CHAPTER 1
ACCOUNTING INFORMATION SYSTEMS: AN OVERVIEW
I. Distinguish between data and information, discuss the characteristics of
useful information, and explain how to determine the value of
information.
Systems, Data, and Information
Systems
A system is a set of detailed methods, procedures, and routines that
carry out specific activities, perform a duty, achieve goals or
objectives, or solve problems.
Systems are almost always composed of smaller subsystems
Each subsystem is designed to achieve one or more
organizational goals.
Each subsystem is designed to achieve one or more organizational
goals, changes in subsystems cannot be made without considering the
effect on other subsystems and the system as a whole.
Goal conflict occurs when a subsystem’s goals are inconsistent with
the goals of another subsystem or the system as a whole.
Goal congruence is achieved when a subsystem achieves its goals while
contributing to the organization’s overall goal.
Data
Data are facts that are collected, recorded, stored, and processed by
an information system.
Several kinds of data need to be collected in businesses, such
as:
1. Facts about the activities that take place.
2. The resources affected by the activities.
3. The people who participate in the activity.
Information
Information is data that have been organized and processed to provide
meaning and context that can improve the decision-making process.
Data is most useful when it is machine-readable and standardized such
that it can be processed by a computer with little human
intervention.
There are limits to the amount of information the human mind
can effectively absorb and process.
Information overload occurs when those limits are passed.
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Information Technology (IT) are computers and other electronic
devices used to store, retrieve, transmit, and manipulate data
to help decision makers more effectively filter and condense
information.
The value of information is the benefit produced by the information
minus the cost of producing it. Benefits include reduced uncertainty,
improved decisions, and improved ability to plan and schedule
activities. Costs include the time and resources spent to produce and
distribute information.
The characteristics that make information useful and meaningful
for decision making are:
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II. Explain the decisions an organization makes, the information needed to
make them, and the major business processes present in most companies.
Key Decisions and Information Needs
Information will be needed to make better decisions.
An information system is comprised of the people and technology that
produce information.
Information in an organization is organized through a set of related,
coordinated, and structured activities and tasks, performed by a
person, a computer, or a machine that help accomplish a specific
organizational goal known as a business process.
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III. Explain how an AIS adds value to an organization, how it affects and is
affected by corporate strategy, and its role in a value chain.
Business Processes
Taking the list of specific business processes, it is easier to group
them into related transactions. A transaction is an agreement between
two entities to exchange goods or services or any other event that can
be measured in economic terms by an organization. Transaction processing
is the process of capturing transaction data, processing it, storing it
for later use, and producing information output such as a financial
statement. The activities between two entities are pairs of events
involved in give-get exchange (e.g., give inventory to a customer, get
cash from the customer). These frequent give-get exchanges that occur in
companies are grouped around business processes or transaction cycles
and are:
1. The Revenue Cycle (AKA customer to cash (C2C)): Activities
associated with selling goods and services in exchange for cash or
future promise to receive cash (Accounts Receivable).
2. The Expenditure Cycle(AKA purchase to pay (P2P)):Purchase of
inventory for resale or raw materials for use in production in
exchange for cash or a promise to pay cash in the future (Accounts
Payable).
3. The Production or Conversion Cycle: Raw materials are converted
into finished goods.
4. The Human Resource/Payroll Cycle: Employees are hired, trained,
compensated, evaluated, promoted, and terminated.
5. The Financing Cycle: Companies acquire capital by selling shares
or borrowing money and where investors are paid dividends or
interest.
For each of these processes there is a basic give-get relationship.
1. Revenue Cycle: Give goods, get cash or A/R.
2. Expenditure Cycle: Give cash or A/P, get goods or raw materials.
3. Production Cycle: Give labor and raw materials, get finished
goods.
4. Human Resource: Give cash, get labor.
5. Financing Cycle: Give cash, get cash.
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The figure below shows the relationship between these cycles and the general
ledger and reporting system function which is used to generate information
for both management and external parties.
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Accounting Information Systems
An accounting information system (AIS) is a system that collects,
records, stores, and processes data to produce information for decision
makers.
An AIS can be a pencil and paper manual system or one that involves the
latest technology.
Six components of an AIS
1. The people who operate the system and perform various
functions.
2. The procedures and instructions, both manual and automated,
involved in collecting, processing, and storing data about the
organization’s activities.
3. The data about the organization and its business processes.
4. The software used to process the organization’s data.
5. The information technology infrastructure, including computers,
peripheral devices, and network communications devices used to
collect, store, process, and transmit data and information.
6. The internal controls and security measures that safeguard the
data in the AIS.
These six components enable an AIS to fulfill three important
business functions:
1. Collect and store data about organizational activities,
resources, and personnel.
2. Transform data into information that is useful for making
decisions so management can plan, execute, control, and
evaluate activities, resources, and personnel.
3. Provide adequate controls to safeguard the organization’s
assets, including its data, to ensure that the assets and data
are available when needed and the data are accurate and
reliable.
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How an AIS Can Add Value to an Organization
1. Improve the quality and reduce the costs of products or
services.
2. Improve efficiency. A well-designed AIS can make operations
more efficient by providing more timely information.
3. Share knowledge. A well-designed AIS can make it easier to
share knowledge and expertise, perhaps thereby improving
operations and even providing a competitive advantage.
4. Improve the efficiency and effectiveness of its supply chain.
5. Improve the internal control structure.
6. Improve decision making.
The AIS and Corporate Strategy
Three factors influence the design of an AIS: IT developments, business
strategy, and organizational culture.
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The Role of the AIS in the Value Chain
The role of an AIS in the value chain is detailed in the figure below
showing the linking together of all the primary and support activities
in a business. The objective of most organizations is to provide value
to their customers.
Five primary activities that directly provide value to its customers:
1. Inbound logistics consists of receiving, storing, and
distributing the materials an organization uses to create the
services and products it sells.
2. Operations activities transform inputs into final products or
services.
3. Outbound logistics activities distribute finished products or
services to customers.
4. Marketing and sales activities help customers buy the
organization’s products or services.
5. Service activities provide post-sale support to customers.
Four Categories of Support Activities
1. Firm infrastructure is the accounting, finance, legal, and
general administration activities that allow an organization to
function.
2. Human resources activities include recruiting, hiring,
training, and providing employee benefits and compensation.
3. Technology activities improve a product or service.
4. Purchasing activities procure raw materials, supplies,
machinery, and the buildings used to carry out the primary
activities.
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Supply Chain shows an extended system that includes an organization’s
value chain (manufacturer) as well as suppliers, distributers,
retailers, and customers.
1. Raw Materials Supplier
2. Manufacturer
3. Distributor
4. Retailer
5. Consumer
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