Accounting Information Systems: An Overview LEARNING OBJECTIVES After studying this chapter, you should be able to: 41. Distinguish data from information, discuss the characteristics of useful information, and explain how to determine the value of information, 2. Explain the decisions an organization makes, the information needed to make them, and the major business processes present in most companies. 3. Explain how an accounting information system (AIS) adds value to an ‘organization, how it affects and is affected by corporate strategy, and its role in a value chain. [ inrecRaTive case | TI S&S Eo After working for years as a regional manager for a retail organization, Scott Parry opened his ‘own business with Susan Gonzalez, one of his district managers, as his partner. They formed ‘S&S to sell appliances and consumer electronics. Scott and Susan pursued a “clicks and bricks” strategy by renting a building in a busy part of town and adding an electronic storefront, Scott and Susan invested enough money to see them through the first six months. They ‘will hire 15 employees within the next two weeks—three to stock the shelves, four sales rep- resentatives, six checkout clerks, and two to develop and maintain the electronic storefront. Scott and Susan will host S&S's grand opening in five weeks. To meet that deadline, they have to address the following important issues: 1. What decisions do they need to make to be successful and profitable? For example: 8, How should they price products to be competitive yet earn a profit? b. Should they extend credit, and, if $0, on what terms? How can they accurately track what customers owe and pay? ¢. How should they hire, train, and supervise employees? What compensation and benefits package should they offer? How should they process payroll? d, How can they track cash inflows and outflows to avoid a cash squeeze? ‘What is the appropriate product mix? What inventory quantities should they ‘carry, given their limited showroom space?2. What information do Scott and Susan need to make ‘8. What information do the external entities they interact with need? b. What information do management and other employees need? c. How can they gather, store, and disseminate that information? 3. What business processes are needed, and how should they be carried out? 4, What functionality should be provided on the website? Although Scott and Susan could use an educated guess or “gut feeling” to make these decisions, they know they can make better decisions if they obtain additional information, A ‘well-designed AIS can solve these issues and provide the information they need to make any remaining decisions, ‘We begin this chapter by explaining important terms and discussing the kinds of information ‘organizations need and the business processes used to produce that information, We continue with an exploration of what an accounting information system (AIS) is, how an AIS adds value to an organization, how an AIS and corporate strategy affect cach other, and the role of the AIS in the value chain, 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 one or more problems, Most systems are composed of smaller subsystems that support the larger system. For example, a college of business is a system composed of various departments, each of which is a subsystem. Moreover, the college itself is a subsystem of the university, Each subsystem is designed to achieve one or more organizational goals. Changes in subsys. tems cannot be made without considering the effect on other subsystems and on the system as a whole. Goal conflict occurs when a subsystem’s goals are inconsistent with the goals of another subsystem or with the system as a whole. Goal congruence occurs when a subsystem achieves its goals while contributing to the organization’s overall goal. The larger the organization and the ‘more complicated the system, the more difficult it is to achieve goal congruence. Data are facts that are collected, recorded, stored, and processed by an information sys tem. Businesses need to collect several kinds of data such as the activities that take place, the resources affected by the activities, and the people who participate in the activity. For example, the business needs to collect data about a sale (date, total amount), the resource sold (good or service, quantity sold, unit price), and the people who participated (customer, salesperson). Information is data that have been organized and processed to provide meaning and con: text that can improve the decision-making process. As a rule, users make better de the quantity and quality of information increase, Table 1-1 presents 14 characteristics that ‘make information useful and meaningful, system - Detaled methods, pre ‘ut actvtis, perform a duty, Senge or abet, geal confit - When subsys Fo gonls of another subsystem forthe system as 2 whole geal congruence - Wren aub ‘contributing tothe organiza tor overall goal data -Facts that ae collected, ‘corded, stored, and procested yan iniormatin stm Information = Data that have 290 PART | CONCEPTUAL FOUNDATIONS OF ACCOUNTING INFORMATION SYSTEMS machine readable «Data ins format tat canbe processed Information ovelod - Exceed ing the amount of information {human mind can absorb and rocess tesling ine cede in ddecssonmaking quay and an rere inthe eo of proving information Information technology (M The computers end ether locrorie devices ured to tore, ‘etiove, Warsi and manipu te dnt vali ofinformation-The bene ‘ft provided by information rrinur the cost of producing TABLE 1-1 Characteristics of Useful Information ‘Access resvicted Able to limit access to authorized parties Accurate Correct free of error, accurately represents events and activities Available ‘Available to users when needed: in a format that can be easily and quickly used Reputable Perceived as tue and credible due to highly regarded source or content Complete Does net omit aspects of events or activities of enough breadth and depth Concise Clear, succinct appropriate volume presented briefly but comprehensively Consistent Presented in same format overtime Curent Includes event and activity data up tothe present date and time Objective Unbiased; unprejudiced; impartial Relevant Reduces uncertainty; improves decision making; applicable and helpful Timely Provided in time for decision makers to make decisions Useable Easy to use fr different tasks; human and machine readable Understandable Presented in a useful and intelligible format: easily comprehended and interpreted Verifiable ‘Same information produced by two independent, knowledgeable people ata is most useful when it is in a machine-readable format that can be read and pro- cessed by a computer. This processing may involve data collection, recording, storage, updat- ing, and data dissemination. For example, public companies are now required to code their financial statements using XBRL (eXtensible Business Reporting Language)—a program ming language designed specifically to facilitate the communication of financial and other business information. Without XBRL, electronic documents ate digital versions of paper re- ports, Humans can read the data, but computers cannot automatically process the data until a person manually enters it in the appropriate format, XBRL changes that by encoding informa- tion about what a particular data item means so that other computer programs can understand What to do with it. XBRL is discussed more fully in Chapter 16. Using machine readable formats like XBRL improves many of the other 14 characteris- tics that make information useful. For example, XBRL. improves: © Reliability by reducing human error and using standard taxonomies, © Relevance by assigning relevant meaning to data so it can be compared to similar data from other organizations, © Accessibility by enabling the automatic importing of data into decision models and other ‘computer systems. © Understandabilty and usability by making the data readable to both humans and computers. © Timeliness by reducing the time needed to import, produce, and distribute information Machine readable data also facilitates newer technologies such as artificial intelligence ‘and data analytics, which are discussed later in the chapter, However, there are limits to the amount of information the human mind can absorb and process. Information overload occurs when those limits are passed, resulting in a decline in decision-making quality and an inerease in the cost of providing that information. Information system designers use information technology (IT) to help decision makers more effectively filter and condense information, For example, Walmart has invested heavily in IT so that every day it can collect and process almost 50 petabytes of transaction data and mine more than 200 internal and external databases to produce valuable information, The value of information is the benefit produced by the information minus the cost of producing it, Benefits of information include reduced uncertainty, improved decisions, and improved ability to plan and schedule activities. The costs include the time and re- sources spent to produce and distribute the information. Information costs and benefits canCHAPTER 1 ACCOUNTING INFORMATION SYSTEMS: AN OVERVIEW 31 be difficult to quantify, and