Chapter12The Revenue Cycle: Sales to Cash Collections

Learning Objectives

1. Describe the basic business activities in the revenue cycle and discuss the general threats to that process and the controls that can be used to mitigate those threats.
2. Explain thesales order entryprocess, key decisions that need to be made and threats to that process, and describe the controls that can be used to mitigate those threats.
3. Explain theshippingprocess, key decisions that need to be made and threats to that process, and describe the controls that can be used to mitigate those threats.
4. Explain thebillingprocess, key decisions that need to be made and threats to that process, and describe the controls that can be used to mitigate those threats.
5. Explain thecash collectionsprocess, key decisions that need to be made and threats to that process, and describe the controls that can be used to mitigate those threats.

Integrative CaseAlpha Omega Electronics

Alpha Omega Electronics (AOE) manufactures a variety of inexpensive consumer electronic products, including calculators, digital clocks, radios, pagers, toys, games, and small kitchen appliances. Like most manufacturers, AOE does not sell its products directly to individual consumers, but only to retailers.Figure12-1shows a partial organization chart for AOE.

Linda Spurgeon, president of AOE, called an executive meeting to discuss two pressing issues. First, AOE has been steadily losing market share for the past three years. Second, cash flow problems have necessitated increased short-term borrowing. At the executive meeting, Trevor Whitman, vice president of marketing, explained that one reason for AOE's declining market share is that competitors are apparently providing better customer service. When Linda asked for specifics, however, Trevor admitted that his opinion was based on recent conversations with two major customers. He also admitted that he could not readily identify AOE's 10 most profitable customers. Linda then asked Elizabeth Venko, the controller, about AOE's cash flow problems. Elizabeth explained that the most recent accounts receivable aging schedule indicated a significant increase in the number of past-due customer accounts. Consequently, AOE has had to increase its short-term borrowing because of delays in collecting customer payments. In addition, the Best Value Company, a retail chain that has been one of AOE's major customers, recently went bankrupt. Elizabeth admitted that she is unsure whether AOE will be able to collect the large balance due from Best Value.

Figure12-1Partial Organization Chart for Alpha Omega Electronics

Figure12-1Full Alternative Text

Linda was frustrated with the lack of detailed information regarding both issues. She ended the meeting by asking Elizabeth and Trevor to work with Ann Brandt, vice president of information systems, to develop improved reporting systems so that AOE could more closely monitor and take steps to improve both customer service and cash flow management. Specifically, Linda asked Elizabeth, Trevor, and Ann to address the following issues:

1. How could AOE improve customer service? What information does marketing need to perform its tasks better?
2. How could AOE identify its most profitable customers and markets?
3. How can AOE improve its monitoring of credit accounts? How would any changes in credit policy affect both sales and uncollectible accounts?
4. How could AOE improve its cash collection procedures?

The AOE case shows how deficiencies in the information system used to support revenue cycle activities can create significant problems for an organization. As you read this chapter, think about how a well-designed information system can improve both the efficiency and effectiveness of an organization's revenue cycle a..2@0:86.2

Case 12.1(page 391) - Research Project: How CPA Firms are Leveraging New Developments in IT: In two to three pages, two-to-three page report that explains the benefits of the new technology( cost reduction, revenue increases, customer attraction and retention) and how the firm mitigates any new threats associated with that technology.