Accounting Information Systems, 6th edition

James A. Hall

COPYRIGHT © 2009 South-Western, a division of Cengage Learning. Cengage Learning and South-Western
are trademarks used herein under license
Objectives for Chapter 4
 Tasks performed in the revenue cycle, regardless of the
technology used
 Functional departments in the revenue cycle and the flow
of revenue transactions through the organization
 Documents, journals, and accounts needed for audit
trails, records, decision making, and financial reporting
 Risks associated with the revenue cycle and the controls
that reduce these risks
 The operational and control implications of technology
used to automate and reengineer the revenue cycle
 Sales Order
1

Credit / Customer
Service REVENUE CYCLE
2 (SUBSYSTEM)
Cash Receipts/
Collections
6

Shipping

Billing/ Accounts
Receivable
4/5
Journal Vouchers/Entries
How do we get them?
 Billing Department prepares a journal voucher:
Accounts Receivable DR
Sales CR
 Inventory Control Dept. prepares a journal
voucher:
Cost of Goods Sold DR
Inventory CR
 Cash Receipts prepares a journal voucher:
Cash DR
Accounts Receivable CR
 Revenue Cycle Databases
 Master files • Other Files
 customer master file – shipping and price data
 accounts receivable master file reference file
 merchandise inventory master – credit reference file (may not
file be needed)
– salesperson file (may be a
 Transaction and Open master file)
Document Files – Sales history file
– cash receipts history file
 sales order transaction file
– accounts receivable reports
 open sales order transaction
file
file
 sales invoice transaction file
 cash receipts transaction file
DFD of Sales Order Process
Sales Order Process Flowchart
Sales Order Process Flowchart
 Manual Sales Order Processing
 Begins with a customer placing an order
 The sales department captures the essential details on a
sales order form.
 The transaction is authorized by obtaining credit
approval by the credit department.
 Sales information is released to:
 Billing
 Warehouse (stock release or picking ticket)
 Shipping (packing slip and shipping notice)
 Manual Sales Order Processing
 The merchandise is picked from the Warehouse and sent
to Shipping.
 Stock records are adjusted.
 The merchandise, packing slip, and bill of lading are
prepared by Shipping and sent to the customer.
 Shipping reconciles the merchandise received from the
Warehouse with the sales information on the packing slip.
 Shipping information is sent to Billing. Billing compiles
and reconciles the relevant facts and issues an invoice to
the customer and updates the sales journal. Information
is transferred to:
 Accounts Receivable (A/R)
 Inventory Control
 Manual Sales Order Processing
 A/R records the information in the customer’s account in
the accounts receivable subsidiary ledger.
 Inventory Control adjusts the inventory subsidiary ledger.
 Billing, A/R, and Inventory Control submits summary
information to the General Ledger dept., which then
reconciles this data and posts to the control accounts in the
G/L.
DFD of Sales Returns
Sales Returns Flowchart
Sales Return Journal Entry
G/L posts the following to control accounts:

Inventory—Control DR
Sales Returns and Allowances DR
Cost of Goods Sold CR
Accounts Receivable—Control CR
DFD of Cash Receipts Processes
Cash Receipts Flowchart
Manual Cash Receipts Processes
 Customer checks and remittance advices are received in
the Mail Room.
 A mail room clerk prepares a cash prelist and sends the prelist
and the checks to Cash Receipts.
 The cash prelist is also sent to A/R and the Controller.
 Cash Receipts:
 verifies the accuracy and completeness of the checks
 updates the cash receipts journal
 prepares a deposit slip
 prepares a journal voucher to send to G/L
Manual Cash Receipts Processes
 A/R posts from the remittance advices to the
accounts receivable subsidiary ledger.
 Periodically, a summary of the postings is sent to G/L.
 G/L department:
 reconciles the journal voucher from Cash Receipts
with the summaries from A/R
 updates the general ledger control accounts
 The Controller reconciles the bank accounts.
Summary of Internal Controls
Authorization Controls
 Proper authorization of transactions
(documentation) should occur so that only valid
transactions get processed.
 Within the revenue cycle, authorization should take
place when:
 a sale is made on credit (authorization)
 a cash refund is requested (authorization)
 posting a cash payment received to a customer’s account
(cash pre-list)
Segregation of Functions
Three Rules
1. Transaction authorization should be separate from
transaction processing.
2. Asset custody should be separate from asset record-
keeping.
3. The organization should be so structured that the
perpetration of a fraud requires collusion between
two or more individuals.
 Segregation of Functions
 Sales Order Processing
 credit authorization separate from SO processing
 inventory control separate from warehouse
 accounts receivable sub-ledger separate from general
ledger control account
 Cash Receipts Processing
 cash receipts separate from accounting records
 accounts receivable sub-ledger separate from general
ledger
Supervision
 Often used when unable to enact
appropriate segregation of duties.
 Supervision of employees serves as a
deterrent to dishonest acts and is
particularly important in the mailroom.
Accounting Records
 With a properly maintained audit trail, it is
possible to track transactions through the systems
and to find where and when errors were made:
 pre-numbered source documents
 special journals
 subsidiary ledgers
 general ledger
 files
Access Controls
 Access to assets and information (accounting records)
should be limited.
 Within the revenue cycle, the assets to protect are cash
and inventories and access to records such as the
accounts receivable subsidiary ledger and cash journal
should be restricted.
 Independent Verification
 Physical procedures as well as record-keeping should be
independently reviewed at various points in the system to
check for accuracy and completeness:
 shipping verifies the goods sent from the warehouse are
correct in type and quantity
 warehouse reconciles the stock release document (picking
slip) and packing slip
 billing reconciles the shipping notice with the sales invoice
 general ledger reconciles journal vouchers from billing,
inventory control, cash receipts, and accounts receivable
Automating the Revenue Cycle
 Authorizations and data access can be performed
through computer screens.
 There is a decrease in the amount of paper.
 The manual journals and ledgers are changed to
disk or tape transaction and master files.
 Input is still typically from a hard copy document
and goes through one or more computerized
processes.
 Processes store data in electronic files (the tape or
disk) or prepare data in the form of a hardcopy
report.
Automating the Revenue Cycle
 Revenue cycle programs can include:
 formatted screens for collecting data
 edit checks on the data entered
 instructions for processing and storing the data
 security procedures (passwords or user IDs)
 steps for generating and displaying output
 To understand files, you must consider the record design
and layout.
 The documents and the files used as input sources must
contain the data necessary to generate the output reports.
Computer-Based Accounting Systems
 CBAS technology can be viewed as a continuum with
two extremes:
 automation - use technology to improve
efficiency and effectiveness
 reengineering – use technology to
restructure business processes and firm
organization
Example: Automated Batch Sales
Reengineering Sales Order Processing Using
Real-Time Technology
 Manual procedures and physical documents are replaced
by interactive computer terminals.
 Real time input and output occurs, with some master files
still being updated using batches.
 Real-time - entry of customer order, printout of stock
release, packing slip and bill of lading; update of credit
file, inventory file, and open sales orders file
 Batch - printout of invoice, update of closed sales order
(journal), accounts receivable and general ledger
control account
Real-time Sales Order
 Advantages of Real-Time
Processing
 Shortens the cash cycle of the firm by reducing the time
between the order date and billing date
 Better inventory management which can lead to a
competitive advantage
 Fewer clerical errors, reducing incorrect items being
shipped and bill discrepancies
 Reduces the amount of expensive paper documents and
their storage costs
Reengineered Cash Receipts
 The mail room is a frequent target for reengineering.
 Companies send their customers preprinted envelopes
and remittance advices.
 Upon receipt, these envelopes are scanned to provides a
control procedure against theft.
 Machines are open the envelopes, scan remittance
advices and checks, and separate the checks.
 Artificial intelligence may be used to read handwriting,
such as remittance amounts and signatures.
Automated Cash Receipts
 Point-of-Sale Systems
 Point of sale systems are used extensively in retail
establishments.
 Customers pick the inventory from the shelves and take
them to a cashier.
 The clerk scans the universal product code (UPC).
The POS system is connected to an inventory file,
where the price and description are retrieved.
 The inventory levels are updated and reorder needs can
immediately be detected.
 Point-of-Sale Systems
 The system computes the amount due. Payment is
either cash, check, ATM or credit card in most cases.
 No accounts receivables
 If checks, ATM or credit cards are used, an on-line link
to receive approval is necessary.
 At the end of the day or a cashier’s shift, the money and
receipts in the drawer are reconciled to the internal
cash register tape or a printout from the computer’s
database.
 Cash over and under must be recorded
Computerized POS
Reengineering Using EDI
 EDI helps to expedite transactions.
 The customer’s computer:
 determines that inventory is needed
 selects a supplier with whom the business has a formal
business agreement
 dials the supplier’s computer and places the order
 The exchange is completely automated.
 No human intervention or management
 EDI System
Company A Company B
Application Purchases Sales Order Application
Software System System Software

