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Billing Process
Invoicing the customer
o Source document: sales invoice
Updating accounts receivable
o Source document: credit memo and monthly statements
THREATS CONTROLS
1. Failure to bill customer a) Reconcile invoices with sales orders and
shipping documents
b) Separate shipping and billing functions
2. Billing Errors a) Data entry edit controls
b) Configure system for automatically enter
price data
c) Reconciliation of shipping documents to
sales orders
3. Posting errors in accounts receivable a) Reconcile subsidiary accounts receivable
balance to the amount for accounts receivable in
the general ledger
b) Mail monthly statements to customers
4. Inaccurate or invalid credit memos a) Segregation of authorization and recording
function for credit memos
THREATS CONTROLS
1. Theft of Cash a) Proper segregation of cash handling and
posting to customer accounts, authorize credit
memos, or reconcile bank account
b) Use lockbox
c) Immediately open mail, prompt
endorsement and deposit all cash receipts daily
d) Use cash registers
2. Cashflow Problems a) Lockbox
b) Discounts for early payment
c) Cash flow budgeting
Key Terms
Revenue Cycle: The recurring set of business activities and data processing operations associated
with providing goods and services to customers and collecting cash in payment for those sales.
Sales Order: The document created during sales order entry listing the item numbers, quantities,
prices, and terms of the sale.
Electronic Data Interchange (EDI): The use of computerized communications and a standard
coding scheme to submit business documents electronically in a format that can be automatically
processed by the recipient’s information system.
Credit Limit: The maximum allowable credit account balance for each customer, based on past
credit history and ability to pay.
Accounts Receivable Aging Report: A report listing customer account balances by length of time
outstanding.
Back Order: A document authorizing the purchase or production of items that is created when
there is insufficient inventory to meet customer orders.
Picking Ticket: A document that lists the items and quantities ordered and authorizes the
inventory control function to release that merchandise to the shipping department.
Customer Relationship Management (CRM) Systems: Software that organizes information about
customers in a manner that facilitates efficient and personalized service.
Packing Slip: A document listing the quantity and description of each item included in a shipment.
Bill of Lading: A legal contract that defines responsibility for goods while they are in transit.
Sales Invoice: A document notifying customers of the amount of a sale and where to send
payment.
Open-Invoice Method: Method for maintaining accounts receivable in which customers typically
pa according to each invoice.
Remittance Advice: A copy the sales invoice returned with a customer’s payment that indicates
the invoices, statements, or other items being paid.
Balance-Forward Method: Method of maintaining accounts receivable in which customers
typically pay according to the amount shown on a monthly statement rather than by individual
invoices. Remittances are applied against the total account balance, rather than specific invoices.
Monthly Statement: A document listing all transactions that occurred during the past month and
informing customers of their current account balance.
Cycle Billing: Producing monthly statements for subsets of customers at different times.
Credit Memo: A document, approved by the credit manager, authorizing the billing department
to credit a customer’s account.
Remittance List: A document listing names and amounts of all customer payments received in the
mail.
Lockbox: A postal address to which customers send their remittances.
Electronic Lockbox: A lockbox arrangement (see lockbox) in which the bank electronically send
the company information about the customer account number and the amount remitted as soon
as it receives payments.
Electronic Funds Transfer (EFT): The transfer of funds through use of online banking software.
Financial Electronic Data Interchange (FEDI): The combination of EFT and EDI that enables both
remittance data and funds transfer instructions to be included in one electronic package.
Universal Payment Identification Code (UPIC): A number that enables customers to remit
payments via an ACH credit without requiring the seller to divulge detailed information about its
bank account.
Cash Flow Budget: A budget that shows projected cash inflows and outflows for a specified
period.
Key Decisions
What is the optimal level of inventory?
Which suppliers provide the best quality at the best price?
How can IT be used to improve efficiency and accuracy of logistics?
How can we take advantage of vendor discounts?
