C

HAPTER 1

Accounting Information Systems:

An Overview

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INTRODUCTION
Questions to be addressed in this chapter include:
What is the meaning of system, data, and information? What makes information useful? Describe the major business processes present in most companies. What is an accounting information system (AIS)? What is the role of the AIS in the value chain?

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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.

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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.

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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.

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

Reliable

Complete

The inclusion in reported information of everything material that is necessary for faithful representation of the relevant phenomena.

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What Makes Information Useful?

Timely
Having information available to a decision maker before it loses its capacity to influence decisions.
The quality of information that enables users to perceive its significance. 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. Available when needed (see Timely) and in a useful format (see Understandable).

Understandable

Verifiable

Accessible

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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

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BUSINESS PROCESSES
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
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BUSINESS PROCESSES
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

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BUSINESS PROCESSES
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

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BUSINESS PROCESSES
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

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BUSINESS PROCESSES
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

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BUSINESS PROCESSES
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

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Business Cycle GiveGet

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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.

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

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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:
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

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ROLE OF THE AIS IN THE VALUE CHAIN

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.
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Value Chain

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ROLE OF THE AIS IN THE VALUE CHAIN

Smith Supply Co. Inbound Logistics Operations Outbound Logistics Marketing & Sales Service Information technology can facilitate synergistic linkages that improve the performance of each companys value chain. The linking of these separate value chains creates a larger system known as a supply chain. Pharmaceuticals, Inc. Inbound Logistics Operations Outbound Logistics Marketing & Sales Service

Customer Pharmacy Inbound Logistics Operations Outbound Logistics Marketing & Sales Service
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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

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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.

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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
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