Chapter 4: Accounting Information Systems And Business Processes: Part I

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Chapter 4 Accounting Information Systems And
Business Processes Part I

• Outline
• Business Process Fundamentals
• Collecting and Reporting Accounting Information
• Core Business Processes

• BUSINESS PROCESS FUNDAMENTALS
• AISs depend on the flow of data through various
  organizational subsystems.
• Effective transaction processing systems ensure
  capture of appropriate data and accurate
  information reporting.
• Transaction processing cycles group transactions
  related to an organizations business processes.

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Source Documents

• Most transactions (or business events) are
  initially recorded on source documents.
• Source documents manage the flow of accounting
  data in several ways
• dictate the kind of data to be collected
• encourage completeness of accounting data
• serve as distributors of information
• establish the authenticity of accounting data and
  ensure an audit trail
• Trend is toward image processing systems or
  paperless offices.

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Journals and Ledgers

• Accounting personnel record transactions in a
  journal.
• The journal is a chronological record of business
  events by account.
• A journal may be a general journal or a special
  journal.
• A general journal allows any type of accounting
  transaction to be recorded.
• A special journal capture specific types of
  transactions.

• Which of the following provides the
  organizational structure for the general ledger?
• Special journals.
• A source document.
• General Journals.
• The chart of accounts.

• A ledger may be a general ledger or a subsidiary
  ledger.
• A general ledger contains summary financial data
  concerning the status of assets, liabilities,
  revenues and expenses of a firm.
• A subsidiary ledger contains detailed records
  pertaining to a particular account in the general
  ledger.

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Trial Balance and Financial Statements

• Once an AIS records journal entries and posts
  them to the general ledger, it produces a trial
  balance.
• Three end of period trial balances are needed
• A preadjusting trial balance after all entries
  have been posted
• An adjusted trial balance after adjustments have
  been recorded and posted
• A postclosing trial balance after temporary
  accounts have closing entries have been recorded
  and posted.

• Financial statements are the primary output of a
  financial accounting system.
• These statements include
• Income Statement
• Statement of Owners Equity or Retained Earnings
• Balance Sheet
• Statement of Cash Flows

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Coding

• AISs depend on coding to record, store, classify
  and retrieve financial data.
• Computer systems most often use numeric codes or
  alphanumeric codes for processing accounting
  transactions.
• Purposes of coding
• uniquely identifies transactions and accounts
• compress data
• aid in classification process
• convey special meanings
• Design considerations in coding
• Codes should serve some useful purpose.
• Codes should be consistent.
• Codes should be standardized throughout the
  organization.
• Codes should plan for future expansion.

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Coding

• Types of Codes
• Mnemonic Codes give visible clues concerning the
  objects they represent.
• Sequence Codes are the simplest type of coding
  scheme that assign numbers or letters in
  consecutive order.
• Block Codes are sequential codes in which
  specific blocks of numbers are reserved for
  particular uses. A frequent use of block codes in
  AISs is in creating a chart of accounts.
• Group Codes reveal two or more dimensions or
  facets pertaining to an object.

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Case 4-12Novelty Gadgets Coding Design

• Novelty Gadgets is a marketer of inexpensive toys
  and novelties that it sells to retail stores,
  specialty stores, and catalog companies. As an
  accountant working for the company, you have been
  asked to design a product code for the company.
  In analyzing this problem, you have discovered
  the following
• The company has three major product lines (1)
  toys and games, (2) party and magic tricks, and
  (3) inexpensive gifts. There are major
  sub-products within each of these product lines,
  and the number of these categories is 25, 18, and
  113, respectively.
• The company has divided its selling efforts into
  five geographic areas (1) the United States, (2)
  the Far East, (3) Europe and Africa, (4) South
  America, and (5) International (a catchall area).
  Each major geographic area has several sales
  districts (never more than 99 per area). Between
  1 and 20 salespeople are assigned to each
  district.
• As noted earlier, there are major categories of
  customers, and certain customers can also
  purchase goods on credit. There are five
  different classes of credit customers and each
  rating indicates the maximum amount of credit the
  customer can have.
• Design a group code that Novelty Gadget could use
  to prepare sales analysis reports. Be sure to
  identify each digit or position in your code in
  terms of both use and meaning.
• Group Code for Sales Analysis L SSS
• Lproduct line code (mnemonic), where Ttoys and
  games, Pparty magic tricks, and Ggifts.
• SSSsubproduct code (sequence), from 001 to 025,
  018, or 113.

