What Is the Revenue Cycle

Accounting Information System Definition -Is the process of recording business transactions (data) classifying and summarizing the accounting information and communicating the same accounting information to the relevant users or interested parties. Users of Accounting Information and their Interests 1. Management -The management require information of all times to make important decisions regarding the business as a whole and /or its segments. 2. Current investors / shareholders - They are interested in both short-term and long-term survival of business. They are interested in the current profitability and value of their wealthy both now and future. 3. Financial Institutions and banks (Creditors) - Financial institutions are the current and potential vendors .– current creditors of finance implies that they have lent money to the business while potential ones implies that the business is ones seeking the funding from these financial institutions Their interest is liquidity i.e the ability to service the principal amount and interest charged. They are also interested in the long-term survival of the enterprise. 4. Potential Investors -They are interested in the long-term viability and survival of the business. They need first hand information regarding how stable the business is before investing their resources into that business. 5. Employees -Interested in the going concern of the business. The persons are concerned with the payslip (ability to pay the remuneration when due and terminal benefits) 6. Customers - Interested in the continued service by the organizations i.e regular provision of goods and services. 7. Government and its departments -Interested in taxes and economic surveys. 8. Trade Suppliers -Interested in the liquidity of the business in order to make decisions regarding credit facilities 9. Consumers organization -Interested in the assessment of the fairness in the pricing policies. 10. Trade Unions -Interested in the agreements based on pay hikes from the accounting information made available Information -This is processed data. Data refers to the raw facts. -For the data to be processed into information it must pass through system . Information when available is used for decision making. A system -A system is a set of interdependent components some of which may be sub-systems in their own right which collectively accomplish certain objectives. Example A business organization is a system. It is a system since it has the objectives to accomplish which include profit organization, wealth maximization ,corporate social responsibility (CSR). -in order to achieve these objectives , the business organizations is divided into functional units/ departments which we can refer to as components. Information Systems -An information system differs from other systems in that its objectives is to monitor and document the operations of some other system referred to as the target system. No information system can exist of its own without the target system e.g production activities would be the target system for the production scheduling information system. The Human Resource Activities are the target system of Human Resource Information System. REVENUE CYCLE It represents the primary source of most companies operational cash flow and therefore needs to be protected, managed and monitored using financial internal controls. Revenue Cycle Procedures 1. Sales Order Entry Procedure The first accounting revenue cycle procedure you should utilize deals with your sales order. All customer orders will be processed in an efficient and organized manner to ensure accurate and prompt shipments. The company should summarize the preparation of documents, paperwork flow, and responsibilities by individuals and departments for obtaining a sales order from a customer through shipping and billing the customer. 2. Point-Of-Sale Orders Procedure The Company should provide POS Point-Of-Sales procedures for ensuring that all sales are proper and collectible and the effect on inventory and cash is posted correctly. There should be proper transaction controls over sales and proper reviews and authorizations by the store manager. This applies to all cashiers and cash handlers. 3. Customer Credit Approval and Terms Procedure To reduce potential collection problems, new customer accounts or credit limit increases will be properly evaluated and approved prior to extending credit. The company should outline the activities and responsibilities involved in obtaining credit approval for a potential customer before sales orders are consummated. These credit procedures are to be followed for all credit approvals requested by the Sales departments. 4. Sales Order Acceptance Procedure To ensure the highest customer services levels and reduce potential order problems, sales orders will be properly evaluated and approved prior to entry into the accounting system and fulfillment by the company. The company should outline the activities and responsibilities involved in verifying the acceptability of all sales orders received. 5. Shipment of Goods Procedure All products and services should be delivered in an organized manner in order to maintain the highest customer service quality levels possible and to ensure compliance with existing laws. The company should outline the steps for the packaging, safe storage, control and delivery of all products and services shipped by the company. This applies to all products and services distributed by the company, sales, customer service and shipping personnel. 6. Invoicing and Accounts Receivable Procedure Accounting is responsible for the timely preparation and distribution of invoices to optimize cash flow and customer payments. Accounting should also maintain accurate records over Accounts Receivable and abide by proper internal controls. The company should explain the methods for the preparation of invoices and accounts receivable records processing. This applies to all product sales and services provided by the company. 