Accounting Information Systems, 15th Edition Marshall B Romney Global Edition Instructor Manual by TBtutors

Type:

Instructor Manual

Resource:

Accounting Information Systems

Edition:

15th Edition

Author(s):

Marshall B. Romney Paul J. Steinbart Scott L. Summers David A. Wood

Instructor’s Resource Manual

Accounting Information Systems 15th Edition

Marshall B. Romney Professor Emeritus, Brigham Young University

Paul John Steinbart Professor Emeritus, Arizona State University

Scott L. Summers Brigham Young University

David A. Wood Brigham Young University

CHAPTER 1 ACCOUNTING INFORMATION SYSTEMS: AN OVERVIEW Instructor’s Manual Learning Objectives: 1. Distinguish between data and information, discuss the characteristics of useful information, and explain how to determine the value of information. 2. Explain the decisions an organization makes and the information needed to make them, and the major business processes present in most companies. 3. Explain how an AIS adds value to an organization, how it affects and is affected by corporate strategy, and its role in a value chain.

Learning Objective One Distinguish data from information, discuss the characteristics of useful information, and explain how to determine the value of information.

Systems, Data, and Information Systems A system is a set of detailed methods, procedures, and routines that carry out specific activities, perform a duty, achieve goals or objectives, or solve problems. Systems are almost always composed of smaller subsystems Each subsystem is designed to achieve one or more organizational goals. For example, the college of business is a system composed of various subsystems known as departments (e.g., Marketing, Management, Accounting, etc.). Each subsystem is designed to achieve one or more organizational goals, changes in subsystems cannot be made without considering the effect on other subsystems and the system as a whole. Goal conflict occurs when a subsystem’s goals are inconsistent with the goals of another subsystem or the system as a whole.

Goal congruence is achieved when a subsystem achieves its goals while contributing to the organization’s overall goal.

Data Data are facts that are collected, recorded, stored, and processed by an information system. Several kinds of data need to be collected in businesses, such as: 1. Facts about the activities that take place (e.g., date, total amount). 2. The resources affected by the activities (e.g., number of units). 3. The people who participate in the activity (e.g., S&S).

Information Information is data that have been organized and processed to provide meaning and context that can improve the decision-making process. If using the example of data provided above—date, number of units, and S&S—would you be able to determine if this is a sales transaction, purchase transaction, or any other type of transaction? No, because it is not organized and contextual, meaning it is not determinable. You would need to know that the context of the transaction is a sales transaction and S&S is a customer (as opposed to a vendor). Number of units are number of units sold. Data is most useful when it is machine-readable and standardized such that it can be processed by a computer with little human intervention. For example, digital transaction information such as “IR144, $12.95, Infrared reader, 3, $38.85” might be presented digitally, but the meaning of that data is not clear. This might be a purchase transaction or a sales transaction. IR144 might represent a transaction ID, employee ID, vendor ID, or customer ID. Taxonomies have been created to embed meaning in digital data. XBRL is a taxonomy that structures business information for communication between business systems. Using the XBRL taxonomy is quite complex and embeds a lot of information about the characteristics and constraints of each data field. An XBRL presentation of Cash of 11,000 from a balance sheet for 2022 may be represented in XBRL as <iascf-pfs:CashCashEquivalents numericContext="Group2022AsOf">11000</iascfpfs:CashCashEquivalents>

Note the tag name of CashCashEquivalents. Tag names have to be created in XBRL for all financial statement elements. Also, note the attribute numericContext that has a value of Group2020AsOf. This provides additional context to the value of 11,000. The XBRL taxonomy does not have elements for tagging individual transactions. 1-2 Copyright © 2021 Pearson Education, Inc.

Thus XBRL cannot effectively ‘tag’ the transaction noted above. The UBL taxonomy, an open source taxonomy for tagging business transactions has a schema for invoices. http://docs.oasisopen.org/ubl/os-UBL-2.2/UBL-2.2.html Below is an example of how the data above might be tagged in that taxonomy. <cac:InvoiceLine> <cbc:ID>1</cbc:ID> <cbc:InvoicedQuantity>3</cbc:InvoicedQuantity> <cbc:LineExtensionAmount currencyID="USD">38.85</cbc:LineExtensionAm ount> <cac:Item> <cbc:Name>Infrared reader</cbc:Name> <cac:SellersItemIdentification> <cbc:ID>IR144</cbc:ID> </cac:SellersItemIdentification> </cac:Item> <cac:Price> <cbc:PriceAmount currencyID="USD">12.95</cbc:PriceAmount> </cac:Price> </cac:InvoiceLine> Tagging data with agreed upon taxonomies allows data elements and their context to be transmitted between systems. It also improves reliability, relevance, accessibility, understandability, and timeliness. There are limits to the amount of information the human mind can effectively absorb and process. Information overload occurs when those limits are passed. When you get more information than you can effectively assimilate, you suffer from information overload. •

Example: Final exams week!

