Type:
Solution Manual
Resource:
WILKINSON - Accounting Information System
Edition:
4th Edition
Author(s):
Joseph W. Wilkinson Michael J. Cerullo Vasant Raval Bernard Wong-On-Wing
CHAPTER
1
The Study of Accounting Information Systems
OBJECTIVES
DISCUSSION QUESTIONS
5. SYNTHESIS
4, 11
4. EVALUATION
1, 6, [9], 12
4, 5, 6
3. APPLICATION
2, 7
7, [9]
2. COMPREHENSION
3, [5], 8, 10
1, 2, 3, 8
1. CONCEPTUALIZATION 22,26
[ ] Infoage
PROBLEMS
11
CHAPTER 1 THE STUDY OF ACCOUNTING INFORMATION SYSTEMS DISCUSSION QUESTIONS DQ 1-1. The influence of accountants has both decreased and increased since the advent of computers. Several factors account for the decrease in influence. Although accountants often play a role in the information system design, maintenance, and operation, other professionals (systems analysts and data base administrators, for example) take on a much greater role. Since computers permit integration of data and applications, AIS has increasingly been absorbed as a subsystem within the MIS. On the other hand, the accountants’ influence has increased due to their ability to use computers, which provide more processing power and greater flexibility and thus permit considerable support in the development of more complex accounting systems that aid decision making and provide timely information (for example, in the review of budgeted and actual expenses). Auditors now use computer-assisted audit techniques and procedures that make the audit engagement more efficient and comprehensive. Paperless audit environments have also become feasible. In summary, accountants have gained more computing and communication support from the entry of computers, but the systems aspects of the computer-based systems are now a domain of non-accountants. DQ 1-2. While the formal information system can provide much of the information needed by the typical manager, the manager must also rely on judgment, intuition, and informal sources from both inside and outside the firm. The formal information system is best equipped to provide quantitative information that is based on transaction flows and routine nontransactional data from external sources. It is less equipped to provide qualitative information. Also, the firm cannot justify the expense of storing rarely needed information within the formal information system. The level within the organizational structure at which the manager is located has a bearing on the extent of information provided by the formal information system. Managers at the highest level tend to require more qualitative information and to need considerable ad hoc information, often drawn from external sources. Managers at the lower levels, on the other hand, mostly need quantitative and routine information, usually drawn from internal sources. Thus, the managers at the lower levels will make more use of the formal information system than managers at the highest levels. The type of decision likewise affects the extent to which the formal information system is used. Information for strategic decision making is drawn less from the formal information system than information needed for operational control decisions. Generally, decisions subject to high uncertainty, longer time frame, and less structure require more qualitative input. DQ 1-3. In order to acquire a common body of knowledge, accountant should study a broad spectrum of topics. These include: Basic understanding of dimensions of a system: hardware, software, communications, etc. Basic understanding of data management concepts and applications. Data base management systems and file oriented data management.
1-2
Basic understanding of the role of the Internet in transaction processing, and related security and control concerns. Information systems stages, in both manual and computer-based systems: data capture, coding, input, processing, output, data storage (files, databases), processing approaches, general controls, audit trails, outputs Typical transaction processing subsystems, both manual and computer-based, document flows, application controls. System development life cycle. Threats, exposures, and risks involved, internal control structure. Computer-assisted audit techniques. Note: Given the fast changing technology, it is important to not only have the knowledge, but also keep current with changes in technology and how they impact each of the above areas. DQ 1-4. Several scenarios can be drawn. Here is one possibility: AIS and MIS are designed as an integrated information system with a client-server configuration. The system has an external interface with customers and suppliers through the Internet. In fact, 90 percent of sales orders are received and 95 percent of purchase orders are placed using the Internet connection. Half of the sales in terms of US dollars are from South Africa. Almost all of the transaction processing is done on a realtime basis, that is, as soon as the transaction arrives it is processed and the existing stored data are updated to reflect the effects of the transaction. The system’s data management function uses object oriented data bases. Most of the information users seek is processed through programmed and ad hoc queries to the data base; only a few reports are generated. Most regulatory reports and returns are filed electronically. The external auditors have continuous read-only access to the system (from their offices) to capture and analyze exception transactions. Unaudited financial statements are provided electronically to the top management within three working days following the year-end. Audited statements are expected within three weeks following the year-end. Off-premise use of the information system is common. Only the core staff comes to the office; everyone