Ch10 - Purchases and Payables

purchasing processes

also known as procurement processes, are focused on acquiring the necessary resources for a business to operate

part of the resource acquisitions and payments process

payment processes

focused on paying for the necessary resources required for a business to operate

part of the resource acquisitions and payments process

inventory

a balance sheet line item that includes all items used in the creation of products

classified as:

• raw materials

• work in process

• finished goods

raw materials

any components that are used in the creation of a product

work in process

products that are in the process of being manufactured

finished goods

products that are ready to ship to customers

high-level business activities

inventory control department

manages inventory and is responsible for ensuring that there is an optimal amount of inventory on hand

purchase requisition

a request to be made by the inventory control department to obtain goods from an authorized source, then sent to the purchasing department

purchasing agent

transforms the purchase requisition, which is an internal company document, to a purchase order

purchase order

an external document used to request a supplier to sell and deliver the products in quantities and for the prices specified in the purchase order

purchasing

the purchase requisition evolves into a legally enforceable purchase order

packing slip

shows quantities and descriptions of items delivered

receiving report

shows the descriptions and quantities of goods received from vendors

discrepancy report

identifies variances between the receiving report and the purchase order

receiving

a supplier delivers an order along with a supplier-generated packing slip to the receiving department at the specified warehouse location

this data input generates an electronic receiving report as well as a discrepancy report

accounts payable

an account that records money the business owes to its suppliers and vendors

employees enter vendor invoices into the system upon receipt

vendor invoice

the bill from the vendor that includes the related purchase order number, billing date, description of quantities and goods, the amount due, and payment terms

inventory management

a process that coordinates the communication of inventory availability and needs across the purchasing, conversion, and sales processes

efficient and effective - critical to success for any business

poor - may result in insufficient or excessive inventory

fixed assets

include land, land improvements, buildings, equipment and machinery used in production, office equipment, computer equipment, furniture and fittings, warehouse shelving, and vehicles

generally known as property, plant, and equipment

capital expenditures CAPEX

the costs of acquiring fixed assets

fixed asset business processes framework

fixed asset acquisitions process

1. fixed asset procurement

2. receiving and tagging fixed assets

3. recording fixed assets

4. fixed asset reconciliation

fixed asset acquisitions internal controls

fixed asset purchases are generally subject to the same risks and internal controls as purchases of other goods

material fixed assets acquisitions should be subject to additional authorization to precent unauthorized purchases

two additional risks are:

• overstatement of fixed assets in the financial statements because of capitalizing expenses

• bid rigging

bid rigging

can happen in two ways:

1. An employee colludes with a vendor to obtain by fraudulent means a contract meant to be subject to a competitive bidding process. Because of “insider information” illegally obtained from an employee, often in a kickback arrangement, the vendor wins the bidding process

2. Vendors collude with one another and reach advance agreement as to the winning bidder for a particular contract. The winning bidder agrees to compensate the other vendors in some manner

payment process

also known as the cash disbursements processes, involving paying for acquisitions made in the purchasing process

impact the amount of the cash line item, the most liquid of current assets on the balance sheet, by decreasing the cash balance

two primary methods: making cash payments and using credit

credit is recorded in accounts payable

payments internal controls

cash is highly susceptible to theft, and fraudulent disbursements schemes are common

one of the greatest fraud risks is an employee creating a fictitious vendor and sending fraudulent payments to accounts the employee controls