Chapter F

1. Chapter F • Information Technology Components

2. Quote for The Day • It is not a question how much a person knows, but use he or she can make of what he or she knows. • J. G. Holland

3. Role of Accountants in Data Processing Cycle • Interact with systems analysts to help answer questions such as • What data should be entered and stored • Who should have access to the data • Which data storage approach should be use: manual, file-base, or data base • How should the date be organized, updated, stored, accessed and retrieved • How can information needs be met

4. What Accounting Information Professionals Should Know About Information Technology • National Top Five Core Competencies • Communications Skills • Strategic and Critical Thinking Skills • Focus on the Client and Market • Interpretation of Converging Information • Technologically Adept - Able to utilize and leverage technology in a way that adds value to clients and employers.

5. What Accounting Information Professionals Should Know About Information Technology • National Top Five Core Services • Assurance • Management Consulting • Financial Planning • International • Technology - Provide services in technology application, system analysis, information management and system security.

6. Denote Communications Channel Memory Input Processor Output Internal Storage External Storage Instructions Components of Information Systems

7. Data Input • Data captured and converted to machine readable form • Input accuracy and efficiency can be improved by the use of • scanning devices instead of keying • turnaround document • source data automation -ATM, POS

8. Input Medium • Paper On-line Medium • Punched card keyboard • MICR document POS device • OCR document Touch-tone phone • Magnetic medium ATM • Tape OCR scanner • Tape cartridge Special Purpose • Disk light pen • Diskette voice input • Optical Disk mouse • Magnetic stripes touch screen • Smart cards bar code

9. External Storage Medium • Tape • Tape cassette • Magnetic disk • Floppy disk • Removable high-capacity floppy disks (zip disk, jazz disk) • Optical disk (CDs, Digital Video Disks or Digital Versatile Disks -DVDs) stores vast amounts of data, sounds and both still and moving picutres

10. Data Storage Concepts • entity - something about which information is stored • ex. Employees, inventory items, customers • attributes - characteristics of interest about an entity; each type of entity possesses the same set of attributes • ex. All employees possess an employee number, pay rate, home address • data value - defines an attribute; will differ among entities • ex. One employee’s pay rate might be $8.00, whereas another’s might be$8.25

11. Data Storage Hierarchy • field - data values stored in a physical space • record - a number of field grouped together • file - a set related records • data base - files containing related data

12. Types of Files • master - all the data that a company needs about an item of interest • transaction - data about a specific type of transaction • table - reference table used during processing • history - transactions already processed • backup - duplicate copy of current file • suspense - records temporarily removed for correction • report - temporary awaiting printing at later time

13. File Access and Organization • Files are updated, stored and retrieved using an identifier - primary key • the attribute that UNIQUELY identifies each record - customer number • secondary key - another field used to identify a record, it is NOT UNIQUE - often used to sort records. Ex - zip codes • File organization - the way data are stored on the physical storage media • sequential storage files - stores records in order according to their primary key (customer numbers from 001 to 999)

14. File Access and Organization • random storage files - store records in no particular order - applies a mathematical algorithm to primary key to determine the physical adress at which to store the record • File Access - the way a computer locates stored records; depends on the file organization • sequential - accessed by starting at the beginning and reading each record until the one desired is located - only method used with magnetic tape • corrections, modifications, additions or deletions require rewriting the entire tape and creating a new tape • Cost-effective for archiving data, backing up data, or storing data that are only involved in sequential process

15. File Access and Organization • Magnetic tapes usually contains • header record - first record of the file that identifies the contents of the file • trailer record - last record of the file that contains summary information, like a control total • end of file marker • Indexed sequential access (ISAM) - stores records in sequential order, but also have an index that links primary keys with their physical access (see - Figure 1); need to use magnetic disk • Direct access - retrieve data items without having to read all the previous records, regardless of where the record is physically located in a file; need to use magnetic disk

16. File Access and Organization • corrections, modifications, additions or deletions do not require rewriting the entire disk

17. Figure 1 Data Storage Area Address No. 4061 Customer No. 1478 Customer No. 1479 Customer No. 1480 Customer No. 1481 Customer No. 1482 Address No. 4062 Customer No. 1483 Customer No. 1484 Customer No. 1485 Customer No. 1486 Customer No. 1487 Address No. 4063 Customer No. 1488 Customer No. 1489 Customer No. 1490 Customer No. 1491 Customer No. 1492 Index Key 1482 1487 1492 Address 4061 4062 4063

18. Processing • Converting input data into meaningful output • Usually performed by central processing unit (CPU) • arithmetic-logic unit (ALU) - performs all math calculations and logical comparisons • control unit - interprets program instructions and coordinates all input, output and storage devices • primary memory • RAM: temporary storage for programs, data and instructions; erased when power is shut off • ROM: information that is stored permanently in the computer; operating system

