Accounting Information Systems: An Overview Chapter 1 Accounting Information Systems: An Overview Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

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 and the information needed to make them Identify the information that passes between internal and external parties and an AIS. Describe the major business processes present in most companies. Explain what an accounting information system (AIS) is and describe its basic functions. Discuss how an AIS can add value to an organization. Explain how an AIS and corporate strategy affect each other. Explain the role an AIS plays in a company’s value chain. Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

Goal What is a System? System A set of two or more interrelated components interacting to achieve a goal Goal Conflict Occurs when components act in their own interest without regard for overall goal Goal Congruence Occurs when components acting in their own interest contribute towards overall goal Process1 Process2 Goal Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

These are all Systems Manual Living Automated ERP Machine-Human

Should All Systems be Automated? No Cost it may be cheaper to continue carrying out the system functions and storing the system’s information manually. Security if the information system is maintaining sensitive, confidential data, the user may not feel that an automated system is sufficiently secure. The user may want the ability to keep the information physically protected and locked up.

Types of Systems On-line Real-time Decision Support Expert Systems Knowledge Based Systems

Automated Manual System Four Sub-processes Business Event Occurs Recorded on Source Document Record Business Event Batch Processed and Input by data-entry clerk Event Data Store (Sales, Purchases, etc.) Data Store = Table Update Master Data Generate Output

Automated Equivalent to a Manual System

Online Transaction Entry (OLTE) Entering business events at time and place the business event occurs Computer input device used to enter data at source at time of business event Merging Step 1 & 2 of Automated Manual System Input/Source document is eliminated Price data is retrieved from the system Source documents are printed by the system Event information in accumulated on tape or disk

Online Transaction Entry (Batch)

Online Real-time (OLRT) Three Sub-processes Business event occurs and is recorded Transactions saved Update Master data Immediate mode Generate Reports and Support Queries Reports periodically or on an as needed basis Support queries to generate unique reports for key decisions on demand

Online real-time processing

Real Time System Not the same as Online Real-Time Controls an environment by receiving data, processing them, and returning the results sufficiently quickly to affect the environment at that time Require concurrent processing of multiple inputs. Interacts with both people and an environment that is generally autonomous and often hostile.

Decision Support Systems Computer system that Supports business and organizational decision-making activities (Wikipedia) Key Features Provides decision alternatives Based on model Human makes final choice

Expert Systems Attempts to mimic the decision making steps of an Expert If-Then-Else Rules Output is Decision Ability to Explain Choice Ability to Explain non-chosen Options

Knowledge Based Systems Two Basic Types Threaded Discussion Boards Database of Information/Knowledge Database of SME’s Purpose Don’t re-invent the Wheel Ease the process of finding an expert

Hierarchical view of Systems Operational/Transactions Decision Support Strategic Planning

General Systems Theory The more specialized a system is, the less able it is to adapt to different circumstances. The larger a system is, the more of its resources that must be devoted to its everyday maintenance. Systems are always part of larger systems, and they can always be partitioned into smaller systems. Systems grow (5-10%/year) The interactions between components of a system are often complex and subtle. a change in system component A can cause a change in B, which can “ripple” into component C. the change in C can cause a “feedback” effect on the original component A

Data vs. Information Information Data are facts that are recorded and stored Insufficient for Decision Making Information is processed data used in decision making Too much information however, will make it more not less difficult to make decisions. This is known as Information Overload Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall

Benefit $’s > Cost $’s Value of Information Benefits Costs Improve Decisions Reduce Uncertainty Improve Planning Improve Scheduling Time & Resources Produce Information Distribute Information Benefit $’s > Cost $’s

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.” Materiality “there are no errors or omissions in the description of the phenomenon, and the process used to produce the reported information has been selected and applied with no errors in the process. “ Faithful Representation “faithful depiction … of economic phenomena” Complete all information necessary for a user to understand the phenomenon being depicted, including all necessary descriptions and explanations. Neutral without bias in the selection or presentation of financial information Free from error there are no errors or omissions in the description of the phenomenon, and the process used to produce the reported information has been selected and applied with no errors in the process. Point out to students that these characteristics are from the SFAC #2 Quality of Accounting Information (maybe have them read it). http://www.fasb.org/pdf/aop_CON2.pdf Copyright 2012 © Pearson Education, Inc. publishing as Prentice Hall

