BUSINESS PROCESSES AND INFORMATION NEEDS Unit 2

This section discusses the basic business activities an organization engages in, the key decisions that must be considered when managing those activities, and the information needed to make those decisions. Introduction

Learning Objectives 1.Explain the basic activities companies engage in, the types of decisions they must make, and the type of information they need to make those decisions. 2.Describe the major transaction cycles present.

SESSION 1-2: BUSINESS PROCESSESAND CYCLES 1-2.1: BUSINESS ACTIVITIES, KEY DECISIONS AND INFORMATION NEEDS 1-2.2: TRANSACTION CYCLES AND GIVE –GET EXCHANGE CONCEPT OF AIS SESSION 2-2: ENTERPRISE RESOURCES PLANNING 2-2.1: ENTERPRISE RESOURCES PLANNING 2-2.2: REQUIRED FUNCTIONALITY AND ERP MODULES 2-2.3: DIVISIONS AND COVERAGE OF ERP 2-2.4: ADVANTAGES AND DISADVANTAGES OF ERP SESSION 3-2: DATA PROCESSING 3-2.1: TRANSACTION PROCESSING: DATA PROCESSING CYCLE (DPC) 3-2.2: SELECTING SUITABLE ACCOUNTING SOFTWARE PACKAGE

SESSION 1-2: BUSINESS PROCESSES AND CYCLES Discusses the basic business activities an organization engages in, the key decisions that must be considered when managing those activities, and the information needed to make those decisions.  Business Activities, Key Decisions and Information Needs Table 1 lists some of the key decisions that will need to be made for each of the business activities, and finally, information output including the different ways information is provided to users and the different purposes for which information is provided.

TABLE 1: Overview Of Business Activities, Key Decisions, And Information Needs Business ActivitiesKey DecisionsInformation Needs Acquired capital How much? Find investors or borrow funds? If borrow, best terms? Cash flow projections Pro-forma financial statements Loan amortization schedule Acquire building and equipment Size of building? Amount of equipment? Rent or buy? Location? How to depreciate? Capacity needs Prices Market study Tax tales and regulations Hire and train employees Experience requirements? How to access integrity and competency of applicant? How to train Job description Applicant job history and skills Acquired inventoryWhat models to carry? How much to purchase? How to manage inventory (store, control, etc.) Which vendors? Market analyses Inventory status reports Vendor performance and payment terms

Business ActivitiesKey DecisionsInformation Needs Adverting & marketing Which media? Content? Cost analyses Market coverage Sell merchandise Mark-up percentage? Offer in-house credit? Which credit cards to accept? Pro-forma income statement Credit and costs Customer credit status Collect payment from customers If officer credit, what terms? How to handle cash receipts? Customer account status Accounts receivable aging report Accounts receivable records Payment employeesAmount to pay? Deductions and withholdings? Process payroll in-house or use outside service? Sales (for commissions) Time worked (hourly employees) W4 forms Costs of external payroll service TABLE 1: Overview Of Business Activities, Key Decisions, And Information Needs Continued …

Business ActivitiesKey DecisionsInformation Needs Pay taxes Payroll tax requirements Sales tax requirements Government regulations Total wage expense Total sales Pay vendors Whom to pay? When to pay? Vendor invoices Accounts payable records Pay taxes Payroll tax requirements Sales tax requirements Government regulations Total wage expense Total sales Pay vendorsWhom to pay? When to pay? Vendor invoices Accounts payable records Types & Sources of Information for Decisions ♦ Financial ♦ Non-financial ♦ Internal sources ♦ External sources An effective AIS needs to be able to integrate information of different types and from different sources.

 Transaction Cycles and Give –Get Exchange Concept of AIS A transaction is an agreement between two entities (internal and external) to exchange goods or services or any other event that can be measured in economic terms by an organization. Examples include selling goods to customers, buying inventory from suppliers, and paying employees. Many business activities are pairs of events involved in a give-get exchange. The idea of modelling a set of ‘give and take’ exchanges of AIS is developed by Cheryl, Dunn and McCarty in Business functions within the model include: (1)collection and storing of data about organizational activities, resources and personnel, (2)transform data into information to enable management to plan, execute, and control, and (3)to provide adequate control to safeguard organizational assets and data.

