Solution Manual for Accounting Information

Systems 11th Edition by Bodnar

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Chapter 1
ACCOUNTING INFORMATION SYSTEMS: AN OVERVIEW

TEACHING TIPS

This chapter provides general coverage of many of the text's major themes. It's usually a good idea to
indicate how the topics covered in this chapter will be covered in more detail later in the course.

Many instructors will not assign any of the problems from the end of this chapter. This can be done
without any loss of overall continuity in the course.

If the course will emphasize internal controls, it might be desirable to cover in class, one of the general
cases on internal control from the back of Chapters 4, 8, or 9. This should be done to stimulate student
interest, but the instructor should not worry if the students in the course fail to analyze the case correctly.

In some ways, teaching systems can be more difficult than teaching other areas. In many cases, there are
no clear-cut debits and credits to be made, and judgment is often required. This can make some students
feel uncomfortable. So, it's usually good to emphasize this at the beginning of the course to properly set
students' expectations. The point should also be made that systems are an important area of professional
examinations.

One of the biggest risks in teaching systems is that it can easily become dry and boring. I have found that
the best way to overcome this is to generate as much class discussion as possible on many of the major
points in the chapter. Accordingly, I always make class participation about one-fourth of the total course
grade. I tell students on the first day of class that as a starting point, I will give all students the same
number of points (reflecting a class average) for participation. Then, at the end of the course, I will
typically add or subtract 5, 10, or 15 points to/from each student's grade according to the participation.
Many students typically stay at the average, so only noteworthy students end up with an adjustment. I
always use a seating chart, unless the class is small.

Many of my students have had jobs. So one question that I constantly ask throughout the term is "Has
anyone experienced this before in his/her job or otherwise?"

ACCOUNTING INFORMATION SYSTEMS AND BUSINESS ORGANIZATIONS

An accounting information system is a collection of resources, such as people and equipment, designed
to transform financial and other data into information. Accounting information systems perform this
transformation whether they are essentially manual systems or thoroughly computerized.

Information and Decisions. The users of accounting information fall into two broad groups: external and
internal. Higher-level managers require less information detail than lower level managers. A distinction
might be drawn between two broad classes of accounting information: mandatory and discretionary.
1
2 1 Accounting Information Systems: An Overview

Conceptually, information should satisfy a cost-benefit criterion. In meeting mandatory information

requirements, the primary consideration is minimizing costs while meeting minimum standards of
reliability and usefulness. When the provision of information is discretionary, the primary consideration is
that the benefits obtained exceed the costs of production.

Information Systems. A "computer-based" information system is a collection of computer hardware and

software designed to transform data into useful information.
Electronic Data Processing (EDP or DP): the use of computer technology to perform an
organization's transaction-oriented data processing.

Management Information Systems (MIS): use computer technology to provide decision-

oriented information to managers. An MIS provides a wide variety of information beyond that
which is associated with DP in organizations. MIS subsystems are not physically independent.
Examples of MIS subsystems are as follows:
Marketing information system
Manufacturing information system
Human resource information system
Financial information system

Decision Support Systems (DSS): process data into a decision-making format for the end user.
DSS serve ad hoc, specific, non-routine information requests by management, including what-if
analyses.

Expert Systems (ES): knowledge-based information systems that use knowledge about a specific
application area to act as an expert consultant to end-users. An ES differs from a DSS in that a
DSS assists a user in making a decision, whereas an ES makes the decision.

Executive Information Systems (EIS): tailor information to the strategic information needs of
top-level management.

Accounting Information Systems (AIS): include transaction processing cycles, the use of
information technology, and the development of financial information systems.

