Accounting, Information Technology, and Business Solutions Irwin/McGraw-Hill Chapter 1 The Nature of...

Accounting, Information Technology, and Business Solutions

Irwin/McGraw-Hill

Chapter 1

The Nature of Accounting and

Information Technology

Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2000

Objectives

Describe how organizations create value for their customers

Describe the historical

relationship between accounting

and IT professionals

Describe three ways that accounting professionals can increase their value

Identify the justifications / reasons for changing the nature of accounting and how the use of information technology (IT) can enable such change


INTRODUCTION The world is changing faster than ever before The accounting profession is in a mode of serious

introspection Examine criticisms about the profession Challenge ourselves to improve the quality of

information products and services Become an active participant in the evolution of

accounting information systems Propose a different philosophy underlying the design,

use, and evaluation of accounting information systems


The Accountant Close your eyes and create a mental picture of an accountant. Do you see a drudge or professional?


Definitions of Accounting

“The process of identifying, measuring, and communicating economic information to permit informed judgements and decisions by users of the information.”

—American Accounting Association (AAA)

“A service activity whose function is to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions.”

—American Institute of Certified Public Accountants (AICPA)


The Changing World

“IT is changing everything” Accounting Educators must invent the third wave accounting

paradigm and produce graduates who can function effectively in the third wave organizations they will be joining


Current Business Environment A very competitive, changing environment in which

companies that add the most value and respond quickly succeed.

Information is becoming one of anorganization’s most important resources.

Advances in information technology have been muchmore rapid than in any other industry.


A Changing World Al Pipkin, controller for Coors Brewing Company, observes

that IT is:

. . . bringing about a total transformation of the controller’s [accounting] staff, and a re‑definition of the overall financial system. Technology is changing the culture of the controller’s organization just as it is impacting the entire business. In the 21st century, there will be fewer accountants on the controller’s staff, but they will perform in totally new and exciting ways.

ControllerThe individual or function responsible for using, designing, and evaluating an organizations financial information system. The controller is typically an accounting executive responsible for developing and maintaining an organizations financial records.


MarginMargin ValueValue -- CostCost

The Nature and Purpose of an Organization: Creating Value

Michael Porter, Competitive Advantage: Everything an organization does should contribute to value for its customers. Creating value, incurs costs for the organization

For-profit organizations try to maximize their margins. Not-for-profit organizations, such as charitable or governmental entities, seek to maximize the goods and services they provide with the resources (funds) they receive.

==


Key Elements of the Value Chain Value chain: a sequence of activities that creates a

good or service, in which each step of the sequence adds something the customer values to the product. A value chain includes: Input activities: product design, process design,

purchasing, receiving, hiring, training Processing activities: making, moving, storing, inspecting Output activities: selling, shipping, service Administrative activities: personnel, finance, legal,

accounting, research


Measuring Value

What the customer

wants

What the customer

wants

What the customer is promised

What the customer is promised

What the customer is

given

What the customer is

given

The Service Gap The Quality Gap


Creating Value Organizations create value by

developing and providing the goods and services customers desire.

Goods and services are provided through a series of business processes.

A business process is a series of activities that accomplishes a business objective.


•

Types of Business Procedures Acquisition/Payment Processes - acquiring,

maintaining, and paying for resources needed by the organization (e.g. human resources, financing, property, plant, equipment, materials and supplies) to provide goods and services.

Conversion Process - converting the acquired resources into goods and services for customers.

Sales/Collection Process - delivering goods and services to customers and collecting payment.


ORGANIZATION

Conversion

Process

Customers

ProvidesFinished

Goods and Services to Customers

Sales/Collection

Process

Goods and services forcustomers

Payment for Goods and

services

Exhibit 1-1 Types of Business Processes

Suppliers

Acquisition, Payment Process

Provides input

resources to the

organization

Requestedinput

resources

Payment for input

resources


Exhibit 1-2 Management Activities

PlanPlan

EvaluateEvaluate ExecuteExecute

ControlControl

InformationSystem

InformationSystem

Planning requires leaders to define the business objectives, to prioritize business processes, and to provide a blueprint for achieving the objectives. They must identify opportunities available to the organization as well as assess the risk associated with each opportunity.

