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Accounting Information Systems

CHAPTER 15

DATA MODELING AND DATABASE DESIGN

SUGGESTED ANSWERS TO DISCUSSION QUESTIONS

15.1 The REA data model is used to develop databases that can meet both transaction
processing and management analysis needs. Only events that either (1) directly change
the quantities of resources, (2) represent commitments to future exchange events, or (3)
that provide new information about activities that management wants to plan, evaluate,
and control need to be included in such databases. Data processing activities, such as
preparing reports or transcribing data from a form, are not explicitly modeled because
they do not change information about any resources nor are they fundamental activities
which management wants to control. (Consider: How often are managers concerned
about how many reports a given employee printed in one day?) Indeed, many
administrative data processing activities are not even necessary steps in the value chain.
For example, with the advent of sophisticated AIS, particularly ERP systems, many
companies are requesting their suppliers to not send them any invoices. This is possible
because all the information contained in the vendor invoice is already in the purchasing
company’s database before the vendor invoice arrives: the quantity ordered is known
when the order is placed, as is the quoted price and terms of payment, and the quantity
received in good condition is known when the receiving report is stored.

15.2 Figure 15-6 does not include an event “enter customer information” because it is not an
activity that management usually wants to track so that they can plan for it and evaluate
its performance. Customer information is stored in rows in the customer table. The bulk
of this would have been entered when the database was initially created and the customer
table created and populated. Subsequently, new rows would be entered in the customer
table to represent new customers – typically, this would occur as a by-product of an event
that management does want to plan, monitor, and evaluate – such as a sales call or the
receipt of a customer order.

15.3 The REA diagram presents a model of the company’s database. Included in the model is
a representation of all the tables contained in the database as well as all of the
relationships that exist between the tables within the database. These tables and
relationships represent the business processes and business events of the company. The
REA diagram can also assist the auditor in planning the audit. For example, examination
of an REA diagram would reveal whether the organization extends credit to its customers,
which would then require audits of accounts receivable, or only makes cash sales. In
addition, an auditor can use and REA diagram to test a client’s business processes for
compliance with various controls that the client has created. The auditor can also design
queries linking various employees to different events in order to evaluate whether there is
adequate segregation of duties.

15-1
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15.4 This question can be used to help students apply the REA model to businesses that do not
follow the typical wholesale/retail revenue cycle of “take order-sale-collect cash” as
represented in Figure 15-6. Some possible points of discussion could relate to a service
based business where service would be added or even replace inventory and/or the take-
order event could be eliminated. In addition, shipping could be added as another event.

15.5 There are asset categories listed on a company balance sheet that would not be presented
as a resource on an REA diagram. The most noticeable is Accounts Receivable.
Accounts Receivable is merely the difference between amount that a company has sold to
a customer and the amount the customer has paid for those sales, and, therefore need not
be explicitly modeled modeled as a resource. There are also some resources in an REA
model that do not appear on an organization’s balance sheet as an asset. A noteworthy
example is employee skills. The skills possessed by employees are certainly an economic
resource to an organization. These skills would be recorded in a database to facilitate
effective management, plan for future hiring and training needs, etc. According to
generally accepted accounting principles, however, employee skills are not recorded as an
asset in the financial statements. This does not mean that they lack economic value;
indeed, the stock market appears to consider intangibles like employee knowledge when
determining the market value of a company.

15.6 Accounts payable would not be represented on and REA diagram. Accounts payable is
simply the difference between a company’s purchases and their cash disbursements for
those purchases at a defined point in time. If a company makes a purchase but does not
disburse cash for that purchase before the end of the current reporting period and the
company prepares its financial statements, the company must recognize a claim against
its assets in the form of a payable. Since the payable is an artifact of reporting time
periods, it is not a resource, event, nor an agent. Therefore, it will not appear on an REA
diagram.

15-2
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Accounting Information Systems

SUGGESTED ANSWERS TO THE PROBLEMS

15.1

Inventory Sales Employee

Customer

Cash Cash Receipts

Employee

15-3
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Ch. 15: Database Design using the REA Data Model

15.2

Inventory Order Inventory Employee

Receive Inventory Vendor

Employee

Cash
Cash
Disbursements

Vendor

15-4
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Accounting Information Systems

15.3

Inventory Sales Employee

Customer

Cash Cash Receipts

Employee

15.4

Inventory Purchases Employee

Vendor

Cash
Cash
Disbursements
Employee

15-5
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Ch. 15: Database Design using the REA Data Model

15.5

Order Office
Office Equipment Purchasing Clerk
Equipment

Supplier

Receive Office
Receiving Clerk
Equipment

Supplier

Cash Pay for Equipment

Cashier

Note: Multiple pieces of equipment could be included on one order and also be included in the
same delivery. Also, an order may be filled by two or more partial shipment from the supplier.
Conversely, several orders placed within a short time period with the same vendor might be filled
with one delivery.