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COLLECTING AND REPORTING ACCOUNTING INFORNATION

• Design of an AIS begins by considering outputs of
  a system first.
• Outputs of an AIS include
• reports to management
• reports to investors and creditors
• files that contain transaction data (transaction
  files)
• files that contain current data about accounts
  (master files)

• Considerations in Report Design
• Usefulness in managerial decision-making without
  creating information overload
• Convenience of format
• Ease of identification
• (i.e. headings, dates, and page numbers)
• Consistency
• over time
• across departmental levels
• with general accounting practice

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Report Design Case

• The Best Sellers Book Company is a college
  textbook publisher. The companys operating data
  are centrally processed by its information
  processing department. Each company subsystem
  (production, marketing, accounting, finance, and
  personnel) receives computerized performance
  reports and has decision-making authority
  delegated from top management.
• In the past few months, the managers of most
  subsystems have been complaining about the
  criteria used by top management for evaluating
  their operating performances. The major complain
  has been the number of non-controllable items
  included within an individual subsystems
  performance report.
• You are one of the accountants working with the
  companys AIS and have been asked by top
  management to design and implement a
  responsibility accounting system for evaluating
  each subsystems monthly operating performance.
  You suggest to top management that a further
  improvement could be made in the companys
  performance reporting system if a
  management-by-exception structure were also
  incorporated into the new reporting system.
• You are currently analyzing the marketing
  subsystems March 2007 budget projection data
  compared with its actual cost performance during
  March under the companys old reporting system.
  The March 2007 performance report computer
  printout appeared as shown below.

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Report Design Case

• After familiarizing yourself with the delegated
  authority given the marketing subsystem managers
  by top management, you accumulate the following
  information.
• The marketing subsystem managers make their own
  decisions regarding the number of salespeople and
  clerical people to hire and how much to pay these
  employees.
• The marketing subsystem occupies the entire
  second floor of the companys building and has a
  separate electric utilities meter on this floor.
• The marketing subsystem managers have complete
  decision-making authority for all advertising
  expenditures associated with promoting textbook
  sales.
• Your next major task is to determine the
  variations from budget that should be considered
  significant. Through discussions with marketing
  subsystem personnel and top management, the
  following budget variability schedule is
  developed. Prepare a new report for the marketing
  subsystem, incorporating a management-by-exception
  reporting structure

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CORE BUSINESS PROCESSES

• An AIS
• collects and
• reports data related to business processes which
  are collections of activities that create value.
• Core business processes
• Sales process
• Purchasing process
• Resource management process
• Human resource management process
• Fixed asset management process
• Production process
• Financing process

• What is (are) a collection of activities or flow
  of work in an organization that creates value?
• An economic event.
• An accounting transaction.
• A business process.
• A chart of accounts.

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The Sales Process (Revenue Cycle)

• The revenue cycle begins with a customer order
  for goods or services and ends with the
  collection of cash from the customer.
• The primary objective in processing revenues is
  to achieve timely and efficient revenue
  collection.
• An organization that generates revenues, but
  fails to collect these revenues on a timely
  basis, may find itself in a position where it
  cannot pay its bills.
• Objectives of the Sales Process
• Tracking sales of goods and/or services to
  customers.
• Filling customer orders.
• Billing customers for goods and services
• Collecting payment for goods and services.
• Forecasting sales and cash receipts.