itis difficult to determine the value of information before it has been produced and utilized. Nevertheless, the expected value of information should be caleu- lated as effectively as possible so that the costs of producing the information do not exceed its benefits. To illustrate the value of information, consider the case of 7-Eleven, When a Japanese ‘company licensed the very successful 7-Eleven name from Southland Corporation, it invested. heavily in IT. However, the U.S. stores did not. Each 7-Eleven store in Japan was given a ‘computer that: ‘© Keeps track of the 3,000 items sold in each store and determines what products are mov- ing, at what time of day, and under what weather conditions. ‘© Keeps track of what and when customers buy to make sure it has in stock the products ‘most frequently purchased. ‘© Orders sandwiches and rice dishes from suppliers automatically. Orders are placed and filled three times a day so that stores always have fresh food. In addition, suppliers can access 7-Eleven sales data electronically so that they can forecast demand, ‘© Coordinates deliveries with suppliers. This reduces deliveries from 34 to 12 a day, result- ing in less clerical receiving time. ‘© Prepares a color graphic display that indicates which store areas contribute the most to sales and profits. Average daily sales of 7-Eleven Japan were 30% higher and its operating margins almost double those of its closest competitor. What happened to Southland and its 7-Eleven stores in the United States? Profits declined, and Southland eventually had to file for bankruptey. ‘7-Bleven Japan came to the company’s rescue and purchased 64% of Southland, As shown in Figure 1-1, an information system is the combination of the people and the technologies in an organization that collect, record, store, and process data to produce the information needed to make informed decisions, Information Needs and Business Processes All organizations need information in order to make effective decisions. In addition, all ‘organizations have certain business processes in which they are continuously engaged. A business process is a set of related, coordinated, and structured activities and tasks that are performed by a person, a computer, or a machine, and that help accomplish a specific ‘organizational goal. To make effective decisions, organizations must decidle what decisions they need to make, What information they need to make the decisions, and how to gather and process the data needed to produce the information, This data gathering and processing is often tied to the COrgorzaton| Technology information stem - The people and technologies Sn organzaton at produce information business process -Aset of related, coordinated ana Frotured actos and tasks, performed by person, 2 com Duley ora machine, that helps Secomplsh speci organiza onal goa FIGURE 1-1 The Components of an Information System2 PART | CONCEPTUAL FOUNDATIONS OF ACCOUNTING INFORMATION SYSTEMS a c business processes in an organization. To illustrate the process of identifying informa- tion needs and business processes, lets return fo our S&S case study. INFORMATION NEEDS ‘Scott and Susan decide they must understand how S&S functions before they can identify the information they need to manage S&S effectively. Then they can determine the types of data and procedures they will need to collect and produce that information. They created Table 1-2 TABLE 1-2 Overview of S&S's Business Processes, Key Decisions, and Information Needs Business Processes Acquire capital Acquire building and equipment Hite and tain employees Acquire inventory ‘Advertsing and marketing Sell merchandice Collect payments from customers Pay employees Pay taxes Pay vendors Key Decisions. How much Find investors or borrow funds borrowing, how to obisin best ters Size of building Amount of equipment Rent or buy Location How to depreciate Experience requirements How to assess integrity and competence of applicants How to tain employees What models to carry ‘Optimal level of inventory to carry How much to purchase How to manage inventory (store, contol, ete) Which vendors; best quality, prices Which media Content What is optimal price for each product How to customize products for customers How to deliver products to customer (Offer in-house credit; determine credit limits Which credit cards to accept Ioffering erect, what terms How to effectively handle cash receipts Amount to pay Deductions and withholdings Process payall in-house or use outside service Payroll tax requirements Sales tax requirements Whom to pay When to pay How much to pay Information Needs Cash flow projections Pro forma financial statements Loan amortization schedule Capacity needs Building and equipment prices Market study ‘Tax tables and depreciation regulations Lob deseriptions Applicant job history and skills Market analyses Sales and inventory tumover forecasts Inventory status reports Vendor performance Cost analyses. Market coverage Product costs; desired margins Customer needs and preferences Customer delivery preferences Credit card costs; company polices Customer credit status Customer account status Accounts receivable aging report ‘Accounts receivable records Sales for commissions) Time worked thourly employees) Wa forms Costs of extemal payroll service Government regulations Total wage expense Total sles Vendor invoices ‘Accounts payable records Payment termsCHAPTER 1 to summarize part of their analysis. It lists S&S’s basic business processes, some key decisions that need to be made for each process, and information they need to make the decisions. ‘Scott and Susan realize that the list is not exhaustive, but they are satisfied that it provides 2 good overview of S&S. They also recognize that not all the information needs listed in the right-hand column will be produced internally by S&S. Information about payment terms for merchandise purchases, for example, will be provided by vendors. Thus, S&S must effectively integrate external data with internally generated data so that Scott and Susan can use both types of information to run S&S. ‘S&S will interact with many external parties, such as customers, vendors, and gov- ‘ernmental agencies, as well as with internal parties such as management and employees. ‘To get a better handle on the more important interactions with these parties, they prepared. Figure 1-2. BUSINESS PROCESSES Scott decides to reorganize the business processes listed in Table 1-2 into groups of related, transactions. A transaction is an agreement between two entities to exchange goods or ser ‘vices or any other event that can be measured in economic terms by an organization. Examples include selling goods to customers, buying inventory from suppliers, and paying employees. ‘The process that begins with capturing transaction data and ends with informational output, such as the financial statements, is called transaction processing, Transaction processing is ‘covered in more depth in Chapter 2. Many business activities are pairs of events involved in a give-get exchange. Most orga- nizations engage in a small number of give-get exchanges, but each type of exchange happens ‘many times, For example, S&S will have thousands of sales to customers every year in ex- ‘change for cash, Likewise, S&S will continuously buy inventory from suppliers in exchange for cash, These exchanges can be grouped into five major business processes or transaction cycles: ‘© The revenue eycle, where goods and services are sold for cash or a future promise to re- ceive cash, This cycle is discussed in Chapter 14. Pare Odes Cuter Odes Goods & Services Goods & Serer Vendo | —Verdorinwices Comer hice” | Camere Vendor Pont Gates Pont — ett —y labor & Services Investors | «<—2™sSencs . ‘Wages, Salaries Employees Facil Stomern | Accuning | Wo Slr Fe System loin 2585 | Monogel Reports & Toan Forme Frail Sore Creditors: | Management Financial Stlement <__fudgts |More — ezine apo Revoir tasters [| Berks | __withowols Toss Report | Agencies Sark Seman ACCOUNTING INFORMATION SYSTEMS: AN OVERVIEW 33 wansactin An agreement be tween two eth to exchange (goods orsonices, sucha ing inventoryin exchange: cash any other event that ean bemeesuted in econ tors by sn organization ‘wancacton processing - Proce of capturing vansaction data, processing toring ifr later (he ane producing nfamaton tutpat, suche a managers report ora franca sateen gve-get exchange - Transactions sucha giving up eash to get inventory rom a supple ond ing employees a payin fichange for ther abr business process of tans on ojlec- The major gveget frchanger that occur hequerty Inrost companies reverue cycle Activities assoc toc with eling goode anc sr ‘ices in exchange ‘or eash or ‘ure promis to rece cash, FIGURE 1-2 Interactions between S8S and External and Internal Parties4 PART | CONCEPTUAL FOUNDATIONS OF ACCOUNTING INFORMATION SYSTEMS epenalire eel etnies ax sotate with purchasing inven tory forreaieorraw matersis Inexchenge for eash ora future promise to pay cash production cle Activites 2 oeatec wit uring abo am ‘materia, and equipment to reduce fished goods. Aso Called conversion oye urna sescurcnapyrll cyclo Actives serocsted eth ‘hing taring, compensating, svsisingpremetng. nde ‘oancing ope = tis a socata with ising money