HAPTER1 Accounting Information Systems

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CHapter1Accounting Information Systems:An Overview

INTRODUCTION Questions to be addressed inthis chapter

include: What is the meaning of system,data, andinformation?

What is an accounting information

system (AIS)? Describe the major businessprocesses present inmost companies.

What is the role of the AIS in thevalue chain?

How does the AIS provide informationfor decisionmaking?SYSTEMS, DATA, ANDINFORMATION


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A system is a set of two or moreinterrelated

components that interact toachieve a goal. Systems are almost alwayscomposed of smaller

subsystems, each performing aspecific functionsupportive of the larger system.

SYSTEMS, DATA, ANDINFORMATION Data are facts that arecollected, recorded,stored, and processed by aninformation system.

Information is different fromdata. Information is data that havebeen organized andprocessed to provide meaning to

a user.


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Usually, more information andbetter information

translates into better decisions.SYSTEMS, DATA, ANDINFORMATION However, when you get

more informationthan you can effectivelyassimilate, yousuffer from information

overload. When youve reached theoverload point,the quality of decisions

declines while thecosts of producing theinformationincreases.


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SYSTEMS, DATA, ANDINFORMATIONBenefits of information- Cost of producinginformationValue of informationCosts and benefits of information areoften difficultto quantify, but you need to try whenyoure making

decisions about whether to provideinformation.

What MakesInformation Useful? Necessary characteristics:

Relevant

The capacity of information to makea differencein a decision by helping users to formpredictionsabout the outcomes of past, present,and future


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events or to confirm or correct priorexpectations.

Reliable The quality of information thatassures thatinformation is reasonably free fromerror and bias

and faithfully represents what itpurports torepresent.

Complete The inclusion in reported informationof everything

material that is necessary for faithful

Timely Having information available to adecision makerbefore it loses its capacity to influence

decisions. Understandable The quality of information thatenables users toperceive its significance.

Verifiable


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The ability through consensusamong measurers

to ensure that information representswhat itpurports to represent or that thechosen method ofmeasurement has been used withouterror orbias.

Accessible Available when needed (see Timely)

and in a Businesses engage in avariety 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


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*Each activity requires different typesofdecisions.Each decision requiresdifferent types of information.

BUSINESSPROCESSES A transaction is:

An agreement between two

entities toexchange goods or services; OR

Any other event that can bemeasured in

economic terms by anorganization.

EXAMPLES: Sell goods to customers

Depreciate equipment

Many business processesare paired ingive-get exchanges. Basic exchanges can be

grouped into five


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major transaction cycles: Revenue cycle Expenditure cycle Production cycle Human resources/payroll cycle

Financing cycle

Transactions in therevenue cycle:MAJOR GIVE-GET Give goods or services; get cashOTHER 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. forsales Receive customer payments Update Accts Rec. for collections Handle sales returns, discounts,and bad debts Prepare management reports

Send info to other cycles


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Transactions in theexpenditure cycle:MAJOR GIVE-GET: Give cash; get goods or servicesOTHER TRANSACTIONS Requisition goods and services Process purchase orders tovendors Receive goods and services Store goods Receive vendor invoices Update accounts payable forpurchase Approve invoices for payment Pay vendors Update accounts payable for

payment Handle purchase returns,discounts, and allowances Prepare management reports


Transactions in the

HR/payroll cycle:MAJOR GIVE-GET: Give cash; get laborOTHER TRANSACTIONS Recruit, hire, and trainemployees Evaluate and promoteemployees


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Discharge employees Update payroll records Pay employees

Process timecard andcommission data Prepare and distributepayroll Calculate and disburse tax andbenefit payments Prepare management reports

Send info to other cycles Transactions in theproduction cycle:MAJOR GIVE-GET: Give labor and raw materials;Get finished goods

OTHER TRANSACTIONS Design products Forecast, plan, and scheduleproduction Requisition raw materials Manufacture products Store finished goods

Accumulate costs for products Prepare management reports


Transactions in thefinancing cycle:MAJOR GIVE-GET: Give cash; get cash


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OTHER TRANSACTIONS Forecast cash needs Sell securities to investors

Borrow money from lenders Pay dividends to investors andinterest to lenders Retire debt Prepare management reports


INFORMATIONNEEDS AND BUSINESSPROCESSES

Systemsworking towardorganizational

Goals

*Business CycleGiveGet


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BUSINESSPROCESSES


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Many accounting softwarepackagesimplement the differenttransaction cyclesas separate modules.

Not every module is needed in

everyorganization, e.g., retailcompanies dont havea production cycle.

Some companies may needextra modules. The implementation of eachtransaction cyclecan differ significantly across

companies.WHAT IS AN AIS? An AIS is a system thatcollects, records,


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stores, and processes data toproduceinformation for decisionmakers. It can:

Use advanced technology; or Be a simple paper-and-pencilsystem; or

Be something in between.

COMPONENTS OF AN

AIS People using the system Procedures and Instructions

For collecting, processing, andstoring data

Data Software Information Technology (IT)Infrastructure


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Computers, peripherals, networks,and so on

Internal Control and Security Safeguard the system and itsdata

WHAT IS AN AIS? The functions of an AIS areto:

Collect and store data aboutevents, resources,and agents.

Transform that data intoinformation thatmanagement can use to makedecisions aboutevents, resources, and agents.

Provide adequate controls toensure that theentitys resources (includingdata) are:

Available when needed


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sold to a customer. Theseinclude:

Primary activities Support activities

These activities aresometimes referred to

as line and staff activitiesrespectively. At each activity the productor service

gains value. *Value Chain:


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ROLE OF THE AIS

IN THE VALUE CHAIN Improve Quality and ReduceCosts Improve Efficiency

Improve Sharing Knowledge


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Improve Supply Chain Improve Internal Control

Improve Decision MakingIMPROVE DECISIONMAKING Identify situations thatrequire action. Provide alternative choices. Reduce uncertainty. Provide feedback onprevious decisions.

Provide accurate andtimely information.

THE AIS ANDCORPORATESTRATEGY Corporations have:

Unlimited opportunities to invest

in technology.


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Limited resources to invest intechnology.

Consequently, they mustidentify theimprovements likely to yieldthe highest

return. This decision requires anunderstanding of

the entitys overall business

strategy.THE AIS ANDCORPORATESTRATEGY Choosing a strategic position isimportantbecause it helps a companyfocus its efforts as


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opposed to trying to beeverything to everybody.

EXAMPLE: A radio station that triesto play all typesof music will probably fail.

Its critical to design theorganizations activities

so they reinforce one another inachieving theselected strategic position. Theresult is synergy,which is difficult for competitorsto imitate.

THE AIS ANDCORPORATESTRATEGY The authors believe:

Accounting and informationsystems should beclosely integrated.


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The AIS should be the primaryinformation

system to provide users withinformation they

need to perform their jobs.

The CITPDesignation CITP: Certified InformationTechnologyProfessional Identifies CPAs who possess abroadrange of technologicalknowledge and the

manner in which informationtechnology(IT) can be used to achievebusinessobjectives


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Reflects the AICPAs recognitionof the

importance and interrelationshipof IT with

accounting

HAPTER1 Accounting Information Systems

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