Accounting Information System & Firm Value

ACCOUNTANTS AS BUSINESS ANALYST

• Help address business opportunities

To address such opportunity the Accountant, need to:
▪ ➢ Decide What Information Is Needed;
▪ ➢ Build An Information System To Gather The Necessary Information; And
▪ ➢ Analyze that information to offer helpful advice to management.

ACCOUNTING INFORMATION SYSTEM (AIS)

• A system that records, processes and reports on transactions to provide financial and non-
financial information to make decisions and have appropriate levels of internal controls
(security measures to protect sensitive data) for those transactions.
• It provides information that companies are required to have and also information that can be
used to make important decisions.
• It is Fundamental to Accounting.
Accounting is an information providing activity, so accountants need to understand:
✓ How the system that provides that information is designed, implemented, and used.
✓ How financial information is reported.
✓ How information is used to make decisions.

DATA VERSUS INFORMATION

• Data are simply raw facts that describe an event and have a little meaning on their own
• Information is defined as being data organized in a meaningful way to be useful to the user.
Data serves as an input
• Too much information causes information overload that hindered decision making. (Computer
can process and organize large amount of data)

INFORMATION VALUE CHAIN

DISCRETIONARY VS MANDATORY INFORMATION

• Mandatory Information is information that is required by law.

o Since it is required, manager may choose to minimize the cost of producing this
information.
ROLE OF ACCOUNTANT IN AIS

• Designer – System Analyst

• Implementer – Database Administrator
• User – Record Journal Entries
• Evaluator – Auditor
• Manager – Controller or Chief Financial Officer (CFO)

CERTIFICATION IN AIS

• Certifies Information System Auditor (CISA) – Perform IT Audits

• Certified Information Technology Professional (CITP) – Work to effectively & efficiently manage
information while ensuring the data’s reliability, security, accessibility, and relevance.
• Certified Internal Auditor – Globally accepted certification for internal auditors.

VALUE CHAIN

Where do AIS add value to a Business?

• Inbound logistics are the activities associated with receiving and storing raw materials and
other partially completed materials and distributing those materials to manufacturing when and
where they are needed.
• Operations are the activities that transform inputs into finished goods and services (for
example, turning wood into furniture for a furniture manufacturer; building a house for a home
builder).
• Outbound logistics are the activities that warehouse and distribute the finished goods to the
customers.
• Marketing and sales activities identify the needs and wants of their customers to help attract
them to the firm’s products and buy them.
• Service activities provide the support of customers after the products and services are sold to
them (for example, warranty repairs, parts, instruction manuals, etc.).
• Firm infrastructure activities are all of the activities needed to support the firm, including the C E
O, finance, accounting, and legal.
• Human resource management activities include recruiting, hiring, training and compensating
employees.
• Technology activities include all of the technologies to support value-creating activities. These
technologies also include research and development to develop new products or research and
development to determine ways to produce products at a cheaper price.
• Procurement activities involve purchasing inputs such as raw materials, supplies, and
equipment.
AIS & INTERNAL BUSINESS PROCESS

• AIS usually serves as the foundation for the enterprise (or ERP) system
• Enterprise system is a centralized database that collects data from throughout the company
including orders, customers, sales, inventory, and employees
• Information across the whole business thus available to everyone within the company in a
useful and timely way.
Use of an Enterprise System The enterprise system can take an order
▪ Checking customer’s Credit. from a customer, fill the order, ship it, and
then create an invoice to bill the customer
▪ Checking the inventory levels in the warehouse
▪ Determining when an order can be shipped. Everyone throughout the entire process can
Figure 1.6: AIS & Internal Business Process view & update the information.

THE SUPPLY CHAIN

• Refers to the flow of materials, information, payments, and services from supplier all the way
through the customer.
• There are many processes involved in the supply chain process which can be made more
efficient using the A I S.

SUPPLY CHAIN MANAGEMENT Supply Chain

Management
• Determine levels of inventory in stock and the amount to be ordered.
software can be used
• Determine timing to transferring inventory.
to optimized processes
CUSTOMER RELATIONSHIP MANAGEMENT within the supply chain

• This software is used to manage interaction with customers and may

includes the following:
o Tracking customers purchases
o Ensuring customer satisfaction.
o Product placement
 EFFECTS OF AIS ON THE INCOME STATEMENT

Income Statement Effect of AIS on Income Statement

Revenues Customer relationship management (C R M) techniques could

attract new customers, or better service existing customers
to generate additional sales revenue.

Less: Cost of Goods Sold Supply chain management (S C M) software allows firms to
carry the right inventory and have it in the right place at the
right time. This, in
turn, will lower obsolescence as well as logistics and procurement
costs.
The gross margin will change as the result of changes in
Gross Margin
revenues or cost of goods sold due to the effects of A I S.

Less: Selling, General, and An efficient enterprise system can significantly lower the cost of
Administrative Expenses support processes included in sales, general, and
(SG&A) administrative expenses.
Less: Interest Expense S C M software allows the firm to carry less inventory. Less
inventory on hand leaves fewer assets to finance, potentially
reducing the amount of debt and the related interest to service
the debt.
Net Income All combined, a well-designed and well-functioning AIS with
investments in enterprise systems, S C M, and/or C R M may be
expected to improve net income.