by {ellng shares inthe company to iwesrs end boeing meme {35 well at paying dvends and FIGURE 1-3, The AIS and Its ‘Subsystems © The expenditure eycle, where companies purchase inventory for resale or raw materials, to use in producing products in exchange for cash or a future promise to pay cash, This cycle is discussed in Chapter 15. © The production cycle, or conversion cycle, where raw materials are transformed into finished goods. This cycle is discussed in Chapter 16. © The human resources/payroll eyele, where employees are hired, trained, compensated, evaluated, promoted, and terminated. This cycle is discussed in Chapter 17. © The financing cycle, where companies sell shares in the company to investors and bor- row money, and where investors are paid dividends and interest is paid on loans, ‘These cycles process a few related transactions repeatedly. For example, most revenue cycle transactions are cither selling goods or services to customers or collecting cash for those sales. Figure 1-3 shows the main transaction cycles and the give-get exchange inherent in cach cycle, ‘These basic give-get exchanges are supported by a number of other business activities For example, S&S may need to answer a number of customer inquiries and check inventory levels before it can make a sale. Likewise, it may have to check customer credit before a credit sale is made, Accounts receivable will have to be increased cach time a credit sale is made and decreased cach time a customer payment is received. Table 1-3 lists the major activities in cach transaction cycle. eaagas ep Gat funds {| Goh coh Ls Funds Gen Resouces Payel G Exponditre Go Sie oe Give Goods Row Gh lebor Goh Marl Purchased Dota ote foie Goede Seneca edger & Reporting Sysom bleoeton me ‘erbote Dae Sera bote cra a Row ves Frducion Ge Aisa re sd cot = patel Gre (Cools ol Finished Rete Creal Goods er Gat Geos cathCHAPTER 1 ACCOUNTING INFORMATION SYSTEMS: Notice that the last activity listed in Table 1-3 for each transaction cycle is “Send appro- priate information to the other cycles.” Figure 1-3 shows how these various transaction cycles. relate to one another and interface with the general ledger and reporting system, which is used to generate information for both management and external parties, The general ledger and reporting system is discussed in more depth in Chapter 18, In many accounting software packages, the various transaction cycles are implemented as separate modules. Not every organization needs to implement every module, Retail stores like S&S, for example, do not have a production eycle and would not implement that mod- ule, Moreover, some organizations have unique requirements. Financial institutions, for ex- ample, have demand deposit and installment-loan cycles that relate to transactions involving ‘customer accounts and loans. In addition, the nature of a given transaction cycle differs across different types of organizations. For example, the expenditure cycle of a service company, TABLE 1-3 Common Cycle Activities, ‘Transaction Cydle Major Activities in the Cycle Revenue Receive and answer customer inquiries “Take custome! Approve credit sales Check inventory availabilty 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 (inerease) sales and accounts receivable Receive customer payments and deposit them in the bank Update (reduce) accounts receivable Handle sales return, discounts, allowances, and bad debts Prepare management reports ders and enter them into the AIS Send appropriate information to the other cycles Expenditure Request 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 Human Resources/Payroll Recruit hire, and tain new employees Evaluate employee performance and promote employees Discharge employees Update payroll records Collect and validate time, attendance, and commission data Propare and disburse payroll Calculate and disburse taxes and benefit payments AN OVERVIEW 35 ‘genera ledger and reporting Sister information procesing ‘Speratons involved in updating ‘he gereral edger and prepa ing reports for both manage ‘ment and external partes3% PART | CONCEPTUAL FOUNDATIONS OF ACCOUNTING INFORMATION SYSTEMS accounting infrmation stem (As) -Asyetom that colt, record, ores, ana processes ‘eta to produce information for dection makers induces people procedures and tue fons, data, sofware, informs tion tecrnalogy inastuctre, tnd internal conto and a vy messes. _sccounting - The systematic and ‘comprehensive recording of en ‘organisation finan anaae one: including emmaritng, sean, ana repertng ese TABLE 1-3 Continued ‘Transaction Cyde Major Activities in the Cycle Human Resources/Payroll Prepare employee and management reports ‘Send appropriate information tothe other cycles Production 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 Financing 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 such as a public accounting or a law firm, does not normally involve processing transactions related to the purchase, receipt, and payment for merchandise that will be resold to customers. Each transaction cycle can include many different business processes or activities. Each business process can be relatively simple or quite complex. ‘After preparing Tables 1-2 and 1-3 and Figures 1-2 and 1-3, Scott and Susan believe they understand S&S well enough to begin shopping for an information system. Susan recalled a previous employer that had several separate information systems because its software was not designed to accommodate the information needs of all managers. She also vividly recalled at tending one meeting where she witnessed the negative effects of having multiple systems, The head of marketing had one report on year-to-date sales by product, the production manager had a different report that contained different sales figures, and the controller's report, which was pro- duced by the general ledger system, had yet a third version of year-to-date sales. Over an hour was wasted trying to reconcile those different reports! Susan vowed to ensure that S&S did not ‘ever find itself in such a mess. She would make sure that any system selected would have the ca- ability to integrate both financial and nonfinancial data about S&S's various business processes. so that everyone could pull information from the same system. Accounting Information Systems It has often been said that accounting is the language of business. If that is the case, then ‘an accounting information system (AIS) is the intelligence—the information-providing vehicle—of that language, Accounting is the systematic and comprehensive recording of an organization’s finan- cial transactions, It also includes summarizing, analyzing, and reporting these transactions to management, owners/investors, oversight agencies, and tax collection entities. That means. accounting is a data identification, collection, and storage process as well as an information development, measurement, and communication process. By definition, accounting is an in- formation system, since an AIS collects, records, stores, and processes accounting and other data to produce information for decision makers. This is illustrated in Figure 1-4, An AIS can be a paper-and-pencil manual system, a complex system using the latest in TT, of something in between, Regardless of the approach taken, the process is the same, TheCHAPTER 1 ACCOUNTING INFORMATION SYSTEMS: AIS must collect, enter, process, store, and report data and information. The paper and pencil ‘or the computer hardware and software are merely the tools used to produce the information, This text does not distinguish an AIS from other information systems. Instead, our view- point is that the AIS can and should be the organization’s primary information system and that it provides users with the information they need to perform their jobs, ‘There are six components of an AIS: . The people who use the system. . The procedures and instructions used to collect, process, and store data, . The data about the organization and its business activities. . The software used to process the data . The information technology infrastructure, including the computers, peripheral devices, and network communications devices used in the AIS. 6. The intemal controls and security measures that safeguard AIS data ‘These six components enable an AIS to fulfill three important business functions: 1. Collect and store data about organizational activities, resources, and personnel. Organi zations have a number of business processes, such as making a sale or purchasing raw ‘materials, which are repeated frequently. 2. Transform data into information so management can plan, execute, control, and evaluate activities, resources, and personnel. Decision making is discussed in detail later in this chapter. 