CHAPTER 2

OVERVIEW OF BUSINESS PROCESSES

Instructors Manual

Learning Objectives:

  1. Explain the basic activities companies engage in, the types of decisions they must make and the types of information they need to make those decisions.
  1. Identify the major internal and external parties that an AIS interacts with and they type of information it provides each user.
  1. Describe the major transaction cycles present in most companies.
  1. Describe the four major steps in the data processing cycle and the major activities in each.
  1. Describe the documents and procedures used in an AIS to collect and process transaction data.
  1. Describe the ways information is stored in computer-based information systems.
  1. Discuss the types of information that an AIS can provide.

Questions to be addressed in this chapter include:

[Refer to power point slide #2]

  1. What are the basic business processes in which an organization engages?

–What decisions must be made to undertake these processes?

–What information is required to make those decisions?

  1. What role does the data processing cycle play in organizing business processes and providing information to users?
  1. What is the role of the information system and enterprise resource planning in modern organizations?

OUTLINE

Introduction

This chapter is divided into two major sections.

The first major section discusses the basic business activities an organization engages in.

The second major section discusses the data processing cycle and its role in organizing business activities and providing information to users.

Information Needs and Business Activities

Table 2-1 on Page 29 provides businesses processes, key decisions and information needs.

Business Processes
1. / Acquires capital / 6. / Sell merchandise
2. / Acquire building and equipment / 7. / Collect payments from customers
3. / Hire and train employees / 8. / Pay employees
4. / Acquire inventory / 9. / Pay taxes
5. / Advertising and marketing / 10. / Pay vendors

Multiple Choice #1

S&S has ten business processes which require information to make key decisions. Which S&S business process requires a market analyses?

  1. Sell merchandise
  2. Advertising and marketing
  3. Acquire inventory
  4. A and B
  5. All of the above

Multiple Choice #2

S&S has ten business processes which require information to make key decisions. What is one or more of the key decisions made to sell merchandise?

  1. Which credit cards to accept?
  2. What models to carry?
  3. How to handle cash receipts?
  4. A and B
  5. None of the above

Interaction Between External and Internal Parties

Figure 2-1 on Page 30 provides important interactions between external and internal parties.

Multiple Choice #3

The AIS at S&S interacts with many external parties. Which external party or parties receive financial statements?

  1. Government agencies
  2. Investors
  3. Customers
  4. Banks
  5. A and B

Multiple Choice #4

The AIS at S&S interacts with many external parties. Which external party receives an invoice from S&S?

  1. Vendor
  2. Customers
  3. Creditors
  4. None of the above

Business Processes

Figure 2-2 on Page 32 provides an overview of the business processes.

Atransactionis an agreement between two entities to exchange goods or services or any other event that can be measured in economic terms by an organization.

Another definition that is not in this book: In order to operate from day to day, a firm conducts a number of business events calledtransactions.

The process that begins with capturing transaction data and ends with an informational output such as the financial statements is calledtransaction processing.

Business activities are pairs of events involved in agive-get exchange.

Table 2-2 on Page 33 provides the major activities in the transaction cycles.

Student Exercise One

Note to Instructor: Students need to become familiar with the various activities included in the different transaction cycles. To do this the following matching exercise should be useful.

Matching Exercise. Match the below listed activities in the following transaction cycles:

  1. Revenue cycle (R)
  2. Expenditure cycle (E)
  3. Human Resources/Payroll (H)
  4. Production (P)
  5. Financing (F)

Student Exercise One
Transaction
Cycle / Activities
1. / Check inventory availability
2. / Store goods
3. / Pay vendors for goods and services
4. / Bill customers for goods shipped or services performed
5. / Prepare management reports
6. / Prepare and disburse payroll
7. / Retire debt
8. / Request raw materials for production
9. / Prepare management reports
10. / Receive customer payments and deposit them in the bank
Match the above ten activities with the five transaction cycles by choosing either R for revenue, E for Expenditure, H for Human Resources/Payroll, P for Production and F for Financing. The answers are provided at the end of this outline.

These basic exchanges can be grouped into five majortransaction cycles:

Therevenue cycle, where goods and services are sold for cash or a future promise to pay cash.

The expenditure cycle, where companies purchase inventory for resale or raw materials to use in producing products in exchange for cash or a future promise to pay cash.

Theproduction cycle, where raw materials are transformed into finished goods.

Thehuman resources/payroll cycle, where employees are hired, trained, compensated, evaluated, promoted and terminated.

Thefinancing cycle, where companies sell sharesin the company to investors and borrow money and where investors are paid dividends and interest is paid on loans

Figure 2-2 on Page 32gives a good overview of thegive-get exchangeand thegeneral ledger and reporting system.

The general ledger and reporting system is used to generate information for both management and external parties.

Table 2-2 on Page 33gives a great listing of activities within the Revenue, Expenditure, Human Resources/Payroll, Production and Financing Cycles.