else works from the field or his/her home. DQ 1-5. Strategic decisions of Infoage, Inc. include the following: (1) How to stay with the frontiers of technology. For example, as LANs and client-server technology become more prevalent, should the firm focus on selling networks instead of microcomputers as stand-alone machines? (2) Since prices of computing and communications products are declining and at the same time, more processing power and greater flexibility is available with each new generation, what should be the pricing and inventory policy? What innovative arrangements with suppliers should be made? (3) Should the services department expand into newer technologies, as they become available? (4) Would be worthwhile for the firm to consider expanding into the training and development arena? For example, should the firm offer training courses in specific software packages? DQ 1-6. The two AISs are different to the extent that they process different transactions and have different transaction cycles. For example, at a university, student registration results in tuition billing,
1-3
which in turn results in cash receipts. For a manufacturing firm, the sale of finished goods results in accounts receivables, which are then collected as cash. Also, the financial statements of a nonprofit organization are in the form of fund accounting, instead of income statement and balance sheet. The two AISs are similar in many ways. Each has several transaction cycles. In each case, AIS is interfaced with MIS. AISs, regardless of nature of organization, have similar characteristics, such as internal controls. For managerial decision making, the ultimate purpose of providing relevant information remains the same, although data, information, and the responsibility reporting structure may be different. DQ 1-7. The AIS at Infoage can add value to the firm in many ways. The system can identify inventory for which new versions are soon to appear in the market. This will permit identification of products which can be placed “on sale,” to avoid obsolescence and severe price reductions later. The AIS can also produce information on weekly (budgeted and actual) contribution margins by products, employees, or profit centers (outlets). This will help management to proactively work toward profit goals. Customer profiles may be maintained to determine products or services that a customer might need, and to market such services in a timely manner. DQ 1-8. There may be situations where highly relevant information may be available only in a qualitative form. For example, a story heard on a golf course, although non-quantifiable, may impact the firm to a far greater extent than an in-depth financial analysis of the firm’s past. Also, there may be a trade off between accuracy and relevance; qualitative information may be less accurate (reliable and precise) and not verifiable, but highly relevant. DQ 1-9. In the case of Infoage, for instance, the information system can help to ensure that merchandise is shipped to the outlets as soon as needed, so that no sales are lost. It can help to reduce the inventory of merchandise carried in the warehouse. This has the effect of increasing the efficiency of the operations, reducing working capital needed, and reducing obsolescence due to short cycle time for development of new computers and peripherals. At the same time, having the right inventory on hand permits Infoage to serve the customer well, thus enhancing customer satisfaction with the firm’s products and services. Additionally, the AIS can increase the accuracy and up-to-datedness of the records, which helps management provide better customer service (e.g., latest customer account balance, or information on the last purchase). The law firm’s AIS may have features and benefits similar to the consulting and service division of Infoage. Both have clients and engagements (or projects, or cases), and each engagement needs to be managed and controlled. For example, since human resource effectiveness is a key success factor in this case, it would be essential to generate information regarding each employee’s productivity, billable hours produced, and actual and estimated contribution margin (current period and year-to-date) for each project. This has the effect of enhancing the quality of planning and control. In addition to managing the engagements on hand, there is a need to continually solicit work. This means that the marketing function should be supported by the information system. A bidding process (or responses to requests for proposals) needs to be maintained to develop proposals for services expected to be rendered.
1-4
Overall, in each case, relevant information should be efficiently generated, keeping in mind the primary functions of the organization. In Infoage, one of the primary functions is inventory management and control; at a law firm, it would be human resource management. DQ 1-10. The new system added value in several ways: • • • •
The sales representatives were able to put together customized multimedia presentation. This may result in increase in sales for Sebastiani. Customer-focused detailed business analysis became possible. New information helped in assisting wine merchants make purchase decisions. Improved decision making may mean fewer sales returns for Sebastiani and fewer stockouts for wine merchants. It was possible to use data in a flexible manner to produce relevant information on site. This characteristic of the new system strengthened the marketing efforts and made Sebastiani more competitive. Wine merchants’ effectiveness in making purchase decisions was improved. Sebastiani thus improved customer satisfaction, and thus impacted customer loyalty.
