END OF CHAPTER MATERIAL

CONCEPT CHECK

1. 1. When a company receives returned goods from a customer, the business process to accept the return would most likely be a(n)
   1. administrative process
   2. conversion process
   3. expenditure process
   4. revenue process
2. 2. Which of the following is least likely to be an output of the accounting information system?
   1. A check
   2. A report
   3. An invoice
   4. A bar code
3. 3. Which of the following is not true of the supply chain?
   1. The supply chain includes vendors.
   2. The supply chain excludes customers.
   3. The supply chain includes information flows.
   4. The supply chain includes secondary suppliers.
4. 4. Which of the following is not an objective of IT enablement?
   1. Increased accuracy of data
   2. Reduced cost
   3. Reduced security problems
   4. Increased efficiency
5. 5. The correct order of the computer data hierarchy is
   1. byte, bit, record, field, file, database
   2. bit, byte, record, field, file, database
   3. bit, byte, field, record, file, database
   4. bit, byte, field, record, database, file
6. 6. The process of searching for identifiable patterns in data is called
   1. sequential processing
   2. data warehousing
   3. data mining
   4. real-time processing
7. 7. An IT enabled system for purchasing that is an “invoice-less” system is called a(n)
   1. automated matching system
   2. evaluated receipt settlement
   3. e-payables
   4. point of sale system
8. 8. The COSO report written for the purpose of assisting managers in the challenge of managing risk in their organizations is entitled
   1. “Internal Controls—Integrated Framework”
   2. “Enterprise Risk Management—Integrated Framework”
   3. “Corporate Governance Guidance”
   4. “IT Governance Guidance”
9. 9. Accountants have some form of use of the AIS in all but which role?
   1. User
   2. Programmer
   3. Auditor
   4. Designer
10. 10. Which of the following is not true of unethical behavior?
    1. The only category of unethical behavior for accountants is inflating revenue.
    2. Accountants are often pressured to help commit or cover up unethical behavior.
    3. Hacking is an unethical behavior that accountants should be concerned about.
    4. An accounting information system can be used to cover up unethical behavior.

DISCUSSION QUESTIONS

1. 11. (SO 1) How might the sales and cash collection processes at a Wal-Mart store differ from the sales and cash collection processes at McDonald's?
2. 12. (SO 1) Can you think of any procedures in place at McDonald's that are intended to ensure the accuracy of your order?
3. 13. (SO 1) How might the sales and cash collection process at Boeing Co. (maker of commercial passenger jets) differ from the sales and cash collection processes at McDonald's?
4. 14. (SO 1) Are there business processes that do not in some way affect accounting records or financial statements?
5. 15. (SO 2) Briefly describe the five components of an accounting information system.
6. 16. (SO 2) Describe how sales data are captured and recorded at a restaurant such as Applebee's.
7. 17. (SO 2) What occurs in an accounting information system that classifies accounting transactions?
8. 18. (SO 2) What are the differences between internal reports and external reports generated by the accounting information system?
9. 19. (SO 3) What types of businesses are in the supply chain of an automobile manufacturer?
10. 20. (SO 3) When a company evaluates a supplier of materials, what kinds of characteristics might be evaluated?
11. 21. (SO 3) How do you think a company may be able to influence a supplier to meet its business processing requirements?
12. 22. (SO 4) Describe any IT enablement that you have noticed at a large retail store such as Wal-Mart or Target.
13. 23. (SO 4) How do you think the World Wide Web (WWW) has led to business process reengineering at companies such as Lands' End or J. Crew?
14. 24. (SO 4) What two kinds of efficiency improvements result from business process reengineering in conjunction with IT systems?
15. 25. (SO 5) Explain the differences between a field, a record, and a file.
16. 26. (SO 5) Explain why random access files would be preferable to sequential access files when payroll personnel are changing a pay rate for a single employee.
17. 27. (SO 5) Why do real-time systems require direct access files?
18. 28. (SO 5) Why is data contained in the data warehouse called nonvolatile?
19. 29. (SO 5) How is an extranet different from the Internet?
20. 30. (SO 6) Prepare a list of the types of businesses that you have been involved in that use point of sale systems.
21. 31. (SO 6) What do you think would be the advantages of an e-payables system over a traditional system that uses paper purchase orders and invoices?
22. 32. (SO 7) Describe why enterprise risk management is important.
23. 33. (SO 7) What is the difference between general controls and application controls?
24. 34. (SO 7) In what way is a code of ethics beneficial to an organization?
25. 35. (SO 8) What roles do accountants have in relation to the accounting information system?

