Case Study of Adam and Co

The managing director of the firm is concerned about the effectiveness of the current business cycle procedure of the firm, where do the weaknesses of the system lie, so that necessary actions can be taken to make the internal control system robust and work better. This report comprises of the present state of efficiency in the systems, namely cash disbursement system, purchase system, and payroll system of the firm, discussion about their weaknesses and some corrective actions necessary to make the internal control system robust.

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Running Head: REPORT ON EXPENDITURE CYCLE OF RETAIL FIRM
Case Study
Expenditure Cycle of Adam and Company
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REPORT ON EXPENDITURE CYCLE OF RETAIL FIRM
EXECUTIVE SUMMARY
Adam and Co is a Perth based industrial supply wholesaler. The managing director of the firm is
concerned about the effectiveness of the current business cycle procedure of the firm, where do
the weaknesses of the system lie, so that necessary actions can be taken to make the internal
control system robust and work better. This report comprises of the present state of efficiency in
the systems, namely cash disbursement system, purchase system, and payroll system of the firm,
discussion about their weaknesses and some corrective actions necessary to make the internal
control system robust. The report is based on review of findings, comments, opinions of subject
experts, and the same has been duly recognized by insertion of references in text, and a full list
of works cited at the end.

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REPORT ON EXPENDITURE CYCLE OF RETAIL FIRM
Introduction
Cash is the life-line of any business organization, hence deserves special attention respected with
its control in flows. The objectives of such control are to plug the leakage in its flow, prevent
unnecessary blockade of cash resulting in opportunity cost, and ensure availability of cash to
avoid cash-dry situations. Achieving these objectives is vital for any business, especially for
retail businesses having multiple cash flow directions, in order to ensure that the scarce resource
is optimally utilized in business. Purchase system involves making purchase requisition on the
basis of stock levels, placing purchase order to the best available vendor, receiving inventory,
and authorization and payment to suppliers. Payroll system comprises of maintaining employee
work records and disbursing salaries. This report is constructed upon the existing expenditure
cycle and the systems in the cycle of Adam and Co. a wholesaler of industrial supplies in Perth.
The audience of this report is the managing director of Adam and Co., on whose behest the
report is prepared by the undersigned to evaluate the expenditure cycle procedure of the firm.
Expenditure Cycle
Expenditure cycle of a business has the objective of converting cash into physical resources like
inventory, and human resources. Human and physical resources are obtained by the business
entries mostly in credit with time lagged cash disbursement. Out-flow of cash to purchase these
resources take place after the resources are availed of by the firms. This makes the expenditure
cycle a two-way traffic; in the first phase resources are procured and in the second phase cash is
disbursed, each phase having different sub-systems (Klamm and Weidenmier, 2004).
Purchasing System of Adam and Co.
The purchasing system of the firm is initiated by a purchase clerk on the basis of information in
his computer terminal about the minimum level and reordering level of respective inventory
items. On the basis of such information the clerk places purchase orders to selected vendors.
After the goods are received, the same is inspected and checked with purchase order for quantity,
quality, and price, and then put in shelves in the stores department. Liability to disburse cash is

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REPORT ON EXPENDITURE CYCLE OF RETAIL FIRM
recognized when the goods are accepted by the purchasing department (Accounting Tools,
2018).
Effective Purchase System Flow-Chart
Robust purchasing system requires determination of different levels of inventory, like maximum
level, minimum level, and re-ordering level for each item. When the stock of a particular
inventory item reaches the reordering level, the store keeper places a purchase requisition to the
purchase department. On the basis of the requisition, purchasing department prepares purchase
order/s, sends the original to the vendor/s and copies to the accounts payable and inventory
departments, and keeps one copy in the purchase department. The accounts payable department
keeps the copy of the purchase order in the account payable inventory file. Another copy of the
purchase order is sent to the goods receiving department till the goods arrive (Power, Cassanego,
Subramanian, and Mo, 2016).
In order for smooth functioning of purchasing system, the procedure of purchase should start
from the inventory control department (Money Matter, 2018). The inventory department