AIS, FIRM PROFITABILITY, & STOCK PRICES

• AIS can be used to improved company profits.

• In addition, studies show that investments in I T can positively impact a company’s stock price.

ITS STRATEGIC ROLE

What role does IT have for the organization?
• Automate, that is, replacing human labor in automating business processes.
• Digitize your medical records.
• Informate-up, that is, provide information about business activities to senior management.
• Summarize performance for senior management (digital dashboards, etc.).
• Informate-down, that is, provide information about business activities to employees across the
firm.
• Give information to all levels of the organization to empower decision making.
• Transform, that is, fundamentally redefine business processes and relationships.
• I T allows Ebay and Amazon to develop a business model based on I T.
An accounting information system (A I S) is defined as being an information system that records,
processes, and reports on transactions to provide financial information for decision making and control.

Firms invest in accounting information systems to create value. The value chain illustrates how during
each primary activity, the product should gain some value. An A I S serves an important role in enabling
value in each primary and supporting activity.

An A I S creates value by managing internal and external business processes such as enterprise
systems, supply chain management, and customer relationship management software.

An A I S system generally helps make business processes more efficient and effective. A well-designed
and well-functioning A I S can be expected to create value by increasing revenues and reducing
expenses.
 ACCOUNTANTS AS BUSINESS ANALYST

ROLES OF ACCOUNTANTS IN BUSINESS

Stewardship and Accounting/Finance Business Management Support

Reporting Operations

Regulatory compliance Finance and accounting Management information

processes

Tax returns Financial close Planning budgeting and forecasting

Stakeholder assurance Financial reporting and Performance measurement

analysis

Investor relations Providing management Performance management

information

Raising capital and loans People management Risk management – from strategic to
operational including fraud risk

Board reports Using IT to make finance and Investment appraisal

accounting processes more
efficient and effective

Statutory reporting Cost management

Supply chain management

CHANGING ROLES OF ACCOUNTANTS IN BUSINESS

To prepare for their changing roles accountants must:

• Understand the business and how it collects summarizes and communicates business
information.

• Understand how the business delivers value to its customers.

• Understand the risks that the business faces and the internal controls in place to mitigate those
risks.

• Understand how accounting information systems collect summarize and report business
process information.
 DEFINITIONS

• Business Process: a defined sequence of business activities that use resources to transform
specific inputs into specific outputs to achieve a business goal.

• Business Analysis: the process of defining business process requirements and evaluating
potential improvements.

• Business Model: a simple abstract representation of one or more business processes.

• Documentation: explains how business processes and business systems work; a tool for
information transmission and communication.

IMPORTANCE OF BUSINESS PROCESS DOCUMENTATION

Documentation includes:
• Made documentation essential for
Business process models businesses.
Business rules
• Requires managers to assess and attest to
User manuals training manuals
the business’s internal control structure and
Product specifications procedures.
Software manuals
Schedules • Requires external auditors to audit
Organization charts management’s assessment of the
Strategic plans effectiveness of internal controls and express
an opinion on the company’s internal control
Documentation supports the following: over financial reporting.

• Employee training Sarbanes-Oxley Act of 2002.

• Internal and external audit requirements
• Accountability
• Standardized communication within the enterprise

• Standardized communication between the enterprise and its customers, suppliers, and
other stakeholders

Facilitate process improvement

• Effectiveness—are the outputs obtained as expected?

• Efficiency—can outputs be produced with fewer inputs?
• Internal control—are controls working?
• Compliance—does the process comply with constantly changing local, state, federal, and
international laws and regulations.

VALUE OF BUSINESS MODELS

• Business processes and systems can also be difficult to describe concisely using words alone.
• G
 THE INFORMATION SYSTEM: AN ACCOUNTANT’S
PERSPECTIVE
INTERNAL & EXTERNAL INFORMATION FLOWS

• Information is one of the vital resources of the business

• Information is being used by various users of information so that they could make decisions

INTERNAL INFORMATION FLOWS

1. Horizontal – Operations level to capture transaction & operation data

2. Vertical Flow of Information
a. Downward flow - Instructions, quotas and Budgets
b. Upward flow – Aggregated transaction and operations data

Information Requirements

• Each user/group has unique information requirements

• The higher the level of the organization, the greater the need for more aggregated information
and less for detail.

SYSTEM- a group of interrelated multiple components or subsystem that serve a common purpose

SYSTEM DECOMPOSITION V.S SYSTEM INTERDEPENDENCY

• System Decomposition is the process of dividing the system into

smaller subsystem parts
• System Interdependency
▪ Distinct parts are not self-contained
▪ They are not reliant upon the functioning of the other parts of
the system
▪ All distinct part must be functioning or the system will fail.

Information System- is a set of formal procedures by which data are collected,

processed into information and distributed to users.
TRANSACTIONS

• Business Events (Data that is collected)

• Financial Nonfinancial Transactions
▪ Financial transactions are economic event that affect the assets and equities of the
organizations.
▪ Nonfinancial transactions are all other event processed by the organization’s information
system

ACCOUNTING IS AN INFORMATION SYSTEM

• It identifies, collect, process, and communicates economic information about a firm using a
wide variety of technologies
• It captures and records the financial effects of the firm’s transactions
• It distributes transaction information to operations personnel to coordinate many key tasks.