How can we maximize cash flow?
Ordering Goods/Services
THREATS CONTROLS
1. Stockouts and excess inventory a) Perpetual inventory system
b) Car-coding, RFID
c) Periodic physical counts
2. Purchasing items not needed a) Perpetual inventory systems
b) Review and approval of purchase requisition
c) Centralized purchasing
3. Purchasing Items at inflated prices a) Price lists
b) Competitive bids
c) Review purchase orders
4. Purchasing goods of poor quality a) Use approved suppliers
b) Review and approve purchases from new
suppliers
c) Monitor product quality by supplier
d) Hold purchasing managers responsible for
rework and scrap cost
5. Unreliable Suppliers a) Monitor supplier performance
b) Require quality certification
6. Purchasing from unauthorized suppliers a) Purchase from approved suppliers
b) Review approval from purchases of new
suppliers
c) EDI specific controls
7. Kickbacks a) Supplier audits
b) Prohibit gifts
c) Job rotation & mandatory vacations
d) Required disclosure of financial and personal
interests in suppliers
Receiving Process
Goods arrive
o Verify goods ordered against the purchase order (what, how much, quality)
o Source document: receiving report
Key Terms
Expenditure Cycle: A recurring set of business activities and related data processing operations
associated with the purchase of and payment for goods and services.
Economic Order Quantity (EOQ): The optimal order size to minimize the sum of ordering,
carrying, and stockout costs.
Reorder Point: Specifies the level to which the inventory balance of an item must fall before an
order to replenish stock is initiated.
Materials Requirements Planning (MRP): An approach to inventory management that seeks to
reduce required inventory levels by improving the accuracy of forecasting techniques to better
schedule purchases to satisfy production needs.
Just-in-Time (JIT) Inventory System: S system that minimizes or virtually eliminates inventories by
purchasing and producing goods only in response to actual, rather than forecasted, sales.
Purchase Requisition: A document or electronic form that identifies the requisitioner; specifies
the delivery location and date needed; identifies the item numbers, descriptions, quantity, and
price of each item requested; and may suggest a supplier.
Purchase Order: A document that formally requests a supplier to sell and deliver specified
products at designated prices. It is also a promise to pay and becomes a contract once the
supplier accepts it.
Blanket Purchase Order or Blanket Order: A commitment to purchase specified items at
designated prices from a particular supplier for a set time period, often one year.
Vendor Managed Inventory (VMI): Practice in which manufactures, and distributors manage a
retail customer’s inventory using EDI. The supplier accesses its customers point-of-sale system in
order to monitor inventory and automatically replenish products when they fall to agreed-upon
levels.
Kickbacks: Gifts given by suppliers to purchasing agents for the purpose of influencing their
choice of suppliers.
Receiving Report: A document that records details about each delivery, including the date
received, shipper, supplier, and quantity received.
Debit Memo: A document used to record a reduction to the balance due to a supplier.
Voucher Package: The set of documents issued to authorize payment to a supplier. It consists of a
purchase order, receiving report, and supplier invoice.
Nonvoucher System: A method for processing accounts payable in which each approved invoice
is posted to individual supplier records in the accounts payable file and is then stored in an open
invoice file. Contrast with voucher system.
Voucher System: A method for processing accounts payable in which a disbursement voucher is
prepared instead of posting invoices directly to supplier records in the accounts payable
subsidiary ledger. The disbursement voucher identifies the supplier, lists the outstanding invoices,
and indicated the net amount to be paid after deducting any applicable discounts and
allowances. Contract with nonvoucher system.
Disbursement Voucher: A document that identifies the supplier, lists the outstanding invoices,
and indicated the net amount to be paid after deducting any applicable discounts and
allowances.
Evaluated Receipt Settlements (ERS): An invoiceless approach to accounts payable that replaces
the three-way matching process (supplier invoice, receiving report, and purchase order) with a
two-ay match of the purchase order and receiving report.
