22

:5
: 13 Continue CHAPTR (2)

The Data Processing Cycle TRANSACTION PROCESSING:

An important function of the AIS is to efficiently and effectively process the data about a
company’s transactions. The operations performed on data to generate meaningful and
relevant information are referred to collectively as the data processing cycle.
• The data processing cycle consists of four steps:
– Data input
– Data storage
– Data processing
– Information output

The first step in data processing is to capture the data. Usually triggered by a business
activity. Data is captured about: ( event , resources , agents.)
:

Are company Devices capture By providing Prenumberin EXAMPLE:

output sent to transaction instructions or g simplifies Check for
an external data in prompts about what verifying inventory
party, who machine- that all availability
data to collect, using
often adds data readable form transactions before
to the at the time and checkoff boxes or have been completing an
document, and place of their pull-down menus to recorded and online sales
then are origin. EX: present the available that none of transaction.
returned to the (ATMs for options. the
company as an banking, Point- documents
input of-sale (POS) has been
document. scanners in misplaced
retail stores.)
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Data needs to be organized for easy and efficient access. Let’s start with some vocabulary
terms and concepts with respect to data storage

is a file used to store cumulative information about resources and agents. We typically use the
word ledger to describe the set of t-accounts.

The general ledger The subsidiary ledgers

the summary level information for all contain the detail accounts associated
accounts. often called a “control” account. with the related general ledger account.

• Control account - A title given to a general ledger account that summarizes the total
amounts recorded in a subsidiary ledger.
• The relationship between the general ledger control account and the total of individual
subsidiary ledger account balances helps maintain the accuracy of AIS data.AS The sum
of the subsidiary account balances should equal the balance in the control account

Data in ledgers is organized logically using coding techniques. Coding is a method of

systematically assigning numbers or letters to data items to help classify and organize them.
There are many types of codes including:
1. sequence codes, (such as checks or invoices) are numbered consecutively to ensure no
gaps in the sequence. The numbering helps ensure that: All items are accounted for, there
are no duplicated numbers.
2. block codes blocks of numbers within a numerical sequence are reserved for a particular
category. EXAMPLE: A company reserved the following numbers for major product categories:

3. group codes are used, two or more subgroups of digits are used to code an item.

EXAMPLE: If a company uses a seven-digit product code number, the group coding technique might be applied
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The chart of accounts is a list of all general ledger accounts an organization uses.
Group coding is often used for these numbers, e.g.:
1. The first section identifies the major account categories, such as asset, liability, revenue.

2. The second section identifies the primary sub-account, such as current asset or long-term investment.

3. The third section identifies the specific account, such as accounts receivable or inventory.

4. The fourth section identifies the subsidiary account, e.g., the specific customer code for an account receivable.

In manual systems and some accounting packages, the first place that transactions are entered
is the journal.

A general journal is used to record: A special journal is used to record

routine transactions. The most common
• Non-routine transactions, such as loan
payments
special journals are:

• Summaries of routine transactions • Cash receipts Cash disbursements

• Adjusting entries Closing entries • Credit sales Credit purchases

• An audit trail exists when there is sufficient documentation to allow the tracing of a
transaction from beginning to end or from the end back to the beginning.
• The inclusion of posting references and document numbers enable the tracing of
transactions through the journals and ledgers and therefore facilitate the audit trail
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-
is something about which information is stored.
are characteristics of interest with respect to the entity.
is the physical space where an attribute is stored.
is the set of attributes stored for a particular instance of an entity.
is the intersection of the row and column.
is a group of related records

• A master file is a file that stores • A transaction file is a file that contains
cumulative information about an records of individual transactions
organization’s entities (similar to a (events) that occur during a fiscal
ledger in a manual AIS) period.( similar to a journal in a manual AIS)
• The file is permanent. and file • The files are temporary and are usually
exists across fiscal periods maintained for one fiscal period

is a set of interrelated, centrally-coordinated files.

There are four different types of file processing : Updating data to record the occurrence
of an event, Changing data, Adding data, Deleting data.
• Updating can be done through several approaches:
Batch processing

• Source documents are grouped into batches, and control totals are calculated.
• Periodically, the batches are entered into the computer system, edited, sorted,
and stored in a temporary file.
• The temporary transaction file is run against the master file to update the master
file.
• Output is printed or displayed, along with error reports, transaction reports, and
control totals.
Online, real-time processing

• Transactions are entered into a computer system as they occur.

