AIS Chapter 5 Cycles

C HAPTER 5
Accounting Information Systems

Applications
The Revenue Cycle, The Expenditure Cycle,
The Production Cycle, The Human Resource
Cycle, General Ledger and Reporting System,
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 1 of 175
INTRODUCTION
• The revenue cycle is a recurring set of

business activities and related information
processing operations associated with:
– Providing goods and services to customers
– Collecting their cash payments
• The primary external exchange of
information is with customers.
INTRODUCTION
• The primary objective of the revenue

cycle:
– Provide the right product in the right place at
the right time for the right price.
INTRODUCTION
• Management also has to evaluate the

efficiency and effectiveness of revenue
cycle processes:
– Requires data about:
• Events that occur
• Resources used
• Agents who participate
– The data needs to be accurate, reliable, and
timely.
REVENUE CYCLE BUSINESS
ACTIVITIES
• Four basic business activities are
performed in the revenue cycle:
– Sales order entry
– Shipping
– Billing
– Cash collection
Orders 1.1
Customer Take Customer
Order
Re
je ct e
dO Orders
r de
rs
Response
Inquiries
Ac
k 1.2
no DFD for
wl
ed Approve
gm Credit Sales Order Entry
en
t
Customer Approved
Orders
1.3
1.4 Check
Sales Order Inv. Inventory
Resp. to
Avail.
Cust. Inq. Bac
k Or d
er s
Sales Sales Picking
Order Order List
Ware- Purchas-
Shipping Billing
house ing
PARTIAL ORGANIZATION CHART FOR
UNITS INVOLVED IN REVENUE CYCLE
CEO
VP of Marketing VP of Manufacturing CFO
Sales Customer Warehouse Shipping Controller Treasurer

Order Service
• Takes customer orders Billing Accounts Credit Cashier

• Authorizes credit for existing
customers in good standing
Dept. Receivable Manager
• Checks inventory availability
CEO

Order Service
• Responds to Billing Accounts Credit Cashier

customer inquiries
CEO

Order Service
• Picks the Billing Accounts Credit Cashier

order
CEO

Order Service
• Packs the Billing Accounts Credit Cashier

order
• Ships the
order
CEO

Order Service
Billing Accounts Credit Cashier

• Invoices the Dept. Receivable Manager
customer
CEO

Order Service
• Maintains the customer’s

account:
– Increases customer account
when sales are made Dept. Receivable Manager
– Decreases account when cash
is collected
CEO

Order Service
• Approves credit for new
customers or existing
customers with issues Billing Accounts Credit Cashier
• Authorizes credits to customer Dept. Receivable Manager
accounts for returns,
allowances, and write-offs
CEO

Order Service

• Deposits cash Dept. Receivable Manager
received from
customers
C The Expenditure Cycle:
Purchasing and Cash
Disbursements
INTRODUCTION
• The primary objective of the expenditure

cycle is to minimize the total cost of acquiring
and maintaining inventory, supplies, and
services.
EXPENDITURE CYCLE BUSINESS
ACTIVITIES
• The three basic activities performed in the
expenditure cycle are:
– Ordering goods, supplies, and services
– Receiving and storing these items
– Paying for these items
• These activities mirror the activities in the
revenue cycle.
PARTIAL ORGANIZATION CHART FOR UNITS
INVOLVED IN EXPENDITURE CYCLE
CEO
VP of M anufacturing CFO
Purchasing Receiving Inventory Controller Treasurer

Stores
• Selects suitable suppliers Accounts Cashier

• Issues purchase orders
Payable
CEO

Stores
• Decides whether to accept Accounts Cashier

deliveries
• Counts and inspects
Payable
deliveries
CEO

Stores
• Stores goods that Accounts Cashier

have been
delivered and
Payable
accepted
CEO

Stores
• Approves invoices Accounts Cashier

for payment
Payable
CEO

Stores
Accounts Cashier
Payable
• Issues payment to
vendors
CThe Production Cycle
INTRODUCTION
• The production cycle is a recurring set of

business activities and related data
processing operations associated with the
manufacture of products.
PRODUCTION CYCLE ACTIVITIES
• The four basic activities in the production cycle
are:
– Product design
– Planning and scheduling
– Production operations
– Cost accounting
• Accountants are primarily involved in the fourth
activity (cost accounting) but must understand
the other processes well enough to design an
AIS that provides needed information and
supports these activities.
C The Human Resources
Management / Payroll Cycle
INTRODUCTION
• The HRM/Payroll cycle is a recurring set of

