Accounting Information Systems: An Overview Chapter 1

Learning Objectives Distinguish between data and information: Understand the characteristics of useful information. Explain how to determine the value of information. Describe the major business processes present in most companies. Explain what an accounting information system (AIS) is and describe its basic functions. Explain the role an AIS plays in a company’s value chain.

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.

Data vs. Information Data are facts stored in the system A fact could be a number, date, name, and so on. For example: 2/22/14 ABC Company, 123, 99, 3, 20, 60

Data vs. Information The previous slide just showed facts, if we put those facts within a context of a sales invoice, for example, it is meaningful and considered information. Invoice Date : 2/22/14 Invoice #: 123 Customer: ABC company Item # Qty Price 99 3 $20 Total Invoice Amount $60

Systems, Data, and Information 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. When you’ve reached the overload point, the quality of decisions declines while the costs of producing the information increases.

Value of Information Information is valuable when the benefits exceed the costs of gathering, maintaining, and storing the data. Benefit (i.e., improved decision making) > Cost (i.e., time and resources used to get the information)

What Makes Information Useful? There are seven general characteristics that make information useful: Relevant: information needed to make a decision (e.g., the decision to extend customer credit would need relevant information on customer balance from an A/R aging report) Reliable: information free from error and bias Complete: does not omit important aspects of events or activities Timely: information needs to be provided in time to make the decision

What Makes Information Useful? Understandable: information must be presented in a meaningful manner Verifiable: two independent people can produce the same conclusion Accessible: available when needed

Transactional Information Between Internal and External Parties in an AIS Business organizations conduct business transactions between internal and external stakeholders. Internal stakeholders are employees in the organization (e.g., employees and managers). External stakeholders are trading partners such as customers and vendors as well as other external organizations such as Banks and Government. The AIS captures the flow of information between these users for the various business transactions.

Interactions Between AIS and Internal and External Parties

Basic Business Processes Transactions between the business organization and external parties fundamentally involve a “give–get” exchange. These basic business processes are: Revenue: give goods/service—get cash Expenditure: get goods/service—give cash Production: give labor and give raw materials—get finished goods Payroll: give cash—get labor Financing: give cash—get cash

What Is an Accounting Information System? It can be manual or computerized Consists of People who use the system Processes Technology (data, software, and information technology) Controls to safeguard information Thus, transactional data is collected and stored into meaningful information from which business decisions are made and provides adequate controls to protect and secure the organizational data assets.

How Does an AIS Add Value? A well thought out AIS can add value through effective and efficient decisions. Having effective decisions means quality decisions Having efficient decisions means reducing costs of decision making

AIS in the Value Chain The value chain shows how the different activities within an organization provide value to the customer. These activities are primary and support activities. Primary activities provide direct value to the customer. Support activities enable primary activities to be efficient and effective.

ROLE OF THE AIS IN THE VALUE CHAIN Smith Supply Co. Inbound Logistics Operations Outbound Logistics Marketing & Sales Service 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 Information technology can facilitate synergistic linkages that improve the performance of each company’s value chain.

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.

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 AICPA’s recognition of the importance and interrelationship of IT with accounting