ACCOUNTING INFORMATION SYSTEM CHAPTER 1 Accounting Information Systems

ACCOUNTING INFORMATION SYSTEM

CHAPTER 1 Accounting Information Systems An Overview

INTRODUCTION �Questions to be addressed in this chapter include: ØWhat is the meaning of system, data, and information? ØWhat is an accounting information system (AIS)? ØWhy is the AIS an important topic to study? ØWhat is the role of the AIS in the value chain? ØHow does the AIS provide information for decision making?

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

SYSTEMS, DATA, AND INFORMATION � Every organization has goals. ◦ The subsystems should be designed to maximize achievement of the organization’s goals ◦ EXAMPLE: The production department (a subsystem) of a company might have to forego its goal of staying within its budget in order to meet the organization’s goal of delivering product on time.

SYSTEMS, DATA, AND INFORMATION � Goal conflict occurs when the activity of a subsystem is not consistent with another subsystem or with the larger system. � Goal congruence occurs when the subsystem’s goals are in line with the organization’s goals. � The larger and more complicated a system, the more difficult it is to achieve goal congruence. � The systems concept encourages integration (i. e. , minimizing the duplication of recording, storing, reporting and processing).

SYSTEMS, DATA, AND INFORMATION � Data are raw facts that are collected, recorded, stored, and processed by an information system. � Organizations collect data about: v. Events that occur v. Resources that are affected by those events v. Agents who participate in the events

SYSTEMS, DATA, AND INFORMATION Ø Information is different from data. Ø Information is data that have been organized and processed to provide meaning to a user. Ø 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. ØExample: Final exams week! � When you’ve 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 Benefits of information may include: • Reduction of uncertainty • Improved decisions • Improved ability to plan and schedule activities

SYSTEMS, DATA, AND INFORMATION Benefits of information Cost of producing information Value of information Costs may include time and resources spent: • Collecting data • Processing data • Storing data • Distributing information to users

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 you’re making decisions about whether to provide information.

SYSTEMS, DATA, AND INFORMATION � Characteristics that make information useful For decision makers are : ◦ Relevance It reduces uncertainty by helping you predict what will happen or confirm what already has happened.

SYSTEMS, DATA, AND INFORMATION � Characteristics ◦ Relevance ◦ Reliability that make information useful: It’s dependable, i. e. , free from error or bias and faithfully portrays events and activities.

SYSTEMS, DATA, AND INFORMATION � Characteristics that make information useful: ◦ Relevance ◦ Reliability ◦ Completeness It doesn’t leave out anything that’s important.

SYSTEMS, DATA, AND INFORMATION � Characteristics ◦ ◦ Relevance Reliability Completeness Timeliness that make information useful: You get it in time to make your decision.

SYSTEMS, DATA, AND INFORMATION � Characteristics ◦ ◦ ◦ that make information useful: Relevance Reliability Completeness Timeliness Understandability It’s presented in a manner you can comprehend and use it easily.

SYSTEMS, DATA, AND INFORMATION � Characteristics ◦ ◦ ◦ that make information useful: Relevance Reliability Completeness Timeliness Understandability Verifiability A consensus notion—the nature of the information is such that different people would tend to produce the same result.

SYSTEMS, DATA, AND INFORMATION � Characteristics ◦ ◦ ◦ ◦ that make information useful: Relevance Reliability Completeness Timeliness Understandability Verifiability Accessibility You can get to it when you need it and in a format you can use.

SYSTEMS, DATA, AND INFORMATION �Information is provided to both: ◦ External users ◦ Internal Users

SYSTEMS, DATA, AND INFORMATION � Information is provided to both: ◦ External users ◦ Internal Users

SYSTEMS, DATA, AND INFORMATION �External users primarily use information that is either: ◦ MANDATORY INFORMATION— Required by a governmental entity E. g. maintaining Books of account for category A and B tax payers ◦ ESSENTIAL INFORMATION—Required to conduct business with external parties, such as purchase orders.