DQ 1-11. Since the new system focused on marketing and sales of wine, it seems that the specific subsystem within the AIS that had most impact would be the revenue cycle. Sales orders are captured on-line. It is reasonable to expect that a wine merchant placing an order would like a confirmation of the order placed even before the salesperson concludes the visit. Consequently, the AIS will have to perform on-line edit of the incoming sales order, check the customer’s credit, and approve the order for further processing. The system may also need to verify prices and sales tax (if applicable), shipping charges (if applicable) and extended amounts, so that the customer can be informed of the amount to be billed upon shipment of the ordered wine. DQ 1-12. Since external users make different decisions than internal users, they generally need information having somewhat different qualities and content. For instance, investors, potential investors, creditors, and suppliers need information that is quite broad, long-range, and concise. They are concerned with the overall condition and prospects relating to the firm, rather than with a detailed picture of its respective segments and activities. They need to know how well the firm will perform against its competitors in the coming years, and whether it will have the ability to repay its debts on time. Managers, on the other hand, need information to help them plan and control the various operations and organizational units within the firm. Of course, both groups have information needs in common, since managers also forecast revenues and earnings and must monitor performance through such indicators as return on sales, return on assets, and the debtequity ratio.
1-5
PROBLEMS 1-1. (a) I (b) III (c ) I (d) II (e) II (f) I (g) I (h) III (i ) I (j) II (k) I (l) I (m) II (n) II (o) III. Although the specific response to each item may vary somewhat, the general understanding is that the accountant must be quite familiar with the transaction cycles, internal controls, and the audit process. Familiarity with the system requires a moderate level of understanding of system features, such as documentation and design requirements (flowcharting and forms design, for example). Accountants involved in management advisory services or consulting may need more depth in some areas than the auditors or financial accountants. 1-2. (c) and (f) are internal users; all others are external users.
a. A creditor bank would be able to perform ratio analysis (liquidity ratios, times interest
b. c.
d. e. f. g. h.
earned, and other relevant ratios) and to some degree, trend analysis. The Statement of Cash Flow would also be useful. The bank may also evaluate qualitative input such as management’s reports. The Securities and Exchange Commission (SEC) would have access to the annual report as well as SEC filings, if the firm were required to make such filings. This information would be helpful in evaluating issues related to management control, for example. The general ledger accountant would be able to reconcile controlling account balances with the combined balances in the related subsidiary ledger (for example, Accounts Receivable Subsidiary Ledger), to review account balances, and to analyze activity in a specific account (Prepaid Expenses, for example). A shareholder would like to assess the earnings potential of the firm, future prospects of earnings growth, and quality of the management team. The employees’ labor union would analyze data to study income trends, cash availability, earnings prospects, dividend growth, and management’s expectations for the future. The Vice President of Finance would be interested in cash flow projections and earnings forecasts, financing requirements in light of future activities (such as business acquisitions or expansion), and debt extinguishment plans and projections. A prospective investor would like to predict earnings potential of the firm, future prospects of earnings growth, risks involved, and quality of the management team. A customer would like to know more about the current and future product offerings, long term viability of the firm, and the management’s perspectives on the markets and customers they serve.
In each case, some of the needs may be met by the annual report; however, additional information may be necessary for the user to make decisions. For the internal users, detailed financial transactions data (in the case of the general ledger accountant) or projections (in the case of Vice President of Finance) will have to be found from sources other than the annual report. 1-3. a. Primarily decision-making. Annual budgets provide information about plans that provide input for replanning, determining and evaluating variances, and initiating corrective actions, where necessary. Detailed budget figures for shorter periods (e.g., a month or week) would help support day-to-day operations. Finally, the budget process also conveys to some degree that stewardship obligations are being met. b. Primarily operations. Helps meet legal and financial obligations.
1-6
c. Primarily operations. Sales transactions, like other transactions, provide data to be captured d. e.
f. g.
h. i. j.
k. l.