business activities and related data
processing operations associated with
effectively managing the employee
workforce.
INTRODUCTION
• The most important tasks performed in the
HRM/payroll cycle are:
– Recruiting and hiring new employees
– Training
– Job assignment
– Compensation (payroll)
– Performance evaluation
– Discharge of employees (voluntarily or involuntarily)
• Payroll costs are also allocated to products and
departments for use in product pricing and mix
decisions.
INTRODUCTION
– Training These two tasks are
– Job assignment normally done only
– Compensation (payroll) once for each
employee.
– Discharge of employees (voluntarily or
involuntarily)
decisions.
INTRODUCTION
– Training
These tasks are done
– Job assignment repeatedly as long as
– Compensation (payroll) the employee works
for the company.
– Discharge of employees (voluntarily or involuntarily)
decisions.
INTRODUCTION
• There are five major sources of input to the
payroll system:
– HRM department provides information about
hirings, terminations, and pay-rate changes.
– Employees provide changes in discretionary
deductions (e.g., optional life insurance).
– Various departments provide data about the
actual hours worked by employees.
– Government agencies provide tax rates and
regulatory instructions.
– Insurance companies and other organizations
provide instructions for calculating and remitting
various withholdings.
INTRODUCTION
• Principal outputs of the payroll system are
checks:
– Employees receive individual paychecks.
– A payroll check is sent to the bank to transfer funds
from the company’s regular account to its payroll
account.
– Checks are issued to government agencies,
insurance companies, etc., to remit employee and
employer taxes, insurance premiums..etc
PAYROLL CYCLE ACTIVITIES
• The seven basic activities in the payroll cycle

are:
– Update payroll master file
– Update tax rates and deductions
– Validate time and attendance data
– Prepare payroll
– Disburse payroll
– Calculate employer-paid benefits and taxes
– Disburse payroll taxes and miscellaneous
deductions
C General Ledger and
Reporting System
INTRODUCTION
 The general ledger and reporting system

(GLARS) includes the processes in place
to update general ledger accounts and
prepare reports that summarize results of
the organization’s activities.
INTRODUCTION
• One of the primary functions of GLARS is to

collect and organize data from:
– Each of the accounting cycle subsystems, which
provide summary entries related to the routine
activities in those cycles.
– The treasurer, who provides entries with respect to
non-routine activities such as transactions with
creditors and investors.
– The budget department, which provides budget
numbers.
– The controller, who provides adjusting entries.
INTRODUCTION
• The information must be organized to

meet the needs of internal and external
users.
• The system must be designed to produce
regular periodic reports and to support
real-time inquiries.
GENERAL LEDGER AND REPORTING
SYSTEM
• The basic activities in the GLARS are:
– Update the general ledger
– Post adjusting entries
– Prepare financial statements
– Produce managerial reports
• The first three represent the basic steps in
the accounting cycle
Thank you

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C HAPTER 5

Accounting Information Systems

• The revenue cycle is a recurring set of

• The primary objective of the revenue

• Management also has to evaluate the

VP of Marketing VP of Manufacturing CFO

Sales Customer Warehouse Shipping Controller Treasurer

• Takes customer orders Billing Accounts Credit Cashier

VP of Marketing VP of Manufacturing CFO

Sales Customer Warehouse Shipping Controller Treasurer

• Responds to Billing Accounts Credit Cashier

VP of Marketing VP of Manufacturing CFO

Sales Customer Warehouse Shipping Controller Treasurer

• Picks the Billing Accounts Credit Cashier

VP of Marketing VP of Manufacturing CFO

Sales Customer Warehouse Shipping Controller Treasurer

• Packs the Billing Accounts Credit Cashier

VP of Marketing VP of Manufacturing CFO

Sales Customer Warehouse Shipping Controller Treasurer

Billing Accounts Credit Cashier

VP of Marketing VP of Manufacturing CFO

Sales Customer Warehouse Shipping Controller Treasurer

• Maintains the customer’s

VP of Marketing VP of Manufacturing CFO

Sales Customer Warehouse Shipping Controller Treasurer

VP of Marketing VP of Manufacturing CFO

Sales Customer Warehouse Shipping Controller Treasurer

Billing Accounts Credit Cashier

• The primary objective of the expenditure

Purchasing Receiving Inventory Controller Treasurer

• Selects suitable suppliers Accounts Cashier

Purchasing Receiving Inventory Controller Treasurer

• Decides whether to accept Accounts Cashier

Purchasing Receiving Inventory Controller Treasurer

• Stores goods that Accounts Cashier

Purchasing Receiving Inventory Controller Treasurer

• Approves invoices Accounts Cashier

Purchasing Receiving Inventory Controller Treasurer

• The production cycle is a recurring set of

• The HRM/Payroll cycle is a recurring set of

• The seven basic activities in the payroll cycle

 The general ledger and reporting system

• One of the primary functions of GLARS is to

• The information must be organized to

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