The Expenditure Cycle

Two Major Subsystems of the Expenditure Cycle

1. the purchases processing subsystem.

2. the cash disbursements subsystem.

The expenditure or purchasing cycle

is a series of business activities that involve acquiring goods and services from external vendors or suppliers.

Expenditure Cycle

Its purpose is to complete procurement successfully, including selecting a vendor, negotiating terms and conditions, placing an order, receiving the goods or services, and making payments to the vendor.

Activities involved in the expenditure cycle

10

The purchasing process

is the steps a business goes through to complete a transaction.

Businesses (under purchasing process)

typically go through a formal process when purchasing something, unlike consumers.

Purchases for a business (under PP)

can require research, input from different departments, negotiations and invoicing.

Purchases procedures

include the tasks involved in identifying inventory needs, placing the order, receiving the inventory, and recognizing the liability.

Manufacturing firms

purchase raw materials for production, and their purchasing decisions are authorized by the production planning and control function.

manufacturing and retailing firms

The relationships between these tasks are presented with the DFD in Figure 5-1. In general, these procedures apply to both____

Firms (under MIR)

deplete their inventories by transferring raw materials into the production process (the conversion cycle) and by selling finished goods to customers (revenue cycle).

Monitor Inventory Records

Our illustration assumes the latter case, in which inventory control monitors and records finished goods inventory levels.

purchase requisition (under MIR)

When inventories drop to a predetermined reorder point, a __________ is prepared and sent to the prepare purchase order function to initiate the purchase process.

purchase requisitions (under MIR)

This can result in multiple purchase requisitions for a given vendor. These _________ need to be combined into a single purchase order (discussed next), which is then sent to the vendor. In this type of system, each purchase order will be associated with one or more purchase requisitions

prepare purchase order function (under PPR)

The _____________ receives the purchase requisitions, which are sorted by vendor if necessary.

purchase order (PO)

copy of the PO

accounts payable (AP) function

blind copy

purchase order file

(under PPR)

Next, a __________ is prepared for each vendor, as illustrated in Figure 5-3.

A _________ is sent to the vendor.

In addition, a copy is sent to the set up ___________ for filing temporarily in the AP pending file,

and a ___________ is sent to the receive goods function, where it is held until the inventories arrive.

The last copy is filed in the open/closed _________.

Prepare Purchase Order:

inventory control function

purchasing department

purchasing department

To make the purchasing process efficient, the ___________ will supply much of the routine ordering information that the purchasing department needs directly from the inventory and valid vendor files. This information 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.

This allows the _____________ to devote its efforts to meeting scarce, expensive, or unusual inventory needs.

To obtain the best prices and terms on special items, the ________ may need to prepare detailed product specifications and request bids from competing vendors.

Receive Goods:

firms

temporary files

firm

firms

Most ______ encounter a time lag (sometimes a significant one) between placing the order and receiving the inventory.

During this time, the copies of the PO reside in __________ in various departments. Note that no economic event has yet occurred.

At this point, the ______ has received no inventories and incurred no financial obligation. Hence, there is no basis for making a formal entry into any accounting record. However, ______ often make memo entries of pending inventory receipts and associated obligations.

Receive Goods:

receipt of the inventory

blind copy of the PO

blind copy

The purpose of the blind copy

receiving docks, receiving staff

The next event in the expenditure cycle is the ___________.

Goods arriving from the vendor are reconciled with the __________.

The _________, illustrated in Figure 5-4, contains no quantity or price information about the products being received.

______________ is to force the receiving clerk to count and inspect inventories prior to completing the receiving report.

At times, ________ are very busy and ____________are under pressure to unload the delivery trucks and sign the bills of lading so the truck drivers can go on their way.

Receive Goods:

receiving clerks

Shipments

If ___________ are only provided quantity information, they may be tempted to accept deliveries on the basis of this information alone, rather than verify the quantity and condition of the goods.

____________ that are short or contain damaged or incorrect items must be detected before the firm accepts and places the goods in inventory.

Receive Goods:

receiving report

One copy of the receiving report

open/closed PO file

A third copy of the receiving report

inventory control

the receiving report file.

Upon completion of the physical count and inspection, the receiving clerk prepares a ___________ stating the quantity and condition of the inventories.

______________ accompanies the physical inventories to either the raw materials storeroom or finished goods warehouse for safekeeping.

Another copy is filed in the _________ to close out the PO.

_____________ is sent to the AP department, where it is filed in the AP pending file.

A fourth copy of the receiving report is sent to __________ for updating the inventory records.