(within revenue cycle) to generate reports for managing operations. Stewardship obligations. Annual Reports are used to report results of operations to stakeholders. Day-to-day operations. Variances provide feedback on differences between actual and expected results (budgeted amounts). This feedback results in investigations of variances and follow up corrective actions where necessary. To maintain and control effective day-to-day operations, variances may be computed in quantitative but non-financial terms, such as units of output, yield on batches of production, or amount of raw materials consumed. It is likely that certain variances would indicate the need for revising the budget itself. Day-to-day operations. Purchase orders are source documents that convey decisions to purchase goods or services. They provide data to be captured (within the expenditure cycle), from which information is generated for reports that aid in managing operations. Primarily decision-making. Cash flow projections assist in determining expected surpluses or shortfalls in the funds required. Thus, such forecasts support financing decisions. Also, such projections may trigger revisions in other budgets; for example, estimated production levels or discretionary cost budgets (items such as advertising) may be changed based on cash flow projections. Financial statements as published in the quarterly and annual reports help meet stewardship obligations. Financial statements prepared for internal purposes, and designed with cost and revenue behavior in mind, provide decision support. Day-to-day operations. Shipping registers permit tracking of orders shipped and may provide useful operational information such as on-time shipments, delayed shipments, and backlogs. Day-to-day operations. Bank reconciliations provide assurance that records, subject to certain expected differences due to time lag, match with the transactions that are conducted by a firm. A bank reconciliation hence also assures that deposits have been accounted for and all withdrawals were made as authorized. Decision-making. New product evaluation models are a non-routine decision model, and thus support the management’s decision concerning whether to produce new products as are, modify them, or not to produce the new products. Stewardship obligations. Income tax returns help meet legal and financial obligations.
1-4. a. As an auditor in the public accounting firm, your role would be as a member of the team assigned to the audit engagement. It is likely that, as a newcomer, you will be doing more of the detailed work; for example, you may verify inventory records or check for the physical existence of selected plant and equipment. You are likely to use more, and therefore understand in depth, the client’s AIS rather than the public accounting firm’s AIS. At the firm, you may retrieve information on audit standards and accounting principles relevant to the audit; you may also retrieve past year’s audit files, if this is a continuing engagement. Such information is likely to exist outside of the firm’s AIS.
b. As an entry-level member of the internal auditing department of the manufacturer, you are likely to conduct well-identified small audits within the firm under supervision. You may also play the role of a junior member of an internal audit team assigned to a major project. Depending on the area and scope of work, you are likely to interact heavily with the firm’s AIS. In contrast, as an external auditor, you would have very focused responsibilities geared to an effective completion of the audit while keeping the costs to a minimum. If you were the systems development consultant from the public accounting firm, your focus will be the designated project. Depending on the system development stage your role would vary. For
1-7
example, you may be heavily involved in the systems analysis and (logical) design, but have limited or no involvement in the physical design. 1-5. a. (1) The roles of a financial accountant are to prepare financial statements that are in full accord with the financial accounting model and generally accepted accounting principles, to perform financial statement analysis, and to recommend changes in accounting methods that affect the financial statements. The roles of an internal auditor are to examine and evaluate the AIS and such products of the AIS as the financial statements and to recommend design changes to the AIS. Financial accountants and internal auditors are similar in that they are employees of a firm and they are particularly concerned with the financial statements of the firm. Differences between them relate mainly to their roles, since financial accountants prepare the financial statements while internal auditors evaluate the statements. Also, internal auditors are at least as concerned with the AIS as with the statements; in fact, certain of their assignments may not involve the financial statements at all.
(2) The roles of a managerial accountant are to prepare information for the use of managers in fulfilling their responsibilities and to recommend improvements in the information outputs and related decision models. The roles of a system developer are to analyze and design the various modules comprising an AIS or other information system (such as an MXS). Managerial accountants and system developers, like financial accountants and internal auditors, are generally employees of the firm in which the AIS in question resides. (However, system developers may alternatively be members of outside consulting firms.) They both are concerned with the outputs of the AIS, including the various reports needed by the firm's managers. Differences between them relate chiefly to their respective roles, since managerial accountants focus on needed information whi1e system developers focus on the AIS itse1f. Furthermore, system developers are concerned with all aspects of the AIS, rather than just its information outputs. b. With respect to the relationships of the pairs to the AIS, (1) the financial accountant is primarily a user while the internal auditor is primarily an evaluator.
