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Chapter 2: Elements of Information Systems

ACCOUNTING INFORMATION SYSTEMS: A DATABASE APPROACH


by: Uday S. Murthy, Ph.D., ACA and S. Michael Groomer, Ph.D., CPA, CISA

Elements of Information Systems

Learning Objectives

After studying this chapter you should be able to:

• distinguish between data and information


• explain the hierarchy of data
• describe alternative field formats, record keys, and coding systems
• explain various types of files
• discuss the steps in the data processing cycle
• discuss data input options
• explain the various file organization, file access, and file update options
• discuss the relative merits and drawbacks of batch versus online processing
• describe and discuss the systems approach

In the previous chapter, we presented the database approach to accounting and


contrasted it with conventional information systems representing the first wave of
computerization of accounting information systems. However, regardless of their design
and architectural differences, all computer-based information systems share some
common elements. In this chapter, we will discuss the basic elements of computerized
information systems. First, we will distinguish between data and information. We will
then discuss how data are organized in computer systems at the most basic level. You
will become familiar with alternative field formats and record keys. Thereafter, the
hierarchy of data from bytes to a database will be presented. Files and the various types
of files will also be discussed. We will conclude the chapter with a discussion of the
"systems approach" and an explanation of what that entails.

Data versus information

As we saw in the previous chapter, the purpose of an information system is to convert


data into information. Accounting information systems convert input transactions into
financial reports and other types of informational outputs. Data represents raw,
unprocessed facts that are useless without further processing. Information is data made
meaningful. The information system processes data to render useless facts into useful
information. For example, if you walk from door to door to every residence in your city
and record the names and phone numbers of all residents in the order of your visit, you
would have an extensive collection of data. However, these data are essentially useless

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since it would be very difficult to locate the phone number based on a resident's last
name. What converts these data into useful information, namely a phone directory, is
the process of alphabetizing the data. That is, if names and phone numbers are sorted
in order of the last name of residents, then the data become useful. The sorted list is
useful since it is now possible to locate the phone number of any resident so long as
you know the last name of the resident. Information alone is only a means to an end.
The right information delivered at the right time and interpreted in the right manner can
lead to knowledge. Knowledge in turn can lead to wisdom and/or power. An excellent
example of information versus knowledge, wisdom, and power is the Internet. There are
trillions of megabytes of information on countless home pages on the Web, but only few
of us obtain knowledge about a particular topic from the Internet. Fewer still can convert
that knowledge into wisdom or power. The data-to-power value chain, also referred to
simply as the information value chain, is shown in the following figure.

For information to be truly useful and meaningful to a user, it must meet certain
qualities. It must be relevant and reliable. The relevance of information pertains to its
ability to assist a user in making a decision. For information to be relevant, it must be
received in a timely manner and must have the capacity to change the user's decision. It
must be made available soon enough to make a difference and must make the user
better off relative to his or her situation prior to receipt of that information. Reliability of
information has to do with its accuracy and freedom from errors. Information replete with
errors is unreliable and can potentially lead the user to an incorrect decision. Control
mechanisms must be placed within the information system to prevent intentional and
unintentional errors in data input, processing, and information output. A concept closely
related to reliability is reproducibility. Using the same data as input, and applying the
same processing methods, another information system should generate identical
information. In summary, data represents raw facts, whereas information is data made
meaningful. Information must be both relevant and reliable to really be useful to a
decision maker. Having discussed the difference between data and information, let us
now explore how data are stored in computer-based information systems.

Hierarchy of data

At the lowest level, all computer systems store data in the form of bits. A bit is a binary
digit and can take a value of either 0 (turned off) or 1 (turned on). In essence, a bit is
turned on by a tiny electrical impulse and is turned off when the impulse is discharged.
A group of bits forms a byte. In most computer systems, eight bits form a byte. A byte is

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roughly equivalent to a character, such as the letter “a” or the number “3,” which is the
lowest element understandable by humans. A group of related bytes forms a field.
Thus, the group of bytes that forms the word 'Jones' makes up a 'name' field. A group of
related fields makes up a record. Tom Jones, Marketing, Sales Associate, 8/1/2008,
$2,500 are a group of fields which make up an employee record showing the
employee's name, department, grade, date hired, and monthly salary. A group of logical
records constitutes a file. All employee records taken together would make up the
employee file. A collection of sales invoices for July 2008 would form the sales file for
July. Finally, a collection of logically related files is a database. All files relating to
Division A's operations would constitute the 'Division A database.' As shown in the
figure below, the hierarchy of data starts with bits at the lowest level and ends with a
database at the highest level.

In creating an information system, a number of design decisions must be made relating


to fields, records, and files. Let us now explore the various options relative to field,
record, and file design.

Field formats

The format designated for a field is one design decision that you might be involved in.
Although the field format decision is usually not irreversible, giving some forethought to
the kind of data that might be stored in each field is time well spent. Back in the late
1990s, a lot was made of the “Year 2000 problem,” referred to in computer speak as the

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"Y2K" problem. When establishing the field format and length of fields in many of the
older computer programs developed in the 1960s and 70s, no thought was given to the
implications of the year 2000. These programs were written primarily in COBOL
(Common Business Oriented Language), which did not have a "date" format at that
time. Dates were simply stored as a string of six alphanumeric characters (e.g., XX-XX-
XX for MM-DD-YY). Thus, these programs stored only the last two digits of the year
(e.g., 85 instead of 1985). This was done to save storage space, which was at a
premium in those days. As a result, these computer programs would have interpreted
the year 2000 as 1900, thereby performing erroneous calculations in a host of
applications such as those computing interest on loans, premium due on insurance
policies, aging accounts receivable, etc. The "Millennium Bug," as it was referred to,
was hidden within trillions of lines of COBOL code in the computer systems of most
large organizations. It is estimated that the industry-wide fix for this problem cost over
$100 billion! Perhaps this was money well spent, since there were almost no Y2K
related problems as organizations moved from 1999 into the year 2000.

