8-1. Accounting System Cycles Flashcards
What is the accounting cycle?
*Systematic process of recording and processing financial transactions and events.
*A way of categorizing similar business and accounting activities.
Accounting system accumulates and reports info on financial position of an entity.
What are 2 ways the term “accounting cycle” used for?
- To categorize business and accounting activities
* A set of accounting procedures to accumulate and report financial info
Accounting cycle: what are general 9 steps of accounting procedures?
- Analyze transactions and business documents
- Journalize transactions
- Post journal entries to accounts
- Determine account balances and prepare a trial balance
- Journalize and post adjusting entries
- Prepare FS and reports
- Journalize and post-closing entries
- Balance the accounts and prepare a post-closing trial balance
9 Repeat
Accounting cycle: what are 3 steps of data processing?
- Data capture (input)
- Data storage and data processing
- Information output and reporting
Accounting cycle: what are steps for data capture?
- Analyze transactions and business documents
- Journalize transactions
- Journalize and post adjusting entries
- Journalize and post-closing entries
Accounting cycle: what are steps for data storage/processing?
- Post journal entries to accounts
- Determine account balances and prepare a trial balance
- Journalize and post adjusting entries
- Journalize and post-closing entries
- Balance the accounts and prepare a post-closing trial balance
Accounting cycle: what are steps for information output and reporting?
- Prepare FS and reports
Accounting cycle: what is it as categories of activity?
Business activities as paid, give-get exchanges.
Accounting cycle as categories of activity: what are 5 major transaction cycles of grouping of basic exchange?
- Revenue cycle: interactions with customers (give goods; get cash)
- Expenditure cycle: interactions with suppliers (give cash; get goods)
- Production cycle: give labor and raw materials; get finished good product
- Human resources/payroll cycle: hire, utilize, and develop labor; give cash and benefits
- General ledger, reporting, financial cycle: give cash; get cash; report financial outcomes
Accounting cycle: Revenue cycle: what are 3 actions that interact with other cycles?
- Get finished goods from production
- Provides data to general ledger and reporting
- Provides funds to the financing
Accounting cycle: Expenditure cycle: what are 3 actions that interact with other cycles?
- Gets $ from financing
- Provides data to the general ledger and reporting
- Provide raw materials to production
Accounting cycle: Production cycle: what are 5 actions that interact with other cycles?
- Gets labor from HR/payroll
- Gets $ from finance
- Gets raw materials from expenditure
- Provides data to general ledger and reporting
- Provides finished goods to revenue
Accounting cycle: HR/payroll cycle: what are 3 actions that interact with other cycles?
Records activity related to employees and payroll.
- Gets funds from financing
- Provides data to general ledger and reporting systems,
- Provides labor to production
Accounting cycle: Financing cycle: what are 3 actions that interact with other cycles?
- Gets funds from revenue
- Provides funds to expenditures and HR/payroll
- Provides data to general ledger and reporting
Accounting cycle: General ledger and reporting cycle: what are 2 actions that interact with other cycles?
- Gets data from all cycle
* Provides info for internal and external users
Accounting cycle: is implementation of each transaction cycle same across organizations?
No, significantly different.
Accounting cycle: do all organizations need all cycles?
No. E.g. retail stores don’t need production cycle module.
Some organizations need extra modules.
Accounting cycle: Common risks across cycles?
- Loss, alteration, or unauthorized disclosure of data.
* Accounting system is not functioning as required by law, regulation, or organizational policy
Accounting cycle: what are controls goals across cycles?
Completeness;
- transactions are properly authorized
- recorded transactions are valid
- valid and authorized transactions are recorded
- transactions are recorded accurately
Safeguarding: assets are safeguarded from loss or theft
Efficiency: business activities are performed efficiently and effectively.
Compliance: the organization complies with all applicable laws and regulations.
Reporting: all financial disclosures are full and fair.
Data integrity: accurate data is available when needed.
Revenue cycle: what is the central item?
Money.
- Sell items or receive pledges for donations
- Collect pmts on receivables or pledges
Revenue cycle: what are core activities?
- Sales
- Accounts receivables
- Cash
Revenue cycle: what are sales activities?
- receive customer orders
- approve customer credit/sales authorization
- physical (or virtual) custody of products or services: fill the order and prepare for shipping (if a physical merchandise, ship or deliver the product.
Revenue cycle: what are A/R activities?
- Bill (if needed)
* Manage receivables (e.g. returns and allowances, determine collectability of accounts)
Revenue cycle: what are cash activities?
- Collection and receipt of pmts
* Reconciliation
Revenue cycle: risks?
- Validity or revenue - revenue recognition
- Collectability of receivables
- Customer returns and allowances
Revenue cycle: Validity of revenue: when can revenue be recognized for FS?
Realized (or realizable) and earned.
Revenue cycle: Validity of revenue: fraud risks?
- booking fake revenue or booking revenue prematurely.
