 INCOME CYCLE:

 SALES and
 BILLING CASH

BUSINESS ACTIVITIES OF INCOME

CYCLE
 The income cycle is:
 A series of business activities and related information processing activities
that continue to recur by providing goods and services to customers and
collecting cash as payment for the sale

What are the four basic business activities

in the income cycle?
 What are the four basic business activities in the income cycle?
 1. Sales order entry
 2. Delivery
 3. Billing and Accounts Receivable
 4. Cash Billing

Sales order entries consist of three stages:

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 Sales order entries consist of three stages:

o Receive consumer orders
o Consumer credit checks and approvals
o Check inventory availability

 BUSINESS ACTIVITIES INCOME CYCLE: SALES ORDER ENTRY

The second basic activity in the income

cycle is to fulfill customer orders and
deliver the desired merchandise, this
process consists of two stages:
  The second basic activity in the income cycle is to fulfill customer orders
and deliver the desired merchandise, this process consists of two stages:
o Order collection and packing
o Order delivery

 BUSINESS ACTIVITIES INCOME CYCLE: DELIVERY

The third basic activity in the income cycle,

involves:
 The third basic activity in the income cycle, involves:
o Billing to customers
o Update accounts receivable data

 BUSINESS ACTIVITIES INCOME CYCLE: BILLING AND BUSINESS

RECEIVABLES

The fourth (final) step in the income cycle is

cash collection, involving:
 The fourth (final) step in the income cycle is cash collection, involving:
o Handling remittances from customers
o The money storage. at the bank

 BUSINESS ACTIVITIES INCOME CYCLE: CASH BILLING

INCOME CYCLE: IMPORTANT

DECISION
 The main purpose of the income cycle is to provide the right product at the
right place and time at the right price
o How can the company achieve this goal? management must make the
following important decisions:

INCOME CYCLE: IMPORTANT

DECISION
 To what extent and should the product be adapted to the needs and desires
of certain consumers?
  How much inventory must be available, and where should the inventory be
placed?
 How are goods shipped to consumers? Should the company carry out its
own shipping function or outsource it to third parties who specifically
handle logistics?

Should credit be offered to customers?

 Should credit be offered to customers?
 How much credit should be given to each customer?
 What credit terms should be given?
 How can customer payments be processed to maximize cash flow?

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 ENTRY SALES ORDER

 (Activity 1)

 This step includes all the activities involved in soliciting and processing
customer orders.
 Key decisions and information needs:
o decisions concerning credit policies, including approval of credit
o information about inventory availability and customer credit status
from the inventory control and accounting functions, respectively

Sales order entry function involves 3

activities:
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 Sales order entry function involves 3 activities:

 1. Responding to consumer requests
 2. Checking and approving consumer credit
 3. Checking inventory availability

 ENTRY SALES ORDER

 (Activity 1)

REQUIRED INFORMATION AND

PROCEDURES
  SIA must provide operational information needed to perform the following
functions:
o Respond to customer questions regarding account balance and order
status
o Decide whether certain customer credit can be added or not

When a customer's order is received, the

following is the edit check needed:
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 When a customer's order is received, the following is the edit check needed:
o Validity checks
o Completeness test
o Reasonableness tests
o Credit Approval:
 General authorization: Credit limits
 Special authorization: Limit checks

 ENTRY SALES ORDER

 (Activity 1)

The next step is to determine whether there

is enough inventory to fulfill the order
 The next step is to determine whether there is enough inventory to fulfill the
order
 The internally generated documents are produced by sales order entry:
o Sales order
o Packing slip
o Goods collection card

REQUIRED INFORMATION AND

PROCEDURES
 Determine inventory availability
 Decide on the credit period offered
 Determine the price of products and services
 Establish policies regarding sales returns and guarantees
 Choose a method for shipping goods
DELIVERY (Activity 2)
 Warehouse workers are responsible for customer orders filling by removing
items from inventory
 Important decisions and information needed:
o Determine the shipping method:
 In-house
 outsource

DELIVERY (Activity 2)
 Documents, records and procedures:
o Pick up card for printing, print by the sales order, the shipping
process and the products to remove from inventory
o The physical amount is compared to the quantity on the pickup card
and packing slip
o Several checkpoints are made and shipping documents are prepared

BILLING AND BUSINESS

RECEIVABLES (Activity 3)
 Two activities carried out at this stage:
o 1. Billing to consumers
o 2. Maintain consumer accounts
 Important decisions and information needed:
o Accurate billing is crucial and requires information identifying the
items and quantities shipped, prices, and special sales terms.

The sales invoice notifies customers of the

amount to be paid and where to send
payments.
 The sales invoice notifies customers of the amount to be paid and where to
send payments.
 A monthly statement summarizes the customers' transactions of their current
account balance.
 A credit memo authorizes the billing department to credit a customer's
account.
Billing system type:
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 Billing system type:

o In the postbilling system, tagging is prepared after confirmation that
the item has been shipped
o In a prebilling system, bills are prepared (but not sent) when the order
is approved.
 Inventories, receivables, and ledgers are updated at this stage .

 Billing and Receivables (Activity 3)

Account management method:

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 Account management method:

o Open invoice method
o Balance-forward method
 To get a more uniform flow of cash receipts, many companies use a process
called cycle billing.

 Collection and Receivables (Activity 3)

Information Needs and Procedures

 What examples of additional information should SIA provide?
o Response time to customer questions
o The time needed to fulfill and send orders
o Percentage of sales that require re-ordering
o Customer satisfaction
o Analysis of market share and sales trends
o Analysis of profitability based on product, customer, and sales area.