ACCOUNTING INFORMATION SYSTEMS AND APPLICATION ARCHITECTURE

Accounting information systems and information technology (IT) are strongly intertwined. The
fundamental benefits of information technology are automation, information organization, and
communication. Applications architecture involves the process of ensuring the suite of organization’s
applications work together as a composite application according to the goals and objectives of the
organization. Architecture has evolved automating the traditional accounting cycle to enhancing
functional planning and control within the organization. Material Requirements Planning (MRP) software
assisted management in managing inventories and scheduling production. MRP evolved into MRP II,
(Manufacturing Resource Planning II) which added new capabilities. MRP and MRP II paved the way for
Computer Integrated Manufacturing (CIM) and Flexible Manufacturing Systems (FMS). In CIM,
computers take control of the entire manufacturing process, and in FMS, computers not only control
production processes but can also be reprogrammed so that the same processes can produce entirely
different products. Enterprise Resource Planning (ERP) involves the combining of the various functional
information systems under the umbrella of a single software package and a single database. ERP II adds
collaborative commerce to ERP. Collaborative commerce involves groups of organizations working
together toward common goals, such as new products, new process methods, and human capital
intelligence. In recent years the ERP system has given way to the Enterprise Application Suite (EAS).
 Accounting Information Systems: An Overview 1 3

The EAS replaces one monolithic ERP software package with a group (i.e., a suite) of individual
packages that work closely with each other and run in web browsers.

BUSINESS PROCESSES

A business process is an interrelated set of tasks that involve data, organizational units, and a logical time
sequence. A key characteristic of business processes is that they are not necessarily limited to a single
functional area of the information system or the organization chart.

Business Process Reference Models

The basic business processes can be organized and grouped together according to various reference
models, depending on the desired emphasis.
The ERP Functional Model
The Value Chain Model
The Supply Chain Model
The Operations Process Model
The Transaction Cycle Model
Transaction Processing Cycles
Revenue cycle Events related to the distribution of goods and services to other entities
and the collection of related payments.
Expenditure cycle Events related to the acquisition of goods and services from other
entities and the settlement of related obligations.
Production cycle Events related to the transformation of resources into goods and
services.
Finance cycle Events related to the acquisition and management of capital funds,
including cash.
The transaction cycle model of an organization includes a fifth cycle — the financial reporting
cycle. The financial reporting cycle is not an operating cycle. It obtains accounting and operating
data from the other cycles and processes these data in such a manner that financial reports may be
prepared.

Internal Control Process

The term internal control process suggests actions taken within an organization to regulate and direct the
activities of the organization.

Elements of Internal Control Process. An organization's internal control process consists of the
policies and procedures established to provide reasonable assurance that specific organizational objectives
will be achieved. An organization's internal control process consists of five elements: the control
environment, risk assessment, control activities, information and communication, and monitoring.
Internal control also calls for the maintenance of adequate records in an effort to control assets and
analyze the assignment of responsibility.

Segregation of Accounting Functions. Segregate record keeping, custody, and authorization.

Internal Audit Function. Internal audit is charged with monitoring and assessing compliance with
organizational policies and procedures. The internal audit function must be segregated from the
accounting function and also have neither responsibility nor authority for any operating activity.

ACCOUNTING AND INFORMATION TECHNOLOGY

4 1 Accounting Information Systems: An Overview

The term accounting information system includes the use of information technology to provide
information to users. Computers are used in all types of information systems. Information technology
includes computers, but it also includes other technologies used to process information. Technologies
such as machine-readable bar codes and scanning devices, and communications protocols and standards
such as ANSI X.12, are essential to contemporary information systems.

The Information Systems Function

Every organization that uses computers to process transactional data has an information systems function,
which is responsible for data processing (DP).

Organizational Location. The head of the information systems function is typically called the Chief
Information Officer and is advised by an advisory group called a steering committee.

Functional Specialization. The most prevalent information systems departmental structure is the
assignment of responsibilities and duties by area of technical specialization, that is, function.

Sub-functions include the analysis function, the programming function, the operations function, the
technical support function, and the user support function.

Analysis and programming functions are typically organized by project. In project organization, analysts
and programmers are assigned to specific application projects and work together to complete a project
under the direction of a project leader.

Quick Response Technology.

Quick response systems are essential to the TQP (Total Quality Performance) movement in business.
Quick response systems use several key technologies: Just-in-Time (JIT), Web Commerce, Electronic
Data Interchange (EDI), Quick Response (QR) Codes, Radio Frequency Identification (RFID),
Computer-Integrated Manufacturing (CIM), Lean Manufacturing, and Electronic Funds Transfer
(EFT).