When you have reached the overload point, the quality of decisions declines while the costs of producing the information increases. Information Technology (IT) are computers and other electronic devices used to store, retrieve, transmit, and manipulate data to help decision makers more effectively filter and condense information. The value of information is the benefit produced by the information minus the cost of producing it. Benefits include reduced uncertainty, improved decisions, and improved ability to plan and schedule activities. Costs include the time and resources spent to produce and distribute information. A good example of the value of information is provided on page 5 for the 7-Eleven stores in Japan. Each store uses information for: 1. Keeping track of the 3,000 items sold in each store and 1-3 Copyright © 2021 Pearson Education, Inc.

determining what products are moving, at what time of the day, and under what weather conditions. 2. Keeping track of customers (what and when they buy). If their best customers are single men, for example, the store makes sure it has the fresh rice dishes they purchase on their lunch hour and at the end of the workday. 3. Ordering sandwiches and rice dishes from suppliers automatically. Orders are placed and filled three times a day so stores can always have fresh food. 7-Eleven allows its suppliers to access sales data in their computers so they can forecast demand. 4. Coordinating deliveries with suppliers. This allows the stores to reduce the number of deliveries from 34 to 12 a day, resulting in less clerical receiving time. 5. Preparing a color graphic display that indicates which store areas contribute the most to sales and profits. Table 1-1 on page 4 provides the fourteen characteristics that make information useful and meaningful for decision making. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14.

Access Restricted Accurate Available Reputable Complete Concise Consistent Current Objective Relevant Timely Useable Understandable Verifiable

Multiple Choice 1 Data differ from information in which way? a. Data are facts about a sale b. Information is data organized to provide meaning c. Data are meaningful bits of information d. There is no difference Multiple Choice 2 Which of the following is not a characteristic that makes information useful? a. It is reputable b. It is timely c. It is inexpensive d. It is relevant 1-4 Copyright © 2021 Pearson Education, Inc.

Learning Objective Two Explain the decisions an organization makes and the information needed to make them, and the major business processes present in most companies. .

Key Decisions and Information Needs Using the S&S case, we can determine what information will be needed to make better decisions. An information system is comprised of the people and technology that produce information. Information in an organization is organized through a set of related, coordinated, and structured activities and tasks, performed by a person, a computer, or a machine that help accomplish a specific organizational goal known as a business process. The case will help students to understand that before collecting data and processing it into information, the decisions that management and other external users will be making need to be known first. Only after this is known can we begin designing and using the AIS to capture, collect, and process the correct data as needed by decision makers. These information needs and key decisions are provided in Table 1-2 on page 6. Multiple Choice 3 What information needs are generally associated with the acquire inventory business process? a. Market Analysis b. Vendor Performance c. Inventory status reports d. All of the above

Learning Objective Three Explain how an AIS adds value to an organization, how it affects and is affected by corporate strategy, and its role in a value chain.

Business Processes

Taking the list of specific business processes from S&S it is easier to group them into related transactions. A transaction is an agreement between two entities to exchange goods or services or any other event that can be measured in economic terms by an organization. Transaction processing is the process of capturing transaction data, processing it, storing it for later use, and producing information output such as a financial statement. The activities between two entities are pairs of events involved in give-get exchange (e.g., give inventory to a customer, get cash from the customer). These frequent give-get exchanges that occur in companies are grouped around business processes or transaction cycles and are: 1. The Revenue Cycle (AKA customer to cash (C2C)—Activities associated with selling goods and services in exchange for cash or future promise to receive cash (Accounts Receivable). 2. The Expenditure Cycle—(AKA purchase to pay (P2P))Purchase of inventory for resale or raw materials for use in production in exchange for cash or a promise to pay cash in the future (Accounts Payable). 3. The Production or Conversion Cycle—Raw materials are converted into finished goods. 4. The Human Resource/Payroll Cycle—Employees are hired, trained, compensated, evaluated, promoted, and terminated. 5. The Financing Cycle—Companies acquire capital by selling shares or borrowing money and where investors are paid dividends or interest. For each of these processes there is a basic give-get relationship. Figure 1-2 on page 7 provides a description of the basic give-get exchanges. 1. Revenue Cycle—Give goods, get cash or A/R. 2. Expenditure Cycle—Give cash or A/P, get goods or raw materials. 3. Production Cycle—Give labor and raw materials, get finished goods. 4. Human Resource—Give cash, get labor. 5. Financing Cycle—Give cash, get cash. Figure 1-3 on page 8 shows the relationship between these cycles and the general ledger and reporting system function which is used to generate information for both management and external parties. Multiple Choice 4 Which transaction cycle includes interactions between an organization and its suppliers? a. Revenue cycle b. Expenditure cycle c. Human resources/payroll cycle 1-6 Copyright © 2021 Pearson Education, Inc.

d. General ledger and reporting system Multiple Choice 5 In which cycle does a company ship goods to customers? a. Production cycle b. Financing cycle c. Revenue cycle d. Expenditure cycle