* creation of fictions customer who “buy” things (hence the goods are taken) but don’t pay for them.
Revenue cycle: is estimating the collectability of receivables objective or subjective? Consequence of it?
Subjective - where subjectivity exists, management may err in its self-interest.
Revenue cycle: fraud related to A/R?
“Sales” to fictitious customers where receivables are written off.
Revenue cycle: how is customer returns and allowances determined and consequence?
They, particularly for new products or technologies, are determined by subjective estimates - managers may error in their self-interest.
Revenue cycle: who are relevant stakeholders?
Customers:
*whose role is to buy products or services - establish that customers exist and receive credit appropriately. *Outbound logistics providers - ship goods to customers.
Revenue cycle: what is lading?
Also called bill of lading = archaic noun - the action or process of loading a ship or other vessel with cargo.
Specify terms of shipment. Legal document between the shipper and the carrier detailing the type, qty, and destination of carried goods. Also a receipt for shipment when the goods are delivered.
Revenue cycle: what are 9 important file, form, or document?
- Customer or sales order
- Credit check files
- Aged trial balance
- Picking list (physical goods)
- Packing list (physical goods)
- Bill of lading (physical goods)
- Customer invoice
- Remittance advice
- Customer stmts (monthly)
Revenue cycle: Customer or sales order: Purpose? Comments and controls?
P: Document order, including items, prices, and stock numbers.
C: Point of sale documentation.
Revenue cycle: Credit check files: Purpose? Comments and controls?
P: Document granting or denial of credit.
C: Review for compliance, accuracy and completeness.
Revenue cycle: Aged trial balance: Purpose? Comments and controls?
P: Document receivables and give evidence of collectability.
C: Verify if receivables are collectable and timely.
Revenue cycle: Picking list (physical goods): Purpose? Comments and controls?
P: Items to be pulled from warehouse.
C: Increasingly automated and use bar code or RFID tagging.
Revenue cycle: Packing list (physical goods): Purpose? Comments and controls?
P: Contents to be shipped.
C: Increasingly automated and use bar code or RFID tagging.
Revenue cycle: Bill of lading (physical goods): Purpose? Comments and controls?
P: Specify terms of shipment
C: Helps determine data goods were sold (cutoff). Can match goods to bill of lading to confirm receipt
Revenue cycle: Customer invoice: Purpose? Comments and controls?
P: Client’s bill
C: Useful in documenting existence of customer and receivable
Revenue cycle: Remittance : Purpose? Comments and controls?
P: Help match pmts to invoices
C: Sent by customer to selling company to indicate pmt
Revenue cycle: Customer stmts: Purpose? Comments and controls?
P: Document orders and pmts
C: Determine billings and collections (accuracy and existence)
Revenue cycle: Accounting and business risks?
- Sales issues
- Receivables and account collections issues
- Shipping issues
- Cash and cash receipt issues
Revenue cycle: Accounting and business risks: Describe sales issues and responses.
- Customer abandons order before completion
- Incomplete or inaccurate customer orders: Re: automate data entry, data input controls, authorization (password or biometric control), input controls.
- Fake sales or sales inconsistent with policy: Re: controls include appropriate authorization and evidence, confirmation and review of customer files
Revenue cycle: Accounting and business risks: Describe receivables and account collection issues and responses.
Grant credit to undeserving customers (e.g. poor credit). Re:
- hire vendors to determine credit status
- segregation of duties (credit granting process is independent of sales)
- cash only businesses reduce sales by reducing uncollectible receivables
Failure to bill customers.
Re:
*Segregation of duties in shipping and billing functions
*Sequentially pre-numbered sales orders, enables identification of missing sales orders when matching to billings
*Matching picking tickets, packing slips, and sales invoices
Receivables inappropriately written off.
Re:
*segregation of duties: someone independent of sales and cash receipts authorized to write off accounts
*access to terminal/system to write off accounts restricted by password, device or biometrics
Pricing based on price list master file.
Re:
*confirm accuracy of price lists (can be complicated)
*check qty on packing slip against qty on sale order
*bar code and RFID scanners to eliminate data entry and other errors
Revenue cycle: Accounting and business risks: Describe shipping issues and responses.
Shipping errors - send wrong items.
Re:
*online shipping systems that check qty shipped; bar code scanners and radio-frequency identification (RFID) tags to record picking and shipping
*additional controls: e.g. field check and completeness tests
Revenue cycle: Accounting and business risks: Describe cash and cash receipt issues and responses.
Controls:
- Segregation of duties: e.g. 2 people opening emails/mails together, remittance data sent to accounts receivable clerk, while cash and check are sent to the cashier
- Prompt documentation and restrictive endorsements of remittances
- Reconcile total credits to accounts receivable and total debits to cash
- sending remittance list to independent party (internal auditor) to compare with validated deposit slips and bank stmts
- monthly stmts to customers
- cash registers that automatically record cash received
- daily deposit of all remittances in the bank
- independent bank reconciliations
