Accounting Systems

SYSTEMS, DATA, AND INFORMATION A system is: A set of interrelated components that interact to achieve a goal

-Every organization has goals. -The subsystems should be designed to maximize achievement of the organization’s goals. 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.

The relation between system and subsystem goals: 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.

The systems concept encourages integration (i. e 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

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.

However, when you get more information than you can effectively assimilate, you suffer from information 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.

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

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

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.

Measuring the value of information in the circumstances of uncertainty The value of the information is measured by the following steps: 1. Determine the expected value of the accounting information under the available information and calculate the expected value of each alternative and choose the best alternative. 2. Determine the expected value of each alternative under full information and choose the best alternative.

3 - Estimating the value of the full information (value added) and calculated by the difference between the two previous steps, and represents the increase in the expected value of obtaining additional information compared to information available only to the decision maker. 4. Decide whether or not to access the information by comparing the value added of the information with the cost of obtaining it from its source (possibly from specialized offices, financial analysts, and so on).

Example: Al Marwa firm has three investment alternatives, The data on the expected savings of each alternative investment are as follows, according to the information available to the Company's Executive Director:

  expected Benefits according to the information available investment alternatives Depression probability 50% stability probability 20% Vogue probability 30% 40000 50000 75000 stocks 46000 55000 60000 Bonds 38000 Deposits

However, the Chairman of the Board of Directors believes that these estimates are inaccurate, which led him to resort to Mr. Mahmood's Office for Financial and Accounting Consultations to conduct a study on the three available alternatives. The study cost 7,200 L.E. The Executive Director received the following estimates regarding the savings in each alternative: 

  expected Benefits according to the information available investment alternatives Depression probability 20% stability probability 35% Vogue probability 40% 35000 55000 65000 stocks 25000 75000 90000 Bonds 15000 40000 60000 Deposits

Required: (1) Choose the best alternative if no additional information is obtained. (2) Choose the best alternative if you have additional information. (3) determine the total value of the additional information. (4) Calculate the net worth of additional information and give an opinion

The solution (1) Calculate expected savings for each of the available alternatives before obtaining additional information: Shares = 75000 × 30% + 50000 × 20% + 40000 × 50% = 52500L.E Bonds = 60000 × 30% + 55000 × 20% + 46000 × 50% = 52000 L.E Deposits = 55000 × 30% + 50000 × 20% + 38000 × 50% = 45500 L.E The best alternative is the Investment in Shares before obtaining additional information (52500L.E)

(2) Calculate the expected savings for each alternative available after obtaining additional information: Shares = 65000 × 40% + 55000 × 35% + 35000 × 25% = 54000 L.E Bond = 90000 × 40% + 75000 × 35% + 25000 × 25% = 68500 L.E Deposits = 60000 × 40% + 40000 × 35% + 15000 × 25% = 41750 L.E the best alternative is the Investment in Bond after obtaining additional information (68500 L.E)

(3) Total value of additional information = expected savings of the best alternative after obtaining additional information - expected savings of the alternative that would have been selected after obtaining the information = 68500-52500 = 16000 LE.

(4) net value of additional information = total value of additional information - cost of acquisition = 16000 - 7200 = 8800 L.E The Executive Director's decision whether or not to obtain additional information? Of course, it is better for him to obtain additional information because the return on it is more than the cost of obtaining it.

Characteristics that make information useful: 1-Relevance: It reduces uncertainty by helping you predict what will happen or confirm what already has happened. 2-Reliability: It’s dependable, i.e., free from error or bias and faithfully portrays events and activities.

3-Completeness: It doesn’t leave out anything that’s important. 4-Timeliness: You get it in time to make your decision. 5-Understandability: It’s presented in a manner you can comprehend and use.

You can get to it when you need it and in a format you can use. 6-Verifiability: A consensus notion—the nature of the information is such that different people would tend to produce the same result. 7-Accessibility: You can get to it when you need it and in a format you can use.

Information is provided to both: -External users -Internal users 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.

In providing mandatory or essential information, the focus should be on: -Minimizing costs. -Meeting regulatory requirements. -Meeting minimum standards of reliability and usefulness

Internal users: 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.

The functions of an AIS are to: 1-Collect and store data about events, resources, and agents. 2-Transform that data into information that management can use to make decisions about events, resources, and agents. 2-Provide adequate controls to ensure that the entity’s resources (including data) are: *Available when needed *Accurate and reliable

WHY STUDY ACCOUNTING INFORMATION SYSTEMS? (A) 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.

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.

(B) The skills are critical to career success. -Auditors need to evaluate the accuracy and reliability of information produced by the AIS. -Tax accountants must understand the client’s AIS adequately to be confident that it is providing complete and accurate information for tax planning and compliance work. -In management consulting, the design, selection, and implementation of accounting systems is a rapid growth area.

(C) 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. (D) AIS topics are tested on the new CPA exam: Makes up about 25% of the Business Environment & Concepts section of the CPA exam.

(E) AIS topics impact corporate strategy and culture: Organizational Culture Strategy Information Technology AIS design is affected by information technology, the organization’s strategy, and the organization’s culture.

THE AIS AND CORPORATE STRATEGY Michael Porter suggests that there are two basic business strategies which companies can follow: 1-Product-differentiation strategy 2-Low-cost strategy

A product-differentiation strategy involves setting your product apart from those of your competitors, i.e., building a “better” Mobile by offering one that’s faster, has enhanced features, etc. A low-cost strategy involves offering a cheaper Mobile than your competitors. The low cost is made possible by operating more efficiently

1-Variety-based strategic position: Porter also argues that companies must choose a strategic position among three choices: 1-Variety-based strategic position: Offer a subset of the industry’s products or services. EXAMPLE: An insurance company that only offers life insurance as opposed to life, health, property-casualty, etc

2-Needs-based strategic position: Serve most or all of the needs of a particular group of customers in a target market, for Example, The original Car Egypt-based insurance companies provided a portfolio of insurance and financial services tailored to the specific needs of Car owners.

3-Access-based strategic position: Serve a subset of customers who differ from others in terms of factors such as geographic location or size. EXAMPLE: Satellite Internet services are intended primarily for customers in rural areas who cannot get DSL or cable services.

**Choosing a strategic position is important because it helps a company focus its efforts on some activities as opposed to trying to be everything to everybody. EXAMPLE: A radio station that tries to play all types of music will probably fail. **It’s critical to design the organization’s activities so they reinforce one another in achieving the selected strategic position. The result is Specialization, which is difficult for competitors to imitate.

Resultes: **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.