james hall ch 10
TRANSCRIPT
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Accounting Information Systems, 6th editionJames A. Hall
COPYRIGHT © 2009 South-Western, a division of Cengage Learning. Cengage Learning and South-Western are trademarks used herein under license
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Objectives for Chapter 10Economic foundations of the REA modelKey differences between traditional ER modeling
and REA modelingThe structure of an REA diagramCreate an REA diagram by applying the view
modeling steps to a business caseCreate an entity-wide REA diagram by applying
the view integration steps to a business case
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Traditional Approaches:User-View OrientationWhen data-modeling and IS design is too
oriented toward the user’s views, problems arise:multiple information systemsduplication of datarestricted user-view leads to poor decision-
makinginability to support change
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REA is an approach to database design meant to overcome problems with traditional approaches:formalized data modeling and design of IS use of centralized database use of relational database structurecollects detailed financial and non-financial datasupports accounting and non-accounting analysissupports multiple user viewssupports enterprise-wide planning
Resources, Events, and Agents Model
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Resources, Events, and Agents Model
REA models consists of three entity types and the associations linking them.
ResourcesEventsAgents
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Resources in the REA ModelResources – the ‘assets’ of the company
things of economic valueobjects of economic exchanges able to generate revenueobjects that are scarce and under the control of the
organizationcan be tangible or intangible
Does not include some traditional accounting assets:artifacts that can be generated from other primary datafor example, accounts receivables
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Events in the REA ModelEvents are phenomena that effect changes
in resources.a source of detailed data in the REA approach
to databasesEvents fall into two groups:
Economic – increases or decreases resourcesSupport – control, planning, and other
management activities; but do not directly affect resources
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Agents in the REA ModelAgents can be individuals or departments.Participate in eventsAffect resources
Have discretionary power to use or dispose of resources
Can be inside or outside the organizationClerksProduction workersCustomersSuppliers, vendorsDepartments, teams
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EconomicResource
Economic Event
External EconomicAgent
Internal EconomicAgent
Stock Flow
Duality
Participates
Participates
Elemental REA Model
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Resources, Events, and Agents Model
Another key feature of the REA model is economic duality.Events occur in pairsRepresent the give event and receive
event of an economic exchange
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Resource AGive EconomicEvent
External Agent
Internal Agent
Out Flow
Duality
Inflow Receive EconomicEvent
External Agent
Internal Agent
Resource B
Participates
Give Activity
Receive Activity
Participates
Participates
Participates
REA Model showing Duality of a Give and Receive Exchange
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ER Diagrams (ERD’s) versus REA Diagrams (READ’s)
Classes of entities ERD’s – one class READ’s – three classes (resources, events, and agents)
Arrangement of entitiesERD’s – determined by cardinality and readabilityREAD’s – organized into constellations by class
Sequencing of eventsERD’s – staticREAD’s – chronological sequence of business processes
Naming conventionsERD’s – all nounsREAD’s – nouns (R’s and A’s) and verbs (E’s)
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View Modeling: Creating an Individual REA DiagramView modeling is a multistep process for creating
an individual REA model. The result is a single view of the entire database.
The four steps involved are:1. identify the event entities to be modeled2. identify the resource entities changed by events3. identify the agent entities participating in events4. determine associations and cardinalities between
entities
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Step 1: Identify the Event EntitiesIdentify the events that are to be included
in the modelInclude at least two economic events (duality)May include support eventsArrange events in chronological sequence
Focus on value chain eventsDo not such invalid events such as:
bookkeeping tasksaccounting artifacts, e.g., accounts receivable
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Take Order
Receive Cash
Verify Availability
Ship Product
Arrangement of Events Entities in Order of Occurrence
Order of Events
Events
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Step 2. Identify the Resource Entities
Identify the resources impacted by events identified in step 1
Each event must be linked to at least one resource.Economic events directly affect resourcesSupport events indirectly affect them
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Step 3. Identify the Agent Entities
Each economic event entity in an REA diagram is associated with at least two agent entities. One internal agent One external agent
It is possible to have only an internal agent when no exchange occurs, as with certain ‘internal’ manufacturing processes.
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Inventory
Take Order
Customer
SalesRepresentative
Receive Cash
Cash ReceiptsClerk
Shipping Clerk
Cash
Customer ServicesClerk
Verify Availability
Ship Product
Customer
REA Model showing Events and Related Resources and Agents
Customer
Inventory
Inventory
Customer
Resources Events Agents
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Step 4. Determine Associations and Cardinalities between Entities
Association – reflects the nature of the relationship between two entitiesRepresented by the labeled line connecting the entities
Cardinality – the degree of association between the entities Describes the number of possible occurrences in one entity that
are associated with a single occurrence in a related entityCardinality reflects the business rules that are in play for a
particular organization. Sometimes the rules are obvious and are the same for all
organizations.Sometimes the rules differ, e.g., whether inventory items are
tracked individually or as quantity on hand.