AIS V.S MIS

• AIS Process - Financial transactions, and Nonfinancial transactions that directly affects the
processing of financial transactions. (New vendors)
• MIS Process – Nonfinancial transactions that are not normally processed by traditional AIS.
(customer complaints)
AIS SUBSYSTEMS

• Transaction processing System (TPS) – supports daily business operations

• General Ledger/ Financial Reporting System (GL/FRS) – produces financial statements and
reports
• Management Reposting System (MRS) – produces special purpose reports for internal use.
GENERAL MODEL OF AIS

DATA SOURCES

• Financial transaction that enter the information system from internal and external sources
▪ External financial transactions are the most common source of data for most
organizations. (sale of goods & services, purchase of inventory, payroll, receipt of cash
and cash disbursement)
▪ Internal financial transactions involve the exchange or movement of resources within
the organization. (WIP, application of labor into WIP, WIP to FG inventory, and
depreciation of equipment)
TRANSFORMING DATA INTO INFORMATION
Function for transforming data into information according to the general AIS Model:

• Data Collection – the objective is to ensure that the event data entering the
system is valid, complete and free from material error. (Most important
Stage)
▪ Capturing transaction data
▪ Recording data onto forms
▪ Validating and editing the data
• Data Processing – To produce information (Simple to complex process)
▪ Classifying ▪ Merging
▪ Transcribing ▪ Calculating
▪ Sorting ▪ Summarizing
▪ Batching ▪ Comparing
 • Data Management – processed data
▪ Storing Organization’s
▪ Retrieving data base
▪ Deleting
• Information Generation – retrieving of information is a physical repository for
▪ Compiling financial and non-financial
▪ Arranging
data
▪ Formatting
▪ Presenting
CHARATERISTICS OF USEFUL INFORMATION

Regardless of physical form or technology useful information has the following characteristics:

▪ Relevance: serves a purpose

▪ Timeliness: no older than the time period of the action it supports
▪ Accuracy: free from material errors
▪ Completeness: all information essential to a decision or task is present
▪ Summarization: aggregated in accordance with the user’s needs

INFORMATION SYSTEM OBJECTIVES IN A BUSINESS CONTEXT

The goal of an information system is to support;

❖ The stewardship function of management (management responsibility to

manage the firm)
❖ Management decision making
❖ The firm’s day-today operations
ORGANIZATIONAL STRUCTURE
The structure of an organization helps to allocate; Segmenting by
▪ Responsibility business function is
▪ Authority very common method
▪ Accountability of organizing.
FUNCTIONAL AREAS (segmentation of business function)
▪ Inventory/ material management – Purchasing, receiving and storing
▪ Production – production planning, quality control, and maintenance
▪ Marketing ▪ Finance
▪ Distribution ▪ Accounting
▪ Personnel ▪ Computer Services
ACCOUNTING INDEPENDENCE
Information reliability requires accounting independence.

Accounting activities must be separate & independent of the functional areas maintaining
resources
Accounting supports the functions with information but does not actively participate
Decision makers in these functions require that such vital information supplied by an
independent source to ensure its integrity.
COMPUTER SERVICE FUNCTION

• Most company fall in between distributed data processing and Centralized data processing
• Distributed data processing- reorganize the computer services function into small information
processing units that are distributed to end user and place under their control.
• Centralized data processing- all data processing is performed by one or more large computers
housed at a central site that serves users throughout the organization.
o Primary areas: database administration, data processing, system development,
system maintenance.
o Most company now a days is using Centralized data processing

POTENTIAL ADVANTAGE OF DISTRIBUTED DATA PROCESSING

• Cost reductions in hardware & data entry tasks

• Improved cost control responsibility
• Improved user satisfaction since control is closer to the user level
• Back up of data can be improved through the use of multiple data storage sites

POTENTIAL DISADVANTAGE OF DISTRIBUTED DATA PROCESSING

• Loss of control • Consolidating task usually segregated
• Mismanagement of company resources • Difficulty attracting qualified personnel
• Hardware & software incompatibility • Lack of standards
• Redundant task and data
MANUAL PROCESS MODEL

• Transaction processing, information processing and accounting are physically performed by

people, usually using paper documents.
• Useful to study because:
✓ Helps link AIS courses to other accounting courses
✓ Often easier to understand business processes when not shrouded in technology
 ✓ Facilitates understanding internal controls

DATA REDUNDANCY PROBLEMS (Flat-File Model Problem)

• Data storage – excessive storage cost of paper documents and/or magnetic form
• Data Updating – changes or additions must be performed multiple times
• Currency of Information – potential problem of failing to update all affected files
• Task-Data Dependency- user’s inability to obtain additional information as needs change
• Data integration- separate files are difficult to integrate across multiple users
REA MODEL

• In 1982 REA Model is introduced. REA

means Resources Events Agents.
• Conceptual model and not a physical system
• The REA Model is an accounting framework
for modelling an organization’s:
o Economic Resources
o Economic Events
o Economic Agents
o Interrelationship among resources,
events and agents
• Entity-relationship diagrams (ERD) are
often used to model these relationships.
ENTERPRISE RESOURCE PLANNING SYSTEMS (ERP)

• Is an information system model that enables an organization to automate and integrate its key
business process.
• ERP breaks down traditional functional barriers by facilitating data sharing, information flows,
and the introduction of common business practices among all organizational users.
• ERP packages are sold to client organizations in modules that support standard processes.