3. Provide adequate controls to safeguard the organization's assets and data. Control con- cepts are discussed in detail in Chapters 8-13. Since accounting data comes from an AIS, AIS knowledge and skills are critical to an accountant’s career success. Interacting with an AIS is one of the most important activities accountants perform. Other important AIS-related activities include design- ing information systems and business process improvements, as discussed in Chapters 22 to 24, Focus 1-1 explains a specialty to designate that certain CPAs (Certified Public Accountants) have an in-depth knowledge of AIS topics. HOW AN AIS GAN ADD VALUE TO AN ORGANIZATION ‘A well-designed AIS can add value to an organization by: 1. Improving the quality and reducing the costs of products or services. For example, an AIS can monitor machinery so operators are notified immediately when performance falls, outside acceptable quality limits. This helps maintain product quality, reduces waste, and Towers costs. Improving efficiency. For example, timely information makes a just-in-time manufactur- ing approach possible, as it requires constant, accurate, up-to-date information about raw ‘materials inventories and their locations. Sharing knowledge, Sharing knowledge and expertise can improve operations and pro- vide a competitive advantage. For example, CPA firms use their information systems to share best practices and to support communication between offices. Employees can search the corporate database to identify experts to provide assistance for a particular client; thus, a CPA firm’s international expertise can be made available to any local client. Improving the efficiency and effectiveness of its supply chain, For example, allowing customers to directly access inventory and sales order entry systems can reduce sales and marketing costs, thereby increasing customer retention rates. 2 4. AN OVERVIEW FIGURE 1-4 ‘An AIS Processes Data to Produce Information for Decision Makers 7eo PART | FOCUS 1-1 The American Institute of Certified Public Accountants (AICPA) offers several specialty designations for CPAs. The CITP (Certified Information Technology Profes- sional) designation reflects the AICPA\s recognition of the importance of IT and its interrelationship with ac- ‘counting, A CITP possesses a broad range of business, managerial, and technological knowledge, making it possible for the CITP to understand how organizations Use IT to achieve their business objectives. To obtain a CITP certification, @ person must demonstrate a mas tery of the following topics: information system man- agement, business intelligence, fraud, risk assessment, internal control concepts, and how to test and evaluate {an information system, There are many reasons to eam the CITP certification + Because only CPAs can be CITPs, this certification fur ‘ther differentiates you from others in the marketplace. CONCEPTUAL FOUNDATIONS OF ACCOUNTING INFORMATION SYSTEMS CITP—An IT Specialty Designation for CPAs * Itis a great “calling card! for IT people who want to bee leaders in industry, public practice, government, fr academia, * It opens the doors to new technology-related roles: and opportunities, + Automatic membership in the IT Section, which allows you to meet, share best practices, network, and commu- ricate with other CITPs, You can also receive CITP news- letters and other communications, attend CITP Webinars, receive CITP member discounts, and access exclusive CCITP resources and content on the CITP website. To qualify for the CITP designation, you must: + Bea CPA and a member of the AICPA + Pass the CITP exam * Inthe five years preceding your application, meet the: 1,000-hour experience and the 75-hour continuing professional education requirements * it affirms your value as an IT specialist and increases. your value to your employer or clients Based on information from htp://[Link] 5. Improving the internal control structure, An AIS with the proper internal control struc- ture can help protect systems from fraud, errors, system failures, and disasters, 6. Improving decision making. Improved decision making is vitally important and is dis- cussed below in more detail AN AIS CAN USE ARTIFICIAL INTELLIGENCE AND DATA ANALYTICS TO IMPROVE DECISION MAKING Decision making is a complex, multistep activity that involves identifying a problem, collect- ing and interpreting data, evaluating ways to solve the problem, selecting a solution methodol- ‘ogy, and determining and implementing the solution. An AIS can help in the decision-making. process by providing the information to reduce uncertainty, providing feedback about the ef- fectiveness of prior decisions, providing information in a timely manner, and identifying situ- ations that require management action. Artificial intelligence and data analytics tools can be used in each of these decision- making activities to help improve decision making, Artificial intelligence (AT) uses computer systems to simulate human intelligence pro- cesses such as learning (acquiring information and rules for using it), reasoning (interpret- ing data and using its rules to artive at conclusions), and self-improvement (learning from the information and past experiences to improve its rules), The Al field draws from many disciplines, including computer science, informa- tion engineering, linguistics, mathematics, philosophy, and psychology. Some popular Al applications include expert systems, intelligent routing of delivery vehicles, machine vision (used in self-driving cars), and speech recognition. Some popular AI cloud offer- ings include Amazon Al, Google Al, IBM Watson, and Microsoft Cognitive S Here are a few examples of the fields where AL is used: arial intaigence A) ~The tbe of computer system ‘Smulate human ineligonce process sucha leaning, ras ening, end setmprovement. Business. Al-driven robots now perform many highly repetitive tasks, especially in ‘manufacturing. Al algorithms determine how to better serve customers. Website chatbots provide immediate customer service.CHAPTER 1 ACCOUNTING INFORMATION SYSTEMS: AN OVERVIEW Fo ‘© Education. AT software automatically grades student work, assesses student perfor- mance and progress, and provides additional support as needed. ‘© Finance. Robo-based stock picking algorithms give advice on what stocks to buy and. sell. Software executes most stock market trades. Personal finance applications use Alto advise their users and keep track of their finances. ‘© Healtheare. AI can make better and faster diagnoses than humans, thereby improv- ing patient outcomes and reducing costs. For example, doctors can use IBM Watson to ‘mine patient data, evaluate their symptoms, access external databases, communicate a diagnosis and how confident Watson is inthe diagnosis, and receive and answer doctor questions Data analytics is the use of software and algorithms to discover, describe, interpret, commu- nicate, and apply meaningful patterns in data to improve business performance. Data analytics tools draw from many disciplines, including computer programming, mathematics, operations research, and statistics. Companies have long analyzed their past performance. Data analytics is a more recent development and is designed to focus on the future and answer questions such ‘as why something happened, what will happen next, and how performance can be improved. Analytics tools are most efficient when there are abundant computational resources and there is a large quantity of data from multiple internal or external databases. An essential part of most analytic tools is a data dashboard that displays important data points, metrics, and key performance indicators in the form of line or bar charts, tables, or ‘gauges, A dashboard provides a central location for businesses to monitor performance. The dashboard is connected to internal and external data sources, analyzes the data, and displays it visually in an easy-to-understand format. Dashboards are usually customized to meet the specific needs of a business process, department, or the entire company. There are many different types of analytics, including predictive, prescriptive, descrip- tive, and cognitive. Some analytics are named after their usage such as retail, supply chain, store optimization, sales force optimization, marketing optimization, call center optimization, web, social media, speech, credit risk, and fraud analytics. Analytics are also categorized by their use and characteristics such as actionable, visual, embedded, automated, and operational analytics. ‘Analytics can help improve decision making in many ways. At the most basic level, ana~ Iyties can idemtify a problem or issue for management to resolve. At an intermediate level, analytics can also collect the data needed to solve the problem, analyze it, and make recom- mendations to management on how to resolve it, At an advanced level, actionable insights can be integrated into the systems used to make decisions. That is, the analytics can be embedded. into AIS components, such as databases, applications, and devices, and operationalized to au- tomatically resolve problems that occur and communicate solutions to management. The data analytics market is estimated to exceed $50 billion and is growing rapidly. Busi- nesses use analytics to increase sales, create products and services to meet new customer needs, reduce costs, and improve decision making, Here are just a few ways data analytics are used: ‘© Cargill has developed an analytics platform that allows dairy farmers to use a tablet or computer to analyze large quantities of data about their cows’ living conditions, diet, and milk productivity. When cows are happier and more comfortable, they produce more milk. © Under Armour uses data from MapMyFitness to determine popular running routes