Accounting Information Systems: An Overview

CHapter1

INTRODUCTION

Questions to be addressed in this chapter include:

What is the meaning of system, data, and information? What is an accounting information system (AIS)? Describe the major business processes present in most companies. What is the role of the AIS in the value chain? How does the AIS provide information for decision making?

SYSTEMS, DATA, AND INFORMATION

A system is a set of two or more interrelated components that interact to achieve a goal. Systems are almost always composed of smaller subsystems, each performing a specific function supportive of the larger system.

SYSTEMS, DATA, AND INFORMATION

Data are facts that are collected, recorded, stored, and processed by an information system. Information is different from data. Information is data that have been organized and processed to provide meaning to a user.

Usually, more information and better information .translates into better decisions

SYSTEMS, DATA, AND INFORMATION However, when you get more information than you can effectively assimilate, you suffer from information overload. When youve reached the overload point, the quality of decisions declines while the costs of producing the information increases.

SYSTEMS, DATA, AND INFORMATION Benefits of information - Cost of producing information Value of information
Costs and benefits of information are often difficult to quantify, but you need to try when youre making decisions about whether to provide .information

What Makes Information Useful?

Necessary characteristics:
Relevant

The capacity of information to make a difference in a decision by helping users to form predictions about the outcomes of past, present, and future

events or to confirm or correct prior expectations.

Reliable

The quality of information that assures that information is reasonably free from error and bias and faithfully represents what it purports to represent.

Complete

The inclusion in reported information of everything material that is necessary for faithful

Timely

Having information available to a decision maker before it loses its capacity to influence decisions.

Understandable

The quality of information that enables users to perceive its significance.

Verifiable

The ability through consensus among measurers to ensure that information represents what it purports to represent or that the chosen method of measurement has been used without error or bias.

Accessible

Available when needed (see Timely) and in a Businesses engage in a

variety of processes, including:

Acquiring capital Buying buildings and equipment Hiring and training employees Purchasing inventory Doing advertising and marketing Selling goods or services Collecting payment from customers Paying employees Paying taxes Paying vendors

*Each activity requires different types ofdecisions.Each decision requires different types of information.

BUSINESS PROCESSES

A transaction is:

An agreement between two entities to exchange goods or services; OR Any other event that can be measured in economic terms by an organization.

EXAMPLES:
Sell goods to customers Depreciate equipment

Many business processes are paired in give-get exchanges. Basic exchanges can be grouped into five

major transaction cycles:

Revenue cycle Expenditure cycle Production cycle Human resources/payroll cycle Financing cycle

Transactions in the revenue cycle:

MAJOR GIVE-GET Give goods or services; get cash OTHER TRANSACTIONS Handle customer inquiries Take customer orders Approve credit sales Check inventory availability Initiate back orders Pick and pack orders Ship goods Bill customers Update sales and Accts Rec. for sales Receive customer payments Update Accts Rec. for collections Handle sales returns, discounts, and bad debts Prepare management reports Send info to other cycles

Transactions in the expenditure cycle:

MAJOR GIVE-GET: Give cash; get goods or services OTHER TRANSACTIONS Requisition goods and services Process purchase orders to vendors Receive goods and services Store goods Receive vendor invoices Update accounts payable for purchase Approve invoices for payment Pay vendors Update accounts payable for payment Handle purchase returns, discounts, and allowances Prepare management reports Send info to other cycles

Transactions in the HR/payroll cycle:

MAJOR GIVE-GET: Give cash; get labor OTHER TRANSACTIONS Recruit, hire, and train employees Evaluate and promote employees

Discharge employees Update payroll records Pay employees Process timecard and commission data Prepare and distribute payroll Calculate and disburse tax and benefit payments Prepare management reports Send info to other cycles

Transactions in the production cycle:

MAJOR GIVE-GET: Give labor and raw materials; Get finished goods OTHER TRANSACTIONS Design products Forecast, plan, and schedule production Requisition raw materials Manufacture products Store finished goods Accumulate costs for products Prepare management reports Send info to other cycles

Transactions in the financing cycle:

MAJOR GIVE-GET: Give cash; get cash

OTHER TRANSACTIONS Forecast cash needs Sell securities to investors Borrow money from lenders Pay dividends to investors and interest to lenders Retire debt Prepare management reports Send info to other cycles

INFORMATION NEEDS AND BUSINESS PROCESSES

Systems working toward organizational Goals

*Business Cycle GiveGet

BUSINESS PROCESSES

Many accounting software packages implement the different transaction cycles as separate modules.

Not every module is needed in every organization, e.g., retail companies dont have a production cycle. Some companies may need extra modules. The implementation of each transaction cycle can differ significantly across companies.

WHAT IS AN AIS?
An AIS is a system that collects, records,

stores, and processes data to produce information for decision makers. It can:
Use advanced technology; or Be a simple paper-and-pencil system; or Be something in between.

COMPONENTS OF AN AIS
People using the system Procedures and Instructions

For collecting, processing, and storing data

Data Software Information Technology (IT) Infrastructure

Computers, peripherals, networks, and so on

Internal Control and Security

Safeguard the system and its

WHAT IS AN AIS?
The functions of an AIS are to:

data

Collect and store data about events, resources, and agents. Transform that data into information that management can use to make decisions about events, resources, and agents. Provide adequate controls to ensure that the entitys resources (including data) are:

Available when needed

ROLE OF THE AIS IN THE VALUE CHAIN

The objective of most organizations is to provide value to their customers. What does it mean to deliver value? It may mean:

Accurate and reliable

Making it faster Making it more reliable Providing better service or advice Providing something in limited supply (like O-negative blood or rare gems) Providing enhanced features Customizing it

Value is provided by performing a series of activities to a product or service before it is

sold to a customer. These include:

Primary activities Support activities

These activities are sometimes referred to as line and staff activities respectively. At each activity the product or service gains value.

*Value Chain:

ROLE OF THE AIS IN THE VALUE CHAIN Improve Quality and Reduce Costs Improve Efficiency Improve Sharing Knowledge

Improve Supply Chain Improve Internal Control Improve Decision Making IMPROVE DECISION MAKING Identify situations that require action. Provide alternative choices. Reduce uncertainty. Provide feedback on previous decisions. Provide accurate and timely information. THE AIS AND CORPORATE STRATEGY Corporations have:

Unlimited opportunities to invest in technology.

Limited resources to invest in technology.

Consequently, they must identify the improvements likely to yield the highest return. This decision requires an understanding of the entitys overall business strategy. THE AIS AND CORPORATE STRATEGY

Choosing a strategic position is important because it helps a company focus its efforts as

opposed to trying to be everything to everybody.

EXAMPLE: A radio station that tries to play all types of music will probably fail.

Its critical to design the organizations activities so they reinforce one another in achieving the selected strategic position. The result is synergy, which is difficult for competitors to imitate.

THE AIS AND CORPORATE STRATEGY The authors believe:

Accounting and information systems should be closely integrated.

The AIS should be the primary information system to provide users with information they need to perform their jobs.

The CITP Designation

CITP: Certified Information Technology Professional Identifies CPAs who possess a broad range of technological knowledge and the manner in which information technology (IT) can be used to achieve business objectives

Reflects the AICPAs recognition of the importance and interrelationship of IT with accounting