• The master file is immediately updated with the data from the transaction.
• Output is printed or displayed
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The final step in the data processing cycle is information output.

output can be in the form of:
are records of transactions or other company data. (Operational documents)
are used by employees to control operational activities and by managers to make
decisions and design strategies.
Organizations should periodically reassess whether each report is needed
are user requests for specific pieces of information.

Output can serve a variety of purposes:

– Financial statements can be provided to both external and internal parties
– Some outputs are specifically for internal use: (planning , management of day-to-
day operations, control , evaluation purposes)
Management by exception is an approach to utilizing performance reports that focuses on
investigating and acting on only those variances that are significant.

Enterprise resource planning (ERP)

➢ The traditional AIS captured financial data. Non-financial data was captured in other,
sometimes-redundant systems Unfortunately, the existence of multiple systems
creates numerous problems and inefficiencies such as redundancy across systems and
discrepancies if data are changed in one system but not in others. In addition, it is
difficult to integrate data from the various systems.
➢ Enterprise resource planning (ERP) systems overcome these problems as they integrate
all aspects of a company’s operations (including both financial and non-financial
information) with the traditional functions of an AIS.
➢ An ERP system - A system that integrates all aspects of an organization’s activities—such
as accounting, finance, marketing, human resources, manufacturing, inventory
management- into one system.
➢ An ERP system is modularized; companies can purchase the individual modules that
meet their specific needs.
➢ An ERP facilitates information flow among the company’s various business functions
and manages communications with outside stakeholders.
➢ ERP systems are modular, with each module using best business practices to automate
a standard business process. This modular design allows businesses to add or delete
modules as needed. Typical ERP modules include:
o Financial (general ledger and reporting system ). Human resources and payroll.
o Order to cash (revenue cycle ) Purchase to pay (disbursement cycle ).
o Manufacturing (production cycle) Project management
o Customer relationship management System tools
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➢ An ERP provides an integrated, enterprise-wide, single view of the organization’s data
and financial situation.
➢ Data input is captured or keyed once, rather than multiple times, as it is entered into
different systems.
➢ Management gains greater visibility into every area of the enterprise and greater
monitoring capabilities.
➢ Employees are more productive and efficient because they can quickly gather data from
both inside and outside their own department.
➢ The organization gains better access control. An ERP can consolidate multiple
permissions and security models into a single data access structure.
➢ Customer service improves because employees can quickly access orders, available
inventory, shipping information, and past customer transaction details.
➢ Manufacturing plants receive new orders in real time, and the automation of
manufacturing processes leads to increased productivity.

➢ Cost. ERP hardware, software, and consulting

➢ Amount of time required. It can take years to select and fully implement an ERP
system, depending on business size, number of modules to be implemented,
➢ Changes to business processes. Unless a company wants to spend time and money
customizing modules, they must adapt to standardized business processes as opposed
to adapting the ERP package to existing company processes.
➢ Complexity. This comes from integrating many different business activities and systems,
each having different processes, business rules, data semantics, authorization
hierarchies, and decision centers.
➢ ● Resistance.
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Return On Capital Employed ROCE:

➢ Measures return on long term funds raised by the entity (from both creditors and owners).
➢ Shows the ability of the entity to turn its long-term financing into profit.
➢ The ratio also shows how efficiently a business is using its resources.
➢ If The return is very low, the business may be better off releasing its assets And investing the
proceeds in a high interest bank account!
➢ Furthermore, a low return can easily become a loss if the business Suffers a downturn
ROCE is calculated as follows:
Profit
= Capital employed × 100%

= Profit margin × Asset turnover

Profit Sales

Sales Capital employed

Profit margin is often seen as an indication
Asset turnover is often seen as a
of the quality of products or services
measure of how intensively the
supplied (top-of-range products usually
assets are worked. (Efficiency)
have higher margins). (Profitability)
Profit is measured as Operating profit, ( The profit before interest and taxation (PBIT)
Capital employed
(Equity +. The long-term liabilities ), or ( Total assets - current liabilities).
= working capital +long term Assets
Note working capital = current Assets - current liabilities
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Example (1)