Most computer systems support the following field formats: numeric, text, currency,
date/time, and Boolean. Some systems also support counter fields and fields capable of
storing binary objects such as a graphical image, a video clip or a sound recording. Let
us now understand each of these field formats.

As the name suggests, numeric fields can only store numbers. In contrast, text fields
can store any keyboard character. Moreover, these text fields can store any character in
the complete character set used for a particular computer. All the characters (numeric
and non-numeric) in the character set for a computer are called alphanumeric
characters. Currency fields are for storing dollars and cents appropriately formatted.
Date/time fields can store dates or times in a variety of user-specified formats (e.g.,
MM/DD/YYYY or DD/MM/YYYY). Boolean fields can hold only one of two possible
values—either true or false, or in some computer systems, yes or no. Counter fields are
automatically incremented by one whenever a new record in the file is created. The user
cannot update the value in the counter field. Fields capable of storing binary large
objects, or BLOBS, are very useful for present day information systems that are
increasingly becoming multimedia. No longer are information systems limited to storing
text and numbers. Other forms of data, such as a photograph of an employee or a video
image of a product, can also be stored in files. The various field formats are
summarized in the following table on the next page.

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Field Formats
Format Explanation
Numeric Used to store integers and real numbers
Text (alphanumeric) Can store any keyboard character
Currency Used for monetary values
Can store date only, time only, or both date and
Date/time
time
Can have only one of two possible values
Boolean
(true/false, or yes/no)
Automatically incremented by 1 every time a
Counter
new record is added
"Binary Large Objects"—used to store pictures,
Blobs
graphics, and other such multimedia data types

Record keys

In addition to selecting appropriate formats for fields in a record, another critical design
decision is the designation of the primary key for the record. The primary key is the
field or set of fields that uniquely identify records in a file. For example, in a student file,
the student identification (ID) number could serve as the primary key because every
student would have a unique student ID number. In most files the primary key is
obvious. Customer files typically have a customer number field, which would be the
primary key. The sales invoice number would be the primary key in a file of sales
invoices. It is possible that a file has more than one unique identifiers. For example, if a
student file stores each student’s assigned student identification number and the
student's social security number, then the student file would have two unique identifiers.
Each of the two unique identifiers is called a candidate key since each is a candidate to
serve as the file's primary key. However, only one of the two unique identifiers must be
designated as the file's primary key. That is, only one field must be designated as the
"search criterion" for the file.

Some files may require more than one field to uniquely identify records in the file.
Consider a file used to store customer complaints. Assume that the customer number of
the customer who makes each complaint is recorded. In addition, the date and time of
the complaint is also recorded. However, no separate "complaint number" is generated.
Assuming that a customer could have more than one complaint, then the customer
number alone would not uniquely identify records in the file. However, if we assume that
a customer will not have more than one complaint in a day, then the combination of
customer number and date would uniquely identify records in the complaint file. If we
assume that customers could make more than one complaint in a day, then the

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combination of customer number, date, and time, would uniquely identify records in the
file. When a combination of fields is needed to uniquely identify records in a file, the
primary key is called a composite key or a concatenated key.

Some computing environments feature system-generated identifiers for files. Recall the
"counter" field format, which is automatically incremented by one when a new record is
added to the file. In effect, the counter becomes the system-generated primary key for
the file. The counter, however, is simply a number beginning with 1 and ending with the
number of records in the file. Depending on the coding scheme chosen, the primary key
can be used to reveal many different aspects of records in the file. Coding schemes are
discussed later in this chapter. Thus, it is often advantageous to create a new field, such
as customer number in a customer file, and designate that field as the primary key for
that file rather than simply relying on the system-generated counter.

Fields, or attributes, in a file that are not part of the primary key are referred to as non-
key attributes. One or more of the non-key attributes in a file can be designated as
secondary keys. While primary keys uniquely identify records in a file, secondary keys
are used to sort the file in some sequence for reporting purposes or to answer user
queries. Consider a file of sales invoices with the following fields: invoice number, date,
customer number, salesperson number, sales region, sales amount. The primary key of
this file is the invoice number. Each of the remaining fields is a potential candidate for
being a secondary key. Secondary keys are used to sort the file to respond to a user
request for information. Thus, the sales manager might want a listing of sales invoices
by date, by salesperson number, or by sales region. These requests could be handled
by sorting the file by each of the relevant fields.

Indexing the file on the field can make sort operations on a field, and the selection of
specific records based on the field, considerably faster. Indexing will be discussed a
little later in this chapter. Although any non-key attribute could be designated as a
secondary key, it is important to note that this designation comes at a cost. As
discussed above, an index must be built on each secondary key field to speed queries.
However, indexes comprise overhead for the computer system. An excessive number
of indexes could actually slow performance in operations such as adding or deleting
records, since all indexes must be rebuilt after each addition or deletion. Thus, it is
necessary to be judicious in the designation of secondary key fields.

The above discussion on record keys is summarized in the following table.

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Record Keys
Key Explanation
The field that is used to uniquely identify records in a file;
Primary key
the field designated as the search criterion.
Candidate key Any unique identifier of records in a file.
Composite Two or more fields that together uniquely identify records in
(concatenated) key a file.
Non-key attribute Any field that is not a primary key field.
A non-key field (attribute) used to sort the file to answer
Secondary key
user queries.

Coding systems

In discussing primary keys, we alluded to the process of establishing a coding system


for key values. There are three types of coding systems: sequence codes, block codes,
and group codes. In a sequence coding system, the records are simply numbered in
sequence. This system is essentially the same as the "counter" primary key discussed
earlier. Sequence codes are typically used to identify transactions or events. Sales
invoices, purchase orders, and checks are examples of business documents where
sequence codes are employed. An advantage of sequence codes is that missing
documents can be quickly identified, either manually or by the computer system.
However, in a sequence coding system it is not possible to indicate categories of the
item being coded. Thus, a sequence code for sales invoices will not be able to
distinguish between say East region invoices and West region invoices.

