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What Are Financial Transaction Cycles - Video Slides 1-19 (8m:38s)

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Slides 1-3 (:51s): Welcome to Introduction to Accounting Preparing for a User’s Perspective
What are the key financial transaction cycles found in most businesses and how does accounting facilitate them?

Managers utilize the management cycle to help an organization achieve its objectives. Much of the information that management uses to properly carry out the management cycle comes from its accounting information system. The accounting information system comprises inputs, processes and outputs to identify and analyze, record, summarize and prepare managerial and financial accounting reports based on the data and transactions captured in the company’s financial transaction cycles.

Slide 4 (:54s) Let’s dissect the term financial transaction cycle.

“Financial” means it involves the financing of the company’s resources (i.e. its assets).

“Transaction” means that something is given as an output and something is received as an input.

“Cycle” means that a recurring process exists. For example, the water cycle is a recurring process because water evaporates, condensates, precipitates, runs off and then starts over again at evaporation.

So, financial transaction cycles involve the recurring giving and receiving of resources and the accounting for such to help develop reports for use by internal and external parties.

Slide 5 (:52s) Most businesses have the following key financial transaction cycles that either directly or indirectly impact their cash account.

As you can see, information flows from one transaction cycle to another. Properly designed, implemented, and functioning accounting information systems should facilitate the information transfer between the various cycles.

Please note that Cash is a resource, it is not a financial transaction cycle. Cash is shown on the cycle diagram to help you see how the cycles directly or indirectly impact it.

Slide 6 (:42s) Cash is the lifeblood of a company's financial transaction cycles. When companies run out of cash, they are often unable to make required payments to suppliers and other creditors. This inability to pay suppliers and other creditors can create a ripple effect that will shut down all of a business’ transaction cycles and shut down the business. For this reason, one of the Chief Financial Officer’s (CFO's) major responsibilities is to manage the timing and amount of a company's cash inflows and outflows. CFOs should understand a company’s financial transaction cycles and their impact on the company’s cash flows.

Slides 7 (:37s) For example, CFO’s should know that they receive cash inflows from the capital acquisition and repayment cycle and the sales and cash receipts cycle.

They should also know that their cash outflows are caused by the personnel and payroll, purchases and payments, and capital acquisition and repayment cycles.

And, even though the inventory and warehousing cycle does not have a direct impact on the cash account, good CFO’s realize that it indirectly impacts both cash inflows and outflows as inventory is purchased into and sold out of the warehouse.

Slide 8 (:15s) Next we will provide a short summary of what each cycle does. As you read the descriptions try to see how each cycle is actually made up of a set of inputs, processes and outputs.

Slide 9 (:26s) The purchases and payments cycle is summarized fairly well in the following diagram from the Chartered Institute of Purchasing & Supply.

Slide 10 (:55s) The inventory and warehousing cycle is directly affected by the purchases and payments cycle because that is where the raw materials inventory (for manufacturers), or finished goods inventory (for wholesalers and retailers) is purchased and paid for. When suppliers deliver the inventory, it is received and stored until it is moved into production along with direct labor (from the personnel and payroll cycle) and manufacturing overhead (from the purchases and payments cycle), until the finished goods are then sold. Once the goods are manufactured and sold to customers, the sale will be processed in the sales and cash receipts cycle. The word warehousing comes from the fact that inventory is often stored in a warehouse. People who are experts in improving this cycle’s efficiency and effectiveness are considered to be experts in supply chain and logistics management.

Slide 11 (:31s) The personnel and payroll cycle manages all hiring, paying, and terminating of employees. Therefore within it, it has processes to ensure it hires the appropriate people, ensures they are properly trained and evaluated, and retains key employee data, such as name, address, etc. This cycle receives the funds for payment from the cash account and sends labor-related data to the inventory and warehousing cycle to be included in the cost of inventory.

Slides 12-14 (:34s) The sales side of the sales and cash receipts cycle includes the receiving of customer orders, shipping of goods, billing of customers and recording of sales in the sales journal and the customer-specific receivables ledger. The cash receipts side of the cycle includes the receiving of customer payments and the updating of the related accounts receivable and cash accounts.

Sometimes customers return goods as can be seen here, so the sales and cash receipts cycle also deals with sales returns which reduce the amount that customers owe.

Slide 15: In addition, sometimes customers simply don’t pay the amounts they owe, so in the cash receipts cycle, management will estimate and record an amount for expected non payments and deal with actual non payments.

Slide 16: (:25s) The capital acquisition and repayment cycle includes the cash inflows resulting from the borrowing of capital from external parties such as creditors and investors. It also accounts for cash outflows to creditors when they repay the principal amounts borrowed and pay for interest. Cash outflows to investors are also recorded when capital is returned to owners or when profits are paid out to them in the form of dividends.

Slide 17 (:53s) How does accounting facilitate the financial transaction cycles?
A company’s accounting information system (AIS) is essential to the proper functioning of the financial transaction cycles discussed thus far. As noted previously, well-designed, implemented and properly functioning accounting information systems do not only track monetary information (i.e. dollar amounts), but also non-monetary information (i.e. names, addresses, buying preferences, etc.) as well.

The sheer volume of data that modern AIS capture has opened up a new field of opportunity for data-driven individuals called “data mining”. In short, a “data miner” uses statistical analytical tools to dig into a company’s database to discover more about their customers, suppliers and employees to help the company improve its efficiency and effectiveness.

Slide 18 (:50s) For example, one grocery store decided to create an aisle in its stores so that the items men most often purchased together were displayed closer together. You can read more about this “man aisle” in the Atlantic Wire article dated July 26, 2012 titled “The Rise of the Grocery Store “Man Aisle”, Just for Man Things”. The point of the article was to indicate that products had been arranged to better help a given customer group (i.e. men) find and purchase the things they need such as soap, shampoo, razors, deodorant, chips, and jerky.

This example is just one of many of how accounting information not only facilitates the various financial transaction cycles, but also how the data captured in the cycles can be utilized to improve a company's overall financial health and profitability.

Slide 19 (:16s) You should now be familiar with the 5 most common transaction cycles of most businesses and understand how accounting helps facilitate those transactions and aids management in preparing managerial and financial reports. Good luck on the quiz.