7. Account Collections Procedure All open accounts receivable with late or delinquent payment activity will be handled in a timely and effective manner to ensure maximum account collections and an optimum accounts receivable turnover ratio. The company should provide the actions and methods for processing late or delinquent payments. This applies to the Credit Department involved with collection of past due accounts receivable. 8. Customer Returns Procedure Te last revenue cycle procedure your company should make sure to have is the customer returns procedure. The company should outline the steps and documents to be used for customers returning goods in order to provide adequate control of inventory and timely refunds to customers. Objectives of AIS in Revenue cycle activities AIS must provide adequate controls so that the following objects are met: (1) Transactions are properly authorized. (2) Recorded transactions are valid. (3) All valid, authorized transactions are accurately recorded. (4) Assets are safeguarded from loss or theft. (5) Business activities are performed efficiently and effectively. The following help achieve the above: • Simple, easy-to-complete documents with clear instructions. • Appropriate application controls (e.g., validity or field checks). • Signature space for persons responsible for completion and review of documents. • Pre-numbering of the documents. Revenue Cycle—Major threats & control procedures (1) Sales to customers with poor credit—(uncollectable sales and losses due to bad debts). Prevention—independent credit approval function and good customer accounting. (2) Shipping errors—wrong quantities, items, or address: bad customers. Prevention—reconcile shipping notices and picking tickets, bar code scanners, data entry controls. (3) Theft of inventory—loss of assets , inaccurate records. Prevention—Secure inventory and document transfers, good accountability for picking and shipping, and frequently reconcile records with physical count. (4) Failure to bill customers—loss of inventory, and erroneous data about: sales, inventory, and receivables. Prevention—Separate shipping and billing. Prenumber of shipping documents and reconciliation of all sales documents. (5) Billing errors—pricing mistakes, overbilling for items not shipped or back ordered—loss assets and mad customers. Prevention—reconciliation of picking tickets and bills of lading with sales orders, data entry edit controls, and price lists. (6) Theft of cash—loss of assets and overstated accounts receivables Prevention—separation of duties: handling cash and posting to customer accounts; handling cash and authorizing credit memos & adjustments; issuing credit memos and maintaining customer accounts. Use lockboxes and EFT. Mail customer statements monthly. Use cash registers in retail. Deposit cash intact daily in the bank. Bank reconciliation done by non cash handler. (7) Accounts receivable incorrectly posted—bad debts customers, incorrect records, and poor decisions. Prevention—reconcile subsidiary accounts receivable ledgers with general ledger, monthly statements to customers, and edit and batch totals controls. (8) Loss of data—loss of confidential information and poor decision making. Prevention—regular on-site & off-site backup, logical and physical access controls to prevent leakage of data to competitors. (9) Poor performance—inefficient and ineffective operations. Prevention—sales and profitability analysis, accounts receivable aging analysis, and cash budgets to track operations. REVENUE CYCLE INFROMATION NEEDS & DATA MODEL AIS needs to provide useful information about: • Customer inquiries about account balances and order status. • Extension of credit to specific customers. • Inventory availability to meet customers orders • Credit terms offered to customers • Prices charged for the products or services • Sales returns and warranty policies. • Alternative merchandise delivery methods. • Strategic and performance evaluation information. REA revenue cycle data model: • Resources—cash and inventory. • Events—orders, shipments, billing, and cash collections. • Agents—primary external agent is the customer, various internal agents. Benefits of the data model: • Integration of traditional accounting data and operational data. • Additional data such as the time of day of a sale can be collected, analyzed and used in decision making. • Links of internal and external information (e.g., credit ratings) is possible. • Flexible/powerful query by SQL if relational DB. • Data mining for target marketing. Internal control and databases: • Foreign key and referential integrity ensures the existence of primary key records in related tables. • Effective access controls are very important in a database environment. • REA diagrams highlight incompatible functions and system can be programmed to reject any attempt to perform incompatible functions by a single employee. When multiple roles are performed, auditors can check for compensating controls. • Use of DBMS makes backup and disaster recovery procedures essential. Internal Controls over Revenues and Cash Receipts           Is one individual responsible to receive payments in the mail and receive over the counter receipts? All office personnel should not receive payments. Have safeguards been provided to prevent employees or officials from cashing cheques payable to the governmental entity? Are monies received by one employee and deposited by another employee? Is a list of cash receipts maintained that can be reconciled to the accounting records? Is the individual handling cash different from the individual handling the accounting records? Are sequentially numbered receipts used? Is the accounts receivable system capable of producing an aged listing of receivables? Are subsidiary receivable ledgers reconciled with the general ledger on a regular basis? Are controls in place for the proper authorization of credit memos and adjusting journal entries to the control accounts? Does the governmental entity have a policy regarding the write-off of delinquent accounts? Are billing, collection, and posting performed by separate individuals or departments? EXPENDITURE CYCLE An expenditure cycle is a set of purchasing decisions and actions. It's the repetitive process of creating purchase orders and ordering goods and services, receiving these items, approving the invoices for these items and services, and paying the invoices. -The expenditure cycle is a recurring set of business activities and related data processing operations associated with the purchases and payments for the goods and services. - The primary objective of expenditure cycle is to minimize the total cost of acquiring and maintaining inventory supplies and the various services necessary for organization functions Key decisions made 1 what is the optimal level of inventory and supplies to be carried by the entity. 