In a block coding system, ranges of numbers are reserved for each category of the
item being coded. A classic example of the block coding system is the chart of
accounts. A chart of accounts coding system might look like this: numbers 100 through
199 for assets, 200 through 299 for liabilities, 300 through 399 for income accounts, and
400 through 499 for expense accounts. If there are only 30 asset accounts, then the
numbers 131 through 199 are simply unused and available for additional asset accounts
to be set up in the future. The advantage of the block coding system is that the type of
account can be discerned simply by knowing the account number. For example, the
user would know that account numbers beginning with 4 are expense accounts. The
drawback of block codes is that they can reveal only very limited aspects of the item
being coded. In the chart of accounts example described above, the code could be
further refined such that accounts numbered 100 through 149 are current assets, and
accounts numbered 150 through 199 are long term assets. Each account number would
then reveal not just the broad account type (i.e., asset, liability, income, expense) but
also the specific type of account in each broad category (i.e., current asset, long term

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asset). However, it is difficult to conceive of a block code being used to represent three
or more aspects of the item being coded.

In a group coding system, each digit or group of digits in the code for an item signifies
a different aspect of that item. Consider the following coding system for parts: digits 1-2
indicate the division number (assuming that there are no more than 99 divisions), digit 3
indicates the warehouse number in the division (assuming a maximum of 10
warehouses in each division), digits 4 and 5 indicate the part type (assuming that there
are no more than 99 part types), and digits 6 through 8 indicate the specific part number
(assuming no more than 999 parts within each part type). So a part number of
16359217 indicates that it belongs to division number 16, is stored in warehouse
number 3 in that division, is of part type 59, and that it is part number 217 in that
warehouse. Group codes can be very flexible since there is no theoretical limit on the
length of the code and the number of dimensions that it can be used to capture.
However, practically speaking the group code should be of reasonable length so that it
is not burdensome for users. Note that both letters and numbers can be used in group
codes. The advantage of using letters is that each position has 26 options rather than
just 10.

If letters are used, a coding system can be made mnemonic either in its entirety or in
part. A mnemonic code is one that is suggestive of the item being coded. The two
letter state codes used by the US Postal Service are an example of a mnemonic code:
IN suggests Indiana, TX suggests Texas, and CA suggests California. In the part
number group code described above, rather than using numbers, two meaningful letters
could be used to indicate the division. For example, the letters NW could be used to
suggest that the part belongs to the Northwest division. In summary, the choices for
coding systems are sequence codes, block codes, and group codes. Group codes can
be made mnemonic either in whole or in part such that the code itself is suggestive of
what is being coded.

Some guidelines for designing coding schemes are as follows:

• Use numbers rather than letters whenever possible (numeric codes are easier to
enter into a computer system)
• Allow for future expansion
• Make the code as simple as possible

Let us now discuss the process of designing a coding scheme. Assume that your
institution would like to devise a coding scheme for identifying students. Students can
be in-state, out of state, or international students. Further, students can be either
undergraduate or graduate students. The institution has about 10,000 students. There
can be over a thousand students but less than 4000 students within each sub-category
(e.g., in-state undergraduate, or international graduate).

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A block coding scheme could be devised for identifying students, as follows:

00001 - 04999 = in-state, undergraduate


05000 - 09999 = in-state, graduate
10000 - 14999 = out of state, undergraduate
15000 - 19999 = out of state, graduate
20000 - 24999 = out of state, international

Presumably, there cannot be an "in-state, international" category of students. Note that


up to 5000 students can be accommodated within each category, thereby allowing room
for expansion.

Group coding schemes can be either entirely numeric or alphanumeric. An


alphanumeric group code would use letters. If the letters used are suggestive of the
aspect of the item being coded, then the code would be referred to as a mnemonic
group code. A numeric group coding scheme for identifying students follows:

Digit
Representation Values
position
1 = in-state
1 In-state or out of state
2 = out of state
1=
undergraduate
Undergraduate, graduate, or
2
international
2 = graduate
3 = international
3-6 Specific student number 0001 to 9999

So student number 120875 would be an in-state graduate student, student number


231278 would be an out of state international student, and so on. In contrast to the
numeric group coding scheme above, a mnemonic group coding scheme would use
meaningful letters for each sub-category, as shown in the table on the next page:

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Digit
Representation Values
position
I = in-state
1 In-state or out of state
O = out of state
U=
undergraduate
Undergraduate, graduate, or
2
international
G = graduate
I = international
3-6 Specific student number 0001 to 9999

Student number IG0875 would be an in-state graduate student, student number OI1278
would be an out of state international student, and so on. If it were decided that the
student code should be alphanumeric but should not reveal the student type, then the
letters in the "values" column would be changed (e.g., A for in-state, B for out of state, C
for undergraduate, etc.).

The various coding schemes are summarized in the following table.

Coding Schemes
Coding scheme Explanation
Records, typically source documents, are numbered
Sequence code
sequentially so that missing documents are easy to spot.
Ranges of numbers are reserved for each category of the
Block code item being coded. Typically used for chart of accounts
coding.
Each digit or group of digits in the code signifies a different
Group code
aspect of the item being coded.
Letters used in the code are suggestive of the item being
Mnemonic code
coded.

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File types

Depending on the contents of a file, it can be classified under one of the following
categories: master, transaction, reference or table, history, and backup. Master files
contain relatively permanent information and are analogous to ledgers in a manual
accounting system. Customer, employee, vendor, and inventory files are examples of
master files.

Transaction files contain relatively temporary information and are analogous to


journals in a manual accounting system. Sales, purchases, payroll vouchers, and cash
receipts are examples of transaction files. Just as journals are used to temporarily hold
transaction information until they are eventually posted into ledgers, transaction files are
also used to temporarily hold transaction-related information until the information can be
used to update master files. Of course, transaction files are also valuable as stores of
transaction information. Transaction files are frequently accessed to provide answers to
a variety of questions posed by users at all levels in the organization. This process of
using transaction file information to update the appropriate master files is called the file
maintenance run and will be discussed later in the chapter.

