Accounting Information Systems

Presented by: ARIEL A. CATAPAL MBA – OLIVAREZ COLLEGE S.Y. 2009 - 2010

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Questions to be addressed in this chapter include:

◦ What is the meaning of system, data, and information? ◦ What is an accounting information system (AIS)? ◦ Why is the AIS an important topic to study? ◦ What is the role of the AIS in the value chain? ◦ How does the AIS provide information for decision making? ◦ What are the basic strategies and strategic positions an organization can pursue?

◦ What are the basic business activities in which an organization engages?  What decisions must be made to undertake these activities?  What information is required to make those decisions? ◦ What role does the data processing cycle play in organizing business activities and providing information to users? ◦ What is the role of the information system and enterprise resource planning in modern organizations?

◦ What is the purpose of documentation? ◦ Why do accountants need to understand documentation? ◦ What documentation techniques are used in accounting systems? ◦ What are data flow diagrams and flowcharts?  How are they alike and different?  How are they prepared?

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A system is:
◦ A set of interrelated components ◦ That interact ◦ To achieve a goal

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Most systems are composed of smaller subsystems . . . . . . And vice versa!

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Every organization has goals. ◦ The subsystems should be designed to maximize achievement of the organization’s goals ◦ Even to the detriment of the subsystem itself ◦ EXAMPLE: The production department (a subsystem) of a company might have to forego its goal of staying within its budget in order to meet the organization’s goal of delivering product on time.

Goal conflict occurs when the activity of a subsystem is not consistent with another subsystem or with the larger system.  Goal congruence occurs when the subsystem’s goals are in line with the organization’s goals.  The larger and more complicated a system, the more difficult it is to achieve goal congruence.
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The systems concept encourages integration (i.e., minimizing the duplication of recording, storing, reporting and processing). Data are facts that are collected, recorded, stored, and processed by an information system. Organizations collect data about:
◦ Events that occur ◦ Resources that are affected by those events ◦ Agents who participate in the events

Information is different from data.  Information is data that have been organized and processed to provide meaning to a user.  Usually, more information and better information translates into better decisions.
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However, when you get more information than you can effectively assimilate, you suffer from information overload. ◦ Example: Final exams week!  When you’ve reached the overload point, the quality of decisions declines while the costs of producing the information increases.
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Benefits of information - Cost of producing information Value of information
Benefits of information may include: • Reduction of uncertainty • Improved decisions • Improved ability to plan and schedule activities

Benefits of information

- Cost of producing information Value of information
Costs may include time and resources spent: • Collecting data • Processing data • Storing data • Distributing information to users

Benefits of information - Cost of producing information Value of information
Costs and benefits of information are often difficult to quantify, but you need to try when you’re making decisions about whether to provide information.

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Characteristics that make information useful:
◦ Relevance
It reduces uncertainty by helping you predict what will happen or confirm what already has happened.

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Characteristics that make information useful: ◦ Relevance ◦ Reliability
It’s dependable, i.e., free from error or bias and faithfully portrays events and activities.

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Characteristics that make information useful: ◦ Relevance ◦ Reliability ◦ Completeness
It doesn’t leave out anything that’s important.

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Characteristics that make information useful: ◦ Relevance ◦ Reliability ◦ Completeness

◦ Timeliness
You get it in time to make your decision.

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Characteristics that make information useful: ◦ Relevance ◦ Reliability ◦ Completeness ◦ Timeliness ◦ Understandability
It’s presented in a manner you can comprehend and use.

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Characteristics that make information useful: ◦ Relevance ◦ Reliability ◦ Completeness ◦ Timeliness ◦ Understandability ◦ Verifiability
A consensus notion—the nature of the information is such that different people would tend to produce the same result.

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Characteristics that make information useful: ◦ Relevance ◦ Reliability ◦ Completeness ◦ Timeliness ◦ Understandability ◦ Verifiability ◦ Accessibility
You can get to it when you need it and in a format you can use.

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Information is provided to both: ◦ External users ◦ Internal Users

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Information is provided to both:
◦ External users ◦ Internal Users

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External users primarily use information that is either: ◦ MANDATORY INFORMATION—Required by a governmental entity, such as Form 10-K’s required by the SEC; or ◦ ESSENTIAL INFORMATION—Required to conduct business with external parties, such as purchase orders

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In providing mandatory or essential information, the focus should be on: ◦ Minimizing costs ◦ Meeting regulatory requirements ◦ Meeting minimum standards of reliability and usefulness

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Information is provided to both: ◦ External users ◦ Internal Users

Internal users primarily use discretionary information.  The primary focus in producing this information is ensuring that benefits exceed costs, i.e., the information has positive value.
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An AIS is a system that collects, records, stores, and processes data to produce information for decision makers.  It can: ◦ Use advanced technology; or ◦ Be a simple paper-and-pencil system; or ◦ Be something in between.  Technology is simply a tool to create, maintain, or improve a system
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The functions of an AIS are to: ◦ Collect and store data about events, resources, and agents. ◦ Transform that data into information that management can use to make decisions about events, resources, and agents. ◦ Provide adequate controls to ensure that the entity’s resources (including data) are:  Available when needed  Accurate and reliable

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It’s fundamental to accounting.
• Accounting is an information-providing activity, so accountants need to understand: – How the system that provides that information is designed, implemented and used. – How financial information is reported – How information is used to make decisions

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It’s fundamental to accounting.
• Other accounting courses focus on how the information is provided and used. • An AIS course places greater emphasis on: – How the data is collected and transformed – How the availability, reliability, and accuracy of the data is ensured • AIS courses are not number-crunching courses

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It’s fundamental to accounting. The skills are critical to career success.

• Auditors need to evaluate the accuracy and reliability of information produced by the AIS.

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It’s fundamental to accounting. The skills are critical to career success. • Tax accountants must understand the client’s AIS adequately to be confident that it is providing complete and accurate information for tax planning and compliance work.

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It’s fundamental to accounting. The skills are critical to career success. • In private industry and not-for-profits, systems work is considered the most important activity performed by accountants.

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It’s fundamental to accounting. The skills are critical to career success. • In management consulting, the design, selection, and implementation of accounting systems is a rapid growth area.

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It’s fundamental to accounting. The skills are critical to career success. The AIS course complements other systems courses. • Other systems courses focus on design and implementation of information systems, databases, expert systems, and telecommunications. • AIS courses focus on accountability and control.

It’s fundamental to accounting.  The skills are critical to career success.  The AIS course complements other systems courses.  AIS topics impact corporate strategy and culture.
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Occupational Culture

Strategy

AIS design is affected by information technology, the organization’s strategy, and the organization’s culture.

AIS

Information Technology

Occupational Culture

Strategy

Information technology affects the company’s choice of business strategy. To perform cost-benefit analyses on IT changes, you need to understand business strategy.

AIS

Information Technology

Occupational Culture

Strategy

While culture affects the design of the AIS, it’s also true that the AIS affects culture by altering the dispersion and availability of information.

AIS

Information Technology

The objective of most organizations is to provide value to their customers.  What does it mean to deliver value?  Let’s peek in on a conversation at Joe’s pharmacy . . .
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Well, Mr. Pharmaceutical Salesman, your proposal looks good, but your prices are about 5% higher than your competitors.

That’s true, but we’re comfortable with that because of the valueadded that we bring to this arrangement.

What is that ―value-added,‖ and how do you convert it into dollars?

Blah—blah—blah– customer service– blah—blah--blah

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While ―adding value‖ is a commonly used buzzword, in its genuine sense, it means making the value of the finished component greater than the sum of its parts. It may mean:
◦ ◦ ◦ ◦ Making it faster Making it more reliable Providing better service or advice Providing something in limited supply (like O-negative blood or rare gems) ◦ Providing enhanced features ◦ Customizing it

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Value is provided by performing a series of activities referred to as the value chain. These include:
◦ Primary activities ◦ Support activities

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These activities are sometimes referred to as ―line‖ and ―staff‖ activities respectively.

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Value is provided by performing a series of activities referred to as the value chain. These include:
◦ Primary activities ◦ Support activities

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These activities are sometimes referred to as ―line‖ and ―staff‖ activities respectively.

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Primary activities include:
◦ Inbound logistics
Receiving, storing, and distributing the materials that are inputs to the organization’s product or service. For a pharmaceutical company, this activity might involve handling incoming chemicals and elements that will be used to make their drugs.

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Primary activities include:
◦ Inbound logistics ◦ Operations
Transforming those inputs into products or services.
For the pharmaceutical company, this step involves combining the raw chemicals and elements with the work of people and equipment to produce the finished drug product that will be sold to customers.