Procurement Card: A corporate credit card that employees can use only at designated suppliers
to purchase specific kinds of items.
Imprest Find: A cash account with two characteristics: (1) It is set at a fixed amount, such as $100;
and (2) vouchers are required for every disbursement. At all times, the sum of cash plus vouchers
should equal the pre-set fund balance.
Product Design
Create a product that meets customer requirements
Generates two output documents:
o Bill of materials
o Operations list
1. Product Design
2. Planning and Scheduling
THREATS CONTROLS
1. Poor product design resulting in excess costs a) Analysis of costs arising from product design
choices
b) Analysis of warranty and repair costs
3. Production Operations
THREATS CONTROLS
1. Inventory Theft a) Restrict physical access
b) Document movement of inventory
c) Segregation of custody duties from
authorization and recording
4. Cost Accounting
THREATS CONTROLS
1. Inaccurate cost data a) Source data automation
b) Data processing integrity controls
2. Inappropriate allocation of overhead costs a) Time-driven activity-based costing
3. Misleading Reports a) Performance metrics
Key Terms
Production Cycle: The recurring set of business activities and related data processing operations
associated with the manufacture of products.
Bill of Materials: a document that specifies the part number, description, and quantity of each
component used in a product
Operations List: A document that specifies the sequence of steps to follow in making a product,
which equipment to use, and how long each step should take.
Manufacturing Resource Planning (MRP-II): An extension of materials requirements planning that
seeks to balance existing production capacity and raw materials needs to meet forecasted sales
demands. Also referred to as push manufacturing because goods are produced in expectation of
customer demand
Lean Manufacturing: Extends the principle of just-in-time inventory systems to the entire
production process to minimize or eliminate inventories of raw materials, work in process, and
finished goods. Lean manufacturing is often referred to as pull manufacturing because goods are
produced in response to customer demand.
Master Production Schedule (MPS): Specifies how much of each product is to be produced during
the planning period and when the production should occur.
Production Order: A documents authorizing the manufacture of a specified quantity of a
particular product
Materials Requisition: Authorizes the removal of the necessary quantity of raw materials from the
storeroom.
Move Tickets: Documents that identify the internal transfer of parts, the location to which they
are transferred, and the time of the transfer
Computer-Integrated Manufacturing (CIM): A manufacturing approach in which much of the
manufacturing process is performed and monitored by computerized equipment, in part through
the use of robotics and real-time data collection of manufacturing activities.
Request for Proposal (RFP): A request by an organization or department for suppliers to bid to
supply a fixed asset that possesses specific characteristics.
Job-Order Costing: A cost system that assigns costs to specific production batches or jobs.
Process Costing: A cost system that assigns costs to each process, or work center, in the
production cycle, and then calculates the average cost for all units produced.
Job-Time Ticket: A document used to collect data about labour activity by recording the amount
of time a worker spent on each specific job task.
Manufacturing Overhead: All manufacturing costs that are not economically feasible to trace
directly to specific jobs or processes.
Activity-Based Costing (ABC): A cost system designed to trace costs to the activities that create
them.
Cost Driver: Anything that has a cause-and-effect relationship to costs.
Throughput: A measure of production efficiency representing the number of “Good” units
produced in a given period of time.
5. Disburse Payroll
6. Disburse Payroll Taxes
THREATS CONTROLS
1. Inventory Theft a) Restrict access to blank payroll checks and
check signing machine
b) Use separate account (imprest fund)
2. Failure to make required payments a) Configure system to make automatic
payments on time
3. Untimely payments a) Configure system to make automatic
payments on time
4. Inaccurate payments a) Process integrity controls
b) Supervisory review
Reasons to Outsource Payroll
Reduce costs
o Cost of processing and minimize errors
Broader range of benefits
o Administration of benefits
Free up computer resources
Key Terms
Human Resource Management (HRM)/Payroll Cycle: the recurring set of business activities and
data processing operations associated with effectively managing the employee workforce.