EDI EDI
Translation Translation
Software Software
Direct Connection
Communications Communications
Software Software

Other
Mailbox

Company VAN Company

A’s mailbox B’s mailbox

Other
Mailbox
 Reengineering Using the
Internet
 Typically, no formal business agreements exist as they
do in EDI.
 Most orders are made with credit cards.
 Mainly done with e-mail systems, and thus a turnaround
time is necessary
 Intelligent agents are needed to eliminate this time lag.
 Security and control over data is a concern with Internet
transactions.
CBAS Control Considerations
 Authorization - in real-time systems, authorizations
are automated
 Programmed decision rules must be closely monitored.
 Segregation of Functions - consolidation of tasks by
the computer is common
 Protect the computer programs
 Coding, processing, and maintenance should be
separated.
 CBAS Control Considerations
 Supervision - in POS systems, the cash register’s internal
tape or database is an added form of supervision
 Access Control - magnetic records are vulnerable to both
authorized and unauthorized exposure and should be
protected
 Must have limited file accessibility
 Must safeguard and monitor computer programs
CBAS Control Considerations
 Accounting Records - rest on reliability and
security of stored digitalized data
 Accountants should be skeptical about the accuracy of
hard-copy printouts.
 Backups - the system needs to ensure that backups of all
files are continuously kept
 Independent Verification – consolidating
accounting tasks under one computer program can
remove traditional independent verification
controls. To counter this problem:
 perform batch control balancing after each run
 produce management reports and summaries for end
users to review
PC-Based Accounting Systems
 Used by small firms and some large decentralized firms
 Allow one or few individuals to perform entire
accounting function
 Most systems are divided into modules controlled by a
menu-driven program:
 general ledger
 inventory control
 payroll
 cash disbursements
 purchases and accounts payable
 cash receipts
 sales order
PC Control Issues
 Segregation of Duties - tend to be inadequate and
should be compensated for with increased
supervision, detailed management reports, and
frequent independent verification
 Access Control - access controls to the data stored
on the computer tends to be weak; methods such as
encryption and disk locking devices should be used
 Accounting Records - computer disk failures cause
data losses; external backup methods need to be
implemented to allow data recovery
 Accounting Information Systems, 6th edition
James A. Hall

COPYRIGHT © 2009 South-Western, a division of Cengage Learning. Cengage Learning and South-Western
are trademarks used herein under license
Objectives for Chapter 5
 Fundamental tasks performed during purchases and cash
disbursement processes
 Functional areas involved in purchases and cash
disbursements and the flow of these transactions through
the organization
 Documents, journals, and accounts that provide audit
trails, promote the maintenance of records, and support
decision making and financial reporting
 Risks associated with purchase and cash disbursements
activities and the controls that reduce these risks
 Operational features and the control implications of
technology used in purchases and cash disbursement
systems
Purchase Requisition Purchasing
1 2

