Accounting Information Systems: An Overview

HAPTER 1 Accounting Information Systems: An Overview

INTRODUCTION • Questions to be addressed in this chapter include: • What is the meaning of system, data, and information? • What is an accounting information system (AIS)? • Why is the AIS an important topic to study? • What is the role of the AIS in the value chain? • How does the AIS provide information for decision making? • What are the basic strategies and strategic positions an organization can pursue?

SYSTEMS, DATA, AND INFORMATION • A system is: • A set of interrelated components • That interact • To achieve a goal

SYSTEMS, DATA, AND INFORMATION • Most systems are composed of smaller subsystems . . . • . . . and vice versa!

SYSTEMS, DATA, AND INFORMATION • Every organization has goals. • The subsystems should be designed to maximize achievement of the organization’s goals. • Even to the detriment of the subsystem itself. • 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.

SYSTEMS, DATA, AND INFORMATION • The systems concept encourages integration (i.e., minimizing the duplication of recording, storing, reporting, and processing). • Data are facts that are collected, recorded, stored, and processed by an information system. • Organizations collect data about: • Events that occur • Resources that are affected by those events • Agents who participate in the events

SYSTEMS, DATA, AND INFORMATION • 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.

SYSTEMS, DATA, AND INFORMATION • However, when you get more information than you can effectively assimilate, you suffer frominformation overload. • Example: 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: • Relevance It reduces uncertainty by helping you predict what will happen or confirm what already has happened.

SYSTEMS, DATA, AND INFORMATION • Characteristics that make information useful: • Relevance • Reliability 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 that make information useful: • Relevance • Reliability • Completeness • Timeliness 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.

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 • External users primarily use information that is either: • MANDATORY INFORMATION—required by a governmental entity, such as Form 10-K required by the SEC; or • 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. • 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 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. • Technology is simply a tool to create, maintain, or improve a system.

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 entity’s resources (including data) are: • Available when needed • Accurate and reliable

WHY STUDY ACCOUNTING INFORMATION SYSTEMS? • It’s fundamental to accounting. • 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? • 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. • How the availability, reliability, and accuracy of the data is ensured. • AIS courses are not number-crunching courses.

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

WHY STUDY ACCOUNTING INFORMATION SYSTEMS? • It’s fundamental to accounting. • The skills are critical to career success. • Tax accountantsmust 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? • It’s fundamental to accounting. • The skills are critical to career success. • Inprivate industryandnot-for-profit, systems work is considered the most important activity performed by accountants.

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

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

WHY STUDY ACCOUNTING INFORMATION SYSTEMS? • It’s fundamental to accounting. • The skills are critical to career success. • The AIS course complements other systems courses. • AIS topics are tested on the new CPA exam. • Makes up about 25% of the Business Environment & Concepts section of the CPA exam.

WHY STUDY ACCOUNTING INFORMATION SYSTEMS? • It’s fundamental to accounting. • The skills are critical to career success. • The AIS course complements other systems courses. • AIS topics are tested on the new CPA exam. • AIS topics impact corporate strategy and culture.

WHY STUDY ACCOUNTING INFORMATION SYSTEMS? Occupational Culture Strategy AIS design is affected by information technology, the organization’s strategy, and the organization’s culture. AIS Information Technology

WHY STUDY ACCOUNTING INFORMATION SYSTEMS? Occupational Culture Strategy AIS Information technology affects the company’s choice of business strategy. To perform cost-benefit analyses on IT changes, you need to understand business strategy. Information Technology

WHY STUDY ACCOUNTING INFORMATION SYSTEMS? Occupational Culture Strategy AIS Although culture affects the design of the AIS, it’s also true that the AIS affects culture by altering the dispersion and availability of information. Information Technology

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? • Let’s peek in on a conversation at Joe’s pharmacy . . .

ROLE OF THE AIS IN THE VALUE CHAIN Well, Mr. Pharmaceutical Salesman, your proposal looks good, but your prices are about 5% higher than your competitors.

ROLE OF THE AIS IN THE VALUE CHAIN That’s true, but we’re comfortable with that because of the value-added that we bring to this arrangement.

ROLE OF THE AIS IN THE VALUE CHAIN What is that “value-added,” and how do you convert it into dollars?

ROLE OF THE AIS IN THE VALUE CHAIN Blah—blah—blah– customer service– blah—blah—blah

ROLE OF THE AIS IN THE VALUE CHAIN • Although “adding value” is a commonly used buzzword, in its genuine sense, it means making the value of the finished component greater than the sum of its parts. • 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

ROLE OF THE AIS IN THE VALUE CHAIN • Value is provided by performing a series of activities referred to as the value chain. These include: • Primary activities • Support activities • These activities are sometimes referred to as “line” and “staff” activities respectively.

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. 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.

Accounting Information Systems: An Overview