and times so it knows when to advertise sneakers, energy drinks, and other products. Research shows that when an advertiser sells repeat-purchase products, ads sent atthe right time to consumers will generate up to 16 times more sales than when sent at other times, ‘© Most web-based retailers such as Amazon use their sales database to suggest additional products and services for its customers to purchase. © A technician ata support center uses key words from a caller, as well as a database of past problems and solutions, to quickly solve technical issues. In time, when the data and analytics are robust enough, the process will be automated; customers will visit the com pany’s website and diagnose most problems themselves, with the most complex issues handed off to a human technician. data anaitis - Us of sofware tnd elgoritims to find and solve problems end improve business data dashboard -Adapay of tnd key performance inlesors Ineasiy understood Ine ar bet ha ables orPART | CONCEPTUAL FOUNDATIONS OF ACCOUNTING INFORMATION SYSTEMS An airline embeds sensors in all important airplane components, continuously monitors them, automatically schedules preventive maintenance, and provides a detailed list of what needs to be done. Focus 1-2 explains how Walmart uses data analytics to improve their business FOCUS 1-2 _ Data Analytics at Walmart Walmart, the world’s biggest retailer, has more than 245 million customers who shop at more than 20,000 stores: in 28 countries. Walmart tracks individual customers, ‘gathering data on what customers like and what they buy. Every hour, more than 1 million customers pur- chase something, which generates 2.5 petabytes (a qua drillion bytes) of unstructured data. The 2.5 petabytes are roughly 167 times the books contained in America’s Library of Congress. To make use of this data, Walmart spent considerable resources to become a leader in big data analytics. n fact, Walmart’s data analytics efforts started before the term big data became popular. Walmart’ analytics systems analyze millions of products and hundreds of millions of ‘customers using data gathered from many diferent inter- nal and external data sources. Data analytics support several Walmart goals. First, they optimize and personalize customers’ shopping expe- riences, whether they are in a store, shopping online via a ‘computer or a mobile device, or browsing Welmar’s web- site. They analyze customer data and buying behaviors to better anticipate customer needs, Walmart also uses ana- Iytics to improve the store checkout experience. Second, data analytics optimize operational effi- ciency, including increasing sales and profit, facilitat- ing better and quicker decision making, improving store and employee efficiency, improving product assortment, managing the supply chain, and locating distribution cconters and stores. Analytics helped Walmart (1) develop smarter stocking, pricing, merchandising, and marketing solutions in real time and (2) make its pharmacies more cofficiont. Walmart analyzed sales before and after big data ana- Iyties were used to change their e-commerce strategy and found that online sales increased 10% to 15%, resulting in 1 bilion in incremental revenue. The data analytics team at Walmart Labs monitors [Link] and analyzes every clickable action to ‘THE AIS AND BLOCKCHAIN determine what consumers buy online and how to im: prove their online experience, The Lab also monitors what is trending on Twiter, local events such as sports activ- ties and concent tat affect sales, and local weather de- vations to determine how they affect buying patterns Wolmar’s precictive data analytics sofware contains ma- chine learning technologies that continously improve the accuracy of analytics algorithms Walmart built the world’s biggest private cloud to facitate its date analytics processes, At its headquar tors, Walmart also created a Data Café (Collaborative Analytics Facilities for Enterprise) to model, manipu- late, and visualize data to create solutions. The Café uses Walmart’ transaction data as well a data from 200 ‘other data sources such as economic, gasoline, local ‘events, social media, telecommunications, television, ‘and weather data to predict outcomes and resolve is sues to make Walmart stores more ecient, responsive, ‘nd profitable Employees are encouraged to submit their problems to Data Café experts fora solution usually produced in minutes rather than weeks and displayed on the Café’s touchscreen smartooards. These real-time solutions help correct errors instantly, gain sales and marketing insights, and track customer trends and competitor strategies Hore are two examples of Weimarts use of the Data Café. A grocery team could not figure out why sales in 1 product category had suddenly declined and used the Café to cil down into the data They found tha a pricing miscalculation resulted in the product being priced higher than it should have been in some stores In a second ex: ample, Walmart date mining algorthms found that a spe- cic cookie was popular at all Walmart stores except one. ‘An investigation showed that a simple stocking oversight resulted in the cookies not being stocked on the store shelves, Onderng and stocking the cookies prevented the further loss of als. In 2008, Satoshi Nakamoto invented the blockchain to digitally record eryptocurrency transac- tions such as Bitcoin. Since then, blockchain technology has been adapted so that virtually ev- crything of value can be recorded, and private blockchains have been developed for business use.CHAPTER 1 ACCOUNTING INFORMATION SYSTEMS: AN OVERVIEW a Just as people do not have to know exactly how the Internet or an automobile works, they do not need to know the technical details of how the blockchain works to use it. However, a basic knowledge of blockchain technology helps users make better use of the technology’ Blockchain got its name from its structure, which is individual digital records, called blocks, linked together using cryptography in a single list, called a chain, The blockchain isn’t stored in a single location—itis a distributed ledger that functions as a decentralized database. Each computer in the distributed peer-to-peer network maintains a copy of the ledger to pre- vent a single point of failure. Since the blockchain is managed by a network that follows pro- tocols for inter-node communication and validating new blocks, there is no need for a central authority that controls everything. The information recorded in the blockchain is made public, so everyone on the blockchain’s peer-to-peer network has a copy of the blockchain and all transactions are accessible t0 everyone. Here is a brief, high-level view of how the blockchain works; that is, how a transac tion is added to a block and how a block is added to a chain, Blockchains are explained in more detail in Chapter 11 1. Initiate transaction. Two partis, such as a buyer and a seller, decide to exchange some- thing of value and request that a transaction be initiated, Instead of using actual buyer or seller names, a unigue digital signature or identifier is used, This is analogous to using a part number for a product or a username for a person, 2. Validate transaction. The transaction is sent to the peer-to-peer network nodes who use algorithms to simultancously validate transaction details, including its time, dol lar amount, and participants. To achieve a consensus, a simple majority of 51% of the nodes must validate the block. The number of computers in the pecr-to-pecr networks ccan be as large as desired; the Bitcoin blockchain has millions, cach with a copy of its blockchain ledger. In a public, permission-less blockchain platform like Bitcoin, ev- ery network node can record transactions and participate in the consensus process. In a private, permissioned chain, participation in the consensus process is restricted to ap- proved nodes. 3. Create a block. Since cach block in a chain can store up to | MB of data, the verified transactions arc combined with hundreds or thousands of similar transactions to create a new block for the ledger. The transaction’s dollar amount and the digital signatures of both parties are stored in the block. 4. Calculate and insert a hash. Each block is given two unique codes, or pieces, of identify- ing information called a hash, which distinguishes it from other blocks. Hash codes use ‘a mathematical algorithm to turn digital information into a string of numbers and letters. (One hash is that of the current block and the second is the hash of the block that precedes iin the chain, When a new block is added to the chain, it is linked to the previous block by storing a cryptographic hash generated from the contents ofthe previous black. The second hhash ensures that the chain is never broken and that cach block is recorded in a permanent and unalterable way. The second hash makes the block tamper resistant and secure; that is, it adds a high level of assurance that the prior block contents have not been changed. If the data on a block is edited in any way, that block’s hash code changes, and the codes of all subsequent blocks change. This discrepancy makes it extremely difficult for informa: tion on the blockchain to be changed without notice. How a hash is created is discussed in Chapter 11. 