ERP MODULES
• Asset Management • Production Planning
• Financial Accounting • Quality Management
• Human Resources • Sales & Distribution
• Industry-Specific Solutions • Inventory Management
• Plant Maintenance
ACCOUNTANTS AS INFORMATION SYSTEM USERS

• Accountants must be able to clearly convey their needs to the system professionals who design
the system.
• The accountant should actively participate in systems development projects to ensure
appropriate systems design.

ACCOUNTANTS AS SYSTEM DESIGNERS

• The accounting function is responsible for the conceptual system, while the computer function
is responsible for the physical system.
• The conceptual system determines the nature of the information required, its sources, its
destination, and the accounting rules that must be applied.

ACCOUNTANTS AS SYSTEM AUDITORS

• External Auditors
o Attest to fairness of financial statements
o Assurance service: broader in scope than traditional attestation audit
• IT Auditors
o Evaluate IT, often as part of external audit
• Internal Auditors
o In-house IS and IT appraisal services
 INTRODUCTION TO TRANSACTION
PROCESSING
Financial Transaction- an economic event that affects the assets and equities of the firm, it is
reflected in its accounts and is measured in monetary terms.

TRANSACTION CYCLES
Three transaction cycles process most of the firm’s economic activity: (each cycle has two primary
subsystem)

• The Expenditure Cycle - Physical component (acquisition of goods), and Financial

Component (cash disbursement to the supplier)
• The Conversion Cycle – Production System (planning, scheduling and control of the physical
product through the manufacturing process), and Cost Accounting System (monitors the flow of
cost information related to production)
• The Revenue Cycle - Physical component (sales order processing), and Financial Component
(cash receipt)

ACCOUNTING RECORDS

MANUAL SYSTEM ACCOUNTING RECORDS

• Documents - provides evidence of an economic event and may be used to initiate

transaction processing. Triggers accounting process.
✓ Source Documents – used to capture and formalize transaction data needed for
transaction processing
✓ Product Documents – the result of transaction processing (payroll check)
✓ Turnaround Documents – a product document of one system that becomes a
source document for another system
• Journals – a record of a chronological entry. Each transaction requires a separate journal
entry, reflecting the accounts affected and the amount to be debited & credited.
✓ Special Journal – used to record specific classes of transaction that occur in high
volume
▪ Register – a term used to denote certain types of special journal.
✓ General Journals – to record nonrecurring, infrequent and dissimilar transaction
• Ledger – a book of financial accounts
✓ General Ledger – shows activity for each account listed on the chart of accounts
✓ Subsidiary Ledger – shows activity by detail for each account type

COMPUTERIZED ACCOUNTING RECORDS/SYSTEM

• Master File - Generally contains account data. E.g. general & subsidiary ledger
• Transaction File - Temporary file of transaction records used to change or update data in
a master file. E.g. Sales order, Inventory receipt and Cash receipt.
• Reference File – Stores data that are used as standards for processing transaction.
• Archive File – Contain records of the past transaction that are retained for future
reference.
The Expenditure Cycle Part 1: Purchases and Cash
Disbursements Procedures

The Conceptual System

• Using data flow diagrams (DFDs) you can trace the sequence of activities through the
purchases processing and cash disbursements procedures.

OVERVIEW OF PURCHASES AND CASH DISBURSEMENTS ACTIVITIES

• Purchases Processing Procedures

• MONITOR INVENTORY RECORDS: A purchase requisition is a document that
authorizes a purchase transaction. A valid vendor file is a file containing vendor mailing
information.
• PREPARE PURCHASE ORDER: A purchase order (PO) is a document based on a
purchase requisition that specifies items ordered from a vendor or supplier. The
open/closed purchase order file is the last copy that is filed while preparing a purchase
order.
• RECEIVE GOODS: Blind copy is a purchase order copy that contains no price or
quantity information. The receiving report is a report that lists quantity and condition of
the inventories received. The AP pending file is the file containing supporting
documents needed to set up an account payable. The receiving report file is the file in
which a copy of the receiving report (stating the quantity and condition of the
inventories) is placed.
• Purchases Processing Procedures (continued)
• UPDATE INVENTORY RECORDS: Standard cost system is used in organizations
that carry their inventories at a predetermined standard value regardless of the price
actually paid to the vendor. An actual cost inventory ledger is a ledger that records
inventory values based on actual costs rather than standard costs.
• SET UP ACCOUNTS PAYABLE: The supplier’s invoice is the bill sent from the seller
to the buyer showing unit costs, taxes, freight, and other charges. An AP packet
consists of reconciled AP supporting documents (PO, receiving report, and invoice).
The AP subsidiary ledger is a set of records controlling the exposure in the cash
disbursements subsystems.
• Vouchers Payable System
• A vouchers payable system is a system under which the AP department uses cash
disbursement vouchers and maintains a voucher register.
• Cash disbursement vouchers provide improved control over cash disbursements
and allow firms to consolidate several payments to the same supplier on a single
voucher, thus reducing the number of checks written.
• The voucher register is a register that reflects a firm’s accounts payable liability.
• The vouchers payable file is equivalent to the open AP file.
 • POST TO GENERAL LEDGER

