CHAPTER 2 Production system

➢ involves the planning, scheduling, and control

TRANSACTION CYCLES
of the physical product through the
➢ Three transaction cycles process most of the
manufacturing process
firm’s economic activity: the expenditure cycle,
the conversion cycle, and the revenue cycle.
Cost accounting system
➢ monitors the flow of cost information related to
EXPENDITURE CYCLE
production
➢ Business activities begin with the acquisition of
materials, property, and labor in exchange for
REVENUE CYCLE
cash
➢ involves processing cash sales, credit sales, and
the receipt of cash following a credit sale.
Subsystem:
➢ Also have physical and a financial component,
Purchases/accounts payable system
which are processed separately
➢ This system recognizes the need to acquire
physical inventory (such as raw materials) and
Primary Subsystems:
places an order with the vendor.
Sales Order Processing
➢ are made on credit and involve tasks such as
Cash disbursements system
preparing sales orders, granting credit, shipping
➢ When the obligation created in the purchases
products to the customer
system is due, the cash disbursements system
authorizes the payment, disburses the funds to
Cash Receipts
the vendor, and records the transaction by
➢ some period of time passes between the point
reducing the cash and accounts payable
of sale and the receipt of cash.
accounts.
➢ includes collecting cash, depositing cash in the
bank, and recording these events in the
Payroll system
accounts (accounts receivable and cash)
➢ collects labor usage data for each employee,
computes the payroll, and disburses paychecks
Accounting Records
to the employees.
➢ is a special-case purchases and cash
MANUAL SYSTEMS
disbursements system. Because of accounting
➢ describes the purpose of each type of
complexities associated with payroll, most firms
accounting record used in transaction cycles.
have a separate system for payroll processing.
➢ used in manual systems (documents, journals,
and ledgers)
Fixed asset system
➢ processes transactions pertaining to the
1. Documents
acquisition, maintenance, and disposal of its
➢ provides evidence of an economic
fixed assets. These are relatively permanent
event and may be used to initiate
items that collectively often represent the
transaction processing.
organization’s largest financial investment.
Examples of fixed assets include land, buildings,
3 Types of Documents
furniture, machinery, and motor vehicles.
SOURCE DOCUMENTS
CONVERSION CYCLE
➢ Economic events result in some documents
The conversion cycle is composed of two major
being created at the beginning (the source) of
subsystems: the production system and the cost
the transaction.
accounting system.
PRODUCT DOCUMENTS SUBSIDIARY LEDGERS
➢ are the result of transaction processing rather ➢ are kept in various accounting departments of
than the triggering mechanism for the process. the firm, including inventory, accounts payable,
payroll, and accounts receivable.
TURNAROUND DOCUMENTS
➢ are product documents of one system that AUDIT TRAIL
become source documents for another system. ➢ provide an audit trail for tracing transactions
➢ contains important information about a from source documents to the financial
customer’s account to help the cash receipts statements.
system process the payment
COMPUTER-BASED SYSTEMS
2. Journals
➢ is a record of a chronological entry. At Four Types of Magnetic Files
some point in the transaction process,
when all relevant facts about the MASTER FILE
transaction are known ➢ contains account data. The general ledger and
➢ Documents are the primary source of subsidiary ledgers are examples of master files.
data for journals
TRANSACTION FILE
2 Types of Journals ➢ is a temporary file of transaction records used
to change or update data in a master file.
SPECIAL JOURNALS ➢ Sales orders, inventory receipts, and cash
➢ used to record specific classes of transactions receipts are examples of transaction files.
that occur in high volume.
REFERENCE FILE
REGISTER ➢ stores data that are used as standards for
➢ used to denote certain types of special journals processing transactions.
➢ For example, the payroll program may refer to a
GENERAL JOURNALS tax table to calculate the proper amount of
➢ Firms use the general journal to record withholding taxes for payroll transactions.
nonrecurring, infrequent, and dissimilar
transactions. ARCHIVE FILE
➢ contains records of past transactions that are
3. Ledgers retained for future reference.
➢ is a book of accounts that reflects the ➢ include journals, prior-period payroll
financial effects of the firm’s transactions information, lists of former employees, records
after they are posted from the various of accounts written off, and prior-period
journals ledgers.
➢ indicates the increases, decreases, and
current balance of each account DATA FLOW DIAGRAMS AND ENTITY RELATIONSHIP
DIAGRAMS
2 Types of Ledgers ➢ Two commonly used systems design and
documentation techniques
GENERAL LEDGERS
➢ summarizes the activity for each of the Data Flow Diagrams
organization’s accounts. ➢ uses symbols to represent the entities,
processes, data flows, and data stores that
pertain to a system.
 Entity Relationship Diagrams Updating Master Files from Transactions
➢ is a documentation technique used to represent
the relationship between entities The update procedure in this example involves the
➢ Entities are physical resources (automobiles, following steps:
cash, or inventory), events (ordering inventory, 1. A sales order record is read by the system.
receiving cash, shipping goods), and agents 2. ACCOUNT NUMBER is used to search the AR
(salesperson, customer, or vendor) master file and retrieve the corresponding AR
record.
Relationship between ER Diagrams and Data Flow 3. The AR update procedure calculates the new
Diagrams customer balance by adding the value stored in the
➢ A DFD is a model of system processes, and the INVOICE AMOUNT field of the sales order record to
ER diagram models the data used in or affected the CURRENT BALANCE field value in the AR master
by the system record.
4. Next, INVENTORY NUMBER is used to search for
SYSTEM FLOWCHARTS the corresponding record in the inventory master
➢ is the graphical representation of the physical file.
relationships among key elements of a system. 5. The inventory update program reduces inventory
levels by deducting the QUANTITY SOLD value in a
Batch Processing transaction record from the QUANTITY ON HAND
➢ Batch processing permits the efficient field value in the inventory record.
management of a large volume of transactions. 6. A new sales order record is read, and the process
➢ A batch is a group of similar transactions (such is repeated.
as sales orders) that are accumulated over time
and then processed together. Database Backup Procedures
➢ Each record in a database file is assigned a
PROGRAM FLOWCHARTS unique disk location or address that is
➢ shows the relationship between computer determined by its primary key value.
programs, the files they use, and the outputs
they produce. REAL-TIME PROCESSING
➢ Real-time systems process the entire
RECORD LAYOUT DIAGRAMS transaction as it occurs
➢ used to reveal the internal structure of the ➢ is well suited to systems that process lower
records that constitute a file or database table. transaction volumes and those that do not
share common records.
Computer-Based Accounting Systems
2 broad classes: Data Coding Schemes
➢ data coding involves creating simple numeric or
1. Batch systems alphabetic codes to represent complex
➢ assemble transactions into groups for economic phenomena that facilitate efficient
processing. data processing.