Required Compute:
Profit Margin, Asset Turnover, and ROCE

2015
PBIT 5000 Sales 24,000
Profit Margin= = 20.8% Asset Turnover = =1
Sales 24,000 Capital (16,200 + 8,000)
ROCE (2015) = 20.8% × 1 = 20.8%
2016

PBIT 5000 Sales 27,000

Profit Margin= = 18.5% Asset Turnover = = 0.9
Sales 27,000 Capital (19,100 + 11,000)
ROCE (2016) = 18.5% × 0.9 = 16.65%
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Example (2)
The following data are given for ABC co. on Dec. 31, 2019:
Current Assets (except cash) = 220,000 Cash = 40,000

Current Liabilities = 120,000 Fixed Assets = 260,000

Sales Revenue = 1,000,000 COGS 70% of sales revenue

General & administrative expenses = 25% of sales revenue

Required: Compute Profit Margin, Asset Turnover, and ROCE?

➢ PBIT
sales 1000,000
- COGS 70% =(1000,000 × 0.70) (700,00)
- G& A expenses = 25% =(1000,000 × 0.25) (250,000)
Profit 50,000

➢ capital employed = Total assets - Current Liabilities

=(40,000 +220,000 + 260,000 )– 120,000 = 400,000

PBIT 50,000 Sales 24,000

Profit Margin= = 5% Asset Turnover = =1
Sales 1000,000 Capital (16,200 + 8,000)
ROCE = Profit margin × Asset turnover
= 5% × 2.5 = 12.5 %
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1- Businesses usually use some type of documents in the data input step of the data
processing cycle. Documents that are sent to customers or suppliers and then sent back to
the organization in the course of a business transaction are known as
A) turnaround documents. B) source documents.
C) source data automation. D) rubber or bounce-back documents.
2- What is a primary example of source data automation?
A) a utility bill B) POS (point-of-sale) scanners in retail stores
C) a bill of lading D) a subsidiary ledger
3- Pre-numbering of source documents helps to verify that
a) all transactions have been recorded since the numerical sequence serves as a control.
b) no inventory has been misplaced.
c) documents have been used in order.
d) all cash has been collected.
4- Source documents generally help to improve accuracy in transaction processing because
a. they specify which information to collect due to their structure.
b. standard information is preprinted on the document.
c. they provide directions and steps for completing the form.
d. All of the above are correct.
5- When the sum of all entries in the subsidiary ledger equals the amount in the
corresponding general ledger account, it is assumed that (select all that apply)
a) the recording and posting processes are accurate.
b) all of the transaction cycles have been completed.
c) since the ledgers are in balance, adjusting entries are not required.
d) no errors exist in the subsidiary ledger and corresponding general ledger account.
6- The general ledger account that corresponds to a subsidiary ledger account is known as a
A) dependent account. B) attribute account.
C) entity account. D) control account.
7- The systematic assignment of numbers or letters to items to classify and organize them is
known as
A) coding B) chart of accounts
C) data input D) pre-numbered documents
8- Pre-numbered checks, invoices and purchase orders are examples of
A) sequence codes B) block codes
C) group codes D) hierarchical codes
9- A chart of accounts is an example of (select all that apply)
A) sequence codes B) block codes
C) group codes D) hierarchical codes
10- Inventory items are often coded with these
A) sequence codes B) block codes
C) group codes D) hierarchical codes
11- A listing of general ledger accounts by account number is called the
A) chart of accounts. B) listing of accounts.
C) trial balance. D) subsidiary accounts.
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12- Regarding codes, which of the following is false?
a) The code should be consistent with its intended use.
b) Codes should allow for growth in the number of items to be coded.
c) Coding systems should be as simple as possible.
d) Coding systems need not be consistent across divisions of an organization.
13- To be effective, the chart of accounts must
a) be as concise as possible.
b) contain only five account categories.
c) limit account codes to 10 digits or less.
d) contain sufficient detail to meet the information needs of the specific organization's AIS.
14- The chart of accounts for a manufacturing corporation would include
A) retained earnings. B) common stock.
C) raw materials inventory. D) all of the above
15- The chart of accounts of a corporate retail bookstore would probably include
A) work-in-process inventory. B) a drawing account.
C) retained earnings. D) both A and C
16- In a chart of accounts using three digits for each account, each numeric digit has
meaning to users of the AIS. For example, a numeric digit may represent either a major
category of accounts, a primary financial subaccount within each category, or a specific
