CHAPTER 2 THEORETICAL FOUNDATION

Transcription

1 CHAPTER 2 THEORETICAL FOUNDATION 2.1 Theoretical Foundation The theoretical foundation in this chapter will contain the overall theories of this IFRS project. These theories below have been described and summarized simpler and comprehensive Introduction to Financial Report As we discussed before, in IFRS project, we focused on the financial report itself. There are many types of financial report in company. But, in IFRS project, we just go deeper in balance sheet, income statement, cash flow, and financial ratio. Thus, before we go deeper on system, analysis, and design theory, frameworks, and other general theories, better to discuss briefly about balance sheet, income statement, cash flow, trial balance and financial ratio Definition of Balance Sheet There are many definitions of balance sheet. According to Financial Management: Principles and Application Book, Balance sheet is the statement that published the 6

2 financial position at particular time, which presenting the assets, liabilities, and owner s capital. Besides that, according to wikipedia.org, Balance sheet is the statement of book value that described the asset, liabilities, and owner equity (inside the liabilities section) in organization or business, company in a specific time such as the end of financial month or year. The formula of Balance Sheet is: Assets = Liabilities +Owner Equity. Figure.1 Balance Sheet (Source: MEDCO holding documents) 7

3 Definition of Assets Based on wikipedia.org, Assets are the resources from economic point of view that hold by entity from the past transactions. There are three types of assets: Current Assets Current Assets are assets which are expected to be converted to cash in a year of operating cycle. The major of current assets consists of: 1. Cash: the liquid money that the company s hold. 2. Account Receivables: the promise that published to receive cash from customers who purchased products from the company on credit. 3. Inventories: the raw material, work-in progress, and finished goods that held by the company for eventual sale. 4. Prepaid Expenses: Expenses that have been paid in advance, for example insurance premium may be due before coverage begins. 8

4 Fixed Assets Fixed Assets are assets that consist of property, building, plant, and land, considered as tangible assets which used or consumed in long term. Other assets Other assets are the assets that exclude the fixed assets and current assets, such as investment and patents Definition of Liabilities Liabilities can be defined as a debt. Liabilities or debt are the financial statement that occurred because of lending money from third party (bank, creditor, etc). There are two types of liabilities in balance sheet: Short-term liabilities Short-term liabilities can be defined as the lending money that has to be paid within a year or 12 months. The components of short-term liabilities are account payable, accrued payables, accrued expenses, short-term notes, and other payables. Long-term liabilities 9

5 Long-term liabilities are the liabilities that have due time more that a year or 12 months, such as long-term notes, mortgages, etc Definition of Owner Equity Based on Financial Management: Principles and Applications Book, Owner equity is the financial statement in balance sheet that included investment other than assets such as common stock and preferred stock and also calculates the retained earning within the month or year Definition of Income Statement Income Statement is a financial statement for companies that indicates how net revenue (money received from the sale of products and services before expenses are taken out, also known as the "top line") is transformed into net income (the result after all revenues and expenses have been accounted for, also known as the "bottom line"). (Quoted from ). The major components of income statements are: 10

6 Sales : the amount money taken from company s products and services Operating income (EBIT): Profit from sales minus total operating expenses. Interest expense: Interest that been paid on a company s outstanding debt. It s related more into tax deductible. Earning before taxes: Operating Income minus interest expense. Net Income: The figure that representing the company s profit or loss for the period. It also relates the earnings available to the company s common stockholders. (Quoted from: Financial Management, Principles and Applications, 2007) 11

7 Figure.2 Income Statement (Source from MEDCO holding documents) Definition of Cash Flow According to wikipedia.org, cash flow is the financial statement in accounting field that determines and measures the amount of cash that being used and gained by the company in business purpose during specific period. There are three classifications of cash flow, such as operational cash flow, investment cash flow, and financing cash flow. 12

8 Figure.3 Cash Flow (Source from MEDCO holding documents 13

9 Definition of Trial Balance Trial balance is a statement of ledger account which all the balance of ledger have two accounts, debit and credit. Trial balance is made in every financial period as a review of the earlier closing ledger. Figure.4 Trial Balance (Source from MEDCO holding documents) 14

10 Definition of Financial Ratio Financial ratio is restating the accounting data in relative terms to identify some of financial strengths and weaknesses of a company. (Quoted from: Financial Management: Principles and Applications, 2005). Based on that book also, there are fourteen ratios that commonly used in company, but in this thesis, we just discussed eleven ratios, which are: Current Ratio Current ratio indicates liquidity of the company which measured by current (liquid) assets relative to their short-term (current) liabilities. Debt Ratio Debt Ratio indicates how much debt is spent to invest in company s assets. Gross margin Ratio Gross margin determines the margin ratios of the company as measured by gross profit relative to net sales. 15