BRIEF EXERCISES

1. 36. (SO 1) For each category of business processes (revenue, expenditure, conversion, administrative), give an example of a business process.
2. 37. (SO 2) Think of a company that you have worked for or with which you have done business. Which departments within the company need reports generated by the accounting information systems?
3. 38. (SO 3) Explain a supply chain linkage and give an example.
4. 39. (SO 4) Explain how business process reengineering occurs. Also, explain how it differs from the typical changes in company policies.
5. 40. (SO 5) For an accounts receivable system, what kind of data would be found in the master files and transaction files, respectively?
6. 41. (SO 5) Describe the differences in the following three types of processing:
   1. batch processing
   2. online processing
   3. real-time processing
7. 42. (SO 5) The networks discussed in this chapter were LANs, Internet, intranet, and extranet. Explain each.
8. 43. (SO 7) Give a brief summary of each of the following:
   1. enterprise risk management
   2. corporate governance
   3. IT governance
9. 44. (SO 9) Describe why accountants should be concerned about ethics.
10. 45. (SO 9) Kelli Droyer is currently pursuing her accounting degree at Bromfeld University. She has excelled in each of her major courses to date; however, she tends to struggle in her computer classes and with assignments requiring use of computer technology. Nevertheless, Kelli confidently claims that she will become an excellent accountant. Comment on the practical and ethical implications of her position.

PROBLEMS

1. 46. (SO 2) If an accounting information system were entirely a manual system (no computers used), explain how data would be captured, recorded, classified, summarized, and reported. Discuss how the sophistication of the company's computer system impacts the accounting output and, alternatively, how the requirements for accounting outputs impact the design of the accounting information systems.
2. 47. (SO 1,3) Classify each of the following as a revenue process, expenditure process, conversion process, or administrative process:
   1. Selling common stock to raise capital
   2. Purchasing electronic components to manufacture DVD players
   3. Moving electronic components from the stockroom to the production floor to begin making DVD players
   4. Paying employees at the end of a payroll period
   5. Preparing financial statements
   6. Receiving cash payments from customers
   7. Buying fixed assets
   8. Moving manufactured DVD players from the production floor to the warehouse
3. 48. (SO 1) Business processes are composed of three common stages: an initial event, a beginning, and an end. For items a. through h. listed in Problem 47, identify the applicable initial event, beginning, and end of the process.
4. 49. (SO 1,2,7) Each of the points listed next represents an internal control that may be implemented within a company's accounting information system to reduce various risks. For each point, identify the appropriate business process (revenue, expenditure, conversion, administrative). In addition, refer to the description of business processes under Study Objective 2 in this chapter, and identify the appropriate subprocess. (Some subprocesses may be used more than once, and others may not be used at all.)
   1. Customer credit must be authorized before a business transaction takes place.
   2. An authorized price list of goods for sale is provided.
   3. A shipping report is prepared for all shipments of goods so that customers may be billed in a timely manner.
   4. Access to personnel files and paycheck records is available only in accordance with management specifications.
   5. New vendors are required to be authorized before a business transaction takes place.
   6. Access to cash is restricted to those employees authorized by management.
   7. Costs of goods manufactured is properly summarized, classified, recorded, and reported.
   8. Amounts due to vendors are reconciled by comparing company records with statements received from the vendors.
   9. Employee wage rates and paycheck deductions must be authorized by management.
   10. Specific procedures such as the performance of a background check are carried out for all new employee hires.
   11. The purchasing manager is notified when stock levels are low so that items may be restocked to prevent backorders.
   12. Two signatures are required on checks for payments in excess of $5000.
   13. When excess cash is on hand, the funds are invested in short-term securities.
   14. Goods received are inspected, and any damaged or unmatched items are promptly communicated to the vendor.
   15. The monthly bank statement is reconciled to the company's cash records by an outside accountant.
5. 50. (SO 3) Using an Internet search engine, search for the terms “RFID” and “supply chain.” Put both of these terms in your search and be sure that “supply chain” is in quotation marks. Read some of the resulting websites you find and answer these questions:
   1. What is RFID?
   2. How is RFID related to the supply chain?
   3. How will RFID improve the accuracy of data from the supply chain?
6. 51. (SO 7) Go to the COSO website and locate the guidance on enterprise risk management. The executive summary of the article “Enterprise risk management—Integrated Framework” can be downloaded at no cost. Read the sections titled “Roles and Responsibilities” and “Use of this Report.” Describe the roles that various parties should play in enterprise risk management.
7. 52. (SO 9) Using an Internet search engine, search for the term (in quotations) “earnings management.” From the items you read, answer the following questions:
   1. Is earnings management always criminal?
   2. Is earnings management always unethical?
8. 53. (SO 9) Using an Internet search engine, search for “HealthSouth” and “fraud” or “Scrushy” (the name of the company's CEO). Explain the fraud that occurred at HealthSouth Corporation. What was the ultimate result of the prosecution of HealthSouth officials?