2 Which supplies pride the best quality goods and services and the best prices 3 Where should the inventories and supplies to be held i.e location of inventory 4 How should the organization consolidate purchases across the units to obtain optimal prices 5 How can IT be used to improve the efficiency and accuracy of inbound logistic function 6 Is sufficient cash available to take advantage of any discounts offered by the suppliers 7 How can payments to the suppliers to be managed to maximise the cash flows Expenditure cycle business activities 1. Ordering Materials Pricing goods and services is the next step in the cycle. Terms and conditions, delivery times and return policies are other factors that affect an order. The company agent places the order with the supplier, filling out the proper paperwork or completing the order online. Companies might use a manual or computer tracking system to follow a purchase from order to final delivery. a) Use of Economic order quantity- this approach is used to calculate the optimal order size so as to minimize the sum of ordering, carrying and stockout costs. b) Material requirement planning – it seeks to reduce required inventory level by scheduling production ruther than estimating the needs c) Just in time – it attempts to minimise both the carrying and stockout costs by acquiring the supplies when needed. Documentation in ordering for goods a) Purchase order – this document formally requests a vendor to sell and deliver specific products at designated prices. Its a promise to pay and it becomes a contract once it is accepted by the vendor. Frequently several purchase orders are designed to fill one purchase requisition b) Requisition note – the document identifies the buyer and quantity to be bought, the delivery location and the date of delivery, description of quantity and the price of each item ordered. 2. Receiving and storage of the goods ordered The receiving department will consider whether deliveries have been made and verify the quantities and quality of items delivered. The receiving report will be prepared to show the details of each item delivered, the date received, the vendors name, the purchase order number. For each item received the report should show the item number description, unit of measurement and number of quantity received. 3. Approval of suppliers invoice for payment The accounts payable department will approve the suppliers invoices for payment. The cashier is responsible for making the payment. The objective of accounts payable department is to authorize payments for goods and services that were ordered and actually received . 4. Making payments to the suppliers The processing efficiency for payments will require that the suppliers to be paid through EFT systems. Information needs for AIS -The AIS is to provide information useful for decision making. -The usefulness in the expenditure cycle means that AIS must provide operational information that is needed to perform the following functions: i) Determine when and how much additional inventory to order. ii) Select the appropriate vendor s or suppliers from whom to order. iii) Verify the accuracy of the vendor invoices. iv) Decide whether purchase discount should be taken v) Monitor the cash flow needs to pay outstanding obligations. Examples of additional information the AIS should provide - Efficiency and effectiveness of purchasing department. - Analysis of vendor performance such as in time, quality – the time taken to move the goods from the receiving point production percentage of the purchase discount given. Control objectives of AIS in purchasing cycle 1 Transactions are properly authorised 2. Recorded transactions are valid 3. Only valid and authorised transactions are recorded 4. Transactions are recorded accurately 5. The assets (cash) inventory and data are safeguarded from loss or theft 6. Business activities are performed efficiently and effectively RISKS IN EXPENDITURE CYCLE-Purchasing system 1. Preventing Stock outs and/or excess inventory -Inventory control systems; perpetual inventory records; barcode and RFID technology; periodic counts of inventory 2 .Ordering unnecessary items -Accurate perpetual inventory records; approval of purchase requisitions 3. Purchasing goods at inflated prices -Use of price lists; soliciting competitive bids; use of approved suppliers; approval of purchase orders; budgetary controls 4. Purchasing goods of inferior quality -use of approved vendors; approval of purchase orders; monitoring vendor performance; budgetary controls 5. Purchasing from unauthorized suppliers -Approval of purchase orders; restricting access to supplier master file; restrictions on procurement card usage 6. Kickbacks -policies against accepting gifts from vendors; training; job rotations; enforced vacation for purchasing agents; requiring purchasing employees to disclose financial interests in suppliers; supplier audits 7. Receiving unordered goods -Requiring receiving dock employees to verify existence of valid purchase order 8. Making errors in counting goods received -using barcode and RFID technology; documenting employee performance; incentives for accurate counts 9. Theft of inventory -physical access controls; periodic counts of inventory and reconciliation of physical counts to records; documenting all transfers of inventory; proper segregation of duties 10. Failing to catch errors in vendor invoices -double-checking invoice accuracy; training of