5. Complete transaction. The block is added to the blockchain, and all the other computers storing the blockchain are updated automatically. This completes the transaction record ing process, and the right of ownership of the item of value is passed from the seller to the buyer. Blockchain has several significant advantages, including the following: ‘© Accuracy. Transactions are verified by many thousands of networked computers instead of error-prone humans. Even if' a computer makes a computational mistake, the error ‘would not spread to the rest of the blockchain unless at least 51% of the network’s com- puters validated the mistake, blockchin Invi igs records, called block, inked ego li esleg neha2 PART | CONCEPTUAL FOUNDATIONS OF ACCOUNTING INFORMATION SYSTEMS © Transparency. Blockchain data are transparent, That is, all transaction details, including participant user names, transaction amount, transaction date and time, and who entered. the transaction, are open for everyone on the blockchain to see, This includes authorized regulators, auditors, ete. © Data consistency. In older legacy systems, data are often located in multiple databases and finding data can be complex. The data can also be inconsistent among databases, with some of them updated and others not. With blockchain, data are stored in one location only. © Trust. To ensure that blockchain networks can be trusted, computers that want to join the blockchain are tested. That is, new users are required to prove themselves before they can be a part of a blockchain network. For example, in Bitcoin’s proof of work test, a system must expend significant computer power and energy to solve a complex math problem before they can add a block to the blockchain, While Bitcoin’s proof of work does not make a hack impossible, the cost of organizing an attack would almost always ‘outweigh the benefits that could be achieved from the attack, © Noneed for third parties. The consensus process of all nodes in the network agreeing ‘on the blockehain’s content allows mutually distrustful parties to enter into transactions safely without trusted third parties. © Single set of books. As both sides of a transaction are stored in a single source, that eliminates some of the need for a set of books for the buyer and for the seller. One set of books provides a trust level not present in current legacy systems. © Cost. Blockchain eliminates the costs of human third-party verification and many trans action processing costs. © Decentralization. By storing the blockchain on all network computers, the risks of data held centrally is eliminated. For example, if a copy of the blockchain is hacked or com- promised, only that copy is affected. This reduces or eliminates the traditional require- ‘ment for file and database backups. © Effcieney. Blockchain works all day, every day—and transactions can be finalized within ‘minutes and considered secure in no more than a few hours. Contrast that with limited busi- ness hours and waiting days for transactions to clear and for money to be availabe. © Privacy. Although many blockchains are public databases, where users can View transac- tion information, users are unable to access confidential data that identify those engaging in the transactions, © Security. A blockchain is difficult to corrupt. There is no single point of failures if one node goes down, there is a copy of the ledger on all the other nodes. Information is shared and continually reconciled by thousands of computers. New blocks are always added chronologically to the end of the blockchain. tis very difficult to go back and change a block’s contents because each block contains its own hash and the hash of the previous block. If information is changed, the hashes for the previous and subsequent blocks also change and this disrupts the ledger’s shared state. When other network com- puters become aware that the change has caused a problem, consensus is no longer pos sible. Until the problem is solved, no new blocks are added to the blockehain. In most ceases, the block that caused the error is discarded and the nodes again attempt to achieve consensus. This process ensures that no single system or user can tamper with the trans- action records or add invalid blocks to the blockchain, © Provenance. Provenance is the history of ownership of something of value. The data cot- lected by Blockchain shows who did what, when they did it, and the history of the item since it was entered in the blockchain. That history is transparent, verified by all network participants, and frequently reconciled. While blockchain has many important advantages, there are significant challenges to its adop. tion, including political and regulatory issues. These challenges include the following: © Cost. Cost is a blockchain advantage because transaction fees are less, but itis also a disadvantage because the technology needed to operate a blockchain is expensive, So are the thousands of hours expended to produce the custom software and back- end processes needed to insert blockchain technologies into current business systems. There are also the utility costs required to run the computers that process and store the blockehain.CHAPTER 1 ACCOUNTING INFORMATION SYSTEMS: AN OVERVIEW © Loss of privacy and confidentiality. Since blockchain users are unable to identify those engaging in transactions, dishonest users can use blockchain networks like Bitcoin to make illegal purchases. To prevent this, some countries like the United States prohibit, full anonymity by requiring online exchanges to collect customer information, verify their identity, and confirm that they are not on any list of known or suspected terrorist, © Susceptibility. A 51% attack is difficult to execute due to the computational power re- quired to gain majority control of a blockchain network. That might change as technol ogy costs decrease and hackers are able to affordably rent computational power rather than buying i. In addition, these attacks are more difficult as the number of nodes in the blockchain network increases, In summary, a blockchain is a public, global, eryptographically secure ledger that automati~ cally records and verifies large volumes of digital transactions, The combination of blocks that ‘cannot be changed, blocks linked together in a chain, and cryptography to secure everything creates a transaction recording system that can be trusted for transactions among untrusted partners. Focus 1-3 briefly discusses some of the many blockchain applications in use today. FOCUS 1-3 Blockchain was first used for digital currencies but has spread to many industries because itis a secure and cost- ‘effective way to manage all types of digital transactions, Recent startups developed their business processes using newer technologies, so they are much more likely to use blockchain. As time passes, some of these blockchain- inspired startups become what some people call emerg- ing disruptors as they begin displacing older and larger ‘companies Established companies with older legacy information systems find it more challenging to use blockchain. They ‘often discover that to achieve blockchain’s advantages, ‘they must change the way they do business, Deloitte surveyed executives at 1,000 established ‘companies about their blockchain experience and found 74% of respondents see compelling reasons to use it, though only 34% currently do. Some 41% expected to be- din using blockchain, and almost 40% will invest at least '$5 million in blockchain applications. Deloitte believes blockchain adoption is higher than their survey indicates because emerging disruptors were not included in the survey. Here are just @ few of the more prominent uses of blockchain * Banks only open during business hours and depos- its take up to 3 days to clear. Blockchain is always ‘open, and deposits can be seen in 10 minutes, It is estimated that blockchain could save banks $20 billion by eliminating money in-transit costs and consumers $16 billion in banking and insurance fees. + Currently, healthcare data is stored by different inst- tutions using different formats and standards, making ithard for doctors to understand a patient’s medical Current and Planned Uses of Blockchain history. Using blockchain technology, patient informa- tion can be signed, time-stamped, and stored securely on a distributed ledger, Doctors and patients can go to single source to access a patients health informa- tion, and patients have more control over their own health data, Blockchain could also help solve the prob- Jem of counterfeit drugs in the medical supply chain. + Recording property rights occurs when a deed is di livered to the local recording office and manually e tered in the county's database and public index. The process is costly, inefficient, time-consuming, error prone, and susceptible to fraud, Disputed property claims are difficult to reconcile, Blockchain can elimi- nate scanning documents and finding paper fles in a recording office. Property owners can trust that their deed is accurate and permanent if its ownership is stored and verified on the blockchain, + In 2016, [Link] was one of the first publicly traded company to use blockchain to sell and dis- tribute company shares. Without blockchain, selling stock