Control is exercised by reviewing the results of an activity or an entire business process to see if they are consistent with expectations. The review may cause a change in expectations or a change in the way an activity or a process is performed to bring the actual results in line with expectations.

Periodically, managers evaluate the operating results to see if the business processes are achieving the organization's objectives. The results of the evaluation are used to modify the plans, objective, or expectations.

Managers execute their plan by dividing business processes into smaller activities, assigning people to perform each activity, and motivating them to do a good job. A clearly defined plan increases the likelihood of proper execution


Information Processes Are shaped by an organization’s business and

management processes.

Include recording data that describes business processes

Maintain up-to-date data about an organization.

Report useful information.

Information processes must change in response to changes in business and management processes.


Information System

Businessevent data

1.0

Capture andrecordprocess

Internal events

External events

2.0

Maintainprocess

External events

Internal events

Bus

ines

s P

roce

sses

3.0

Reportprocess

Financial statements

Financial statements

Reports Reports

Management

Investors/Users


Exhibit 1-3 The Information System and Information Processes

Business Processes

Information System

CaptureBusiness

Data

MaintainBusiness

Data

Primary Information Processes

ReportUseful

Information

Management


Information Processes are shaped by an organization’s business and

management processes include recording data that describes the business

processes, maintaining the data about an organization up-to-date, reporting useful information

as business and management processes change so must its information processes


Exhibit 1-4 Relationship between Business Processes, Information Processes and Management Activities

Management Activities

Management Activities

Plan

Execute

Control

Evaluate

BusinessProcesses

Acq./Pmt.Process

ConversionProcess

Sell/CollectProcess

MaintainData

MaintainData

Information System

Manage Business Processes

Manage Business Processes

CaptureData Provide

Reports


User managementUser management

CompletenessAccuracyAuthorizationSecurity

CompletenessAccuracyAuthorizationSecurity

ProvideProvide

IS PoliciesIS Policies

Senior ManagementSenior Management

Assign ResponsibilitiesAssign Responsibilities

IS Development PlansIS Development Plans

MonitorMonitor

Management Roles

IS ManagementIS Management

IS CapabilitiesIS Capabilities

ProvideProvide

Implement

InformationInformation Information ProcessingInformation Processing Information UseInformation Use


The Calls for Change “The world that is fast emerging from the clash of

new values and technologies, new geopolitical relationships, new life-styles and modes of communication, demands wholly new ideas and analogies, classifications and concepts.” Alvin Tofler


The Call for Change Many organizations are reconsidering how they

operate and create value. Some organizations are implementing change by

reengineering business processes The accounting profession must

reinvent how information is gathered, stored and provided to users or be replaced by a new yet to emerge profession.

The profession can not continue to rely on audit and tax services


The Call for Change Many information customers are dissatisfied with the

quality and timeliness of information provided by our accounting systems:—Result is…. managers take matters into

their own hands real time access to

corporate databases has reduced the relevance of compressed FinancialStatements

an expectations gap


Primary Functions of Accounting Recording data about business transactions. In the Egyptian era they used

a quill pen to record the data and stored it on papyrus scrolls. Today we might use a bar code and scan data into a computer system and store it on a magnetic disk.

Summarizing results of business activity into useful reports. The balance sheet and income statement have been standard reports for many years. More recently we added a statement of cash flows. However, managers in today's environment demand more detailed reports like sales by district or sales by product type.

Providing assurances that the business is operating as intended and that the assets of the organization are protected. All parties to a business event have looked to accountants to provide assurance that the transaction is properly handled, accurately recorded, and accurately reported. Throughout most of this century the assurance has been based on a system of internal controls and an audit of the published financial statements.


Accounting Information System The accounting information system has traditionally captured

and stored data about a selected subset of business events, namely activities that meet the definition of an accounting transaction—events that change the composition of the company's assets, liabilities, or owner's equity .

Could we modify the set of business events and capture data about a broader set of business events than "accounting transactions?" Sure!

Do we want to broaden the set of business events? Maybe, depending on the type of information our information customers need to make good decisions.