accounts payable staff; using ERS 11. Paying for goods not received Only paying invoices supported by original receiving reports; using ERS; budgetary controls 12. Failing to take available purchase discounts -proper filing; cash flow budgets 13. paying the same invoice twice -only paying invoices supported by original voucher package; cancellation of voucher package upon payment; using ERS; controlling access to supplier master file 14. Recording and posting errors in accounts payable Various data entry and processing edit controls; periodic reconciliation of accounts payable subsidiary accounts with general ledger 15. Misappropriating cash, checks, or EFTs -restricting access to blank checks, check-signing machine, and EFT transfer terminals; segregation of duties of accounts payable and cashier; reconciliation of bank account by someone independent of cash disbursements process; check protection measures; regular review of EFT transactions 16. Loss, alteration, or unauthorized disclosure of data -Use of file labels; backup and disaster recovery plans; physical and logical access controls; configuration of ERP systems to enforce proper segregation of duties; encryption; data transmission controls 17. Performing poorly in purchasing. -Development and periodic review of appropriate performance reports THE HUMAN RESOURCES MANAGEMENT/ PAYROLL CYCLE INTRODUCTION • Questions to be addressed in this chapter include: – • • • • • • • What are the basic business activities and data processing operations that are performed in the human resources management (HRM)/payroll cycle? – What decisions need to be made in this cycle, and what information is needed to make these decisions? – What are the major threats and the controls that can mitigate those threats? The HRM/payroll cycle is a recurring set of business activities and related data processing operations associated with effectively managing the employee workforce. The most important tasks performed in the HRM/payroll cycle are recruiting and hiring new employees; training; job assignment; compensation (payroll); performance evaluation; and discharge of employees (voluntarily or involuntarily). Additionally, payroll costs are allocated to products and departments for use in product pricing and mix decisions. The payroll system handles compensation, while the other duties are the purview of HR management. This chapter focuses primarily on the payroll system, which is one of the largest and most important components of the AIS. This system must be designed to meet management’s needs and government regulations. Incomplete or erroneous payroll records can impair decision making and result in fines or imprisonment. There are five major sources of input to the payroll system. The HRM department provides information about hiring’s, terminations, and pay-rate changes. Employees provide changes in discretionary deductions (e.g., optional life insurance). Various departments provide data about the actual hours worked by employees. Government agencies provide tax rates and regulatory instructions. Insurance companies and other organizations provide instructions for calculating and remitting various withholdings. Principal outputs of the payroll system are checks. Employees receive individual paychecks. A payroll check is sent to the bank to transfer funds from the company’s regular account to its payroll account. Checks are also issued to government agencies, insurance companies, etc., to remit employee and employer taxes, insurance premiums, union dues, etc. The payroll system also produces a variety of reports. Employees are an organization’s most valuable assets. However, the traditional AIS has not measured or reported on the status of a company’s human resources. Some companies are now creating positions for a director of intellectual assets. Because employees are so valuable, turnover is expensive, and employee morale is important. To effectively track intellectual capital and human resources, the AIS must do more than just record time and attendance and prepare pay checks. Payroll should be integrated with HRM so management can access data about employee-related costs and employee skills and knowledge. PAYROLL CYCLE ACTIVITIES • • • • • The payroll application is processed in batch mode because pay checks are issued periodically, and most employees are paid at the same time. There are seven basic activities in the payroll process. Activity 1: Update payroll master file—The HRM department provides information on new hires, terminations, changes in pay rates, and changes in discretionary withholdings. Appropriate edit checks, such as validity checks on employee number and reasonableness tests are applied to all change transactions. Changes must be entered in a timely manner and reflected in the next pay period. Records of terminated employees should not be deleted immediately as some year-end reports (e.g., W-2s) require data on compensation for all employees during the year. Activity 2: Update tax rates and deductions—The payroll department receives notification of changes in tax rates and other payroll deductions from government agencies, insurers, unions, etc. These changes occur periodically. Activity 3: Validate time and attendance data--Information on time and attendance comes in various forms depending on the employee’s pay scheme. Some employees are paid on an hourly basis. Many companies use a time card to record their arrival and departure time. Some use electronic • • • • • • • • • • • • time clocks, where employees swipe their badge through a reader when they come and go. Manufacturing companies may use job time tickets to record not only time present but also time dedicated to each job. Some employees earn a fixed salary, e.g., managers and professional staff. These employees usually don’t record their time, but supervisors informally monitor their presence. Professionals in accounting, law, and consulting firms must track their time on various assignments to accurately bill clients. Sales staff are often paid on a straight commission or base salary plus commission. Some may also receive bonuses for