Holmes Institute: HI5019 Bell Studio Expenditure Cycle Case Study

This case study report analyzes the expenditure cycle of Bell Studio, an Adelaide-based wholesaler of art suppliers. The report examines the purchases system, cash disbursement system, and payroll system, including their processes, risks, and internal controls. The study utilizes Data Flow Diagrams and system flowcharts to illustrate the systems. The report also identifies potential weaknesses and risks within each system, providing insights for the Chief Operating Officer to evaluate and improve the company's financial processes. The analysis covers the flow of goods, cash, and information, from initial purchase requisitions to cash disbursements and payroll processing, emphasizing the importance of internal controls to mitigate risks and ensure the efficiency and accuracy of financial operations.

Case Study – Bell Studio 1
CASE STUDY – BELL STUDIO REPORT ON THE EXPENDITURE CYCLE
Student’s Name
Student’s Code
Professor’s Name
Institution Affiliation
Date

Case Study – Bell Studio 2
Executive Summary
This paper is a report to the Chief Operating Officer in Bell Studio Organization, an
Adelaide-based wholesaler of art suppliers. The main aim of this report is to analyse
processes, risks and internal controls in the expenditure cycle. Considering the company’s
centralized accounting system with various networking terminals in different locations, this
paper composes an in-depth evaluation of the expenditure cycle process. In this rationale,
three systems that constitute the expenditure cycle will be discussed: purchases systems, cash
disbursement system and the payroll system before evaluating the risks of each system. The
first part of the paper will provide an overview of the reports and the conceptual systems Data
Flow Diagram (DFD) will be discussed in the second section. Afterward, the system
flowchart will be analyzed before the section that discusses the potential weaknesses and
risks of each system.

Case Study – Bell Studio 3
Table of Contents
Executive Summary...................................................................................................................2
Introduction................................................................................................................................4
Data Flow Diagram of Purchases and Cash Disbursements Systems........................................4
Purchase System.....................................................................................................................4
Cash Disbursement Systems..................................................................................................8
Data Flow Diagram of Payroll System......................................................................................9
System Flowchart of Purchases System...................................................................................11
System Flowchart of Cash Disbursements System..................................................................13
System Flowchart of Payroll System.......................................................................................14
Internal Control Weaknesses and Risks in Each System.........................................................15
Purchases System.................................................................................................................15
Cash Disbursement Systems................................................................................................15
Payroll Systems....................................................................................................................15
Conclusion................................................................................................................................16
References................................................................................................................................17

Purchasing
Department
Inventory
Warehous
e
Cash
Disbursement
Department
Monitor inventory
records
Updates inventory
records
Receives Goods
Prepares Digital
Purchase Order
Updates Inventory
Control Access
Updates AP Control
Access
Updates digital AP
subsidiary ledger
Valid Vendor File
AP Pending File
Vendor
Account
Payable
Department
Inventory Subsidiary Ledger
Receiving File
Digital purchase order records
Purchase order copy 1
Purchase order copy 2
Receiving reports copy
Receiving report copy 2
Sends invoice
Sends invoice
Inventory level
Case Study – Bell Studio 4
Introduction
The main objective of the expenditure cycles is to enable the conversion of the
company’s business cash, human resources and physical materials that enhance various
functions in the organization. In that regard, this paper analyses the expenditure cycle
(purchases systems, cash disbursement systems, and payroll system) in the Bell Studio
organization, including the evaluation of the relevant weaknesses and risks of the systems.
The main purpose of this report is to enable the Chief Operating Officer to evaluate the risks,
processes and internal controls for its expenditure cycle.
Data Flow Diagram of Purchases and Cash Disbursements Systems
Purchase System
Figure 1: Purchase System Data Flow Diagram
Inventory
Subsidiary
Ledger