PROCUREMENT CYCLE
(SUBSYSTEM)
Receiving/
Cash Disbursements Inspection
3
5

Accounts Payable
4
Goals of the Expenditure Cycle
 The goal of providing needed resources to organization can
be broken down into several objectives:
 purchase from reliable vendors
 purchase high quality items
 obtain best possible price
 purchase only items that are properly authorized
 have resources available when they are needed
 receive only those items ordered
 ensure items are not lost, stolen, or
broken
 pay for the items in a timely manner
DFD of Purchases System
A Manual Purchases System
 Begins in Inventory Control when inventory levels
drop to reorder levels
 A purchase requisition (PR) is prepared and copies to
sent to Purchasing and Accounts Payable (A/P)
 Purchasing prepares a purchase order (PO) for each
vendor and sends copies to Inventory Control, A/P,
and Receiving
A Manual Purchases System
 Upon receipt, Receiving counts and inspects the
goods.
 A blind copy of the PO is used to force workers to count
the goods.
 A receiving report is prepared and copies sent to the
raw materials storeroom, Purchasing, Inventory
Control, and A/P.
A Manual Purchases System
 A/P eventually receives copies of the PR, PO,
receiving report, and the supplier’s invoice.
 A/P reconciles these documents, posts to the
purchases journal, and records the liability in the
accounts payable subsidiary ledger.
A Manual Purchases System
 A/P periodically summarizes the entries in the
purchases journal as a journal voucher which is sent to
the General Ledger (G/L) department.
Inv-Control or Purchases DR
Accts Payable-Control CR
 A/P also prepares a cash disbursements voucher and
posts it in the voucher register.
A Manual Purchases System
G/L department:
 posts from the accounts payable journal
voucher to the general ledger
 reconciles the inventory amount with the
account summary received from inventory
control
Manual Purchases Flowchart
DFD of Cash Disbursements System
Manual Cash Disbursements System
 Periodically, A/P searches the open vouchers payable
file for items with payments due:
 A/P sends the voucher and supporting
documents to Cash Disbursements
 A/P updates the accounts payable
subsidiary ledger
Manual Cash Disbursements System
 Cash Disbursements:
 prepares the check
 records the information in a check register (cash
disbursements journal)
 returns paid vouchers to accounts payable, mails the
check to the supplier
 sends a journal voucher to G/L:
Accounts Payable DR
Cash CR
Manual Cash Disbursements System
 G/L department receives:
 the journal voucher from cash disbursements
 a summary of the accounts payable subsidiary ledger
from A/P
 The journal voucher is used to update the
general ledger.
 The accounts payable control account is
reconciled with the subsidiary summary.
Cash Disbursements System
Computer-Based Accounting Systems
 CBAS technology can be viewed as a continuum with
two extremes:
 automation - use technology to improve
efficiency and effectiveness
 reengineering – use technology to
restructure business processes and firm
organization
Levels of Automating and Reengineering
Ordering
 Computer generates PR
 Purchases manually generates PO
 Computer generates PO (no PR needed)
 PO not sent until manually reviewed
 Computer-generated PO is automatically sent without
manual review
 Electronic Data Interchange (EDI)
 Computer-to-computer communication without PO
Expenditure Cycle Database
 Master Files • Other Files
 supplier (vendor) master file – supplier reference and
 accounts payable master file history file
 merchandise inventory master – buyer file
file – accounts payable detail file
 Transaction and Open
Document Files
 purchase order file
open purchase order file
 supplier’s invoice file
 open vouchers file
 cash disbursements file
Computer-Based Purchases
 A Data Processing dept. performs routine
accounting tasks.
 Purchasing - a computer program identifies
inventory requirements
 The following methods are used for authorizing
and ordering inventories:
 the system prepares POs and sends them to Purchases
for review, signing, and distributing
 the system distributes POs directly to the vendors and
internal users, bypassing Purchases
 the system uses electronic data interchange (EDI) and
electronically places the order without POs
Computer-Based Purchases
 Other tasks performed automatically by the
computer:
 updates the inventory subsidiary file from
the receiving report
 calculates batch totals for general ledger
update
 closes the corresponding records in the open
PO file to the closed PO file
 validates the voucher records against valid
vendor files
Computer-Based Cash Disbursements

Tasks performed automatically by

the computer:
 the system scans for vouchers currently
due
 prints checks for these vouchers
 records these checks in the check register
 batch totals are prepared for the general
ledger update procedure
Automated Batch Purchases
Automated Batch Purchases
Advantages of Real-Time Data Input &
Processing Over Batch Processing
 Shortens the time-lag in record-keeping;
hence, records are more current
 Eliminates much of the routine manual
procedures, such as transcribing information
onto paper documents
 Eliminates much of the storage and shuffling of
paper documents
 Reduces data entry correction procedures
Reengineered Purchases/Cash
Disbursements
Summary of Internal Controls
General Internal Controls
 Organization controls
 segregation of duties
 Documentation
 Asset Accountability Controls
 Management Practices
 Data Center Operations Controls
 Authorization Controls
 Access Controls
Manual
Authorization Controls
 Purchases of inventory should be authorized by the
Inventory Control department, not by purchasing
agents
 Accounts Payable authorizes the payments of bills, not
the cash disbursements clerk, who writes the checks

How do these controls change in a CBAS?

 Computer-Based Authorization
Controls
 Authorizations are automated.
 programmed decision rules must be debugged
 Automating inventory in EDI and JIT
 faulty inventory model can lead to over-purchasing or
under-purchasing
 Cash disbursements may automate check printing and
signing.
 programming logic must be flawless
 automated signing only below a dollar threshold
Traditional Segregation of Duties
 Warehouse (stores)
 Inventory control
 Accounts payable
 General ledger
 Requisitioning
 Purchases
 Purchases returns and allowances
 Cash disbursements
Manual
Segregation of Functions
 Custody of the asset, inventory, by the Warehouse
must be separate from recordkeeping for the assets by
the Inventory Control.
 Custody of the asset, cash, by Cash Disbursements
must be kept separate from recordkeeping for the asset
by A/P.

How do these controls change in a CBAS?

Computer-Based Segregation
of Functions
 Extensive consolidation by the
computer of tasks traditionally
segregated
 computer programs authorize and process
purchase orders
 computer programs authorize and issue
checks to vendors
Manual
Supervision
 Within the expenditure cycle, supervision is of
highest importance in the Receiving department,
where the inventory arrives and is logged in by a
receiving clerk. Need to minimize:
 failures to properly inspect the assets
 theft of the assets

How do these controls change in a CBAS?

Computer-Based Supervision
 Automation often leads to a collapsing of the
traditional segregation of duties.
 requires greater supervision
 Supervision takes on new aspects as technology
advances.
 electronic monitoring
 Supervision because more difficult as the workplace
becomes more sophisticated.
 employees may have advanced IT training
 Manual
Accounting Records
 Must maintain adequate records for:
 accounts payable
 vouchers payable
 checks
 general ledger
 subsidiary ledgers

How do these controls change in a CBAS?