Finally, a copy of the receiving report is placed in __________.

Update Inventory Records:

the inventory control procedures

standard cost system

Posting to a standard cost inventory ledger

the receiving report

Updating an actual cost inventory ledger

Depending on the inventory valuation method in place, ____________ may vary somewhat among firms.

Organizations that use a ____________ carry their inventories at a predetermined standard value regardless of the price actually paid to the vendor. Figure 5-6 presents a copy of a standard cost inventory ledger.

____________ requires only information about the quantities received.

Because ________ contains quantity information, it serves this purpose.

____________ requires additional financial information, such as a copy of the supplier's invoice when it arrives.

Vouchers Payable System:

vouchers payable system

vouchers payable system

cash disbursement voucher

Vouchers

voucher register

voucher register

cash disbursement voucher

vouchers payable file.

Rather than using the AP procedures described in the previous section, many firms use a _________.

Under this system, the AP department uses cash disbursement vouchers and maintains a voucher register.

After the AP clerk performs the three-way match, he or she prepares a __________ to approve payment.

_______ provide improved control over cash disbursements and allow firms to consolidate several payments to the same supplier on a single voucher, thus reducing the number of checks written. Figure 5-8 shows an example of a voucher.

Each voucher is recorded in the _______, as illustrated in Figure 5-9.

The _________ 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.

The AP clerk files the _________, along with supporting source documents, in the _______.

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 methods.

Set Up Accounts Payable:

the set up AP function

Set Up Accounts Payable

estimate the value

estimate

During the course of this transaction, ______________ 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 containing the financial information needed to record the transaction.

The firm will thus defer recording (recognizing) the liability until the invoice arrives. This common situation creates a slight lag (a few days) in the recording process, during which time the firm's liabilities are technically understated.

As a practical matter, this misstatement is a problem only at period-end when the firm prepares financial statements.

To close the books, the accountant will need to __________ of the obligation until the invoice arrives.

If the ______ is materially incorrect, an adjusting entry must be made to correct the error.

Because the receipt of the invoice typically triggers AP procedures, accountants need to be aware that unrecorded liabilities may exist at period-end closing

Set Up Accounts Payable:

the AP clerk

Open AP File

Set Up Accounts Payable

the AP clerk

After recording the liability, _______ transfers all source documents (PO, receiving report, and invoice) to the open AP file.

Typically, this file is organized by payment due date and scanned daily to ensure that debts are paid on the last possible date without missing due dates and losing discounts.

We examine cash disbursements procedures later in this section.

Finally, ______ summarizes the entries in the purchases journal for the period (or batch) and prepares a journal voucher for the general ledger function (see Figure 5-7).

Post To General Ledger:

general ledger function

general ledger function

approved journal vouchers, journal voucher file

purchases phase

The ___________ receives a journal voucher from the AP department and an account summary from inventory control.

The _________ posts from the journal voucher to the inventory and AP control accounts and reconciles the inventory control account and the inventory subsidiary summary.

The _______ are then posted to the ______.

With this step, the _________ of the expenditure cycle is completed.

Identifying a need for goods or services:

The first step is identifying the need for goods or services.

Also, this may be initiated by a department or an individual within the company.

2. Requesting quotes or proposals from vendors:

request quotes or proposals

Once the need is identified, the company may ___________ from vendors to compare prices and the quality of goods or services.

3. Selecting a vendor:

the company selects a vendor

After reviewing the quotes or proposals, _________ based on various factors such as price, quality, reputation, and delivery time.

4. Negotiating terms and conditions:

The company negotiates the terms and conditions of the purchase with the vendor, including payment terms, delivery schedule, and warranties.

5. Placing an order:

places an order

The company ________ with the selected vendor, which includes details such as the quantity, price, and delivery date.

6. Receiving the goods or services:

Once they are delivered, the company receives them and confirms that they match the order placed.

7. Verifying the goods or services received match the order placed:

The company verifies that the goods or services received match the order placed and meet the quality standards.

8. Approving the invoice:

After verifying the goods or services received, the company approves the invoice received from the vendor.

9. Recording the transaction in the accounting system:

transaction

The ______ is recorded in the accounting system, which includes details such as the date, vendor name, invoice amount, and payment terms

10. Payment to the vendor:

Thus, the final step is to make the payment based on the agreed payment terms. Proper management of the expenditure cycle ensures that the company can acquire the goods it needs to operate efficiently.