1. Accounting Information Systems: An Overview
Chapter 1

2. What Is a System? System Goal Conflict Goal Congruence
A set of two or more interrelated components (subsystems)
interacting
to achieve a goal
Goal Conflict
Occurs when subsystems goals conflict with goals of other subsystem or with systems as a whole
Goal Congruence
Occurs when components acting in their own interest contribute toward overall goal

3. DATA vs. INFORMATION
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

4. DATA vs INFORMATION 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.
data
Information

5. DATA vs INFORMATION

6. Benefit $’s > Cost $’s
Value of Information
Benefits
Costs
Reduce Uncertainty
Improve Decisions
Improve Planning
Improve Scheduling
Time & Resources
Collecting data
Processing data
Storing data
Distribution to users
Benefit $’s > Cost $’s

7. What Makes Information Useful?
There are seven general characteristics that make information useful:
Relevant: information needed to make a decision
Reduces uncertainty
Confirms prior decisions
Reliable: information free from bias
Faithful representation of events and activities
Using examples in Problem 1.4 is a good exercise to illustrate the characteristics of useful information.
Another example to use and carry throughout the seven characteristics is to use an example of customer credit decisions:
Relevant information is needed to make a customer credit decision, the relevant information would include customer balances, payment history, credit history from other vendors, and so on.
The information is free from bias in making a credit decision for example, when the information comes from the credit manager and not the sales manager who may have an incentive to extend customer credit to get a sale and the sales commission.
Not having customer payment history is incomplete information to make a decision on extending credit to a customer. If we only know how much the customer purchased in the past, but have no information on how timely the customer makes payments, this is not providing a complete picture to make a credit decision.
If the credit manager makes a decision based upon customer account information activity (sales and payments) from last quarter, it is not timely. For example, a customer may experience recent cash flow problems which would show that their ability to pay on time is getting later and later. If this is a recent trend, using an old report would not be useful in making a good credit decision.
If the customer account information is organized in invoice date order only and not within a customer subgroup, it is not in an understandable format to use that information to make a credit decision on a specific customer because you would have to find each invoice from the date order list.
Information is verifiable if two independent people can produce the same information on how much a customer owes today.
If the accounting system goes down before the credit manager can access the customer information, it will prohibit the credit manager from making a decision.

8. What Makes Information Useful?
Complete: does not omit important aspects of events or activities
Timely: information needs to be provided in time to make the decision
Understandable: information must be presented in a meaningful manner
Using examples in Problem 1.4 is a good exercise to illustrate the characteristics of useful information.
Another example to use and carry throughout the seven characteristics is to use an example of customer credit decisions:
Relevant information is needed to make a customer credit decision, the relevant information would include customer balances, payment history, credit history from other vendors, and so on.
The information is free from bias in making a credit decision for example, when the information comes from the credit manager and not the sales manager who may have an incentive to extend customer credit to get a sale and the sales commission.
Not having customer payment history is incomplete information to make a decision on extending credit to a customer. If we only know how much the customer purchased in the past, but have no information on how timely the customer makes payments, this is not providing a complete picture to make a credit decision.
If the credit manager makes a decision based upon customer account information activity (sales and payments) from last quarter, it is not timely. For example, a customer may experience recent cash flow problems which would show that their ability to pay on time is getting later and later. If this is a recent trend, using an old report would not be useful in making a good credit decision.
If the customer account information is organized in invoice date order only and not within a customer subgroup, it is not in an understandable format to use that information to make a credit decision on a specific customer because you would have to find each invoice from the date order list.
Information is verifiable if two independent people can produce the same information on how much a customer owes today.
If the accounting system goes down before the credit manager can access the customer information, it will prohibit the credit manager from making a decision.

9. What Makes Information Useful?
Verifiable: two independent people can produce the same conclusion
consensus
Accessible:
available when needed
Useable format

10. 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.
A good example to walk thru with students would be a local restaurant near campus (e.g., a pizza restaurant).
Ask students to put themselves in the shoes of the restaurant owner, what decisions would the owner need to make to run the business successfully?
The students may have many answers which could include decisions about what products (pizzas to sell), what resources are needed to make the pizza (labor, equipment, and ingredients), Who to buy the ingredients from? How many people are needed to work at the restaurant, and what skills are required from employees (pizza maker, waiter, delivery person), and so on.
In essence, all of these decisions can be mapped to a series of business processes and from these decisions identify information that is needed to measure performance.
For example, if the key decision is what types of pizzas should I sell, the processes that may impact this decision would be sales and market information. In addition, vendor information on ingredient costs may play a role here as well (especially if its an exotic ingredient, expensive ingredient, or hard to source, e.g., cheese imported from Italy).

11. 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).
Primarily use discretionary information
On an as needed basis

12. Transactional Information Between Internal and External Parties in an AIS
External stakeholders are trading partners such as customers and vendors as well as other external organizations such as Banks and Government.
Mandatory
Essential for conducting business with external parties
The AIS captures the flow of information between these users for the various business transactions.

13. Business Process Cycles
Revenue
Expenditure
Production
Human Resources
Financing
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14. Business Transactions
Give–Get exchanges
Between two entities
Measured in economic terms

15. 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
It seems odd that the financing cycle is give cash—get cash, what does this really mean?
It basically means that a business organization can get cash in the form of a bank loan , but will need to give that cash back over time in the form of monthly payments to the bank.
Or it may mean that the company can get cash from investors and give equity (which eventually turns into cash in the form of dividend payments).