The Accountant’s Roles

Accountant as user

Accountant as system designer

assesses users’ information needs defines content and format of output reports specifies sources of data selects appropriate accounting rules determines controls

Accountant as system auditor


AICPA’s CPA Vision Project The objective is to create a comprehensive and

integrated vision of the profession's future that will: Build awareness of future opportunities and challenges for

all segments of the profession. Lead the profession as it navigates the changing demands of

the marketplace. Draw together the profession to create a vibrant and viable

future. Leverage the CPA's core competencies and values. Guide current and future


AICPA: Values and Skills Continuing education and

lifelong learning

Competence

Integrity

Attunement with broad business issues

Objectivity

Communication skills

Strategic and critical thinking skills

Focus on clients and markets

Ability to interpret converging information

Technological adeptness


Assurance: reliability of information and systems.

Technology: systems analysis, information management, and system security.

Management consulting: advice to organizations on management and performance improvements.

Financial planning: advice in broad financial planning areas.

International: services for cross-border tax planning, multinational mergers and joint ventures, etc.

Future success relies on public perceptions of PAs' roles and abilities.

PAs must be market driven, and not depend on regulations to keep them in business.

The market demands less auditing and accounting, and more value-added consulting services.

Specialization is critical for the future survival of the PA profession.

The marketplace demands that PAs be conversant with global business practices and strategies.

Top 5 Service and Delivery Issues


Accounting Quotes “Accounting as a discipline is the focus of constructive debate

and intensive rethinking caused by economic and technological change, and one that will continue to evolve in the future.”

—Accounting Education Change Commission (AECC)


Accounting Quotes “The globalization of the economy, the explosion of

technology, the complexity of business transactions and other forces have thrust the financial system into a new age. As the pace of economic change accelerates, so does the need for reliable and relevant information…”

“To stay the best, our financial reporting system must be as dynamic as the financial markets themselves…”

“Financial reporting is without value if the user does not perceive it to be sound.”

—American Institute of Certified Public Accountants (AICPA)

Two information systems that businesses now run side by side - computer based data processing and the accounting system - increasingly overlap. They also increasingly come up with what look like conflicting - or at least incompatible - data about the same event; for the two look at the same event quite differently.

Until now, this has created little confusion. Companies tended to pay attention to what their accountants told them and to disregard the data of their information system, at least for top management. But this is changing as computer literate executives are moving into decision making positions. P. Drucker

Information System Overlap


React to change Ways to react to calls for change:

resist change - be pulled respond to events as they occur - follow be at the forefront of change - lead

if change is not understood and adapted, our ability to provide valued services will lessen


Adding Value How can accountants further add value?? What are the opportunities in the information age??

Provide useful information for decision makers who are responsible for planning, executing, or evaluating activities of an organization

Help embed information processes into business processes Help management define business rules or policies that

shape the nature of its business processes


Solving Business Problems When you begin to think about solving business

problems, you begin to: Consider strategy, business processes, organization

structures, measurements, and IT. They are all important. Make sure each proposed solution is aligned with an

organization’s business processes. Encourage continuous organization learning and real-time

adaptation to a complex and ever changing world.


Culture and Environment Solution 3



Solving Business Problems: A Framework

Accounting andother measurements

Businessprocesses/

events

People and structures

Information technology

Strategy

Consider strategy, business processes,

organization structures,

measurements, and IT. They are all important

Encourage continuous organization learning

and real-time adaptation to a

complex and ever changing world

Make sure each proposed solution is

aligned with an organization’s

business processes.


ORGANIZATION ACCOUNTING AIS

Involved inprofit ornot-for-profitactivitiesto producevalued goodsor servicesfor customers

Organization support function:Delivers informationproducts to help information customersplan, evaluate, and control the execution of business activities

The structureused to store,produce, andreport theaccountinginformationproducts

Organizations, Accounting, and AIS

TopManagement

MiddleManagement

Operations Management

Operations Personnel

TopManagement

MiddleManagement



Customers

Suppliers

Stakeholders

TopManagement

MiddleManagement



Day-to-Day Operations Information

Customers

Suppliers

Stakeholders

Performance Inform

ation

Bud

get I

nfor

mat

ion

and

Inst

ruct

ions


What is a System? Natural systems / Artificial Systems Elements of a System

Multiple Components Relatedness System vs. Sub-System Purpose System Decomposition System Interdependency