involves brokers, clearing houses, and custodi- ‘ans. The money and shares involved in the trade are frozen for up to 3 days. With blockchai 0-pet trading, there is no need for intermediaries, and the shares exchange hands within minutes, Compani are also developing a blockchain application for proxy voting, + Manufacturing companies are developing applications to track the flow of materials, information, and pay- ‘ments as they move through their supply chains Source of Survey data: haps//[Link]/us/er/pages! ‘corauking/ariclesinnovation-blockchai-survey html4 PART | CONCEPTUAL FOUNDATIONS OF ACCOUNTING INFORMATION SYSTEMS iralewton - Running rutple {etm satay on one ‘Physica computer, cloud computing - Using bromrer to romately acco software dts storage, hardnare,and applications Intemet af Things Embedsing sensors in device se they can connect tthe Internat CLOUD COMPUTING, VIRTUALIZATION, AND THE INTERNET OF THINGS Recently, many organizations have embraced virtualization, cloud computing, and the Internet Of things to enhance both efficiency and effectiveness. Virtualization takes advantage of the power and speed of modern computers to run multiple systems simultaneously on one physi- cal computer. This cuts hardware costs because fewer computers need to be purchased. Fewer ‘machines means lower maintenance costs. Data center costs also fall because less space needs to be rented, which also reduces utility costs. Cloud computing takes advantage of the high bandwidth of the modern global tele- communication network to enable employees to use a browser to remotely access software (software as a service), hardware (infrastructure as a service), and entire application envi- ronments (platform as a service), The arrangement is referted to as a “private,” “public,” or “hybrid” cloud, depending on whether the remotely accessed resources are entirely owned. by the organization, a third party, or a mix of the two. Table 1-4 compares the different lev- els of service provided in the cloud to eating pizza, You can either make and bake a pizza in house, buy a frozen pizza and bake it, have a pizza delivered to your home, or go out to cat a pizza, As the table shows, you can do the same with computer services (the items in blue are done in house, and the items in red are done by a cloud provider). Cloud computing can potentially generate significant cost savings. For example, in- stead of purchasing, installing, and maintaining separate copies of software for each end user, an organization can purchase one copy, install it on a central server, and pay for the right for a specified number of employees to simultancously use a browser to remotely access and use that software. Public clouds eliminate the need for making major capital investments in IT, with organizations purchasing (and expensing) their use of computing resources on a pay-for-use or subscription basis. In addition to reducing costs, the central- ization of computing resources with cloud computing (whether public, private, or hybrid) ‘makes it easier to change software and hardware, thereby improving flexibility. The term. Internet of Things (IoT) refers to the embedding of sensors in a multitude of devices (lights, heating and air conditioning, appliances, ctc.) so that those devices can now con rect fo the Internet, The 1oT has significant implications for information security. THE AIS AND CORPORATE STRATEGY ‘Since most organizations have limited resources, itis important to identify the AIS improve- ‘ments likely to yield the greatest return. Making a wise decision requires an understanding of the organization's overall business strategy. To illustrate, consider the results of a CIO maga- zine survey of 500 Chief Information Officers. Asked to identify the three most important skill sets for a CIO, more than 75% put strategic thinking and planning on their list Figure 1-5 shows tree factors that influence the design of an AIS: developments in IT, business strategy, and organizational culture, Il is also important to recognize that the design. of the AIS can also influence the organization's culture by controlling the flow of information within the organization, For example, an AIS that makes information easily accessible and widely available is likely to increase pressures for more decentralization and autonomy. TABLE 1-4 Comparing Cloud Services to Eating Pizza ‘Traditional (make pizza | laaS: Infrastructure ‘SaaS: Software as 2 from scratch in house) | asa Service (take Service (dine out) and bake) Dining table Electricity and gas ToppingsCHAPTER 1 ACCOUNTING INFORMATION SYSTEMS: AN OVERVIEW 45 (Orgonizotions! ‘Culre ‘ AS Information Technology IT developments can affect business strategy. For example, the Internet has profoundly affected the way many activities are performed, significantly affecting both strategy and slrategic positioning, The Internet dramatically cuts costs, thereby helping companies to implement a low-cost strategy. [every company used the Internet to adopt a low-cost stral- cegy, then the effects might be problematic. Indeed, one possible outcome may be intense price competition among firms, with the likely result that most of the cost savings provided by the Internet get passed on to the industry's customers, rather than being retained in the form of higher profits. Moreover, because every company can use the Internet to streamline its activities, a company is unlikely to gain a sustainable long-term competitive advantage. An organization’s AIS plays an important role in helping it adopt and maintain a strategic position, Achieving a close fit among activities requires that data are collected about each activity. tis also important that the information system collects and integrates both financial ‘and nonfinancial data about the organization's activities. ‘THE ROLE OF THE AIS IN THE VALUE CHAIN ‘To provide value to their customers, most organizations perform a number of different activi ties. Figure 1-6 shows that those activities can be conceptualized as forming a value chain consisting of five primary activities that directly provide value to customers: 1. Inbound logisties consists of receiving, storing, and distributing the materials an organi- zation uses to ereate the services and products it sells. For example, an automobile manu facturer receives, handles, and stores steel, glass, and rubber. 2 Operations activities transform inputs into final products or services. For example, assembly line activities convert raw materials into a finished car and retailers remove goods from packing boxes and place the individual items on shelves for customers to purchase. 3. Outbound logistics activities distribute finished products or services to customers. An example is shipping automobiles to car dealers, Pay hte tend em Scandrett Ondine «| outeund mes Logis Technlogy eee efhtng alee sevice 4 FIGURE 1-5 Factors Influencing Design of the AIS ale dain Leking all pimary tnd suppor actives ins bs fess. Valo i added a = prod Uet oases through the chan primary stivities Value cheln Seine that produes, mar let and deve prosicts anc services to customers and pro Vide post-davery servic ond FIGURE 1-6 The Value Chain46 PART | CONCEPTUAL FOUNDATIONS OF ACCOUNTING INFORMATION SYSTEMS sport activi -Wlle chin {Ure technology, purchasing, tnd human resoutes that trsble primary ave to be performed stciomty anc ‘fective. “apply chain An extended system that includes an org iets valve chan wll its suppers ditto, and Raw Materials Supplier XN ManiFachrer| oa Disribuor lS Reviler \ Consumer FIGURE 1-7 The Supply Chain 4. Marketing and sales activities help customers buy the organization's products or ser- vices, Advertising is an example of a marketing and sales activity. S. Service activities provide post-sale support to customers, Examples include repair and ‘maintenance services ‘Support activities allow the five primary activities to be performed efficiently and effec tively. They are grouped into four categories: Firm infrastructure is the accounting, finance, legal, and general administration activi- ties that allow an organization to function. The AIS is part of the firm infrastructure. 2. Human resources activities include recruiting, hiring, training, and compensating employees. 