Knowledge Management Systems: Software that stores and organizes expertise possessed by
individual employees so that the knowledge can be shared and used by others
Time Card: A document that records the employee’s arrival and departure times for each work
shift.
Time Sheet: A data entry screen (or paper document) used by salaried professionals to record
how much time was spent performing various tasks for specific clients
Payroll Register: A listing of payroll data for each employee for a payroll period
Deduction Register: A report listing the miscellaneous voluntary deductions for each employee.
Earnings Statement: A report listing the amount of gross at, deductions, and net pay for the
current period and the year-to-date totals for each category.
Payroll Clearing Account: a used general ledger account used to check the accuracy and
completeness of recording payroll costs and their subsequent allocation to appropriate cost
centers.
Flexible Benefits Plans: A plan under which each employee receives some minimum coverage in
medical insurance and pension contributions, plus additional benefit “credits” that can be used to
acquire extra vacation time or additional health insurance. These plans are sometimes called
cafeteria style benefit plans because they offer a menu of options.
Payroll Service Bureau: An organization that maintains the payroll master file for each of its
clients and performs their payroll processing activities for a fee.
Professional Employer Organization (PEO): An organization that processes payroll and also
provides human resource management services such a s employee benefit design and
administration.
Adjusting Entries
Accruals
o Made at end of accounting period to reflect events that have occurred but are not in the
financial statements (ex. wages payable).
Deferrals
o Made at end of accounting period to reflect exchange of cash prior to performance of
related event (ex. rent).
Estimates
o Portion of expenses expected to occur over a number of accounting periods (ex.
Depreciation).
Revaluations
o Entries made to reflect differences between actual and recorded value of an asset or
change in accounting principle.
Corrections
o Entries made to counteract effects of errors found in the general ledger
Key Terms
Journal Voucher File: A file that stores all journal entries used to update the general ledger
Trial Balance: A report listing the balance of all general ledger accounts
Audit Trail: A path that allows a transaction to be tranced through a data processing system from
point of origin to output or backwards from output to point of origin.
XBRL: extensible Business Reporting Language is a variant of XML (eXtensible Markup Language)
specifically designed for use in communicating the content of financial data.
Instance Document: An XBRL file that contains tagged data.
Element: A specific data item in an XBRL instance document, such as a financial statement line
item
Taxonomy: A set of XBRL files that defines elements and the relationships among them.
Schema: An XBRL file that defines every element that appears in a specific instance document.
Linkbases: One or more XBRL files that define the relationships among elements found in a
specific instance document.
Style Sheet: An XBRL file that provides instructions on how to display (render) an instance
document on either a computer screen or printed report.
Extension Taxonomy: A set of custom XBRL tags to define elements unique to the reporting
organization that are not part of the standard generally accepted taxonomies for that industry.
Responsibility Accounting: A system of reporting financial results on the basis of managerial
responsibilities within an organization.
Flexible Budget: A budget in which the amounts are stated in terms of formulas based upon
actual level of activity.
Balanced Scorecard: A management report that measures four dimensions of performance:
financial, internal operations, innovation and learning, and customer perspective of the
organization.
Planning Techniques
Program evaluation and review technique (PERT)
o Diagram that depicts all project activities that require time and resources with
completion estimates. Determines critical path.
Grant chart
o Bar chart that organizes activities on the left hand side and project time scheduled with a
bar drawn to show the progress to date for that particular activity.
Capital Budgeting
Payback period
o Calculate the number of years required for the net savings to equal the initial cost of
investment
Net Present Value (NPV)
o Estimate future cash flows with discounted rate for time value of money
Internal Rate of Return (IRR)
o Calculates the interest rate that makes the present value of total costs equal to the
present value of total earnings.
Why Behavioural Problems Occur?
Fear
o Of failure, the unknown, losing status
Lack of top-management support
o If the top management is not supportive why should the employee change?