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Primary activities include:
◦ Inbound logistics ◦ Operations ◦ Outbound logistics
Distributing products or services to customers. For the pharmaceutical company, this step involves packaging and shipping the goods to drug stores, doctors, and hospitals.

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Primary activities include:
◦ Inbound logistics ◦ Operations ◦ Outbound logistics ◦ Marketing and sales
Helping customers to buy the organization’s products or services. A pharmacy rep may visit with drug stores, doctors, etc. to inform them about their products and take orders.

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Primary activities include: Post-sale support provided to

◦ Inbound logistics customers such as repair and ◦ Operations maintenance function. ◦ Outbound logistics A pharmaceutical firm will ◦ Marketing and sales not be repairing it’s typically product (though the product may ◦ Service
be periodically reformulated). The pharmaceutical company is more likely to be providing advisory services to pharmacists, etc.

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Value is provided by performing a series of activities referred to as the value chain. These include:
◦ Primary activities ◦ Support activities

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These activities are sometimes referred to as ―line‖ and ―staff‖ activities respectively.

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Support activities include:
◦ Firm infrastructure
Accountants, lawyers, and administration. Includes the company’s accounting information system.

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Support activities include:
◦ Firm infrastructure ◦ Human resources
Involves recruiting and hiring new employees, training employees, paying employees, and handling employee benefits.

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Support activities include:
◦ Firm infrastructure ◦ Human resources ◦ Technology
Activities to improve the products or services (e.g., R&D, website development).

For the pharmaceutical company, these activities would include research and development to create new drugs and modify existing ones.

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Support activities include: Buying the resources (e.g.,

◦ Firm infrastructure materials, inventory, fixed assets) needed to carry out the ◦ Human resources entity’s primary activities. ◦ Technology ◦ Purchasing In the pharmaceutical company,
the purchasing folks are trying to get the best combination of cost and quality in buying chemicals, supplies, and other assets the company needs to run its operations.

Information technology can significantly impact the efficiency and effectiveness with which the preceding activities are carried out.  An organization’s value chain can be connected with the value chains of its customers, suppliers, and distributors.
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Smith Supply Co. Inbound Logistics Operations Outbound Logistics Marketing & Sales Service

For example, the inbound logistics of Pharmaceuticals, Inc., links to the outbound logistics of its suppliers. Pharmaceuticals, Inc. Inbound Logistics Operations Outbound Logistics Marketing & Sales Service

Customer Pharmacy Inbound Logistics Operations Outbound Logistics Marketing & Sales Service

Smith Supply Co. Inbound Logistics Operations Outbound Logistics Marketing & Sales Service

The linking of these separate value chains creates a larger system known as a supply chain. Pharmaceuticals, Inc. Inbound Logistics Operations Outbound Logistics Marketing & Sales Service

Customer Pharmacy Inbound Logistics Operations Outbound Logistics Marketing & Sales Service

Smith Supply Co. Inbound Logistics Operations Outbound Logistics Marketing & Sales Service Information technology can facilitate synergistic linkages that improve the performance of each company’s value chain.

The linking of these separate value chains creates a larger system known as a supply chain. Pharmaceuticals, Inc. Inbound Logistics Operations Outbound Logistics Marketing & Sales Service

Customer Pharmacy Inbound Logistics Operations Outbound Logistics Marketing & Sales Service

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There is variation in the degree of structure used to make decisions:
◦ Structured decisions
• Repetitive and routine • Can be delegated to lower-level employees • EXAMPLE: Deciding whether to write an auto insurance policy for a customer with a clean driving history.

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There is variation in the degree of structure used to make decisions:
◦ Structured decisions ◦ Semistructured decisions
• Incomplete rules • Require subjective assessments • EXAMPLE: Deciding whether to sell auto insurance to a customer with a tainted driving history.

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There is variation in the degree of structure used to make decisions:
◦ Structured decisions ◦ Semistructured decisions ◦ Structured decisions
• Non-recurring and non-routine • Require a great deal of subjective assessment • EXAMPLE: Deciding whether to begin selling a new type of insurance policy

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There is also variation in the scope of a decision’s effect:
◦ Occupational control decisions
• Relate to performance of specific tasks • Often of a day-to-day nature • EXAMPLE: Deciding whether to order inventory

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There is also variation in the scope of a decision’s effect:
◦ Occupational control decisions ◦ Management control decisions
• Relate to utilizing resources to accomplish organizational objectives • EXAMPLE: Budgeting

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There is also variation in the scope of a decision’s effect:
◦ Occupational control decisions ◦ Management control decisions ◦ Strategic planning decisions
• The ―what do we want to be when we grow up‖ types of questions • Involves establishing – Organizational objectives – Policies to achieve those objectives • EXAMPLE: Deciding whether to diversify the company into other product lines

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In general, the higher a manager is in the organization, the more likely he/she is to be engaging in:
◦ Less structured decisions ◦ Broader scope (i.e., strategic planning) decisions

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Corporations have:
◦ Unlimited opportunities to invest in technology ◦ Limited resources to invest in technology

Consequently, they must identify the improvements likely to yield the highest return.  This decision requires an understanding of the entity’s overall business strategy.
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Michael Porter suggests that there are two basic business strategies companies can follow:
◦ Product-differentiation strategy ◦ Low-cost strategy

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Michael Porter suggests that there are two basic business strategies companies can follow:
◦ Product-differentiation strategy ◦ Low-cost strategy

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A product differentiation strategy involves setting your product apart from those of your competitors, i.e., building a ―better‖ mousetrap by offering one that’s faster, has enhanced features, etc.

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Michael Porter suggests that there are two basic business strategies companies can follow:
◦ Product-differentiation strategy ◦ Low-cost strategy

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A low-cost strategy involves offering a cheaper mousetrap than your competitors. The low cost is made possible by operating more efficiently.

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Sometimes a company can do both, but they normally have to choose.

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Porter also argues that companies must choose a strategic position among three choices:
◦ Variety-based strategic position
• Offer a subset of the industry’s products or services. • EXAMPLE: An insurance company that only offers life insurance as opposed to life, health, propertycasualty, etc.

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Porter also argues that companies must choose a strategic position among three choices:
◦ Variety-based strategic position ◦ Needs-based strategic position
• Serve most or all of the needs of a particular group of customers in a target market. • EXAMPLE: The original Farm Bureau-based insurance companies provided a portfolio of insurance and financial services tailored to the specific needs of farmers.

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Porter also argues that companies • Serve a subset of customers who differ must from others terms of factors such as geographic choose ain strategic position among three location or size.. choices:
◦ Access-based strategic position

• EXAMPLE: Satellite Internet services are ◦ Variety-based strategic position in rural areas intended primarily for customers ◦ Needs-based strategic who cannot get DSL or position cable services.

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Porter also argues that companies must choose a strategic position among three choices:
◦ Variety-based strategic position ◦ Needs-based strategic position ◦ Access-based strategic position These strategic positions are not mutually exclusive and can overlap.

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Choosing a strategic position is important because it helps a company focus its efforts as opposed to trying to be everything to everybody.
◦ EXAMPLE: A radio station that tries to play all types of music will probably fail.

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It’s critical to design the organization’s activities so they reinforce one another in achieving the selected strategic position. The result is synergy, which is difficult for competitors to imitate.

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The growth of the Internet has profoundly affected the way value chain activities are performed:

◦ Inbound and outbound logistics can be streamlined for products that can be digitized, like books and music. ◦ The Internet allows companies to cut costs, which impacts strategy and strategic position. ◦ Because the Internet is available to everyone, intense price competition can result. The outcome may be that many companies shift from low-cost to productdifferentiation strategies. ◦ The Internet may impede access-based strategic positions.

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The AIS should help a company adopt and maintain its strategic position.
◦ Requires that data be collected about each activity. ◦ Requires the collection and integration of both financial and nonfinancial data.

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Businesses engage in a variety of activities, including:
◦ ◦ ◦ ◦ ◦ ◦ ◦ ◦ ◦ ◦ Acquiring capital Buying buildings and equipment Hiring and training employees Purchasing inventory Doing advertising and marketing Selling goods or services Collecting payment from customers Paying employees Paying taxes Paying vendors
Each activity requires different types of decisions!

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Businesses engage in a variety of activities, including:
◦ ◦ ◦ ◦ ◦ ◦ ◦ ◦ ◦ ◦ Acquiring capital Buying buildings and equipment Hiring and training employees Purchasing inventory Doing advertising and marketing Selling goods or services Collecting payment from customers Paying employees Paying taxes Paying vendors
Each decision requires different types of information.