Accounting Information Systems An accounting information system (AIS) is a system that collects, records, stores, and processes data to produce information for decision makers. This is illustrated in Figure 1-4 on page 11. An AIS can be a pencil and paper manual system or one that involves the latest technology. Six components of an AIS 1. The people who operate the system and perform various functions. 2. The procedures and instructions, both manual and automated, involved in collecting, processing, and storing data about the organization’s activities. 3. The data about the organization and its business processes. 4. The software used to process the organization’s data. 5. The information technology infrastructure, including computers, peripheral devices, and network communications devices used to collect, store, process, and transmit data and information. 6. The internal controls and security measures that safeguard the data in the AIS. These six components enable an AIS to fulfill three important business functions: 1. Collect and store data about organizational activities, resources, and personnel. 2. Transform data into information that is useful for making decisions so management can plan, execute, control, and evaluate activities, resources, and personnel. 3. Provide adequate controls to safeguard the organization’s assets, including its data, to ensure that the assets and data 1-7 Copyright © 2021 Pearson Education, Inc.

are available when needed and the data are accurate and reliable. Multiple Choice 6 Which of the following is a function of an AIS? a. Reducing the need to identify a strategy and strategic position. b. Transforming data into useful information. c. Allocating organizational resources. d. Automating all decision making.

How an AIS Can Add Value to an Organization 1. Improve the quality and reduce the costs of products or services. 2. Improve efficiency. A well-designed AIS can make operations more efficient by providing more timely information. 3. Share knowledge. A well-designed AIS can make it easier to share knowledge and expertise, perhaps thereby improving operations and even providing a competitive advantage. 4. Improve the efficiency and effectiveness of its supply chain. 5. Improve the internal control structure. 6. Improve decision making.

Multiple Choice 7 An AIS provides value by: a. improving products or services through information that increases quality and reduces costs b. providing timely and reliable information to decision makers c. creating new products d. both A and B

An AIS Can Use Artificial Intelligence and Data Analytics to Improve Decision Making Artificial Intelligence uses computer systems to simulate human intelligence processes such as learning, reasoning, and self-improvement. Within accounting AI may be used to automate parts of the financial reporting process, the audit, and many operational decisions. Data Analytics is the use of software and algorithms to discover, describe, interpret, communicate, and apply meaningful patterns to improve business performance. Data analytics have long been used to analyze past

performance. Increasingly data analytics are designed to focus on the future. A data dashboard is an essential part of most analytic tools. It displays important data points, key metrics, and key performance indicators in the form of graphs, tables, and gauges.

The AIS and Blockchain Blockchain is appropriately named as it chains blocks of data together through the use of cryptography algorithms that create hashes. The hash of a prior block is included in the latest block, creating the chain. At a high level a blockchain repeatedly executes the following 5 steps: 1. Initiate transaction 2. Validate transaction 3. Create a block 4. Calculate and insert a hash 5. Complete transaction A detailed discussion of the processes of using and maintaining a blockchain are covered in Chapter 11. Blockchain advantages include: 1. Accuracy 2. Transparency 3. Data consistency 4. Trust 5. No need for third parties 6. Single set of books 7. Cost 8. Decentralization 9. Efficiency 10. Privacy 11. Security 12. Provenance Blockchain disadvantages include: 1. Cost 2. Loss of privacy and confidentiality 3. Susceptibility

Cloud Computing, Virtualization, and the Internet of Things Cloud computing takes advantage of the modern global network to allow individuals to access software (software as a service), hardware (infrastructure as a service), and application environments (platform as a service) remotely. Variations include: public, private, or hybrid clouds, depending on whether the remote resources are owned by the user. Virtualization is the installation of multiple computing environments in a single physical computer. A corporation might virtualize their database server, email server, and file server (three separate computing environments – each with their own operating system) on a single physical computer. This cuts hardware costs and reduces maintenance costs.

The Internet of Things (IOT) refers to the embedding of sensors in a multitude of devices that are capable of communicating (sharing data) with the internet. IOT allows for monitoring and control of many common devices such as heating, appliances, and lights from any internet connection in the world. There are significant security implications to the IOT.

The AIS and Corporate Strategy Figure 1-5 on page 19 shows three factors that influence the design of an AIS: IT developments, business strategy, and organizational culture. For example, the growth of the internet has affected the way many value chain activities are performed. The internet makes a company’s products available almost anywhere. An organization’s AIS play an important role in helping it adopt and maintain a strategic position. The information system can collect financial and nonfinancial data about the organization’s activities.

The Role of the AIS in the Value Chain The role of an AIS in the value chain is detailed in Figure 1-6 on page 19 showing the linking together of all the primary and support activities in a business. The objective of most organizations is to provide value to their customers. Five primary activities that directly provide value to its customers: 1. Inbound logistics consists of receiving, storing, and distributing the materials an organization uses to create the services and products it sells. 2. Operations activities transform inputs into final products or services. 3. Outbound logistics activities distribute finished products or services to customers. 4. Marketing and sales activities help customers buy the organization’s products or services. 5. Service activities provide post-sale support to customers. Four Categories of Support Activities

