EDNA Vlog

Not every company has the same revenue and collection cycle. Thus, the auditor needs to get an overview of the various activities that make up the company’s revenue and collection cycle. Let’s assume the company is a manufacturer that sells goods on credit. The revenue and collection cycle would consist of 5 steps:1. Receiving and processing customer orders2. Approving credit3. Delivering goods and services4. Billing customers and managing accounts receivable5. Collecting and depositing cashStep 1: Receiving and processing customer ordersThe revenue and collection cycle begins with a customer order being entered into the company’s system. The order could be generated through the company’s website, through the mail, or when a customer walks into the company’s business. Think about ordering a pizza from Domino’s: you could place an order by calling on the phone, walking into the store, or going to the company’s website or app.Step 2: Approving creditIf the company makes sales on credit, it should have a process for evaluating customers’ creditworthiness. The credit approval process should ensure that:• The customer is creditworthy (bad credit risks lead to bad debt)• The customer doesn’t exceed the credit limit without approval• The customer isn’t already delinquent• The customer actually exists (no fictitious sales)If the company relies on third-party credit (credit cards such as Visa) the risk of nonpayment shifts to a third party in exchange for a processing fee. This is treated as a cash sale as the company isn’t granting credit to the customer and is instead receiving payment from the third party.Step 3: Delivering goods and servicesManufacturers typically keep inventory in a warehouse. The inventory is transferred to the shipping department when a shipping order has been authorized. The chain of custody is important; employees should be required to sign forms when they receive or release inventory. The company would thus know which employee to speak with if inventory were to go missing.When a carrier arrives to pick up the inventory for shipment/delivery, the carrier will sign a form called a bill of lading. The carrier is acknowledging receipt of the inventory and that the goods have been shipped. A packing slip (a form that describes the goods being shipped) is usually included with the shipment. Step 4: Billing customers and managing accounts receivableWhen a shipment is completed, the company should:• File a shipment record• Notify billing so they can send an invoice to the customerThe sales invoice is a bill sent to the customer that says the amount due and payment terms. The company should make sure the sales invoice includes authorized prices and terms. Many companies have a price list master file that shows the prices for its products. Unauthorized people shouldn’t have access to the price list because they could make price changes that affect customer billings.Upon shipment, the company should also record sales revenue and an account receivable.Step 5: Collecting and depositing cashThe company should deposit checks and cash received from customers on a daily basis. The journal entries to record cash receipts should be reflected in a corresponding reduction of the receivable for the correct customer. The company can check whether cash is being received and recorded by sending periodic statements to customers, as the customer will gladly point out any discrepancies. — Edspira is the creation of Michael McLaughlin, an award-winning professor who went from teenage homelessness to a PhD. Edspira’s mission is to make a high-quality business education accessible to all people.— SUBSCRIBE FOR A FREE 53-PAGE GUIDE TO THE FINANCIAL STATEMENTS, PLUS: • A 23-PAGE GUIDE TO MANAGERIAL ACCOUNTING• A 44-PAGE GUIDE TO U.S. TAXATION• A 75-PAGE GUIDE TO FINANCIAL STATEMENT ANALYSIS• MANY MORE FREE PDF GUIDES* http://eepurl.com/dIaa5z— GET CERTIFIED IN FINANCIAL STATEMENT ANALYSIS, IFRS 16, AND ASSET-LIABILITY MANAGEMENT * https://edspira.thinkific.com — LISTEN TO THE SCHEME PODCAST * Apple Podcasts: https://podcasts.apple.com/us/podcast/scheme/id1522352725 * Spotify: https://open.spotify.com/show/4WaNTqVFxISHlgcSWNT1kc * Website: https://www.edspira.com/podcast-2/ — GET TAX TIPS ON TIKTOK * https://www.tiktok.com/@prof_mclaughlin — ACCESS INDEX OF VIDEOS * https://www.edspira.com/index — CONNECT WITH EDSPIRA * Facebook: https://www.facebook.com/Edspira * Instagram: https://www.instagram.com/edspiradotcom * LinkedIn: https://www.linkedin.com/company/edspira — CONNECT WITH MICHAEL * Twitter: https://www.twitter.com/Prof_McLaughlin * LinkedIn: https://www.linkedin.com/in/prof-michael-mclaughlin — ABOUT EDSPIRA AND ITS CREATOR * https://www.edspira.com/about/