19. Processing • Peripheral devices • on-line devices: connected to the CPU by cables or telephone lines • off-line devices: not connected directly to the CPU and are used to prepared data input or output • Storage Measurements • bits (binary digits - 0 or 1) • byte - a group of 8 bits (represents a different character such as a number or letter of the alphabet)

20. Processing • Memory Capacity • kilobytes (K or KB) - l,000 characters • megabytes (MB) - 1,000,000 characters • gigabytes (GB) - 1,000,000,000 characters • terabytes (TB) - 1,000,000,000,000 characters • Speed • MIPS - millions of instructions per second • access time - time required to retrieve data from memory • execution time - time required to perform a computer instruction (add or compare)

21. Processing • Measurement of execution time • millisecond (thousandth) • microsecond (millionth) • nanosecond (billionth) • picosecond (trillionth) • Types of Processing Modes • batch processing - accumulates a group of data before it is entered; master files are periodically update to reflect all transactions that occurred during a given period of time • primarily used for applications like payroll, in which every or almost every record in the master file is updated • advantage - efficiency • disadvantage - master file do not contain current information, except immediately after the periodic update

22. Processing • On-Line Batch Processing - activity data are entered and stored as they occur; master files are periodically update to reflect all transactions that occurred during a given period of time • advantage - data entry is more accurate because the system can refuse incomplete or erroneous entries and, since the data is being entered at the time the transaction occurs, the errors can be easily corrected • On-Line, Real-Time Processing - activity data are captured as they occur; master files are updated as each transaction occurs • advantage - data entry is more accurate

23. Processing • Information in the master files is always current • Cooperative processing • distributed processing - links geographically separate computers; dividing large tasks into smaller parts that can be performed separately, and bringing together the finished results • parallel processing - coordination of several processors within a single computer to perform several related tasks simultaneously

24. Data Communication • Communication networks range from localized (local area networks - LANs) to more geographically dispersed networks (wide area networks - WANs) • LANs are configured using a variety of topologies (denote the path that communications physically travel to transfer data and access LAN hardware components: • star: all terminals are connected to a central computer (Ethernet model uses this configuration)- most expensive because it requires the greatest amount of wiring; if one node goes down, the performance of the rest of the network is not affected • ring: each terminal is connected to two other nodes; the flow of data is controlled by a software code called a token); if one connection is broken, the network can still continue to function, but at more slowly; less expensive than star

25. Data Communication • Bus: each device is connected to the main channel, or bus; a software algorithm known as carrier sense multiple access with collision detection (CSMA/CD) controls communication among the devices; easy to expand; cheaper to set up than stars; performance decreases as the number of nodes connected to the bus increases (when this occurs, the LAN should be partitioned into separate LANs) • WANs are configured • centralized system: all devices are connected to a central corporate computer which is usually large mainframe; provides better control, more experience IT staff, and some economies of scale; disadvantages include: greater complexity, higher communication costs, less flexibility in meeting the needs of individual departments and users

26. Data Communication • Decentralized system: each departmental unit has its own computer and LAN; better able to meet individual department and user needs; communication costs are lower because most of the data needed is stored locally; disadvantages include: complexity of coordinating data stored at many locations; increased hardware costs, greater difficulty in implementing effective controls • distributed data processing: a hybrid of the centralized and decentralized approaches; each location has its own computers to handle local processing (decentralized system); each system is also linked to the corporate mainframe (centralized system); less risk of catastrophic loss because resources are in multiple locations; each local system is a module that can easily be added, upgraded, or deleted from the system; disadvantages include: multiple locations and varying needs complicate the task of coordinating the system and maintaining hardware, software, and data consistency; difficulty in standardizing documentation and control; increased storage costs

27. Data Communication • Transmission capacity is determined by the bandwidth-larger the bandwidth, the more data capacity • Transmission mode measures the quantity of data sent and received • asynchronous - transmits one character at a time with a start bit preceding the bits of the character and a stop bit at the end of the character • synchronous - transmission is continuous; do not contain start and stop bits; is faster • Gateways - devices that allow a LAN to be connected to external networks and to communicate with external mainframes and data bases

28. Data Communication • Other communication devices • simplex devices - perform one way transmission (televisions) • half duplex devices - perform two-way transmission, but one direction at a time (CB or ham radios) • full duplex devices - perform two-way transmission simultaneously (telephones and interactive cable television) • modems - take a digital signal, convert it to wave form, then convert it back to digital form; computers think digitally • baud rate - describes the speed of data transmission

29. Electronic Commerce • Any commerce facilitated by electronic means • Electronic commerce activities • business-to-consumer: a consumer visits a company’s web site, places an order, pays for the purchase; the company ships the goods • business-to-business: • Electronic data interchange (EDI) - electronic exchange of information between trading partners; available for more than 20 years; used to be restricted to large companies • eliminate the need to manually enter data • improves accuracy • cuts cost by eliminating the need to mail, process and store paper documents

