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Accounting Information Systems

Fourteenth Edition

Chapter 1

Accounting Information Systems: An Overview

Chapter 1: Accounting Information Systems: An Overview

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Learning Objectives

Distinguish between data and information:

Discuss the characteristics of useful information.

Explain how to determine the value of information.

Explain the decisions an organization makes:

The information needed to make them.

The major business processes present in most companies.

Explain how an AIS adds value to an organization.

How it affects and is affected by corporate strategy.

The role of AIS in a value chain.

Chapter 1: Accounting Information Systems: An Overview

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This chapter has three key takeaways and introduces students to an Accounting Information System (AIS) and the fundamental concepts that accountants need to understand that business transactions in the form of business processes create data that is used for decision making.

Distinguishing Between Data and Information

Data are facts collected, recorded, and stored in the system

A fact could be a number, date, name, and so on.

For example:

2/22/14

ABC Company, 123,

99, 3, 20, 60

Chapter 1: Accounting Information Systems: An Overview

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What is the difference between data and information?

Data are just facts that are collected, recorded, and stored in a system. For example, data could be a number, a date, a name of a business. Yet the facts are not meaningful until you place the facts within a context. Then it becomes information.

For example, if the following facts are only shown below:

2/22/14

123

ABC company

$60.00

The above has no meaning and you could not determine if ABC company is a customer or a vendor that you are doing business with, in addition 123 does not tell you if it’s a product number, an amount, or a number on a form. However, if data is organized and placed in the context of a sales invoice, we now have meaning and the facts are information:

Invoice Date : 2/22/14 Invoice #: 123

Customer: ABC company

Item # Qty Price

99 3 $20

Total Invoice Amount $60

Data vs. Information

The previous slide just showed data, if we organize the data within a context of a sales invoice, for example, it is meaningful and considered information.

Invoice Date : 2/22/14 Invoice #: 123

Customer: ABC company

Item # Qty Price

99 3 $20

Total Invoice Amount $60

Chapter 1: Accounting Information Systems: An Overview

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Compared to the previous slide, the data is organized within the context of a sales invoice now is meaningful and considered information. With meaningful information, you can make decisions.

Decision Quality

Information helps us make better decisions.

Too much information causing information overload can reduce decision quality.

Information Technology (IT) is used to help decision makers more effectively filter and condense information.

Chapter 1: Accounting Information Systems: An Overview

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Is there such a thing as too much information? Having IT helps us use information more efficiently and effectively. For example, would students be able to do their homework efficiently and effectively without a computer or mobile device?

This is also a good way to get students to think about a “data analytic” mindset. Understanding the concepts in AIS courses will help students understand how to solve accounting problems by thinking about the information they need and where that information comes from in an AIS (see Chapter 4).

Value of Information

Information is valuable when the benefits exceed the costs of gathering, maintaining, and storing the data.

Benefit (i.e., improved decision making) - Cost (i.e., time and resources used to get the information) = value of information

Chapter 1: Accounting Information Systems: An Overview

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Can you think of an example, when an organization would go to great costs to gather information and not get their value?

Sometimes, regulations require companies to gather information to be in compliance of new laws (this would be the benefit: compliance), yet the cost of this information may be higher. For example, organizations may have felt in the beginning when Sarbanes–Oxley Act 2002 required publicly held organizations to access the effectiveness of their internal controls (this will be discussed more in Chapter 7) that the costs were much higher than the benefit. To comply with this new act, organizations experienced great costs in the amount of time and resources used to gather the necessary information in order to access the effectiveness of their internal controls. However, with the initial investment, the cost of oversight becomes more reasonable and investors expect companies to have good internal controls.

What Makes Information Useful? (1 of 2)

There are seven general characteristics that make information useful:

Relevant: information needed to make a decision (e.g., the decision to extend customer credit would need relevant information on customer balance from an A/R aging report)

Reliable: information free from bias

Complete: does not omit important aspects of events or activities

Timely: information needs to be provided in time to make the decision

Chapter 1: Accounting Information Systems: An Overview

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Using examples in Problem 1.4 is a good exercise to illustrate the characteristics of useful information.