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REPORT ON EXPENDITURE CYCLE OF RETAIL FIRM
possesses and sends necessary purchasing information like re-ordering quantity re-ordering level,
quality and rates of inventories, and addresses of listed vendors. On the basis of these
information, purchasing department is enabled to make best purchasing decisions.
Review of the purchase system of Adam and Co. reveals certain draw-backs. The purchase
department of the company places purchase orders on the basis of information contained in
inventory subsidiary ledger, instead of on the basis of requisition placed by the inventory clerk.
The inventory subsidiary ledger may not contain updated information about ground situation and
vendor credentials, resulting in either unnecessary purchase or delayed purchase which would
affect business operations of the firm. Adam and Co. should take note of this shortcoming and
reorganize the purchase system of the firm. Secondly inventory control and purchasing system of
the firm need to be managed with the help of established inventory control tools of inventory
levels. Minimum level is the level below which the stock of an inventory should not be allowed
to fall, to ensure smooth operations. Maximum level is the level above which the stock of an
inventory must not rise, to prevent capital blockade in inventory. Re-ordering level lies between
these two levels, at which orders will have to be placed, Re-ordering quantity also termed as
economic order quantity (EOQ) is the quantity to be ordered at a time, so that cost of carrying
plus the cost of ordering is minimum. All these quantities are determined on the basis of annual
demand, cost per unit, ordering cost of placing an order, and carrying or storage cost of
inventories (Trade Gecko, 2018). Establishing these levels and using them in the purchase
system would ensure better inventory control and more efficient utilization of resources by the
purchase department of the company.
The purchase department should send a blind copy of the purchase order to the goods receiving
department, so that the goods receiving clerk can check quantity of material with the purchase
order handed to him by the representative of the vendor carrying in the goods. In busy schedule,
the goods receiving clerk often does not physically check the quantity of inventory carried in,
before making the goods received report. Sending blind copy to the receiving department would
prevent such negligence.
Purchase System Flow-Chart of Adam and Co.

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REPORT ON EXPENDITURE CYCLE OF RETAIL FIRM
Vendor selection Digital purchase
order
Receiving deptt
Warehouse
Accounts deptt
Cash
disbursement
deptt
Digital accounts
payable subsidiary
ledger
Accounts payable
control ledger
Inventory control
account
Oopen Digital
PO and AP
files
Prepare cash
disbursement
Accounts
Cash
Identify
liabilities Supplier
Purchase and Cash Disbursement System Data Flow Diagram (DFD) of Adam and Co.

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REPORT ON EXPENDITURE CYCLE OF RETAIL FIRM
Cash Disbursement Flow-Chart of Adam and Co.

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REPORT ON EXPENDITURE CYCLE OF RETAIL FIRM
Accounts
payable
deptt.
Cash deptt. Treasurer
Vendor
Time card Payroll deptt. Digital employee
recirds
Supervisors
Accounts
payable
Bell Studio's
employees Time
card Payroll Supervisors
Disbursement
Cash Disbursement System of Adam and Co.
Cash disbursement system follows the purchase system in order to clear payment obligations
generated by the purchase system. The cash disbursement system is aimed at paying the right
vendor for the right quantity and quality at the right time. The system keeps a balance between
too early payments resulting in loss of interest earnings by the company, and too delayed
payments resulting in failure to obtain discount facility and loss of credentials of the company in
matters of meeting short term obligations (Cue, et al. 2017).
In this system the accounts payable department opens the accounts payable file to check the
creditors to be paid within a short time. Based on such information the accounts payable clerk
sends an approval the cash disbursement department. Clerk at the cash disbursement department
checks the vouchers sent by the accounts payable clerk for arithmetical accuracy of the amount
payable, and prepares cash disbursement vouchers.
The cash disbursement system of Adam and Co. follows the above mentioned procedure with
necessary control points. But the company has no system of authorization of payment by a
manager in the cash disbursement pr accounts department. Such authorization would prevent any
mistake in payment vouchers in the cash disbursement department (Uwonda and Okello, 2015).