Reference files, which are also called table files, are used to store relatively permanent
information that is needed only for reference purposes during a file maintenance run.
Tax tables and price list files are examples of reference files. These files can of course
be updated periodically, but they are accessed only for reference purposes during the
process of updating a master file. For example, in the file maintenance run to update the
customer master file, in which the sales invoices transaction file would be used, a price
list file might be accessed to verify the unit prices of items sold. However, during this
process of updating the customer master file, the price list file would typically not be
updated. Rather, the price list file would be updated in a separate procedure.

History files are old transaction and master files that are maintained only for reference
purposes and for legal reasons. An example of a history file would be the file containing
July 2003 sales invoices. These files are usually maintained off line as archive files.
That is, they are stored using inexpensive storage media such as tapes and cannot be
instantaneously accessed. Presumably, there is little need to access the July 2003
sales file in the year 2008.

The last file type is backup files. As the name suggests, backup files are duplicate
copies of transaction, master, and reference files. Since history files are typically
maintained only for legal reasons, and since there is little danger of accidentally
destroying history files, most organizations would typically not maintain backup copies
of history files. It is a good practice to make frequent backups of all transaction and
master files. Backup copies should be maintained on site as well as off site at a secure
location.

The following table shows the various file types along with a brief description.

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File Types
File type Description
Master files Contain relatively permanent information.
Used to store transaction information which is used to
Transaction files
update master files. Relatively temporary.
Accessed but not updated during routine transaction
Reference (table) files
processing. Updated periodically.
Old transaction files. Stored as archive files for the
History files
purpose of reference and legal reasons.
Duplicate copies of master, transaction, and reference
Backup files
files.

The data processing cycle

Now that we have discussed the basic elements of information systems, let us turn our
attention to the data processing cycle. All information systems applications undergo a
sequence of steps from data input to information output. This process, called the "data
processing cycle," uses the temporary data in a transaction file to update the permanent
data in a master file and also generate relevant reports. The sequence of steps in the
data processing cycle are data input, data preparation, data processing, file
maintenance, and information output.

Data input involves collection of data and converting data into computer-readable form.
Data input results in the creation of a transaction file. For example, paper copies of
sales invoices may need to be keyed into the computer system’s sales transaction file
using a keyboard terminal. Newer technologies facilitate automatic entering of data, for
example using bar code scanners.

Data preparation may be needed to facilitate data processing and file maintenance.
Data preparation entails two main steps: (1) validating input data to filter out erroneous
transactions, and (2) sorting input data to facilitate the process of updating the master
file. If the file processing method calls for master files to be updated instantly rather than
periodically, then the sorting step would not be needed. As will be discussed a little later
in the chapter, online processing systems result in the master file being updated
instantly, whereas batch processing systems result in the master file being updated
periodically (e.g., at the end of every day). In both online and batch processing
systems, data inputs must still be validated to prevent erroneous data from entering the
system.

Data processing represents the next step in the data processing cycle. This step
includes all the calculations, comparisons, and manipulations that are undertaken in the
particular application. For example, in a sales application system, data processing might

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involve calculating the sales tax payable on each invoice. The data processing step
takes a transaction file as input and may access a reference file.

File maintenance is the next step in the data processing cycle. This is the step where
the master file is actually updated using transaction file data. There are three types of
file maintenance activities: add, update, and delete. The add activity involves adding
new master file records, for example adding a new customer to a customer master file.
The update activity involves modifying an existing master file record. For example, a
customer's address could be changed or the customer's balance may be updated to
reflect new credit sales transactions. Specifically, customer balances will be increased
for all customers who had credit sales transactions in a particular period. The delete
activity involves deleting an existing master file record. Note that although the data
preparation step filters the transaction file to detect erroneous transactions, some types
of errors can be detected only at the file maintenance step. For example, if the
customer's balance would exceed the credit limit if a credit sales transaction amount is
added to the previous balance, then that transaction would have to be rejected. Such
rejected transactions are stored in a "suspense file" to be dealt with subsequent to the
file maintenance run. Although data processing and file maintenance are distinct steps
in the data processing cycle, it should be noted that they are frequently combined into
one data processing run.

Information output is the last step in the data processing cycle. This step is where
reports are generated and output either on paper or on the user's computer screen. For
example, in a sales application system, the information output step could result in the
following reports: sales analysis report, salesperson performance report, product
turnover analysis, and customer statements of account. Reports can either be routine
scheduled reports that are always generated, demand reports that are generated only if
specifically requested, or ad hoc custom reports that are designed to answer specific
user questions. Depending on the type of data processing method employed, any of
these types of reports can be instantly generated by the end user with little or no
involvement of data processing personnel.

The steps in the data processing cycle, along with the types of files accessed at
different stages, are shown in the following figure on the next page.

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As discussed above, the data preparation step may only be partially necessary
depending on whether the processing system is batch or online. Specifically,
transactions do not need to be sorted in an online processing system, since the desired
master file record can be accessed instantly. However, note that transactions still need
to be validated, even in an online system. Also note in the above figure that the
transaction file is accessed during the data input step in order to store input
transactions, and the master file is accessed during the file maintenance step in order to
read and update the appropriate master file record.

Data input options

In the above discussion of the data processing cycle, we alluded to some options
available relative to data input, file access, and master file update. Data can either be
input instantaneously, as it is generated, or subsequently at some predetermined point
in time. For example, in a sales application, sales invoice information can be keyed in
directly into the computer system as sales orders are received, say over the phone.
Sales information can also be input instantaneously using bar code scanners attached
to point-of-sale terminals. Alternatively, sales order information can be recorded on
paper as sales orders are generated. Later, perhaps at the end of each day, all of the
paper documents can be keyed into the computer system. The resulting file containing
the transactions in computer readable form is called the transaction file. When data are
entered instantaneously into the computer system, the process is referred to as online
data input. When data are recorded on paper and subsequently entered into the
computer system, the process is referred to as batch data input. Batch and online input
are depicted below in the following two diagrams. Note that in batch input, either a tape

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or a magnetic disk (“hard drive”) is used to store transaction records. In the case of
online input, however, a magnetic disk device is invariably used.