2. Real-time systems A SYSTEM WITHOUT CODES

➢ process transactions individually at the ➢ Firms process large volumes of transactions that
moment the event occurs. are similar in their basic attributes

Operational Efficiency The negative effects of this approach may be seen in

➢ Real-time processing in systems that handle many parts of the organization:
large volumes of transactions each day can
create operational inefficiencies.
 1. Sales staff DISADVANTAGES
➢ Properly identifying the items sold As with the sequential codes, the information content
requires the transcription of large of the block code is not readily apparent.
amounts of detail onto source
documents. Group Codes
➢ used to represent complex items or events
2. Warehouse personnel involving two or more pieces of related data.

➢ Locating and picking goods for ADVANTAGES

shipment are impeded and shipping Group codes have a number of advantages over
errors will likely result. sequential and block codes.

3. Accounting personnel DISADVANTAGES

➢ Postings to ledger accounts will require Ironically, the primary disadvantage of group coding
searching through the subsidiary files results from its success as a classification tool.
using lengthy descriptions as the key.
Alphabetic Codes
A SYSTEM WITH CODES ➢ used for many of the same purposes as numeric
➢ These problems are solved, or at least greatly codes
reduced, by using codes to represent each item
in the inventory and supplier accounts ADVANTAGES
The capacity to represent large numbers of items is
NUMERIC AND ALPHABETIC CODING SCHEMES increased dramatically through the use of pure
alphabetic codes or alphabetic characters embedded
Sequential Codes within numeric codes.
➢ As the name implies, sequential codes
represent items in some sequential order DISADVANTAGES
(ascending or descending) The primary drawbacks with alphabetic coding are (1) as
with numeric codes, there is difficulty rationalizing the
ADVANTAGES meaning of codes that have been sequentially assigned,
Sequential coding supports the reconciliation of a batch and (2) users tend to have difficulty sorting records that
of transactions, such as sales orders, at the end of are coded alphabetically.
processing.
Mnemonic Codes
DISADVANTAGES ➢ are alphabetic characters in the form of
Sequential codes carry no information content beyond acronyms and other combinations that convey
their order in the sequence. meaning.