1. Firm infrastructure is the accounting, finance, legal, and general administration activities that allow an organization to function. 2. Human resources activities include recruiting, hiring, training, and providing employee benefits and compensation. 3. Technology activities improve a product or service. 4. Purchasing activities procure raw materials, supplies, machinery, and the buildings used to carry out the primary activities. Supply Chain [Figure 1-7 on Page 20] shows an extended system that includes an organization’s value chain (manufacturer) as well as suppliers, distributers, retailers, and customers. 1. Raw Materials Supplier 2. Manufacturer 3. Distributor 4. Retailer 5. Consumer Multiple Choice 8 The value chain concept is composed of the following two types of activities: a. Primary and secondary b. Primary and support c. Support and value d. Technology and support Multiple Choice 9 Which of the following is a primary activity in the value chain? a. Purchasing b. Accounting c. Post-sales service d. Human resource management Multiple Choice 10 Which of the following is a support activity in the value chain? a. Purchasing b. Manufacturing c. Post-sales service d. Receiving materials

Answers to Multiple Choice Questions: Multiple Choice Number 1 2 3 4 5

Multiple Choice Answer B C D B C

Multiple Choice Number 6 7 8 9 10

Multiple Choice Answer B D B C A

References Used: 1. Michael E. Porter and Victor E. Millar, How Information Gives You Competitive Advantage. Harvard Business Review, (July–August 1985), pp. 149–160. 2. Michael E. Porter, What Is Strategy? Harvard Business Review, November-December 1996), pp. 61-78.

CHAPTER 2 OVERVIEW OF TRANSACTION PROCESSING AND ENTERPRISE RESOURCE PLANNING SYSTEMS Instructor’s Manual Learning Objectives: 1. Describe the data processing cycle used to process transactions, including how data is input, stored, and processed and how information is output. 2. Discuss how organizations use enterprise resource planning (ERP) systems to process transactions and provide information. Questions to be addressed in this chapter include: 1. How should I organize the accounting records so that financial statements can be easily produced? 2. How am I going to collect and process data about all of S&S’s transactions? 3. How do I organize all the data that will be collected? 4. How should I design the AIS so that the information provided is reliable and accurate? 5. How can I design procedures to ensure that they meet all government obligations, such as remitting sales, income, and payroll taxes?

Learning Objective One Describe the data processing cycle used to process transactions, including how data is input, stored, and processed and how information is output.

Transaction Processing: The Data Processing Cycle Four Major Steps in the Data Processing Cycle

1) Data Input 2) Data Storage 3) Data Processing 4) Information Output The first step in processing transactions is to capture the data for each transaction that takes place and enter them into the system. Data Input Data must be collected about three facets of each business activity: 1. Each activity of interest 2. The resource(s) affected by each activity 3. The people who participate in each activity For example, collect the following data about a sales transaction: 1. Date and time of day the sale occurred 2. Employee who made the sale and the checkout clerk who processed the sale 3. Checkout register where the sale was processed 4. Item(s) sold 5. Quantity of each item sold 6. List price and actual price of each item sold 7. Total amount of the sale 8. For credit sales: delivery instructions, customer bill-to and ship-to addresses, customer name For the above example, the activity of interest is the sales activity. A sales activity involves resources of inventory and cash (the company gives inventory and in exchange receives cash). The people who participated in this activity are the salesperson and the customer. Source documents are used to capture data at the beginning of the transaction. Table 2-1 (p. 33) provides details as to various business activities and related source documents. Many times this data is automatically captured such as point-ofsale (POS) scanners or even automated invoice scanning that uses scanners that will automatically capture common items from a vendor invoice and processes it to accounts payable. These types of examples are known as source data automation.

Source documents are documents used to collect data about their business activities. Source documents are also used to support the validity of the business activities. XBRL is a good example of a format that supports source data automation between financial reporting systems. UBL is an example of a format that supports source data automation between transaction processing systems. If paper documents are exchanged with customers or suppliers, data input accuracy and efficiency is improved by using turnaround documents, which are records of company data sent to an external party and then returned to the system as input (e.g., remittance slip). 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 ledger contains 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 or 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.

1. With sequence codes, items are numbered consecutively to ensure that there will be no gaps in the sequence. 2. With a block 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 1000000-1999999 2000000-2999999 3000000-3999999 4000000-4999999

Product Type Electric range Refrigerator Washer Dryer

3. Group codes are 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 1-2 3 4-5 6-7

Meaning Product line, size, style Color Year of manufacture Operational features

4. Mnemonic codes are letters and numbers used in a combination to identify an item. The code is derived from the description of the item and is usually easy to memorize. For example, Dry300W05 could represent a low end (300), white (W) dryer (Dry) made by Sears (05). In designing a coding system, the following guidelines will result in a better coding system: 1. 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. 2. Make sure the code allows for growth in the number of items to be coded. 3. 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. 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. Audit Trail: The accounting data and records should provide a trail starting with the source document that supports the transaction (e.g., let’s 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 be called tracing. In the opposite direction; from the general ledger to the journals and subsidiary ledgers to the source document; this is called vouching for auditors. This is covered in more detail in Auditing Theory and Practice courses. Computer-Based Storage Concepts An entity is something about which information is stored (e.g., employees, inventory items, and customers). Each entity has attributes, 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 2-3 on page 38 provides examples of data storage elements: 1. Data values are stored in a physical space called a field. In the figure the fields are Customer number, Customer name, Address, Credit limit, and Balance. 2. A row of fields that contain data about various attributes (values) of the same entity forms a record. In the figure the records are represented by each of the three rows; so there are three records. 3. 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 specific data element which contains the value of the data. 4. In turn, data elements/data value is composed of characters such as letters, numbers, and symbols. 5. Related records are grouped to form a file. 6. 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 a transaction file, which is conceptually similar to a journal in manual AIS.