SYSTEMS, DATA, AND INFORMATION �In providing mandatory or essential information, the focus should be on: ◦ Minimizing costs ◦ Meeting regulatory requirements ◦ Meeting minimum standards of reliability and usefulness

SYSTEMS, DATA, AND INFORMATION � Information is provided to both: ◦ External users ◦ Internal Users

SYSTEMS, DATA, AND INFORMATION �Internal users primarily use discretionary information(detail information's). E. g. Managers �The primary focus in producing this information is ensuring that benefits exceed costs, i. e. , the information has positive value.

WHAT IS AN AIS? �An AIS is an Accounting system that collects, records, stores, and processes data to produce information for decision makers. � An accounting information system (AIS) consists of: ◦ People ◦ Procedures ◦ Data ◦ Software ◦ Information technology infrastructure like computer �Technology is simply a tool to create, maintain, or improve a system.

WHAT IS AN AIS? v. The Three functions of an AIS are to: 1. Collect and store data about events, resources, and agents. 2. Transform that data into information(process data to information) that management can use to make decisions about events, resources, and agents. 3. Provide adequate controls or safeguard to ensure that the entity’s resources (including data) are: • Available when needed • Accurate and reliable

WHY STUDY ACCOUNTING INFORMATION SYSTEMS? A. It’s fundamental to accounting. ØIn Statement of Financial Accounting Concepts No. 2, The FASB. . . defined accounting as an information system. Ø Accounting is an information-providing activity, so accountants need to understand: – How the system that provides that information is designed, implemented and used. – How financial information is reported – How information is used to make decisions

WHY STUDY ACCOUNTING INFORMATION SYSTEMS? A. It's fundamental to accounting. • Other accounting courses focus on how the information is provided and used. • An AIS course places greater emphasis on: – How the data is collected and transformed to information – How the availability, reliability, and accuracy of the data is ensured • AIS courses are not number-crunching courses

WHY STUDY ACCOUNTING INFORMATION SYSTEMS? A. It’s fundamental to accounting. B. The skills are critical to career success. • Auditors need to evaluate the accuracy and reliability of information produced by the AIS.

WHY STUDY ACCOUNTING INFORMATION SYSTEMS? A. It’s fundamental to accounting. B. The skills are critical to career success. • Tax accountants must understand the client’s AIS adequately to be confident that it is providing complete and accurate information for tax planning and compliance work.

WHY STUDY ACCOUNTING INFORMATION SYSTEMS? A. It’s fundamental to accounting. B. The skills are critical to career success. • In private industry and not-for-profits organizations, systems work or system development is considered the most important activity performed by accountants.

WHY STUDY ACCOUNTING INFORMATION SYSTEMS? A. It’s fundamental to accounting. B. The skills are critical to career success. • In management consulting, the design, selection, and implementation of accounting systems is a rapid growth area.

WHY STUDY ACCOUNTING INFORMATION SYSTEMS? A. It’s fundamental to accounting. B. The skills are critical to career success. C. The AIS course complements other systems courses. • Other systems courses focus on design and implementation of information systems. • AIS courses focus on accountability and control.

WHY STUDY ACCOUNTING INFORMATION SYSTEMS? A. It’s fundamental to accounting. B. The skills are critical to career success. C. The AIS course complements other systems courses. D. AIS topics are tested on the new CPA exam. • Makes up about 25% of the Business Environment & Concepts section of the CPA exam. v The Accounting Education Change Commission recommended that the accounting curriculum should provide students with a solid understanding of three essential concepts: 1. The use of information in decision making 2. The nature, design, use and implementation of an AIS 3. Financial information reporting

WHY STUDY ACCOUNTING INFORMATION SYSTEMS? A. It’s fundamental to accounting. B. The skills are critical to career success. C. The AIS course complements other systems courses. D. AIS topics are tested on the new CPA exam. E. One of the fastest growing types of consulting services is the design, selection, and implementation of new Accounting Information Systems. F. AICPA’s(American institute of CPA) recognizes the importance and interrelationship of IT with accounting

�Questions to be addressed in this chapter include: ØWhat is the meaning of system, data, and information? ØWhat is an accounting information system (AIS)? ØWhy is the AIS an important topic to study? ØWhat is the role of the AIS in the value chain? ØHow does the AIS provide information for decision making?

