The study focuses on defining expenditure cycle while covering the concepts of ordering and receiving goods along with the use of retailing and distribution link. Apart from that, a situation of a company named Fruito has been facing issues in the accounting process. Potential impact of the recognized threat will be described.
Expenditure cycle is defined as the set of actions and purchasing decisions. Expenditure cycle is considered as a repetitive process that is responsible for creating various purchased orders, ordered goods, receiving the products, approving invoices of the purchased items, and lastly paying the invoices. Every shoppers and companies while making purchase every time use expenditure cycle. It is used to buy the products and to compare the process of pricing and choosing the suppliers. Shoppers in the next time will make a purchase after choosing the appropriate mode of payment (Sueyoshi & Goto, 2013). Expenditure cycle of a company consists of few procedures. They are described in the following:
Purchasing Decision: Firms requires raw materials for production of goods and services. For purchasing the goods business owners will consider few things in terms of pricing and choosing right mode of payment.
Ordering Materials: Pricing is the next step after purchasing. After that, the company agent will confirm about the terms and conditions return policies and delivery times. The company agent will fill the order after confirmation (Kellermann & Jones, 2013).
Receiving Materials: After receiving the order, the purchasing agent will clear the invoice and will check about any discrepancies in terms of returns and credits.
Inventory and storage: Once the order is received, they are properly stored at the inventory. The excess materials are stored in the inventory or shipped to the warehouse in order to prevent deterioration and loss.
Payment: It is the last stage of the whole expenditure cycle, where company agent clears the payment and completes the whole expenditure cycle. Modes of payments include different forms of credits, checks and cash, etc. However, payments of the gods also include credits and cash for the damaged products and any other discounts or incomplete orders (Amoako, 2013).
Risks Faced by Fruito
Fruito is a company that deals with selling fruits and vegetables in its company owned shops and distributing the products into other local businesses such as hotels and restaurants. However, it is found that the company is facing risks while completing the whole processes of expenditure cycle. Fruito faces problems in terms of ordering the fruits and vegetables and receiving the products from its potential suppliers. Threats in ordering the products are discussed below:
- Ordering unnecessary items
- Purchasing inferior quality fruits and vegetables
- Purchasing from unauthorized suppliers
- Purchasing fruits at inflated prices
- Excess inventory and stock outs.
Threats related to receiving fruits are as follows:
- Receiving unordered fruits
- Theft of inventory
- Errors in terms of counting the received fruits and vegetables
These are the possible threats that are faced by Fruito in their process of operating the expenditure cycle. The risks will hamper the result of the whole expenditure cycle. The financial department of the company will face issue in calculating the profitability of the company. The risks are responsible for the decreased productivity of the company and supervising the accounts payable department of the company (Hall, 2012).
Potential impact of each threat
- Stock out or excess inventory can result into loss of the products. As fruits and vegetables are perishable products, hence they will perish early if excess amount of inventory is stored.
- Ordering unnecessary fruits will lead to rotten of fruits and loss of money. As there is a fixed rate of selling and distribution of the products, hence unnecessary items can not be stored for a long time.
- Purchasing fruits at inflated price leads to loss of money for the company (Davenport, 2013).
- Purchasing inferior quality of fruits and vegetables will ultimately leads to fast rotten of fruits along with diminished reputation from customers and clients. It will recur both monetary and non-monetary loss from all sides.
- Purchasing from unauthorized suppliers is a disadvantage in terms of quality of the fruits and vegetables (Amoako, 2013).
- In terms of receiving the ordered goods, receiving unordered goods will lead to increase of inventory at excess that will lead to loss of fruits and vegetables.
- Sometimes the purchasing agents can make error in counting the products during the time of delivery of the ordered goods from the supplier’s facility. Error in counting leads to loss of money as well as improper delivery of fruits to the retail shops as well as to clients.
- Theft of inventory is a problem of irregular delivery of products to the clients. Hence, the demand and supply of goods are not met properly (Zadek et al., 2013).
Reducing risk by implementation of control
Risks are reduced by the following implementation of control related to the particular risks.
- For stock outs and excess inventory, use of perpetual inventory method, supplier performance reports, periodical physical accounts, and sales forecasting & accurate inventory control.
- In case of ordering unnecessary items, databases of different divisions along with production reports must be integrated.
- At the time of inflation, catalogs of low cost fruits, checking prices of frequently used fruits, reviewing purchase orders, and performance review can be practiced (Collier, 2015).
- Reducing inferior fruits can be done by reviewing purchase orders, using approved list of suppliers.
- Unauthorized suppliers can be reduced by periodic review of the list of suppliers, and restriction of the access to list of suppliers (Belo et al., 2013).
- Accepting fruits on the approved purchased order will reduce unordered goods.
- Signature of the clerks and bar coding of the ordered fruits reduces errors in counting.
- Documentation of transfers of intra company, segregation of duties and securing storage locations will reduce theft in inventory (Hall, 2012).
An initial internal audit will be conducted to identify the threats in the process of ordering and receiving goods in the process of expenditure cycle. The audit has pointed out the above risks and their potential impact to the company in its business operations. Apart from that, proper implementation of controls is also recommended to the company for minimizing the risks.
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