Chapter 2: Overview of Business processes April 19, 2017 Dr. Fred Barbee

Chapter 2: Overview of Business processes April 19, 2017 Explain the three basic functions performed by an accounting information system (AIS). Describe the documents and procedures used in an AIS to collect and process transaction data. Dr. Fred Barbee

Chapter 2: Overview of Business processes April 19, 2017 Discuss the types of information that can be provided by an AIS. Describe the basic internal control objectives of an AIS and explain how they are accomplished. Dr. Fred Barbee

Chapter 2: Overview of Business processes April 19, 2017 Hi, I’m Susan. Pleased to meet you! I’m Scott and I’m pleased to meet ya too! Dr. Fred Barbee

Chapter 2: Overview of Business processes April 19, 2017 Scott, our grand opening is only two weeks away! Yeah, it’s a good thing we hired an accountant! Dr. Fred Barbee

Chapter 2: Overview of Business processes April 19, 2017 Hi folks, Ashton Fleming here! Dr. Fred Barbee

Chapter 2: Overview of Business processes April 19, 2017 Dr. Fred Barbee

Chapter 2: Overview of Business processes April 19, 2017 Dr. Fred Barbee

Chapter 2: Overview of Business processes April 19, 2017 Dr. Fred Barbee

Chapter 2: Overview of Business processes April 19, 2017 Dr. Fred Barbee

Chapter 2: Overview of Business processes April 19, 2017 Collect and store data Provide information useful for decision making Provide adequate controls Dr. Fred Barbee

Chapter 2: Overview of Business processes April 19, 2017 Dr. Fred Barbee

Chapter 2: Overview of Business processes April 19, 2017 A transaction processing cycle combines one or more types of transactions having related features or similar objectives. Dr. Fred Barbee

Chapter 2: Overview of Business processes April 19, 2017 A transaction cycle consists of a set of transactions leading to the recognition of a major economic event on the financial statements Dr. Fred Barbee

Chapter 2: Overview of Business processes April 19, 2017 It is through the study of transaction cycles that we gain a clear view of a firm’s processing framework. (See Figure 2-1 p. 25) Dr. Fred Barbee

Chapter 2: Overview of Business processes April 19, 2017 Dr. Fred Barbee

Chapter 2: Overview of Business processes April 19, 2017 Dr. Fred Barbee 13

Chapter 2: Overview of Business processes April 19, 2017 Cost Flows in a Manufacturing Firm Manufacturing Costs Balance Sheet Unused DM DM Inv. Used Used Unfinished DL WIP WIP Inv. Product Costs Applied Conversion Cycle MOH Finished FG Inv. Sale Expenditure Cycle Sales Revenue Cycle - COGS Sold = Income Statement Gross Margin - S&A Period Costs = Net Income Dr. Fred Barbee

Chapter 2: Overview of Business processes April 19, 2017 Labor Customers Fin. Goods Cash Materials Cash Plant EXPENDITURE CYCLE Subsystems Purchasing & A/P Cash Disbursements Payroll CONVERSION CYCLE Subsystems Production Planning and Control Cost Accounting REVENUE CYCLE Subsystems Sales Order Processing and Cash Receipts Fin. Goods Cash Dr. Fred Barbee 4

Chapter 2: Overview of Business processes April 19, 2017 Dr. Fred Barbee 13

Chapter 2: Overview of Business processes April 19, 2017 Merchandising Shipments Cash Receipts Sale of Merchandise GL & Fin Rpt Cycle PP&E, Investments Purchase of Mdse, & Labor, Etc. Cash Disbursements Merchandise Receipts Dr. Fred Barbee

Chapter 2: Overview of Business processes April 19, 2017 47 Dr. Fred Barbee

Chapter 2: Overview of Business processes April 19, 2017 Merchandising Shipments Cash Receipts Sale of Merchandise GL & Fin Rpt Cycle PP&E, Investments The Revenue Cycle Spans activities from “Sale” to “Receipt of Cash Key Transactions: Sales Cash Receipts Purchase of Mdse, & Labor, Etc. Cash Disbursements Merchandise Receipts Dr. Fred Barbee

