TUTORIAL for use in Acct 420:
Linking Business Processes and Transaction Cycles*
Bonnie K. Klamm
Assistant Professor
North DakotaStateUniversity
Marcia L. Weidenmier
Assistant Professor
MississippiStateUniversity
We gratefully acknowledge the feedback received from the associate editor, two anonymous reviewers, and participants at the 2002 AIS Educator’s Conference. Presented at the 2003 AAA IS midyear conference.
*Forthcoming, Journal of Information Systems, Fall 2004
THE TUTORIAL
The objective of this tutorial is to increase students’ understanding of accounting transaction cycles and business processes within accounting information systems. The six sections of the tutorial are:
- Business Processes
- Data Flow Diagrams
- Flowcharts
- REA Models (Resources, events, agents)
- Enterprise Resource Planning Systems
A.Business Processes
Businesses generally engage in three main processes: (1) acquiring and paying for resources, (2) converting resources into goods/services, and (3) acquiring customers, delivering goods and services, and collecting revenues.1 Businesses need information about their processes so that managers can (1) make operational decisions, (2) improve the efficiency of the processes, and (3) generate financial reports. To help firms streamline operations, Porter (1985) developed a model linking these processes. Porter’s model, the value chain, incorporates all business processesfrom raw material acquisitions, to manufacturing, to delivering the product to the customer.
The value chain captures the firm’s essential give-to-get processes. The firmgives cash to suppliers and labor to get resources, adds (perceived) value to the product through changes or repackaging of the resources, and then gives customers a product/service to get cash. The costs and profits of the firm depend on how efficiently and effectively the firm executes the activities.
Each business process is a collection of activities that combine different inputs to create an output that is of value to the customer.2 For example, the business process of acquiring new customers, delivering goods and services, and collecting revenues includes the financial activities of taking sales orders and the non-financial activities of pricing new products and handling customer inquiries. In any large organization, thousands of these financial and non-financial activities take place. Manual accounting systems and early-computerized systems could not handle the volume, and organizations needed a way to simplify what was recorded. This resulted in separate functional systems that tracked only financial transactions (for purchasing, production, marketing, personnel, accounts payable, accounts receivable, fixed assets, inventory).
To further simplify, firms also divided the processes into five accounting transaction cycles. These cyclesdo not convey the relationships among the activities, and capture only the financial portion of the transaction. However, if accounting transaction cycles are expanded to include non-financial information (such as those indicated by the gray activities in Figure 1), they are equivalent to business processes as shown in Figure 1.
1
1
Exercise 1: Business Activities
Given the activity of an inventory purchase, answer the following questions:
A)The activity is in which accounting transaction cycle?
B)What accounting (journal) transaction is recorded for this activity?
C)The activity is in which business process?
D)Part C required identifying the business process for purchasing inventory. Identify three other activities in this process. Identify the accounting transaction cycle associated with each activity.
E)What non-financial information might you like to collect related to inventory purchases?
Exercise 2: Value Chain Model
Smitty’s Pizza receives phone orders, then makes and delivers pizzas. Figure 2 shows Smitty’s Pizza’s value chain. Because business processes are a different way to categorize accounting transaction cycles, each bubble represents both processes and cycles. The dotted lines conceptually link the processes (and therefore the accounting transaction cycles) and represent the value added when inputs are transformed into outputs. The solid lines represent how the firm’s information system, whether manual or automated, collects data and distributes needed information to the processes/cycles.
The following questions pertain to Figure 2:
A)Bubble D represents which business process? Which accounting transaction cycle?
B)Purchasing pizza ovens (in Bubble B) is part of which accounting transaction cycle? Which business process
FIGURE 2
Exercise 2: Value Chain for Smitty’s Pizza**
= data/information
= conceptual link between processes (cycles)
** Adapted from Romney and Steinbart (2003, 25)
B.Data Flow Diagrams
Data flow diagrams (DFDs) illustrate the movement of data, define the system inputs/outputs, and set the boundaries of the system. Auditors, system users, and system developers use DFDs to document business processes, hence communicating their understanding of a particular system or subsystem. Exercises 3 and 4 require reading and drawing DFDs, respectively, for Smitty’s Pizza. See the textbook for DFD symbols.
Exercise 3A: Logical DFD3
The following questions pertain to the logical DFD shown in Figure 3.
FIGURE 3
Exercise 3A: Logical Data Flow Diagram
A)What are the documents?
B)What are the data stores?
C)What are the main DFD transformation processes in this system?
D)This diagram represents part of which accounting transaction cycle(s)? A complete DFD for these cycles would also include ______?
E)The tasks included in this diagram belong to which business process(es)?
Exercise 3B: Physical DFD
The physical DFD shown in Figure 4 represents the same business process as the logical DFD, but from a different perspective.
FIGURE 4
Exercise 3B: Physical Data Flow Diagram
A)Explain the differences and similarities between the physical and logical DFDs.
B)Why is there not a data flow between the delivery driver and the customer?
Exercise 3C: Context DFD
The context diagram in Figure 5 is a higher level, or “bird’s eye view,” of Smitty’s DFDs. Provide labels for each of the symbols.