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Inventory Take Order
Customer
SalesRepresentative
Reserves
Respond to Customer
Process Order
IncreasesReceive Cash Cash Receipts
Clerk
Shipping Clerk
Cash
Places Order
Relatedto
ProcessesRemittance
Customer ServicesClerk
Verify AvailabilityReview Items Available
Request
Ship Product
Causes
Customer
Reduces
Duality
Ships
Remits
Receives
Associations and Cardinality in REA Diagram
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Many-to-Many Associations
Many-to-many (M:M) associations cannot be directly implemented into relational databases.
They require the creation of a new linking table. This process splits the M:M association into
two 1:M associations.The linking table requires a ‘composite primary
key’.
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Inventory Take Order
Customer
SalesRepresentative
Process Order
Shipping Clerk
Places Order
Ship Product
Causes
Customer
Ships
Receives
Inventory-Order Link
Inventory-Ship Link
Link Tables in REA Diagram
Verify AvailabilityInventory-VerifyLink
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View Integration: Creating an Enterprise-Wide REA Model
View integration – combining several individual REA diagrams into a single enterprise-wide model
The three steps involved in view integration are: 1. consolidate the individual models2. define primary keys, foreign keys, and attributes3. construct physical database and produce user
views
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Step 1. Consolidate the Individual ModelsMerging multiple REA models requires
first a thorough understanding of the business processes and entities involved in the models.
Individual models are consolidated or linked together based on shared entities.For example, procurement (expenditures) and sales
(revenue) both use inventory and cash resource entities.
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Inventory Take Order
Customer
Sales Rep
Receive Cash Cash Rec Clerk
Shipping Clerk
Cash
Cust Ser Clerk
Verify Availability
Request
Ship Product
Customer
Get TimeSupervisor
Worker
Payroll Clerk
Order Product
Purchasing Clerk
Supplier
Receive Product
Disburse CashCash Disb Clerk
Supplier
Receiving Clerk
Integrated REA Diagram
(Employee)
(Employee)
(Employee)
(Employee)
(Employee)
(Employee)
(Employee) (Employee)
(Employee)
(Employee)
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Step 2. Define Primary Keys, Foreign Keys, and Attributes
Implementation into a working relational database requires primary keys, foreign keys and attributes in tables.Primary key – uniquely identifies an instance of an
entity (i.e., each row in the table)Foreign key – the primary key embedded in the related
table so that the two tables can be linkedAttribute – a characteristic of the entity to be recorded
in the table
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Rules for Foreign KeysPrimary key Foreign key: Relations are formed
by an attribute that is common to both tables in the relation.
Assignment of foreign keys:if 1 to 1 (1:1) association, either of the table’s
primary key may be the foreign keyif 1 to many (1:m) association, the primary key on
one of the sides is embedded as the foreign key on the other side
if many to many (m:m) association, create a separate linking table with a composite primary key
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Attributes
Financial Customer name Customer address Customer telephone numberAmount owed by customerValue of total sales to dateTerms of trade offered
NonfinancialCustomer credit ratingDamaged goods recordOn-time payment recordCustomer volume recordEDI accessInternet access
Using the customer as an example, these data include:
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Step 3. Construct Physical Database and Produce User Views
The database designer is now ready to create the physical relational tables using software.
Once the tables have been constructed, some of them must be populated with data.Resource and Agent tables
Event tables must wait for business transactions to occur before data can be entered.
The resulting database should support the information needs of all users.SQL is used to generate reports, computer screens, and
documents for users.
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User-Views
User-View #1
Past Due AccountsName AmountJames $500.00Henry $100.00 … …
Sales Report
User-View #2
REA Database
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Value Chain AnalysisCompetitive advantages from the REA approach
can be see via value chain analysis. Value chain analysis distinguishes between
primary activities (create value) and support activities (assist performing primary activities).
REA provides a model for identifying and differentiating between these activities.
Prioritizing Strategy: Focus on primary activities; eliminate or outsource support activities.
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Revenue
Costs
Firm Infrastructure
Human resource managementTechnology development
Procurement
Inbound Logistics
OperationsOutput
LogisticsMarketing
& SalesService
Sup
port
Ac t
ivit
ies
Primary Activities
Ma rgin
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Competitive Advantages of the REA Model
Using REA can lead to more efficient operations.Helps managers identify non-value added activities
that can be eliminated Increasing productivity via elimination of non-value
added activities generates excess capacityStoring both financial and nonfinancial data in the
same central database reduces multiple data collection, data storage, and maintenance.
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Using REA can lead to more efficient operations.Detailed financial and nonfinancial business data
supports a wider range of management decisionssupporting multiple user views (e.g., different
perspectives on a problem)Provides managers with more relevant, timely, and
accurate information. leading to better customer service, higher-quality
products, and flexible production processes
Competitive Advantages of the REA Model