Good day everyone, today we are going to discuss the chapter 5 which is all about the
expenditure cycle part 1. This talks about purchases and cash disbursements procedures.
When we say expenditure it is the action of spending funds. The objective of the
expenditure cycle is to convert the organization’s cash into the physical materials and the human
resources it needs to conduct business.
LEARNING OBJECTIVES
In this chapter, we concentrate on systems and procedures for acquiring raw materials
and finished goods from suppliers. Most business entities operate on a credit basis and do not
pay for resources until after acquiring them. The time lag (The meaning of TIME LAG is an
interval of time between two related phenomena (such as a cause and its effect) between these
events splits the procurement process into two phases: (1) the physical phase, involving the
acquisition of the resource, and (2) the financial phase, involving the disbursement of cash. As a
practical matter, these are treated as independent transactions that are processed through separate
subsystems.
OVERVIEW OF PURCHASES AND CASH DISBURSEMENTS ACTIVITIES
In this section we examine the expenditure cycle conceptually. Using data flow diagrams (DFDs)
as a guide, we will trace the sequence of activities through two of the processes that constitute
the expenditure cycle for most retail, wholesale, and manufacturing organizations. These are
purchases processing and cash disbursements procedures.
As in the previous chapter, the conceptual system discussion is intended to be technology-
neutral. The tasks described in this section may be performed manually or by computer. At this
point our focus is on what (conceptually) needs to be done, not how (physically) it is
accomplished. At various stages in the processes, we will examine specific documents, journals,
and ledgers as they are encountered. Again, this review is technology-neutral. These documents
and files may be physical (hard copy) or digital (computer generated). Later in the chapter, we
examine examples of physical systems
PURCHASES PROCESSING PROCEDURES
. In general, these procedures apply to both manufacturing and retailing firms. A 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. The inventory control function provides the purchase authorization for
this type of firm. MONITOR INVENTORY RECORDS. Firms deplete their inventories by
transferring raw materials
MONITOR INVENTORY RECORDS
Reorder point is the specific, predetermined level at which a given product must be replenished
to avoid an inventory shortage or stockout. In other words, it's a minimum inventory threshold
that triggers a new order of additional inventory.
A purchase requisition form is a document submitted by an employee to request the purchase of
goods or services on behalf of the company. These purchases may be for business operations,
inventory, or to manufacture supplies for sale. Submitting a purchase requisition form sets off the
purchasing process.
Although procedures will vary from firm to firm, typically a separate purchase requisition will be
prepared for each inventory item as the need is recognized
PREPARE PURCHASE ORDER
A purchase order is used by a buyer to place an order and is issued before delivery. It defines the
amount the buyer owes for the purchased goods and the date by which the buyer needs to pay.
To make the purchasing process efficient, the inventory control function will supply much of the
routine ordering information that the purchasing department needs directly from the inventory
and valid vendor files
RECEIVED GOODS
Upon completion of the physical count and inspection, the receiving clerk prepares a receiving
report stating the quantity and condition of the inventories.
UPDATE INVENTORY RECORDS
Posting to a standard cost inventory ledger requires only information about the quantities
received. Because the receiving report contains quantity information, it serves this purpose.
Updating an actual cost inventory ledger requires additional financial information, such as a copy
of the supplier’s invoice when it arrives
SET UP ACCOUNTS PAYABLE (Basa before PPT)
During the course of this transaction, the set up AP function has received and temporarily filed
copies of the PO and receiving report. The organization has received inventories from the vendor
and has incurred (realized) an obligation to pay for the goods. At this point in the process,
however, the firm has not received the supplier’s invoice2
VOUCHER PAYABLE SYSTEM (Basa before PPT)
Rather than using the AP procedures described in the previous section, many firms use a
vouchers payable system.
The AP clerk files the cash disbursement voucher, along with supporting source documents, in
the vouchers payable file. This file is equivalent to the open AP file discussed earlier and also is
organized by due date. The DFD in Figure 5-1 illustrates both liability recognition method
POST TO GENERAL LEDGER. The general ledger function receives a journal voucher from
the AP department and an account summary from inventory control. The general ledger function
posts from the journal voucher to the inventory and AP control accounts and reconciles the
inventory control account and the inventory subsidiary summary. T
THE CASH DISBURSEMENT SYSTEM (PPT nya basa)
Cash disbursements are a vital part of cash flow tracking. If your company records more
disbursals than revenues, that's an early warning sign that your business is in financial
trouble. The presence of good internal controls is important in cash disbursements and helps
ensure that cash is paid for legitimate transactions.
If the system makes payments early, the firm forgoes interest income that it could have earned on
the funds. If obligations are paid late, however, the firm will lose purchase discounts or may
damage its credit standing. Figure 5-10 presents a DFD conceptually depicting the information
flows and key tasks of the cash disbursements system.
EXPENDITURE CYCLE CONTROLS
This section describes the primary internal controls in the expenditure cycle according to the
control procedures specified in Statement on Auditing Standards No. 78. The main points are
summarized in Table 5-1.
MANUAL SYSTEM
As mentioned in the previous chapter, manual systems are covered here as a visual training aid to
promote a better understanding of the concepts presented in the previous section.
Inventory control - When inventories drop to a predetermined reorder point, the
clerk prepares a purchase requisition. One copy of the requisition is sent to the
purchasing department, and one copy is placed in the open purchase requisition
file
Purchasing department - The purchasing department receives the purchase
requisitions, sorts them by vendor, and prepares a multipart PO for each vendor.
Two copies of the PO are sent to the vendor. One copy of the PO is sent to
inventory control.
Receiving - Goods arriving from the vendor are reconciled with the blind copy of
the PO. Upon completion of the physical count and inspection, the receiving clerk
prepares a multipart receiving report stating the quantity and condition of the
inventories.
AP department - When the invoice arrives, the AP clerk reconciles the financial
information with the documents in the pending file, records the transaction in the
purchases journal, and posts it to the supplier’s account in the AP subsidiary
ledger (voucher register).
General ledger department - The general ledger department receives a journal
voucher from the AP department and an account summary from inventory
control. The general ledger clerk reconciles these and posts to the inventory and
AP control accounts. With this step, the purchases phase of the expenditure cycle
is completed
THE CASH DISBURSEMENTS SYSTEMS
A detailed system flowchart of a manual cash disbursements system is presented in Figure 5-13.
The tasks performed in each of the key processes are discussed in the following section
AP Department - Each day, the AP clerk reviews the open vouchers payable (AP) file for
items due and sends the vouchers and supporting documents to the cash disbursements
department
Cash Disbursements Department - The cash disbursements clerk receives the voucher
packets and reviews the documents for completeness and clerical accuracy. For each
disbursement, the clerk prepares a three-part check and records the check number, dollar
amount, voucher number, and other pertinent data in the check register. the check, along
with the supporting documents, goes to the cash disbursements department manager, or
treasurer, for his or her signature. T