What makes information Useful? Enhancing Characteristics Timely “Having information available to a decision maker before it loses its capacity to influence decisions.” Enhances relevance of information as even untimely information may be useful in confirming previous decisions Understandable “The quality of information that enables users to perceive its significance.” Verifiable “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.” Enhances the usefulness of information but is not necessarily required Comparability Relevant and Faithful representations of information are enhanced if it can be compared with other companies and/or between different periods of the same company Point out to students that these characteristics are from the SFAC #8 which supersedes SFAC#2 Quality of Accounting Information (maybe have them read it). Copyright 2012 © Pearson Education, Inc. publishing as Prentice Hall

Business Process A set of related, coordinated, and structured activities, performed by a person/machine that help to accomplish a specific goal. Systems working towards Organizational Goals Revenue Expenditure Production Human Resources Financing Copyright 2012 © Pearson Education, Inc. publishing as Prentice Hall

Revenue Cycle Activities Sales order entry Shipping Billing Cash collections

Expenditure Cycle Activities Ordering materials, supplies, and services Receiving materials, supplies, and services Approving supplier invoices Cash disbursements Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

Production Cycle Activities Product design Planning and scheduling Production operations Cost accounting Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

HRM and Payroll Cycle Activities Update master data Validate time and attendance Prepare payroll Distribute payroll Disburse taxes and miscellaneous deductions Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

Business Transactions Give – Get Exchanges Between 2 entities Measured in economic terms Copyright 2012 © Pearson Education, Inc. publishing as Prentice Hall

Business Cycle Give–Get Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

Accounting Information Systems Collect, Process, Store and Report Data and Information If Accounting = Language of Business AIS = Information providing vehicle Accounting = AIS Copyright 2012 © Pearson Education, Inc. publishing as Prentice Hall

Components of an AIS People using the system Procedures and Instructions For collecting, processing and storing data Data Software Information Technology (IT) Infrastructure Computers, peripherals, networks, etc. Internal Control and Security Safeguard the system and its data Copyright 2012 © Pearson Education, Inc. publishing as Prentice Hall

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 and external users 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

AIS & Business Functions Collect and Store data about organizational: Activities, Resources, & Personnel Transform data into information enabling Management to: Plan, Execute, Control, & Evaluate Provide adequate control to safeguard Assets & Data Copyright 2012 © Pearson Education, Inc. publishing as Prentice Hall

AIS Value Add Improve Quality / Reduce Costs Improve Efficiency Improve Sharing Knowledge Improve Supply Chain Improve Internal Control Improve Decision Making Copyright 2012 © Pearson Education, Inc. publishing as Prentice Hall

Improve Decision Making Identify situations that require action Provide alternative choices Reduce Uncertainty Provide feedback on previous decisions Provide accurate and timely information Copyright 2012 © Pearson Education, Inc. publishing as Prentice Hall

Value Chain The set of activities a product or service moves along before as output it is sold to a customer. At each activity the product or service gains value Copyright 2012 © Pearson Education, Inc. publishing as Prentice Hall

Value Chain – Primary Activities Inbound Logistics Operations Outbound Logistics Marketing/Sales Service Copyright 2012 © Pearson Education, Inc. publishing as Prentice Hall

Value Chain - Support Activities Firm Infrastructure Human Resources Technology Purchasing Copyright 2012 © Pearson Education, Inc. publishing as Prentice Hall

Value Chain Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

AIS & Corporate Strategy Organizations have limited resources thus investments to AIS should have greatest impact on ROI Organizations need to understand how: IT developments Business Strategy & Organizational Culture Will effect and be effected by new AIS AIS IT Developments Business Strategy Organizational Culture Copyright 2012 © Pearson Education, Inc. publishing as Prentice Hall