The Expenditure Cycle: Purchasing and Cash Disbursements

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The Expenditure Cycle Purchasing and Cash
Disbursements

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• UAA ACCT 316 Fall 2002
• Accounting Information Systems
• Dr. Fred Barbee

Chapter
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The Primary Objective
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Main Objective

• 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
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Key Decisions

• What is the optimal level of inventory and
  supplies to carry?
• Which suppliers provide the best quality and
  service at the best prices?

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Key Decisions

• Where should inventories and supplies be held?
• How can the organization consolidate purchases
  across units to obtain optimal prices?

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Key Decisions

• How can information technology be used to improve
  both the efficiency and accuracy of the inbound
  logistics function?

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Key Decisions

• 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
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Defined

• 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 well-designed AIS is to
support the effective performance of the
organizations business activities.
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The Expenditure Cycle Business Activities
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Business Activities

1. Order Goods
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
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Order Goods (Activity 1)

• The first major business activity in the
  expenditure cycle involves ordering inventory or
  supplies.

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Order Goods (Activity 1)

• What to purchase?
• When to purchase?
• How much to purchase?
• From what supplier?

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Order Goods (Activity 1)

• Inventory control methods
• EOQ
• MRP
• JIT

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What is the major difference between MRP and JIT?
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MRP Systems

• Schedule production to meet estimated sales need,
  thereby creating a stock of finished goods
  inventory.

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JIT Systems

• Schedule production to meet customer demands,
  thereby virtually eliminating finished goods
  inventory.

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Documents and Procedures
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Order Goods

• What is a key decision?
• determine vendor
• What factors should be considered?
• price
• quality of materials
• dependability in making deliveries

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2.0 Receive and Store Goods
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Receive and Store Goods

• The receiving department has two major
  responsibilities
• Deciding whether to accept a delivery
• Verifying quantity and quality

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3.0 Pay for Goods
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Pay for Goods

• 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 well-designed AIS is to
provide useful information for decision making.
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Key Decisions

• Determine when and how much additional inventory
  to order.
• Select the appropriate vendors from whom to
  order.
• Verify the accuracy of vendor invoices.

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Key Decisions

• Decide whether purchase discounts should be
  taken.
• Monitor cash flow needs to pay outstanding
  obligations.

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Other Information Needed

• Efficiency and effectiveness of the purchasing
  department
• Analyses of vendor performance such as on-time
  delivery, quality, etc.

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Other Information Needed

• 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.
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Control Objectives

• Transactions are properly authorized.
• Recorded transactions are valid.
• Valid, authorized transactions are recorded.
• Transactions are recorded accurately.

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Control Objectives

• Assets (cash, inventory, and data) are
  safeguarded from loss or theft.
• Business activities are performed efficiently and
  effectively.

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Threats to the Expenditure Cycle
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Threats

• Stockouts
• Purchasing too many or unnecessary goods
• Purchasing goods at inflated prices
• Purchasing goods of inferior quality

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Threats

• Purchasing from unauthorized vendors
• Kickbacks
• Receiving unordered goods
• Errors in counting goods

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Threats

• Theft of inventory
• Failure to take available purchasing discounts
• Errors in recording and posting purchases and
  payments
• Loss of data

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Expenditure Cycle Exposures
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Exposures

• Production delays and lost sales
• Increased inventory costs
• Cost overruns
• Inferior quality of purchased goods
• Inflated prices

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Exposures

• Violation of laws or import quotas
• Payment for items not received
• Inaccurate inventory records
• loss of assets

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Exposures

• Cash flow problems
• Overstated expenses
• Incorrect data for decision making

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Expenditure Cycle Control Procedures
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Control Procedures

• Inventory control system
• Vendor performance analysis
• Approved purchase requisitions
• Restricted access to blank purchase requisitions

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Control Procedures

• Price list consultation
• Budgetary controls
• Use of approved vendor lists
• Approval of purchase orders
• Prenumbered purchase orders

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Control Procedures

• Prohibition of gifts from vendors
• Incentives to count all deliveries
• Physical access control
• Recheck of invoice accuracy
• Cancellation of voucher package