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. Explain fundamental decisions an organization makes: Understand basic information needed to make them. Identify the transactional 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.

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

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 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

Organizational Decisions and Information Needed Business organizations use business processes to get things done. These processes are a set of structured activities that are performed by people, machines, or both to achieve a specific goal. Key decisions and information needed often come from these business processes.

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 / give service—get cash Expenditure: get goods / get 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 and Strategy An AIS is influenced by an organization’s strategy. A strategy is the overall goal the organization hopes to achieve (e.g., increase profitability). Once an overall goal is determined, an organization can determine actions needed to reach their goal and identify the informational requirements necessary to measure how well they are doing in obtaining that goal.

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.

Key Terms Revenue cycle System Expenditure cycle Goal conflict Production (conversion) cycle Human resource/payroll cycle Financing cycle General ledger and reporting system Accounting information system (AIS) Predictive analytics Value chain Primary activities Support activities Supply chain System Goal conflict Goal congruence Data Information Information technology (IT) Information overload Value of information Business process Transaction Transaction processing Give-get exchange