Revenue Cycle

Question 1

what is revenue cycle?

Answer 1

The revenue cycle i is an exchange of finished goods or services for cash in a single transaction between seller and buyer

Question 2

4 steps are relevant for us:

Answer 2

• sales order entry
• shipping
• Billing and accounts receivable
• cash collection

Question 3

Key decisions that need to made in the revenue cycle?

Answer 3

Operational information:

• Responding to customer enquiries.
• Deciding on extending credit to a customer.
• Determining inventory availability.
• Selecting merchandise delivery methods.

Strategic decisions:

• Setting prices for products/services.
• Establishing policies on returns and warranties.
• Deciding on credit terms.
• Determining short-term borrowing needs.
• Planning new marketing campaigns

Question 4

Fraud potential?

Answer 4

B/AR/CR process provides an oppotunity to manipulate final results.
Misappropriating cash:
- improper segregation of duties between handling cash and recording cash transactions.
Lapping:
is stealling of funds paid by one customer and covering up by applying funds from another customer.
rotation of duties and forced vacations help preventing this type of fraud.

Question 5

Why goal conflicts can occur in the cycle?

Answer 5

• every department has department specific objectives.
• business processes cross department borders.
• as a result, goal conflicts occur frequently.

example:
- sales department objective is to increasing sales by 10%
- credit department objective is minimise risk of payment default.

Question 6

Subsidiary ledgers

Answer 6

Subsidiary Ledgers provide detailed recording for:

• Customers (Accounts Receivable)
• Vendors (Accounts Payable)

The corresponding GL account is referred to as a “Control” or “Reconciliation” account

Question 7

What is the difference between a subsidiary ledger and a reconciliation account?

Answer 7

A subsidiary ledger account provides detailed recording for business events. Customer accounts, for instance, are accounts receivable subsidiary ledgers that provide details for the accounting records in relation to transactions with specific customers.

In contrast, a reconciliation or control account is a general ledger account that sums up the balances of the corresponding subsidiary ledgers. The accounts receivable reconciliation account, for instance, does not distinguish between different customers and only displays the sum of all the customer accounts in the general ledger.