Block Codes ADVANTAGES

➢ is a variation on sequential coding that partly The mnemonic coding scheme does not require the user
remedies the disadvantages just described to memorize meaning; the code itself conveys a high
➢ used to represent whole classes of items by degree of information about the item that is being
restricting each class to a specific range within represented.
the coding scheme
DISADVANTAGES
ADVANTAGES Although mnemonic codes are useful for representing
Block coding allows for the insertion of new codes classes of items, they have limited ability to represent
within a block without having to reorganize the entire items within a class.
coding structure.
 CHAPTER 1 SYSTEM
➢ generates me images of computers and
The Information Environment programming
➢ The study of AlS with the recognition that ❖ Natural system range from the atom
information is a business resource ❖ Artificial system are man-made
➢ Is a group of the or more interrelated
components or subsystems that serve a
common purpose

ELEMENTS OF A SYSTEM

Multiple components
➢ A system must contain more than one part

Relatedness
➢ A common purpose relates the multiple parts of
the system

System versus Subsystem

➢ The distinction between the terms system and
subsystem is a matter of perspective

SUBSYSTEM - when it is viewed in relation to

Horizontal Flow
the larger system of which it is part
➢ supports operations-level tasks with highly
detailed information about business
Purpose
transactions
➢ Must serve at least one purpose, but it may
serve several
Vertical Flow
➢ Provides a measure of time electrical power or
➢ distributes information downward from senior
information
managers to junior managers and operations
personnel
An Example of an Artificial System.
➢ An automobile, is an example of an artificial
Third Flow
system that is Familiar to most of us and that
➢ exchanges between the organization and wers
satisfied the definition of a system provided
in the external environment

System Decomposition
TWO GROUPS OF EXTERNAL USER
➢ The process of dividing the system into smaller
subsystem parts
1. Trading Partners
➢ include customer sales and billing information,
Subsystem Interdependency
purchase information and inventory receipts
➢ Ability to achieve its goal depends on the
info.
effective functioning and harmonious
interaction of its subsystems
2. Stakeholders
➢ entities outside /inside the organization with
Information system
the direct/indirect interest in the firm
➢ The set of formal procedures by which data are
collected
Transaction - an event that affects or is of interest in External user
the organization ➢ Include creditors, stockholders potential
inventors, suppliers and customers.
Financial Transactions - an economic event that affects
the assets and equities of the organization Internal user
➢ include management at every level of the
Nonfinancial Transactions - events that do not meet organization as well as operations personnel
the narrow definition of o financial transaction
DATA VERSUS INFORMATION
The Accounting Information system
➢ AIS subsystems process financial and Data - are facts, which may or may not be processed
nonfinancial transactions that directly affect the and have no direct expect
processing of financial transactions
Information - causes the user to take an action that
3 MAJOR SUBSYSTEMS OF AIS he/she could not have taken

1. Transaction Processing System (TPS) - Data Source

support daily business operations with ➢ are financial transactions that are enter the
numerous reports, documents and information system from both internal &
messages external sources

2. General Ledger/Financial Reporting Data collection

system (GL/FRS) – Produces the ➢ First operational stage in the information
traditional Financial statements such as system
15, BS statement of cash flows, etc. ➢ Ensure that event data entering the system are
valid, complete, and Free
3. Management Reporting System (MRS)
– Provides internal management with Data Processing
special-purpose financial reports and ➢ Require processing to produce information
information needed
Database Management
The Management Information System ➢ It is physical repository for Financial and
➢ Processes nonfinancial transactions that are not nonfinancial data
normally processed by traditional AlS.
LEVELS IN THE DATA HIERARCHY
Transaction Processing Systems - is central to the
overall function of the information system DATA ATTRIBUTE
➢ Most elemental piece of potentially useful data
General Ledger / Financial Reporting System - in the database
subsystems are two closely related ➢ A logical and relevant characteristic of an entity
about which the Firm captures data
Management Reporting System - needed to manage a
provides internal financial information business RECORD
➢ A complete set of attributes for a single
A GENERAL MODEL FOR AIS occurrence within an entity class

End users - falls into two general groups: FILES

➢ complete set of records of an identical class
 DATABASE MANAGEMENT TASK THREE TYPES OF BASIC COMMERCIAL SOFTWARE
Involves 3 fundamental tasks: STORAGE, RETRIEVAL,
and DELETION. 1. Turnkey Systems - completely finished and
tested system that are ready for
Storage- assigns keys to new records and stores them implementation
in their proper location
2. Backbone Systems – consist of a basic system
Retrieval - the task of locating and extracting an existing structure on which to build
record prom the database for processing.
3. Vendor- supported Systems - are custom
Deletion - task of permanently removing obsolete or systems that client organizations purchase
redundant records From the database commercially rather than develop in-house