• The Cash Disbursements System

• IDENTIFY LIABILITIES DUE
• PREPARE CASH DISBURSEMENT: The check register is a record of all cash
disbursements. The cash disbursements journal contains the voucher number
authorizing each check and provides an audit trail for verifying the authenticity of each
check written.
• UPDATE AP RECORD: The closed AP file is a record of all accounts payable that
have been discharged by making payment to the creditors.
• POST TO GENERAL LEDGER

Physical Systems

• The mix of possible technology/human options creates a continuum.

• At one end are minimal technology systems that rely heavily on human involvement and
manual procedures.
• At the other end of the continuum are advanced technology systems, which replace human
activity with automated processes.
• Systems at different points on the continuum operate differently and present different internal
control issues.

BASIC TECHNOLOGY EXPENDITURECYCLE

• Basic Technology Purchases Processing System

• INVENTORY CONTROL: The purchase requisition file comprises purchase
requisitions. It is created during the sales activity when the inventories drop to their
predetermined reorder point. The open purchase requisition file contains a copy of
purchase requisitions.
• PURCHASING DEPARTMENT: The open purchase order file contains the last copy of
the multipart purchase order along with the purchase requisition.
• RECEIVING
• AP DEPARTMENT
• GENERAL LEDGER DEPARTMENT
• Basic Technology Cash Disbursements System
• AP DEPARTMEN
• CASH DISBURSEMENTS DEPARTMENT
• AP DEPARTMENT
• GENERAL LEDGER DEPARTMENT

ADVANCED TECHNOLOGY EXPENDITURE CYCLE

❖ The purpose of advanced technologies in AIS is to integrate accounting and other business
functions through a common information system.
❖ Integration improves operational performance and reduces costs by eliminating nonvalue-
added tasks.
INTEGRATED PURCHASES PROCESSING SYSTEM

❖ The level of departmental activity is significantly lower than that of the basic technology system.
❖ In the advanced technology system, computer programs perform many clerical tasks, which is
much cheaper and far less prone to error.
❖ Computer Operations
❖ Receiving Department
❖ Accounts Payable Department

INTEGRATED CASH DISBURSEMENTS SYSTEM

• A cash disbursements system is that in which the organization makes vendor payments with
hard-copy checks that are mailed to the vendor.
• Organizations that use electronic funds transfer (EFT) to transmit payments employ different
procedures.

EXPENDITURE CYCLE RISKS AND INTERNAL CONTROLS

• Risk of Unauthorized Inventory Purchases

• Physical Controls
▪ TRANSACTION AUTHORIZATION
• IT Controls
▪ AUTOMATED PURCHASE APPROVAL
• Risk of Receiving Incorrect Items/Quantities/Damaged Goods
• Physical Controls
▪ INDEPENDENT VERIFICATION
▪ SUPERVISION
• IT Controls
▪ SCANNER TECHNOLOGY
• Risk of Inaccurately Recording Transactions in Journals and Ledgers
• Physical Controls
▪ TRANSACTION AUTHORIZATION
▪ ACCOUNTING RECORDS
▪ INDEPENDENT VERIFICATION
• IT Controls
▪ INPUT DATA EDITS
▪ ERROR MESSAGES
▪ AUTOMATED POSTINGS TO SUBSIDIARY AND GL ACCOUNTS
▪ FILE BACKUP
• Risk of Misappropriation of Cash and Inventory
• Physical Controls
▪ SUPERVISION
▪ INDEPENDENT VERIFICATION
▪ SEGREGATION OF DUTIES—INVENTORY CONTROL FROM INVENTORY
WAREHOUSE
▪ SEGREGATION OF DUTIES—ACCOUNTS PAYABLE FROM CASH
DISBURSEMENTS
 • IT Controls
▪ AUTOMATED THREE-WAY MATCH AND PAYMENT APPROVAL
▪ MULTILEVEL SECURITY
• Risk of Unauthorized Access to Accounting Records and Reports
• Physical Controls
▪ ACCESS CONTROL
▪ SEGREGATION OF DUTIES
• IT Controls
▪ PASSWORD CONTROL
▪ MULTILEVEL SECURITY

REENGINEERING USING EDI

❖ The vendor’s invoice is a commercial document issued by a vendor to a buyer, indicating the
products or services, quantities, and agreed prices for products or services that the vendor has
already provided to the buyer. An invoice indicates that payment is due from the buyer to the
vendor, according to the payment terms.
❖ EDI Control Issues
✓ EDI poses unique risks for organizations that need to be recognized and controlled.
 The Conversion Cycle
The Traditional Manufacturing Environment

• A company’s conversion cycle transforms (converts) input resources, such as raw materials,
labor, and overhead, into finished products or services for sale.
• Materials requirements planning (MRP) systems are used to determine how much raw materials
are required to fulfill production orders.
• The conversion cycle consists of both physical and information activities related to manufacturing
products for sale.