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Accounting Information Systems

15.6

a. A company may receive multiple cash payments on a single sale or a company may
receive one payment for several sales. This scenario could take place between any
vendor and any customer. The vendor is allowing customers to make multiple
payments on a single invoice and is allowing customers to pay for multiple invoices
with a single payment.

b. A sale can include multiple items, but an item can be included in only one sale. This
type of arrangement would involve individual items like art work or automobiles.

c. In this scenario some inventory purchases can be paid for with multiple payments,
while at times a single disbursement may pay for multiple purchases. This scenario
represents a revolving credit plan offered by suppliers.

d. In this scenario, inventory purchases are to be paid for with a single payment. For
example, a vendor sends a monthly bill for merchandise delivered to a customer. The
supplier does not accept or allow installment payments. This is typical for many B2B
transactions that involve low-priced items.

e. In this scenario a single purchase of inventory is paid for with multiple payments. For
example, a car dealership makes installment payments for cars delivered from the
manufacturer.

f. In this scenario each sale must be preceded by one and only one order. The fact that
both the order and sales events are recorded implies that there is probably a time lag
between taking the customer’s order and filling that order, so that the selling
organization needs to be able to track the status of orders. An internet sale is an
example of this type of scenario. When a customer places an order with
Amazon.com, there is a time lag between the time the order is sent by the customer
and the time Amazon fills the order.

g. In this scenario each sale can be comprised of multiple orders and each order can be
associated with multiple sales. Thus, we have here a situation where probably the
selling company batches orders and only ships periodically – e.g., with restaurants,
suppliers may take orders daily but fill them only on Mondays and Thursdays.
Moreover, suppliers may occasionally run out of some items, and, therefore, may
make multiple deliveries (sales) to fill a specific order.
15-7
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Ch. 15: Database Design using the REA Data Model

h. Payment upfront for a single sale similar to the way DELL sells computers; i.e., no
installment payments are allowed, the customer must pay in full in advance (prior to
shipment).

i. In this scenario a sale can include multiple inventory items. Also, a single inventory
item can be included in multiple sales. Wal-Mart is a good example. Wal-Mart
customers can purchase many inventory items such as detergent, tires, and clothing
items. These mass produced inventory items can also be sold to many customers.
Therefore, a sale can include a box of detergent, a set of tires, and a sweatshirt. By
the same token, of the same brand of detergent can be included in many different
sales.

15.6 (cont.)

j. Sales need not be preceded by orders, but any orders are associated with only one sale
(filled individually, not batched). An example of this would be a hardware store in
which some sales are made to walk-in customers (sales without preceding orders), but
which also allows contractors to place orders by phone, fax, or over the Internet in
advance and then pick up the order later.

15-8
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Accounting Information Systems

15.7
a.

Sales Cash Collections

b.

Sales Cash Collections

c. The solution presented here presumes that one sale (order fulfillment event) can be
linked to multiple orders – if each order is filled individually, with occasional partial
deliveries because items need to be back ordered, then the cardinality on the order
side of the relationship would have a maximum of 1.

Orders Sales

d. This solution assumes that customers only purchase one home at a time. This is likely
to be the case for custom homes. Situations in which an investor purchases multiple
homes from a builder are most likely going to involve “tract” homes (e.g., several
homes that follow a standard floor plan).

Sales Inventory

e.

Sales Order Cash Collections

f. This solution assumes that customers also occasionally pay for multiple sales with
one payment. If, however, this never occurs, the alternate solution would be
appropriate.

Sales Cash Collections

Alternate solution assuming all payments are for one and only one sale.

15-9
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Ch. 15: Database Design using the REA Data Model

Sales Cash Collections

g.
Cash
Receive Inventory
Disbursements

h.
Take Customer
Call on Customers
Order

15.7 (cont.)
i.
Take Customer
Call on Customers
Order

j
Cash
Receive Inventory
Disbursements

15.8

Inventory Sales Employee

Customer

Cash Cash Receipts Employee

15-10
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Accounting Information Systems

15.9

Inventory Order Inventory Employee

Vendor

Receive Inventory

Employee

Cash
Cash
Disbursements
Vendor

15-11
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Ch. 15: Database Design using the REA Data Model

15.10

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Accounting Information Systems

Employee

Inventory Order Inventory

Vendor

Employee

Receive Inventory

Vendor

Cash
Cash Employee
Disbursement

15-13
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Ch. 15: Database Design using the REA Data Model

SUGGESTED ANSWERS TO THE CASES

15.1
The entities of interest include: the equipment, cash accounts, the events of running the
rides and collecting cash, the guests, and the employees. Note that there is no event called
“sell membership card” because the economic exchange is the providing of rides in return
for money. The membership card is just a means of tracking who uses what rides. Be sure
students understand that the membership cards are not a resource – Sparky’s is not better
off by printing up more cards. The cards could be replaced with tokens, hand stamps, or
any other mechanism.

The relationships of interest are those shown in the REA diagram. Most cardinalities are
standard, except for the following:

The “Give Ride” event involves running one particular piece of equipment.
Many guests can ride the same piece of equipment at the same time.
The Get Cash event can involve receiving money for a group of people.
The cardinalities also reflect the fact that the “Get Cash” event precedes the “Give
Ride” event.
The unique number assigned to an activated membership card represents each
“Guest” – this is how Sparky can track who uses what rides. Hence, a new row is only
added to the Guest table for each paying customer. Since Sparky does not know the
personal identity of his patrons, a new row in that table is created each separate day
that the same person pays for admission. Note that customers do not, however, have
to ride any rides – they may just be “babysitting” for example. On the other hand,
most paying customers probably go on many different rides.

The REA solution is as follows:

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Accounting Information Systems

Give Ride
Equipment Employee

Customer

Cash Cash Receipt

Employee

This solution assumes that attractions are run (e.g., the Ferris Wheel is turned on) at regular
intervals, even if no customers happen to be on it. If, however, an attraction is only run if there is
at least one customer who wants to go on that ride, then the diagram would have to be modified
to show that each “Give Ride" event is linked to at least one customer.

15-15
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