File organization and access options

There are two primary methods of file organization and access: sequential and
random. Sequential file organization means that the records in a file are stored in
sequential order of the primary key. The records can be stored either in ascending or
descending order. For example, an employee master file could be stored in ascending
sequential order of the employee number primary key. The records must be accessed
sequentially. That is, n-1 records must be traversed to access the nth record. When new
records are to be added to a sequential file it is important to maintain the sequential
order of all records (old and new combined). In effect, an entirely new file must be
created, merging the new records with the old ones so that the correct sequential order
is maintained.

Random files, or random access files, are also referred to as direct access files.
Records in random files are scattered throughout the storage medium (usually a
magnetic disk). Records are not stored in any particular physical order. A hashing
routine is used to determine the storage location of records. The hashing routine takes
the primary key of a record and applies some mathematical algorithm (formula) to
generate a disk address for the record. To access a particular record, the hashing
algorithm is applied to its primary key to determine its storage location. Thus, in a

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random access file, the nth record can be directly accessed without having to traverse
n-1 records. Hashing algorithms are not perfect. It is possible that when the algorithm is
applied for two records with different primary keys, the same disk address could be
generated. Such duplicate disk addresses are referred to as clashes. That is, a "clash"
occurs when a record is attempted to be written to a location that is already occupied.
Such clashes are stored in an overflow area on the magnetic disk. When a clash occurs
it is resolved by placing a pointer alongside the disk address that is already occupied.
This pointer points to the overflow area location where the second record that generated
the same disk address is stored.

A third option in file organization is the indexed file. File indexing involves the creation of
an index that contains key values and associated storage locations (disk addresses) of
records in a file. File indexing facilitates both sequential access and random access.
For this reason, this method is often referred to as the indexed sequential access
method (ISAM). To locate a particular record, the file index is first searched to obtain
the storage location of the record and then the record itself is located on the disk. Note
that the file index itself can be accessed and searched very quickly. However, locating a
single record is slower in an indexed file relative to a purely random file because two
accesses are required--one to the file index and a second to the actual disk location (in
a purely random file only one access is needed--directly to the disk location using the
hashing algorithm). To access all records in the file, for example to generate a
sequential listing of the records, the file index is first accessed to obtain the first record's
disk address and that record is accessed. Thereafter, each subsequent record is
accessed in sequence by first looking up the index and then retrieving the record from
the disk. However, this process is slower than in a purely sequential file organization
since the index must be accessed after each record to determine the location of the
next sequential record (in a purely sequential file the records are physically in
sequence). Note also that indexed files are faster than random files when all records
must be accessed because in a random file each record's location must be individually
generated using the hashing algorithm. In sum, indexed files (1) permit both sequential
and random access to a file, and (2) are faster than purely random files but slower than
purely sequential files when all records must be accessed.

File update options

There are two options available regarding the periodicity of master file update. If batch
data input is employed, then the master file can only be updated in batch mode. That is,
the file maintenance run takes place at predetermined intervals such as at the end of
every day. As indicated above, when data are input in batch mode, the transaction file is
created. Thereafter, in the file maintenance step in the data processing cycle, all master
file records are read and those records with corresponding records in the transaction file
are updated to reflect transaction activity. Both the transaction file and the master file
are organized sequentially. Batch processing to update the master file is depicted in the
following diagram. Note that all files are on magnetic tape. The transaction file must
undergo the data preparation step of sorting and editing. The transaction file must be
sorted in order of the primary key of the master file. For example, in a batch processing

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run where credit sales transactions are used to update the customer master file, the
sales transaction file (primary key = invoice number) must be sorted by the customer
number (a secondary key). Note also in the diagram below that a transaction listing and
an error listing are generated as a result of the run.

If online data input is used, then the master file can be updated either in batch mode or
in online mode. Although transaction data can be entered into the computer system
online, as the transactions occur, the data may simply be stored in a transaction file at
the time of input. Records in master files that are affected by the transaction are not
updated instantaneously. The transaction file can then be used at a predetermined
interval, say at the end of every day, to update the master file. Thus, although data entry
occurs online as transactions occur, the relevant master files are updated only in batch

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mode whenever the file maintenance run occurs. In this option too the master file is
organized sequentially. Given that the master file is updated only in batch mode, the
difference between online data input and batch input is simply that the transaction file is
created as transactions occur with online input, and at the batch processing interval with
batch input.

The other alternative if data are input online is to update the relevant master file record
instantaneously. Thus, as a transaction occurs, the master file is accessed and the
appropriate master file record related to that particular transaction is instantly updated.
For the master file record to be accessed and updated instantaneously, it must be
organized as a direct access file (random access file). The transaction may still be
stored in a transaction file, but this file is maintained purely as a record of transaction
activity; the file is not used later to update the master file. Thus, in a sales application, a
sales order may be input online and the customer's record may be instantly accessed
and updated to reflect the sales transaction just entered. Online master file update is
also referred to as online real-time processing since the master file records are updated
as transactions occur, that is, in real time. The following diagram depicts online
processing of transactions as they occur. Note that the master file is maintained on a
magnetic disk and that there is only one version of the master file. After processing,
transactions are stored either on a magnetic tape or on a magnetic disk. There is no
"error listing" because erroneous data are identified during input and are simply not
processed (the user is prompted to correct erroneous data).

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The following table presents the possible combinations of data input and master-file
update for the batch and online options. Note that the only combination that is not
possible is batch data input with online master file update. It is possible to have online
data input combined with batch master file update. The more common combinations, of
course, would be batch data input combined with batch master file update and online
data input combined with online master file update.