(2) the managerial accountant is primarily a user while the system developer is (as the name implies) primarily a developer or bui1der. The first pair focuses primarily on financial accounting model, while the second pair focuses on management accounting model. 1-6. The steps that you, an inventory c1erk for an appliance dealer, shou1d perform in processing inventory transactions are as follows: a. Sort the day's batch of documents according to merchandise code numbers. b. When more than one item of merchandise appears on a single document, transcribe the code numbers of the additional merchandise items and the related quantities onto separate documents. c. By referring to the reference file, transcribe the unit prices onto the source documents for each merchandise item. d. Calculate the dollar amount of each receipt and sales transaction by multiplying the unit price times the quantity received or sold.
1-8
e. During the referencing process described in (c) above, or in a separate step, transcribe the descriptive title of each merchandise item onto the daily report form. (If the reference file also contains status information concerning the balance on hand of each merchandise item, update the file by transcribing the quantities received and sold from the source documents, together with the related dollar amounts, and calculate the new balance on hand.) f. Transcribe the dollar amounts pertaining to receipts and sales of each inventory item opposite the descriptive title on the daily report. (If more than one document pertains to receipts of the same merchandise item during that day, add the dollar amounts to summarize total receipts for that item. Perform the same step if more than one document pertains to sales of the same merchandise item during the day.) g. Reduce (summarize) receipts of all merchandise items for that day to a total. Reduce (summarize) sales of all merchandise items for that day to a total. h. Communicate the daily report to the appropriate user. 1-7. See the following pages for the diagrams.
1-9
1-7 a. Purchases procedure for a campus bookstore.
Supplier reference file
Measure quantities of merchandise needed to replenish stocks and record on requisitions (source documents).
Classify and sort
Transmit requisition data to owner-manager (or to person assigned to reorder merchandise).
requisitions according to suppliers who provide the store's respective items of merchandise; add expected prices to requisitions from file.
Supplier (accounts payable) master file
Purchase data file
Summarize Communicate
A
quantities to be purchased to totals and store, together with copies of purchase orders.
purchase data to suppliers via postal service.
Merchandise inventory master file
Receive invoices (bills) from suppliers and update supplier master file to show amounts owed.
1-10
Transcribe data from requisitions onto purchase orders addressed to identified suppliers, and update inventory master file to show ordered quantities.
Purchase order data
At end of month, retrieve data from files and prepare reports concering quantities purchased and outstanding payables.
Supplier master file
Communicate monthly reports to managers
A
1-7 b. Credit-sales procedure for a service station. Note: Many variations are possible in the procedures shown in the procedures shown below, depending upon assumptions made by students. Capture data concerning each customer by embossing a name and number from credit card onto sales slip "flimsy" (source document).
Batch all sales slips at end of day and calculate total of amounts.
Transmit sales slips to credit sales processing center via postal service
Measure data by reading gasoline usage and dollar amount from dials on gas pump and recording data by pen onto sales slip.
Transcribe total onto daily sales summary sheet, together with totals from cash sales and other sales for the day.
Provide control by obtaining signature of customer on sales slip.
Store copies of sales slips for future reference.
Sales slip file
At credit sales processing center, sort sales slips and update each customer's master record to show new balance due. At end of month prepare monthly statements and communicate to customers via postal service; also prepare monthly report for service stations and transmit via postal service.
Customer master file
C
At service station validate data in monthly report by comparing amounts credited to service station with amounts shown on daily sales summaries.
1-11
Analyze monthly sales by comparing total sales shown on this month's report with totals on previous reports.
C
1-7 c. Cash disbursements procedure for a shoe store.
Supplier invoice file
Measure gross amounts due from suppliers' invoices; calculate any allowed discount and determine net amount due.
Supplier master file
Batch all invoices due and payable and summarize amounts to single total.
For each amount due, transcribe data onto check and update supplier master record to show new balance.
Payment data file
A
Communicate payment amounts by mailing checks to suppliers via postal service.
Store total of payments for day in file, together with copies of checks.
A
Payment data file
At end of month, retrieve daily payment totals and prepare a report of disbursements.
Communicate monthly report of cash disbursements to managers.