Lean Manufacturing (or Lean Production) is a general class of production improvement principles that
focus on eliminating waste and improving the smoothness of the production flow.

Retail EFT systems include the telephone wire transfers and telephone payment systems, preauthorized
payment systems, point-of-sale (POS) applications, and automated teller machines (ATMs).

THE ACCOUNTANT AND SYSTEMS DEVELOPMENT

The term accounting information system includes systems development activities that an accountant or
auditor might expect to encounter professionally.

The Nature of Systems Development. A systems development project ordinarily consists of three
general phases: systems analysis, systems design, and systems implementation.

The systems approach is a process that consists of six steps:

o Statement of system objective(s)
o Creation of alternatives
o Systems analysis
o Systems design
o Systems implementation
o Systems evaluation
 Accounting Information Systems: An Overview 1 5

Business Process Blueprinting. Blueprinting is the use of generic or industry standards for systems
development, as opposed to the development of a new system.

Behavioral Considerations in Systems Development

The user cooperation needed to operate the system successfully should be ensured during the design of a
system, not afterward. A philosophy of user-oriented design fosters a set of attitudes and an approach to
systems development that consciously considers the organizational context.
Green IT: Designing For Sustainability
The term Green IT has become an acronym for utilizing information technology resources in an
environmentally responsive manner.
Energy Usage. Green data centers use energy-efficient cooling technologies, energy efficient
equipment, and energy efficient building designs to reduce their environmental footprint.
E-waste. E-waste is IT and other electronic products that are at, or near the end, of their useful
life.

REVIEW QUESTIONS

1. An accounting information system is a collection of resources designed to provide data,

especially financial data, to a variety of decision makers according to their needs and entitlement.

2. The users of accounting information fall into two broad groups: external and internal. External
users include stockholders, investors, creditors, government agencies, customers and vendors,
competitors, labor unions, and the public at large. Internal users are the managers in an organization.

3. Electronic data processing (EDP) is the use of computer technology to perform an organization's
transaction-oriented data processing. Management information systems (MIS) use computer technology
to provide decision-oriented information to managers. In a decision support system (DSS), data is
processed into a decision-making format for the end user. An expert system (ES) is a knowledge-based
information system that uses its knowledge about a specific application area to act as an expert consultant
to end-users.

4. The four common operating cycles of business activity are the revenue cycle, expenditure cycle,
production cycle, and finance cycle.

5. The term internal control suggests actions taken within an organization to regulate and direct the
activities of the organization.

6. A controller is in charge of the accounting function. The treasurer is responsible for the finances
of the business.

7. Internal audit is charged with monitoring and assessing compliance with organizational policies
and procedures.

8. The most prevalent information systems departmental structure is the assignment of

responsibilities and duties by area of technical specialization, that is, function.

9. The analysis function focuses on identifying problems and projects for computer processing and
designing systems to satisfy these problems' requirements. The programming function is responsible for
the design, coding, testing, and debugging of computer programs necessary to implement the system
designed by the analysis function. The operations function is charged with data preparation, the operation
of the equipment, and system maintenance. The technical support function allows specialization in areas
such as operating systems and software, data management and database design, and communications
6 1 Accounting Information Systems: An Overview

technology. The user support function services end users, much as the technical support function services
personnel of the information systems department.

10. In project organization, analysts and programmers are assigned to specific application projects
and work together to complete a project under the direction of a project leader. Project organization
focuses responsibility for application projects on a single group, unlike functional organization, in which
responsibility for a specific project is spread across different functional areas.

11. A steering committee is the means by which managers of other areas outside of information
systems can influence the policies, budget, and planning of information services.

12. Blueprinting is the use of generic or industry standards for systems development, as opposed to
the development of a new system. Blueprinting avoids the expense of 'reinventing the wheel.'

13. An accountant might access accounts receivable data from a company's centralized database,
manipulate them, and then print a report using a networked PC and query language software.

14. Several technologies important to quick response systems are EDI (Electronic Data Interchange),
UPC bar code identification of products, and scanning technology.

15. EDI differs from electronic mail in that electronic mail messages are created and interpreted by
humans (person-to-person), whereas EDI messages are created and interpreted by computers.