surpassing sales targets. Requires careful recording of their sales. Increasingly, labourers may be paid partly on productivity. Some management and employees may receive stock to motivate them to cut costs and improve service. The payroll system needs to link to the revenue cycle and other cycles to calculate these payments. It’s also important to design bonus schemes with realistic, attainable goals that can be measured, are congruent with corporate objectives, are monitored by management for continued appropriateness, and are legal. Recent corporate scandals have led to scrutiny and criticism of executive compensation plans. Compensation boards are being created to design compensation plans, rather than having executives create their own. Accountants can help by advising on financial and tax effects of proposals; identifying appropriate metrics to measure performance; enabling compliance with legal and regulatory requirements; and suggesting appropriate public disclosures. IT can help by collecting time and attendance data electronically, e.g., badge readers, electronic time clocks, data entered on terminals, touch-tone telephone logs, and using edit checks to verify accuracy and reasonableness when the data are entered. Activity 4: Prepare payroll--The employee’s department provides data about hours worked. A supervisor confirms the data. Pay rate information is obtained from the payroll master file. The payroll transaction file is sorted by employee number (same sequence as master file). For each transaction, the payroll master file is read for pay rates, etc., and gross pay is calculated. Payroll deductions are summed and subtracted from gross pay to obtain net pay. Year-to-date totals for gross pay, deductions, and net pay are calculated, and the master file is updated. Pay checks are printed for employees, often accompanied by an earnings statement, which lists pay detail, current and year-to-date. A payroll register is produced, which lists each employee’s gross pay, deductions, and net pay in a multi-column format. The payroll register is used to authorize the transfer of funds to the company’s payroll bank account. As payroll transactions are processed, labour costs are accumulated by general ledger accounts based on codes on the job time tickets. The totals for each account are used as the basis for a summary journal entry to be posted to the general ledger. Other payroll reports and government reports are produced. Activity 5: Disburse payroll-- Most employees are paid either by check or direct deposit. Cash payments may still be made, but this approach does not provide good documentation. When pay checks have been prepared, the payroll register is sent to accounts payable for review and approval. A disbursement voucher is prepared to authorize transfer of funds from checking to the payroll bank account. For control purposes, checks should not be drawn on the company’s regular bank account. The approved disbursement voucher and payroll register are sent to the cashier, who reviews the documents; prepares and signs the payroll check to transfer the funds; reviews, signs, and distributes employee pay checks; re-deposits unclaimed checks in the company’s bank account; sends a list of these pay checks to internal audit for investigation; returns the payroll register to the payroll department, where it is filed with time cards and job time tickets; and sends the disbursement voucher to the accounting clerk to update the general ledger. Direct deposit can improve efficiency and reduce costs of payroll processing. Activity 6: Calculate employer-paid benefits and taxes--The employer pays some payroll taxes and employee benefits directly. The employer withholds federal and state taxes from employee pay check, along with Medicare tax, and the employee’s share of Social Security. The employer may • • also withhold voluntary deductions such as union dues, United Way contributions, credit union savings, retirement contributions, etc. In addition, the employer pays federal and state unemployment taxes; a matching amount of Social Security; and the employer share of health, disability, life insurance premiums, and pension contributions. Some companies offer flexible benefit plans, sometimes called cafeteria-style benefit plans, that offer a menu of options. Providing employees access to payroll/HRM information through a company intranet can help reduce costs. Activity 7: Disburse payroll taxes and miscellaneous deductions-- The company must periodically prepare checks or EFT to pay tax and other liabilities. OUTSOURCING OPTIONS • Many entities outsource payroll and HRM to payroll service bureaus that maintain the payroll master file and perform payroll processing activities or to professional employer organizations (PEOs) that perform the services of the payroll service bureau and also administer and design employee benefit plans. Outsourcing is especially attractive to small and mid-size businesses but must be monitored carefully. CONTROL OBJECTIVES, THREATS, AND PROCEDURES • In the HRM/payroll cycle (or any cycle), a well-designed AIS should provide adequate controls to ensure that the following objectives are met: (1) all transactions are properly authorized; (2) all recorded transactions are valid; (3) all valid and authorized transactions are recorded; (4) all transactions are recorded accurately; (5) assets are safeguarded from loss or theft; (6) business activities are performed efficiently and effectively; (7) the company is in compliance with all applicable laws and regulations; and (8) all disclosures are full and fair. THREATS IN EMPLOYMENT PRACTICES • • • Main objective: Effectively hire, retain, and dismiss employees. Threat No. 1—Hiring Unqualified or Larcenous Employees – Controls: Specify job skills required; make candidates accountable for inaccurate information; perform background checks; verify skills and references. Threat No. 2—Violation of Employment Law – Controls: Document all employment actions; train employees to keep them abreast of legal requirements. THREATS IN PAYROLL PROCESS • • • • Main objective: Efficiently and