Primary Systems of an Automobile

FuelSystem

PropulsionSystem

BrakeSystem

ElectricalSystem

Automobile

Carburetor

Fuel Pump

Fuel Tank

Wheels

Rear Axle

Transmission

Engine

Disk

Brake Lines

Master Cylinder

Brake Pedal

Battery

Radio

Ignition

LIghts


Framework for Information Systems

Information System (IS)Information System (IS)

Accounting Accounting Information Information

System System (AIS)(AIS)

Management Management Information System Information System

(MIS)(MIS)

The information system is the set of formal procedures by which data are collected, processed into information and distributed to users.

A transaction is an event that affects or is of interest to the organization and that is processed by its information system as a unit of work


Accounting Information Systems Fixed Asset System (FAS) General Ledger/ Financial Reporting System

(GL/FRS) Transaction Processing System (TPS)

Expenditure Cycle Conversion Cycle Revenue Cycle

Management Reporting System (MRS)


Management Information System Financial Management Systems Marketing Systems Production Systems Human Resource Systems Decision Support Systems

(DSS) and Expert Systems (ES)


MIS

Financial Management Systems Marketing Systems Production Systems Human Resource Systems Decision Support Systems

(DSS) and Expert Systems (ES)

Portfolio ManagementCapital Budgeting

New Product developmentMarket Analysis

Production PlanningJob Scheduling

Job Skill TrackingEmployee Benefits


Accounting Information Systems

Expenditure Cycle Purchase systemCash Disbursement

systemPayroll Processing system

Conversion Cycle Cost Accounting SystemMaterials Requirements

PlanningRevenue Cycle Sales Processing System

Cash Receipts System

Expenditure Cycle Purchase systemCash Disbursement

systemPayroll Processing system

Conversion Cycle Cost Accounting SystemMaterials Requirements

PlanningRevenue Cycle Sales Processing System

Cash Receipts System


A General Model for AISThe External Environment

The Information System

Data Base Management System

Data Base Management System

DataCollection

DataCollection

DataProcessing

DataProcessing

InformationGeneration

InformationGeneration

External Sources of Data

ExternalEndUsers

Internal Sources

of Data

InternalEndUsers

The Business Organization


Database Management System Data Attributes Records Files Data Base

Management Tasks Storage Retrieval Deletion


Information Generation Relevance Timeliness Accuracy Completeness Summarization


Attributes of Information Systems Efficiency Effectiveness Flexibility


Acquisition of Information Systems Systems Development Life Cycle Turnkey systems Backbone systems Vendor-Supported Systems


Organization structure Responsibility, Authority and Accountability Business Segments Functional Segmentation The Accounting Function The Computer Services Function


Business Segments Geographic Product Lines Business Functions


Functional Segmentation

Material Management Purchasing / Receiving / Stores

Production Manufacturing Support - Production Planning, Quality

control, Maintenance Marketing Distribution Personnel Finance Information -

Accounting /Computer Services

Materials

Labour

Capital

Information


The Accounting Function Accounting captures and records in the database the

financial effects of the firm’s transactions Accounting function distributes transaction

information to operation personnel to coordinate many of their key tasks

The value of information


Accounting Independence Internal Control Separation of:

record keeping asset custody functional authority

Flows of resources between functional areas


The Computer Services Function Centralized Data Processing

Data base Administration Data Processing

– data control

– data conversion

– computer operations

– data library

Systems development and maintenance

Distributed Data Processing


• Accounting systems are based on pre-computer thinking. (Robert Mednick)

• Information customers are dissatisfied with the timeliness and quality of information. (R. Green & K Barrett)

• Traditional financial statements are extremely compressed and not released in a timely manner. (R. K. Elliott)

Status of Accounting IS

Accounting, Information Technology, and Business Solutions Irwin/McGraw-Hill Chapter 1 The Nature of...

Documents

Transcript of Accounting, Information Technology, and Business Solutions Irwin/McGraw-Hill Chapter 1 The Nature of...