CASES

1. 54. The Gas-Up & Go Mart is a gas station and convenience market similar to any BP, Shell, or Speedway gas and convenience stores. Gas-Up & Go is a regional chain located in eastern Missouri, with 14 locations.

   Required:

   The section of this chapter identified as Learning Objective 2 describes five work steps, or processes, in the accounting information system. Based on your experience in using similar kinds of gas and convenience marts, briefly describe your impression of how these five work steps would be accomplished at Gas-Up & Go if you buy gas, a bottled soft drink, and a candy bar.

2. 55. The fast food industry has been dramatically altered through IT enablement. However, IT enablement has not completely eliminated manual processes in fast food franchise restaurants such as McDonald's, Wendy's, and Burger King.

   Required:

   Using your experience in visiting fast food restaurants, answer the two questions that follow:

   1. List and describe four different activities that are manual parts of business processes at a restaurant such as Wendy's.
   2. List and describe four different activities that are IT enabled parts of business processes at a restaurant such as Wendy's.
3. 56. Consider any recent purchase you made at a department store such as Target, Walmart, or Kmart. A business process that occurred was the sale of a product to you. However, to make that sale, the department store had to engage in many other processes that support that sales process, or result from that sales process. These other processes may precede or occur after that sales process.

   Required:

   1. Describe any necessary supporting processes that precede the sale of a product to you.
   2. Describe any necessary supporting processes that occur after a sale to you.
4. 57. Culpe's Cues Co. is a small manufacturing operation that makes and sells pool cues for sporting goods stores and billiard halls in Baltimore, Maryland, and the surrounding local area. James Culpe and his wife, Rebecca, are the owners and only employees.

   James Culpe purchases all of the materials needed to make pool cues, including wood, paint, hardware, and supplies. All purchases are made from local suppliers, and all payments are made in cash at the time of the purchase. James Culpe is responsible for making the pool cues. He also handles all telephone calls and replacements, and he personally delivers all finished products.

   All sales are conducted on account via the Internet. Orders are received electronically through the company's website at www.culpescues.com. Rebecca Culpe prints the orders and forwards them to her husband in the workshop. Mrs. Culpe is also responsible for website design and maintenance, as well as all accounting and customer collections.

   Address the following questions regarding Culpe's Cues:

   1. What are the business processes that apply to this business?
   2. How would the business processes change if Culpe's Cues expanded to a regional focus?
   3. How would the business processes change if Culpe's Cues began selling pool balls and other billiard equipment in addition to cues?