16. Interactions Between AIS and Internal and External Parties
Examining Figure 1-1 provides a great amount of detail and insights as to the flow of information going from the internal and external stakeholders for business processes. Note that this information can be easily mapped to Figure 1-2 which shows the transactional activity “give-get” exchange.

17. AIS & its Subsystems
Inventory

18. Common Cycle Activities
Revenue Cycle
Receive and answer customer inquiries
Take customer orders and enter them into the AIS
Approve credit sales
Check inventory availability
Initiate back orders for goods out of stock
Pick and pack customer orders
Ship goods to customers or perform services
Bill customers for goods shipped or services performed
Update (increase) sales and accounts receivable
Receive customer payments and deposit them in the bank
Update (reduce) accounts receivable
Handle sales returns, discounts, allowances, and bad debts
Prepare management reports
Send appropriate information to the other cycles
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19. Common Cycle Activities
Expenditure Cycle
Request that goods and services be purchased
Prepare, approve, and send purchase orders to vendors
Receive goods and services and complete a receiving report
Store goods
Receive vendor invoices
Update (increase) accounts payable
Approve vendor invoices for payment
Pay vendors for goods and services
Update (reduce) accounts payable
Handle purchase returns, discounts, and allowances
Prepare management reports
Send appropriate information to the other cycles
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20. Common Cycle Activities
HR/Payroll Cycle
Recruit, hire, and train new employees
Evaluate employee performance and promote employees
Discharge employees
Update payroll records
Collect and validate time, attendance, and commission data
Prepare and disburse payroll
Calculate and disburse taxes and benefit payments
Prepare employee and management reports
Send appropriate information to the other cycles
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21. Common Cycle Activities
Production Cycle
Design products
Forecast, plan, and schedule production
Request raw materials for production
Manufacture products
Store finished products
Accumulate costs for products manufactured
Prepare management reports
Send appropriate information to the other cycles
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22. Common Cycle Activities
Financing Cycle
Forecast cash needs
Sell stock/securities to investors
Borrow money from lenders
Pay dividends to investors and interest to lenders
Retire debt
Prepare management reports
Send appropriate information to the other cycles
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23. What Is an Accounting Information System?
System that
collects,
records,
stores,
processes data to produce information for decision makers
It can be manual or computerized

24. Components of an AIS People using the system
Procedures, Instructions & Documentation
For collecting, processing, and storing data
Data
Software used to process the data
Information Technology (IT) Infrastructure
Computers, peripherals, networks, and so on
Internal Control and Security
Safeguard the system and its data

25. AIS and Business Functions
Collect and store data about organizational:
Activities, resources, and personnel
Transform data into information enabling
Management to:
Plan, execute, control, and evaluate
Provide adequate control to safeguard
Assets
data

26. 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
A good example here is thinking back to the Pizza restaurant example in the earlier slides. The owner uses an AIS to determine which pizzas are the most popular. The sales information in the AIS is used to help answer this question and provides the owner with information to know how much of certain ingredients should be on hand to make those popular pizza pies. If ingredients were to run out, then the quality of this decision would be considered poor as there would be many dissatisfied customers. In addition, this information helps the owner not to buy too much of an ingredient to have on hand to where their may be waste if the ingredients go stale.

27. AIS Value Add Improve Quality and Reduce Costs Improve Efficiency
Improve Sharing Knowledge
Improve Supply Chain
Improve Internal Control
Improve Decision Making

28. Improve Decision Making
Identify situations that require action.
Provide alternative choices.
Reduce uncertainty.
Provide feedback on previous decisions.
Provide accurate and timely information.

29. 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.
For example, if the strategy is increase profitability an organization can increase sales revenue and decrease manufacturing costs. Each of these actions will have different informational needs to measure progress. To increase sales revenue, the company can increase prices, increase volume, change the product mix. To decrease manufacturing costs, the company can reduce the cost of the inputs into the manufacturing process or improve the process.

30. 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.
Please note that students may see primary and then assume secondary is next. This is a common mistake and using the visual from Figure 1-5 in the book as well as an example can help mitigate this common misperception.
A basic example involves buying a textbook. Ask the students how they generally buy a textbook (usually they buy it online or go to the bookstore), either way you can walk through the primary and support activities that are needed for them to get their textbook in time for the first day of class!

32. Value Chain—Support Activities
Firm Infrastructure
Human Resources
Technology
Purchasing

33. Value Chain—Support Activities
Support activities include:
Firm infrastructure
Accountants, lawyers, and administration. Includes the company’s accounting information system.
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34. Value Chain—Support Activities
Support activities include:
Firm infrastructure
Human resources
Involves recruiting and hiring new employees, training employees, paying employees, and handling employee benefits.
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35. Value Chain—Support Activities
Support activities include:
Firm infrastructure
Human resources
Technology
Activities to improve the products or services (e.g., R&D, Web site development).
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36. Value Chain—Support Activities
Support activities include:
Firm infrastructure
Human resources
Technology
Purchasing
Buying the resources (e.g., materials, inventory, fixed assets) needed to carry out the entity’s primary activities.
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37. ROLE OF THE AIS IN THE VALUE CHAIN
Linkage between the value chain of various organizations forms a larger system called the Supply chain (extended value chain)
Information technology can facilitate synergistic linkages that improve the performance of each company’s value chain.
Examples
POS in retail
JIT in manufacturing
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