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REPORT ON EXPENDITURE CYCLE OF RETAIL FIRM
Payroll System of Adam and Co.
Payroll of a firm consists of records of employee compensation including basic salary,
allowances, other payments, bonus, deductions, etc. Correct payroll system ensures payment to
right employee of the right amount and at the right time. Payroll system is a special type of
purchase system as the employers purchase services of the employees in lieu of cash. Purchasing
system has blanket application for all types of industries. But payroll system of firms differ from
one business to another depending upon whether the payment is made weekly, fortnightly, or
monthly (Kondrk, et al. 2016). Payroll system requires detailed and complex calculations to arrive
at the disbursement figures. The personnel department supplies employee compensation details
to the accounts department where salary sheets are prepared. The primary documents used by the
accounts department to prepare the salary sheets are job ticket and time card. Time card shows
the time the employee is present at the work place and the job ticket shows the time employees
spend on a particular job. These documents are sent by the personnel department to the payroll
section of the accounts department. One common fraud committed by employees is to provide
details of non-existent employees to the payroll section. To prevent this fraud, many firms use
paymasters for employee payment. Paymaster prepares salary checks independent of payroll
information. Whenever a paycheck is not claimed by genuine employees of the firm, the same
goes back to the Paymaster, who then returns the check to the payroll department. When this
happens, investigations can be made as to how the check reached unintended person (Khan,
2018).
The payroll registers are checked by the accounts payable department where payment vouchers
are prepared. The accounts payable clerk keeps records of the payment vouchers in the voucher
register and sends vouchers to the cash disbursement department. Copies of these vouchers are
then sent to the general ledger clerk. The cash disbursement department prepares a single check
for the entire amount and places it the company’s payroll imprest account.
Fund from general cash account is then transferred to the imprest account from where individual
cheques to the employees are handed out. A labour distribution summary is prepared by the cost
accounting department for posting in the general ledger. This summary is tallied by the journal
vouchers prepared by cash disbursement department and disbursement vouchers prepared by the

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REPORT ON EXPENDITURE CYCLE OF RETAIL FIRM
accounts payable department. The amounts I debit and credit in these documents must tally. If
any discrepancies arise the same must be investigated. If no discrepancy is found in those
documents, then the clerk responsible for preparing general ledger files the labour distribution
summary and the vouchers. The personnel department sends payroll authorization to the payroll
department. Production department sends information to the payroll department about hours
booked of employees. The information are cross checked by the payroll department and salary
cheques are distributed to the individual employees.
Payroll System Flow-Chart of Adam and Co.
Time card Payroll deptt. Digital employee
recirds
Supervisors
Accounts
payable
Employees
bank details Time
card Payroll Supervisors
Calculate pay
Calculate
deductions and
subtractions
Deductions
Employee pay
Depodit
employee
pay
Payroll System Data Flow Diagram of Adam and Co.

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REPORT ON EXPENDITURE CYCLE OF RETAIL FIRM
Bank details Supervisor Hard copies of paycheques
Payroll registers
Details
Pay deductions
Hours worked and rate
Employee payslip
Employee pay
Employees
bank details Time
card Payroll Supervisors
Calculate pay
Calculate
deductions and
subtractions
Deductions
Employee pay
Depodit
employee
pay
One shortcoming of the payroll system of Adam and Co. is that it does not have job ticket system
in practice. This may prove a cash leakage point in the firm’s payroll system. Job tickets show
the nature of job performed by an employee. If Adam and Co. has different grades of employees
for different jobs, then fraudulent employee may take this opportunity and claim higher pay.
The functions of payroll department include the function of personnel department as well. The
payroll department’s functions should be kept limited to making correct salary cheques for the
employees. But in case of Adam and Co. the functions of payroll department is burdened by the
responsibilities of the personnel department. As a result there is the glaring gap in the system in
that the current rates of pay and deductions cannot be checked. This might cause leakage of
valuable cash of the company.
Internal control system
The concept of business expenditure cycle, the generally accepted management techniques for
the purchasing system, cash disbursement system, and payroll system and the actual management