Another example to use and carry throughout the seven characteristics is to use an example of customer credit decisions:

Relevant information is needed to make a customer credit decision, the relevant information would include customer balances, payment history, credit history from other vendors, and so on.

The information is free from bias in making a credit decision for example, when the information comes from the credit manager and not the sales manager who may have an incentive to extend customer credit to get a sale and the sales commission.

Not having customer payment history is incomplete information to make a decision on extending credit to a customer. If we only know how much the customer purchased in the past, but have no information on how timely the customer makes payments, this is not providing a complete picture to make a credit decision.

If the credit manager makes a decision based upon customer account information activity (sales and payments) from last quarter, it is not timely. For example, a customer may experience recent cash flow problems which would show that their ability to pay on time is getting later and later. If this is a recent trend, using an old report would not be useful in making a good credit decision.

If the customer account information is organized in invoice date order only and not within a customer subgroup, it is not in an understandable format to use that information to make a credit decision on a specific customer because you would have to find each invoice from the date order list.

Information is verifiable if two independent people can produce the same information on how much a customer owes today.

If the accounting system goes down before the credit manager can access the customer information, it will prohibit the credit manager from making a decision.

What Makes Information Useful? (2 of 2)

Understandable: information must be presented in a meaningful manner

Verifiable: two independent people can produce the same conclusion

Accessible: available when needed

Chapter 1: Accounting Information Systems: An Overview

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Information Needs and Business Processes

Business organizations use business processes to get things done. A business process is a set of related, coordinated, and structured activities and tasks performed by people, machines, or both to achieve a specific organizational goal.

Key decisions and information needed often come from these business processes.

Chapter 1: Accounting Information Systems: An Overview

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A good example to walk through with students would be a local restaurant near campus (e.g., a pizza restaurant).

Ask students to put themselves in the shoes of the restaurant owner, what decisions would the owner need to make to run the business successfully?

The students may have many answers that could include decisions about what products (pizzas to sell), what resources are needed to make the pizza (labor, equipment, and ingredients), whom to buy the ingredients from? How many people are needed to work at the restaurant, and what skills are required from employees (pizza maker, waiter, delivery person), and so on.

In essence, all of these decisions can be mapped to a series of business processes and from these decisions identify information that is needed to measure performance.

For example, if the key decision is what types of pizzas should I sell, the processes that may impact this decision would be sales and market information. In addition, vendor information on ingredient costs may play a role here as well (especially if its an exotic ingredient, expensive ingredient, or hard to source, e.g., cheese imported from Italy).

At the end of this class exercise, many of these can be mapped to Table 1-2 found on page 5.

Transactional Information Between Internal and External Parties in an AIS

Business organizations conduct business transactions which is an agreement between two entities to exchange goods, services, or any other event that can be measured in economic terms by an organization.

Transaction data is used to create financial statements and is called transaction processing.

The flow of information between these users for the various business activities involves a give-get exchange grouped into business processes or transaction cycles.

Chapter 1: Accounting Information Systems: An Overview

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Internal stakeholders are employees in the organization (e.g., employees and managers).

External stakeholders are trading partners, such as customers and vendors, as well as other external organizations, such as Banks and Government.

Transaction processing is covered in Chapter 2.

Interactions Between AIS and Internal and External Parties

Chapter 1: Accounting Information Systems: An Overview

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Chapter 1: Accounting Information Systems: An Overview

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Examining Figure 1-1 provides a great amount of detail and insights as to the flow of information going from the internal and external stakeholders for business processes. Note that this information can be easily mapped to Figure 1-2 which shows the transactional activity “give–get” exchange.

Basic Business Processes

Transactions between the business organization and external parties fundamentally involve a “give–get” exchange. These basic business processes are:

Revenue cycle: give goods / give service—get cash

Expenditure cycle: get goods / get service—give cash

Production cycle: give labor and give raw materials—get finished goods

Payroll cycle: give cash—get labor

Financing cycle: give cash—get cash

Chapter 1: Accounting Information Systems: An Overview

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It seems odd that the financing cycle is give cash—get cash, what does this really mean?

It basically means that a business organization can get cash in the form of a bank loan , but will need to give that cash back over time in the form of monthly payments to the bank.