INFORMATION GENERATION Organizational structure

➢ The process of compiling, arranging, Formatting ➢ reflects the distribution of responsibility,
and presenting information to user authority, and accountability throughout the
organization
Characteristics:
1. RELEVANCE BUSINESS SEGMENTS
➢ The contents of a report or document must Three of the most common approaches include
serve a purpose. This could be to support a segmentation by:
managers decision or Clerks talk
1. GEOGRAPHIC LOCATION
2. TIMELINESS ➢ many organizations have operations
➢ An age of information is a critical factor in dispered actors the country and around
determining its usefulness. the world
➢ Must be no older than the time of the action it
supports 2. PRODUCT LINE
➢ produced highly diversified products
3. ACCURACY often organize around product lines
➢ information must be free from material errors
3. BUSINESS FUNCTION
4. COMPLETENESS ➢ functional segmentation divides the
➢ no piece of information essential to a organization into areas of specialized
decision/task should be missing. responsibility based on tasks

5. SUMMARIZATION Materials Management

➢ should be aggregated in accordance with the ➢ is to plan and control the materials inventory of
user’s needs the company. It has three sub functions:

Feedback 1. Purchasing - responsible for ordering inventory

➢ form of output that is sent back to the system from vendors
as a source of data
➢ Used to initiate or alter a process 2. Receiving - the task of accepting the inventory
previously ordered by purchasing
System Development Life Cycle
➢ formal process by which this is accomplished 3. Stores - takes physical custody of the inventory
received and releases these resources into the
production process
 PRODUCTION & MARKETING FUNCTION Data Processing
➢ data processing group manages resources the
Production computer resources used to perform the day-
➢ occur in the conversion cycle in which row to-day processing of transaction
materials, labors plant assets are used to create
finished products SYSTEMS DEVELOPMENT AND MAINTENANCE
➢ is responsible for analyzing user needs and for
Marketing designing new systems
➢ Marketplace needs to know about, and have
access to a Firm’s products The Evolution of Information System Models

Distribution 1. MANUAL PROCESS MODEL

➢ The activity of getting the product to the ➢ The manual process model is the oldest
customer after the vale and most traditional form of accounting
systems.
Personnel
➢ Competent and reliable employees are a 2. THE FLAT-FILE MODEL
valuable resource to a business ➢ often associated with so-called legacy
systems
Finance ➢ large mainframe system that were
➢ Manages the financial resources of the firm implemented in the late 1960s
through banking and treasury activities ➢ describes an environment in which
individual data files are not related to
THE ACCOUNTING FUNCTION other files
➢ Manager the financial resources information
resource of the firm. Four significant problems in the flat-file environment:

Accounting Independence 1. Data Storage

➢ accounting activities must be separate and ➢ An efficient information system
independent of the functional areas that captures and stores data only once
maintain custody of physical resources
2. Data Updating
THE INFORMATION TECHNOLOGY FUNCTION (IT) ➢ require periodic updating to reflect
➢ Is associated with the information resource changes
➢ Its activities can be organized in a number of
different ways 3 Currency of Information
➢ is the problem of failing to update all
Centralized Data Processing the user files
➢ all data processing is performed by one or more
large computers housed at a central site 4. Task-Data Dependency
➢ is the user’s inability to obtain
Database Administration additional information
➢ centrally organized companies maintain their
data resources in a central location that is 3. THE DATABASE MODEL
shared by all user ➢ An organization can overcome the
problems associated with flat files by
implementing the database model
 4 THE REA MODEL IT AUDITING
➢ REA is an accounting framework for ➢ IT auditing is usually performed as part of a
modeling an organization’s critical broader financial audit.
resources, events, and agents (REA) and
the relationships between them Internal Auditing
➢ Internal auditing is an appraisal function housed
Resources within the organization
➢ are defined as objects that are both scarce and
under the control of the enterprise.

Events
➢ Economic events are phenomena that affect
changes in resources.

Agents
➢ Economic agents are individuals and
departments that participate in an economic
event

5. ENTERPRISE RESOURCE PLANNING SYSTEMS

➢ enables an organization to automate
and integrate its key business
processes.

The Role of the Accountant

ACCOUNTANTS AS USERS
➢ must provide a clear picture of their needs to
the professionals who design their systems.

ACCOUNTANTS AS SYSTEM DESIGNERS

➢ requires a historic perspective that predates the
computer as a business information tool

ACCOUNTANTS AS SYSTEM AUDITORS

➢ Auditing is a form of independent attestation
performed by an expert—the auditor—who
expresses an opinion about the fairness of a
company’s financial statements

External Auditing
➢ the external accountant’s responsibility as a
systems auditor was limited to the attest
function described previously.

ASSURANCE
➢ Are designed to improve the quality of
information, both financial and nonfinancial,
used by decision makers.