30. Electronic Commerce • improved speed of information exchange enables companies to carry less inventory • cost use to be a primary barrier • Internet eliminates the need to use a special proprietary third-party network • XML, a standard language for defining data on web pages, eliminates the need for complex software to translate documents created by different companies • Electronic funds transfer (EFT) - refers to making cash payments electronically • most banks can send and receive funds through the Automated Clearing House (ACH) • not all banks possess the EDI capabilities to process the accompanying remittance data; therefore, companies have to use one network for EFT and a separate network for EDI

31. Electronic Commerce • Financial Electronic Data Interchange (FEDI) - the integration of EFT with EDI - both buyer and seller can send remittance date and funds transfer instructions in one package • If the seller’s bank is not EDI-capable, the buyer still has two ways to implement financial electronic data interchange (FEDI) • if the buyer’s bank is EDI-capable, the buyer can still send the remittance data and funds transfer instruction together in one message to its bank • the buyer can contract with a financial value-added network (FVAN) - an independent organization that offers specialized hardware and software to enable the linking of various EDI networks with the ACH network

32. Electronic Commerce • Effects on Value Chain • sales and marketing: create electronic catalogs on web sites to totally automate sales order entry • ex. Cisco Systems generated $4 billion in sales in 1998, which were processed by a staff of only ten salespeople • improves the efficiency of the operations • ex. Ford uses its internal data -voice-video communications network to facilitate communications among 120 designers throughout the world; it helped them to reduce the average time it takes to design a car from 36 to 24 months; allowed them to avoid the time and costs of flying people to meetings • ex. Dell’s use of a web-based sale order entry system helps to reduce the amount of inventory it needs to carry

33. Electronic Commerce • improve the quality of post-sales customer support • ex. AT&T and Nike use a sequence of menu-driven forms to electronically interview customers at their web site; only the most complex problems need to be routed to a customer service representative • for products that can be digitized, such as books, software and music, the inbound and outbound logistics can be performed electronically; companies are relieved of the time and cost of receiving merchandise and then routing it to the person who ordered it; the selling organization avoids the time and expense of packing the goods for shipment and the associated shipping costs

34. Electronic Commerce • Improve the efficiency and effectiveness of value chain support activities • purchasing - can more easily compare prices across a larger number of potential vendors • ex. General Electric estimates that such comparison shopping helped it save about 20% on materials cost associated with $1 billion of supplies it purchased in 1997 • human resources management - provide employees with the ability to make changes in such things as withholdings, retirement allocation, names • ex. Lawson Software realized a 93% reduction in the number of employee calls to the human resources department, resulting in an estimated savings of more than $15,000 a year

35. Electronic Commerce • Electronic commerce creates control issues in three areas: • Validity of transaction • validity requires two things: • authenticating the identity of the other party to the transaction • customer wants assurance that the seller is legitimate • sellers want assurance that the customer exists and will not repudiate the transaction • business-to-business: establishes a list of preferred vendors; seldom make purchases from suppliers with whom they have never previously interacted • business-to-consumer: greater concern; individuals do not have easy access to independent sources of information; use WebTrust

36. Electronic Commerce • Receiving payment from customers • business-to-consumer: not a major problem because payment is received before the merchandise is shipped • business-to-business: frequently sells on credit to customers; use same procedures to check credit that is used in non-electronic commerce • ensuring that the information is not altered during transmission between the buyer and seller • use of virtual private networks (VPNs) - controls access to an extranet by encryption and authentication technology; use of digital signatures • proper authorization of transactions - use digital signatures; digital certificates • safeguarding assets

37. Electronic Commerce • Safeguarding assets • loss of confidentiality: the sender cannot control or predetermine through which routers a message will go; creates an opportunity for eavesdropping; encrypt the data prior to transmission to trading partners • unauthorized access: either by outsiders or by employees, to parts of the system which they should not have admittance; passwords, firewalls (a combination of hardware and software that controls the flow of data into and out of an organization’s AIS) • routers should intercept all incoming and outgoing data packets to examine the source or destination information, and decide whether or not to let that packet proceed to the appropriate application gateway • the application gateway can be programmed to determine whether or not they should be allowed to pass further

38. Electronic Commerce • Implement intrusion detection systems to provide real-time warning that unauthorized access is occurring • have computer security and Internal audit professionals continuously monitor and review all links in the organization’s communications network • loss of data • create backup copies of all vital information (offsite storage of at least one copy) • develop and practice disaster recovery plan

39. Electronic Commerce • Accounting Issues: • proper valuation of digital assets: • marginal costs of making additional copies of digitized images • when digitized assets are sold, the original item is not consumed; therefore, what is the cost of the digitized asset itself and should it be depreciated • taxation: • difficulty in determining nexus (the legal term used to justify when and where a transaction can be taxed • ex. Customer lives in Arizona, use an Internet service provider based in Maine to purchase items from a company based in Washington and that company uses a shipping company headquartered in Tennessee to deliver the product; which state(s0 can properly tax that transaction