CONTINUING CASE: ROBATELLI'S PIZZERIA

INTRODUCTION

On the morning of October 31st, Elaine Black, Chief Information Officer at Robatelli's Pizzeria, was waiting for both Jim Saxton, database administrator, and Peter Greyton, operations manager, to come to her office for a meeting. While waiting, Elaine was thinking about the surge of telephone and Internet orders expected to be received through the company's customer order center within the next 12 hours. Halloween had always been the most popular day of the year for people in the greater Pittsburgh area to order pizza from Robatelli's. There were 53 restaurant locations to serve these customers, but only one location to receive all of the orders and forward them to the right restaurant. Elaine's thoughts were interrupted as Jim and Peter entered her office. The following conversation took place:

ELAINE: Well, guys, it's here again, our biggest day of the year. Not only is Halloween a busy day, but we have the upcoming day after Thanksgiving, the week before Christmas, and Super Bowl Sunday. Can our current computer system's infrastructure and people keep pace with the orders we expect?

JIM: I think our systems are all running at peak performance. We shouldn't have any computer concerns for today or those other busy days.

PETER: Everyone in the customer order center is focused on making sure that our customers get their pizzas as ordered. We have plenty of people scheduled to work tonight, so we're good to go.

ELAINE: Terrific. But every time we face one of these peak sales days, I start wondering about the long-term capacity and effectiveness of our computer systems. Jim, we need to think long term about our computer system. I was just reading an article that I'd like you to take a look at. It's about Anheuser-Busch Companies and their use of data mining.

JIM: I do agree with you, Elaine; we should always be thinking about how newer IT systems can help us. Could you e-mail me the link to the article?

ELAINE: Sure, and I would like you to think about how we might use the same approach in our business. Pete, your order center people are doing a great job, but again there's something I'd like us to think about in the long run. As you know, we now have to manually enter all customer order center sales and store sales into our general ledger (GL). I think we could improve a lot of things if those sales fed automatically into our GL software. Why don't you think about any advantages you see for an automatic interface, and we'll look at the costs compared to those advantages. How's that sound?

PETER: I'll do that. I'll give it some thought and work on a report about an automatic interface between our GL software and the point of sale systems in our restaurants as well as the phone and Internet sales. How soon do you want to meet again to look at these issues?

ELAINE: Let's say, in two weeks at the same time.

As Jim and Peter left her office, Elaine continued to think about the features of the company's accounting information systems and whether or not data extracted from these systems could facilitate the multiple needs of the company. The focus had always been on providing accurate financial accounting information from the various locations; however, the company's aggressive growth strategies meant increased emphasis on the system's ability to analyze detailed customer information that could be translated into increased sales opportunities.

Elaine knew the challenges they faced could very well affect the company's ability to maintain its competitive advantage. She realized that her department must continually improve the company's information systems to help it achieve growth strategies. Operating state-of-the-art systems was imperative to position the company to execute those growth plans. However, she was concerned about the possibility that restrictions of the current information systems could actually prevent the company from doing what it wanted to do. Allowing restrictive systems to prevent them from achieving business strategies was a risk that Elaine would not tolerate!

BACKGROUND

Robatelli's Pizzeria is a great American success story. Started by Dino Robatelli in the 1960s, the business impetus was a family pizza recipe. Introduced to the public at a church festival in Pittsburgh's Little Italy, Robatelli's pizzas are now a recognized tradition in the Greater Pittsburgh area. A full menu and local expansion have led to its growing popularity over the years and have helped it achieve nearly 50 percent of the area market share. Annual sales now exceed $100 million. Following is a timeline of milestones in the company's history:

The company has been known for its ability to get ahead of national trends. For instance, in the early 1980s, Robatelli's began offering delivery service; however, while the competitors were merely delivering pizzas, Robatelli's delivered many additional items from its extensive menu. The company was also on the cutting edge when it launched its one-number telephone ordering system whereby a single telephone number was used to service sales orders for the entire region. Additional conveniences became available about ten years later when Robatelli's introduced online ordering. Recently, it has expanded its menu offerings and opened prototype restaurants specially designed with new features (such as a full-service bar and a retail counter) that appeal to various customer groups. Each of these advancements has propelled Robatelli's growth over the past four decades.