Computer-Based
Accounting Records
 Accounting records rest on the reliability and
security of stored digitalized data.
 Accountants should be skeptical about the accuracy of
hard-copy printouts.
 Backups - the system needs to ensure that backups of all
files are continuously kept
 Most automated systems still have a lot of paper
documents.
 This is good for audit trail purposes but is often
inefficient.
 As the system becomes increasing paperless,
maintaining an audit trail becomes more difficult.
Manual
Access Controls
Access to:
 inventories (direct)
 cash (direct)
 accounting records (indirect)

How do these controls change in a CBAS?

Computer-Based
Access Controls
 Magnetic records are vulnerable to both authorized
and unauthorized exposure and should be protected
 must have limited file accessibility
 programs must be safeguarded and monitored
 Manual
Independent Verification
 A/Payable dept. verifies much of the work done
within the expenditure cycle.
 PR, PO, receiving reports, and suppliers’ invoices must be
checked and verified by A/P.
 G/Ledger dept. verifies:
 the total obligations recorded equal the total inventories
received
 the total reductions in accounts payable equal the total
disbursements of cash
How do these controls change in a CBAS?
Computer-Based
Independent Verification
 Automating the accounting function reduces the need
for verification by reducing the chances of fraud and
error in the expenditure cycle.
 However, the need for verification shifts to the
computer program and the programmers where fraud
and error may still be present.
 Accounting Information Systems, 6th edition
James A. Hall

COPYRIGHT © 2009 South-Western, a division of Cengage Learning. Cengage Learning and South-Western
are trademarks used herein under license
Objectives for Chapter 6
 Fundamental tasks of payroll and fixed asset processes
 Functional depts. of payroll and fixed asset activities
and the flow of transactions through the organization
 Documents, journals, and accounts needed for audit
trails, record maintenance, decision making, and
financial reporting
 Exposures associated with payroll and fixed asset
activities and the controls that reduce these risks
 Operational features and the control implications of
technology used in payroll and fixed asset systems
DFD of Payroll Procedures
Manual Payroll System
 Personnel dept. uses personnel
action forms to:
 activate new employees
 change the pay rate of employees
 change marital status and/or number of
dependents
 terminate employees
Manual Payroll System
 Production employees fill out two
forms:
 job tickets - account for the time spent by
the worker on each production job
 time cards - used to capture the total time
worked each pay period for payroll
calculations
 must be signed by a supervisor
Manual Payroll System
 Cost Accounting dept:
 uses the job tickets to allocate labor
costs to WIP accounts
 summarizes these charges in a labor
distribution summary which is
forwarded to G/L dept.
Manual Payroll System
 Payroll dept receives personnel action forms and
time cards.
 Uses them to:
 prepare the payroll register
 enter the information into the employee payroll records
 prepare paychecks
 send paychecks to Cash Disbursements and a copy of the
payroll register to Accounts Payable
Manual Payroll System
 Accounts Payable dept:
 prepares a cash disbursements
voucher for the total amount of the
payroll
 sends copies to the Cash
Disbursements and G/L depts.
Manual Payroll System
 Cash Disbursements dept:
 reviews and signs the paychecks and
forwards them to a paymaster for
distribution to the employees
 writes a check for the payroll and deposits
it into the payroll imprest account
 Manual Payroll System
 G/L dept. makes the following journal entries:
 From the Labor Distribution Summary
WIP (Direct Labor) DR
Factory Overhead (Indirect Labor) DR
Wages Payable CR
 From the Distribution Voucher
Wages Payable DR
Cash CR
Fed. Inc. Tax Withholding Payable CR
State Inc. Tax Withholding Payable CR
FICA Withholding Payable CR
Other Withholding Payables CR
Manual Payroll System
 G/L dept. makes a journal entry to transfer
the cash from the operating bank account to
the payroll imprest account:
Cash - Payroll Imprest Account DR
Cash - Operating Account CR
Payroll Procedures Flowchart
Payroll Controls
 Transaction authorization - the
personnel action form helps prevent:
 terminated employees from receiving
checks
 wage rates from being improperly
changed for current employees
Payroll Controls
 Segregation of Duties -
timekeeping and personnel
functions should be separated
 Supervision - need to monitor
employees to ensure they are not
“clocking in” for one another
Payroll Controls
 Accounting Records - audit trail
includes:
 time cards
 job tickets
 disbursement vouchers
 labor distribution summary
 payroll register
 subsidiary ledger accounts
 general ledger accounts
Payroll Controls
 Access Controls - need to prevent
employees from having improper
access to:
 accounting records, such as time cards
which can be altered
 unsigned checks
Payroll Controls
 Independent Verification:
 verification of time cards
 distribution of paychecks to authorized
employees
 verification of accuracy of payroll
register by A/P dept.
 G/L dept. reconciles the labor
distribution summary and the payroll
disbursement voucher
Computer-Based Payroll
Systems
 Payroll is well-suited to batch processing
and sequential files.
 Most employees on the master file receive
paychecks periodically.
 The computer program performs the
detailed record-keeping, check-writing, and
general ledger functions.
Reengineered HRM Systems
 Payroll can be reengineered as a part of human
resource management (HRM).
 IT can process a wide range of personnel-related data,
including:
 employee benefits
 labor resource planning
 employee skills and training
 pay rates, deductions, and pay checks
 evaluations
Key Features of Reengineered HRM
 Personnel - can make changes to the
employee file in real time
 Cost Accounting - enters job cost data
either daily or in real time
 Timekeeping - enters the attendance file
daily
 Data Processing - still uses batch
processing and prepares all reports, the
checks, and updates the general ledger
Reengineered HRM Systems…
differ from automated manual and
batch/sequential file systems because:
 operations depts. transmit transactions to
data processing via terminals
 direct access files are used for storage
 many processes are performed real time
 real-time access to personnel files required
for direct inquiries
Reengineering Payroll—Before (Batch)
Reengineering Payroll—After (Real-Time)
The Fixed Asset System (FAS)
 Fixed Assets - property, plant, and
equipment used in the operation of a
business
 Life of a Fixed Asset
2. Depreciation.
1. Acquisition 4. Disposal
3. Subsequent
of asset. of asset.
expenditures.
Asset
cost $