ROLE OF THE AIS IN THE VALUE CHAIN �The ultimate goal of any business is to provide value to its customers. �A business will be profitable if the value it creates is greater than the cost of producing its products or services. �Value provided by performing a series of activities referred to as the value chain. �An organization’s value chain consists of nine interrelated activities that collectively describe everything it does. 38

ROLE OF THE AIS IN THE VALUE CHAIN �The five primary activities consist of the activities performed in order to create, market, and deliver products and services to customers and also to provide post-sales services and support. �The four support activities in the value chain make it possible for the primary activities to be performed efficiently and effectively. �These activities are sometimes referred to as “line” and “staff” activities respectively.

The Value Chain Primary Activities Inbound Logistics Marketing and Sales Operations Outbound Logistics Post sale-Service 40

The Value Chain Support Activities Infrastructure Technology Human Resources Purchasing 41

ROLE OF THE AIS IN THE VALUE CHAIN � Primary activities include: ◦ Inbound logistics Receiving, storing, and distributing the materials that are inputs to the organization’s product or service. E. G For a pharmaceutical company, this activity might involve handling incoming chemicals and elements that will be used to make their drugs.

ROLE OF THE AIS IN THE VALUE CHAIN � Primary activities include: ◦ Inbound logistics ◦ Operations Transforming those inputs into products or services. For the pharmaceutical company, this step involves combining the raw chemicals and elements with the work of people and equipment to produce the finished drug product that will be sold to customers.

ROLE OF THE AIS IN THE VALUE CHAIN � Primary activities include: ◦ Inbound logistics ◦ Operations ◦ Outbound logistics Distributing products or services to customers. For the pharmaceutical company, this step involves packaging and shipping the goods to drug stores, doctors, and hospitals.

ROLE OF THE AIS IN THE VALUE CHAIN � Primary ◦ ◦ activities include: Inbound logistics Operations Outbound logistics Marketing and sales Helping customers to buy the organization’s products or services. A pharmacy rep may visit with drug stores, doctors, etc. to inform them about their products and take orders.

ROLE OF THE AIS IN THE VALUE CHAIN Post-sale support provided to activities include: customers such as repair and ◦ Inbound logistics maintenance function. ◦ Operations � Primary ◦ Outbound logistics ◦ Marketing and sales A pharmaceutical firm will ◦ Post sale Service typically not be repairing it’s product (though the product may be periodically reformulated). The pharmaceutical company is more likely to be providing advisory services to pharmacists, etc.

ROLE OF THE AIS IN THE VALUE CHAIN �Support activities include: ◦ Firm infrastructure Accountants, lawyers, and administration. Includes the company’s accounting information system.

ROLE OF THE AIS IN THE VALUE CHAIN � Support activities include: ◦ Firm infrastructure ◦ Human resources Involves recruiting and hiring new employees, training employees, paying employees, and handling employee benefits.

ROLE OF THE AIS IN THE VALUE CHAIN � Support activities include: ◦ Firm infrastructure ◦ Human resources ◦ Technology Activities to improve the products or services (e. g. , website development). For the pharmaceutical company, these activities would include research and development to create new drugs and modify existing ones.

ROLE OF THE AIS IN THE VALUE CHAIN � Support ◦ ◦ activities include: Firm infrastructure Buying the resources (e. g. , Human resources materials, inventory, fixed Technology assets) needed to carry out the Purchasing entity’s primary activities. In the pharmaceutical company, the purchasing folks are trying to get the best combination of cost and quality in buying chemicals, supplies, and other assets the company needs to run its

ROLE OF THE AIS IN THE VALUE CHAIN �The value chain concept can be extended by recognizing that organizations must interact with suppliers, distributors, and customers. �An organization’s value chain and the value chains of its suppliers, distributors, and customers collectively form a value system.

How An AIS Can Add Value To An Organization �An AIS adds value. . . – by providing accurate and timely information so that five primary value chain activities can be performed more effectively and efficiently. 52

How An AIS Can Add Value To An Organization – An AIS adds value by: ◦ improving the quality and reducing the costs of products or services. ◦ improving efficiency. ◦ Improving decision making capabilities. ◦ increasing the sharing of knowledge. A well-designed AIS can also help an organization profit by improving the efficiency and effectiveness of its supply chain.

END OF CHAPTER ONE