Chapter 2: Overview of Business processes April 19, 2017 Includes transactions surrounding the recognition of revenue. Sales Accounts Receivable Inventory (some) General Ledger (some) Dr. Fred Barbee

Chapter 2: Overview of Business processes April 19, 2017 Capturing and recording of customer orders; Shipment of the goods and the recording of the cost of goods sold. Dr. Fred Barbee

Chapter 2: Overview of Business processes April 19, 2017 The billing process and the recording of sales and accounts receivable; The capturing and recording of cash receipts. Dr. Fred Barbee

Chapter 2: Overview of Business processes April 19, 2017 47 Dr. Fred Barbee

Chapter 2: Overview of Business processes April 19, 2017 The Expenditure Cycle Spans activities from the “need” for resources/services to “payment” for that resource/service Key Transactions: Purchases Cash Disbursements Merchandising Shipments Cash Receipts Sale of Merchandise GL & Fin Rpt Cycle PP&E, Investments Purchase of Mdse, & Labor, Etc. Cash Disbursements Merchandise Receipts Dr. Fred Barbee

Chapter 2: Overview of Business processes April 19, 2017 Includes the transactions surrounding the recognition of expenditures. Purchases Accounts Payable Cash Disbursements Inventory (some) General Ledger (some) Dr. Fred Barbee

Chapter 2: Overview of Business processes April 19, 2017 The preparation and recording of purchase orders; The receipt of goods and the recording of the cost of inventory; The receipt of vendor invoices and the recording of accounts payable; Dr. Fred Barbee

Chapter 2: Overview of Business processes April 19, 2017 The preparation and recording of cash disbursements. The cycle also includes the preparation of employee paychecks and the recording of payroll activities. Dr. Fred Barbee

Chapter 2: Overview of Business processes April 19, 2017 Dr. Fred Barbee

Chapter 2: Overview of Business processes April 19, 2017 Collect and store data about the organization’s business activities and transactions efficiently and effectively Dr. Fred Barbee

Chapter 2: Overview of Business processes April 19, 2017 Capture transaction data on source documents. Record transaction data in journals, which present a chronological record of what occurred. Dr. Fred Barbee

Chapter 2: Overview of Business processes April 19, 2017 Post data from journals to ledgers, which sort data by account type. Dr. Fred Barbee

Chapter 2: Overview of Business processes April 19, 2017 The resources affected by that event. The agents who participate in that event. The Event of Interest Dr. Fred Barbee

Data Files Process Input Output Feedback Loop Control Sensor

Chapter 2: Overview of Business processes April 19, 2017 Sales Order Purchase Order O Sales Invoice Dr. Fred Barbee

Chapter 2: Overview of Business processes April 19, 2017 Control over data collection is improved by prenumbering each source document. Accuracy and efficiency in recording transaction data can be further improved if source documents are properly designed. Dr. Fred Barbee

Chapter 2: Overview of Business processes April 19, 2017 Input documents can be categorized into three types . . . Source Documents Product Documents Turn-around Documents Dr. Fred Barbee

Creation of a Source Document 1 1 Data Collection 2 Order 3 Sales Order Customer Sales System

A Product Document Sales System Source Document 1 Data Collection 2 Order 3 Sales Order Customer Bill Sales System Remittance Advice Product Document

Chapter 2: Overview of Business processes April 19, 2017 A Turnaround Document Source Document 1 Data Collection 2 Order 3 Sales Order Customer Bill Sales System Remittance Advice Product Document Check Cash Receipts System 1 1 Remittance Advice Dr. Fred Barbee

Chapter 2: Overview of Business processes April 19, 2017 Source Document Function Sales Order Record Customer Order Delivery Ticket Record Delivery to Customer Remittance Advice Receive Cash Deposit Slip Record Amounts Deposited Credit Memo Support Adjustments to Customer Accounts Dr. Fred Barbee