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Application Systems for the Sales Process
Shipping notice
Deliver the goods or services
Request payment for the goods or services
Shipping system
Billing system
Accounts Receivable ? Revenue ?
Inventory ? Cost of Goods Sold ?
Sales order
Sales invoice
Order entry system
Cash receipts system
Accounts Receivable ? Cash ?
Customers
Receive cash in payment
Receive a request for goods or services
Customer order
Payment
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Inputs Outputs of the Sales Process

• Inputs
• Sales Order - prenumbered and usually prepared in
  multiple copies used to prepare sales invoice
• Sales Invoice - prepared after shipment of goods
  or providing of a service
• Remittance Advice - serve as source document for
  credits to accounts receivable
• Shipping Notice - warehouse prepares after goods
  are released for shipment
• Debit/Credit memo - issued for sales returns and
  allowances debit memos increase amount customer
  owes

Outputs Financial Statement Information
Customer Billing Statement - includes customer
account activity such as sales, returns, and cash
receipts Accounts Receivable Aging Report -
contains data concerning the status of open
balances of all active credit customers arranging
the overdue amounts by time periods Bad Debt
Report - customer accounts written off. Cash
Receipts Forecast - all data gathered from source
documents in revenue transactions are inputs to
this forecast. Customer Listing Report - shows
customer codes, contacts, shipping and billing
addresses, credit limits, and billing
terms. Sales Analysis Reports - captures detailed
data about each sale in order to monitor sales
activities and plan production and marketing
efforts.
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The Purchasing Process

• The purchasing process begins with a request for
  goods or services and ends with the payment of
  cash to the vendor.
• Purchase may be for either goods or services and
  for cash or on credit.
• Objectives of the purchasing process
• Tracking purchases of goods and/or services from
  vendors
• Tracking amounts owed
• Maintaining vendor records
• Controlling inventory
• Making timely and accurate vendor payments
• Forecasting purchases and cash outflows

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Application Systems in the Purchasing Process
Receiving report
Recognizing an obligation to pay for the goods or
services
Receive goods or services
Receiving system
Voucher system
Accounts Payable ? Asset or Expense ?
Inventory ?
Purchase order
Voucher
Purchasing system
Cash disbursements system
Accounts Payable ? Cash ?
Vendors
Request for goods or services
Payment for the goods or services
Purchase order
Payment
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Inputs Outputs of the Purchasing Process

• Inputs
• Purchase Requisition - shows items requested by
  stores and may indicate the name of the vendor
• Purchase Order - based on purchase requisition
  but also includes vendor information and payment
  terms
• Vendor Invoice - includes items shipped by
  vendors, prices, shipping terms and discounts
  provided
• Receiving Report - reflects the count and
  condition of received goods
• Shipping notice - accompanies the goods being
  shipped
• Debit/Credit Memoranda - debits or credits
  Accounts Payable

Outputs Financial Statement Information Vendor
checks - should be supported by a voucher and
signed by a person designated by management Check
registers - list all checks issued for a
particular period Discrepancy reports - used to
identify any differences among quantities on the
purchase order, receiving report, and vendor
invoice Cash requirement forecasts - predict
future payments and payment dates by reference to
outstanding purchase order, unbilled receiving
reports and vendor invoices

• Which of the following reports is common to both
  the sales and the purchasing processes?
• Cash receipts forecast and cash requirements
  forecast.
• Financial statement information.
• c. Discrepancy and bad debts reports.
• d. None of the above.

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DFD of the Purchasing Process Purchases
Procedure
Supplier (vendor)
Inventory data
Acknowledgement
Requested items and quantities
Order data
Purchase order
Purchase Goods when requested
Open order
Inventory data
Supplier data
Supplier number, address, past purchases, etc.
Ordered quantities
Approved order
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DFD of the Purchasing Process Receiving
Procedure
Approved order
Supplier (vendor)
Received quantities
Shipped goods (with packing slip)
Inventory data
Receive Goods from supplier
Receipts
Purchases received
Receiving data
Supplier data
Receiving document
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DFD of the Purchasing Process Payables Procedure
Supplier (vendor)
Receiving document
Order data
Order quantities
Invoice
Approve obligation for payment
Open voucher and invoices
Payable data
Amount of obligation
Amount of Obligation
General ledger
Payable data
Approved payables
Payment details
Payment data
Process Payment
Account balances
Prepare accounting analysis and reports
Supplier data
Payable summaries
Payment
Payment summaries
Amount of Payment
Accountants and managers
Supplier (vendor)
Analysis and reports
General Ledger