Case Study – Bell Studio 5
The purchase system includes the purchase processing procedure that composes of the
relevant tasks fundamental for placing an order, receiving inventories, enhancing the
identification of inventory needs and evaluating the available liabilities. These tasks and their
relations are illustrated in Fig, 1 above. All these procedures are applicable in the retailing
and manufacturing sector in the company. However, the main difference defining the two
sectors is the manner in which various purchases are authorized (Adi and Kristin, 2014). The
manufacturing sector in the company purchases raw materials vital for production, whereby
their purchasing decisions are approved by the control functions and production planning.
The merchandise sector in the company purchases finished goods for reselling and the
inventories control function provides the purchasing approval in this sector.
The process of monitoring inventories records is facilitated when the company
depletes is inventories through the transfer of materials in the production stage. This is the
conversion cycle and the reselling of finished goods to the consumers through the revenue
cycle. The inventory controls records and monitors the finished products and their inventory
levels. Upon the drop in the level of inventories and the predetermining reordering point,
there is a need for the purchasing clerk to prepare the purchase order function, which will
initiate the purchasing process.
Thereafter, a purchase requisition is fundable and varies in different organizations.
Typically, the company will facilitate and prepare a discrete purchase requisition for various
inventory items where need be (Fauzi and Setyawan, 2018). Resultantly, multiple purchasing
requisitions may be evidently for an available vendor and these requisitions need to be
combined into one purchasing order before it is sent to the vendor. This form of the system
allows each purchasing order to be linked to more than one purchase requisitions.

Case Study – Bell Studio 6
The preparation of the purchase order function obtains the purchasing requisitions,
organized by the vendor whenever needed. Afterward, the Purchase Order (PO) copy is
designed for the respective vendors as indicated in the Data Flow Diagram (DFD) in Fig 1.
Additionally, another copy is transferred to the purchasing department for set-up of the
Account Payable (AP) functions meant for temporary filing of the AP pending files.
Therefore, a blind copy of the file is then sent to Receiving Goods functions.
Many companies experience a time lag between receiving goods and placing an order.
During this stage, various PO copies will be included in the temporary files in the account
payable department, and no economic aspect is executed. At this juncture, the Bell Studio
organization has not yet received any inventories or incurred any financial obligations. In that
regard, there is no need for facilitating the making of formal entries in the accounting records
(Fedaghi, 2014). Nonetheless, the company may decide the make a memo entry in reference
to the pending inventory-related obligation and receipts.
The next stage in the cycle will involve the receipt inventories whereby goods arrive
and the receiving report is prepared. These goods are then reconciled with the packing slip
and Digital Purchase Order (DPO). The copies of the document include the data on the
quantity and prices of the items received. The main purpose of these documents is to enable
the receiving clerk to inspect and count inventories before drafting the receiving report.
Mostly, the receiving department is busy and their staff as subjected to the pressure of
unloading the delivery vehicles or signing lading bills (Gautam, 2010). In such cases, the
receiving clerk will only be provided with the relevant data on item quantity and accept
delivery of products in reference to the provided data.
In the cycle, the next stage in the provision of update regarding the inventory record.
Relative to the inventories valuation technique, the inventories controls technique varies in

Case Study – Bell Studio 7
different organizations. A company that utilizes a standardized cost framework may execute
its inventory at a predetermined standardized figure irrespective of the charges being paid to a
given vendor (Bhoite, 2012). Presenting a standardized inventories ledger necessitates the
relevant data regarding the quantity attained. Since the receiving reports contain the item
quantity data, this file serves this purpose. Thus, updating the main cost inventory ledger
necessitates more financial data from the inventory warehouse. During the process of this
transaction, accounts payable needs a set-up. The AP function receives this setting the
temporary files of the receiving report and the PO is filed. The Bell Studio organization has
received these inventories from the respective vendors and realized its obligation to pay for
the received goods.
To end the process, the accounts payable clerk needs to evaluate the exact valuation
of the obligation up to the time the invoice is received (Hooshyar, Yusop, and Horng, 2015).
When the estimate is materially improper, an adjustment of the entry needs to be undertaken
to rectify the mistakes, Since the receipt of the received invoice trigger AP techniques and
processes, clerks need to evaluate all the liabilities that have not been recorded during the
time-end-closing. Upon the arrival of the inventories, the AP clerks reconcile the relevant
financial data with the PO and the receiving report in the available pending file. This is
known as three-way matching that verifies the quantity that has been obtained and its
respective prices (Jarrah, 2018). During this moment, the clerk progressively updates the
Digital Account Payable (DPO) subsidiary ledger, Account payable controls account and the
inventories controls account in the general ledger. Lastly, an involve, PO and receiving report
are then transferred