account into which transaction data will be posted. Using this example, which digit position
would best represent a primary financial subaccount within an account category?
A) first B) second
C) third D) fourth
17- In transaction processing, generally which activity comes first?
A) recording data in a journal B) posting items to special journals
C) capturing data on source documents D) posting data to a ledger
18- The efficiency of recording numerous business transactions can be best improved by the
use of
A) prenumbered source documents. B) specialized journals.
C) posting references. D) segregation of duties.
19- A general journal
a) is used to record infrequent or non-routine transactions.
b) simplifies the process of recording large numbers of repetitive transactions.
c) records all detailed data for any general ledger account that has individual sub-accounts.
d) contains summary-level data for every account of the organization.
20- The general ledger
a) is used to record infrequent or non-routine transactions.
b) simplifies the process of recoding large numbers of repetitive transactions.
c) records all detailed data for any general ledger account that has individual sub-accounts.
d) contains summary-level data for every account of the organization.
21- A subsidiary ledger
a) is used to record infrequent or non-routine transactions.
b) simplifies the process of recoding large numbers of repetitive transactions.
c) records all detailed data for any general ledger account that has individual sub-accounts.
d) contains summary-level data for every account of the organization.
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22- A specialized journal
a) is used to record infrequent or non-routine transactions.
b) simplifies the process of recording large numbers of repetitive transactions.
c) records all detailed data for any general ledger account that has individual sub-accounts.
d) contains summary-level data for every account of the organization.
23- An audit trail
a) provides the means to check the accuracy and validity of ledger postings.
b) is provided by the ledger and the general journal.
c) is automatically created in every computer-based information system.
d) is a characteristic of interest.
24- Something about which information is stored is
A) attribute B) database
C) entity D) record
25- Characteristics of interest that need to be stored are
A) attribute B) database
C) entity D) record
26- Computers store data by organizing smaller units of data into larger units, which have
meaning to users. Data values that are stored in a physical space are called a
A) field. B) record.
C) file. D) database.
27- Related records grouped together form a(n)
A) field. B) entity.
C) file. D) database.
28- The set of fields that contain data about various attributes of the same entity forms a
A) entity B) record.
C) file. D) database.
29- Which of the following is conceptually similar to a journal in a manual AIS?
A) database B) master file
C) record D) transaction file
30- Which of the following is not one of the four types of file processing?
A) changing B) updating
C) deleting D) altering
31- Periodic updating of the data stored about resources and agents is
A) On-line processing B) real-time processing
C) batch processing D) data processing
32- Concerning processing, which of the following statements is true?
a) Batch processing ensures that stored information is always current.
b) Batch input is more accurate than on-line data entry.
c) On-line batch processing is a combination of real-time and batch processing.
d) Batch processing is almost never used.
33- The coding method used for checks and receipts is called a
A) group code. B) block code.
C) data code. D) sequence code.
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Exercise (1):
If total assets = 500,000 EGP of which 60% are fixed assets, current liabilities = half current
assets, sales = 500,000, COGS and selling & administrative expenses represent 50% and 30%
of sales respectively.
Required
1) Calculate the ROCE
2) If the company's goal is to achieve a ROCE of 40%, what is the efficiency rate in achieving
the goal
Exercise (2):

If current assets exceed current liabilities by 140,000 EGP, and fixed assets = 360,000 EGP,
and PBIT is 100,000 EGP (10% of sales).
Required
Calculate the asset turnover and the ROCE
Exercise (3):
If profit margin is 20%, PBIT = 200,000 EGP, fixed assets = 380,000, current assets =
150,000 and current liabilities 30,000.
Required:
Calculate working capital, capital employed, return on capital employed, asset turnover, and
the value of sales

Exercise (4): True or False

If sales = 1 million, profit margin is 20%, capital employed is 80% of sales, the return on
capital employed should be 16%?