PowerPoint Presentation Materials Accounting Information Systems: Basic Concepts and Current Issues 2nd edition Robert L. Hurt McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

Role and Purpose of Accounting Information Systems Chapter 1 Role and Purpose of Accounting Information Systems

Outline Objectives Definition of accounting information systems FASB Conceptual Framework Typical AIS structure Information competence Textbook structure 1-3

Objectives When you finish this chapter, you should be able to: Define “accounting information systems” Discuss why AIS is an important area of study for future accountants Compare and contrast AIS with other areas of study in accounting Explain the structure of most accounting information systems Locate and evaluate information sources on accounting information systems Describe the structure and content of the remainder of this text 1-4

Definition of AIS Interrelated activities, documents and technologies Collect data and process it Report information Diverse group of internal and external decision makers 1-5

FASB Conceptual Framework Developed in 1977 Well-designed AIS can respond to many elements Components Objectives of financial reporting Elements of financial statements and qualitative characteristics Assumptions, principles and constraints 1-6

FASB Conceptual Framework

FASB Conceptual Framework Objectives of financial reporting Framework lists multiple objectives For AIS study, the most important may be the most basic: to provide information for decision making Elements of financial statements Balance sheet: assets, liabilities, equity Income statement: revenues, expenses, gains, losses Other: comprehensive income 1-8

FASB Conceptual Framework Qualitative characteristics Primary Relevance: information makes a difference in decisions Reliability: information can be relied upon for decisions Secondary Comparability: between organizations Consistency: across time 1-9

FASB Conceptual Framework Assumptions Economic entity: a business is separate from its owners Going concern: a business will survive long enough to meet its current obligations Periodicity: the life of a business is divided into time periods for financial reporting Monetary unit: the value of a dollar is stable 1-10

FASB Conceptual Framework Principles Historical cost: in general, items in the AIS are recorded at their historical cost Realization: revenue can be recorded in the AIS when the earnings process is essentially complete Matching: expenses should appear on the income statement with the revenue they helped generate Full disclosure: give decision makers all the information they need 1-11

FASB Conceptual Framework Constraints Cost effectiveness: the benefit of having information must exceed the cost of obtaining it Materiality: dollar amounts must be large enough to make a difference in decisions Conservatism: when choosing between accounting practices, make the choice that presents the “worst case” scenario Industry practices: follow the conventions of the industry in financial reporting 1-12

Typical AIS structure Inputs Processes Outputs Storage Such as source documents Processes Journals, ledgers, information technology Outputs General purpose financial statements and other reports Storage Paper-based or electronic Internal controls Designed to Safeguard assets Promote operating efficiency Encourage adherence to management rules Ensure reliable financial reports 1-13

Information competence Problems in accounting information systems often have more than one “correct” answer In other words, they are non-deterministic But, some answers are clearly incorrect Research is often required to address problems in AIS Therefore, accountants must be able to evaluate information 1-14

Information competence Definition Information competence is the ability to find, evaluate, use, and communicate information in all of its various formats (Curzon, 1995) 1-15

Information competence Types of information Sponsored / commercial Someone has paid a fee or given other consideration Popular / practitioner Has been reviewed. May be descriptive in nature. Scholarly Has been reviewed. Typically intended for academic audiences. 1-16

Information competence Criteria for evaluating information (UMUC) Authority Accuracy Objectivity Currency Coverage 1-17

Information competence Authority Who created the information? For what purpose? Objectivity Does the information contain advertising? Is it available freely? Accuracy Where did the information come from? Any obvious factual errors? Currency When was the information created / written? When was it last updated? Coverage Is the information continually “under construction?” Does it provide sufficient depth? 1-18

Textbook structure Part One: Introduction and Basic Concepts Nature and purpose of AIS Transaction processing Professionalism and ethics Internal control Part Two: Documentation Techniques Flowcharting Data flow diagramming and database design REAL modeling 1-19

Elements in the Study of AIS

Implications for both public and private accountants Sarbanes-Oxley Act of 2002 Section 404 – Management must identify, document, and evaluate significant internal controls Auditors must report on management’s assertions regarding internal controls Section 409 – Requires disclosure to the public on a “rapid and current” basis of material changes in an organization’s financial condition. Implications for both public and private accountants

Accounting Systems and Subsystems A system is a set of interdependent elements that together accomplish specific objectives. A subsystem is the interrelated parts that have come together, or integrated, as a single system, which we have named System 1.0.

Information System Model An information system (IS) (or management information system [MIS]) is a manmade system that generally consists of an integrated set of computer-based and manual components established to collect, store, and manage data and to provide output information to users. The Figure on the next slide depicts the functional components of an information system.

Information System Model

Purpose of AIS Collect, process and report information related to the financial aspects of business events Often integrated and indistinguishable from overall information system Like the IS, the AIS may be divided into components based on the operational functions supported.

Information Qualities

INFORMATION QUALITIES STATEMENT OF FINANCIAL ACCOUNTING CONCEPTS NO. 2: “QUALITATIVE CHARACTERISTICS OF ACCOUNTING INFORMATION” http://www.fasb.org/pdf/con2.pdf

Information Qualities Control Matrix

Management Decision Making 1. Intelligence: Searching the environment for conditions calling for a decision. 2. Design: Inventing, developing, and analyzing possible courses of action. 3. Choice: Selecting a course of action.

Management Decision Making

Vertical information flows Strategic Management Vertical information flows Tactical Management Operations Management Operations and Transaction Processing Horizontal information flows

Management Problem Structure and Information Requirements Horizontal flows relate to specific business events, such as one shipment, or to individual inventory items. the information moves through operational units such as sales, the warehouse, and accounting. Vertical Flows relate to the flow of information to and from strategic management through tactical management, operations management, and operations and transaction processing

Management Problem Structure and Information Requirements Higher up the pyramid, the less structured the decision Less defined External orientation More summarized information Future oriented Less frequent Less accurate Lower down the pyramid, the more structured the decision More defined Internal orientation More detailed information Historical More frequent More accurate

Accountant’s Role Designer—application of accounting principles, auditing, information systems, and systems development User—participate in design Auditor—provide audit and assurance services

A weekend edition of the NY Times contains more information than the average person was likely to come across in a lifetime in seventeenth-century England.

More new information has been produced in the last 30 years than in the previous 5,000.

About 1,000 books are published internationally every day, and the total of all printed knowledge doubles every eight years.

The world produces between 1 and 2 exabytes of unique information per year, which is roughly 250 megabytes for every man, woman, and child on earth.

Data Powers of Ten Byte - 8 bits Kilobyte – 1,000 bytes or 103 bytes Megabyte – 1,000,000 bytes or 106 bytes Gigabyte – 1,000,000,000 bytes Terabyte – 1,000,000,000,000 bytes Petabyte – 1,000,000,000,000,000 bytes Exabyte – 1,000,000,000,000,000,000 bytes

Data Powers of Ten Zettabyte – 1,000,000,000,000,000,000,000 bytes Yottabyte – 1,000,000,000,000,000,000,000,000 bytes

Textbook structure Part Three: Systems Analysis and Information Technology Information technology basics Information systems models XBRL E-business and ERP systems Part Four: Business Processes Sales / collection Acquisition / payment Other business processes Business process management 1-41

Textbook structure Part Five: Other Topics in AIS Computer crime and IT security Decision-making models and knowledge management Professional certifications and career planning Auditing and evaluating the AIS 1-42