FIGURE 5
Exercise 3C: Context Data Flow Diagram
Exercise 4: DFDs and Smitty’s
In Exercise 3, DFDs illustrated the sales process at Smitty’s Pizza. The following narrative describes the delivery and cash collection process.
Dispatch slips pass to one of four drivers, who map out a delivery route. By the time the driver receives the corresponding two-part sales order slip(s) and pizza(s), he/she has an efficient plan of delivery. At delivery time, the driver (1) leaves the pizza and one copy of sales slip and (2) collects payment (cash or check) along with applicable coupons. After returning to Smitty’s, the driver staples the sales order slip to the coupon, which is passed, along with the customer’s payment, to the cashier. The cashier enters the receipt into the computer system updating the cash receipts file and the coupon file. The sales order and coupons are thrown in a manila folder.
At the end of the day, the cashier prints a cash receipt report. The cash receipt report, monies, and note of any discrepancy (i.e., overage or shortage) are handed to the manager. The manager fills out the bank deposit and drops the deposit in the bank’s night depository. The manager gives the cash receipt report and the overage/shortage note to the accountant.
The bank sends the accountant a validated bank deposit slip. The computer generates a weekly report summarizing the coupons used, cash receipts, and pizza (sales) orders during the week. Once a week, the accountant compares the deposit slips with the information on the weekly report making sure that all ordered pizzas were properly paid for and all monies received were deposited. Weekly, the accountant sends the owner a report noting any discrepancies.
Answer questions A, B, and C with respect to DFDs in general:
A)External entities appear on which DFD(s)? Symbol?
B)Internal entities appear on which DFD(s)? Symbol?
C)Which DFD explicitly identifies the transformation processes in sequential order?
With respect to the process described above, answer D, E, and F:
D)The Exercise 4 description pertains to which business process?
E)The Exercise 4 description pertains to which accounting transaction cycle?
F)Figures 6, 7, and 8 present DFDs for the above narrative. Fill in the blanks.
Figure 6 is a ______DFD. The data flow for A should be labeled ______and the data flow for B should be labeled ______.
Figure 7 is a ______DFD. The letters A through H appear on the diagram. What label should replace each letter?
Figure 8 is a ______DFD. The letters A through H appear on the diagram. What label should replace each letter?
FIGURE 6
Exercise 4F: Data Flow Diagram for Smitty’s Pizza Cash Collection Process
FIGURE 7
Exercise 4F: Data Flow Diagram for Smitty’s Pizza Cash Collection Process
FIGURE 8
Exercise 4F: Data Flow Diagram for Smitty’s Pizza Cash Collection Process
- Flowcharts
DFDs and flowcharts are complementary methods that together provide documentation of the (electronic and manual) activities within a business process, including the inputs and outputs. Both methods are useful tools for reviewing current systems, designing new systems, training personnel, and evaluating controls. DFDs provide a “bird’s eye view” of the system that can be used to develop the details in flowcharts. See the textbook for flowchart symbols.
Exercise 5: System Flowcharts
Figure 9 shows a partial system flowchart for Smitty’s Pizza. The following questions pertain to the flowchart.
FIGURE 9
Exercise 5: System Flowcharts
A)Which processing system does this system flowchart relate to: the sales process (Exercise 3) or the delivery and cash collection process (Exercise 4)?
B)Identify the processing entities. Would these entities appear on the logical DFD? Physical DFD?
C)Identify the activities diagrammed. Would these steps appear on the logical DFD? Physical DFD?
D)Identify the files. Would these files appear on the logical DFD? Physical DFD?
E)Identify the storage medium of each file. Would either DFD reveal storage type?
F)Identify the manual processes.
G)Identify the documents generated by the system. Would these documents appear on the logical DFD? Physical DFD?
H)Make the appropriate accounting transaction entry, i.e., the accounts debited/credited in relation to this subsystem. The entry is within which accounting transaction cycle(s)?
I)Identify the business process(es). Give an example of non-financial data to collect.
D.REA Model (Resources, Events, and Agents)
While DFDs and flowcharts illustrate data flows and the related processing tasks, they do not reflect the relationships between entities, the attributes of the entities, or the economic duality of events (i.e., give-get relationship). A model that symbolizes these items and supports the value chain is the REA model (McCarthy 1982). By applying entity-relationship diagramming, the REA model captures business activities, the relationships between activities, and both financial and non-financial data. The model preserves unsummarized information about an organization’s activities and is the basis for implementing a relational database. REA modeling does not include journals, ledgers, charts of accounts, or debits and credits, but these can be generated from the relational database. Thus, unlike the accounting-transaction-cycle approach, the REA model allows firms to tailor their AIS to support their entire information needs.
Exercise 6: BasicREA Diagramming
Figure 10 shows the general REA diagram of the revenue cycle.
FIGURE 10
Exercise 6: Basic REA Diagram of the Revenue Cycle
A)Identify the missing labels.
B)Why is accounts receivable missing? How is this information generated when needed?
