Accounting Information Systems

1. Accounting Information Systems Lecture 2

2. Lecture 2 - overview • Business cycles • Revenue cycle • Expenditure cycle • Documenting systems • Techniques for documenting systems • Data Flow Diagrams

3. Introduction to business cycles • There are five major business transaction cycles. • Revenue cycle • Expenditure cycle • Production cycle • Human resources/payroll cycle • Financing cycle

4. Overview of Revenue cycle • The revenue cycle involves interactions with your customers. • You sell goods or services and get cash. Give Goods Get Cash

5. Overview of expenditure cycle • The expenditure cycle involves interactions with your suppliers. • You buy goods or services and pay cash. Give Cash Get Goods

6. Overview of Production cycle • In the production cycle, raw materials and labor are transformed into finished goods. Give Raw Materials & Labor Get Finished Goods

7. Overview of payroll cycle • The human resources cycle involves interactions with your employees. • Employees are hired, trained, paid, evaluated, promoted, and terminated. Give Cash Get Labor

8. Overview of Financing cycle • The financing cycle involves interactions with investors and creditors. • You raise capital (through stock or debt), repay the capital, and pay a return on it (interest or dividends). Give Cash Get cash

9. Business cycles • Thousands of transactions can occur within any of these cycles. • But there are relatively few types of transactions in a cycle. • In this unit we will concentrate on the revenue and expenditure cycles

10. Revenue cycle transactions Transactions in the revenue cycle include: • Give goods get cash • Handle customer inquiries • Take customer orders • Approve credit sales • Check inventory availability • Initiate back orders • Pick and pack orders • Ship goods • Bill customers • Update sales and Acc Rec for sales • Receive customer payments • Update Acc Rec for collections • Handle sales returns, discounts, & bad debts • Prepare management reports • Send info to other cycles

11. Expenditure cycle • Transactions in the expenditure cycle: • Give cash; get goods or services • Requisition goods and services • Process purchase orders to vendors • Receive goods and services • Store goods • Receive vendor invoices • Update accounts payable for purchase • Approve invoices for payment • Pay vendors • Update accounts payable for payment • Handle purchase returns, discounts, and allowances • Prepare management reports • Send info to other cycles

12. Business cycles • Every transaction cycle: • Relates to & interacts with other cycles • Interfaces with the general ledger and reporting system, which generates information for management and external parties.

13. Finished Goods Expenditure Cycle Revenue Cycle Production Cycle Data • The revenue cycle • Gets finished goods from the production cycle • Provides funds to the financing cycle • Provides data to the General Ledger and Reporting System Funds General Ledger and Reporting System Human Res./ Payroll Cycle Financing Cycle

14. Expenditure Cycle Raw Mats. Revenue Cycle Production Cycle • The expenditure cycle • Gets funds from the financing cycle • Provides raw materials to the production cycle • Provides data to the General Ledger and Reporting System Data Funds General Ledger and Reporting System Human Res./ Payroll Cycle Financing Cycle

15. Finished Goods Expenditure Cycle Raw Mats. Revenue Cycle Production Cycle • The production cycle: • Gets raw materials from the expenditure cycle • Gets labor from the HR/payroll cycle • Provides finished goods to the revenue cycle • Provides data to the General Ledger and Reporting System Data General Ledger and Reporting System Labor Human Res./ Payroll Cycle Financing Cycle

16. Expenditure Cycle Revenue Cycle Production Cycle • The HR/payroll cycle: • Gets funds from the financing cycle • Provides labor to the production cycle • Provides data to the General Ledger and Reporting System General Ledger and Reporting System Labor Data Human Res./ Payroll Cycle Financing Cycle Funds

17. Expenditure Cycle Revenue Cycle Production Cycle • The Financing cycle: • Gets funds from the revenue cycle • Provides funds to the expenditure and HR/payroll cycles • Provides data to the General Ledger and Reporting System Funds Funds General Ledger and Reporting System Data Human Res./ Payroll Cycle Financing Cycle Funds

18. Expenditure Cycle Revenue Cycle Production Cycle • The General Ledger and Reporting System: • Gets data from all of the cycles • Provides information for internal and external users Data Data Data General Ledger and Reporting System Information for Internal & External Users Data Data Human Res./ Payroll Cycle Financing Cycle

19. Business cycles • Not every cycle is needed in every organization, e.g., retail companies don’t have a production cycle. • Some companies may need extra cycles. • The implementation of each transaction cycle can differ significantly across even similar companies.