Dino Robatelli's name is also well known for its tradition of supporting neighborhood organizations. Robatelli's promotes schools, amateur athletics, and other community groups. Interestingly, some local student athletes were a tremendous help to Robatelli's in 1971 when the business was in trouble. A fire had destroyed much of the building containing Robatelli's original pizzeria and commissary. The commissary made menu ingredients for all of the Robatelli's pizzerias, so the entire business was in jeopardy when this facility became inoperable. Area students and coaches helped with the clean-up and rebuilding efforts that made it possible for the facility to be reopened in a fraction of the anticipated time. Dino Robatelli thanked them by establishing a hall of fame that has become a fixture of Greater Pittsburgh high school athletics.

Robatelli's reputation for great Italian food and innovations in both customer service and community service have contributed to the company's ability to grow into the most popular pizzeria in the Greater Pittsburgh region. Robatelli's sales include an average of 110,000 pizzas per week. It has managed to stay ahead of the national competitors, which is an unusual feat. In fact, many people in and around Pittsburgh believe that pizza can only be Robatelli's!

MULTIPLE SYSTEMS, MULTIPLE FUNCTIONS, MULTIPLE USES OF INFORMATION

There are three ways to place an order at Robatelli's: in-store, via telephone, or online. The order processing systems are illustrated in Figure 1. Here's how they work:

In-store orders

In-store orders are taken by restaurant staff serving patrons dining in one of Robatelli's restaurants or walking in to place an order. Servers manually complete an order ticket at the tableside and input the information into the company's point of sales system through computer terminals located in the food preparation stations. Walk-in orders are typically entered directly into the system by staff using the computer terminal located at the counter.

Figure 1 Robatelli's Order Processing Systems

Telephone orders

Approximately two-thirds of the company's business is processed via the telephone. Robatelli's phone ordering system is called a one-number system, referring to the convenience of ordering through a single phone number, regardless of the restaurant location nearest the customer.

Most phone orders are received by an operator, who enters the order directly into a computer terminal while speaking with the customer. Customer phone numbers are used to present the customer with a choice of the nearest pizzeria for preparation and carry-out or delivery. The software in the system references a street database to verify that the street address exists. Credit card numbers are obtained from customers paying by credit card. The customer service representative verifies the order and credit card number before ending the call.

Upon confirmation of an order, the order is sent directly to the restaurant, where it is processed through the company's transaction processing system and printed at the appropriate food preparation station(s). Credit card numbers are included in the transmission, and all credit card transactions are processed at the restaurants at the time the order is received.

There are several advantages of handling phone orders through a customer order center rather than at individual restaurant locations. Above all, the reduction in background noise improves the accuracy of the order-taking process. In addition, the customer's wait time is greatly reduced. Before Robatelli's implemented its one-number system, customers' wait time at peak could be up to 15 minutes. The order center's average wait time goal is now one minute or less.

Internet orders

To place an online order, a customer must be registered. Registration is a simple process that can occur anytime during business hours. Customers are asked to provide identifying information that will be retained in the system. Repeat customers will not have to go through the registration process again.

Web-based ordering is tied to the company's one-number system. When a customer enters an order online, customer information is pulled from the one-number system. Identifying data such as phone number and address do not have to be entered. Menu offerings are presented on the screen in various drop-down boxes so that any combination of items can be ordered with many different choices of toppings or accompaniments. A customer must answer a series of questions regarding the order, similar to the questions that would be asked if the customer had been speaking with a telephone operator.

Online orders also require confirmation of the menu items and restaurant location before the call is ended. Credit card information may be entered online, and the transaction will be processed at the restaurant filling the order (as is done for telephone orders). Two firewalls protect the security of customer information submitted online.