Or it may mean that the company can get cash from investors and give equity (which eventually turns into cash in the form of dividend payments).

What Is an Accounting Information System (AIS)?

AIS is a system that collects, records, stores, and processes data to produce information for decision makers.

Consists of

People who use the system

Processes (procedures and instructions)

Technology (data, software, and information technology)

Controls to safeguard information

Thus, an AIS collects and stores data, transforms that data into information, and provides adequate controls.

Chapter 1: Accounting Information Systems: An Overview

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There are six components to an AIS:

People use the system

Procedures and instructions used to collect, process, and store the data

Data

Software used to process the data

Information technology (i.e., computers)

Internal controls and security

These six components help the AIS fulfill three important business functions:

Collect and store data about organizational activities (through business processes).

Transform data into information so management can make decisions (plan, execute, control and evaluate activities, resources, and personnel).

Provide adequate controls to safequard the organization’s assets and data.

How Does an AIS Add Value to an Organization?

A well thought out AIS can add value by:

Improving the quality and reducing the costs of products or services

Improving efficiency

Sharing knowledge

Improving efficiency and effectiveness of its supply chain

Improving the internal control structure

Improving decision making

Chapter 1: Accounting Information Systems: An Overview

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A good example here is thinking back to the Pizza restaurant example in the earlier slides. The owner uses an AIS to determine which pizzas are the most popular. The sales information in the AIS is used to help answer this question and provides the owner with information to know how much of certain ingredients should be on hand to make those popular pizza pies. If ingredients were to run out, then the quality of this decision would be considered poor as there would be many dissatisfied customers. In addition, this information helps the owner not to buy too much of an ingredient to have on hand to where their may be waste if the ingredients go stale.

Taking this example further to each bullet point made above can help students begin to think more about how transactional data provides information for better decision making in an organization.

AIS and Corporate Strategy

An AIS is influenced by an organization’s strategy.

A strategy is the overall goal the organization hopes to achieve (e.g., increase profitability).

Once an overall goal is determined, an organization can determine actions needed to reach their goal and identify the informational requirements (both financial and nonfinancial) necessary to measure how well they are doing in obtaining that goal.

Chapter 1: Accounting Information Systems: An Overview

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For example, if the strategy is increase profitability, an organization can increase sales revenue and decrease manufacturing costs. Each of these actions will have different informational needs to measure progress. To increase sales revenue, the company can increase prices, increase volume, or change the product mix. To decrease manufacturing costs, the company can reduce the cost of the inputs into the manufacturing process or improve the process.

Technological developments and advances have an affect on corporate strategy. Data analytics is becoming more widespread in organizations as they continue to take advantage of the technological advancements. An example is the use of predictive analysis.

AIS in the Value Chain

The value chain links together the different activities within an organization that provide value to the customer.

Value chain activities are primary and support activities.

Primary activities provide direct value to the customer.

Support activities enable primary activities to be efficient and effective.

A supply chain is an extended system that includes the organizations value chain as well as its suppliers, distributors, and customers.

Chapter 1: Accounting Information Systems: An Overview

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Please note that students may see primary and then assume secondary is next. This is a common mistake and using the visual from Figure 1-5 in the book also as an example can help mitigate this common misperception.

A basic example involves buying a textbook. Ask the students how they generally buy a textbook (usually they buy it online or go to the bookstore), either way you can walk through the primary and support activities that are needed for them to get their textbook in time for the first day of class!

Chapter 1: Accounting Information Systems: An Overview

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Chapter 1: Accounting Information Systems: An Overview

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Figure 1-5 on p. 14 of the book shows the activities that are distinguished between primary and support activities.

Key Terms

System

Goal conflict

Goal congruence

Data

Information

Information technology (IT)

Information overload

Value of information

Business process

Transaction

Transaction processing

Give-get exchange

Revenue cycle

Expenditure cycle

Production (conversion) cycle

Human resource/payroll cycle

Financing cycle

General ledger and reporting system

Accounting information system (AIS)

Predictive analysis

Value chain

Primary activities

Support activities

Supply chain

Chapter 1: Accounting Information Systems: An Overview

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Chapter 1: Accounting Information Systems: An Overview

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