AP Department
Updates
Documents
Document Receipts
Identification
of Liability
Due
Treasurer
Vendor
Preparation of
cheque for an
invoice account Signature
Mailing
Receiving
Receiving Report File
Invoice FileCheque Copy
Case Study – Bell Studio 8
Cash Disbursement Systems
Figure 2: Cash Disbursements Systems Data Flow Diagram
In the expenditure cycle, the evaluation of cash disbursement flow is vital. When the
clerk receives the receipt of the relevant documents from the Account Payable Department,
the filling is done awaiting the due dates of the payments. When the date arrives, the clerk is
tasked with the obligation to prepare a cheque referenced to the invoiced account. This is
cheque is then sent to the company's treasurer for signing and mailing to the vendor.
Afterward, updating the cheque registers, AP subsidiaries ledger, and the AP control account
is then done from the computer terminal. Lastly, the records are then sent to the receiving
department for filing of the invoices, receiving reports, cheque copies and PO copies.

Prepares cash
disbursement
vouchers
Payroll DepartmentEmployees Time Cards
Supervisors
Central Payroll SystemTime Card data
Payroll register
Payroll register
Supervisor
AC Department
Write ChequesCheque file
Imprest bank
General ledger
department
Cheque file
Department Employees
Reviews and submits
Hour’s records
Digital Employee Record
Reviews and submits
Deposits
Reviews
Check
Case Study – Bell Studio 9
Data Flow Diagram of Payroll System
Figure 3: Payroll System Data Flow Diagram
The payroll system in the Bell Studio is designed to allow the employees to fill in the time
cards which collect data concerning the number of hours worked. The information in the time
cards is then evaluated and review by the supervisors who then forward the data to the payroll

Case Study – Bell Studio 10
department. The payroll system is referenced from the central payroll system that is located
in the data processes department from which the clerk inputs data and prints copies of a
paycheque, payroll registers, and digital employees' records. From the payroll department, the
clerk possibly files the time cards and sends the employees' payment cheques to the
supervisors for distribution and review. Afterward, the clerk sends a copy of the payroll
register to the AP department and the other composed of the time cards to the payroll
department.
The AP clerks then review the register and prepare the cash disbursement voucher manually.
Afterward, the clerk then sends the payroll register and the voucher to the general ledgers
department and the AP clerk writers a cheque for the payroll and then deposits the cheque in
the imprest account at the Bank.

Case Study – Bell Studio 11
Figure 4: System Flowchart of Purchases System
The system’s flowchart composes of the inventory control whereby the inventory level is
monitored (Zhang and Fang, 2013). During the drop of the predetermined reordering point,
the clerk drafts a purchasing requisition whereby one copy is transferred to the purchasing
department of the other of sent to the available purchase requisition file (Milan, Bebber and
Eberle, 2015). It should be noted that the provision of the authorization controls in the
inventories controls department is separated from the purchasing department that executes the
transactions.
This process follows the purchase requisition, sorting by vendors and preparation of the PO
for every vendor in the purchasing department. During this stage, two copies of the purchase

Case Study – Bell Studio 12
orders are transferred to the vendor and the PO copy is transferred to the inventory control for
filing with available purchasing requisition. The goods that originate from the vendors are
then reconciled with the blind copies of the PO. When the physical counting and inspection
process is complete, the receiving clerk then prepares different reports that state the condition
and quantity of the inventories (Nakamoto, 2017). One of the copies of the receiving reports
is sent to the inventory department accompanied by the physical inventory. The remaining
copy is transferred to the purchasing department and the clerk is then able to reconcile it with
the available PO.
In the accounts payable department, the clerk receives the arriving invoice whereby the
information is reconciled with the available pending document file. Thereafter, a record of
the relevant transactions in the journal purchases and points, including the AP subsidiary
ledger is then prepared. This follows a record of the liabilities, whereby the clerk sends the
sourced documents, receiving reports and available voucher payable files. During this stage,
an update of the digital account payable subsidiaries ledgers is done, including the AP
controls account and the inventories control accounts in the DL department from the
computer terminal. Lastly, the clerk transfers the invoices, PO copies and receiving reports to
the cash disbursement department.