effectively compensate employees for services provided. Threat No. 3—Unauthorized Changes to the Payroll Master File – Controls: Proper segregation of duties; independent review of changes to the file; logical and physical access restrictions. Threat No. 4—Inaccurate Time Data – Controls: Automated recording of time; input edit routines; segregation of duties; reconciliation of time clock data to job time tickets by an independent party; and supervisory approval of time sheets. Threat No. 5—Inaccurate Processing of Payroll – • Controls: Batch totals, cross-footing of payroll register; use of payroll clearing account; review of worker classification. Threat No. 6—Theft or Fraudulent Distribution of Paychecks – Controls: Sequentially number checks; restrict access to checks and check-signing devices; sign checks only with proper documentation; use an imprest payroll account; independent reconciliation of the payroll account; segregation of duties; surprise observations of check distribution; re-deposit of unclaimed checks. GENERAL THREATS • • Threat No. 7—Loss, Alteration, or Unauthorized Disclosure of Data – Controls: Offsite backups of files; external and internal file labels; logical and physical access controls; modification of default ERP settings; encryption; VPNs; message acknowledgment techniques. Threat No. 8—Poor Performance – Controls: Performance reports. KEY DECISIONS AND INFORMATION NEEDS • The payroll system should be integrated with cost data and HR information so management can make decisions with respect to the following types of issues: (1) future work force staffing needs; (2) employee performance; (3) employee morale; and (4) payroll processing efficiency and effectiveness. SUMMARY OF MATERIAL COVERED • • • • • Basic business activities and data processing operations that are performed in the HRM/payroll cycle, including recruiting, hiring, training, assigning, compensating, evaluating, and discharging employees. Key procedures in payroll processing. How IT can improve the efficiency and effectiveness of these processes Decisions that need to be made in the HRM/payroll cycle and what information is required to make these decisions. Major threats that present themselves in the HRM/payroll cycle and the controls that can be instigated to mitigate those threats PRODUCTION CYCLE It is a recurring set of a business activities and related data processing operations associated with the manufacturing of the products. The activities are grouped into four 1. Product design -The objectives of this activity is to design the product that meets the customers requirement in terms of quality, durability and functionality while minimizing the product costs. How can accountants be involved in the product design -By showing how various design trade offs affect production cost and there by the profitability. -By ensuring that AIS is designed to collect and provide information about the machine set up and materials handling cost associated with alternative product design. -By providing data about repair and warranty cost associated with existing products. 2. Planning and Scheduling Objectives make the production planning efficient enough to meet the existing orders and anticipate short-term demand without creating excess finished goods and inventory .The methods used are; a) Manufacturing resource Planning MRP-II b) JIT production systems NB MRP-II is an extension of material / resource planning that seeks to match existing production capacity and raw material mix with forecasted sales demand. JIT aims at minimising inventory materials or wip and finished goods. How can accountants be involved in planning and scheduling: -By ensuring that accountants collect and reports the cost in a manner consistent with the production planning techniques used by the company – by helping to choose whether it is MRP II or JIT is more appropriate to the company. Documentation in planning scheduling I) II) III) 3 Master production schedule – is specifies how much of each product is to be produced during the planning period and when that production should occur. Material requisition - it authorises removal of materials from the store room to the factory. Subsequent transfer of material which is documented by the movement tickets. Actual manufacturing of the product -The manner in which this activity is accomplished varies greatly across companies .Many companies’s use computer integrated manufacturing which entails the use of various forms of IT in the production process such as robots and computer controlled machinery to reduce production costs. -Every firm needs to collect the data about the following matters of its production operation.. I) The raw materials used in production of products ii) The labour hour spent in production operation. iii) Machine operation performed. iv) 4 Manufacturing overhead cost incurred in the processes. Cost accounting -The main objective of such a system involve: i) To provide information for planning, controlling and evaluating of production operation. ii) To provide accurate cost data about the products for use in pricing and product mix decision. iii) To collect and process the information used to calculate the inventory and costs of goods sold values. Control objectives of production cycle -A well designed accounting information system is to provide adequate controls to ensure the following objectives are met. 1) All production fixed asset acquisition are properly authorised. 2) The work in progress, inventory and fixed assets are safeguarded from misuse. 3) All valid and authorised production transactions are recorded accurately. 4) Production activities are performed efficiently and effectively. Threats to production cycle 1) Unauthorised transactions related to the production. 2) The ft or destruction of inventories and fixed assets. 