8 26 2013 EXAM STUDY GUIDE OUTLINE Three aspects to the accounting system Store accounting data Analyze accounting data Safeguard accounting data AIS objective to support stakeholder decision making 9 9 2013 Core Business Processes 1 Revenue cycle Give finished goods or services Get cash External party is Customers 2 Expenditure purchasing cycle Give cash Get services External party is vendor or suppliers 3 Financing cycle Give equity cash Get Cash External party is financers investors and creditors 4 Human resources payroll cycle Give money cash Get Labor External party is employees 5 Manufacturing production model Give both labor and raw materials Get finished goods NO EXTERNAL PARTIES THEY ARE ALL INTERRELATED R economic resources E economic event the give gets A economic agent 3 steps to creation 1 REA model Identify the economic exchange events Identify the pair of events that reflect the basic economic exchange give and get in that cycle Rule 1 every event entity must be linked to at least one resource entity o Some events affect the quantity of a resource If they increase the quantity of a resource they are called a get event If they decrease the quantity of a resource they are called a give event o Not every event directly alters the quantity of a resource like if a customer orders goods but has not paid and has not received goods this is a COMMITMENT promise to execute an economics event in the future organizations track the effects of commitments to provide better service and for planning purposes Simple examples Airplane or hotel reservations course enrollment raw material requisition quote Complex examples bundles Contracts and agreements schedules 2 Identify resources and agents Identify the resources affected by each event and the agents who participate in those events Rule 2 every event entity must be linked to at least two participating agents employees o For accountability orgs need to be able to track actions of o Also need to monitor the status of commitments and exchanges outside parties 3 Cardinalities Determine the cadinalities of each relationship Types of relationships o 3 basic types depending on the MAXIMUM cardinality one to one relationship 1 1 one to many relationship 1 N or 1 M many to many relationship M N or UML means Unified Modeling Language Revenue cycle REA model Step 1 identify relevant events typical include take customer order commitment fill customer order GIVE decrease quantity sale bill customer order involves the exchange of info With an external party but does not affect resources collect payment GET increase QUANTITY cash receipt Step 2 identify relevant events although accounts receivable is an asset in financial reporting it is not represented as a resource in an REA model use queries o it represents the difference between total sales to a customer and total cash collections from the customer o Information to calculate an accounts receivable balance is already there because the sales and cash receipt info is captured Step 3 determine cardinalities of relationships The final step in an REA diagram for a transaction is to add information about relationship cardinalities A cardinality describes the nature of the relationship between two entities o Indicates how many instances of one entity can be linked to a specific instance of another entity 0 times optional 1 time mandatory o Minimum o Maximum 1 time single time only times many times o relationships between events when events occur in sequence the minimum cardinality between the first event and the second event is always zero because there is a span of time although possibly quite short when the first event has occurred but there are zero occurrences of the second event The minimum cardinality between the second event and the first event is typically one because the second event cant occur without the first event having occurred Minimum on Sales is ALWAYS 1 Minimum on Cash Receipt is ALWAYS 0 Sale 1 1 0 1 cash receipt sale doesn t have to be associated with a cash receipt but could have one A cash receipt must have one and only one sale Sale 1 1 0 cash receipt a sale could have many receipts ex Many individual payments overtime to pay off that sale Sale 1 0 1 cash receipt a cash receipt could have many sales ex Country club where you can accumulate a charge over a period of time OR buying on account many things and paying just once at end of period Sale 1 0 cash receipt a sale with many receipts and a receipt with many sales ex Paying with more than one cash account so 2 entities for sale of raw materials Revenue Cycle 1 Sales order entry doesn t effect resources 2 Shipping give 3 Billing doesn t effect resources 4 Cash Collections get 5 Returns Information is needed for the following Operational tasks The AIS need to provide information to evaluate critical revenue cycle processes Responding to customer inquiries Deciding on extending credit to a customer Determining inventory availability Selecting merchandise delivery methods Response time to satisfactorily resolve customer inquiries Time to fill and deliver orders Percentage of sales orders back ordered Customer satisfaction rates and trends Analyses of market share and sales trends Profitability by product customer and region Sales volume in dollars and market share Effectiveness of advertising and promotions Bad debt expense Days receivables outstanding Remittances processed daily Sales staff performance Data Flow Diagrams DFD help show process of how data flows to support revenue cycle widely used in information processes not so much outside 1 Sales Order Entry Description all the activities involved in soliciting and processing customer orders Key decisions Inventory availability customer inquiries and customer credit 2 Shipping 3 Billing This involves two tasks Invoicing and updating Accounts Receivable 4 Cash Collections What tasks happen during the collecting cash o First the mailroom receives the remittances and the remittance advices from customers o Second the mailroom records these on the remittance list The remittance advices and a copy of the remittance list is sent The remittances and a copy of the remittance list is sent to the to A R cashier What are the five approaches to collecting cash 1 Mailroom 2 Lockbox arrangements 3 Electronic Funds Transfer EFTs 4 Financial electronic data interchange FEDI 5 Accept credit cards 5 Returns Description authorizing accepting and providing credit or replacement items for