1-2.3 Major Transaction Cycles The revenue cycle, where goods and services are sold for cash or a future promise to pay cash. The expenditure cycle, where companies purchase inventory for resale or raw materials to use in producing products in exchange for cash or a future promise to pay cash. The production cycle, where raw materials are transformed into finishes goods. The human resources/payroll cycle, where employees are hired, trained, compensated, evaluated, promoted, and terminated. The financing cycle, where companies sell parts of the company to investors and borrow money and where investors are paid dividends and interest is paid on loans. Figure 1: Give-Get Exchange Model

2-2.1 Enterprise Resources Planning 1.A system that integrates all aspects of an organisation’s activities into one AIS. 2.ERP provides critical support for fund business processes 3.ERP systems are used to collect, process, and store data about their business processes, and use to assess organisation efficiency and effect 4.It is about integrating financial data with non-financial operating data. i.e. Sales force enters an order, effect of the transaction automatically flows to all affected parts, inventory is updated, production schedules adjusted, and purchase orders are initiated to acquire raw materials Required Functionality and ERP Modules 1.Integrate an organization’s information into one overall AIS for sharing 2.Financial-accounting tasks 3.Human resources and payroll-employee benefits, trg, payroll 4.Order to cash-sales order entry 5.Purchase to pay-acquisition of raw material 6.Manufacturing-transforming raw material to FGs 7.Project management-resources and time scheduling for completion 8.Customer relationship management 9.System tools-for establishing file data, specifying flow of information

1. Integrations & Sharing of AIS 2. Finance Function 3. HR Function 6. Production Function 5. Purchases Function 9. System Management Tools 8. CRM Function 7. Project Management 4. Sales Function Figure 2: ERP Module

2-2.3 Divisions and Coverage of ERP Five divisions covering … 1.Revenue Cycle 2.Expenditure Cycle 3.Production Cycle 4.HR/Payroll Cycle 5.GL and Reporting Advantages and Disadvantages of ERP The Advantages i.Integration of an organization’s data and financial information ii.Data is captured once iii.Greater management visibility, increased monitoring iv.Better access controls v.Standardizes business operating procedures vi.Improved customer service vii.More efficient manufacturing The Disadvantages i.Cost ii.Time-consuming to implement iii.Changes to an organization’s existing business processes can be disruptive iv.Complex v.Resistance to change

SESSION 3-2: DATA PROCESSING Data processing whether manual or computerized is very crucial to every organization. This section looks at efficient and effective data processing with regards to AIS.

Process Output Storage Input Transaction Processing: Data Processing Cycle (DPC) Important function of the AIS - efficiently and effectively process transaction data. (a)Manual (non-computer-based) systems: data are entered into journals and ledgers maintained on paper. (b)Computer-based systems: data are entered into computers and stored in files and databases. The operations performed on data to generate meaningful and relevant information are referred to collectively as the data processing cycle. DPC – Four Processes (Steps): [Accountants Role: Decides the following: (1)What data should be entered and stored by the organization; (2) who should have access to them? (3) How should the data be organized, updated, stored, accessed, and retrieved? To answer these and related questions, accountants must understand the data processing concepts explained as follows:]

Step I: Data Input It is process to capture the data for each transaction that take place and enter them into the system. Data must be collected about three facets of each business activity: Each activity of interest The resource(s) affected by each activity The people who participate in each activity E.g., transaction in the revenue cycle is a sale, either for cash or on credit. Historically, most businesses used paper source documents to collect data about their business activities. Later transferred that data into the computer. Today data about business activities are recorded directly through computer data entry screens. Source data automation is yet another means to improve the accuracy and efficiency of data input. Source data automation devices capture transaction data in machine- readable form at the time and place of their origin. Examples include ATMs used by banks, point-of-sale (POS) scanners used in retail stores, and bar code scanners used in warehouses. Step II: Data (Processing-to-Storage) The second step in processing transactions is to perform control features to make sure the data that are captured are accurate and complete. One way to increase accuracy and completeness is to use well-designed turnaround documents and data entry screens as well as source data automation. Pre-numbering or Computer Assigned Sequential Numbering and System Pre-verification. Accountant needs to know the functionality of ledgers, journals, coding techniques, chart of accounts, and computer-based storage concepts as they relates to Step I & II.

Step III: Data Processing Collected and stored data must be processed thus helps keep the data stored in files or data bases current. Updating data previously stored about the activity, the resources affected by the activity, or the people who performed the activity. Updating can be done periodically, such as daily, or immediately as each transaction occurs. Types of Data Processing 1.Batch processing: Under batch processing, periodic updating of data is done. Source documents are grouped into batches, and control totals are calculated. Periodically, the batches are entered into the computer system, edited, sorted, and stored in a temporary file. The temporary transaction file is run against the master file to update the master file. Is a legacy method that continues to be used for some applications, such as payroll, that naturally occur at fixed time periods. The disadvantage of batch processing is that stored data are only current and accurate immediately after the periodic batch updating process. Output is printed or displayed, along with error reports, transaction reports, and control totals. 2.On-line batch processing: Transactions are entered into a computer system as they occur and stored in a temporary file. Periodically, the temporary transaction file is run against the master file to update the master file. On-line batch processing is combination of batch processing and on-line real-time processing.