Cost Salvage
value
Time (useful life)
DFD of Fixed Asset System
Computer-
Based FAS
Flowchart
Objectives of FAS
 Acquire fixed assets in accordance with
management approval and procedures
 Maintain adequate accounting records of asset
acquisition, cost, description, and location
 Maintain depreciation records for depreciable
assets in accordance with acceptable method
 Provide management with information to help it
plan future fixed asset investments
 Properly record the retirement and disposal of fixed
assets
 Asset Acquisition
 Begins when a dept. manager determines that an
old fixed asset needs to be replaced or that a new
fixed asset is warranted
 A purchase requisition is filled out.
 May require an authorizing signature for items over a pre-
specified limit
 FAS dept. performs record-keeping functions.
 Asset Maintenance
 Involves adjusting FAS subsidiary account balances
as assets depreciate
 Depreciation calculations are internal transactions
that the FAS system bases upon a depreciation
schedule.
 Physical improvements must also be recorded to
increase the subsidiary account balance and
depreciation schedule.
Asset Disposal
 At the end of an asset’s useful life (or
earlier disposition), the asset must be
removed from the records and
depreciation schedule
 Disposals require disposal request
forms and disposal reports as source
documents.
Computer-Based Fixed Asset
System—Acquisition
 Receipt of assets are digitally recorded
in the system, along with information
such as its useful life, depreciation
methods, etc.
 Ledgers are automatically updated
 Computer-Based Fixed Asset
System—Maintenance
 Computerized FAS automatically:
 calculate current period’s depreciation
 update accumulated depreciation and book-value fields
in the subsidiary records
 post total depreciation to the affected general ledger
accounts
 record depreciation transactions by adding records to the
journal voucher file
Computer-Based Fixed Asset
System—Disposal
 Computerized FAS automatically:
 post adjusting entries to the fixed asset
control account in the general ledger
 record losses or gains associated with the
disposal transaction
 prepare journal voucher records
 FAS Controls
 Authorization - should be formal and explicit because
of high cost of FAS:
 acquisitions
 changes in depreciation methods
 Supervision - threat of misappropriation requires
constant management oversight:
 theft - secure physical locations of assets
 misuse - monitor on-the-job activities
FAS Controls
 Independent Verification - internal auditors should
periodically verify FAS records:
 the reasonableness of factors used in decisions
(useful life, discounts, budgeting model)
 location, condition, and fair value of the fixed asset
records in the subsidiary ledger
 the programming logic for automatic calculations
(depreciation)
 Accounting Information Systems, 6th edition
James A. Hall

COPYRIGHT © 2009 South-Western, a division of Cengage Learning. Cengage Learning and South-Western
are trademarks used herein under license
 Objectives for Chapter 7
 Elements and procedures of a traditional production
process
 Data flows and procedures in a traditional cost accounting
system
 Accounting controls in a traditional environment
 Principles, operating features, and technologies of lean
manufacturing
 Shortcomings of traditional accounting methods in the
world-class environment
 Key features of activity based costing and value stream
accounting
 Information systems of lean manufacturing and world-class
companies
The Conversion Cycle
 Transforms input resources, raw materials,
labor, and overhead into finished products
or services for sale
 Consists of two subsystems:
 Physical activities – the production system
 Information activities – the cost accounting
system
 Conversion Cycle in Relation to Other Cycles

Marketing
System

Sales
Forecast

Purchase Requisitions
Revenue Cycle Sales Orders
Conversion Expenditure
Cycle Cycle
Labor Usage

Work
Finished
In
Goods
Process

General Ledger
and Financial
Reporting System
Production System
 Involves the planning, scheduling, and control of
the physical product through the manufacturing
process
 determining raw materials requirements
 authorizing the release of raw materials into
production
 authorizing work to be conducted in the
production process
 directing the movement of work through the
various stages of production
 Production Methods
 Continuous Processing creates a homogeneous
product through a continuous series of standard
procedures.
 Batch Processing produces discrete groups
(batches) of products.
 Make-to-Order Processing involves the fabrication
of discrete products in accordance with customer
specifications.
Overview: Traditional Batch
Production Model…
 consists of four basic processes:
 plan and control production
 perform production operations
 maintain inventory control
 perform cost accounting
 Batch Production System
 Production Planning and Control
 Materials and operations requirements
 Production scheduling
 Materials and Operations Requirements
 Materials requirement – the difference between what is
needed and what is available in inventory
 Operations requirements – the assembly and/or
manufacturing activities to be applied to the product
Batch Production System
 Production Scheduling
 Coordinates the production of multiple batches
 Influenced by time constraints, batch size, and other
specifications
 Work Centers and Storekeeping
 Production operations begin when work centers
obtain raw materials from storekeeping.
 It ends with the completed product being sent to the
finished goods (FG) warehouse .
Batch Production System
 Inventory Control
 Objective: minimize total inventory cost while
ensuring that adequate inventories exist of
production demand
 Provides production planning and control with
status of finished goods and raw materials inventory
 Continually updates the raw material inventory
during production process
 Upon completion of production, updates finished
goods inventory
EOQ Inventory Model
 Very simple too use, but assumptions are not always
valid
 demand is known and constant
 ordering lead time is known and constant
 total cost per year of placing orders decreases as the
order quantities increase
 carrying costs of inventory increases as quantity of
orders increases
 no quantity discounts
 EOQ Inventory Model
Inventory Cycle Daily Demand

EOQ

Reorder
Point

Lead Time Time (days)

Information: Documents in
the Batch Production System
 Sales Forecast - expected demand for the
finished goods
 Production Schedule - production plan
and authorization to produce
 Bill of Materials (BOM) - specifies the
types and quantities of the raw materials
and subassemblies used to produce a single
finished good unit
Information: Documents in
the Batch Production System
 Route Sheet - details the production path a
particular batch will take in the manufacturing
process
 sequence of operations
 time allotted at each station
 Work Order - uses the BOM and route sheet to
specify the exact materials and production
processes for each batch
Information: Documents in
the Batch Production System
 Move Ticket - records work done in each
work center and authorizes the movement
of the batch
 Materials Requisition - authorizes the
inventory warehouse to release raw
materials for use in the production process
 Production Planning and Control
Sales Forecast
Raw Materials Requirements
Inventory Status Report (Purchase Requisitions)

