoice)
 - Formal authority to record liability and subsequently make payment.
- Files the AP Packet in the open AP file. The transaction is recorded in purchase journal and posted to
supplier’s account in AP Subsidiary ledger
- Inventory valuation method – will determine how inventory control will have recorded the receipt of
inventories
- Actual cost method: AP clerk will send a copy of the supplier’s invoice to inventory control
- Standard costing: that step is not necessary

VOUCHER PAYABLE SYSTEM

- Alternative to the AP procedures

- The AP dept. uses cash disbursement vouchers and maintains a voucher register
- After the AP clerk performs three-way match, prepares a cash disbursement voucher to approve payments
- Vouchers (Cash disbursement voucher) – provide improved control over cash disbursements and allow firms to
consolidate several payments to the same supplier on single voucher, thus reducing the numbers of checks
written
- Voucher register – reflects the AP liability of the firm; the sum of the unpaid vouchers in the register (those with
no check numbers and paid dates) is the firm’s total AP balance
- Files the cash disbursement voucher with supporting documents to voucher payable file

 POST TO GENERAL LEDGER

- general ledger function receives journal voucher from the AP dept. and an account summary from invty
control
- post the data to the inventory and AP control accounts and reconciles the invty control account w/ invty
subsidiary summary
- Journal voucher is filed in approved journal voucher file

CASH DISBURSEMENTS SYSTEM

- Process the payment of obligations created in the purchases system
- Objective: to ensure that the valid creditors receive payment and that amounts paid are timely and correct

 IDENTIFY LIABILITIE DUE

- Begins in the AP dept., where each day the AP clerk reviews the open AP file for items due for payment
- The file is organized by payment due to ensure that debts are paid in the last possible date without missing
due dates and losing discounts
- Sends payments approval in the form of AP Packet to cash disbursement dept.

 PREPARE CASH DISBURSEMENT

- Cash disbursement clerk receives the AP packet and reviews the documents for completeness and clerical
accuracy
- Check register (also called cash disbursement journal) – where check number, dollar amount and other
pertinent data are recorded
- Depending on company’s materiality threshold, the check may require additional approval by the cash
disbursements dept manager or treasurer
- Negotiable portion of the check is mailed to the supplier
- A copy of check is attached to the AP Packet as proof of payment and a check copy is filed in the dept
- Clerk marks the documents in the packet and return to AP clerk
 - CD clerk summarizes the entries made to the check register and sends a journal voucher

 UPDATE AP RECORD
- When paid AP packet receive, AP clerk removes liability by debiting vendor’s AP subsidiary ledger account
- AP Packet is filed in the closed AP file & account summary is prepared and sent to GL function

 POST TO GENERAL LEDGER

- Journal Voucher – shows the total reduction in the firm’s obligations and cash account as a result of
payments to supplierss