Week 1b

Chapter 2—AIS processes

Business activities

Business cycles

Data Processing Cycle

Business Activities

Basic business activities an organization engages in? Buying buildings/equipment Hiring/training employees Purchasing inventory Selling goods/services Paying Vendors Acquiring capital

Basic Business Processes

Get Cash

Give Cash

Get Ship

Give Cash

GetEmployeeService

Give Cash

Get Silk

Give Cash

Get Cash

Give SilkA set of

Give-Get exchanges

Effective AIS

Each activity requires different types of information.

Information may be financial or non-financial

Source of information may be internal or external

An effective AIS needs to be able to integrate this information

Interaction

Business cycles

Like business activities for the AIS to capture, process, report

Revenue Expenditure

Some companies split out Fixed Assets as there own cycle

PR (in book = HR)

Production Treasury (in book = Financing)

What is missing?

FINANCIAL REPORTING

Most companies now consider the activities around this process a separate cycle

Activities include? Journal entries Financial disclosure Management review

Business Activities = Cycle groupings

Buying buildings/equipment=Fixed Asset Cycle

Hiring/training employees=HR/Payroll Cycle

Cycle counting inventory=Production Cycle

Selling goods/services=Revenue Cycle

Paying Vendors=Expenditure Cycle

Acquiring Capital=Treasury Cycle

Things to keep in mind

Thousand of transactions can occur within a cycle, but there are relatively few types of transactions in a cycle.

Every transaction cycle relates to other cycles and interfaces with the general ledger/reporting system (i.e. Financial Close Cycle), which generates information for management and external parties.

Accounting software packages often separate into modules that mirror cycles.

Not every company uses every cycle.

Chapter 2 – Problem 2.9

Answer to Problem 2.9: Classify each of the following items as belonging in the

revenue, expenditure, human resources/payroll, production, or financing cycle.

a) Purchase raw materials – Expenditure cycle

b) Payoff mortgage on factory – Treasury cycle

c) Hire a new assistant controller – Payroll cycle

d) Establish a $10,000 credit limit for customer XYZ company –

Revenue cycle

Chapter 2 – Problem 2.9 (cont)

Answer to Problem 2.9 (cont): Classify each of the following items as belonging in the

revenue, expenditure, human resources/payroll, production, or financing cycle.

e) Pay for raw materials – Expenditure cycle

f) Disburse payroll checks to factory workers - PR cycle

g) Record goods received from vendor – Expenditure cycle

h) Update the allowance for uncollectible accounts – Financial Reporting cycle

(book=Revenue) i) Decide how many units to make next month –

Production cycleProduction cycle

Data Processing “Cycle”

An important function of the AIS is to efficiently and effectively process the data about a company’s transactions.

The “data processing cycle’s” 4 steps:1. Data input2. Data storage3. Data processing4. Information output

i.e. Collect data

Capture the data Implement control procedures Record in journals

• General for rare or adjusting• Specialized for standardized

Post to ledgers Prepare reports

Data Input

Usually triggered by a business activity

What is captured? Timing of the event (when) Characteristics (what is affected) Participants (who)

Data Input: Internal control considerations

A number of small actions can improve the accuracy and efficiency of data input: Document design (manual)

• Multiple copies• Space for approval sign-off• Pre-numbered

Input (automated)• Fill-in based on key data• Automatic numbering• Smart fields• Matching to existing data

Data Storage

Data needs to be organized for easy and efficient access

With automated systems, master tables (chart of accounts, vendor, customer, inventory, etc.) set-up, content and access is critical to integrity of system

Data storage: Internal control considerations

Sequence codes: consecutive numbering to prevent gaps and/or duplicates

Sub-ledgers/journals: provide more details for like transactions and enhance information retrieval/support

Smart coding: means of grouping items (G/L account, vendors, inventory, customers, etc.) for analysis

Audit trail: adequate documentation to allow tracing of a transaction from beginning to end or from end back to beginning (i.e. posting references, document numbers, bundling)

Audit Trail

Data Processing

Updating data-recording the transaction i.e. purchase of raw material, record a

customer sale Changing data-update to existing permanent

records i.e. change a customer address, change the

name of a vendor Adding data-add a new permanent record

i.e. add new G/L account, add new inventory item

Deleting data-delete permanent record (be very careful do not destroy existing audit trail, usually involves lack of activity in the current period at least) i.e. remove non-active customer

Data (Computer) processing

Master/transaction files Batch/real-time/on-line Queries/reports

I am going to spend little time on this, but expect you to use the terms and concepts pretty readily…ask questions if you need to.

Data processing: Internal control considerations

Access, Access, Access

Edit reports: provides potential errors in data (i.e. unusual account balances (negative cash, credit balance for an expense account)

IT Segregation of duties

Information output

Documents – generated for internal or external use; can be printed or stored electronically (i.e. paychecks, invoices, purchase orders)

Reports – used by employees to control operational activities and by manages to make decisions and design strategies (i.e. general ledger, variance analysis, inventory turnover)

Queries – ad hoc user requests for specific information; often system display only (i.e. vendor address, customer credit limit)

Information output: Internal control considerations

Confidentiality – develop means to restrict access to certain data (SS#s, pricing data, costing, etc.)

Timeliness – information should be available when needed (invoices, M/E reports, audit schedules) by user, not restricted by system processing

Version Control – user should be able to readily determine information “as of” date. Is it as of a certain date/time period (today, M/E, Year-to-date), last processing update, real-time? Previous (historical) data availability should also be based on user needs.