Bad prior experiences
o Bad experience with prior IS changes
Poor communication
o Employees need to understand why change is necessary
Disruption
o Additional requests for information and additional burdens of time is distracting and
prompts negative feelings
Manner change is introduced
o Approaches are different for top level and lower level employees
Biases and emotions
Personal characteristics and background
o Age
o Open to technology and comfortable with it
Purchasing
Select a vendor (from referral, trade shows, etc.)
Request for proposal (RFP) that meets needs
Evaluate proposals
o Top vendors invited to give demonstrations on how their system will fit your needs
Make a final selection based upon your criteria
End-User Computing
Advantages
o Allows for end-users to create, control, and implement simple systems
o More likely to meet user needs
o Saves time
o Frees up system resources
o Easy to use and understand
Disadvantages
o Lack of testing of application and possible calculation errors
o Inefficient systems
o Poorly controlled
o Poorly documented
o System incompatibilities
o Duplication of data
o Increase costs in later years with upgrades
Outsourcing
Advantages
o Allows companies to concentrate on core competencies
o Asset utilization
o Access to greater expertise and better technology
o Lower costs by standardizing user application and splitting development and
maintenance costs between projects
o Less development time
o Elimination of peaks-and-valleys usage
o Facilitates downsizing
Disadvantages
o Inflexibility
o Loss of control
o Reduced competitive advantage
o Locked-in system
o Unfulfilled goals
o Poor service
o Increased risk
Prototyping
Advantages
o Results in well-defined user needs
o Higher user satisfaction and involvement
o Faster development time
o Fewer errors
o Opportunities to suggest changes
o Less costly
Disadvantages
o Requires significant user time
o Resource efficiency may not be achieved
o Inadequate testing and documentation
o Negative behavioural reactions
o Continuous development of iterations leaves a feeling of no project completion
Key Terms
Canned Software: programs for sale on the open market to a broad range of users with similar
needs.
Turnkey System: Software and hardware sold as a package such that the vendor installs the
system and the user “turns on the key” often written by vendors who specialize in a particular
industry.
Application Service Provider (ASP): Company that delivers software via the internet; ASP owns
and hosts the software remotely via the internet.
Request for Proposal (RFP): A request for vendors to bid on a system to meet a company’s
specified needs.
Benchmark Problem: Comparing systems by executing an input, processing, and output task on
different computer systems and evaluating the results.
Point Scoring: Evaluating the overall merits of vendor proposals by assigning a weight to each
evaluation criterion based on its importance.
Requirements Costing: Comparing systems based on the cost of all required features; when
software does not meet all requirements, the cost of developing unavailable features is
estimated and added to its cost.
Custom Software: Software developed and written in-house to meet the unique needs of a
particular company.
End-User Computing (EUC): The hands-on development, use, and control of computer-based
information systems by users.
Help Desk: Analysts and technicians who answer employee questions with the purpose of
encouraging, supporting, coordinating, and controlling end-user activity.
Outsourcing: Hiring and outside company to handle all or part of an organization’s data
processing activities.
Business Process Reengineering (BPR): The thorough analysis and redesign of business processes
and information systems to achieve dramatic performance improvements; often a drastic, one-
time event.
Business Process Management (BPM): A systematic approach to continuously improving and
optimizing business processes; a more gradual improvement facilitated by technology.
Business Process Management System (BPMS): System that automates and facilitates business
process improvements throughout the SDLC.
Prototyping: An approach to systems design in which a simplified working model, or prototype, of
an IS is developed.
Operational Prototypes: Prototypes that are further developed into fully functional systems.
Nonoperational (throwaway) Prototypes: Prototypes that are discards, but the system
requirements identified from the prototypes are used to develop a new system.
Computer-Aided Software (or Systems) Engineering (CASE): integrated package of tools that
skilled designers use to help gain, analyse, ,design, program, and maintain an IS.