3) Inefficiencies and quality control problems in production. Control procedures / remedy 1) 2) 3) 4) 5) 6) 7) Accurate sales forecasts and inventory level. Authorization of production of goods. Review and approval of capital assets expenditure. Documentation of all internal movements of inventory. Proper segregation of duties amongst the personnel. Regular performance reports produced for analysis. Quality control measurement done on regular basis. General Ledger and Reporting System cycle General ledger and reporting activities -Updating the journal / ledger. -Posting the adjusting entries in the ledgers. -Preparing financial statements -Production of managerial reports. a) Updating the journal/ ledgers -Updating consist of posting the journal entities that originated from account subs-systems or the treasurer. b) Posting the various adjusting entities to the ledgers . -The adjustment entries originates from the controller’s office after the initial trial balance has been prepared. The 5 groups of adjusting entities will involve: 1) 2) 3) 4) 5) Accruals (wages payable) Prepayments (deferrals) rent, interest, insurance. Estimation (depreciation, provision) doubtful debts. Revaluation (change in inventory valuation) depreciation rates / policy). Correction made in the ledgers. c) Preparation of Financial Statement-include income statement and statement of financial position. d) Production of various managerial reports -The reports prepared involve the general ledger control account and budgets. -Examples of control reports will involve list of journal entries or vouchers by numerical sequence, list of general ledger account balances. -Examples of budgets prepared include operating and capital expenditure budget. NB Budgets are performance reports that should be developed of the basis of responsibility accounting which involves reporting financial results on the basis of managerial responsibilities within an organization. Control objectives of general ledgers 1) 2) 3) 4) 5) Updates to the journal / ledger are properly authorised. Recorded general transactions are valid genuine recorded. Valid and authorised general ledger transactions are recorded accurately. General ledger data are safeguarded from theft / destruction. General ledger system activities are performed efficiently. Threats to the General ledger a) Errors in updating of the general ledger – Errors made in updating of the general ledger can lead to poor decision making based on erroneous information in financial performance reports. The control procedures to be used will include: i) Input edit and controls. ii) Reconciliation and control reports prepared regularly. iii) Maintenance of adequate audit trial. b) Unauthorised access to the general ledger - It can result into confidential data leakage to the competitors, or corruption of the data in general ledger. It can also provide a means of hiding the theft of assets. The controls include: i) ii) iii) Use of passwords / secret codes by employees. Read only access to the general ledger. Systems checks of authorization codes for each journal / voucher record before posting. c) Loss /destruction of the general ledger – Adequate backups and disastel recovery procedures must be in place to protect the general ledger backup control will include: i) The use of internal / external file labels. ii) Performance of regular backup of the general ledger details. DATABASE MANAGEMENT INFORMATION SYSTEM Database is a collection of related data and data is a collection of facts and figures that can be processed to produce information. Mostly data represents recordable facts. Data aids in producing information, which is based on facts. For example, if we have data about marks obtained by all students, we can then conclude about toppers and average marks. A database management system stores data in such a way that it becomes easier to retrieve, manipulate, and produce information. Characteristics Traditionally, data was organized in file formats. DBMS was a new concept then, and all the research was done to make it overcome the deficiencies in traditional style of data management. A modern DBMS has the following characteristics: 1. Real-world entity: A modern DBMS is more realistic and uses real-world entities to design its architecture. It uses the behavior and attributes too. For example, a school database may use students as an entity and their age as an attribute. 2. Relation-based tables: DBMS allows entities and relations among them to form tables. A user can understand the architecture of a database just by looking at the table names. 3. Isolation of data and application: A database system is entirely different than its data. A database is an active entity, whereas data is said to be passive, on which the database works and organizes. DBMS also stores metadata, which is data about data, to ease its own process. 4. Less redundancy: DBMS follows the rules of normalization, which splits a relation when any of its attributes is having redundancy in values. Normalization is a mathematically rich and scientific process that reduces data redundancy. 5. Consistency: Consistency is a state where every relation in a database remains consistent. There exist methods and techniques, which can detect attempt of leaving database in inconsistent state. A DBMS can provide greater consistency as compared to earlier forms of data storing applications like file-processing systems. 6. Query Language: DBMS is equipped with query language, which makes it more efficient to retrieve and manipulate data. A user can apply as many and as different filtering options as required to retrieve a set of data. Traditionally it was not possible where file-processing system was used. 7. ACID Properties: DBMS follows the concepts of Atomicity, Consistency, Isolation, and Durability (normally shortened as ACID). These concepts are applied on transactions, which manipulate data in a database. ACID properties help the database stay healthy in multi-transactional environments and in case of failure. 8. Multiuser and Concurrent Access: DBMS supports multi-user environment and allows them to access and manipulate data in parallel. Though there are restrictions on transactions when users attempt to handle the same data item, but users are always unaware of them. 9. Multiple views: DBMS offers multiple views for different users. A user who is in the Sales department will have a different view of database than a person working in the Production department. This feature enables the users to have a concentrate view of the database according to their requirements. 