BATCH PROCESSING SYSTEM

• Documents in the Batch Processing System

o The production schedule is the formal plan and authorization to begin production.
o The bill of materials (BOM) is a document that specifies the types and quantities of the raw
materials and subassemblies used in producing a single unit of finished product.
o A route sheet is a document that shows the production path a particular batch of products
follows during manufacturing.
o The work order (or production order) is a document that draws from bills of materials and
route sheets to specify the materials and production for each batch.
o A move ticket is a document that records work done in each work center and authorizes
the movement of the job or batch from one work center to the next.
o A materials requisition is a document that authorizes the storekeeper to release materials
to individuals or work centers in the production process.
• Batch Production Activities
o PRODUCTION PLANNING AND CONTROL
o MATERIALS AND OPERATIONS REQUIREMENTS
o PRODUCTION SCHEDULING
o WORK CENTERS AND STOREKEEPING
o INVENTORY CONTROL: The economic order quantity (EOQ) model is an inventory
model designed to reduce total inventory costs. The reorder point (ROP) is the lead
time multiplied by daily demand. Safety stock is additional inventories added to the
reorder point to avoid unanticipated stock-out conditions.
• Cost Accounting Activities

COST IN THE TRADITIONAL ENVIRONMENT

• Transaction Authorization
• Segregation of Duties
• Supervision
• Access Control
o Direct access to assets
o Indirect access to assets
• Accounting Records
• Independent Verification
 World-class Companies and Lean Manufacturing

• Over the past three decades rapid swings in consumer demands, shorter product life cycles,
and global competition have radically changed the rules of the marketplace.
• In an attempt to cope with these changes, manufacturers have begun to conduct business in a
dramatically different way.
• The term world-class defines this modern era of business.

WHAT IS WORLF CLASS COMPANY?

✓ World-class companies must maintain strategic agility and be able to turn on a dime.
✓ World-class companies motivate and treat employees like appreciating assets.
✓ A world-class company profitably meets the needs of its customers.
✓ The philosophy of customer satisfaction permeates the world-class firm.
✓ Lean manufacturing improves efficiency and effectiveness in product design, supplier
interaction, factory operations, employee management, and customer relations.

PRINCIPLES OF LEAN MANUFACTURING

• The Toyota Production System (TPS) is a lean manufacturing system based on the just-in-time
production model.
• The just-in-time (JIT) production model is a philosophy that addresses manufacturing problems
through process simplification.
• Pull Processing
is the principle characterizing the lean manufacturing approach where products are
pulled into production as capacity downstream becomes available. Products are pulled from the
consumer end (demand).
• Perfect Quality
• Waste Minimization
• Inventory Reduction
• Production Flexibility
• Established Supplier Relations
• Team Attitude

Techniques & Technologies that Promote Lean Manufacturing

• Modern consumers want quality products, they want them quickly, and they want variety of
choice.
• This demand profile imposes a fundamental conflict for traditional manufacturers, whose
structured and inflexible orientation renders them ineffective in this environment.
• Manufacturing flexibility is the ability to physically organize and reorganize production facilities
and the employment of automated technologies.

PHYSICAL REORGANIZATION OF THE REDUCTION FACILITIES

• Traditional manufacturing facilities tend to evolve into snakelike sequences of activities.

• The inefficiencies inherent in this layout add handling costs, conversion time, and even
inventories to the manufacturing process.
 • The flexible production system is organized into a smooth-flowing stream of activities.
• Computer-controlled machines, robots, and manual tasks that comprise the stream are
grouped physically into factory units called cells.

AUTOMATION OF THE MANUFACTURING PROCESS

• Traditional Manufacturing
• Islands of Technology
➢ The term islands of technology describe an environment where modern automation
exists in the form of islands that stand alone within the traditional setting.
➢ Computer numerical controlled (CNC) machines can perform multiple operations with
little human involvement. The computer contains programs for all parts being
manufactured by the machine.
• Computer-Integrated Manufacturing
➢ Computer-integrated manufacturing (CIM) is a completely automated environment.
➢ Automated storage and retrieval systems (AS/RS) are computer-controlled conveyor
systems that carry raw materials from stores to the shop floor and finished products to
the warehouse.
➢ ROBOTICS
➢ Computer-aided design (CAD) is the use of computers to design products to be
manufactured.
➢ Computer-aided manufacturing (CAM) is the use of computers in factory automation.
• Value Stream Mapping
➢ A company’s value stream includes all the steps in the process that are essential to
producing a product.
➢ A value stream map (VSM) is a graphical representation of the business process to
identify aspects that are wasteful and should be removed.

ACCOUNTING IN A LEAN MANUFACTURING ENVIRONMENT

• Lean companies require new accounting methods and new information that:
1. Shows what matters to their customers (such as quality and service).
2. Identifies profitable products.
3. Identifies profitable customers.
4. Identifies opportunities for improvement in operations and products.
5. Encourages the adoption of value-added activities and processes within the organization
and identifies those that do not add value.
6. Efficiently supports multiple users with both financial and nonfinancial information.