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REPORT ON EXPENDITURE CYCLE OF RETAIL FIRM
of the said systems of Adam and Co. are discussed in the foregoing sections of this report. A
succinct analysis has been made to get insight of the existing internal control system as reflected
by the purchasing system, payroll system, and cash disbursement system of the company. The
purchasing system needs a revisit in the light of some holes in the system, which has given rise
to risk and may prove costly in future in the form of weak liquidity position of the firm.
Purchasing procedure must be initiated by the inventory department as this gives real time data
to the purchasing department (De Mattei, and Emeth, 2016). For better management of the
purchasing system different quantitative measurements for the items are needed to be
established. The cash disbursement system requires managerial authorization of payment to bring
in greater control as the cash disbursement clerk presently depends upon the information
supplied by the payroll, and AP department to prepare disbursement cheques.
Conclusion
In this report the concept of business expenditure cycle, the best management techniques of the
purchase system, cash disbursement system, and the payroll system and the actual practice of
these systems by the management of Adam and Co. are discussed. Analysis of the actual system
in operation in Adam and Co. reveals certain shortcomings in the said systems. The purchasing
system of the company needs a revisit in order to plug certain loopholes which may result in
leakage of cash or opportunity cost of cash. The purchasing department should reorganize the
system to incorporate certain inventory management tools, tom provide real time data to the
purchase department. The cash disbursement system may be strengthened by introducing a
system of authorization of payment to suppliers by a manager. In the absence of separate
personnel department in Adam and Co., the functions of maintaining employee job and
compensation records and supplying information to the payroll department should be undertaken
by the directors to avoid any ghost payments.

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REPORT ON EXPENDITURE CYCLE OF RETAIL FIRM
References
Accounting Tools (2018). Expenditure Cycle. [online] Accessed from
https://www.accountingtools.com/articles/2018/12/28/expenditure-cycle on 20 September
2019
Cue, E., Kondrk, R., Gautier, P., Robbin, J. L., and Heller, D. (2017). U.S. Patent No. 9,715,500.
Washington, DC: U.S. Patent and Trademark Office.
De Mattei, M. A., and Emeth, S. (2016). U.S. Patent No. 9,289,018. Washington, DC: U.S. Patent and
Trademark Office.
Khan, R. A. (2018). Payroll Management System. [online] Accessed from
https://www.academia.edu/4898966/Payroll_Management_System on 20 September
2019
Klamm, B. K. and Weidenmier, M. L. (2004). Linking Business Process and Transaction Cycle.
American Accounting Association,18(2), 113 – 125.
https://doi.org/10.2308/jis.2004.18.2.113. [online] Accessed from
https://aaapubs.org/doi/abs/10.2308/jis.2004.18.2.113 20 September 2019
Kondrk, R. H., Martin, T. B., Robbin, J. L., Heller, D., and Wiese, M. (2016). U.S. Patent No. 9,406,068.
Washington, DC: U.S. Patent and Trademark Office.
Money Matter (2018). General purchase procedure of a company. [online] Accessed from
https://accountlearning.com/general-purchase-procedure-company/ on 20 September
2019
Power, M., Cassanego, D. E., Subramanian, H. K., and Mo, S. Y. (2016). U.S. Patent No. 9,483,783.
Washington, DC: U.S. Patent and Trademark Office.
Trade Gecko (2018). Inventory control (stock control). [online] Accessed from
https://www.tradegecko.com/inventory-management/inventory-control on 20
September 2019

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Uwonda, G. and Okello, N. (2015). Cash Flow Management and Sustainability of Small Medium
Enterprises (SMEs) in Northern Uganda. International Journal of Social Science and
Economic Invention, 25(2), 153 – 173. DOI https://doi.org/10.23958/ijssei/vol01-i03/02.
[online] Accessed from http://ijssei.in/index.php/ijssei/article/view/19 on 20 September
2019