Notice that the last activity listed in Table 2-2 for each transaction cycle is “send appropriate information to the other cycles.”

Multiple Choice #5

Give cash and get raw materials is an event in the ______cycle, and give labor and get finished goods is an event in the ______cycle.

  1. Expenditure, production
  2. Financing, human resources
  3. Revenue, production
  4. Expenditure, production

Multiple Choice #6

Which business cycle does not involve cash?

  1. Revenue
  2. Production
  3. Human resources
  4. Expenditure
  5. Financing

Transaction Processing: The Data Processing Cycle

Four Major Steps in The Data Processing Cycle [Figure 2-3 on Page 35]:

1)Data Input

2)Data Storage

3)Data Processing

4)Information Output

The first step in processing transaction is to capture the data for each transaction that takes place and enter them into the system.

Data Inputs

Data must be collected aboutthree facetsof each business activity:

  1. Each activity of interest
  1. The resource(s) affected by each activity
  1. The people who participate in each activity

For example, collect the following data about a sales transaction:

  • Date and time of day the sale occurred
  • Employee who made the sale and the checkout clerk who processed the sale
  • Checkout register where the sale was processed
  • Item(s) sold
  • Quantity of each item sold
  • List price and actual price of each item sold
  • Total amount of the sale
  • For credit sales: delivery instructions, customer bill-to and ship-to addresses, customer name

Multiple Choice #7

Accountants have a significant role in the data processing cycle. Accountants interact with system analyst to answer questions that include:

  1. What report should be used to portray the goals in financial terms?
  2. What data should be entered and stored by the organization?
  3. How should the information be organized, updated, stored, accessed and retrieved?
  4. B and C
  5. None of the above

Multiple Choice #8

The most frequent transaction in the revenue cycle is a

  1. purchase of inventory
  2. sale
  3. credit approval
  4. customer payments

Source Documents– documents used to collect data about their business activities. Source documents are also used to support the validity of the business activities.

If paper documents are exchanged with customers or suppliers, data input accuracy and efficiency is improved by usingturnaround documents, which are records of company data sent to an external party and then returned to the system as input.

Table 2-3 on Page 36 provides an excellent listing of Common Business Activities and Source Documents for the revenue, expenditure and human resources cycles that students should become familiar with.

Source Data Automationis yet another means to improve the accuracy and efficiency of data input. An example would be once the sale of merchandise is rung up on the cash register it would be interfaced with accounting to automatically record the sale and also interfaced with the warehouse to automatically reduce the level of inventory for the item that was sold. This would also be interfaced with purchasing in which the purchase order would automatically be printed out for delivery to the vendor.

The second step in processing transactions is to make sure captured data are accurate and complete.

One way to increase accuracy and completeness is to use well-designed turnaround documents and data entry screens, as well as source data automation.

Multiple Choice #9

The source document used to request that items be purchased is a

  1. purchase order
  2. purchase budget
  3. purchase requisition
  4. A and C
  5. all of the above

Multiple Choice #10

A customer returns merchandise to a company. The source document that should be used is:

  1. credit memo
  2. adjustment memo
  3. remittance advice
  4. none of the above

Data Storage

A company’s data are one of its most important resources.

Accountants need to know how to manage data for maximum corporate use.

Ledgers

General Ledgercontains summary-level data for every asset, liability, equity, revenue and expense account of the organization.

Subsidiary Ledger. Records all the detailed data for any general ledger account that has many individual subaccounts.

These subsidiary ledgers would be used for accounts receivable and accounts payable.

Accounts receivable subsidiary ledger would record detailed data for customers whom buy products or services on credit.

The accounts receivable subsidiary ledger would support the accounts receivable general ledger controlling account.

Accounts payable subsidiary ledger would record detailed data for the individual vendor credit purchases of merchandise/supplies made by the company.

The accounts payable subsidiary ledger would support the accounts payable general ledger controlling account.

Coding Techniques

Coding is the systematic assignment of numbers or letters to items to classify and organize them

  • Withsequence codes, items are numbered consecutively to ensure that there will be no gaps in the sequence.
  • With ablock code, blocks of numbers within a numerical sequence are reserved for categories having meaning to the user

S&S had the specific range of code numbers for their following major product categories:

Product Code Product Type

1000000-1999999 Electric range

2000000-2999999 Refrigerator

3000000-3999999 Washer

4000000-4999999 Dryer

  • Group codesare often used in conjunction with the block code. S&S uses a seven-digit product code number, for example, the group coding technique might be applied as follows

Digit Position Meaning

1-2Product line, size, style

3 Color

4-5 Year of manufacture

6-7 Operational features

In designing a coding system, the following guidelines will result in a better coding system:

  • The code should be consistent with its intended use, which requires the code designer to determine the types of system outputs desired by users prior to selecting the code.
  • Make sure the code allows for growth in the number of items to be coded.
  • Make the coding system as simple as possible in order to minimize costs, facilitate memorization and interpretation of coding categories, and ensure employee acceptance
  • Make sure the coding system is consistent (1) with the company’s organizational structure and (2) across the different divisions of an organization

Note to Instructor: The following is optional additional information that could be included in the chapter two outline that does not come from the AIS 11e book.