WHAT IS WRONG IN TRADITIONAL ACCOUNTING INFORMATION

• Inaccurate Cost Allocations • Time Lag
• Promotes Non-lean Behavior • Financial Orientation
ACTIVITY BASED COSTING (ABC)

✓ is an accounting technique that provides managers with information about activities and cost
objects.
✓ An activity driver is a factor that measures the activity consumption by the cost object.

VALUE STREAMING ACCOUNTING

• Value stream accounting is an accounting technique that captures cost data according to
value stream rather than by department.
• Product families share common processes from the point of placing the order to shipping the
finished goods to the customer.

INFORMATION SYSTEM THAT SUPPORT LEAN MANUFACTURING

• Materials requirements planning (MRP) are systems used to plan inventory requirements in
response to production work orders.
• Manufacturing resources planning (MRP II) is a system that incorporates techniques to execute
the production plan, provide feedback, and control the process.
• Enterprise resource planning (ERP) is a system assembled of prefabricated software
components.

MATERIALS REQUIREMENTS PLANNING

• MRP is an automated production planning and control system used to support inventory
management. Its operational objectives are to:
▪ Ensure that adequate raw materials are available to the production process.
▪ Maintain the lowest possible level of inventory on hand.
▪ Produce production and purchasing schedules and other information needed to control
production.

MANUFACTURING RESOURCE PLANNING

• MRP II is an extension of MRP that has evolved beyond the confines of inventory
management.
• MRP II integrates product manufacturing, product engineering, sales order processing,
customer billing, human resources, and related accounting functions.
• Benefits of the MRP II:
o Improved customer service o Help in managing change (e.g.,
o Reduced inventory investment new product development or
o Increased productivity specialized product development
o Improved cash flow for customers or by vendors)
o Assistance in achieving long- o Flexibility in the production
term strategic goals process

ENTERPRISE RESOURCE PLANNING SYSTEM

• Electronic data interchange (EDI) is an intercompany exchange of computer-processable

business information in standard format.
 FINANCIAL REPORTING AND MANAGEMENT
REPORTING SYSTEM
General Ledger System

• a hub connected to other systems of the firm through information flows.

• Transaction cycles process individual events that are recorded in special journals and
subsidiary accounts.
• Summaries of there transactions flows into the GLS and become sources of input for the MRS
and FRS
• Information also flows from the FRS as feedback into the GLS.

The Journal Voucher

• The source of input to the general ledger is the journal voucher

• Identifies the financial amounts and affected GL account

THE GLS DATABASE

The GLS database includes a variety of files:

• General ledger master

• Chart of accounts
• General ledger history file
• Journal voucher file
• Journal voucher history file
• Responsibility center file
• Budget master file

The GLS Procedures

• Financial Reporting System

✓ The final step in the overall accounting process that begins in the transaction cycles
✓ The law dictates management’s responsibility for providing stewardship information
to external parties.
✓ Much of the information provided takes the form of standard financial statements,
tax returns, and documents required by regulatory agencies such as the Securities
and Exchange Commission (SEC).
✓ The primary recipients of financial statement information are external users, such
as stockholders, creditors, and government agencies.

SOPHISTICATED USERS

• are users of financial reports who understand the conventions and accounting principles that
are applied and that the statements have information content that is useful.
Reengineering Financial Reporting

✓ XBRL (extensible Business Reporting Language) is an XML-based language that was designed
to provide the financial community with a standardized method for preparing, publishing, and
automatically exchanging financial information, including financial statements of publicly held
companies.
o XBRL taxonomy are classification schemes that are compliant with the XBRL
Specifications to accomplish a specific information exchange or reporting objective
such as filing with the Securities and Exchange Commission.
o XBRL instance documents (the actual financial reports) are the mapping of the
organization’s internal data to XBRL taxonomy elements.
✓ The objective of XBRL is to facilitate the publication, exchange, and processing of financial and
business information.
✓ XML (extensible Mark-up Language) is a metalanguage for describing mark-up languages that
can be used to model the data structure of an organization’s internal database.
o XML is a metalanguage for describing mark-up languages
o XML can be used to model the data structure of an organization’s internal database.

COSO CONTROL ISSUES

• Transaction Authorization
• Segregation of Duties
• Access Controls
• Accounting Records
• Independent Verification
▪ The journal voucher listing is a listing that provides relevant details about each journal
voucher received by the GL/FRS.
▪ The general ledger change report presents the effects of journal voucher transactions
on the general ledger accounts.
• IT Application Controls

INTERNAL CONTROL IMPLICATIONS OF XBRL

• Taxonomy Creation
• Taxonomy Mapping Error
• Validation of Instance Documents

The Management Reporting System

• Management reporting is often called discretionary reporting because it is not mandated, as is

financial reporting.
• An MRS that directs management’s attention to problems on a timely basis promotes effective
management and thus supports the organization’s business objectives.
FACTORS THAT INFLUENCE THE MRS