Engineering Specifications
BOM and Route Sheets Operations Requirements

Production Scheduling
Work Orders
Move Tickets
Materials Requisitions
Open Work Orders
Work Centers
Job Tickets Cost Accounting
Time Cards Payroll
Completed Move Tickets Prod. Plan. and Control
 Upon Completion of the Production Process…
Finished Product Finished Goods Warehouse
and Closed Work Order

Closed Work Order

Inventory Control
Status Report of Raw Materials
and Finished Goods Prod. Plan. and Control

Journal Voucher General Ledger

Cost Accounting System
 Records the financial effects of the events
occurring in the production process
 Initiated by the work order
 Cost accounting clerk creates a new cost
record for the batch and files in WIP file
 The records are updated as materials and
labor are used
Elements of the Cost Accounting System

Inventory Control Work Centers

materials requisitions job tickets
completed move tickets

COST ACCOUNTANTS
Update WIP accounts
STANDARDS DL
DM
Mfg. OH.
Compute Variances
Cost Accounting System
 Receipt of last move ticket signals
completion of the production process
 clerk removes the cost sheet from WIP file
 prepares a journal voucher to transfer
balance to a finished goods inventory
account and forwards to the General
Ledger department
Summary of Internal Controls
Internal Controls
 Transaction authorizations
 work orders – reflect a legitimate need
based on sales forecast and the finished
goods on hand
 move tickets – signatures from each work
station authorize the movement of the batch
through the work centers
 materials requisitions – authorize the
warehouse to release materials to the work
centers
Internal Controls
 Segregation of duties
 production planning and control department
is separate from the work centers
 inventory control is separate from materials
storeroom and finished goods warehouse
 cost accounting function accounts for WIP
and should be separate from the work centers
in the production process
Internal Controls
 Supervision
 work center supervisors oversee the usage of
raw materials to ensure that all released
materials are used in production and waste is
minimized
 employee time cards and job tickets are
checked for accuracy
Internal Controls
 Access control
 direct access to assets
 controlled access to storerooms, production
work centers, and finished goods warehouses
 quantities in excess of standard amounts
require approval
 indirect access to assets
 controlled use of materials requisitions, excess
materials requisitions, and employee time
cards
Internal Controls
 Accounting records
 pre-numbered documents
 work orders
 cost sheets
 move tickets
 job tickets
 material requisitions
 WIP and finished goods files
 Internal Controls
 Independent verification
 cost accounting reconciles material usage (material
requisitions) and labor usage (job tickets) with
standards
 variances are investigated

 GL dept. verifies movement from WIP to FG by

reconciling journal vouchers from cost accounting and
inventory subsidiary ledgers from inventory control
 internal and external auditors periodically verify the raw
materials and FGs inventories through a physical count
World-Class Companies…
 continuously pursue improvements in all
aspects of their operations, including
manufacturing procedures
 are highly customer oriented
 have undergone fundamental changes from
the traditional production model
 often adopt a lean manufacturing model
Principles of Lean Manufacturing
 Pull Processing – products are pulled from the
consumer end (demand), not pushed from the
production end (supply)
 Perfect Quality –pull processing requires zero defects
in raw material, WIP, and FG inventories
 Waste Minimization – activities that do not add value
or maximize the use of scarce resources are eliminated
 Inventory Reduction – hallmark of lean manufacturing
 Inventories cost money
 Inventories can mask production problems
 Inventories can precipitate overproduction
Principles of Lean Manufacturing
 Production Flexibility – reduce setup time to a
minimum, allowing for a greater diversity of products,
without sacrificing efficiency
 Established Supplier Relations – late deliveries,
defective raw materials, or incorrect orders will shut
down production since there are inventory reserves
 Team Attitude – each employee must be vigilant of
problems that threaten the continuous flow of the
production line
Lean Manufacturing Model
 Achieve production flexibility by means of:
 Changes in the physical organization of
production facilities
 Employment of automated technologies
 CIM, AS/RS, robotics, CAD, and CAM
 Use of alternative accounting models
 ABC and value stream accounting
 Use of advanced information systems
 MRP, MRPII, ERP, and EDI
 Physical Reorganization of the
Production Facilities
 Inefficiencies in traditional plant layouts increase
handling costs, conversion time, and excess
inventories.
 Employees tend to feel ownership over their stations,
contrary to the team concept.
 Reorganization is based on flows through cells which
shorten the physical distance between activities.
 This reduces setup and processing time, handling costs, and
inventories.
 Progression of Automation in
the Manufacturing Process

Traditional Islands of Computer

Technology Integrated
Manufacturing

Progression of Automation toward World-Class Status

Automating Manufacturing
 Traditional Approach to Automation
 Consists of many different types of machines
which require a lot of setup time
 Machines and operators are organized in
functional departments
 WIP follows a circuitous route through the
different operations
Automating Manufacturing
 Islands of Technology
 Stand alone islands which employ computer numerical
controlled (CNC) machines that can perform multiple
operations with less human involvement
 Computer Numerical Controlled (CNC ) Machines
 Reduce the complexity of the physical layout
 Arranged in groups and in cells to produce an entire part
from start to finish
 Need less set-up time
Automating Manufacturing
 Computer Integrated Manufacturing (CIM)
 A completely automated environment which
employs automated storage and retrieval systems
(AS/RS) and robotics
 Automated Storage and Retrieval Systems
(AS/RS)
 Replaces traditional forklifts and their human
operators with computer-controlled conveyor
systems
 Reduce errors, improved inventory control, and
lower storage costs
Computer-Integrated
Manufacturing (CIM) System
Automating Manufacturing
 Robotics
 Use special CNC machines that are useful in
performing hazardous, difficult, and monotonous
tasks
 Computer-Aided Design (CAD)
 Increases engineers’ productivity
 Improves accuracy
 Allows firms to be more responsive to market
demands
 Interfaces with CAM and MRPII systems
Automating Manufacturing
 Computer Aided Manufacturing
(CAM)
 Uses computers to control the physical
manufacturing process
 Provides greater precision, speed, and
control than human production processes
Achieving World-Class Status
 The world-class firm needs new accounting
methods and new information systems that:
 show what matters to its customers
 identify profitable products
 identify profitable customers
 identify opportunities for improving operations and
products
 encourage the adoption of value-added activities and
processes and identify those that do not add value
 efficiently support multiple users with both financial
and nonfinancial information
What’s Wrong with Traditional
Accounting Information?
 Inaccurate cost allocations – automation changes
the relationship between direct labor, direct
materials, and overhead cost
 Promotes nonlean behavior – incentives to produce
large batches and inventories, and conceal waste in
overhead allocations
 Time lag – data lag due to assumption that control
can be applied after the fact to correct errors
 Financial orientation – dollars as the standard unit
of measure
Activity Based Costing (ABC)…
 is an information system that provides managers
with information about activities and cost
objects
 assumes that activities cause costs and that
products (and other cost objects) create a
demand for activities
 is different from traditional accounting system
since ABC has multiple activity drivers, whereas
traditional accounting has only one, e.g. machine
hours
ABC – Pros and Cons
 Advantages
 More accurate costing of products/services, customers, and
distribution channels
 Identifying the most and least profitable products and customers
 Accurately tracking costs of activities and processes
 Equipping managers with cost intelligence to drive continuous
improvements
 Facilitating better marketing mix
 Identifying waste and non-value-added activities
 Disadvantages
 Too time-consuming and complicated to be practical
 Promotes complex bureaucracies in conflict with lean
manufacturing philosophy
Value Stream Accounting
 Value stream – all the steps in a process that are
essential to producing a product
 Value streams cut across functions and departments
 Captures costs by value stream rather than by
department or activity
 Simpler than ABC accounting
 Makes no distinction between direct and indirect costs
 Including labor costs
 Cost Assignment to Value Stream