Batch versus online: A comparison

In deciding between batch and online data input and master file update, the tradeoff to
consider is between efficiency and timeliness. If transactions occur sporadically, as is
likely for many organizations, then batch input is more efficient because data are
converted into computer readable form all at once in one operation. Online input is less
efficient if transactions occur sporadically since the data entry operators will remain idle
during times when transactions are not occurring. Note also that batch input and update
typically requires a separate data preparation step to sort and edit the data (recall the
data processing cycle discussed earlier). In contrast, online input and update does not
require a separate data preparation step; transactions are simply processed as they are
entered. Note that transaction inputs will still need to be edited (or validated) in an
online system; it is only the sorting step that is eliminated.

Let us now turn to timeliness. Online data input facilitates instantaneous updating of the
master file. With batch input, the master file can only be updated periodically. In some
instances, the periodic nature of the update process is preferable because of the
greater control over the file update process. Care can be taken to ensure that
transactions being used to update the master file during the periodic batch processing
run are in fact all valid transactions. As already noted, a separate "edit run" detects
errors in the transaction data file, and these erroneous transactions are excluded from
the file maintenance run. However, when the master file is updated only periodically, its
records are not always up to date. Consider a sales and accounts receivable application
in which the customer master file is updated in batch mode at the end of every day.

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During the day the customer file will not reflect the correct customer balances to the
extent that sales and collections transactions would have occurred but would not be
used to update the appropriate master file records until the end of the day. In contrast, if
sales transactions are entered online and the master file is updated as transactions
occur, then the customer file would always reflect the current balance of each customer.
Given that timeliness of information is becoming increasingly critical, online data entry
and instantaneous master file update is the preferred option for most organizations.
Moreover, decreasing hardware costs in recent years have made it cost effective for all
but the smallest of organizations to use online data input combined with real time
master file update. The following table compares and contrasts the relative advantages
of batch and online file update options.

Comparison of batch versus online update


Advantages of batch update Advantages of online update
More efficient use of computer system
and personnel when transactions occur Master file always up to date.
sporadically.
More control over input and processing No separate data preparation step
of transactions. required; no need to sort transactions.
Faster access to master file data
because of the use of magnetic disks for
storage.

The Systems Approach

Now that we have defined and discussed a number of elements of information systems,
let us explore how these various elements or components all fit together. Every system,
including an information system, has an objective, one or more components, constraints
within which it must operate, and a boundary separating it from its environment. The
systems approach is a way of thinking about an information system and how its
components interact with one another. The approach involves taking a holistic view
such that the system is seen as more than just the sum of its parts. Problems,
constraints, and potential solutions are examined from the entire system's point of view
and not just at the subsystem or component level.

One way to embrace the systems approach is through the "General Systems Model."
This model defines a system as a set of elements that operate together to achieve
some objective. For example, a system might be an amoeba, your family cat, an
automobile, or the planet earth. For our purposes we like to think about systems from an

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information perspective. That is, let's focus on those systems inside organizations that
take data and generate information useful for decision-making.

From the General Systems Model perspective, a system has inputs, process(es),
outputs, a boundary, and operates in an environment.

Based upon an example involving sales on account, an accounting system has inputs
(sales on account), processes these inputs in some way (journalize and post to the
ledger accounts), and generates outputs (a trial balance and/or a set of financial
statements). In addition, each system has a boundary, and the boundary defines what
is contained inside the system (i.e., the processing of sales). Each system operates in
an environment. The environment is what is outside the system (i.e., the remaining
parts of the accounting system or generally other systems in the business organization).

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If the process inside a system is not understood, the system is termed a "black box."
For a system at this level, the inputs and outputs are known, but exactly what occurs
inside the system is unknown to the interested party. You may have heard one of your
friends describe something as a "black box." What your friend is really saying is that
they don't really understand what is going on about a particular issue.

Developing an understanding of what a system actually does is a critical endeavor. Let's


assume that you were visiting a local business and you were attempting to understand
how accounting transactions were recorded. How would you begin to develop such an
understanding? The most logical way in which this could be accomplished is to divide a
larger system into smaller parts. This process is known as factoring. The factored parts
are known as subsystems and generally form hierarchical structures. The difficulty with
factoring is that the number of interconnections between these subsystems, known as
interfaces, increases rapidly. Each interconnection or interface is essentially a
communication channel between each sub-system. In order to fully understand each
sub-system, you must know what data (inputs or outputs) is being passed across the
interconnection or channel. In the diagram on the next page, notice that the accounting
system can be factored into a number of sub-systems (cycles) and each sub-system
(cycle) can be further factored. In addition, each line connecting a sub-system is an
interface. However, note that due to the hierarchical nature of accounting sub-systems,
not all sub-systems will have interfaces between them.

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The general rule for specifying the number of interconnections (I) is the following
relationship.

I = [(ns)*(ns-1)] / 2

Where ns = the number of subsystems.

Thus if we had four subsystems, there would be six possible interconnections. This
would be calculated as follows:

I = [(4)*(4-1)] / 2

I=6

We can also see the interconnection among four sub-systems graphically. Count them.

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With even ten subsystems, the number of interconnections becomes

I = [(10)*(10-1)] / 2

I = 45

Thus, the number of interconnections can escalate very rapidly.

Fortunately, as indicated earlier, not all the subsystems that make up a whole are
necessarily connected, given the hierarchical nature of sub-systems discussed above.
On the other hand, if we seek an understanding of a collection of available subsystems,
there are two ways in which this can be accomplished. First, sub-systems can be
clustered. In this way, we can group closely related subsystems and assume that there
is a single interface. Second, we can ignore any weak interconnections. Some of these
interconnections may not be important in our understanding of how a collection of sub-
systems operates.

Another issue relating to systems is the notion of independence between related sub-
systems. You may have read about a strike at a GM brake plant in Ohio a while ago.
Because of the tightly connected operating plants (systems) at GM, this strike caused
many GM assembly plants to shut down in a matter of days. Because GM and many
other business organizations have embraced "just in time" inventories, the impact of a
problem in one sub-system is quickly felt in the rest of the system. Manufacturers have
for a long time used inventories to decouple sub-systems allowing these subsystems to
operate independently of one another. Random access memory (RAM) is used as a
buffer to allow the decoupling of computers from peripheral devices like laser printers,
which operate much slower than computers. The loosening of connections between
systems is called decoupling. Another way that business organizations decouple
systems is to build extra (slack) capacity into their production facilities. However,

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decoupling systems comes at a price. Holding inventories, providing extra RAM in your
personal computer, or providing extra capacity in a production facility has an associated
cost. Therefore, the potential gains from decoupling (increased flexibility) must be
weighed against the cost of the decoupling mechanism.