3. On-line, real-time processing: Transactions are entered into a computer system as they occur. The master file is immediately updated with the data from the transaction. On-line data entry is more accurate than periodic batch input because the system can refuse incomplete or erroneous entries. In addition, because the data are being entered at the time the transaction occurs, any errors can be easily corrected. Real-time processing ensures that stored information is always current, thereby increasing its usefulness for making decisions. Many companies use on-line, real-time processing because of the competitive advantages it offers. For example, a few years ago Federal Express updated its mission statement to include the phrase “Positive control of each package will be maintained by utilizing real-time electronic tracking and tracing system.” The company’s on-line real-time system tells the exact location of each package and estimates its arrival time. Federal Express also provides customers with software that allows them to tract their own parcels. Changing data, such as changing a customer’s address when they move or their credit limit when their financial situation changes. Adding data, such as adding a new employee to the payroll master file or data base after they have been hired. Deleting data, such as purging the vendor master file of all vendors that the company no longer does business with.

Step IV: Information Output and forms The final step in the data processing cycle is information output. Forms of Information Output Information is usually presented in three forms: 1.Documents are records of transaction or other company data. Some, such as checks and invoices, are transmitted to external parties. Others, such as receiving reports and purchase requisitions, are used internally. Documents generated at the end of transaction processing activities are called operational documents to distinguish them from source documents, which are used at the beginning of the process. 2.Reports are prepared for both internal and external users. Reports are used by employees to control operational activities and by managers to make decisions and design strategies for the business. External users need reports for a wide variety of reasons, such as to evaluate company profitability, to judge creditworthiness, or to comply with regulatory requirements. Reports can also be produced on demand. It is important to periodically reassess the need for each report a company produces. 3.Query: To respond to this problem personal computers or terminals are used to query the system. A user enters a request for a specific piece of information. When the information is found, it is retrieved, displayed, or analyzed as requested. Since many queries are repetitive, users will usually have a predetermined set of queries available to them.

3-2.2 Selecting suitable Accounting Software package The information needs within the table in the various divisions of transaction cycles tend to give clear understanding to the manager the kind of accounting software package that would serve as the core of its AIS. The accounting software package to be selected should have the capability to integrate both financial and non-financial data about the client’s various business activities. Transaction CycleMajor Activities in the Cycle Revenue  Receive and answer customer inquiries  Take customer orders and enter them into the AIS  Approve credit sales  Check inventory availability  Initiate back orders for goods out of stock  Pick and pack customer orders  Ship goods to customers or perform services  Bill customers for goods shipped or services performed  Update (increase) Sales and Accounts Receivable  Receive customer payments and deposit them in the bank  Update (reduce) Accounts Receivable  Handle sales returns, discounts, allowances, and bad debts  Prepare management report  Send appropriate information to the other cycles

Transaction CycleMajor Activities in the Cycle Expenditure ■ Request goods and services be purchased ■ Prepare, approve, and send purchase orders to vendors ■ Receive goods and services and complete a receiving report ■ Store goods ■ Receive vendor invoices ■ Update (increase) Accounts Payable ■ Handle purchase returns, discounts, and allowances ■ Prepare management reports ■ Send appropriate information to the other cycles Human Resources/ Payroll ▼ Recruit, hire, and train new employees ▼ Evaluate employees performance and promote employees ▼ Discharge employees ▼ Update payroll records ▼ Collect and validate time, attendance, and commission data ▼ Prepare and disburse payroll ▼ Calculate and disburse taxes and benefit payments ▼ Prepare employee and management reports ▼ Send appropriate information to the other cycles

Transaction CycleMajor Activities in the Cycle Production ■ Design products ■ Forecast, plan, and schedule production ■ Request raw materials for production ■ Manufacture products (transform raw materials and labor into finished goods) ■ Store finished products ■ Accumulate costs for products manufactured ■ Prepare management reports ■ Send appropriate information to the other cycles Financing ▼ Forecast cash needs ▼ Sell stock/securities to investors ▼ Barrow money from lenders ▼ Pay dividends to investors and interest to lenders ▼ Retire debt ▼ Prepare management reports ▼ Send appropriate information to the other cycles

2-1. Self Assessment – Business Processes & Cycles 1.What are the basic business activities in which an organization engages?What decisions must be made to undertake these activities? 2.What information is required to make those decisions? 3.Outline the elements in the major Transaction Cycles 4.How are "Give and Take" transactions classified in business today and what impact does this have on AIS? 5.What role does the data processing cycle play in organizing business activities and providing information to users? 2-2. Self Assessment – ERP SYSTEMS 1.Discuss how organizations use ERP systems to process transactions and provide information. 2.What is the role of the information system and enterprise resource planning in modern organizations?

2-3. Self Assessment – Data Processing Cycle 1.Describe the four major steps in the data processing cycle and the major activities in each. 2.Describe the ways information is stored in computer-based information systems. 3.What role does the data processing cycle play in organizing business activities and providing information to users? Unit 2 Review Question: Updating can be done through several approaches. Namely:  Batch processing  On-line Batch Processing  On-line, Real-time Processing If you’re going through enrolment, which of these approaches would you prefer that your university was using? Why?