Once data about a business activity have been collected and entered into the system they must be processed. Data processing implies the execution of certain procedures, usually involving a series of tasks. There are four different types of file processing, referred to as CRUD: 1. Creating new data records, such as adding a new employee to the payroll master file or database after they have been hired. 2. Reading, retrieving, or viewing existing data. 3. Updating data previously stored about the activity, the resources affected by the activity, or the people who performed the activity (see Figure 2-4, page 39). 4. Deleting data, such as purging the vendor master file of all vendors that the company no longer does business with. Periodic updating of data is referred to as batch processing. This approach may be combined with either the offline or online entry of data. Under the real-time processing method of processing, individual transactions are entered directly into the computer via a terminal as they occur; thus, ensuring that stored information is always current. Information Output This is the final step in the data processing cycle. Forms of Information Output Documents are records of transaction or other company data, such as checks and invoices. Documents generated at the end of transaction processing activities are called operational documents to distinguish them from source documents, which are used at the beginning of the process. Reports are prepared for both internal and external users. We are all familiar with the external reports called financial statements. Information needs cannot always be satisfied strictly by documents or periodic reports. Instead, problems and questions constantly arise that need rapid action or answers. To respond to this problem, personal computers or terminals are used to query the system. For example, it is much easier for a customer service 2-6 Copyright © 2021 Pearson Education, Inc.

employee to help solve a customer billing problem by looking up the information instead of looking through several different reports. Purpose of Output There are four main types of financial reports that were covered in Principles of Accounting I & II courses, the balance sheet, income statement, statement of owner’s equity, or statement of stockholder’s equity, and the statement of cash flows. Sometimes a statement of retained earnings is used instead of the statement of stockholder’s equity. These financial statements are used by both external and internal users. Budgets are used by the management of the firm. Budgets require estimating future revenue/sales, cost, and expenses. This is the operational budget. There are also cash budgets and capital expenditure budgets. Blockchain is more than a distributed ledger that you learned about in Chapter 1. Transactions can be processed through blockchain in the form of smart contracts. Smart contracts are regular contracts with terms and agreements. They are stored in the blockchain in such a way that when the terms are met, they can autoexecute to fulfill the contract. The terms can be met by actions happening within the blockchain. The terms (and autoexecution) can also be tied to external events such as receiving inventory or fulfilling service terms. Multiple Choice 1 Which of the following is not a step in the data processing cycle? a. Data collection b. Data input c. Data storage d. Data processing Multiple Choice 2 Recording and processing information about a transaction at the time it occurs is referred to as which of the following? a. Batch processing b. Real-time processing c. Captured transaction processing d. Chart of accounts processing Multiple Choice 3 How does the chart of accounts list general ledger accounts? a. Alphabetical order b. Chronological order c. Size order d. The order in which they appear in financial statements

Multiple Choice 4 Which one below is not a type of data processing activity? a. Creating b. Updating c. Recording d. Reading Multiple Choice 5 Which of the items below are not an attribute of a smart contract? a. Has terms b. Can auto-execute c. Built into blockchain d. Must use cryptocurrency For class discussion: Why is it important for an accountant to understand their business and industry as well as management’s informational needs in addition to knowing how to generate financial statements? (You may use S&S as the context while asking this question.) This discussion question is useful to get students to understand that accounting information is not just about knowing debits and credits. The role of an accountant is an important role in understanding the business information, how to incorporate controls for that information, and how to help management measure performance by providing insight, foresight, and oversight to the business. Hence, an accountant can be an active member of the business management team.

Learning Objective Two Discuss how organizations use enterprise resource planning (ERP) systems to process transactions and provide information.

ERP systems are designed to overcome problems as they integrate all aspects of a company’s operations with its traditional AIS. A key feature of ERP systems is the integration of financial with other nonfinancial operating data. More sophisticated ERP systems are using tools to integrate external information with their internal information to be more proactive in managing the business. Multiple Choice 6 Which of the following is not an advantage of an ERP system? a. Better access control 2-8 Copyright © 2021 Pearson Education, Inc.

b. Standardization of procedures and reports c. Improved monitoring capabilities d. Simplicity and reduced costs Class Discussion Question: Think about the various forms of social media (e.g., Twitter, Facebook). Would this nonfinancial information external to the company be of use? What other nonfinancial information would be useful? Could you think of financial information that is external to the organization that might be useful to management as well? This discussion question is to get the students thinking in a “data analytic mindset” because organizations need to compete in a global market which requires synthesizing information that is both internal and external to the organization. For example, Walmart uses sales information as well as weather forecasts to predict which items stores should be stocked up on during a hurricane (NYtimes.com, 2004). This allows the company to use past information from within the organization and synthesize it with external information to be more proactive. In addition, IBM purchased weather.com specifically so weather data analytics can be used by organizations to better predict their inventory needs (Thurai, November 9, 2015). Sources: https://www.nytimes.com/2004/11/14/business/yourmoney/whatwalmart-knows-about-customers-habits.html https://www.ibmbigdatahub.com/blog/author/andy-thurai