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Types of information needed for decisions: ◦ Some is financial ◦ Some is nonfinancial ◦ Some comes from internal sources ◦ Some comes from external sources An effective AIS needs to be able to integrate information of different types and from different sources.

AIS
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External Parties

The AIS interacts with external parties, such as customers, vendors, creditors, and governmental agencies.

Internal Parties

AIS

External Parties

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The AIS also interacts with internal parties such as employees and management.

Internal Parties

AIS

External Parties

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The interaction is typically two-way, in that the AIS sends information to and receives information from these parties.

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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. EXAMPLES: ◦ Sell goods to customers ◦ Depreciate equipment

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The transaction cycle is a process: ◦ Begins with capturing data about a transaction ◦ Ends with an information output, such as financial statements

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Many business activities are paired in give-get exchanges The basic exchanges can be grouped into five major transaction cycles. ◦ Revenue cycle ◦ Expenditure cycle ◦ Production cycle ◦ Human resources/payroll cycle ◦ Financing cycle

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Many business activities are paired in give-get exchanges The basic exchanges can be grouped into five major transaction cycles. ◦ Revenue cycle ◦ Expenditure cycle ◦ Production cycle ◦ Human resources/payroll cycle ◦ Financing cycle

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The revenue cycle involves interactions with your customers. You sell goods or services and get cash.

Give Goods

Get Cash

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Many business activities are paired in give-get exchanges The basic exchanges can be grouped into five major transaction cycles. ◦ Revenue cycle ◦ Expenditure cycle ◦ Production cycle ◦ Human resources/payroll cycle ◦ Financing cycle

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The expenditure cycle involves interactions with your suppliers. You buy goods or services and pay cash.

Give Cash

Get Goods

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Many business activities are paired in give-get exchanges The basic exchanges can be grouped into five major transaction cycles. ◦ Revenue cycle ◦ Expenditure cycle ◦ Production cycle ◦ Human resources/payroll cycle ◦ Financing cycle

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In the production cycle, raw materials and labor are transformed into finished goods.

Give Raw Materials & Labor

Get Finished Goods

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Many business activities are paired in give-get exchanges The basic exchanges can be grouped into five major transaction cycles. ◦ Revenue cycle ◦ Expenditure cycle ◦ Production cycle ◦ Human resources/payroll cycle ◦ Financing cycle

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The human resources cycle involves interactions with your employees. Employees are hired, trained, paid, evaluated, promoted, and terminated.

Give Cash

Get Labor

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Many business activities are paired in give-get exchanges The basic exchanges can be grouped into five major transaction cycles. ◦ Revenue cycle ◦ Expenditure cycle ◦ Production cycle ◦ Human resources/payroll cycle ◦ Financing cycle

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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

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Thousands of transactions can occur within any of these cycles. But there are relatively few types of transactions in a cycle.

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EXAMPLE: In the revenue cycle, the basic giveget transaction is: ◦ Give goods ◦ Get cash

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• • • • • • • •

Other transactions in the revenue cycle include:
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 Accts Rec. for sales • Receive customer payments • Update Accts Rec. for collections • Handle sales returns, discounts, & bad debts • Prepare management reports • Send info to other cycles

Note that the last activity in any cycle is to send information to other cycles.

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Transactions in the expenditure cycle:
• • • • • • • 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

MAJOR GIVE-GET: • Give cash; get goods or services OTHER TRANSACTIONS • Requisition goods and services • Process purchase orders to vendors • Receive goods and services • Store goods • Receive vendor invoices

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Transactions in the HR/payroll cycle:
• Pay employees – Process timecard and commission data – Prepare and distribute payroll Calculate and disburse tax and benefit payments Prepare management reports Send info to other cycles

MAJOR GIVE-GET: • Give cash; get labor OTHER TRANSACTIONS • Recruit, hire, and train employees • Evaluate and promote employees • Discharge employees • Update payroll records

• • •

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Transactions in the production cycle:
• Store finished goods • Accumulate costs for products • Prepare management reports • Send info to other cycles

MAJOR GIVE-GET: • Give labor and raw materials; Get finished goods OTHER TRANSACTIONS • Design products • Forecast, plan, and schedule production • Requisition raw materials • Manufacture products

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Transactions in the financing cycle:
• Pay dividends to investors and interest to lenders • Retire debt • Prepare management reports • Send info to other cycles

MAJOR GIVE-GET: • Give cash; get cash OTHER TRANSACTIONS • Forecast cash needs • Sell securities to investors • Borrow money from lenders

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

Finished Goods

Revenue Cycle

Expenditure Cycle

Production Cycle

General Ledger and Reporting System

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Human Res./ Payroll Cycle

Financing Cycle

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

Revenue Cycle

Expenditure Cycle
Data

Raw Mats.

Production Cycle

General Ledger and Reporting System

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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

Human Res./ Payroll Cycle

Financing Cycle

Finished Goods
Raw Mats.

Revenue Cycle

Expenditure Cycle

Production Cycle

General Ledger and Reporting System

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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

Human Res./ Payroll Cycle

Financing Cycle

Revenue Cycle

Expenditure Cycle

Production Cycle

General Ledger and Reporting System

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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

Human Res./ Payroll Cycle

Funds

Financing Cycle

Revenue Cycle

Expenditure Cycle

Production Cycle

General Ledger and Reporting System

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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

Human Res./ Payroll Cycle

Funds

Financing Cycle

Revenue Cycle

Expenditure Cycle
Data

Production Cycle

General Ledger and Reporting System
Data

Information for Internal & External Users

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The General Ledger and Reporting System:
◦ Gets data from all of the cycles ◦ Provides information for internal and external users

Human Res./ Payroll Cycle

Financing Cycle

BUSINESS CYCLES
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Many accounting software packages implement the different transaction cycles as separate modules. ◦ Not every module is needed in every organization, e.g., retail companies don’t have a production cycle. ◦ Some companies may need extra modules. ◦ The implementation of each transaction cycle can differ significantly across companies.

BUSINESS CYCLES
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However the cycles are implemented, it is critical that the AIS be able to:
◦ Accommodate the information needs of managers ◦ Integrate financial and nonfinancial data.

TRANSACTION PROCESSING: THE DATA PROCESSING CYCLE
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Accountants play an important role in data processing. They answer questions such as:
◦ What data should be entered and stored? ◦ Who should be able to access the data? ◦ How should the data be organized, updated, stored, accessed, and retrieved? ◦ How can scheduled and unanticipated information needs be met.

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To answer these questions, they must understand data processing concepts.

TRANSACTION PROCESSING: THE DATA PROCESSING CYCLE
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An important function of the AIS is to efficiently and effectively process the data about a company’s transactions. ◦ In manual systems, data is entered into paper journals and ledgers. ◦ In computer-based systems, the series of operations performed on data is referred to as the data processing cycle.

TRANSACTION PROCESSING: THE DATA PROCESSING CYCLE
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The data processing cycle consists of four steps: ◦ Data input ◦ Data storage ◦ Data processing ◦ Information output

TRANSACTION PROCESSING: THE DATA PROCESSING CYCLE
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The data processing cycle consists of four steps: ◦ Data input ◦ Data storage ◦ Data processing ◦ Information output

DATA INPUT
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The first step in data processing is to capture the data. Usually triggered by a business activity. Data is captured about: ◦ The event that occurred ◦ The resources affected by the event ◦ The agents who participated

DATA INPUT
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A number of actions can be taken to improve the accuracy and efficiency of data input: ◦ Turnaround documents
• • EXAMPLE: The stub on your telephone bill that you tear off and return with your check when you pay the bill. The customer account number is coded on the document, usually in machine-readable form, which reduces the probability of human error in applying the check to the correct account.

DATA INPUT
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A number of actions can be taken to improve the accuracy and efficiency of data input: ◦ Turnaround documents ◦ Source data automation
• • Capture data with minimal human intervention. EXAMPLES:
– ATMs for banking – Point-of-sale (POS) scanners in retail stores – Automated gas pumps that accept your credit card

DATA INPUT
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A number of actions can be taken to improve the accuracy and efficiency of data input: ◦ Turnaround documents ◦ Source data automation ◦ Well-designed source documents and data entry screens
• How do these improve the accuracy and efficiency of data input?

DATA INPUT
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A number of actions can be taken to improve the accuracy and efficiency of data input:

◦ Turnaround documents ◦ Source data automation ◦ Well-designed source documents and data • What does it mean if a document number is missing in the sequence? entry screens ◦ Using pre-numbered documents or having the system automatically assign sequential numbers to transactions

DATA INPUT
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A number of actions can be taken to improve the accuracy and efficiency of data input:

◦ Turnaround documents ◦ Source data automation ◦ Well-designed source documents and data • What does it mean if there are duplicate document numbers? entry screens ◦ Using pre-numbered documents or having the system automatically assign sequential numbers to transactions

DATA INPUT
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A number of actions can be taken to improve the accuracy and efficiency of data input: ◦ Turnaround documents ◦ Source data automation ◦ Well-designed source documents and data entry screens ◦ Using pre-numbered documents or having the system automatically assign sequential • EXAMPLE: Check for inventory availability before completing an online sales transaction. numbers to transactions ◦ Verify transactions

TRANSACTION PROCESSING: THE DATA PROCESSING CYCLE
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The data processing cycle consists of four steps: ◦ Data input ◦ Data storage ◦ Data processing ◦ Information output

DATA STORAGE
Data needs to be organized for easy and efficient access.  Let’s start with some vocabulary terms with respect to data storage.


DATA STORAGE


Ledger
A ledger is a file used to store cumulative information about resources and agents. We typically use the word ledger to describe the set of t-accounts. The t-account is where we keep track of the beginning balance, increases, decreases, and ending balance for each asset, liability, owners’ equity, revenue, expense, gain, loss, and dividend account.

DATA STORAGE


Ledger ◦ Following is an example of a ledger account for accounts receivable:
GENERAL LEDGER ACCOUNT: Accounts Receivable Date Description 01/01/05 01/03/05 Sales 01/13/05 Cash collections 01/23/05 Sales Post Ref S03 CR09 S04 Account Number: 120 Debit 1,300.00 4,600.00 5,600.00 Credit Balance 42,069.00 43,369.00 38,769.00 44,369.00

DATA STORAGE




Ledger General ledger The general ledger is the summary level information for all accounts. Detail information is not kept in this account.

DATA STORAGE
Ledger  General ledger


Example: Suppose XYZ Co. has three customers. Anthony Adams owes XYZ P100. Bill Brown owes P200. And Cory Campbell owes XYZ P300. The balance in accounts receivable in the general ledger will be P600, but you will not be able to tell how much individual customers owe by looking at that account. The detail isn’t there.

DATA STORAGE
Ledger  General ledger  Subsidiary ledger


The subsidiary ledgers contain the detail accounts associated with the related general ledger account. The accounts receivable subsidiary ledger will contain three separate taccounts—one for Anthony Adams, one for Bill Brown, and one for Cory Campbell.

DATA STORAGE
Ledger  General ledger  Subsidiary ledger


The related general ledger account is often called a ―control‖ account. The sum of the subsidiary account balances should equal the balance in the control account.

DATA STORAGE
Ledger  General ledger  Subsidiary ledger  Coding techniques

• Coding is a method of systematically assigning numbers or letters to data items to help classify and organize them. There are many types of codes including: – Sequence codes – Block codes – Group codes

DATA STORAGE
Ledger  General ledger  Subsidiary ledger  Coding techniques

• With sequence codes, items (such as checks or invoices) are numbered consecutively to ensure no gaps in the sequence. The numbering helps ensure that: – All items are accounted for – There are no duplicated numbers, which would suggest errors or fraud

DATA STORAGE
Ledger  General ledger  Subsidiary ledger  Coding techniques

• • When block codes are used, blocks of numbers within a numerical sequence are reserved for a particular category. EXAMPLE: The first three digits of a Social Security number make up a block code that indicates the state in which the Social Security number was issued: – 001-003 New Hampshire – 004-007 Maine – 008-009 Vermont

DATA STORAGE
Ledger  General ledger  Subsidiary ledger  Coding techniques

• • When group codes are used, two or more subgroups of digits are used to code an item. EXAMPLE: The code in the upper, right-hand corner of many checks is a group code organized as follows: – Digits 1-2 Bank number – Digit 3 Federal Reserve District – Digits 4-7 Branch office of Federal Reserve – Digits 8-9 State

DATA STORAGE
Ledger • Group coding schemes are often used in assigning general ledger  General ledger account numbers. The following guidelines should be observed:  Subsidiary ledger – The code should be consistent with its intended use, so make sure you know what users need.  Coding techniques – Provide enough digits to allow room for growth.

– Keep it simple in order to:
• Minimize costs • Facilitate memorization • Ensure employee acceptance

– Make sure it’s consistent with:
• The company’s organization structure • Other divisions of the organization

•

•

•

The chart of accounts is a list of all general ledger accounts an organization uses. Group coding is often used for these numbers, e.g.: – The first section identifies the major account categories, such as asset, liability, revenue, etc. – The second section identifies the primary sub-account, such as current  asset or long-term investment. – The third section identifies the specific account, such as accounts  receivable or inventory. – The fourth section identifies the subsidiary account, e.g., the specific  customer code for an account receivable. The structure of this chart is an important AIS issue, as it must contain sufficient  detail to meet the organization’s needs.

Ledger General ledger Subsidiary ledger Coding techniques  Chart of accounts

•

In manual systems and some accounting packages, the first place that transactions are entered is the journal. – A general journal is used to record:
• • • • Non-routine transactions, such as loan payments Summaries of routine transactions Adjusting entries Closing entries

 Ledger
• • • •

– A special journal is used to record routine transactions.  General ledger most common special journals are:

The

 Subsidiary

ledger  Coding techniques  Chart of accounts  Journals
Cash receipts Cash disbursements Credit sales Credit purchases

DATA STORAGE
• An audit trail exists when there is sufficient  Ledger documentation to allow the tracing of a transaction from beginning to end or from the  General ledger end back to the beginning.  Subsidiary ledger • The inclusion of posting references and document numbers enable the tracing of  Coding techniques transactions through the journals and ledgers and therefore facilitate the audit trail.  Chart of accounts

 Journals  Audit

trail

DATA STORAGE
Now that we’ve learned some storage terminology, let’s return to the data storage process.  When transaction data is captured on a source document, the next step is to record the data in a journal.  A journal entry is made for each transaction showing the accounts and amounts to be credited.


DATA STORAGE


If you took a principles of financial accounting, you probably worked with journals that looked something like this:
01/15/04 Accounts receivable Sales revenue 2,200 2,200

01/18/04 Cash 1,800 Accounts receivable 01/21/04 Salaries expense Cash 900

1,800

900

DATA STORAGE


You may not have gotten much experience with special journals, but in most real-world situations, journal entries really work like this.
◦ Entries are originally made in the general journal only for ◦ Routine transactions are originally entered in special journals. The most common special journals are:
    Credit sales Cash receipts Credit purchases Cash disbursements

 Non-routine transactions.  Summaries of routine transactions

DATA STORAGE


Let’s work through an example with a special journal. In this case we’ll use the sales journal.

DATA STORAGE


On Dec. 1, a sale is made to Lee Co. for $800. Lee Co. was sent Invoice No. 201.

Page 5

Sales Journal
Amount 800.00

Invoice Account Account Date Number Debited Number Post Ref. 12/01/04 201 Lee Co. 120-122

DATA STORAGE


The general ledger account number for accounts receivable is No. 120. Lee Co. was about the 122nd customer, so their subsidiary account number is 120122.

Page 5

Sales Journal
Amount 800.00

Invoice Account Account Date Number Debited Number Post Ref. 12/01/04 201 Lee Co. 120-122

DATA STORAGE


The next sale on Dec. 1 was made to May Co. for $700.

Page 5 Invoice Date Number 12/01/04 201 12/01/04 202

Sales Journal
Account Account Debited Number Post Ref. Lee Co. 120-122 May Co. 120-033 Amount 800.00 700.00

DATA STORAGE


The third and final sale on Dec. 1 was made to DLK Co. for $900.

Page 5 Invoice Date Number 12/01/04 201 12/01/04 202 12/01/04 203

Sales Journal
Account Debited Lee Co. May Co. DLK Co. Account Number Post Ref. 120-122 120-033 120-111 Amount 800.00 700.00 900.00

DATA STORAGE


Suppose the company making these sales posts transactions at the end of each day. Consequently, at day’s end, they will post each individual transaction to the accounts receivable subsidiary ledger: ◦ An $800 increase in accounts receivable (debit) will be posted to Lee Co.’s subsidiary account (120-122). ◦ A $700 debit will be posted to May Co.’s subsidiary account (120-033). ◦ A $900 debit will be posted to DLK Co.’s subsidiary account (120-111).

DATA STORAGE


Then a summary journal entry must be made to the general journal. The sales for the period are totaled. In this case, they add up to $2,400.

Page 5 Invoice Date Number 12/01/04 201 12/01/04 202 12/01/04 203

Sales Journal
Account Debited Lee Co. May Co. DLK Co. Account Number Post Ref. 120-122 120-033 120-111 TOTAL Amount 800.00 700.00 900.00 2,400.00 120/502

DATA STORAGE


The ―120/502‖ that appears beneath the total indicates that a summary journal entry is made in the general journal with a debit to accounts receivable (120) and a credit to sales (502).

Page 5 Invoice Date Number 12/01/04 201 12/01/04 202 12/01/04 203

Sales Journal
Account Debited Lee Co. May Co. DLK Co. Account Number Post Ref. 120-122 120-033 120-111 TOTAL Amount 800.00 700.00 900.00 2,400.00 120/502

DATA STORAGE


The entries in the general journal are periodically (or automatically) posted to the general ledger. The $2,400 debit to accounts receivable will be posted to the accounts receivable control account, and the $2,400 credit will be posted to the general ledger account for sales.
12/01/04 Accounts receivable Sales revenue 2,400 2,400

12/01/04 Cash 1,800 Accounts receivable 12/01/04 Salaries expense Cash 900

1,800

900

DATA STORAGE
From time to time, the subsidiary account balances will be added up, and this sum will be compared to the balance of the control account.  What does it mean if they aren’t equal?


DATA STORAGE


Review so far: ◦ When routine transactions occur, they are recorded in special journals. ◦ When non-routine transactions occur, they are recorded in the general journal. ◦ Periodically, the transactions in the special journal are totaled, and a summary entry is made in the general journal. ◦ The individual line items in the special journal are posted to the subsidiary ledger accounts. ◦ The items in the general journal are posted to the general ledger. ◦ Periodically, the balances in the general ledger control accounts are compared to the sums of the balances in the related subsidiary accounts.

COMPUTER-BASED STORAGE CONCEPTS


Now let’s moving on to discussing some computer-based storage concepts, including:
◦ ◦ ◦ ◦ ◦ ◦ ◦ ◦ ◦ Entity Attribute Record Data Value Field File Master File Transaction File Database

COMPUTER-BASED STORAGE CONCEPTS
 



An entity is something about which information is stored. In your university’s student information system, one entity is the student. The student information system stores information about students. What are some other entities in your student information system?

COMPUTER-BASED STORAGE CONCEPTS
 

Attributes are characteristics of interest with respect to the entity. Some attributes that a student information system typically stores about the student entity are:
◦ Student ID number ◦ Phone number ◦ Address



What are some other attributes about students that a university might store?

COMPUTER-BASED STORAGE CONCEPTS
 

A field is the physical space where an attribute is stored. The space where the student ID number is stored is the student ID field.

Col. 1-9

Col. 10-30

Col. 31-40

Col. 41-50

328469993 328500732 529036409

SIMPSON ANDREWS FLANDERS

ALICE BARRY CARLA

4053721111 4057440236 4057475863

COMPUTER-BASED STORAGE CONCEPTS
 

A record is the set of attributes stored for a particular instance of an entity. The combination of attributes stored for Barry Andrews is Barry’s record.

Col. 1-9

Col. 10-30

Col. 31-40

Col. 41-50

328469993 328500732 529036409

SIMPSON ANDREWS FLANDERS

ALICE BARRY CARLA

4053721111 4057440236 4057475863

COMPUTER-BASED STORAGE CONCEPTS
 

A data value is the intersection of the row and column. The data value for Barry Andrews’ phone number is 405-744-0236.

Col. 1-9

Col. 10-30

Col. 31-40

Col. 41-50

328469993 328500732 529036409

SIMPSON ANDREWS FLANDERS

ALICE BARRY CARLA

4053721111 4057440236 4057475863

COMPUTER-BASED STORAGE CONCEPTS




A file is a group of related records. The collection of records about all students at the university might be called the student file. If there were only three students and four attributes stored for each student, the file might appear as shown below:
Col. 1-9 Col. 10-30 Col. 31-40 Col. 41-50

328469993 328500732 529036409

SIMPSON ANDREWS FLANDERS

ALICE BARRY CARLA

4053721111 4057440236 4057475863

COMPUTER-BASED STORAGE CONCEPTS
A master file is a file that stores cumulative information about an organization’s entities.  It is conceptually similar to a ledger in a manual AIS in that:


◦ The file is permanent ◦ The file exists across fiscal periods ◦ Changes are made to the file to reflect the effects of new transactions.

COMPUTER-BASED STORAGE CONCEPTS
A transaction file is a file that contains records of individual transactions (events) that occur during a fiscal period.  It is conceptually similar to a journal in a manual AIS in that:


◦ The files are temporary ◦ The files are usually maintained for one fiscal period

COMPUTER-BASED STORAGE CONCEPTS
 

A database is a set of interrelated, centrallycoordinated files. When files about students are integrated with files about classes and files about instructors, we have a database. Student File Instructor File Class File

TRANSACTION PROCESSING: THE DATA PROCESSING CYCLE


The data processing cycle consists of four steps:
◦ Data input ◦ Data storage ◦ Data processing ◦ Information output

DATA PROCESSING


Once data about a business activity has been collected and entered into a system, it must be processed.

DATA PROCESSING


There are four different types of file processing: ◦ Updating data to record the occurrence of an event, the resources affected by the event, and the agents who participated, e.g., recording a sale to a customer. ◦ Changing data, e.g., a customer address ◦ Adding data, e.g., a new customer. ◦ Deleting data, e.g., removing an old customer that has not purchased anything in 5 years.

DATA PROCESSING


Updating can be done through several approaches: ◦ Batch processing

DATA PROCESSING


Batch processing: ◦ Source documents are grouped into batches, and control totals are calculated. ◦ Periodically, the batches are entered into the computer system, edited, sorted, and stored in a temporary file. ◦ The temporary transaction file is run against the master file to update the master file. ◦ Output is printed or displayed, along with error reports, transaction reports, and control totals.

DATA PROCESSING


Updating can be done through several approaches:
◦ Batch processing ◦ On-line Batch Processing

DATA PROCESSING
 On-line

batch processing: ◦ Transactions are entered into a computer system as they occur and stored in a temporary file. ◦ Periodically, the temporary transaction file is run against the master file to update the master file. ◦ The output is printed or displayed.

DATA PROCESSING


Updating can be done through several approaches: ◦ Batch processing ◦ On-line Batch Processing ◦ On-line, Real-time Processing

DATA PROCESSING


On-line, Real-time Processing ◦ Transactions are entered into a computer system as they occur. ◦ The master file is immediately updated with the data from the transaction. ◦ Output is printed or displayed.

DATA PROCESSING






Updating can be done through several approaches: ◦ Batch processing ◦ On-line Batch Processing ◦ On-line, Real-time Processing If you’re going through enrollment, which of these approaches would you prefer that your university was using? Why?

TRANSACTION PROCESSING: THE DATA PROCESSING CYCLE


The data processing cycle consists of four steps:
◦ Data input ◦ Data storage ◦ Data processing ◦ Information output

INFORMATION OUTPUT
The final step in the information process is information output.  This output can be in the form of: • Documents are records of transactions or ◦ Documents other company data.

• • EXAMPLE: Employee paychecks or purchase orders for merchandise Documents generated at the end of the transaction processing activities are known as operational documents (as opposed to source documents). They can be printed or stored as electronic images.

•

INFORMATION OUTPUT
The final step in the information process is information output. • Reports are used by employees to control  This output can be in the activities form of: operational and by managers to make decisions and design strategies. ◦ Documents • They may be produced: – On a regular basis ◦ Reports – On an exception basis

• – On demand Organizations should periodically reassess whether each report is needed.

INFORMATION OUTPUT
The final step in the information process is information output.  This output can be in the form of: ◦ Documents • Queries are user requests for specific pieces of information. ◦ Reports • They may be requested: – Periodically ◦ Queries – One time

• They can be displayed: – On the monitor, called soft copy – On the screen, called hard copy

INFORMATION OUTPUT


Output can serve a variety of purposes:
◦ Financial statements can be provided to both external and internal parties. ◦ Some outputs are specifically for internal use:  For planning purposes
• Examples of outputs for planning purposes include:
– Budgets • Budgets are an entity’s formal expression of goals in financial terms – Sales forecasts

INFORMATION OUTPUT


Output can serve a variety of purposes:
◦ Financial statements can be provided to both external and internal parties. ◦ Some outputs are specifically for internal use:
 For planning purposes  For management of day-to-day operations
• Example: delivery schedules

• Performance reports are outputs that are used for control purposes. • These reports compare an organization’s  Output can serve a variety of purposes: standard or expected performance with its ◦ Financial statements can be provided to both actual outcomes. Management by exception is an approach to external• and internal parties. utilizing performance reports that focuses ◦ Some outputs are specifically for internal use: on investigating and acting on only those  For planning purposes variance s that are significant.  For management of day-to-day operations  For control purposes

INFORMATION OUTPUT

INFORMATION OUTPUT


Output can serve a variety of purposes:
◦ Financial statements can be provided to both external and internal parties. ◦ Some outputs are specifically for internal use:
    For planning purposes For management of day-to-day operations For control purposes For evaluation purposes
• These outputs might include:
– Surveys of customer satisfaction – Reports on employee error rates

INFORMATION OUTPUT


Behavioral implications of managerial reports: ◦ YOU GET WHAT YOU MEASURE!

ROLE OF THE AIS




The traditional AIS captured financial data. ◦ Non-financial data was captured in other, sometimes-redundant systems Enterprise resource planning (ERP) systems are designed to integrate all aspects of a company’s operations (including both financial and non-financial information) with the traditional functions of an AIS.

DATA FLOW DIAGRAMS


A data flow diagram (DFD) graphically describes the flow of data within an organization. It is used to:
◦ Document existing systems ◦ Plan and design new systems



There is no black-and-white approach to developing a DFD.

DATA FLOW DIAGRAMS
• Example of a data flow diagram of the customer payment process

Accounts Receivable

Customer

Customer

payment

1.0 Process Payment

Remittance data

2.0 Update A/R

Receivables Information

Credit Manager

Deposit

Bank

DATA FLOW DIAGRAMS


A data flow diagram consists of four basic elements: ◦ Data sources and destinations ◦ Data flows ◦ Transformation processes ◦ Data stores

DATA FLOW DIAGRAMS


A data flow diagram consists of four basic elements: ◦ Data sources and destinations ◦ Data flows ◦ Transformation processes ◦ Data stores

DATA FLOW DIAGRAMS


Data sources and destinations
◦ Appear as squares ◦ Represent organizations or individuals that send or receive data used or produced by the system



An item can be both a source and a destination

DATA FLOW DIAGRAMS
• Data sources and destinations are marked in red. • Can you tell which are sources and which are destinations?
Customer payment

Accounts Receivable

Customer

1.0 Process Payment

Remittance data

2.0 Update A/R

Receivables Information

Credit Manager

Deposit

Bank

DATA FLOW DIAGRAMS


A data flow diagram consists of four basic elements: ◦ Data sources and destinations ◦ Data flows ◦ Transformation processes ◦ Data stores

DATA FLOW DIAGRAMS


Data flows
◦ Appear as arrows ◦ Represent the flow of data between sources and destinations, processes, and data stores

DATA FLOW DIAGRAMS
• Data flows are shown in red. • Does it appear that a data flow can be two-way? • If so, how is it handled?

Accounts Receivable

Customer

Customer payment

1.0 Process Payment

Remittance data

2.0 Update A/R

Receivables Information

Credit Manager

Deposit

Bank

DATA FLOW DIAGRAMS
• Data flows should always be labeled. • The exception is a data flow moving into or out of a data store. • What symbol is the data store?
Customer payment

Accounts Receivable

Customer

1.0 Process Payment

Remittance data

2.0 Update A/R

Receivables Information

Credit Manager

Deposit

Bank

DATA FLOW DIAGRAMS


As you probably surmised from the previous slides, if a data flow is two-way, use a bidirectional arrow. Update Receivables

General Ledger

DATA FLOW DIAGRAMS


If two data elements flow together, then the use of one data flow line is appropriate.

Customer

Cash Rec’t & Remittance Slip

Process Payment

DATA FLOW DIAGRAMS


If the data elements do not always flow together, then multiple lines will be needed.

Customer Inquiry

Customer

Customer Payment

Process Payment

DATA FLOW DIAGRAMS


A data flow diagram consists of four basic elements:
◦ Data sources and destinations ◦ Data flows ◦ Transformation processes ◦ Data stores

DATA FLOW DIAGRAMS


Processes ◦ Appear as circles ◦ Represent the transformation of data

DATA FLOW DIAGRAMS
•

•

•

The transformation processes are shown in red. Every process must have at least one data inflow and at least one data outflow. Why? What do you notice about how the processes are labeled?
Customer payment

Accounts Receivable

Customer

1.0 Process Payment

Remittance data

2.0 Update A/R

Receivables Information

Credit Manager

Deposit

Bank

DATA FLOW DIAGRAMS


Data stores ◦ Appear as two horizontal lines ◦ Represent a temporary or permanent repository of data

DATA FLOW DIAGRAMS
• The data store is shown in red. • Notice that the inflows and outflows to the data store are not labeled.

Accounts Receivable

Customer

Customer payment

1.0 Process Payment

Remittance data

2.0 Update A/R

Receivables Information

Credit Manager

Deposit

Bank

DATA FLOW DIAGRAMS


Data dictionary: ◦ Data flows and data stores are typically collections of data elements. ◦ EXAMPLE: A data flow labeled student information might contain elements such as student name, date of birth, ID number, address, phone number, and major. ◦ The data dictionary contains a description of all data elements, data stores, and data flows in a system.

DATA FLOW DIAGRAMS


Subdividing the DFD: ◦ Few systems can be fully diagrammed on one sheet of paper, and users have needs for differing levels of detail. ◦ Consequently, DFDs are subdivided into successively lower levels to provide increasing amounts of detail.

DATA FLOW DIAGRAMS


The highest level of DFD is called a context diagram.
◦ It provides a summary-level view of the system. ◦ It depicts a data processing system and the external entities that are:
 Sources of its input  Destinations of its output

DATA FLOW DIAGRAMS
Departments Govt. Agencies

Payroll Processing System

Employee checks

Employees

Human Resources

Bank

• This is the context diagram for the S&S payroll processing system

Management

DATA FLOW DIAGRAMS
Departments Govt. Agencies

Payroll Processing System

Employee checks

Employees

Human Resources •

Bank

What information comes into this process, and from where?

Management

DATA FLOW DIAGRAMS
Departments Govt. Agencies

Payroll Processing System

Employee checks

Employees

Human Resources •

Bank

What information is produced by this process, and where does it go?

Management

DATA FLOW DIAGRAMS




We’re going to go into a partial example of how the first level of detail was created. But before we do, let’s step through some guidelines on how to create a DFD.

DATA FLOW DIAGRAMS






RULE 1: Understand the system. Observe the flow of information and interview people involved to gain that understanding. RULE 2: Ignore control processes and control actions (e.g., error corrections). Only very critical error paths should be included. RULE 3: Determine the system boundaries— where it starts and stops. If you’re not sure about a process, include it for the time being.

DATA FLOW DIAGRAMS






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.

DATA FLOW DIAGRAMS






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.

DATA FLOW DIAGRAMS






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.

DATA FLOW DIAGRAMS






RULE 13: As much as possible, organize the flow from top to bottom and left to right. RULE 14: You’re not likely to get it beautiful the first time, so plan to go through several iterations of refinements. RULE 15: On the final copy, lines should not cross. On each page, include:
◦ The name of the DFD ◦ The date prepared ◦ The preparer’s name

DATA FLOW DIAGRAMS




Now that we’ve been through the guidelines for developing DFDs, let’s go back to the chapter example and see if we can re-create a part of it. You may wish to create a table with the following headings to organize your information:
◦ Data Inputs ◦ Processes ◦ Data Outputs

DATA FLOW DIAGRAMS
Data Inputs Processes Data Outputs

DATA FLOW DIAGRAMS


The first paragraph of the narrative for the payroll process reads as follows:
◦ When employees are hired, they complete a new employee form. When a change to an employee’s payroll status occurs, such as a raise or a change in the number of exemptions, human resources completes an employee change form. A copy of these forms is sent to payroll. These forms are used to create or update the records in the employee/payroll file and are then stored in the file. Employee records are stored alphabetically.

DATA FLOW DIAGRAMS


The first paragraph of the narrative for the payroll process reads as follows:
◦ When employees are hired, they complete a new employee form. When a change to an employee’s payroll status occurs, such as a raise or a change in the number of exemptions, human resources completes an employee change form. A copy of these forms is sent to payroll. These forms are used to create or update the records in the employee/payroll file and are then stored in the file. Employee records are stored alphabetically.
The portion marked in red relates to activities that go on outside the boundaries of the payroll system. Consequently, these activities will not be included on the DFD.

DATA FLOW DIAGRAMS


The first paragraph of the narrative for the payroll process reads as follows:
◦ When employees are hired, they complete a new employee form. When a change to an employee’s payroll status occurs, such as a raise or a change in the number of exemptions, human resources completes an employee change form. A copy of these forms is sent to payroll. These forms are used to create or update the records in the employee/payroll file and are then stored in the file. Employee records are stored alphabetically.
The portion marked in red suggests two data flows coming into the payroll process (new employee forms and employee change forms). The source of the inflows is the human resources department.

DATA FLOW DIAGRAMS
Data Inputs
New employee forms and employee change forms (from H.R. Dept.)

Processes

Data Outputs

DATA FLOW DIAGRAMS


The first paragraph of the narrative for the payroll process reads as follows:
◦ When employees are hired, they complete a new employee form. When a change to an employee’s payroll status occurs, such as a raise or a change in the number of exemptions, human resources completes an employee change form. A copy of these forms is sent to payroll. These forms are used to create or update the records in the employee/payroll file and are then stored in the file. Employee records are stored alphabetically.
The sentence marked in red suggests a process (update employee records) with the data outflow going to a data store (the employee/payroll file).

DATA FLOW DIAGRAMS
Data Inputs
New employee forms and employee change forms (from H.R. Dept.)

Processes
Update records (read from file and record)

Data Outputs
Updated employee/ payroll file

DATA FLOW DIAGRAMS


The first paragraph of the narrative for the payroll process reads as follows:
◦ When employees are hired, they complete a new employee form. When a change to an employee’s payroll status occurs, such as a raise or a change in the number of exemptions, human resources completes an employee change form. A copy of these forms is sent to payroll. These forms are used to create or update the records in the employee/payroll file and are then stored in the file. Employee records are stored alphabetically.
The final sentence in this paragraph provides information about the physical storage of the data. Physical information is utilized in flowcharts but not in data flow diagrams.

DATA FLOW DIAGRAMS
Data Inputs
New employee forms and employee change forms (from H.R. Dept.)

Processes
Update records (read from file and record)

Data Outputs
Updated employee/ payroll file

We will not do the entire DFD, however, you could finish this table by reading the remainder of the narrative in Table 3-1 in your textbook. The portion of the table completed so far allows us to draw the segment of the DFD that is highlighted on the following slide.

DATA FLOW DIAGRAMS
Departments Human Resources New employee form Employee Change form 1.0 Update empl. Payroll file Time cards 2.0 Pay Employees Payroll Disbursement data Employee paychecks Employees

Payroll check

Bank

3.0 Prepare reports

Employee/ Payroll file

Payroll report

Payroll tax disb. voucher 4.0 Pay taxes

5.0 Update Gen. Ledger

Management

Tax report & payment

General Ledger Govt. Agencies

DATA FLOW DIAGRAMS


Keep the following in mind as you develop your DFD:
◦ Remember to ignore control activities, such as error correction processes. ◦ Some data inputs and outputs will not appear on the first level of the DFD but appear as the processes are exploded into greater levels of detail.

DATA FLOW DIAGRAMS




The data flow diagram focuses on the logical flow of data. Next, we will discuss flowcharts, which place greater emphasis on physical details.

FLOWCHARTS




A flowchart is an analytical technique that describes some aspect of an information system in a clear, concise, and logical manner. Flowcharts use a set of standard symbols to depict processing procedures and the flow of data.

FLOWCHARTS






Every shape on a flowchart depicts a unique operation, input, processing activity, or storage medium. In the days of yore, flowcharts were commonly drawn with templates. Now, it is more common to use a software program such as Visio.
◦ Microsoft and Power Point are also used ◦ The software uses pre-drawn shapes, and the developer drags the shapes into the drawing.

FLOWCHARTS


There are four types of flowcharting symbols:
◦ Input/output symbols
Input/output symbols indicate the type of device or media that provides input to or records output from a process.

FLOWCHARTS


There are four types of flowcharting symbols:
◦ Input/output symbols ◦ Processing symbols
Processing symbols indicate the type of device used to process the data or whether the data is processed manually.

FLOWCHARTS


There are four types of flowcharting symbols:
◦ Input/output symbols ◦ Processing symbols ◦ Storage symbols
Storage symbols indicate the type of device used to store data while the system is not using it.

FLOWCHARTS


There are four types of flowcharting symbols: • Flow and miscellaneous symbols may indicate:
◦ ◦ ◦ Storage symbols ◦ Flow and miscellaneous symbols
– The flow of data and goods Input/output – symbols The beginning or end of the flowchart – The location of a decision Processing symbols – An explanatory note

INPUT/OUTPUT SYMBOLS



Document Symbol
◦ Represents a document or report that is prepared by hand or printed by a computer.

INPUT/OUTPUT SYMBOLS
1
2 3



Multiple Copies of One Document
◦ Indicates multiple copies of a paper document or report. ◦ The document copies should be numbered in the upper, right-hand corner.

INPUT/OUTPUT SYMBOLS



Input/Output; Journal/Ledger
◦ Can represent any input or output on a program flowchart. ◦ Also represents accounting journals or ledgers in a document flowchart.

INPUT/OUTPUT SYMBOLS



Display
◦ Represents information displayed by an online output device such as a terminal, monitor, or screen.

INPUT/OUTPUT SYMBOLS



Online Keying
◦ Represents data entry by an online device such as a terminal or personal computer.

INPUT/OUTPUT SYMBOLS



Terminal or Personal Computer
◦ Combines the display and online keying symbols to represent terminals and personal computers.

INPUT/OUTPUT SYMBOLS



Transmittal Tape
◦ Represents manually prepared control totals which are to be compared to computer totals for control purposes.

PROCESSING SYMBOLS



Computer Processing
◦ Represents a process performed by a computer, which usually results in a change in data or information.

PROCESSING SYMBOLS



Manual Operation
◦ Represents a processing operation that is performed manually.

PROCESSING SYMBOLS



Auxiliary Operation
◦ Represents a processing operation carried out by a device other than a computer, e.g., an optical character scanner.

PROCESSING SYMBOLS



Off-line Keying Operation

◦ Represents an operation that uses an offline keying device, such as a cash register or keying to a disk.

STORAGE SYMBOLS



Magnetic disk
◦ Represents data stored permanently on a magnetic disk. ◦ Frequently used to represent master files and databases.

STORAGE SYMBOLS



Magnetic Tape
◦ Represents data stored on a magnetic tape. ◦ Sometimes represents transaction files.

STORAGE SYMBOLS



Diskette
◦ Represents data stored on a floppy disk or zip disk.

STORAGE SYMBOLS



Online Storage
◦ Represents data stored in a temporary online file in a direct-access medium such as a magnetic disk.

STORAGE SYMBOLS
A



File
◦ Represents a file of documents that are manually stored and retrieved. ◦ Letter indicates the ordering sequence:
 A = Alphabetic order  D = Date order  N = Numeric order

FLOW AND MISCELLANEOUS SYMBOLS



Document or Processing Flow
◦ Represents the direction of processing or document flow. ◦ Normal flow is top to bottom and left to right.

FLOW AND MISCELLANEOUS SYMBOLS



Data/Information Flow
◦ Represents the direction of data/information flow. ◦ Often used to show data being copied from one document to another.

FLOW AND MISCELLANEOUS SYMBOLS



Communication Link
◦ Represents the transmission of data from one location to another via communication lines.

FLOW AND MISCELLANEOUS SYMBOLS



On-page connector
◦ Connects processing from one location to another on the same page. ◦ Used to avoid crisscrossing lines.

FLOW AND MISCELLANEOUS SYMBOLS



Off-page connector
◦ Connects the processing flow between two different pages. ◦ Signals the exit from one page and the corresponding entrance on another page.

FLOW AND MISCELLANEOUS SYMBOLS



Terminal
◦ Represents the beginning, end, or a point of interruption in a process or program. ◦ Also used to indicate an external party.

FLOW AND MISCELLANEOUS SYMBOLS



Decision
◦ Represents a decision-making step. ◦ Used in a program flowchart to show branching to alternate paths.

FLOW AND MISCELLANEOUS SYMBOLS



Annotation

◦ Provides for the addition of descriptive comments or explanatory notes as clarification.

DOCUMENT FLOWCHARTS




A document flowchart shows the flow of documents and information among areas of responsibility in an organization. These flowcharts trace a document from cradle to grave and show:
◦ ◦ ◦ ◦ ◦ Where a document comes from Where it’s distributed How it’s used It’s ultimate disposition Everything that happens as it flows through the system

DOCUMENT FLOWCHARTS




Internal control flowcharts are document flowcharts used to evaluate the adequacy of internal controls, such as segregation of duties or internal checks. They can reveal weaknesses or inefficiences such as:
◦ Inadequate communication flows ◦ Unnecessarily complex document flows ◦ Procedures that cause wasteful delays



Document flowcharts are also prepared in the system design process.

This is part of the document flowchart

GUIDELINES FOR PREPARING FLOWCHARTS


Let’s step through some guidelines for preparing flowcharts:
◦ As with DFDs, you can’t effectively prepare a flowchart if you don’t understand the system, so:

 Interview users, developers, auditors, and management.  Administer questionnaires.  Read through narratives.  Walk through systems transactions

GUIDELINES FOR PREPARING FLOWCHARTS
◦ Identify:

 Entities to be flowcharted, e.g., departments, functions, external parties (the parties who ―do‖ things in the story)  Documents or information flows  Processes

◦ As you read through a narrative, you may want to mark the preceding items with different shapes (e.g., drawing a rectangle around entities, circling documents, etc.).

GUIDELINES FOR PREPARING FLOWCHARTS
◦ Use separate columns for the activity of each entity.
 Example: If there are three different departments or functions that ―do‖ things in the narrative, there would be three columns on the flowchart.

What are the entities in this flowchart?

GUIDELINES FOR PREPARING FLOWCHARTS
◦ Flowchart the normal course of operations, and identify exceptions with annotations. ◦ As much as possible, the flow should go from top to bottom and left to right. ◦ Use standard flowcharting symbols, and draw with a template or computer. ◦ Clearly label all symbols. Use annotations if necessary to provide adequate explanation.

GUIDELINES FOR PREPARING FLOWCHARTS
◦ Give the flowchart a clear beginning and ending.  Show where each document originated and its final disposition. ◦ One approach you can use is to read through the narrative and for each step define:  What was (were) the input(s)  What process was carried out  What was (were) the output(s) ◦ Note on the next slide that the flow sequence is input -- process – output.

Identifies where input is coming from

Inputs

Process

Input for next process

Process

Output

GUIDELINES FOR PREPARING FLOWCHARTS
◦ Every manual process should have at least one input and at least one output. ◦ Show all data entered into or retrieved from a computer file as passing through a process first. ◦ Do not show process symbols for:  Forwarding a document to another entity  Filing a document

Forwarding a document

Filing a document

GUIDELINES FOR PREPARING FLOWCHARTS
◦ Do not connect two documents except when forwarding to another column.
 When a document is forwarded, show it in both locations.

Show forwarded document in both locations

GUIDELINES FOR PREPARING FLOWCHARTS
◦ When using multiple copies of a document, place document numbers in the upper, right-hand corner.

What happens to the document numbers as the documents move to other locations?

GUIDELINES FOR PREPARING FLOWCHARTS
◦ Show on-page connectors and label them clearly to avoid excess flow lines.

GUIDELINES FOR PREPARING FLOWCHARTS
◦ Use off-page connectors if the flow goes to another page.

Are there other offpage connectors on this flowchart?

GUIDELINES FOR PREPARING FLOWCHARTS
◦ If a flowchart takes more than one page, label the pages as 1 of 5, 2 of 5, 3 of 5, etc. ◦ Show documents or reports first in the column where they are created. ◦ Start with a rough draft; then redesign to avoid clutter and crossed lines. ◦ Verify the accuracy of your flowchart by reviewing it with users, etc. ◦ Place the flowchart name, the date, and the preparer’s name on each page of the final copy.

SYSTEM FLOWCHARTS


Now that we’ve looked at document flowcharts and guidelines for creating flowcharts, let’s take a brief look at system flowcharts.

SYSTEM FLOWCHARTS


A system flowchart depicts the relationship among the inputs, processes, and outputs of an AIS. ◦ The system flowchart begins by identifying the inputs to the system.
• These inputs can be:
– New data – Data stored for future use – Both

SYSTEM FLOWCHARTS


A system flowchart depicts the relationship among the inputs, processes, and outputs of an AIS. ◦ The system flowchart begins by identifying the inputs to the system. ◦ Each input is followed by a process, i.e., the steps performed on the data.
• If the process is performed by a computer, the logic of the computer program would be depicted in a program flowchart.

SYSTEM FLOWCHARTS


A system flowchart depicts the relationship among the inputs, processes, and outputs of an AIS. • The output may be: ◦ The system flowchart begins byuse – Stored for later – Displayed on a screen identifying the inputs to the system. – Printed on paper ◦ Each input is followed by a process, i.e., – An input to the next process the steps performed on the data. ◦ The process is followed by outputs— the resulting new information.

SYSTEM FLOWCHARTS


A system flowchart depicts the relationship among the inputs, processes, and outputs of an AIS. ◦ The system flowchart begins by identifying the inputs to the system. ◦ Each input is followed by a process, i.e., the steps performed on the data. ◦ The process is followed by outputs—the resulting new information. ◦ In other words, it’s the same basic input – process – output pattern that we saw in the document flowchart.

System Flowchart Shown  Can you spot the input – process – output pattern?


PROGRAM FLOWCHARTS
Program flowcharts illustrate the sequence of logical operations performed by a computer in executing a program.  They also follow an input – process – output pattern.


• The program flowchart shown on the right.

• Note that the program flowchart details the logic of processes performed by the computer.

• This flowchart becomes the programmer’s blueprint for writing the actual computer program.

FLOWCHARTS VS. DFDs




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

Now that we’ve examined both flowcharts and DFDs, it may be useful to discuss the differences again. DFDs place a heavy emphasis on the logical aspects of a system. Flowcharts place more emphasis on the physical characteristics of the system. An example may be useful.

FLOWCHARTS VS. DFDs


EXAMPLE: The registrar’s office of a small college receives paper enrollment forms from students. They sort these records alphabetically and then update the student record file to show the new classes. They also prepare class lists from the same data. The sorted enrollment forms are forwarded to the bursar’s office for billing purposes. Class lists are mailed to faculty members.

Students
Enrollment Forms

Here’s a DFD that goes with the story.

1.0 Update Student Records
Enrollment Forms

Student Records

2.0 Prepare Class Lists
Class Lists

Enrollment Forms

Bursar

Faculty

Registrar’s Office

Students
Enrollment Forms

Students

Enrollment Forms

Sort Forms

1.0 Update Student Records
Enrollment Forms

A

Student Records

Update Student Records

Sorted Enrollment Forms

Sorted Enrollment Forms

Prepare Class Lists

2.0 Prepare Class Lists
Class Lists

Enrollment Forms

Bursar

Here’s a flowchart that goes with the story

Class Lists

Sorted Enrollment Forms

Faculty

Faculty

Bursar

FLOWCHARTS VS. DFDs


Now let’s change the story so that students enter enrollment data online. The registrar’s office sends a tape file of the enrollment data to the bursar’s office and continues to send paper class lists to faculty.

Students
Enrollment Forms

Original DFD

Students
Enrollment Data

Here’s the revised DFD. How has it changed?

1.0 Update Student Records
Enrollment Forms

Student Records

1.0 Update Student Records
Enrollment Data

Student Records

2.0 Prepare Class Lists
Class Lists

Enrollment Forms

Bursar

2.0 Prepare Class Lists
Class Lists

Enrollment Data

Bursar

Faculty

Faculty

Registrar’s Office Enrollment Forms

Registrar’s Office

Student s

Sort Forms

Students

Enrollment Data

A

Update Student Records

Sorted Enrollment Forms

Enrollment Data

Update Student Records

Sorted Enrollment Forms

Prepare Class Lists

Bursar Student Records

Prepare Class Lists

Class Lists

Sorted Enrollment Forms

Here’s the revised flowchart. How has it changed?

Class Lists

Faculty

Bursar Faculty

Original Flowchart

FLOWCHARTS VS. DFDs


 

Moral of the Story: Changes in the physical characteristics of the process do affect the flowchart but have little or no impact on the DFD. The DFD focuses more on the logic. When deciding which tool to employ, consider the information needs of those who will view it.

THANK YOU!