10.Security: Features like multiple views offer security to some extent where users are unable to access data of other users and departments. DBMS offers methods to impose constraints while entering data into the database and retrieving the same at a later stage. DBMS offers many different levels of security features, which enables multiple users to have different views with different features. For example, a user in the Sales department cannot see the data that belongs to the Purchase department. Additionally, it can also be managed how much data of the Sales department should be displayed to the user. Since a DBMS is not saved on the disk as traditional file systems, it is very hard for miscreants to break the code. Users of database management system Users A typical DBMS has users with different rights and permissions who use it for different purposes. Some users retrieve data and some back it up. The users of a DBMS can be broadly categorized as follows: 1. Administrators: Administrators maintain the DBMS and are responsible for administrating the database. They are responsible to look after its usage and by whom it should be used. They create access profiles for users and apply limitations to maintain isolation and force security. Administrators also look after DBMS resources like system license, required tools, and other software and hardware related maintenance. 2. Designers: Designers are the group of people who actually work on the designing part of the database. They keep a close watch on what data should be kept and in what format. They identify and design the whole set of entities, relations, constraints, and views. 3. End Users: End users are those who actually reap the benefits of having a DBMS. End users can range from simple viewers who pay attention to the logs or market rates to sophisticated users such as business analysts. DBMS FUNCTIONS There are several functions that a DBMS performs to ensure data integrity and consistency of data in the database. The ten functions in the DBMS are: data dictionary management, data storage management, data transformation and presentation, security management, multiuser access control, backup and recovery management, data integrity management, database access languages and application programming interfaces, database communication interfaces, and transaction management. 1. Data Dictionary Management Data Dictionary is where the DBMS stores definitions of the data elements and their relationships (metadata). The DBMS uses this function to look up the required data component structures and relationships. When programs access data in a database they are basically going through the DBMS. This function removes structural and data dependency and provides the user with data abstraction. In turn, this makes things a lot easier on the end user. The Data Dictionary is often hidden from the user and is used by Database Administrators and Programmers. 2. Data Storage Management This particular function is used for the storage of data and any related data entry forms or screen definitions, report definitions, data validation rules, procedural code, and structures that can handle video and picture formats. Users do not need to know how data is stored or manipulated. Also involved with this structure is a term called performance tuning that relates to a database’s efficiency in relation to storage and access speed. 3. Data Transformation and Presentation This function exists to transform any data entered into required data structures. By using the data transformation and presentation function the DBMS can determine the difference between logical and physical data formats. 4. Security Management This is one of the most important functions in the DBMS. Security management sets rules that determine specific users that are allowed to access the database. Users are given a username and password or sometimes through biometric authentication (such as a fingerprint or retina scan) but these types of authentication tend to be more costly. This function also sets restraints on what specific data any user can see or manage. 5. Multiuser Access Control Data integrity and data consistency are the basis of this function. Multiuser access control is a very useful tool in a DBMS, it enables multiple users to access the database simultaneously without affecting the integrity of the database. 6. Backup and Recovery Management Backup and recovery is brought to mind whenever there is potential outside threats to a database. For example if there is a power outage, recovery management is how long it takes to recover the database after the outage. Backup management refers to the data safety and integrity; for example backing up all your mp3 files on a disk. 7. Data Integrity Management The DBMS enforces these rules to reduce things such as data redundancy, which is when data is stored in more than one place unnecessarily, and maximizing data consistency, making sure database is returning correct/same answer each time for same question asked. 8. Database Access Languages and Application Programming Interfaces A query language is a nonprocedural language. An example of this is SQL (structured query language). SQL is the most common query language supported by the majority of DBMS vendors. The use of this language makes it easy for user to specify what they want done without the headache of explaining how to specifically do it. 9. Database Communication Interfaces This refers to how a DBMS can accept different end user requests through different network environments. An example of this can be easily related to the internet. A DBMS can provide access to the database using the Internet through Web Browsers (Mozilla Firefox, Internet Explorer, Netscape). 10. Transaction Management This refers to how a DBMS must supply a method that will guarantee that all the updates in a given transaction are made or not made.All transactions must follow what is called the ACID properties.