Sales Product Warehousing Manufacturing Shipping

Planning

Production Production Cell

Materials Labor Machines

Value Stream Product Family A

Marketing and Product Support Facilities Rent &

Design Labor Distribution Expenses
Selling Expenses Maintenance

Value Stream Product Family B

Production Production Cell

Materials Labor Machines
Information Systems that
Support Lean Manufacturing
 Manufacturing Resources Planning (MRP)
 Ensures adequate raw materials for production process
 Maintains the lowest possible level of inventory on hand
 Produce production and purchasing schedules and other
information needed to control production
 MRP II
 An extension of MRP
 More than inventory management and production
scheduling – it is a system for coordinating the
activities of the entire firm
Information Systems that
Support Lean Manufacturing
 Enterprise Resource Planning (ERP) Systems
 Huge commercial software packages that support the
information needs of the entire organization, not just
the manufacturing functions
 Automates all business functions along with full
financial and managerial reporting capability
 Electronic Data Interchange (EDI)
 External communications with its customers and
suppliers via Internet or direct connection
 Accounting Information Systems, 6th edition
James A. Hall

COPYRIGHT © 2009 South-Western, a division of Cengage Learning. Cengage Learning and South-Western
are trademarks used herein under license
Objectives for Chapter 8
 Features, advantages, and disadvantages of
various coding schemes
 Operational features of the GLS, FRS, and
MRS
 Principle operational controls governing
the GLS and FRS
 Factors that influence the design of the
MRS
 Elements of a responsibility accounting
system
 Uses of Coding in AIS
 Concisely represent large amounts of complex
information that would otherwise be
unmanageable
 Provide a means of accountability over the
completeness of the transactions processed
 Identify unique transactions and accounts within
a file
 Support the audit function by providing an
effective audit trail
Sequential Codes
 Represent items in sequential order
 Used to prenumber source documents
 Track each transaction processed
 Identify any out-of-sequence documents
 Disadvantages:
 arbitrary information
 hard to make changes and insertions
Block Codes
 Represent whole classes by assigning each class a
specific range within the coding scheme
 Used for chart of accounts
 The basis of the general ledger
 Allows for the easy insertion of new codes within a
block
 Don’t have to reorganize the coding structure
 Disadvantage:
 arbitrary information
Group Codes
 Represent complex items or events involving two
or more pieces of data using fields with specific
meaning
 For example, a coding scheme for tracking sales
might be 04-09-476214-99, meaning:
Store Number Dept. Number Item Number Salesperson
04 09 476214 99

• Disadvantages:
– arbitrary information
– overused
Alphabetic Codes
 Used for many of the same purposes as
numeric codes
 Can be assigned sequentially or used in block
and group coding techniques
 May be used to represent large numbers of
items
 Can represents up to 26 variations per field
 Disadvantage:
 arbitrary information
Mnemonic Codes
 Alphabetic characters used as abbreviations,
acronyms, and other types of combinations
 Do not require users to memorize the
meaning since the code itself is informative
– and not arbitrary
 NY = New York
 Disadvantages:
 limited usability and availability
 IS Functions of GLS
 General ledger systems should:
 collect transaction data promptly and accurately
Input
 classify/code data and accounts
 validate collected transactions/ maintain accounting
controls (e.g., equal debits and credits)
 process transaction data
Process
 post transactions to proper accounts
 update general ledger accounts and transaction files
 record adjustments to accounts
 store transaction data
Output
 generate timely financial reports
 Financial
Reporting
System
Management
Billings
Reporting
System

Sales Inventory
Control
General
Ledger
System
Cash Payroll
Receipts (GLS)

Cost Cash
Accounting Disbursements

Accounts
Payable
 GLS Database
 General ledger master file
 principal FRS file based on chart of accounts
 General ledger history file
 used for comparative financial support
 Journal voucher file
 all journal vouchers of the current period
 Journal voucher history file
 journal vouchers of past periods for audit trail
 Responsibility center file
 financial data by responsibility centers for MRS
 Budget master file
 budget data by responsibility centers for MRS
 The Financial Accounting Process