16. Components of a CIM system typically include computer-aided design (CAD) workstations,
real-time production monitoring and control systems, and order and inventory control systems. CIM
components are connected by a computer network and equipped with software systems designed to
support distributed operation.

17. The six steps in the systems approach are:

o Statement of system objective(s)
o Creation of alternatives
o Systems analysis
o Systems design
o Systems implementation
o Systems evaluation

18. A philosophy of user-oriented design fosters a set of attitudes and an approach to systems
development that involves users in the design of applications.

ANSWERS TO DISCUSSION QUESTIONS AND PROBLEMS

19. Nature of Transactions - 10 minutes Easy

A credit sale is not complete until the subsequent billing and collection of funds from the customer. This
question illustrates how a single transaction might consist of several events and also how a transaction
might impact on several cycles (in this case both revenue and finance cycles as discussed in the chapter).
The instructor might note the interdependencies between sales, billings, and cash collections, as well as
the possibilities of sales returns, adjustments, and uncollectibility of accounts.

20. Organizational Location of Audit Function - 10 minutes Easy

Internal auditing should be organizationally independent of the controller or similar office and should be
administratively responsible to top management. The Securities and Exchange Commission and the major
stock exchanges have endorsed this position, as have all of the professional accounting associations
 Accounting Information Systems: An Overview 1 7

(AICPA, IIA, IMA).

21. Apply the Systems Approach - 20 minutes Easy

The systems approach is a general procedure for the administration of a systems project. The systems
approach can be viewed as a process that consists of several stages. Its purpose is to assist in the orderly
development of effective systems. These steps can be described as:
* Statement of system objective(s)
* Creation of alternatives
* Systems analysis
* Systems design
* Systems implementation
* Systems evaluation
The discussion of the systems approach to each of the given objectives could follow a format as presented
in Figure 1.16 of the text. The instructor can stress the importance of defining objectives and plans in
operational terms.

22. Nature of Accounting Function - 10 minutes Easy

Some discussion areas for specific decisions follow:
(1) Selection of the controller, technological configuration of the AIS, monitoring and setting
budget for the AIS function.
(2) Overall responsibility for lower-level personnel, procedures and methods, financial report
preparation, budgeting, and tax-planning. Duties would depend on the size of the
organization.
(3) Various operating decisions relating to personnel and procedures: approval of journal
vouchers, memos, and other such items; scheduling work assignments; handling of
exceptions; monitoring of work load.

23. Communication in Systems Design - 10 minutes Easy

Effective communication between all parties is essential to the system development process. Systems
analysts must understand management's needs in order to integrate these needs into the system that they
are designing. Likewise, management must be able to communicate their needs and desires to systems
analysts for the same reason. Operating personnel must understand management's needs in order to
properly operate the system, and the needs of operating personnel must be understood by analysts and
management in order that the system operates effectively.

24. Control Objectives - 30 minutes Medium

a. Procurement
b. Outbound sales logistics
c. Outbound sales logistics
d. Outbound sales logistics
e. Human resource management
f. Manufacturing/Production Operations
g. Firm infrastructure
h. Firm infrastructure
i. Firm infrastructure
j. Firm infrastructure
k. Firm infrastructure
l. Firm infrastructure
m. Firm infrastructure

25. Steering Committee - 15 minutes Medium

A steering committee is an organizational group, which meets periodically to set and review important
8 1 Accounting Information Systems: An Overview

policy, budget, and project decisions relating to the information systems department in an organization. A
steering committee is composed of high-level members of user functions as well as the head of the
information systems department. Because members of a steering committee include users (i.e.,
consumers) as well as representatives of the information systems department, a steering committee
provides user feedback in controlling the information systems department in an organization. An
important aspect of a steering committee is that it allows for the exercise of organizational power and
politics in decisions regarding the information systems department in an organization. This facilitates
support for decisions made with respect to the allocation of information system resources.

A steering committee would assume the overall responsibility for planning for the acquisition and
use of computer resources at the Red Wine Company. Members of the steering committee should include
high-level officers from each of the company's business functions — manufacturing, marketing, finance,
accounting, and general administration — as well as the manager of IS department. The steering
committee should attempt to find the best allocation of resources to fit the needs of the company.