Cash Collection (Activity 4)

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 2 areas involved in this activity:

o Cashier
o Receivable function
Cash Billing (Activity 4)
 Important Decisions and Information Needs:
o The importance of reducing cash theft.
o The trade receivable billing function should not have physical access
to cash or checks.
o The function of accounts receivable must be able to identify the
source of a money transfer and the application invoice must be
credited.

Cash Billing (Activity 4)

 Documents, records and procedures:
o Checks are received and sent (saved).
o A list of remittances is prepared and entered on-line by the customer,
invoice number, and the amount of each payment .
o The system performs a number of online editing checks to verify the
accuracy of data entry.

Control: Objectives, Threats and

Procedures
 In the income cycle, a well-designed SIA must provide adequate controls to
ensure that the following objectives are achieved:
o All transactions have been authorized correctly.
o All recorded transactions are valid (actually happened).

Control: Objectives, Threats and

Procedures
o All valid, validated transactions have been recorded.
o All transactions are recorded accurately.
o Assets (cash, inventory, and data) are guarded from loss or theft.
o Business activities are carried out efficiently and effectively.

Threats and Procedures for Controlling

Sales Order Entry Applications
  Control procedures that can
 Threat
 applied

 1. Customer orders that

are incomplete or  Data entry edit checks
inaccurate

 2. Sales on credit to  Credit approval by the credit manager, not

customers who have bad by the sales function; accurate records of
credit records customer account balances.

 Signature on paper documents, digital

 3. Legitimacy of orders signatures and digital certificates for e-
business

 4. Out of stock,
warehousing costs, and  Inventory control system
price reductions.

Threats and Shipping Application Control

Procedures
 Control procedures that can
 Threat
 applied

 1. Error
shipping:  Reconciliation of sales orders with pick-up cards
 Brg. Dag. Wrong and packing slips; line code scanner; control data
 Wrong Amount entry applications
 Wrong address

 Limit physical access to inventory;

 Documentation of all inventory internal
 2. Inventory theft transfers; periodic inventory physical inventory
inventory and reconciliation calculation with the
amount recorded
Threats and Procedures for
Controlling Billing and Accounts Receivable
Applications
 Control procedures that can
 Threat
 applied

 Separation of shipping and billing functions;

 Numbering first all periodic shipping and
 1. Failure to
reconciliation documents; Reconciliation of
collect customers
collection cards and shipping documents with
sales orders

 Data entry edit control

 2. Error in billing
 Price list

 3. Error entering
data when  Reconciliation of accounts receivable subsidiary
updating accounts ledger; monthly reports to customers
receivable

Threats and Procedures for Cash Billing

Application Control
 Control procedures that can
 Threat
 applied

 Separation of duties; minimizing cash handling; lockbox

agreement; confirm authorization and storage of all
 1. Theft
receipts;
of Cash
 Periodic reconciliation of bank statements with records of
someone not involved in processing cash receipts

General Control Problems

 Threat
 Control procedures that can
  applied

 Backup and recovery procedures from

 1. Data loss
disasters; access control (physically and logically)

 2. Bad
 Preparation and review of performance reports
performance

Income Cycle Data Model

 The REA data model provides a method for designing databases that
efficiently integrate both financial and operational data.
 A simple REA data model for the acceptance cycle of a manufacturing
company must include information: 2 main resources (cash and inventory)
used in the acceptance cycle
 Two main sources (cash and inventory) are useful in the income cycle

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 Inventory

 (0, N )

 Inventory order

 Inventory
 fill order

 Inventory ship

 (0, N )

 (0, N )

 Partial REA diagram on

 acceptance cycle

 Revenue Cycle data model

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 Cash

 Deposits
  Collects
 cash

 (1, N )

 (1, 1)

 by

 Cashier

 (1, N )

 (1, 1)

 Partial REA diagram on

 acceptance cycle

 Revenue Cycle data model

Income Cycle Information Needs and Data

Models
 SIA is designed to collect, process, and store business activity data so that
management gets information to support decision making.

Income Cycle Information Needs:

Operational Data
 Operational data is needed to monitor performance and to perform the
following routine tasks:
o Respond to customer questions regarding account balance and order
status
o Decide whether certain customer credit can be added or not
o Determine inventory availability
o Choose a method for sending items

Income Cycle Information Needs: Current

and Past Information
  Past and current information is needed so that management can make the
following strategic decisions:
o Determine the price of products and services
o Establish policies regarding sales returns and guarantees
o Decide on the credit period offered
o Determine the need for short-term loans
o Plan a new marketing campaign

Income Cycle Information Needs:

Performance Assessment
 The SIA must also provide information needed to evaluate the performance
of the following important processes:
 Response time to customer questions
 The time needed to fulfill and send orders
 Percentage of sales that require re-ordering
 Customer satisfaction levels and trends
 Analysis of market share and sales trends
 Analysis of profitability based on product, customer, and sales area
 Sales volume in dollars and number of customers
 Effectiveness of advertising and promotion
 Sales staff performance
 Expenditures on doubtful loans and credit policies

Income Cycle Data Model

 Four major business activities in the income cycle (Orders, fulfilling orders,
shipping and cash collection)
 The primary external agent (customer) as well as various internal agents
involved in revenue cycle activities

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 Reference

 Romney, Marshall B., 2006, Accounting Information Systems, 9th Edition,

Book 1, Salemba Empat, Jakarta

 Income Cycle