Answers to Multiple Choice Questions: Multiple Choice Number 1 2 3 4 5 6

Multiple Choice Answer A B D C D D

CHAPTER 3 SYSTEMS DOCUMENTATION TECHNIQUES Instructor’s Manual Learning Objectives: 1. Prepare and use business process diagrams (BPDs) to understand, evaluate, and document information systems. 2. Prepare and use flowcharts to understand, evaluate, and document information systems. 3. Prepare and use data flow diagrams to understand, evaluate, and document information systems.

Questions to be addressed in this chapter include: 1. What is the purpose of documentation? 2. Why do accountants need to understand documentation? 3. What documentation techniques are used in accounting systems? 4. What are BPDs, flowcharts, and data flow diagrams? •

How are they alike and different?

•

How are they prepared?

Introduction Techniques Used to Document a System Narratives, flowcharts, diagrams, and other written materials that explain how a system works. Documentation tools are important on one or more of the following levels: 1. At a minimum, you must be able to read documentation to determine how the system works. 2. You may be required to evaluate internal control systems documentation to identify control strengths and weaknesses and recommend improvements. Alternatively, you may have to evaluate the documentation for a proposed system to determine if the system meets the company’s needs. 3. The greatest amount of skill is needed to prepare documentation. If you are a member of a team that is developing a new system, then you must prepare documentation to show how both the existing and the 3-1 Copyright © 2021 Pearson Education, Inc.

proposed systems operate. This chapter discusses the following three documentation tools: 1. BPD is a graphical description of the business processes used by a company. 2. Flowcharts a. Document flowchart is a graphical description of the flow of documents and information between departments or areas of responsibility within an organization. i. Internal Control flowchart is used to describe, analyze, and evaluate internal controls, including identifying system strengths, weaknesses, and inefficiencies. b. System flowchart is a graphical description of the relationship among the input, processing, and output in an information system. c. Program flowchart is a graphical description of the sequence of logical operations that a computer performs as it executes a program. 3. Data flow diagram is a graphical description of data sources, data flows, transformation processes, data storage, and data destinations.

Accountants need to understand systems documentation for many reasons. For example, auditing standards require independent auditors to understand the automated and manual internal control procedures an entity uses. In addition, Sarbanes-Oxley Act (SOX) of 2002 requires an internal control report in public company annual reports. To be able to document and attest to internal controls requires the use and knowledge of systems documentation tools.

Learning Objective One Prepare and use business process diagrams to understand, evaluate, and document information systems.

Business Process Diagrams A BPD is a visual representation of the different steps or activities in a business process. Figure 3-1 on page 61 shows the basic symbols used for drawing BPDs as well as the Payroll at S&S. The Business 3-2 Copyright © 2021 Pearson Education, Inc.

Process Modeling Initiative Notation Working Group established standards for drawing BPD’s. Guidelines are in Focus 3-1 on page 61: 1. Identify and understand the business processes. 2. Ignore certain items (e.g., documents as they flow through the system of where they are stored). 3. Decide how much detail to include. 4. Organize diagram. 5. Enter each business process on the diagram. 6. Draw a rough sketch of the BPD. 7. Draw a final copy of the BPD. Multiple Choice 1 A BPD is a visual way of: a. Describing the systems program b. Describing the activities in a process c. Describing the internal controls of a process d. Describing the documents in a process

Learning Objective Two Prepare and use flowcharts to understand, evaluate, and document information systems.

Flowcharts A flowchart is a pictorial, analytical technique used to describe some aspect of an information system in a clear, concise, and logical manner. Flowcharts use a standard set of symbols to describe pictorially the transaction processing procedures a company uses and the flow of data through a system. The Sarbanes-Oxley Act requires companies to document their business processes and internal controls. 1. Input/output symbols. Input/output symbols represent devices or media that provide input to or record output from processing operations. 2. Processing symbols. Processing symbols either show what type of device is used to process data or indicate when processing is performed manually. 3. Storage symbols. Storage symbols represent the device used to store data that the system is not currently using. 4. Flow and miscellaneous symbols. Flow and miscellaneous symbols indicate the flow of data and goods. They also represent such operations as where flowcharts begin or end, where decisions are made, and when to add explanatory notes to flowcharts. 3-3 Copyright © 2021 Pearson Education, Inc.

