Summary Catch Up (Midterm 2) Part 1

Continuing on with our discussion of the revenue cycle, next is shipping, which is best done by someone outside of the warehouse. If the shipping clerk thinks everything is OK, they remove the items from on-hand inventory, and print out the two main shipping documents, a packing slip and a bill of lading. The packing skip authorizes the shipment for final release of the finished goods, and it communicates to the customer what is in the box. The bill of lading identifies responsibilities for the item while it is in transit with a 3rd party delivery company, which is really important for revenue recognition purposes.

Shipping needs to send a copy of the bill of lading (or packing slip if there isn't one) to the billing department so that the invoicing process can start. Invoicing is done by taking the price and term details from the sales order, and quantities from the bill of lading. We also walked through an alternative approach to invoicing that is known as evaluated receipts settlement (ERS), where companies agree on an arrangement with their customers that they won't send out invoices at all, but the customer agrees to pay the sales order order price for the number of items they receive after a specified number of days.

We also have to update our accounts receivable records when we bill - this is done by an A/R clerk.

There are two approaches to billing. The open invoice method involves sending bills one at a time, and the balance forward method groups a series of transactions together in once monthly statement (I called this the Mastercard approach). When a company uses the balance forward method, they often will use cycle billing to have a more uniform flow of cash.

When people return products, they need to be processed by the receiving clerk, and then the credit manger makes a decision on whether to issue a credit memo that authorizes a reduction in the customer's A/R subsidiary ledger balance. If a customer doesn't end up paying at all, the credit manager makes the decision on whether or not to write-off the balance, but we don't tell the customer if that is the way we want to go because they may have a change of heart someday.

The last step in the revenue cycle is cash collections. We have to take in customer payments and make deposits, update the A/R subsidiary ledger accounts to reflect the payments (known as cash application), and make decisions regarding whether or not it is time to write-off a balance.

There are several approaches to collecting cash, but I focused on two of them. The first is where the company processes customer payments on their own. In this case, the invoice will request that companies send a remittance advice along with their payment (the top part of the invoice usually). When the mail is opened, the mailroom clerk compiles the remittance advices and sends them to the A/R clerk to make updates to the subsidiary ledger, and sends the checks to the cashier. Each party is then going to add up their transactions, and make sure they are the same. If the total of remittance advices is different than the deposits made to the bank, we may have a problem.

The other primary approach involves the use of a lockbox. This is where the company outsources the processing of customer payments to their bank. Banks set up a post office box that customers send payments to, and then they deposit checks as they come in, and notify the firm about payments received.

The process of "finding a home" for customer payments is known as cash application. This involves giving the right customer credit for the payments they make. If a company uses a lockbox, it is pretty common to have an automated interface between banks and firms that allows for automated cash application. Systems will usually be configured to general an unapplied cash report listing out the payments received for which the bank was not able to find a home for. Someone in A/R is going to need to investigate these.