11 Operating margin ratio Operating margin ratio determines management s effectiveness in managing the firm s income statement which measured by operating profits relative to sales. Return on assets (ROA) Return on assets determines the amount of net income produced on the company s assets by relating net income to total assets. Return on equity Return on equity indicates the accounting rate of return on the stockholder s investment, which measured by net income relative to equity. Interest coverage ratio Interest coverage ratio determines the company s ability to cover their interest expense, as measured by their earnings before interest and taxes relative to the interest expense. 16

12 Return on capital stock Return on capital stock is measured by net profit of a company itself relative with capital stock. Equity turnover Equity turnover is determined by revenue of the firm relative to equity. Assets turnover Assets turnover determines the effectiveness of management at managing the company s balance sheet (in here according to their assets) which indicated by the amount of the sales produced per one dollar of assets. Debt to Equity Ratio Debt to Equity Ratio is measured by total liabilities relative to equity. 17

13 Figure.5 Financial Ratios Highlight (Source from MEDCO holding documents) 18

14 2.1.2 System Development Life Cycle In order to make information systems become more reliable, robust, efficient, and decrease the risk, we create IFRS project with using some system development method named system development life cycle Definition of System Development Life Cycle (SDLC) According to Satzinger, SDLC is the framework in project management which can be classified into phases and activities. This kind of life cycle is separated into five phases like project planning, analysis, design, implementation, and support phase. All phases have correlated each other and in this life cycle, we use iterative way, thus we can still go back to previous phases if we found some cases that have to be fixed System Development Methodology Satzinger elaborates system development methodology as comprehensive rules to follow in order to make every activity in system development life cycle do completely including the specific tools models, and 19

15 techniques. This is the commonly activities during the development task SDLC phases and activities Satzinger determine the system development life cycle (SDLC) into five phases and activities, which are: 1. Planning phase; which have purpose to identify the scope for the new system and also arrange the project planning. 2. Analysis phase; which has objective to understand the user needs and develop the requirements, 3. Design phase; where the systems and programs are designed. 4. Implementation phase; where the new system is made and installed. 5. Support phase; the place to keep and maintain the system running productively after the program is being installed The method in system analysis In the previous subchapter, we mentioned about system analysis or we called analysis phase. Analysis 20

16 phase is very important because in this phase we want to recognize first the user needs and the requirement, and also the phase where we have consider whether the project is worth to continue or not Activities in system analysis phase There are six activities that cover the analysis phase: 1. Gather information; which obtain some information from people or user who will be using the system with doing some interview and watching the user works. 2. Define system requirements; where the information that be absorbed will define into requirement, such as technical requirement and functional requirement. 3. Prioritize requirements; activity after defining the requirement which sort the requirement into the priority (which one will be done first and later). 21

17 4. Prototype for feasibility and discovery; which have purpose to build the prototype during analysis. 5. Generate and evaluate alternatives; where we generate and create alternative after determines the requirements. 6. Review recommendations with management; the activities after evaluate all the requirement and alternative, we propose some recommendation to the management The approaching models in System analysis phase There are several models that we use in this project regarding the analysis activities Flowchart Flow chart is schematic representation of all algorithms or a process. (Quoted from ). 22

18 Thus, flowchart can show all step analysis process in the project. The notation or symbols that commonly used in flowchart are: 1. Oval or rounded rectangles; show the start and the end of the process. 2. Arrows; show the control process to the symbol that connected to arrow. 3. Diamond; represent the logical condition and decision. 4. Rectangles; show as the processing steps. 5. Parallelogram; represent the input or output process The example of flow chart will be illustrated in chart below. 23

19 Figure.6 Flow Chart (Source from 24

20 Entity Relationship Diagram (ERD) Entity Relationship diagram is type of conceptual data models that represent the end product of modeling design. The elements of Entity Relationship diagram are: 1. Entity; used to represent the object that need to store the data. 2. Attribute; used to describe the characters of an entity. 3. Relationship; the association in business that occur between one or more entities. 25

21 Figure.7 Entity Relationship Diagram (Source from Data Flow Diagram (DFD) Satzinger elaborates data flow diagram as diagram that show system requirements as a processes, external agents, data flow, and data stores in one diagram. There are four symbols that commonly used in data flow diagram: 1. Process; as step by step instructions are followed that transform input into outputs. 26