Control systems are an integral part of business systems. Below is a diagram of a


system that has two sub-systems. One of the sub-systems processes sales transactions
(cash and credit sales). The other sub-system has a control orientation. Notice that the
sales processing system sends a credit sale to the control device where the availability
of credit is evaluated. The sensor determines the type of sale. The control
comparison evaluates credit against a pre-determined standard (credit limit). The
activating unit then indicates whether or not the credit sale has been approved. If the
credit sale is approved, the transaction is recorded. If not, the client is notified of the
declined request for credit.

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Business control systems typically involve both man and machines under man's control.
These man/machine systems typically tend to be subject to random disturbances, which
are usually associated with humans. Ideally, for each way in which a system can get out
of control, the control system provides for a corresponding control state. This is called
the "Law of Requisite Variety." Realistically, the ability to adhere strictly to this law is
nearly impossible. What is desired is a balance between controlling everything and
controlling nothing. As you might suspect, what we are seeking is a balance between
the horrendous cost of controlling everything and the reasonable cost of controlling high
risk, high exposure events with which we are most concerned.

In summary, the systems approach involves taking a broad viewpoint and avoiding the
pitfall of attempting to optimize each subsystem individually. Frequently, when a
designer changes the features of a single subsystem in isolation, the result may have
undesirable consequences on other subsystems through the interaction of the changed
subsystem with other subsystems. The advantage of taking a macro view of the system
as a whole is that inputs, processing procedures, controls, and information reports are
located in the most appropriate subsystem. The resulting information system is a tightly
coupled set of subsystems that are all logically interrelated.

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Summary
This chapter began by drawing a distinction between data and information. Data are
unprocessed facts, whereas information represents data made meaningful through
processing. The hierarchy of data from bits and bytes to files and databases was then
presented. Alternative field formats such as text, numeric, and currency were discussed.
Various record keys such as primary and secondary keys were then described. Coding
systems including sequence, block, and group codes were explained. Mnemonic codes,
which make codes suggestive of the item being coded, were also discussed. The
various file types such as transaction, master, reference, history, and backup files were
then described. The data processing cycle was then presented. The five steps in the
data processing cycle are data input, data preparation, data processing, file
maintenance, and information output.

Alternative data input options such as batch and online were described. File
organization and access methods were then discussed. The two primary file update
options—batch versus online—were then compared and contrasted in terms of their
relative advantages and disadvantages. The chapter concluded with a discussion of the
systems approach which involves taking a holistic view of information systems such that
it is seen as much more than just the sum of its parts.

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Key Terms
• activating units
• batch input
• bits
• black box
• boundary
• buffer
• byte
• character
• composite (concatenated) key
• control comparison
• database
• decoupling
• environment
• factoring
• field
• file
• hashing routine
• independence
• indexed file
• inputs
• interfaces
• non-key attribute
• online input
• outputs
• overflow area
• processes
• random access files
• record
• sensor
• sequential file organization
• standard
• subsystems

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Discussion Questions
1. Distinguish between data and information.
2. Explain the concept of the "information value chain."
3. What are the attributes of "good" information?
4. Briefly explain the hierarchy of data from the lowest to the highest level.
5. Briefly describe any three field formats.
6. Distinguish between primary and candidate keys.
7. Giving examples, explain the concept of a "composite" or "concatenated" key.
8. Distinguish between block, sequence, and group coding systems.
9. Why is a "mnemonic" coding system more user-friendly? Explain with examples.
10. Giving examples, distinguish between master and transaction files.
11. What is a reference file? Are reference files updated during routine transaction
processing?
12. Indicate the steps in the data processing cycle.
13. Compare and contrast batch input versus online input of transactions.
14. Distinguish between sequential, random, and indexed files.
15. Briefly explain the sequence of steps in batch processing of transactions. What
storage media are typically used in batch processing?
16. Briefly explain the sequence of steps in online processing of transactions. What
storage media are typically used in online processing?
17. Compare and contrast batch and online processing in terms of their relative
advantages and disadvantages.
18. Describe the components of the general systems model.
19. Describe the nature of a "Black Box." Provide an example of a "black box."
20. How do systems achieve independence?
21. Distinguish between buffers and inventories. How are these two concepts
similar?
22. Define and describe the components of a control system.

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Problems and Exercises


1. Listed below are a number of files. In parentheses following the file name is a listing
of fields in the file. Also indicated is the purpose of each file

• (a) INVOICES (INVOICE-NUMBER, DATE, CUSTOMER-NUMBER, SALE-


AMOUNT)

Used to record credit sales to customers.

• (b) STUDENTS (STUDENT-NUMBER, NAME, ADDRESS, MAJOR, SSN,


STATE-OF-RESIDENCE)

Used to store information about students at a university.

• (c) CONTACTS (CUSTOMER-NUMBER, SALESPERSON-NUMBER,


CONTACT-DATE, HOURS)

Used to record information about contacts between salespersons and


customers. Each customer can be contacted by many salespersons, and each
salesperson can contact many customers. There can be only one contact
between a given customer and a given salesperson on a particular date.

• (d) VENDORS (VENDOR-NUMBER, NAME, ADDRESS, BALANCE, TAX-ID)

Used to store information about vendors.

Required: Identify primary, candidate, and composite keys in each file.

2. Brazos Valley Supplies would like you to develop a coding scheme for their chart of
accounts. The coding scheme must distinguish between assets, liabilities, income, and
expense accounts. Within each of these categories, the coding scheme must further
distinguish between current and long term assets and liabilities, income from sales and
other income, and operating expenses versus other expenses. There are currently
about 400 accounts—approximately 100 each of asset, liability, income and expense
accounts.