Figure 3-3 on pages 64-65 contains common flowcharting symbols. Focus 3-2 on page 65 provides the following guidelines for preparing flowcharts: 1 2 3

Understand a system before flowcharting it. Identify the entities to be flowcharted. Organize flowchart. Design so that data flows from top to bottom and from left to right. Show where documents or processes originate, where data is processed, and where data is stored and sent. Show the final disposition of all documents to prevent loose ends that leave the reader dangling. Show data entered into or retrieved from a database as passing through a processing operation (i.e., computer program) first. In document flowcharts, divide the flowchart into columns with labels. Clearly label all symbols. Write a description of the input, process, or output inside the symbol. Use arrowheads on all flow lines.

Page Connectors. If flowchart cannot fit on one page use offpage connectors.

Draw a rough sketch of the flowchart. Be more concerned with capturing content than with making a perfect drawing. Review it with people familiar with the system. Make sure all uses of flowcharting conventions are consistent.

Draw the final flowchart. Place the flowchart name, date, and preparer’s name on each page.

Document Flowcharts A document flowchart illustrates the flow of documents and information among areas of responsibility within an organization. Document flowcharts that describe and evaluate internal controls are often referred to as internal control flowcharts. The document flowchart for the S&S payroll process, as described in Table 3-1 on page 62 and 63, is now shown in Figure 3-4 on pages 66 and 67. Note that there are four areas of responsibility: payroll, accounts payable, management, and general ledger. Note that the solid lines represent the document or processing flow whereas the dashed lines represent the data or information flow. System Flowcharts System flowcharts depict the relationship among the input, processing, and output of an accounting information system. 3-4 Copyright © 2021 Pearson Education, Inc.

Program Flowcharts A program flowchart illustrates the sequence of logical operations performed by a computer in executing a program. Some of the computer programs are COBOL (Common Business Language), FORTRAN, and RPG from the old days. COBOL is still being used in many large organizations. Now, there is C++ and Java. Multiple Choice 2 Which of the following statements is FALSE? a. A flowchart is an analytical technique used to describe some aspect of an information system in a clear, concise, and logical manner. b. Flowcharts use a standard set of symbols to describe pictorially the flow of documents and data through a system. c. Flowcharts are easy to prepare and revise when the designer utilizes a flowcharting software package. d. A system flowchart is a narrative representation to identify system weaknesses. e. A program flowchart shows the logic used in computer programs.

Learning Objective Three Prepare and use data flow diagrams to understand, evaluate, and document information systems.

Data Flow Diagrams A data flow diagram (DFD) graphically describes the flow of data within an organization. Elements in a Data Flow Diagram (Figure 3-1, p. 61 of the book) Four Basic Elements: 1.

Data sources and destinations

Data flows

Transformation processes

Data stores

Internal Control

Data flow diagram symbols shown in Figure 3-7 on page 69: Data sources and destinations

Data flows Transformation processes Data stores Internal Control Figure 3-8 on page 70 shows the basic data flow diagram elements between data source, process, and data destination. Data Sources and Destinations Data sources and data destinations are represented by squares, as illustrated by items A (customer), J (bank), and K (credit manager) in Figure 3-9 on page 71. A data flow represents the flow of data among processes, data stores, and data sources and destinations. Processes represent the transformation of data. Figure 3-9 shows that process payment (c) takes the customer payment and splits it in to the remittance data and the deposit (which includes the checks and deposit slip created within process payment). A data store is a temporary or permanent repository of data. Subdividing the Data Flow Diagram The highest-level data flow diagram is referred to as a context diagram. A context diagram provides the reader with a summarylevel view of the system. Figure 3-11 (p. 72) provides an example of the data flows at this summary level. Focus 3-3 on Page 73 Guidelines for Drawing a Data Flow Diagram 1.

Understand the system.

Ignore certain aspects of the system.

Determine system boundaries.

Develop a context diagram.

Group data flows.

Identify transformation processes.

Group transformation processes.

Identify all files or data stores.

10.

Identify all data sources and destinations.

11.

Name all data flow diagram elements.

12.

Subdivide the data flow diagram.

13.

Give each process a sequential number.

14.

Repeat the process.

15.

Prepare a final copy.

Multiple Choice 1 A DFD is a representation of which of the following? a. Relationship among modules, data, and programs of an AIS b. Flow of data in an organization c. Decision rules in a computer program d. Computer hardware configuration

Answer to Multiple Choice Questions: Multiple Choice Question Answers Number Answer 1 B 2 D 3 B

CHAPTER 4 RELATIONAL DATABASES Instructor’s Manual Learning Objectives: 1. Explain the importance and advantages of databases, as well as the difference between database and file-based legacy systems. 2. Explain database systems, including logical and physical views, schemas, the data dictionary, and DBMS languages. 3. Describe what a relational database is and how it organizes data, and how to create a set of well-structured relational database tables. 4. Query a relational database using visual methods as well as using structured query language. Questions to be addressed in this chapter: 1. What is a database system, and how is this different from fileoriented systems? 2. What is a relational database? 3. How do you design a well-structured set of tables in a relational database? 4. How do you query a relational database system?

Introduction The emphasis in this chapter will be on understanding the structure of a relational database system. Databases and Files Figure 4-1 on page 94 provides a comparison of file-oriented versus database systems. A key concept to remember is that fileoriented data stays in the originating department whereas the database approach is an organizational resource used by the entire organization. Most firms developing new systems and applications for use in today’s business environment choose the database approach to data management. Data independence, a critical feature of the database approach, is the separation of data from the program applications that access and process the data. Data independence is achieved by interposing the database management system (DBMS) software between the database and the users of the data (e.g., the application programs).