22 Figure.8 Process (Source from Microsoft Visio documents) 2. Data Flow; data flowing from place to place, such as an input or output to process. Figure.9 Data Flow (Source from Microsoft Visio Documents) 3. External Agents; the source or destination of data outside the system. 27

23 Figure.10 External Agents (Source from Microsoft Visio Documents) 4. Data store; Data at rest, being store for later use. Commonly, it corresponds with data entity or ERD. Figure.11 Data Store (Source from Microsoft Visio Documents) 5. Real time link; communication back and forth between an external agent and a process as the process is executing. 28

24 Figure.12 Real-time link (Source from Microsoft Visio Documents) Use Case Diagram In order to specify the requirement, we create use case to techniques in terms of developing the system Definition of use case Based on wikipedia.org, use case is a technique in making software to gain the functional requirement of the system Use case diagram According to Sitzinger, use case 29

25 diagram is used to present the interactions between the user, the system, and external system. By creating the use case diagram, we can be able to recognize who use the system and how they can do interaction each other The elements of use case diagram The elements of use case diagram consist of: 1. Actor; which is the user that interacts with outside system. It can be machine, human, or any other system. 30

26 2. Use Case; determines the interaction that occurs who have correlation with the user. 3. Package; the namespace like element that can be combined in other namespace packages. 4. Use connector; which use to identify the requirement of one element to others in order to present some interaction. 2.2 Theoretical Framework In this project, we use iterative waterfall (incremental development model) because in iterative model, we can still go back to the previous phase if we want to fix some problem that late to occur. 31

27 2.2.1 Iterative Waterfall or Incremental Development Model According to wikipedia.org, iterative waterfall or commonly called as incremental development model is the cyclical software development process that been created to respond the weakness of the previous waterfall model. More definitions of iterative waterfall are the model which can revise and improve the part in phases of the system itself. Thus, if they found some mistakes in the previous phase, they can go back and fix the problem Activities and tasks in Iterative Waterfall The activities and tasks that involved in Iterative Waterfall are: 1. Definition; this task consists of Marketing & Business requirement, costumer s feedback, competitive analysis, and determines then project scope. The major point of this task is requirement. 2. Design; this activities cover functional specification, frames the problem, create the use case, design document and project plan. The major point is designing the project and planning them. 32

28 3. Development; this task consists of creating the lass and sequence diagrams, code and testing the plan. In this task, the major point is code the plan. 4. Debugging; this task consists of creating the test scripts, report the bugs, and fix it. The major point is testing the scripts and fixing the problem. 5. Deployment; this tasks cover test the alpha and beta phase, product the software, document the task. The major point is product the software. 6. Production; the tasks cover product support, demonstration, sales literature, maintenance, custom deployment, and training. The major point is maintenance The iterative waterfall process The process of iterative waterfall consists of 6 activities. The first task is defining the user requirement. They have to define the requirement first to continue with the design because we can t recognize the design if we don t know what the user needs. After that, we continue to the design phase, development phase, debugging phase, deployment phase, and finally to the 33

29 production phase. The complete process will be explained in graph below. Figure.13 Iterative Waterfall Model (Source from Advantages of iterative waterfall The benefits of iterative waterfall are: 1. Iterative waterfall can go back to previous phase. If we have problem occurred after we go to the next phase, we can go back to the previous phase to fix 34

30 the problem and after that we can go the existing phase. 2. Iterative waterfall is integrated. In iterative waterfall model, all phases is integrated, thus they can go to the next phase at least if we do have the blueprint of the system existing. 3. Iterative waterfall is simple and efficient. Iterative waterfall is simple and efficient because we can go back to the previous phase, if we get some problem occurred regarding the previous phase and we don t have restart again from beginning. 2.3 General Knowledge In here, we want to discuss shortly about several theories that still have correlation with this project Intranet According to wikipedia.org, intranet is a private network in a computer the use internet protocols that commonly used to connect internally in a company and it securely share between employees. 35

31 2.3.2 Management Information System (MIS) Management Information System (MIS), based on Satzinger, is the information system which gain the information captured by transaction processing systems and produce reports that management needs for planning and controlling Executive Information System (EIS) Satzinger describes Executive Information System (EIS) as information system that been provided for executives to use for monitoring the competent environment and also for strategic planning Decision Support System (DSS) Satzinger determines Decision Support System (DSS) as support system that permit the user to explore the impact of available options or decisions Enterprise Resource Planning (ERP) Based on Wikipedia, Enterprise resource planning is a system that has function to integrate all the data and processes that organization or company had become a one system combined. 36