The Expenditure Cycle:

Purchasing to Cash Disbursements

Chapter 13

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Learning Objectives
Explain the basic business activities and related
information processing operations performed in
the expenditure cycle.
Discuss the key decisions to be made in the
expenditure cycle, and identify the information
needed to make those decisions.
Identify major threats in the expenditure cycle, and
evaluate the adequacy of various control
for
Copyrightprocedures
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Inc. dealing with those threats.

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Basic Expenditure Cycle Activities

Order materials, supplies, and services

Receive materials, supplies, and services
Approve supplier (vendor) invoice
Cash disbursement

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Order Goods (Materials/Supplies) or

Services Processing Steps
Identify what, when, and how much to purchase
Source document: purchase requisition

Choose a supplier
Source document: purchase order

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Ordering Goods/Services
Threats

Controls

1.

1 a. Perpetual inventory system

b. Bar-coding, RFID
2 a. Review and approval of
purchase requisitions
3 a. Price lists
b. Competitive bids
4 a. Use approved suppliers
5 a. Monitor supplier
performance
b. Require quality certification
6 a. Purchase from approved
suppliers
7 a. Supplier audits
b. Prohibit gifts

2.
3.
4.
5.
6.
7.

Stockouts and excess

inventory
Purchasing items not needed
Purchasing items at inflated
prices
Purchasing goods of poor
quality
Unreliable suppliers
Purchasing from
unauthorized suppliers
Kickbacks

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Receiving Process
Goods arrive
Verify goods ordered against the purchase order
(what, how much, quality)
Source document: receiving report

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Receiving Goods or Services

Threats

Controls

1.
2.
3.
4.

1 a. Authorized purchase orders

needed before receiving
goods
2 a. Bar codes or RFID
3 a. Budget controls and audits
4 a. Restrict physical access to
inventory
b. Document all inventory
transfers
c. Segregate custody vs.
receiving of inventory
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Accepting unordered items

Mistakes in counting
Verifying receipt of services
Inventory theft

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Approve Supplier Invoice and Cash

Disbursements
Match the supplier invoice to:
Purchase order
Receiving report
supplier invoice + purchase order + receiving report = voucher

Approve supplier invoice for payment

Source document: disbursement voucher

Pay vendor

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Approve Supplier Invoice

Threats

Control

1. Errors in supplier invoice

2. Mistakes in posting to
accounts payable

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1 a. Verify invoice accuracy

2 a. Data entry edit controls
b. Reconcile detailed accounts
payable records to the
general ledger accounts
payable account
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Cash Disbursements
Threats

Controls

1.
2.
3.
4.
5.
6.

1 a. File invoices by due date to

take advantage of discounts
2 a. Match supplier invoice to
supporting documents
(purchase order, receiving
report)
3 a. Pay only original invoices
b. Cancel supporting document
when payment is made
4 a. Physical security of checks
b. Separation of duties
c. Reconcile bank accounts
5 a. Check Protection machines
6 a. Cash flow budget
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Failure to take discounts

Pay for items not received
Duplicate payments
Theft of cash
Check alteration
Cash flow problems

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Key Terms
Expenditure cycle
Economic order quantity
(EOQ)
Reorder point
Materials requirement
planning (MRP)
Just-in-time (JIT) inventory
system
Purchase requisition
Purchase order
Blanket purchase order
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Vendor-managed inventory
Kickbacks
Receiving report
Debit memo
Voucher package
Nonvoucher system
Voucher system
Disbursement voucher
Evaluated receipt settlement
(ERS)
Procurement card
Imprest fund

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