The Red Wine Company's rapid growth has strained the firm's computer resources, and the
number of complaints concerning inadequate support and service from IS have increased dramatically in
the past year. This indicates a lack of support for the current manner in which resource allocation
decisions concerning computer equipment are being made. Currently IS itself has a budget, which
apparently it administers itself, subject to the president's approval. But several users have recently made
or are actively considering their own purchase of computer equipment. This situation could prove to be
counterproductive for the company as a whole, and is a good reason why a steering committee is needed
to centralize and control the responsibility for planning for the acquisition and use of computer resources
at the company. A steering committee would allow for the exercise of organizational power and politics
in decisions regarding the allocation of computer resources. This should tend to build support within the
organization for decisions, which are made with respect to the future allocation of computer systems
resources.

26. Information Systems Function - 30 minutes Medium

Courtesy of Touche Ross Foundation
See figure on next page.

27. Business Processes - 10 minutes Easy

a. The fact that the business is Web-based has no real bearing to what are the company's basic
business processes. The usual processes are involved: logistics, operations, marketing, service,
procurement, technology development, organization and human resources management, and firm
infrastructure.
b. Logistics and procurement.
c. The basic business processes would not change. Of course, specific sub-processes would change.
d. The major business processes would remain essentially the same if a second product were added.

28. Procurement Process - 10 minutes Medium

a. Rough sketch of procurement process: a) identify need to purchase tea, b) negotiate pricing and
select vendor, c) generate order, d) take delivery, e) process delivery and perform necessary accounting
functions.
b. The negotiation of pricing and selecting of a vendor would change.
c. The answer to part 1 also serves to describe sub-processes.

Figure for Problem 26.

 Accounting Information Systems: An Overview 1 9

29. Business Processes - 15 minutes Medium

a. Start, end: Generate sales order, ship customer order. Trigger: customer.
b. Start, end: acquire inventory, ship or use inventory. Trigger: customer or production order.
c. Start, end: assemble shipment and paperwork, ship order. Trigger: customer order.
d. Start, end: assemble order, generate order. Trigger: sales or production demand.
e. Start, end: collection of hours worked, generation of payroll check. Trigger: end of workweek.

30. Web Commerce - 10 minutes Easy

At first glance, Luxdale was purely an innocent victim. But on the other hand, Luxdale was apparently
unable to reassure the public with a published privacy policy that had been subject to some sort of audit.
Luxdale might have obtained an AICPA Web Trust seal of approval before the problem occurred. It
would have been in a much better position to assure the public when the trouble developed if it had.

31. Blueprinting Approach to Systems Development - 20 minutes Medium

The company seems to have a truly amazing product, one that can forecast accurately up to 6 months in
the future. Because of this, rapid growth is likely to continue. It is therefore imperative that a new system
be implemented that will allow for future growth. So the blueprint approach makes a lot of sense if it will
10 1 Accounting Information Systems: An Overview

produce an integrated system that will handle the company's present and future needs. So the real question
is not so much the viability of the blueprint approach, but rather the quality of the work that might be
performed by SysQuick. Then there is the issue of Blake being able to implement the blueprint once it is
developed. If Barbara Conta signs on with SysQuick, she is in effect putting her future in their hands. So
it would be imperative for her to thoroughly investigate this company and its success with other
companies.

32. Systems Development in a Small Company - 15 minutes Medium

Fancy Ropa’s situation is typical for a company that has grown without a comprehensive IS plan. The
result is a system that is a patchwork of parts that are not well integrated with each other.

The solution is to adopt a single, integrated enterprise-wide information system such as SAP Business
One or Oracle Small Business Suite, which target small and medium-size enterprises. These products
could then be upgraded to the enterprise versions with continued expansion of the business.

Switching to an ERP-type system can be fraught with many risks and a lot of pain and expense. For this
reason, the best approach is to use a major accounting firm such as Accenture to assist with the project.

WEB RESEARCH ASSIGNMENTS

33. In recent years, the top focus has been on information security and privacy. The exact priorities
change from year to year. Most students should have no problem completing this assignment.

34. Most students should have no problem with this assignment. It may be helpful to ask students to
present summaries of their findings to the class.