Exercise 7: Smitty’s Pizza Sales and Cash Collection Processes
The REA diagram in Figure 11 represents the sales process at Smitty’s Pizza.
A)Identify the missing labels.
B)An implementation of the diagram in Part A into a relational database would include a table for each rectangle. Two tables have been selected for this exercise. Below is a list of attributes that you are to use to identify the tables. Identify the two table names and match the appropriate attribute(s) with each table. Underline the primary key for each table, and identify any foreign keys with an asterisk.
Employee SS#Employee #Cash receipt #
Employee date of hireCash receipt date
Employee health insurance indicatorCash received (for pizza delivery)
C)Which of the three REA entities symbolizes a business activity?
FIGURE 11
Exercise 7: REA Diagram of Smitty’s Pizza
Exercise 8: Cardinalities for Smitty’s Pizza
For each of the diagrams below in Figure 12, add the cardinalities for Smitty’s Pizza and state the business policy/rule used. For 3A/3B, assume that the system includes prospective customers.
FIGURE 12
Exercise 8: Cardinalities for Smitty’s Pizza
Exercise 9: REA for The Smithereen Corporation
Due to the popularity of Smitty’s Pizza, Smitty is expanding his business. His new company, the Smithereen Corporation, sells four types of frozen pizzas to convenience stores in the northwestern U.S. After manufacturing the pizzas in Smitty’s new manufacturing plant, Smithereen stores them in freezers before making customer deliveries. Smithereen’s sales process is as follows:
Company sales people are assigned to convenience stores. The convenience stores place orders for the frozen pizzas with their salesperson. There are three methods of payment: (1) immediately, (2) on the 10th of the following month, or (3) over the course of six months. When cash is received, a cashier (who is not a salesperson) makes deposits into one of the company’s bank accounts. Each sale has a sales invoice; each cash receipt has a cash receipt number.
Prepare an REA diagram of the sales process, including cardinalities. Identify the tables, primary keys, and foreign keys required to implement the model into a relational database.
E.Enterprise Resource Planning Systems
Enterprise resource planning systems (ERPs), allow firms to integrate their entire value chain by providing users with information for decision making, i.e., capturing both non-financial and financial information. (ERP is depicted as the Information Reporting System bubble in Figure 2.) For example, Wal-mart has a well-developed ERP supporting its value chain. Wal-mart obtains sales information at the cash register using a bar code scanner. The ERP system allows firms to capture both the selling price of the item sold as well as other non-financial information including vendor name, model number, size, and color. Wal-mart allows more than 10,000 of its suppliers to access this real-time information so the vendors can monitor stock levels, alter manufacturing schedules, and replenish stocks as needed.4 This integrated system, along with Internet technology, helps Wal-mart maintain the right level of inventory to serve its customers.5
Exercise 10: ERP
Smitty wants to implement an ERP system for the Smithereen Corporation. He knows that some ERP implementations have been unsuccessful, but does not fully understand why. To ensure success, Smitty hired you to gather and evaluate data.
A)First, Smitty asks you to determine the critical success factors for an ERP implementation. After an extensive search, you find two perfect articles. Using the article “The key to ERP success” ( describe three critical success factors.6 Using the article “Why the Controversy over ROI from ERP” ( identify specific reasons why ERP implementations have failed and what percentage of ERP implementations fail.7
B)Secondly, Smitty wants you to identify what went wrong at the following installations: Foxmeyer, Nike, Nestle, the city of Oakland CA, and Hershey.
C)Thirdly, Smitty wants you to investigate one ERP system: Oracle.
1)To help users implement and understand its software, Oracle has divided its ERP software into different applications the following 10 different applications: Financials, Human Resources, Manufacturing, Marketing, Order Management, Procurement, Projects, Sales, Service, and Supply Chain. For each application, identify the business process.
2)Oracle applications are divided into different modules or products. Users implement the modules that are necessary for their business. The Human Resources application is divided into the following modules: Advanced Benefits, Core Human Resources, HR Intelligence, iRecruitment, Learning Management, Oracle iLearning, Oracle Tutor, Payroll, Self-Service HR, Time & Labor, and Training. Why might the information in these modules be useful to an organization?
3)Oracle provides predefined, embedded graphical workflows that identify the activities required to complete a task.
a)Identify the activities to hire a new employee (hint: there are 11).
b)The Oracle web site offers a slide show at Human Resources Management Systems Overview Presentation). Within this slide show, Slide 12illustrates how data from the Human Resources application automatically flows across different applications. List the modules that are integrated with Human Resources (hint: each rectangle is a module).
c)Based on this diagram, what is the accounting journal entry from Human Resources to the general ledger? Identify the business process for the journal entry.
d)What non-financial information is collected about a new employee?
4)Lastly, identify four other ERP systems that would be equivocal to Oracle.
TUTORIAL
ENDNOTES
Hollander et al. (2000); Walker and Ainsworth (2001).
2Hammer and Champy (1993).
3Smitty’s Pizza is adapted from Capsule Case 1 in Gelinas, Sutton, & Oram (1999, 10-51).