Chapter 2: Overview of Business processes April 19, 2017 Source Document Function Purchase Requisition Request that purchasing department order goods. Purchase Order Request goods from vendors. Receiving Report Record receipt of merchandise. Check Pay for items. Dr. Fred Barbee

Chapter 2: Overview of Business processes April 19, 2017 Source Document Function W4 forms Collect employee withholding data. Time cards Record time worked by employees. Job time tickets Record time spent on specific jobs. Dr. Fred Barbee

Chapter 2: Overview of Business processes April 19, 2017 General Ledger and Reporting System Journal Voucher Record entry posted to general ledger. Dr. Fred Barbee

Data Files Process Input Output Feedback Loop Control Sensor

Chapter 2: Overview of Business processes April 19, 2017 Updating previously stored information about the resources affected by the event and agents who participated in the activity. Dr. Fred Barbee

Chapter 2: Overview of Business processes April 19, 2017 Periodic updating of the data stored is referred to as batch processing. Immediate updating as each transaction occurs is referred to as on-line, real-time processing. Dr. Fred Barbee

Chapter 2: Overview of Business processes April 19, 2017 An audit trail provides a means to check the accuracy and validity of ledger postings. Dr. Fred Barbee

Data Files Process Input Output Feedback Loop Control Sensor

Chapter 2: Overview of Business processes April 19, 2017 Ledgers and files provide storage of data in both manual and computerized systems. The General Ledger The Accounts Payable Ledger The Accounts Receivable Ledger Dr. Fred Barbee

Chapter 2: Overview of Business processes April 19, 2017 A ledger is . . . . . . a book of financial accounts, which reflect the financial effects of the firm’s transactions after they are posted from the various journals. Dr. Fred Barbee

Flow of Information From the Economic Event to the General Ledger Journal Entry Order Sales Order Sales Journal Customer Post Post AR Sub Ledger General Ledger Periodically reconcile subsidiary ledger to General Ledger

Chapter 2: Overview of Business processes April 19, 2017 A file is an organized collection of data. Files may be Manual Computer (magnetic) Dr. Fred Barbee

Chapter 2: Overview of Business processes April 19, 2017 A transaction file is . . . . . . a collection of transaction input data - normally temporary in nature. Dr. Fred Barbee

Chapter 2: Overview of Business processes April 19, 2017 A master file is . . . . . . a collection of data that are of a more permanent or continuing interest Dr. Fred Barbee

Chapter 2: Overview of Business processes April 19, 2017 A reference (table) file . . . . . . contains data that are necessary to support data processing Dr. Fred Barbee

Chapter 2: Overview of Business processes April 19, 2017 Dr. Fred Barbee

Chapter 2: Overview of Business processes April 19, 2017 To provide management with information useful for decision making. Dr. Fred Barbee

Chapter 2: Overview of Business processes April 19, 2017 This information is provided in the form of reports that fall into two main categories: financial statements managerial reports Dr. Fred Barbee

Chapter 2: Overview of Business processes April 19, 2017 Provide adequate controls to ensure that data are recorded and processed accurately Dr. Fred Barbee

Chapter 2: Overview of Business processes April 19, 2017 Ensure that the information produced by the system is reliable. Safeguard organizational assets. Dr. Fred Barbee

Chapter 2: Overview of Business processes April 19, 2017 Ensure that business activities are performed efficiently and in accordance with management’s objectives. Dr. Fred Barbee

Chapter 2: Overview of Business processes April 19, 2017 What are two important methods for accomplishing these objectives? Provide for adequate documentation of all business activities. Design the AIS for effective segregation of duties. Dr. Fred Barbee

Chapter 2: Overview of Business processes April 19, 2017 Documentation allows management to verify that assigned responsibilities were completed correctly. Dr. Fred Barbee

Chapter 2: Overview of Business processes April 19, 2017 Segregation of duties refers to dividing responsibility for different portions of a transaction among several people. Dr. Fred Barbee

Chapter 2: Overview of Business processes April 19, 2017 What functions should be performed by different people? authorizing transactions recording transactions maintaining custody of assets Dr. Fred Barbee

Authorization Recording Custody

Preventive Detective Corrective