A DBMS acts as an interface between the database and the various application programs. As technology improves many companies are developing very large databases called data warehouses which are used as analysis (and not transaction processing) to provide support for strategic decision making. A file, as described in the back of our book in the glossary, is a set of logically related records, such as the payroll records of all employees. A database is a set of interrelated, centrally coordinated data tables stored electronically with as little data redundancy as possible. Figure 4-2 on page 94 shows the basic elements of data hierarchy. Fields contain data about one customer such as the customers address, customer name, and so on. All the fields for one customer form a record (e.g., customer record). A set of related records, such as all customer records, forms a table (e.g., customer table). A set of interrelated tables forms a database (e.g., a customer sales database may include customer table, inventory table, and sales table). We use the term database to mean the collected data sets that are organized and stored as an integral part of an organization’s computer-based information system. Data analytics is discussed more fully in Chapter 7. Three techniques are introduced here: 1. Business Intelligence is the analysis of large amounts of data for strategic decision making. 2. Online analytical processing (OLAP) is the process of using queries to investigate hypothesized relationships among data. 3. Data mining is the process of analyzing data repositories for unhypothesized relationships in the company’s data and business processes using sophisticated statistical analysis.

Learning Objective One Explain the importance and advantages of databases, as well as the difference between database and file-based legacy systems.

The Importance and Advantages of Database Systems Note to Students: Many job announcements for accounting positions require the knowledge and skills from experience in using databases and data analytics. Understanding the data structure of an AIS is critical when you need to create custom reports.

Most accounting students will audit or work for a company that uses database technology to store, process, and report accounting transactions. Database technology is widespread because it provides organizations with the following benefits: 1. Data integration: Integration is achieved by combining files into larger “pools” of data that many application programs can access. An example is an employee database that consolidates data formerly contained in payroll, personnel, and job skills master files. This makes it easier for information to be combined in unlimited ways. 2. Data sharing: Integrating data makes it easier to share data with all authorized users. 3. Minimal data redundancy and data inconsistencies: Because data items are usually stored only once, data redundancy and data inconsistencies are minimized. 4. Data independence: Because data and the programs that use them are independent of one another, each can be changed without having to change the other. This makes programming easier and simplifies data management. 5. Cross-functional analysis: In a database system, relationships, such as the association between selling costs and promotional campaigns, can be explicitly defined and used in the preparation of management reports. Note to the Instructor: This additional benefit could be added that is not mentioned in the book: One-time Data Entry and Storage: In the database approach to data management, data are input into the database once, stored in a particular location, and available for use by multiple applications and users. Multiple Choice 1 A customer’s name would be a: 4-3 Copyright © 2021 Pearson Education, Inc.

a. database b. table c. field d. record Multiple Choice 2 Which of the following would be identified as a table? a. A customer’s name b. Data about one customer c. All inventory records d. Data about one inventory item Multiple Choice 3 Which of the following is not an advantage of database systems? a. Data sharing b. Data independence c. Data privacy d. Data integration For class discussion: How would sales data information be used in the following management positions? Sales Manager Marketing Manager Purchasing Manager Manufacturing Manager Accounting Manager The reason for this discussion is to get the class to think broader about how the same information is useful within different contexts. For example, the sales manager may use sales information to examine two different commission plans before making a final decision. The purchasing manager may use sales information to help predict demand for certain products. The manufacturing manager may use sales information to help plan for product production. It is also good to tie this into a discussion of why it’s important to have good quality data. This may be a good time to discuss rights to data by posing the question of who should have access to the particular elements within sales data.

Learning Objective Two Explain database systems, including logical and physical views, schemas, the data dictionary, and DBMS languages.

Logical and Physical Views of Data Figure 4-3 on page 96 provides an example of a record layout of an accounts receivable table. The logical view is how the user or programmer conceptually organizes and understands the data. The physical view refers to how and where the data are physically arranged and stored in the computer system. Figure 4-4 on page 97 provides two logical views of data. As shown in Figure 4-4, DBMS software handles the link between the way data are physically stored and each user’s logical view of the data.

Schemas A schema describes the logical structure of a database. Three levels of schemas: the conceptual, the external, and the internal. Figure 4-5 on page 98 provides the three levels of schemas. The conceptual-level schema is the organization-wide view of the entire database. The external-level schema consists of a set of individual user views of portions of the database, each of which is also referred to as a subschema. The internal-level schema provides a low-level view of the database. It describes how the data are actually stored and accessed, including information about record layouts, definitions, addresses, and indexes.

The Data Dictionary The data dictionary contains information about the structure of the database. The data elements composing the database are fully described in a data dictionary, which serves as a repository containing facts about the structure of the data elements employed in applications. Table 4-1 on page 99 provides an example of a data dictionary. The data dictionary is a useful document to refer to when you are creating queries or customized reports. For class discussion: