There are two problems due this week (each worth 35 points) as follows.

• Problem 1.6 (page 20) In comprehensive paragraphs, answerrequirements a to e. You will have 5 paragraphs total of four to five sentences each.
• Problem2.5(page41)Matcheachtermwithitsdefinition.

see attached doc

1.6. Based on Walmart's success in the United States, many expected the company to quickly dominate the British market after it bought the Asda grocery chain in 1999. That did not happen; Walmart's market share in groceries grew to a little more than half that of its biggest competitor, Tesco. Initially, Tesco's sales and net income rose significantly while Walmart's sales and net income increased at a much slower rate. More recently, Walmart has made small gains in market share, and Tesco has had small decreases. Walmart found out that Tesco is a formidable worldwide competitor. Tesco operates almost 2,400 stores in Britain in four different formats. It has a very successful operation in Central Europe, and it expanded to the United States with Fresh & Easy stores. In Korea, Tesco's 174 stores thrived while Walmart gave up after an eight-year effort to succeed and sold its 16 stores. One of the biggest reasons for Tesco's success is its use of technology. In 1995, Tesco started a loyalty card program, called Clubcard, and over 80% of its shoppers are members. Shoppers fill out an application in the store and receive a plastic card and a key fob in the mail that is scanned before they make a purchase. Tesco gathers massive amounts of data about its customers' 15 million purchases each week. Sales data are analyzed and turned into information that provides Tesco with a significant competitive advantage. As traditional advertising loses effectiveness, these large stores of data allow Tesco to find new and creative ways to market its products. REQUIRED a. What kind of information do you think Tesco gathers? b. How do you think Tesco has motivated over 22 million customers to sign up for its Clubcard program? c. What can Tesco accomplish with the Clubcard data it collects? Think in terms of strategy and competitive advantage. d. What are some of the disadvantages to the Clubcard program? e. Do an Internet search to find out how Tesco is doing in comparison to Walmart and other grocers and retailers. Write a few paragraphs explaining your findings. CHAPTER 2 Overview of Transaction Processing and Enterprise Resource Planning Systems LEARNING OBJECTIVES After studying this chapter, you should be able to: 1. Describe the four parts of the data processing cycle and the major activities in each. 2. Describe documents and procedures used to collect and process transaction data. 3. Describe the ways information is stored in computer-based information systems. 4. Discuss the types of information that an AIS can provide. 5. Discuss how organizations use enterprise resource planning (ERP) systems to process transactions and provide information. INTEGRATIVE CASE S&S The grand opening of S&S is two weeks away. Scott Parry and Susan Gonzalez are working long hours to make the final arrangements for the store opening. Most of the employees have already been hired; training is scheduled for next week. Susan has ordered inventory for the first month. The store is being remodeled and will have a bright, cheery decor. All seems to be in orderall, that is, except the accounting records. Like many entrepreneurs, Scott and Susan have not given as much thought to their accounting records as they have to other parts of their business. Recognizing they need qualified accounting help, they hired a full-time accountant, Ashton Fleming. Scott and Susan think Ashton is perfect for the job because of his three years of experience with a national CPA (Certified Public Accountants) firm. Ashton is looking forward to working for S&S because he has always wanted to be involved in building a company from the ground up. During Ashton's first day on the job, Susan gives him the invoices for the inventory she purchased and a folder with their bank loan documentation, with the first payment due after the grand opening. She also hands him a folder containing information on rental payments, utilities, and other expenses. Susan tells Ashton that she and Scott know little about accounting and he will run the accounting end of S&S. She adds that the only thing they have done so far is to open a checking account for S&S and that they have kept the check register updated to monitor their cash flow. Scott explains that the sales staff is paid a fixed salary and commissions and that all other employees are paid hourly rates. Employees are paid every two weeks, with their first paychecks due next week. Ashton asks Scott what accounting software the company is using. Scott replies that he and Susan have not had time to tackle that aspect yet. Scott and Susan looked at some of the popular packages but quickly realized that they did not know enough about accounting to make an intelligent choice. Scott then tells Ashton that his first task should be to purchase whatever accounting software he thinks will be best for S&S. After Scott leaves, Ashton feels both excited and a little nervous about his responsibility for creating an accounting information system (AIS) for S&S. Although Ashton has audited many companies, he has never organized a company's books and is unsure how to go about it. A million questions run through his head. Here are just a few of them: 1. How should I organize the accounting records so that financial statements can be easily produced? 2. How am I going to collect and process data about all of S&S's transactions? 3. How do I organize all the data that will be collected? 4. How should I design the AIS so that the information provided is reliable and accurate? 5. How can I design procedures to ensure that they meet all government obligations, such as remitting sales, income, and payroll taxes? Introduction This chapter is divided into two major sections. The first section discusses the data processing cycle and its role in organizing business activities and providing information to users. It explains how organizations capture and enter data about business activities into their accounting information system (AIS) and how companies process data and transform it into useful information. It also discusses basic data storage concepts, showing how data are stored for further use. Finally, information output is discussed, including the different ways information is provided to users. The second section discusses the role of the information system in modern organizations and introduces the concept of an enterprise resource planning (ERP) system. An ERP can help integrate all aspects of a company's operations with its traditional AIS. This section also describes the significant advantages of an ERP as well as significant challenges that must be overcome to implement an ERP system. Transaction Processing: The Data Processing Cycle Accountants and other system users play a significant role in the data processing cycle. For example, they interact with systems analysts to help answer questions such as these: What data should be entered and stored by the organization, and who should have access to them? How should data be organized, updated, stored, accessed, and retrieved? How can scheduled and unanticipated information needs be met? To answer these and related questions, the data processing concepts explained in this chapter must be understood. One important AIS function is to process company transactions efficiently and effectively. In manual (non-computer-based) systems, data are entered into journals and ledgers maintained on paper. In computer-based systems, data are entered into computers and stored in files and databases. The operations performed on data to generate meaningful and relevant information are referred to collectively as the data processing cycle. As shown in Figure 2-1, this process consists of four steps: data input, data storage, data processing, and information output. data processing cycle - The four operations (data input, data storage, data processing, and information output) performed on data to generate meaningful and relevant information. DATA INPUT The first step in processing input is to capture transaction data and enter them into the system. The data capture process is usually triggered by a business activity. Data must be collected about three facets of each business activity: 1. Each activity of interest 2. The resource(s) affected by each activity 3. The people who participate in each activity For example, the most frequent revenue cycle transaction is a sale, either for cash or on credit. S&S may find it useful to collect the following data about a sales transaction: Date and time the sale occurred Employee who made the sale and the checkout clerk who processed the sale Checkout register where the sale was processed Item(s) sold Quantity of each item sold List price and actual price of each item sold Total amount of the sale Delivery instructions For credit sales: customer name, customer bill-to and ship-to addresses Historically, most businesses used paper source documents to collect data about their business activities. They later transferred that data into the computer. When the data is entered using computer screens, they often retain the same name and basic format as the paper source document it replaced. Table 2-1 lists some common transaction cycle activities and the source document or form used to capture data about that event. Examples of many of these documents can be found in Chapters 12 through 16. For example, a purchase order, used to request merchandise from suppliers, is shown in Chapter 13. source documents - Documents used to capture transaction data at its source - when the transaction takes place. Examples include sales orders, purchase orders, and employee time cards. Turnaround documents are company output sent to an external party, who often adds data to the document, and then are returned to the company as an input document. They are in machine-readable form to facilitate their subsequent processing as input records. An example is a utility bill that is sent to the customer, returned with the customer's payment, and read by a special scanning device when it is returned. turnaround document - Records of company data sent to an external party and then returned to the system as input. Turnaround documents are in machine-readable form to facilitate their subsequent processing as input records. An example is a utility bill. FIGURE 2-1 The Data Processing Cycle TABLE 2-1 Common Business Activities and Source Documents BUSINESS ACTIVITY SOURCE DOCUMENT Revenue Cycle Take customer order Sales order Deliver or ship order Delivery ticket or bill of lading Receive cash Remittance advice or remittance list Deposit cash receipts Deposit slip Adjust customer account Credit memo Expenditure Cycle Request items Purchase requisition Order items Purchase order Receive items Receiving report Pay for items Check or electronic funds transfer Human Resources Cycle Collect employee withholding data W-4 form Record time worked by employees Time cards Record time spent on specific jobs Job time tickets or time sheet Source data automation devices capture transaction data in machinereadable form at the time and place of their origin. Examples include ATMs used by banks, point-of-sale (POS) scanners used in retail stores, and bar code scanners used in warehouses. source data automation - The collection of transaction data in machinereadable form at the time and place of origin. Examples are point-of-sale terminals and ATMs. The second step in processing input is to make sure captured data are accurate and complete. One way to do this is to use source data automation or well-designed turnaround documents and data entry screens. Welldesigned documents and screens improve accuracy and completeness by providing instructions or prompts about what data to collect, grouping logically related pieces of information close together, using checkoff boxes or pull-down menus to present the available options, and using appropriate shading and borders to clearly separate data items. Data input screens usually list all the data the user needs to enter. Sometimes these screens resemble source documents, and users fill out the screen the same way they would a paper source document. Users can improve control either by using prenumbered source documents or by having the system automatically assign a sequential number to each new transaction. Prenumbering simplifies verifying that all transactions have been recorded and that none of the documents has been misplaced. (Imagine trying to balance a checkbook if the checks were not prenumbered.) The third step in processing input is to make sure company policies are followed, such as approving or verifying a transaction. For example, S&S would not want to sell goods to a customer who was not paying his bills or to sell an item for immediate delivery that was out of stock. These problems are prevented by programming the system to check a customer's credit limit and payment history, as well as inventory status, before confirming a customer sale. DATA STORAGE A company's data are one of its most important resources. However, the mere existence of relevant data does not guarantee that they are useful. To function properly, an organization must have ready and easy access to its data. Therefore, accountants need to understand how data are organized and stored in an AIS and how they can be accessed. In essence, they need to know how to manage data for maximum corporate use. Imagine how difficult it would be to read a textbook if it were not organized into chapters, sections, paragraphs, and sentences. Now imagine how hard it would be for S&S to find an invoice if all documents were randomly dumped into file cabinets. Fortunately, information in an AIS is organized for easy and efficient access. This section explains basic data storage concepts and definitions. LEDGERS Cumulative accounting information is stored in general and subsidiary ledgers. A general ledger contains summary-level data for every asset, liability, equity, revenue, and expense account. A subsidiary ledger contains detailed data for any general ledger account with many individual subaccounts. For example, the general ledger has an accounts receivable account that summarizes the total amount owed to the company by all customers. The subsidiary accounts receivable ledger has a separate record for each individual customer, with detailed information such as name, address, purchases, payments, account balance, and credit limit. Subsidiary ledgers are often used for accounts receivable, inventory, fixed assets, and accounts payable. general ledger - A ledger that contains summary-level data for every asset, liability, equity, revenue, and expense account of the organization. subsidiary ledger - A ledger used to record detailed data for a general ledger account with many individual subaccounts, such as accounts receivable, inventory, and accounts payable. The general ledger account corresponding to a subsidiary ledger is called a control account. The relationship between the general ledger control account and the total of individual subsidiary ledger account balances helps maintain the accuracy of AIS data. Specifically, the sum of all subsidiary ledger account balances should equal the amount in the corresponding general ledger control account. Any discrepancy between them indicates that a recording error has occurred. control account - A title given to a general ledger account that summarizes the total amounts recorded in a subsidiary ledger. For example, the accounts receivable control account in the general ledger represents the total amount owed by all customers. The balances in the accounts receivable subsidiary ledger indicate the amount owed by each specific customer. CODING TECHNIQUES Data in ledgers is organized logically using coding techniques. Coding is the systematic assignment of numbers or letters to items to classify and organize them. coding - The systematic assignment of numbers or letters to items to classify and organize them. With sequence codes, items are numbered consecutively to account for all items. Any missing items cause a gap in the numerical sequence. Examples include prenumbered checks, invoices, and purchase orders. sequence codes - Items are numbered consecutively so that gaps in the sequence code indicate missing items that should be investigated. Examples include prenumbered checks, invoices, and purchase orders. With a block code, blocks of numbers are reserved for specific categories of data. For example, S&S reserved the following numbers for major product categories: block code - Blocks of numbers that are reserved for specific categories of data, thereby helping to organize the data. An example is a chart of accounts. Users can identify an item's type and model using the code numbers. Other examples include ledger account numbers (blocked by account type), employee numbers (blocked by department), and customer numbers (blocked by region). Group codes, which are two or more subgroups of digits used to code items, are often used in conjunction with block codes. If S&S uses a seven-digit product code number, the group coding technique might be applied as follows. group code - Two or more subgroups of digits that are used to code an item. A group code is often used in conjunction with a block code. There are four subcodes in the product code, each with a different meaning. Users can sort, summarize, and retrieve information using one or more subcodes. This technique is often applied to general ledger account numbers. With mnemonic codes, letters and numbers are interspersed to identify an item. The mnemonic code is derived from the description of the item and is usually easy to memorize. For example, Dry300W05 could represent a low end (300), white (W) dryer (Dry) made by Sears (05). mnemonic code - Letters and numbers that are interspersed to identify an item. The mnemonic code is derived from the description of the item and is usually easy to memorize. The following guidelines result in a better coding system. The code should: Be consistent with its intended use, which requires that the code designer determine desired system outputs prior to selecting the code. Allow for growth. For example, don't use a three-digit employee code for a fast-growing company with 950 employees. Be as simple as possible to minimize costs, facilitate memorization and interpretation, and ensure employee acceptance. Be consistent with the company's organizational structure and across the company's divisions. CHART OF ACCOUNTS A great example of coding is the chart of accounts, which is a list of the numbers assigned to each general ledger account. These account numbers allow transaction data to be coded, classified, and entered into the proper accounts. They also facilitate the preparation of financial statements and reports, because data stored in individual accounts can easily be summed for presentation. chart of accounts - A listing of all the numbers assigned to balance sheet and income statement accounts. The account numbers allow transaction data to be coded, classified, and entered into the proper accounts. They also facilitate financial statement and report preparation. However, data stored in summary accounts cannot be easily analyzed and reported in more detail. Consequently, it is important that the chart of accounts contain sufficient detail to meet an organization's information needs. To illustrate, consider the consequences if S&S were to use only one general ledger account for all sales transactions. It would be easy to produce reports showing the total amount of sales for a given time period, but it would be very difficult to prepare reports separating cash and credit sales. Indeed, the only way to produce these latter reports would be to go back to original sales records to identify the nature of each sales transaction. If S&S used separate general ledger accounts for cash and credit sales, then reports showing both types of sales could be easily produced. Total sales could also be easily reported by summing each type of sale. TABLE 2-2 Sample Chart of Accounts for S&S ACCOUNT CODE ACCOUNT NAME ACCOUNT CODE ACCOUNT NAME 100-199 Current Assets 400-499 Equity Accounts 101 Checking Account 400 Common Stock 102 Savings Account 410 Retained Earnings 103 Petty Cash 120 Accounts Receivable 125 Allowance for Doubtful Accounts 501 Cash Sales 130 Notes Receivable 502 Credit Sales 150 Inventory 510 Sales Returns & Allowances 160 Supplies 511 Sales Discounts 170 Prepaid Rent 520 Interest Revenue 180 Prepaid Insurance 530 Miscellaneous Revenue 200-299 Noncurrent Assets 500-599 600-799 Revenues Expenses 200 Land 600 Cost of Goods Sold 210 Buildings 611 Wages Expense 215 Accumulated Depreciation Buildings 612 Commissions Expense 230 Equipment 613 Payroll Tax Expense 235 Accumulated Depreciation Equipment 620 Rent Expense ACCOUNT CODE ACCOUNT NAME ACCOUNT CODE ACCOUNT NAME 240 Furniture & Fixtures 630 Insurance Expense 245 Accumulated Depreciation Furniture & Fixtures 640 Supplies Expense 250 Other Assets 650 Bad Debt Expense 701 Depreciation Expense Buildings Liabilities 702 Depreciation Expense Equipment 300 Accounts Payable 703 Depreciation Expense Furniture 310 Wages Payable 710 Income Tax Expense 321 Employee Income Tax Payable 322 FICA Tax Payable 323 Federal Unemployment Tax Payable 324 State Unemployment Tax Payable 330 Accrued Interest Payable 360 Other Liabilities 300-399 900-999 910 Summary Accounts Income Summary Table 2-2 shows the chart of accounts Ashton developed for S&S. Each account number is three digits long. The first digit represents the major account category and indicates where it appears on S&S's financial statements. Thus, all current assets are numbered in the 100s, noncurrent assets are numbered in the 200s, and so on. The second digit represents the primary financial subaccounts within each category. Again, the accounts are assigned numbers to match the order of their appearance in financial statements (in order of decreasing liquidity). Thus, account 120 represents accounts receivable, and account 150 represents inventory. The third digit identifies the specific account to which the transaction data will be posted. For example, account 501 represents cash sales, and account 502 represents credit sales. Similarly, accounts 101 through 103 represent the various cash accounts used by S&S. A chart of accounts is tailored to the nature and purpose of an organization. For example, the chart of accounts for S&S indicates that the company is a corporation. In contrast, a partnership would include separate capital and drawing accounts for each partner, instead of common stock and retained earnings. Likewise, because S&S is a retail organization, it has only one type of general ledger inventory account. A manufacturing company, in contrast, would have separate general ledger accounts for raw materials, work in process, and finished goods inventories. Ashton left gaps in S&S's chart of accounts to allow for additional accounts. For example, when S&S has excess cash to invest in marketable securities, a new general ledger account can be created and assigned the number 110. When S&S opens stores in the future, he will add three digits to the chart of accounts to represent each store in the chain, so that S&S can track items in each store. Subsidiary ledger accounts often have longer account codes than general ledger accounts. At S&S, each account receivable will have a seven-digit code. The first three digits are 120, the code for accounts receivable. The next four digits identify up to 10,000 individual customers. JOURNALS Transaction data are often recorded in a journal before they are entered into a ledger. A journal entry shows the accounts and amounts to be debited and credited. A general journal is used to record infrequent or nonroutine transactions, such as loan payments and end-of-period adjusting and closing entries. A specialized journal records large numbers of repetitive transactions such as sales, cash receipts, and cash disbursements. general journal - A journal used to record infrequent or nonroutine transactions, such as loan payments and end-of-period adjusting and closing entries. specialized journals - A journal used to record a large number of repetitive transactions such as credit sales, cash receipts, purchases, and cash disbursements. Table 2-3 is a sample sales journal. All transaction information is recorded in one line, with every entry a debit to accounts receivable and a credit to sales. There is no need to write an explanation of each entry, as is the case with general journal entries. Given the high number of daily sales transactions, the time saved by recording these transactions in a sales journal, rather than in the general journal, is considerable. The Post Ref column indicates when transactions are posted to the appropriate ledger. In a manual system, ledgers are books; hence, the phrase \"keeping the books\" refers to the process of maintaining the ledgers. TABLE 2-3 Sample Sales Journal SALES JOURNAL DATE INVOICE NUMBER Oct. 15 151 ACCOUNT DEBITED PAGE 5 ACCOUNT NUMBER Brown Hospital Supply 120-035 POST REF AMOUNT 798.00 SALES JOURNAL PAGE 5 INVOICE NUMBER ACCOUNT DEBITED ACCOUNT NUMBER 15 152 Greenshadows Hotel Suites 120-122 1,267.00 15 153 Heathrow Apartments 120-057 5,967.00 15 154 LMS Construction 120-173 2,312.50 15 155 Gardenview Apartments 120-084 3,290.00 15 156 KDR Builders 120-135 1,876.50 TOTAL 120/502 15,511.00 DATE POST REF AMOUNT Figure 2-2 shows how to journalize and post sales transactions. First, each credit sale is recorded in the sales journal. Then each sales journal entry is posted to the appropriate customer account in the accounts receivable subsidiary ledger (note the arrow linking the $1,876.50 sale to KDR Builders in the sales journal to the debit for $1,876.50 in the accounts receivable subsidiary ledger). Periodically, the total of all sales journal entries is posted to the general ledger (note the arrow showing the daily sales journal total of $15,511.00 posted to both the Accounts Receivable and the Credit Sales general ledger accounts). FIGURE 2-2 Recording and Posting a Credit Sale AUDIT TRAIL Figure 2-2 shows how the posting references and document numbers provide an audit trail. An audit trail is a traceable path of a transaction through a data processing system from point of origin to final output, or backward from final output to point of origin. It is used to check the accuracy and validity of ledger postings. Observe that the SJ5 posting reference for the $15,511 credit to the sales account in the general ledger refers to page 5 of the sales journal. By checking page 5 of the sales journal, it is possible to verify that $15,511 represents the total credit sales recorded on October 15. Similarly, the posting reference for the $1,876.50 debit to the KDR Builders' account in the subsidiary accounts receivable ledger also refers to page 5 of the sales journal as the source of that entry. Furthermore, note that the sales journal lists the invoice numbers for each individual entry. This provides the means for locating and examining the appropriate source documents in order to verify that the transaction occurred and it was recorded accurately. audit trail - A path that allows a transaction to be traced through a data processing system from point of origin to output or backwards from output to point of origin. It is used to check the accuracy and validity of ledger postings and to trace changes in general ledger accounts from their beginning balance to their ending balance. FIGURE 2-3 Data Storage Elements COMPUTER-BASED STORAGE CONCEPTS An entity is something about which information is stored, such as employees, inventory items, and customers. Each entity has attributes, or characteristics of interest, that are stored, such as a pay rate and address. Each type of entity possesses the same set of attributes. For example, all employees possess an employee number, pay rate, and home address. The specific values for those attributes will differ. For example, one employee's pay rate might be $12.00 an hour, whereas another's might be $12.25. entity - The item about which information is stored in a record. Examples include an employee, an inventory item, and a customer. attributes - The properties, identifying numbers, and characteristics of interest of an entity that is stored in a database. Examples are employee number, pay rate, name, and address. Figure 2-3 shows that computers store data in a field. The fields containing data about entity attributes constitute a record. In Figure 2-3, each row represents a different record, and each column represents an attribute. Each intersecting row and column in Figure 2-3 is a field within a record, the contents of which are called a data value. field - The portion of a data record where the data value for a particular attribute is stored. For example, in a spreadsheet each row might represent a customer and each column is an attribute of the customer. Each cell in a spreadsheet is a field. record - A set of fields whose data values describe specific attributes of an entity, such as all payroll data relating to a single employee. An example is a row in a spreadsheet. data value - The actual value stored in a field. It describes a particular attribute of an entity. For example, the customer name field would contain \"ZYX Company\" if that company was a customer. A file is a group of related records. A master file, like a ledger in a manual AIS, stores cumulative information about an organization. The inventory and equipment master files store information about important organizational resources. The customer, supplier, and employee master files store information about important agents with whom the organization interacts. file - A set of logically related records, such as the payroll records of all employees. master file - A permanent file of records that stores cumulative data about an organization. As transactions take place, individual records within a master file are updated to keep them current. Master files are permanent; they exist across fiscal periods. However, individual master file records may change frequently. For example, individual customer accounts balances are updated to reflect new sales transactions and payments received. Periodically, new records are added to or removed from a master file, for example, when a new customer is added or a former customer deleted. A transaction file contains records of individual business transactions that occur during a specific time. It is similar to a journal in a manual AIS. For example, S&S will have a daily sales transaction file and a cash receipts file. Both files will update individual customer account balances in the customer master file. Transaction files are not permanent and may not be needed beyond the current fiscal period. However, they are usually maintained for a specified period for backup purposes. transaction file - A file that contains the individual business transactions that occur during a specific fiscal period. A transaction file is conceptually similar to a journal in a manual AIS. A set of interrelated, centrally coordinated files is referred to as a database. For example, the accounts receivable file might be combined with customer, sales analysis, and related files to form a customer database. Chapter 4 discusses database technology. database - A set of interrelated, centrally controlled data files that are stored with as little data redundancy as possible. A database consolidates records previously stored in separate files into a common pool and serves a variety of users and data processing applications. DATA PROCESSING Once business activity data have been entered into the system, they must be processed to keep the databases current. The four different types of data processing activities, referred to as CRUD, are as follows: 1. Creating new data records, such as adding a newly hired employee to the payroll database. 2. Reading, retrieving, or viewing existing data. 3. Updating previously stored data. Figure 2-4 depicts the steps required to update an accounts receivable record with a sales transaction. The two records are matched using the account number. The sale amount ($360) is added to the account balance ($1,500) to get a new current balance ($1,860). 4. Deleting data, such as purging the vendor master file of all vendors the company no longer does business with. Updating done periodically, such as daily, is referred to as batch processing. Although batch processing is cheaper and more efficient, the data are current and accurate only immediately after processing. For that reason, batch processing is used only for applications, such as payroll, that do not need frequent updating and that naturally occur or are processed at fixed time periods. batch processing - Accumulating transaction records into groups or batches for processing at a regular interval such as daily or weekly. The records are usually sorted into some sequence (such as numerically or alphabetically) before processing. Most companies update each transaction as it occurs, referred to as online, real-time processing because it ensures that stored information is always current, thereby increasing its decision-making usefulness. It is also more accurate because data input errors can be corrected in real time or refused. It also provides significant competitive advantages. For example, FedEx updated its mission statement to include the phrase \"Positive control of each package will be maintained by utilizing real-time electronic tracking and tracing systems.\" With FedEx's system, employees and customers can track the exact location of each package and estimate its arrival time. online, real-time processing - The computer system processes data immediately after capture and provides updated information to users on a timely basis. A combination of the two approaches is online batch processing, where transaction data are entered and edited as they occur and stored for later processing. Batch processing and online, real-time processing are summarized in Figure 2-5. INFORMATION OUTPUT The final step in the data processing cycle is information output. When displayed on a monitor, output is referred to as \"soft copy.\" When printed on paper, it is referred to as \"hard copy.\" Information is usually presented in one of three forms: a document, a report, or a query response. FIGURE 2-4 The Accounts Receivable File Update Process Documents are records of transaction or other company data. Some, such as checks and invoices, are transmitted to external parties. Others, such as receiving reports and purchase requisitions, are used internally. Documents can be printed out, or they can be stored as electronic images in a computer. For example, Toys 'R' Us uses electronic data interchange to communicate with its suppliers. Every year it processes over half a million invoices electronically, thereby eliminating paper documents and dramatically reducing costs and errors. This has resulted in higher profits and more accurate information. FIGURE 2-5 Batch and Online Processing document - A record of a transaction or other company data. Examples include checks, invoices, receiving reports, and purchase requisitions. Reports are used by employees to control operational activities and by managers to make decisions and to formulate business strategies. External users need reports to evaluate company profitability, judge creditworthiness, or comply with regulatory requirements. Some reports, such as financial statements and sales analyses, are produced on a regular basis. Others are produced on an exception basis to call attention to unusual conditions. For example, S&S could have its system produce a report to indicate when product returns exceed a certain percentage of sales. Reports can also be produced on demand. For example, Susan could produce a report to identify the salesperson who sold the most items during a specific promotional period. report - System output, organized in a meaningful fashion, that is used by employees to control operational activities, by managers to make decisions and design strategies, and by investors and creditors to understand a company's business activities. The need for reports should be periodically assessed, because they are often prepared long after they are needed, wasting time, money, and resources. For example, NCR Corporation reduced the number of reports from 1,200 to just over 100. Another company eliminated 6 million pages of reports, a stack four times higher than its 41-story headquarters building. One 25-page report took five days to prepare and sat unread. A database query is used to provide the information needed to deal with problems and questions that need rapid action or answers. A user enters a request for a specific piece of information; it is retrieved, displayed, or analyzed as requested. Repetitive queries are often developed by information systems specialists. One-time queries are often developed by users. Some companies, such as Walmart, allow suppliers to access their databases to help them better serve Walmart's needs. Suppliers can gauge how well a product is selling in every Walmart store in the world and maximize sales by stocking and promoting items that are selling well. query - A request for the data base to provide the information needed to deal with a problem or answer a question. The information is retrieved, displayed or printed, and/or analyzed as requested. Additional information about system output is contained in Chapters 12 to 16. Enterprise Resource Planning (ERP) Systems Traditionally, the AIS has been referred to as a transaction processing system because its only concern was financial data and accounting transactions. For example, when a sale took place, the AIS would record a journal entry showing only the date of the sale, a debit to either cash or accounts receivable, and a credit to sales. Other potentially useful nonfinancial information about the sale, such as the time of day that it occurred, would traditionally be collected and processed outside the AIS. Consequently, many organizations developed additional information systems to collect, process, store, and report information not contained in the AIS. Unfortunately, the existence of multiple systems creates numerous problems and inefficiencies. Often the same data must be captured and stored by more than one system, which not only results in redundancy across systems but also can lead to discrepancies if data are changed in one system but not in others. In addition, it is difficult to integrate data from the various systems. Enterprise resource planning (ERP) systems overcome these problems as they integrate all aspects of a company's operations with a traditional AIS. Most large and many medium-sized organizations use ERP systems to coordinate and manage their data, business processes, and resources. The ERP system collects, processes, and stores data and provides the information managers and external parties need to assess the company. enterprise resource planning (ERP) system - A system that integrates all aspects of an organization's activitiessuch as accounting, finance, marketing, human resources, manufacturing, inventory managementinto one system. An ERP system is modularized; companies can purchase the individual modules that meet their specific needs. An ERP facilitates information flow among the company's various business functions and manages communications with outside stakeholders. As shown in Figure 2-6, a properly configured ERP system uses a centralized database to share information across business processes and coordinate activities. This is important because an activity that is part of one business process often triggers a complex series of activities throughout many different parts of the organization. For example, a customer order may necessitate scheduling additional production to meet the increased demand. This may trigger an order to purchase more raw materials. It may also be necessary to schedule overtime or hire temporary help. Well-designed ERP systems provide management with easy access to up-to-date information about all of these activities in order to plan, control, and evaluate the organization's business processes more effectively. ERP systems are modular, with each module using best business practices to automate a standard business process. This modular design allows businesses to add or delete modules as needed. Typical ERP modules include: Financial (general ledger and reporting system)general ledger, accounts receivable, accounts payable, fixed assets, budgeting, cash management, and preparation of managerial reports and financial statements FIGURE 2-6 Integrated ERP System Human resources and payrollhuman resources, payroll, employee benefits, training, time and attendance, benefits, and government reporting Order to cash (revenue cycle)sales order entry, shipping, inventory, cash receipts, commission calculation Purchase to pay (disbursement cycle)purchasing, receipt and inspection of inventory, inventory and warehouse management, and cash disbursements Manufacturing (production cycle)engineering, production scheduling, bill of materials, work-in-process, workflow management, quality control, cost management, and manufacturing processes and projects Project managementcosting, billing, time and expense, performance units, activity management Customer relationship managementsales and marketing, commissions, service, customer contact, and call center support System toolstools for establishing master file data, specifying flow of information, access controls, and so on An ERP system, with its centralized database, provides significant advantages: An ERP provides an integrated, enterprise-wide, single view of the organization's data and financial situation. Storing all corporate information in a single database breaks down barriers between departments and streamlines the flow of information. Data input is captured or keyed once, rather than multiple times, as it is entered into different systems. Downloading data from one system to another is no longer needed. Management gains greater visibility into every area of the enterprise and greater monitoring capabilities. Employees are more productive and efficient because they can quickly gather data from both inside and outside their own department. The organization gains better access control. An ERP can consolidate multiple permissions and security models into a single data access structure. Procedures and reports are standardized across business units. This standardization can be especially valuable with mergers and acquisitions because an ERP system can replace the different systems with a single, unified system. Customer service improves because employees can quickly access orders, available inventory, shipping information, and past customer transaction details. Manufacturing plants receive new orders in real time, and the automation of manufacturing processes leads to increased productivity. ERP systems also have significant disadvantages: Cost. ERP hardware, software, and consulting costs range from $50 to $500 million for a Fortune 500 company and upgrades can cost $50 million to $100 million. Midsized companies spend between $10 and $20 million. Amount of time required. It can take years to select and fully implement an ERP system, depending on business size, number of modules to be implemented, degree of customization, the scope of the change, and how well the customer takes ownership of the project. As a result, ERP implementations have a very high risk of project failure. Changes to business processes. Unless a company wants to spend time and money customizing modules, they must adapt to standardized business processes as opposed to adapting the ERP package to existing company processes. The failure to map current business processes to existing ERP software is a main cause of ERP project failures. Complexity. This comes from integrating many different business activities and systems, each having different processes, business rules, data semantics, authorization hierarchies, and decision centers. Resistance. Organizations that have multiple departments with separate resources, missions, profit and loss, and chains of command may believe that a single system has few benefits. It also takes considerable training and experience to use an ERP system effectively, and employee resistance is a major reason why many ERP implementations do not succeed. It is not easy to convince employees to change how they do their jobs, train them in new procedures, master the new system, and persuade them to share sensitive information. Resistance, and the blurring of company boundaries, can cause problems with employee morale, accountability, and lines of responsibility. Reaping the potential benefits of ERP systems and mitigating their disadvantages requires conscious effort and involvement by top management. Top management's commitment to and support for the necessary changes greatly increase the chances of success. Because ERP systems are complex and expensive, choosing one is not an easy task. In doing so, you must take great care to ensure that the ERP system has a module for every critical company process and that you are not paying for software modules that you do not need. One way to choose a suitable system is to select a package designed for your industry. Although cost is a huge concern, buying too cheaply can cost more in the long run if the system does not meet your needs, because modification costs can be quite high. You can minimize the risk of buying the wrong package by researching the best ERP vendors. There are many ERP vendors, the two largest being SAP and Oracle. Other leading vendors are The Sage Group, Microsoft, and Infor. Because it is too difficult for most companies to implement ERP software by themselves, they often hire an ERP vendor or a consulting company to do it for them. These firms usually provide three types of services: consulting, customization, and support. For most midsized companies, implementation costs range from the list price of the ERP user licenses to twice that amount. Large companies with multiple sites often spend three to five times the cost of the user license. Because many processes automatically trigger additional actions in other modules, proper configuration is essential. This requires a sound understanding of all major business processes and their interactions so they can be defined. Examples include setting up cost/profit centers, credit approval policies, and purchase approval rules. In the configuration process, companies balance the way they want the system to operate with the way it lets them operate. If the way an ERP module operates is unacceptable, the company can modify the module. Alternatively, it can use an existing system and build interfaces between it and the ERP system. Both options are time consuming, costly, and result in fewer system integration benefits. In addition, the more customized a system becomes, the more difficult it is to communicate with suppliers and customers. To make configuration easier, ERP vendors are developing built-in \"configuration\" tools to address most customers' needs for system changes. The importance of sound internal controls in an ERP cannot be overstated. The integrated nature of ERP systems means that unless every data item is validated and checked for accuracy at the time of initial entry, errors will automatically propagate throughout the system. Thus, data entry controls and access controls are essential. Most managers and employees see and have access to only a small portion of the system. This segregation of duties provides sound internal control. It is important to separate responsibility for custody of assets, authorization of activities that affect those assets, and recording information about activities and the status of organizational assets. Summary and Case Conclusion Ashton is aware that Scott and Susan plan to open additional stores in the near future and want to develop a website to conduct business over the Internet. Based on this information, Ashton will select an accounting package that will satisfy S&S's current and anticipated future needs. The software should be able to take care of all data processing and data storage tasks. Ashton will also make sure that the software can interface with the source data automation devices he wants to use to capture most data input. The software must be capable of producing a full set of financial reports and be flexible enough to produce other useful information the company will need to be successful. Finally, Ashton realized his next step would be to select the software and produce some documentation of how the system worked. KEY TERMS data processing cycle 26 source documents 26 turnaround documents 26 source data automation 27 general ledger 28 subsidiary ledger 28 control account 28 coding 28 sequence code 28 block code 28 group code 28 mnemonic code 28 chart of accounts 29 general journal 30 specialized journal 30 audit trail 31 entity 32 attributes 32 field 32 record 32 data value 32 file 32 master file 32 transaction file 32 database 32 batch processing 33 online, real-time processing 33 document 33 report 34 query 35 enterprise resource planning (ERP) system 35 AIS in Action: CHAPTER QUIZ 1. 2. Which of the following is NOT a step in the data processing cycle? a. data collection b. data input c. data storage d. data processing All of the information (name, GPA, major, etc.) about a particular student is stored in the same ______. a. file b. record c. attribute d. field Which of the following would contain the total value of all inventory owned by an organization? a. source document b. general ledger c. cash budget Which of the following is most likely to be a general ledger control account? a. accounts receivable b. petty cash c. prepaid rent d. retained earnings Which of the following documents is most likely to be used in the expenditure cycle? a. sales orders b. credit memo c. receiving report d. job time ticket Which of the following is LEAST likely to be a specialized journal? a. sales journal b. cash receipts journal c. prepaid insurance journal d. cash disbursements journal How does the chart of accounts list general ledger accounts? a. alphabetical order b. chronological order c. size order d. the order in which they appear in financial statements 3. 4. 5. 6. 7. 8. Which of the following is NOT an advantage of an ERP system? a. better access control b. standardization of procedures and reports c. improved monitoring capabilities d. simplicity and reduced costs 9. 10. Records of company data sent to an external party and then returned to the system as input are called ______. a. turnaround documents b. source data automation documents c. source documents d. external input documents Recording and processing information about a transaction at the time it takes place is referred to as which of the following? a. batch processing b. online, real-time processing c. captured transaction processing d. chart of accounts processing DISCUSSION QUESTIONS 2.1. Table 2-1 lists some of the documents used in the revenue, expenditure, and human resources cycle. What kinds of input or output documents or forms would you find in the production (also referred to as the conversion) cycle? 2.2. With respect to the data processing cycle, explain the phrase \"garbage in, garbage out.\" How can you prevent this from happening? 2.3. What kinds of documents are most likely to be turnaround documents? Do an Internet search to find the answer and to find example turnaround documents. 2.4. The data processing cycle in Figure 2-1 is an example of a basic process found throughout nature. Relate the basic input/process/store/output model to the functions of the human body. 2.5. Some individuals argue that accountants should focus on producing financial statements and leave the design and production of managerial reports to information systems specialists. What are the advantages and disadvantages of following this advice? To what extent should accountants be involved in producing reports that include more than just financial measures of performance? Why? PROBLEMS 2.1. 2.2. The chart of accounts must be tailored to an organization's specific needs. Discuss how the chart of accounts for the following organizations would differ from the one presented for S&S in Table 22. a. university b. bank c. government unit (city or state) d. manufacturing company e. expansion of S&S to a chain of two stores Ollie Mace is the controller of SDC, an automotive parts manufacturing firm. Its four major operating divisions are heat treating, extruding, small parts stamping, and machining. Last year's sales from each division ranged from $150,000 to $3,000,000. Each division is physically and managerially independent, except for the constant surveillance of Sam Dilley, the firm's founder. The AIS for each division evolved according to the needs and abilities of its accounting staff. Mace is the first controller to have responsibility for overall financial management. Dilley wants Mace to improve the AIS before he retires in a few years so that it will be easier to monitor division performance. Mace decides to redesign the financial reporting system to include the following features: It should give managers uniform, timely, and accurate reports of business activity. Monthly reports should be uniform across divisions and be completed by the fifth day of the following month to provide enough time to take corrective actions to affect the next month's performance. Company-wide financial reports should be available at the same time. Reports should provide a basis for measuring the return on investment for each division. Thus, in addition to revenue and expense accounts, reports should show assets assigned to each division. The system should generate meaningful budget data for planning and decision-making purposes. Budgets should reflect managerial responsibility and show costs for major product groups. Mace believes that a new chart of accounts is required to accomplish these goals. He wants to divide asset accounts into six major categories, such as current assets and plant and equipment. He does not foresee a need for more than 10 control accounts within each of these categories. From his observations to date, 100 subsidiary accounts are more than adequate for each control account. No division has more than five major product groups. Mace foresees a maximum of six cost centers within any product group, including both the operating and nonoperating groups. He views general divisional costs as a non-revenue-producing product group. Mace estimates that 44 expense accounts plus 12 specific variance accounts would be adequate. REQUIRED Design a chart of accounts for SDC. Explain how you structured the chart of accounts to meet the company's needs and operating characteristics. Keep total account code length to a minimum, while still satisfying all of Mace's desires. (CMA Examination, adapted) 2.3. 2.5. An audit trail enables a person to trace a source document to its ultimate effect on the financial statements or work back from financial statement amounts to source documents. Describe in detail the audit trail for the following: a. Purchases of inventory b. Sales of inventory c. Employee payroll Match the following terms with their definitions. Term Definition _____a. data processing cycle 1. Contains summary-level data for every asset, liability, equity, revenue, and expense account _____b. source documents 2. Items are numbered consecutively to account for all items; missing items cause a gap in the numerical sequence _____c. turnaround documents 3. Path of a transaction through a data processing system from point of origin to final output, or backward from final output to point of origin _____d. source data automation 4. List of general ledger account numbers; allows transaction data to be coded, classified, and entered into proper accounts; facilitates preparation of financial statements and reports _____e. general ledger 5. Contents of a specific field, such as \"George\" in a name field _____f. subsidiary ledger 6. Portion of a data record that contains the data value for a particular attribute, like a cell in a spreadsheet _____g. control account 7. Company data sent to an external party and then returned to the system as input _____h. coding 8. Used to record infrequent or nonroutine transactions _____i. sequence code 9. Characteristics of interest that need to be stored _____j. block code 10. The steps a company must follow to efficiently and effectively process data about its transactions _____k. group code 11. Something about which information is stored _____l. mnemonic code 12. Stores cumulative information about an organization; like a ledger in a manual AIS _____m. chart of accounts 13. Contains detailed data for any general ledger account with many individual subaccounts _____n. general journal 14. Contains records of individual business transactions that occur during a specific time period _____o. specialized journal 15. Updating each transaction as it occurs _____p. audit trail 16. Devices that capture transaction data in machine-readable form at the time and place of their origin _____q. entity 17. Used to record large numbers of repetitive transactions _____r. attribute 18. Set of interrelated, centrally coordinated files _____s. field 19. Two or more subgroups of digits are used to code items _____t. record 20. Updating done periodically, such as daily _____u. data value 21. Systematic assignment of numbers or letters to items to classify and organize them _____v. master file 22. Letters and numbers, derived from the item description, are interspersed to identify items; usually easy to memorize _____w. transaction file 23. Initial record of a transaction that takes place; usually recorded on preprinted forms or formatted screens _____x. database 24. Fields containing data about entity attributes; like a row in a spreadsheet _____y. batch processing 25. Sets of numbers are reserved for specific categories of data _____z. online, real-time processing 26. The general ledger account corresponding to a subsidiary ledger, where the sum of all subsidiary ledger entries should equal the amount in the general ledger account