Source Journal Trial balance

entries in the Post entries to
documents
journal the ledger

Financial
Adjusting and
statements
closing
Financial Reporting Process Flowchart
GLS Reports
 General ledger analysis:
 listing of transactions
 allocation of expenses to cost centers
 comparison of account balances from prior periods
 trial balances
 Financial statements:
 balance sheet
 income statement
 statement of cash flows
 Managerial reports:
 analysis of sales
 analysis of cash
 analysis of receivables
 Chart of accounts: coded listing of accounts
Potential Risks in the GL/FRS
 Improperly prepared journal entries
 Unposted journal entries
 Debits not equal to credits
 Subsidiary not equal to G/L control accounts
 Inappropriate access to the G/L
 Poor audit trail
 Lost or damaged data
 Account balances that are wrong because of
unauthorized or incorrect journal vouchers
GL/FRS Control Issues
 Transaction authorization - journal
vouchers must be authorized by a
manager at the source dept
 Segregation of duties – G/L clerks
should not:
 have recordkeeping responsibility for special
journals or subsidiary ledgers
 prepare journal vouchers
 have custody of physical assets
GL/FRS Control Issues
 Access controls:
 Unauthorized access to G/L can result in errors,
fraud, and misrepresentations in financial
statements.
 Sarbanes-Oxley requires controls that limit
database access to only authorized individuals.
 Accounting records - trace source
documents from inception to financial
statements and vice versa
GL/FRS Control Issues
 Independent verification
 G/L dept. reconciles journal vouchers and
summaries.
 Two important operational reports used:
 journal voucher listing – details of each
journal voucher posted to the G/L
 general ledger change report – the effects of
journal voucher postings on G/L accounts
GL/FRS Using Database Technology
GL/FRS Using Database Technology
 Advantages:
 immediate update and reconciliation
 timely, if not real-time, information
 Removes separation of transaction authorization and
processing
 Detailed journal voucher listing and account activity reports
are a compensating control
 Centralized access to accounting records
 Passwords and authorization tables as controls
Management Reporting
Systems
 Produce financial and nonfinancial
information needed by management to
“plan, evaluate, control”
 Usually seen as discretionary reporting
 Can argue that Sarbanes-Oxley requires
MRS
 MRS provide a formal means for monitoring
the internal controls
Factors That Influence MRS
Design
 Management principles
 Management function, level, and decision
type
 Problem structure
 Types of management reports
 Responsibility accounting
 Behavioral considerations
Management Principles
 Formalization of tasks:
 structures the firm around the tasks
performed rather than around individuals’
unique skills
 allows specification of the information
needed to support the tasks
Management Principles
 Responsibility and authority:
 responsibility - obligation to achieve
desired results
 authority - power to make decisions
within the limits of that responsibility
 delegated by managers to subordinates
 define the vertical reporting channels
through which information flows
 Management Principles
 Span of control:
 the number of subordinates directly under the manager’s
control
 detailed reports for managers with narrow spans of control
 summarized information for managers with broad spans of
control

Narrow Span of Control Wide Span of Control

Management Principles
 Management by exception:
 Managers should limit their attention
to potential problem areas.
 Reports should focus on changes in
key factors that are asymptomatic of
potential problems.
Management Function, Level,
and Decision Type
Management Function, Level,
and Decision Type
 Strategic planning decisions:
 firm’s goals and objectives
 scope of business activities
 organizational structure
 management philosophy
 long-term, with broad scope and impact
 non-recurring , with high degree of uncertainty
 need highly summarized information
 require external & internal information sources
Management Function, Level,
and Decision Type
 Tactical planning decisions:
 subordinate to strategic decisions
 short term
 specific objectives
 recur often
 fairly certain outcomes
 limited impact on the firm
Management Function, Level,
and Decision Type
 Management control decisions:
 using resources as productively as possible in all
functional areas
 evaluating the performance of subordinates against
standards
 Measuring performance is difficult because sound
decisions with long-term benefits may negatively
impact the short- term bottom line.
Management Function, Level,
and Decision Type
 Operational control decisions:
 deal with routine tasks
 narrower focus, dependent on details
 highly structured
 short time frame
 Three basic elements or steps:
 set attainable standards
 evaluate performance
 take corrective action
Classification of Decision Types by
Decision Characteristics
Problem Structure
 Reflects and affects how well decision
makers understand and solve problems
 Elements of problem structure:
 data
 procedures
 objectives
 Problem Structure
Information System Management Level Problem Structure
Non-Traditional IS

Unstructured

Strategic
Management

Tactical Partially
Management Structured
Traditional IS

Operations Management

Operations
Structured
Management Reports
 Report objectives - reports must have value
or information content
 They should…
 reduce the level of uncertainty associated with a
problem facing the decision maker
 influence the behavior of the decision maker in
a positive way
Report Attributes
 Relevance – useful to decision making
 Summarization – appropriate level of detail
 Exception orientation – identify risks
 Accuracy – free of material errors
 Completeness – essential information
 Timeliness – in time for decisions
 Conciseness – understandable format
 Attributes of Useful Information According to
FASB’s Conceptual Framework
Feedback
Value

Representational Relevant Timely

Faithfulness
Information
Predictive
Reliable Value
Verifiable
Information

Neutral
Types of Management Reports
 Programmed reports:
 scheduled reports – produced at specified
intervals, e.g., weekly
 on-demand reports – triggered by events, e.g.,
inventory levels drop to a certain level
 Ad hoc reports:
 designed and created “as needed”
 situations arise that require new information
Responsibility Accounting
 Implies that every economic event that
affects the organization is the responsibility
of and can be traced to an individual
manager
 Incorporates the fundamental principle that
responsibility-area managers are
accountable for items that they control
Setting Financial Goals:
Budgeting
 Budgeting helps management achieve financial
objectives by setting measurable goals for each
organizational segment.
 Budget information flows downward and
becomes increasingly detailed at each lower
level.
 The performance information flows upward as
responsibility reports.
Responsibility Centers
 Cost center – responsible for keeping costs
within budgetary limits
 Profit center – responsible for both cost
control and revenue generation
 Investment center – has general authority to
make a wide range of decisions affecting costs,
revenue, and investments in assets
Behavioral Considerations:
Goal Congruence
 MRS and compensation schemes help to
appropriately assign authority and
responsibility.
 If compensation measures are not carefully
designed, managers may engage in actions
not optimal for the organization.
 Short-term v. long-term measures
Behavioral Considerations:
Information Overload
 Occurs when managers receive more
information than they can assimilate
 Can cause managers to disregard formal
information and rely on informal—probably
inferior—cues when making decisions
Behavioral Considerations:
Performance Measures
 Appropriate performance measures
 Stimulate behavior consistent with firm objectives
 Managers consider all relevant aspects, not just one
 Example of inappropriate measures:
 price variance – can affect the quality of the items
purchased
 quotas – can affect quality control, material usage
efficiency, labor relations, plant maintenance
 profit measures – can affect plant investment, employee
training, inventory reserve levels, customer satisfaction