Required: Devise a group coding scheme for Brazos Valley Supplies' chart of accounts.
The code should be mnemonic with respect to the account type (assets, liabilities,
income, or expense) and also with respect to the category within each account type
(e.g., current and long term assets). Show example codes for each account type and
category.

3. The Howdy-Ags Corp. would like you to develop a coding scheme for their customers
based on the following information. The company has a branch office to serve
customers in each of the following regions: East, Northeast, Mid-Atlantic, West, South,

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Southeast, Midwest, Canada, and Mexico. In addition to the region, it is necessary to


identify whether the customer is an in-state or an out-of state customer, since each
branch office serves many states. It is also necessary to identify whether the customer
is a government customer or a non-government customer. There are currently about
4000 customers.

Required: Devise (1) a numeric group coding scheme and (2) a block coding scheme
for Howdy-Ags' customers. For each coding scheme, show an example code for a
hypothetical customer.

4. From the description of each of the following files, indicate whether the file is a
master file, transaction file, reference file, or history file.

• (a) Purchase orders for July 2006.


• (b) Current sales invoice file.
• (c) Employee file.
• (d) File containing city and states for each U.S. zip code (used during processing
of sales orders).
• (e) Current vendor file.
• (f) Current payroll time tickets file.
• (g) March 2007 payroll file.
• (h) Finished goods inventory file.

5. For each of the following activities, indicate the stage in the data processing cycle in
which the activity would be undertaken.

• (a) updating the customer's balance to reflect a new credit sales transaction
• (b) generating a sales analysis report
• (c) sorting purchase order transactions by vendor number
• (d) calculating sales tax for a sales transaction
• (e) entering cash collection data into the system
• (f) checking a batch of sales transactions to ensure that all fields have been
entered
• (g) changing a vendor's address
• (h) calculating the F.I.C.A. amount on a payroll voucher
• (i) deleting a finished goods inventory item from the file
• (j) scanning grocery items at the check out counter

6. PartsWorld is a specialty auto parts store. Orders for auto supplies are received over
the phone from service stations in the city and surrounding communities. A sales order
slip is prepared when the order is received. At the end of the day, the sales orders are
batched and processed. For each step in the data processing cycle, indicate the task(s)
involved in processing PartsWorld's sales orders. Indicate all documents, files, and
reports that would be generated as appropriate.

• Data input

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• Data preparation
• Data processing
• File maintenance
• Information output

7. Indicate the type of file organization and access method that would be most
appropriate for each of the following files, given the description of its usage pattern.

• (a) a customer file which needs to be accessed at the end of each day to process
the day's batch of sales transactions.
• (b) an employee file which is accessed throughout the day to obtain employees'
office and phone number, but which is also used every Friday for the payroll
batch processing run.
• (c) a finished goods inventory file accessed during processing of sales orders
that are entered as customers call in their orders over the phone.
• (d) a vendor file used to process batches of purchase orders twice a day.
• (e) a student file accessed sporadically during the day to answer student related
queries from departmental advisors and which is also used to process fee
statements and other routine mailings on a weekly basis.

8. Draw a diagram of the general systems model. Make sure each component of the
model is labeled clearly.

9. The number of interconnections between subsystems can escalate rapidly. Calculate


the number of interconnections assuming you have

• five subsystems
• ten subsystems
• fifteen subsystems
• twenty-five subsystems

10. Bloomington Convalescent Center is a non-profit organization that cares for


individuals that are in need of non-critical extended care. The stay in the convalescent
center can be either long term or short term. An individual admitted to the Center has to
have an attending physician. The attending physician consults with the Center's medical
staff in specifying what type of medical treatments are to be administered.

The Center is headed by an administrator. This individual is responsible to the board of


directors for the day to day running of the Center. The Center has the following
functions:

• An accounting function headed by a controller. The accounting function tends to


the financial reporting needs of the Center, reimbursements from Medicare and
Medicaid intermediaries, and payroll preparation and reporting.
• Purchasing function
• Physical Plant

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• Food Preparation
• Physical Therapy

The medical staff of the Center consists of Registered Nurses, Licensed Practical
Nurses, and Staff Assistants. The staff assistants are the primary care givers in the
center. An individual can be either classified as a Medicare, Medicaid, or private pay
patient. Individuals are billed on a monthly basis by the accounting function. In addition
to earning revenues from basic patient care, the center also earns a significant amount
of revenue from physical therapy. The Center has also contracted to provide hot meals
seven days a week to the local "Meals on Wheels" organization.

Required: Identify all the major systems that are a part of the Bloomington Convalescent
Center. To the extent possible identify the inputs, processing, outputs, and linkages
between systems.

11. Len Graham is considering purchasing a brand new Corvette Hardtop at Dan Young
Chevrolet. He wants to purchase the car loaded with all the options. He currently owns
a loaded 2004 Toyota Camry V-6 with 45,000 miles. Len lives in Indiana, and the used
car manager at Dan Young has evaluated his Camry as “above average”. While
Corvettes typically are sold at the factory sticker price, Dan Young has offered the
Corvette at $500 over dealer invoice, but won't indicate to Len the exact invoice amount.

Required: Using information services found on the Web, what amount should Len offer
Dan Young assuming that he plans to trade his Camry on the Corvette? Please
prepare a detailed schedule in Excel that displays the amount Len should pay for the
Corvette.

12. The Rudy Rose Corp. would like you to develop a coding scheme for sales order
documents. Currently, Rudy Rose sells a variety of products to customers located in the
following regions: East, South, Southeast, Midwest, West, and Canada. At present, 30
different products are sold. The number of products sold is likely to expand to some 200
in the next year. Fifty salespersons sell products for Rudy Rose, and there is a need to
include a salesperson identifier in the sales order number.

Required: Devise a group coding scheme for the sales order at Rudy Rose. Use
mnemonics where possible. Show an example code for a hypothetical customer.

Last updated: August 19, 2009

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