1-8.
a. Sherry compromised her integrity by making a statement that was clearly untrue; she was aware that it was untrue and that the statement would have a significant impact on the hiring decision. b. Jack did not exercise due professional care and compromised his integrity. By accepting the gift, Jack was knowingly, although perhaps passively, participating in the cover up. c. All communication—written and oral, direct or indirect—within the firm, needs to be treated with a degree of confidentiality. The statement Jane heard was not supported by evidence
1-12
available to her (it could be a tentative statement or even rumor), and the subject matter was highly confidential. By revealing the news to others who were not supposed to be told (and Jane should know that), Jane failed to exercise due professional care. d. Mark knowing violated generally accepted accounting principles for a personal gain. Thus, he failed to exercise due professional care and compromised his integrity. e. Doretta failed to understand and respect the responsibilities of all parties involved in the decision. Her role was to implement the decision, not to sidestep or distort it. She should know that only proper avenues must be followed to raise and address disagreements. Doretta compromised her integrity. 1-9.
1. Major organizational functions: Microcomputer sales, Systems selection and installation, Marketing, Treasurer and Controller, Operations and inventory management.
2. Internal users include employees of Infoage. External users include customers, prospective 3. 4. 5. 6.
customers, regulatory agencies, banks, and prospective employees. Major types of accounting transactions: Purchase of hardware, software, and services; sale of services and products; cash receipts related to sales and cash disbursements related to purchases; payment to employees for services (payroll). Components of AIS/MIS: These include peer-to-peer LAN at the main office, standalone microcomputers at the stores, printers, computer-based files and data, system and applications software, historical records and correspondence files. Marketing (Sales analyses and forecasts by each of the two principal activities). Finance (Cash flow projections, payment analysis, accounts receivable aging analysis). Human resources (Payroll analysis, personnel productivity analysis). Since the information technology is changing rapidly, one decision support system that the firm could use would provide information regarding upcoming versions of heavily sold software at Infoage. The system would track the new version, announced release date, new or additional features, compatibilities with other software and also with its earlier versions, and estimated price. This system would help answer many questions from customers and may also be used to market new versions to those customers who have purchased an earlier version of the software.
1-13
CHAPTER
2
The Business Environment of AIS
OBJECTIVES
DISCUSSION QUESTIONS
5. SYNTHESIS
PROBLEMS
6, 9
4. EVALUATION
5, 7, 11, 12, 14
4, 10
3. APPLICATION
1, 3, 4, 9, 10, 13
2, 3, 5, 8, 11
2. COMPREHENSION
2, 6
1, 7, 12, 13
1. CONCEPTUALIZATION 8
[ ] Infoage
CHAPTER 2 THE BUSINESS ENVIRONMENT AND THE AIS DISCUSSION QUESTIONS DQ 2-1. a. An electric utility has the primary purpose of serving consumers with electricity. If the utility is privately owned, this service is provided at a price per kilowatt-hour to insure a profit and return on investment. Its inputs consist of employees and managers, facilities such as generating plants and transmission lines, materials and supplies such as poles and insulators and work order forms, finances such as funds from bond issues and payments by consumers, and data such as readings from consumers’ meters. The process consists of converting such inputs into outputs as electricity for consumers and information for consumers as well as the public utility commissions, managers, stockholders, and others. The environment of a utility consists of the market area served by the utility (and its consumers) and other surrounding areas, governmental agencies such as the Federal Power Commission and state public utility commissions, creditors such as bondholders and banks, stockholders or other owners, labor unions, and so on. Subsystems include such functions as generating and transmission operations, engineering, construction, personnel, and accounting; such entities as employees, trucks and other equipment, furniture, and generating plants; and such major structures as the organizational structure, the operational system, and the information systems. Many interfaces are formed at the boundaries of such subsystems. Constraints include physical size of the utility facilities and market served, budgets, and regulations established by such bodies as the Federal Power Commission. Controls include those provided by the budget (to control costs), by managerial supervision (to maintain employee productivity and to prevent fraud), and by engineering (to construct and maintain facilities). b. A primary purpose of a paper-products manufacturer is to provide its customers, including wholesale and retail chains, paper products with a view to make profits. The inputs include lumber, saw dust, wood chips, paper products to be recycled, etc. The process permits the receipt of materials at the manufacturing site (e.g., lumber is moved from forests to the manufacturing plant using rivers), converting into a fine paste, pressing and drying it into paper rolls, which are cut according to predetermined sizes, packed, and shipped. Primary outputs consist of different types of paper products (rolls, sheets, etc.). The environment consists of the market the firm serves, governmental agencies, labor unions, and so on. Environmental consciousness of consumers and consumer groups (reduce, recycle, and reuse efforts), and new information