Customer Service

Up to 135 customer service representatives may be on hand at the customer order center to process orders coming in to the business at peak times. In addition, Robatelli's employs approximately ten home-based agents to handle incoming orders. Home-based agents may perform any of the customer service functions from a computer terminal located within their homes.

All operators are required to undergo a one-week training program before they begin serving customers. After the training program, operators are subject to one week of supervised on-the-job training, followed by ongoing performance evaluations. Supervisors at the customer order center perform order scanning, whereby orders are randomly reviewed for reasonableness. Order scanning is performed more frequently for orders taken by new operators. Supervisors also follow up on errors and customer complaints, and may listen in on calls to review the operator's performance.

If customers are in need of customer service, they may call or e-mail the company. Supervisors handle these types of calls and e-mail messages, and will respond either via telephone or reply e-mail. Restaurant managers can also print customer complaints at their respective locations.

Accounting functions

Robatelli's ordering systems and transaction processing systems are the source of all sales information sent to the accounting department. Restaurant managers prepare daily sales summaries and submit them to the company's administrative offices on the following day. These summaries are transmitted electronically via the intranet and are received in the accounting department. Accounting staff prepare general ledger entries based upon these sales summaries and key the information into the company's accounting software. The transaction processing system provides sales by restaurant for call-in and Internet orders, which are reconciled to the restaurant summaries on a daily basis. Once the accounting system is updated and the daily reconciliations are performed, the data are stored in an on-site server.

Although a lot of accounting information comes from many different locations, the capacity of the system is nearly 25 times its current load.

Information Technology

The information technology staff at Robatelli's is continuously engaged in system maintenance activities. Because the business changes so frequently, systems maintenance is an ongoing process. Every time a new coupon is offered, a price is changed, or a new menu item becomes available, the related information must be integrated into the transaction processing system.

Each menu addition has its own level of complexity, and many of the items include options to customize to individual tastes in a plethora of combinations. This poses a challenge in ordering; however, the menu presentation continues to be improved to eliminate chances of an incomplete or incorrect order. The options are available online and to customer service representatives via dropdown boxes on their computer screens. Most screens require an entry, even if it is “none,” in order to ensure that no part of the order is forgotten.

Required:

1. After reading the Robatelli's case information, list and briefly describe (two to three sentences) each business process included in the case description.
2. Think about, list, and briefly describe other business processes that probably occur at Robatelli's.

SOLUTIONS TO CONCEPT CHECK

1. (SO 1) The business process to accept a customer's return would most likely be a d. revenue process. Customer returns are part of the sales return process, which is a revenue process.
2. (SO 2) Of the choices presented, d. a bar code would be least likely to be an output of the accounting information system. A bar code is usually an input to the accounting information system. For example, the bar code on a grocery product is scanned to process a sale. The other options are outputs of an accounting information system.
3. (SO 3) The following is not true of the supply chain: b. The supply chain excludes customers. The supply chain includes vendors, customers, and all intermediaries.
4. (SO 4) The following is not an objective of IT enablement: c. reduced security problems. IT systems usually have increased security problems. The other three answers are objectives of IT enablement.
5. (SO 5) The correct order of the computer data hierarchy is c. bit, byte, field, record, file, database.
6. (SO 5) The process of searching for identifiable patterns in data is called c. data mining.
7. (SO 6) An IT enabled system for purchasing that is “invoice-less” is called b. evaluated receipt settlement.
8. (SO 7) The title of the COSO report that was written for the purpose of assisting managers in the challenge of managing risk in their organizations is b. “Enterprise Risk Management—Integrated Framework.”
9. (SO 8) Accountants have some form of use of the AIS in all of the given choices except b. programmer. The programming role involves formulation of the AIS to meet users' needs. It uses input and feedback from a variety of people within the organization and the supply chain to determine its components.
10. (SO 9) The following is not true of unethical behavior: a. The only category of unethical behavior for accountants is inflating revenue. This is only one of the many forms of unethical behavior that may take place.