The data collectionfunction (performed during the input stage) involves steps such as capturing the transaction data, recording the data onto forms, and validating and editing the data to ensure their accuracy and completeness.This is not in the book.

Also, this isnot in the book. Thedata maintenancefunction (performed during the processing stage) involves steps like the following:

  • Classifying, or assigning collected data to pre-established categories
  • Transcribing, or copying/reproducing the data onto another document or medium
  • Sorting, or arranging data elements according to one or more characteristics
  • Batching, or gathering together groups of transactions of a similar nature
  • Merging, or combining two or more batches or files of data.

Multiple Choice #11

Purchase orders would use ______codes, while coding for major product categories would use a ______code.

  1. account and ledger
  2. block and sequence
  3. group and sequence
  4. sequence and block

Multiple Choice #12

In designing a coding system, the following guidelines will results in a better coding system:

  1. The second digit in each account code should represent the primary financial subaccounts within each category.
  2. The code should be consistent with its intended use, which requires the code designer to determine the types of system outputs desired by users after selecting the code.
  3. Make sure the coding system is consistent (1) with the company’s organizational structure and (2) across the different divisions of an organization.
  4. A and C

Chart of Accounts

A chart of accounts is a list of all general ledger accounts an organization uses with each general ledger account being assigned a specific number.

Table 2-4 on Page 39provides the chart of accounts for S&S

Note that the various categories of accounts all start with the same first number. For example, current assets all start with the number 1. The 2nd and 3rd number identifies the specific account. For example, cash 101, where the first number 1 identifies the category of current assets and the 2nd & 3rd numbers 0 and 1 identifies the checking account.

Journals

Sales Journal (SJ)– Credit Sales

Cash Receipts Journal (CR) – Cash Sales & Cash Collected From Customers’ Accounts Receivable

Purchase Journal (PJ) – Credit Purchases

Cash Payments Journal (CP) – All Cash Payments

General Journal (GJ) – Adjusting Entries and Closing Entries

Table 2-5 at the bottom of Page 40 provides an example of the Sales Journal. Students should remember that the column on the far right in this journal represents the debits to accounts receivable and credit to sales.

Students should also remember that credit sales are recorded daily in the Sales Journal and also recorded in the Accounts Receivable Subsidiary Ledger. Then at the end of the month the column total in the Sales Journal is then posted to the general ledger accounts for accounts receivable and sales.

Figure 2-4 on Page 41provides the flow of Recording and Posting Credit Sales.

Students should note that transactions are recorded daily in the sales journal and accounts receivable subsidiary ledger. Students should also remember that SJ1 means Sales Journal Page 1, CR4 means Cash Receipts Journal Page 4 and SJ5 means Sales Journal Page 5.

Audit TrailThe accounting data and records should provide a trail starting with the source document that supports the transaction (for example, lets use credit sales) all the way through to the final posting in the general ledger accounts to the financial statements. An audit trail provides a means to check the accuracy and validity of ledger postings.

In auditing, this technique would becalledTracing. In the opposite direction; from the general ledger to the journals & subsidiary ledgers to the source document; this is calledVouchingfor auditors.This is covered in more detail in Auditing Theory and Practice courses.

Multiple Choice #13

The journal that records cash collections from customers is the:

  1. Sales journal
  2. Cash receipts journal
  3. General journal
  4. A and B
  5. None of the above

Multiple Choice #14

Posting references and ______numbers provides what is known as a(n) ______.

  1. Document and general ledger control account
  2. Account and Audit trail balance
  3. Transaction and subsidiary ledger
  4. Document and audit trail

Computer-Based Storage concepts

An entityis something about which information is stored. For example, employees, inventory items and customers.

Each entity hasattributes, or characteristics of interest, which need to be stored. For example an employee’s hourly rate of pay, unit cost of an inventory item and a customer’s address.

Figure 2-5 on Page 42 provides examples of data storage elements:

Data values are stored in a physical space called afield. In the figure the fields are Customer number, Customer name, Address, Credit limit and Balance

The sect of fields that contain data about various attributes of the same entity forms arecord. In the figure that records are represented by each of the three rows; so there are three records.

The contents of each field within a record are called a data value. Sometimes, not mentioned in this book, the contents of each field are called a specificdata element which contains value the data.

In turn, data elements/data value is composed ofcharacterssuch as letters, numbers and symbols.

Related records are grouped to form afile.

Two basic types of files exist:

  • A master file is conceptually similar to a ledger in a manual AIS
  • The second basic type of file is called atransaction file, which is conceptually similar to a journal in a manual AIS

Data Processing