1. Management Principles
❖ The formalization of tasks is the subdivision of organizational areas into tasks that
represent full-time job positions. An organizational chart shows typical job positions in a
manufacturing firm.
❖ Responsibility refers to an individual’s obligation to achieve desired results. Authority
is the right to make decisions pertaining to areas of responsibility.
❖ Span of control refers to the number of subordinates directly under a manager’s control.
❖ The principle of management by exception is a concept that managers should limit
their attention to potential problem areas rather than being involved with every activity or
decision.
2. Management Function, Level, and Decision Type
❖ Implementation is the carrying out, execution, or practice of a plan, a method, or any
design for doing something. Short-term planning involves the implementation of specific
plans that are needed to achieve the objectives of the long-range plan.
❖ Strategic planning decisions is planning with a long-term time frame that is associated
with a high degree of uncertainty.
❖ Tactical planning decisions is the planning performed by the middle-level manager to
achieve the strategic plans of the organization.
❖ Management control decisions are a technique for motivating managers in all
functional areas to use resources as productively as possible.
3. Management Function, Level, and Decision Type
❖ Operational control decisions are a technique that ensures that the firm operates in
accordance with pre-established criteria.
❖ The variance is the difference between the expected price—the standard—and the
price actually paid.
4. Problem Structure
❖ A structured problem is a problem in which data, procedures, and objectives are
known with certainty.
❖ An unstructured problem is a problem for which there are no precise solution
techniques.
5. Types of Management Reports
❖ A management report is a discretionary report used for internal decision making.
Management reports are not mandated like income statements, balance sheets, etc.
❖ Information content is the ability of a report to reduce uncertainty and influence
behavior of the user.

PROGRAMMED REPORTING

• Programmed reports provide information to solve problems that users have anticipated.
• Scheduled reports are reports produced according to an established time frame.
• On-demand reports are triggered by events.
• Report attributes are the characteristics of a report. To be effective, a report must
possess the following attributes: relevance, summarization, exception orientation,
accuracy, completeness, timeliness, and conciseness.
 •The decision-making process is a cognitive process leading to the selection of a
course of action among variations.
• Responsibility Accounting
• Responsibility accounting is the concept that every economic event affecting the
organization is the responsibility of and can be traced to an individual manager.
• SETTING FINANCIAL GOALS: THE BUDGET PROCESS: The budget is a process
that helps management achieve their financial objectives by establishing measurable
goals for each organizational segment.
• MEASURING AND REPORTING PERFORMANCE: Responsibility reports are
reports containing performance measures at each operational segment in the firm,
which flow upward to senior levels of management.
• RESPONSIBILITY CENTERS: Responsibility centers are the organization of
business entities into areas involving cost, profit, and investment.
• A cost center is an organizational unit with responsibility for cost management within
budgetary limits.
• A profit center is an organizational unit with responsibility for both cost control and
revenue generation.
• An investment center is an organizational unit that has the objective of maximizing
the return on investment assets.

BEHAVIORAL CONSIDERATIONS

• Goal congruence is the merging of goals within an organization.

• Information overload occurs when a manager receives more information than can be
assimilated.
• Inappropriate performance measures is when behavior and performance measures are
inconsistent with the objectives of the firm.

Data Analytics and Ad Hoc Reporting

• Data analytics represents a significant departure from the traditional structured reporting.
• Small data analytics characterizes techniques that employ data that are in a format and of a
volume that allows them to be analyzed and acted upon by traditional technologies.
• Big data analytics is characterized and defined by the three Vs: extreme volumes of data, the
rapid velocity at which the data must be processed, and the wide variety of structured and
unstructured data types that need to be integrated.

SMALL DATA ANALYTICS

• Data warehouse is a database constructed for quick searching, retrieval, ad hoc queries, and
ease of use.
• Data mining is the process of selecting, exploring, and modelling large amounts of data to
uncover relationships and global patterns that exist in large databases but are hidden among
the vast amount of facts.
• The verification model is a drill-down technique to either verify or reject a user’s hypothesis.
• The discovery model uses data mining to discover previously unknown but important info tion
that is hidden within the data.
BIG DATA ANALYTICS

• The concept of big data was introduced in 1941, its current rendition is characterized and
defined by the three Vs:
▪ Volume
Volume is the “V” most associated with big data, and refers to terabytes, petabytes,
and even exabytes of data.
▪ Velocity
Velocity refers to the speed at which big data must be analyzed.
▪ Variety
Variety is the primary driver of volume.
• Big Data Reporting Systems
▪ Prescriptive analytics tells the user what actions should be taken in response to
specific questions.
▪ Predictive analytics encompasses a variety of statistical techniques that draw upon
current and past data to calculate the statistical likelihood of future scenarios occurring.
▪ Descriptive analytics is a mathematical process that describes real-world events and
the relationships between factors responsible for them.
▪ Diagnostic analytics techniques view past performance to determine why something
happened the way it did.
• Big Data Analytics Risks and Controls
• Data Security
▪ FIREWALLS
▪ ACCESS PRIVILEGES
▪ PASSWORD CONTROL
▪ SYSTEM AUDIT TRAILS
▪ OUTSOURCING CONTROLS