20. Documenting systems • Documenting systems is representing the system in written form. • Documentation includes the following types of tools: • Narratives (written descriptions) • Flowcharts • Data Flow Diagrams • Other written material

21. Documenting systems • Why document systems? • Aid in planning & reviewing systems • Used to help evaluate strengths & weaknesses of internal controls • Assist in understanding how a system works • Meet legal requirements eg CLERP 9, auditing standards, & Privacy Act (1988)

22. Documenting systems • Data Flow Diagram (DFD) • A DFD graphically describes the flow of data within an organization. • DFD’s show: • Where data comes from • How it flows • The processes performed on it • Where it goes

23. DFD’s • A data flow diagram consists of four basic elements: • Data sources & destinations, also known as external entities • Data flows • Processes that transform data • Data stores

24. Customer DFD elements • External entities are represented by a square with the name of the entity inside: • These show the flow of data to sources or destinations that are external to the system. Some typical examples include customers, banks, & suppliers etc.

25. DFD elements • Data flows are represented by arrows with a label along side with the data being exchanged: • These show the flow of data from and to the system being documented. They can include customer_order_details, invoice_details, or order_request etc. Order_details

26. DFD elements • Processes that transform data are represented by a circle with the name of the process inside: • These show the systems, subsystems, or processes that convert or transform data. Some typical examples include write cheque, update journal, or record order etc. Write cheque

27. DFD elements • Date stores are represented by a parallel lines with the name of the data store inside: • These show where data is stored within the system. Some typical examples include Customer_file, in_tray, diary, or General_journal etc. Customer_file OR Customer_file

28. Order Revenue Cycle Receipt Customer Customer Customer payment Deposit Bank statement Bank DFD – Context diagram example 1 The context diagram is the highest level data flow diagram. It shows the system in the context of the rest of the world.

29. DFD context diagram example 2 Govt. Agencies Depart- ments Tax report & payment Time cards Payroll Processing System Employees Employee cheques Payroll cheque New employee form Bank Employee change form Human Resources Payroll report Manage- ment

30. DFD’s leveled diagrams • Each process represented in the context level diagram is then represented in another diagram. • This process is called leveling. • Each level breaks the processes of the previous level into more detail, until a fundamental or atomic level is achieved.

31. DFD’s • Once a fundamental level is reached these “atomic” elements are defined in a data dictionary. • DFD’s for a system consist of a set of these leveled diagrams and a data dictionary. • The highest level DFD is the context diagram. It provides a summary level view of the system.

32. Employee/ Payroll file General Ledger Next Level of DFD from example 2 Employee paychecks New employee form Time cards 1.0 Update empl. Payroll file 2.0 Pay Employ- ees Employee Change form Payroll check Payroll Disburse- ment data 3.0 Prepare reports 5.0 Update Gen. Ledger Payroll tax disb. voucher Payroll report 4.0 Pay taxes Tax report & payment

33. Rules for drawing a DFD • RULE 1: Understand the system. • RULE 2: Ignore control processes and control actions (e.g., error corrections). • RULE 3: Determine the system boundaries — where it starts and stops.

34. Rules for drawing DFD’s • RULE 4: Draw the context diagram first, and then draw successively greater levels of detail. • RULE 5: Identify and label all data flows. The only ones that do not have to be labeled are those that go into or come out of data stores. • RULE 6: Data flows that always flow together should be grouped together. Those that do not flow together should be shown on separate lines.

35. Rules for drawing DFD’s • RULE 7: Show a process (circle) wherever a data flow is converted from one form to another. Likewise, every process should have at least one incoming data flow and at least one outgoing data flow. • RULE 8: Transformation processes that are logically related or occur simultaneously can be grouped in one bubble. • RULE 9: Number each process sequentially. A process labeled 5.0 would be exploded at the next level into processes numbered 5.1, 5.2, etc. A process labeled 5.2 would be exploded into 5.21, 5.22, etc.

36. Rules for drawing DFD’s • RULE 10: Process names should include action verbs, such as update, prepare, etc. • RULE 11: Identify and label all data stores, whether temporary or permanent. • RULE 12: Identify and label all sources and destinations. An entity can be both a source and destination. You may wish to include such items twice on the diagram, if needed, to avoid excessive or crossing lines.

37. Example 1 – Context Diagram Prepare a context level diagram for the following system: An inventory request is received by the purchasing department. The purchasing department prepares and sends a purchase order to the appropriate vendor.

38. Example 1

39. Example 1- level 0 Prepare a level 0 diagram for the following system (same system as given in Example 1): An inventory request is received by the purchasing department. The purchasing department prepares and sends a purchase order to the appropriate vendor.

40. Example 1

41. Example 2 Prepare a context level diagram for the following system: Customers make deposits into their bank accounts.

42. Example 2 – Context Diagram Customer Deposit system Customer Customer Receipt Deposit

43. Example 2 – Level 0 Prepare a level 0 diagram for the following system: Customers make deposits into their bank accounts.

44. Example 2 – Level 0 Diagram Deposit Customer Customer Receipt

45. Example 2 – Level 0 Diagram 1.0 Update Account Accounts Receipts Deposit Customer Customer 3.0 Approve receipt Deposit_info Incomplete_Receipt 2.0 Prepare receipt Receipt

46. Revision questions

47. Revision question 1

48. Revision question 1

49. Revision question 2

50. Revision question 2