technology (making paperless information systems possible) are major variables. Subsystems include lumber transportation, manufacturing, engineering, personnel and accounting. The organizational structure, the operational system, and the information system are closely related. Constraints include the availability of lumber and environmental protection regulation. Controls include cost controls (through budgets), operational controls (through supervision) and engineering controls (through plans, standards, and benchmarks). c. A bank has the primary purpose of providing financial services at a profit. Its inputs consist of employees and managers, materials and supplies such as currency wrappers and deposit slips, facilities such as tellers’ windows and safe deposit boxes, funds derived from such sources as interest charges, and data such as amounts of deposits and withdrawals. The bank’s process consists of converting these inputs into such outputs as demand deposits and loan services and information for managers, depositors, stockholders, and others. For example, a bank might receive data in the form of a loan application; it will process this application, drawing upon such other data as the applicant’s credit ratings, to generate an approved loan. The environment of a bank includes the market area, competing banks and 2-2
the Federal Reserve banks. Within the boundary of a bank are a variety of subsystems, including such departments as loan, demand deposits, and general accounting; such entities as tellers and bank officers; and such major structures as the organizational structure, the operational system, and the information system. Many interfaces are formed at the boundaries of these subsystems. Constraints include the physical size of the bank’s facilities, budgets, governmental banking regulations, actions of competitors, and industry codes of ethics. Controls include those provided by the budget (to control costs), by managerial supervision (to control productivity), and by bank inspectors and the vault (to control and secure deposited cash). d. A wholesale grocer is an intermediary between the manufacturers and the retailers, transferring merchandise across the (value) chain for profit. Its inputs include employees and managers, merchandise received from producers, warehouses, transportation fleet, etc. The process involves receipts of merchandise from the suppliers and the distribution of such merchandise, perhaps in different quantities, to the retailers. The output is in the form of the redistribution service rendered for the benefit of both the producer and the retailer. The value added lies in providing the physical and informational network that permits efficient and timely transfer of merchandise. The environment includes producers, retailers, labor unions, and creditors. Subsystems involved are such functions as personnel and accounting; transportation and inventory management; such entities as employees; and such structures as the organization, transportation and warehousing network, and the information system. Constraints include the physical capacity of the warehouses, and characteristics of the merchandise (e.g., perishable goods). Controls are provided by the budgeting system (to control costs), by managerial supervision (for employee productivity), and by engineering (to maintain warehouses and transportation fleets, if owned by the firm). e. If owned by a for-profit entity, the bookstore’s primary purpose would be to earn a return on its investments. A college-owned store may want to break even, allowing for common costs allocations and perhaps some imputed interest on the assets tied up. In either case, the store’s mission would be to serve its customers well, providing timely service in offering textbooks and other supplies at the best possible prices. The store’s inputs consist of the inventory of books and supplies, t-shirts carrying the college logo, employees and managers, and facilities. The process involves procurement of books and other merchandise, and their sales. The output is the service to students, which in turn generates funds for the store. The environment consists of the college and its faculty, students, and administrators, the academic programs offered by the college, curriculum changes, and the degree of technology emphasis at the college. Subsystems include such functions as personnel, accounting, and inventory management. Constraints include the physical size of the store, types of curricula offered by the college, the extent of reuse of the same textbooks, etc. Controls include those provided by the budget (to control costs and achieve profits), by managerial supervision (to maintain employee productivity), and inventory controls (e.g., to maintain identification and sale of used books separately, to monitor textbook returns for classes dropped by students, to manage ordering of a textbook when its next edition is due for publication soon). f. A purpose of the brokerage house would be to earn a desired rate of return in providing investment services. The firm’s inputs include a knowledge base of the employees, literature on individual stock analysis (and recommendations to buy, hold, or sell), systems that help retrieve information about the market, industry, stocks and bonds, and news that affects the market. The process involves research and analysis of the market, and client portfolios. The output is in terms of investment advice to clients, and the transactions resulting from such interaction with clients (buying or selling stocks, bonds, or options). This in turn results in funds flows. The environment of the firm is dynamic, since the market constantly absorbs new information (economic and political, local as well as global), resulting in price changes. Present and prospective investors, institutional investors, regulatory agencies (e.g., Securities 2-3