3. Technology activities improve a product or service, Examples include research and devel- ‘opment, investments in IT, and product design 4. Purchasing activities procure raw materials, supplies, machinery, and the buildings used to carry out the primary activities. Using IT to redesign supply chain systems yields tremendous benefits and cost savings. For example, Tennessee Valley Authority, a power generator, reengineered its supply chain and created an enterprise-wide system that provides up-to-the-minute information, rather than the “current once a day” system that it replaced. The new system replaced 20 smaller and in compatible systems, reduced head count by 89 people, and saved $270 million in its first five An organization's value chain is a part of a larger system called a supply chain. As shown in Figure 1-7, a manufacturing organization interacts with its suppliers and distributors. By paying attention to its supply chain, a company can improve its performance by helping the ‘thers in the supply chain to improve their performance. For example, S&S can improve its purchasing and inbound logistics activities by implementing a more efficient just-in-time in- ‘ventory management system that reduces its costs and minimizes the capital tied up in inven. tory. S&S can reap additional benefits if it links its new systems with its suppliers so they can perform their primary value chain activities more efficiently. For example, by providing more detailed and timely information about its inventory needs, S&S suppliers can more efficiently plan their production schedules. Part of the resultant cost reduction can be passed on to S&S in the form of lower product costs. The problems created by an ineffective supply chain are illustrated by Limited Brands. Limited experienced explosive growth, including acquisitions of other retail companies such as Victoria's Secret and Abercrombie & Fitch. These acquisitions left Limited with a tangled web of more than 60 incompatible information systems. The prob- lems came to a head one night when 400 trailers converged on a distribution center park- ing lot that could fit only 150 trailers. The trailers blocked traffic along all the highways around the distribution center and caused countless traffic and community problems. No one from Limited knew where all the trailers came from, what the merchandise was, or where it was to be sent. Chaos reigned until the merchandise could be routed to stores and other distribution centers. Limited solved many of its problems by installing a new, integrated system that greatly improved its supply chain processes and technologies. De- veloping the new system was not easy. Limited has more than 1,000 suppliers and sells its merchandise using various platforms, including retail stores, the Internet, catalogs, and third-party retailers, Summary and Case Conclusion Susan and Scott reflected on what they had done to try and understand what decisions S&S would need to make and the information needed to make them. They began by obtaining an understanding of S&S’s basic business processes and key decisions that must be made to op- crate the business effectively. They followed that with an analysis of the internal and external parties that the AIS would have to interact with and the information the AIS would have to provide them,CHAPTER 1 ACCOUNTING INFORMATION SYSTEMS: AN OVERVIEW Since S&S is a retail merchandising company, its business processes could be described in terms of four basic transaction cycles: 1. The revenue cycle encompasses all transactions involving sales to customers and the col- lection of cash receipts for those sales. 2. The expenditure eycle encompasses all transactions involving the purchase and payment of merchandise sold by S&S as well as other services it consumes such as rent and utilities. 3. The human resources/payroll cycle encompasses all the transactions involving the hiring, training, and payment of employees. 4. The financing cycle encompasses all transactions involving the investment of capital in the company, borrowing money, payment of interest, and loan repayments. ‘These four eycles interface with the general ledger and reporting system, which consists of all activities related to the preparation of financial statements and other managerial reports, Scott and Susan will need a well-designed AIS to provide the information they need to effectively plan, manage, and control their business. Their AIS must be able to process data about sales and cash receipts, purchasing and paying for merchandise and services, payroll and tax-related transactions, and acquiring and paying for fixed assets. The company’s AIS. ‘must also provide the information needed to prepare financial statements, Fortunately, many computer-based accounting packages are available for the retail indus try. As they begin looking at various software packages, however, Scott and Susan quickly eam that considerable accounting knowledge is required to choose the one that will best fit their business. Because neither has an accounting background, Scott and Susan decide that their next task will be to hire an accountant, a rae system 29 sgive-get exchange 33 accounting 36 goal conflict 29 business processes or artificial intelligence (AI) 38 ‘goal congruence 29 transaction eycles 33, data analytics 39 data 29 revenue cycle 33, data dashboard 39 information 29 expenditure cycle 34 bblockchain 41 ‘machine-readable 30 production cycle or virtualization 44 information overload 30 conversion cycle 34 cloud computing 44 information technology (IT) _ human resources/payroll Internet of Things (1oT) 44 30 eycle 34 value chain 45 value of information 30 financing cycle 34 primary activities 45 information system 31 general ledger and reporting support activities 46 business process 31 system 35 supply chain 46 transaction 33 accounting information transaction processing 33, system (AIS) 36 AIS in Action Caras 1. Data differ from information in which way? a, Data are output, and information is input. ». Information is output, and data are input. ©. Data are meaningful bits of information, 4. There is no difference. 2. The business process that includes goods storage, receiving vendor invoices, and updating payable accounts is called a. the expenditure cycle. «, the production or conversion cycle. b. the revenue cycle. 4. the financing cycle.8 PART | CONCEPTUAL FOUNDATIONS OF ACCOUNTING INFORMATION SYSTEMS 3. 2 10. Which of the following is a primary activity in the value chain? a. purchasing , post-sales service b. accounting 4d, human resource management Which transaction cycle includes interactions between an organization and its suppliers? a. revenue cycle ‘c, human resources/payroll cycle b. expenditure cycle 4. general ledger and reporting system 5. Which of the following is NOT a means by which information improves decision making? a. increases information overload b. reduces uncertainty c. provides feedback about the effectiveness of prior decisions . identifies situations requiring management action, In the value chain concept, upgrading IT is considered what kind of activity? a. primary activity c, service activity b. support activity 4, structured activity ‘When a subsystem’s goals are inconsistent with the goals of another subsystem or with the system as a whole, itis called a. goal conflict. neither of these. ». goal congruence. . Which of the following is a function of an AIS? a. reducing the need to identify a strategy and strategic position ». transforming data into useful information ¢. allocating organizational resources d, automating all decision making ). A firm, its suppliers, and its customers collectively form which of the following? a. supply chain c. ERP system ». value chain AIS ‘A performance report about all approved vendors during the previous 12 months is infor- mation MOST needed in which business process? a. paying vendors «, selling merchandise b. acquiring inventory 4, paying cmployces PTT me a Ad 12 13 14 Discuss the concept ofa system and the issues of goal conflict and goal congruence. Give an example of how an AIS can improve decision making and describe the multi- step activities involved in the process. A software company in Munich is organizing a competition, inviting business ideas that promote the use of smartphone technology to conduct business. You enter your busi- ness plan, an initiative to involve unemployed teenagers and young adults from local communities to generate business and employmient, and it was so well received that you ‘were awarded a special prize of €5,000. You plan on using your prize money to imple- ment your idea. . Ientify key decisions you need to make, the information you require to make these key decisions, and the five major business processes you need to engage in », Identify the external parties with whom you would need to exchange information and specify the information you will receive from these partes and the information that you will send to these parties. How do an organization's business processes and lines of business affect the design of its AIS? Give several examples of how differences among organizations are reflected in their AIS,CHAPTER 1 ACCOUNTING INFORMATION SYSTEMS: AN OVERVIEW ry 1.5. Figure 1-5 shows that organizational culture and the design of an AIS influence one an- ‘other. What does this imply about the degree to which an innovative system developed by one company can be transferred to another company? 1.6 Why are accounting software packages designed with separate transaction ‘modules? 1.7 Apply the value chain concept to S&S. Explain how it would perform the various pri- ‘mary and support activities. 1.8 ITenables organizations to easily collect large amounts of information about employ- ees, Discuss the following issues’ a. To what extent should management monitor employees’ e-mail? ». To what extent should management monitor which websites employees visit? . To what extent should management monitor employee performance by, for example, using software to track keystrokes per hour or some other unit of time? If such infor ‘mation is collected, how should it be used? 4. Should companies use software to electronically “shred” all traces of e-mail? ce. Under what circumstances and to whom is it appropriate for a company to distribute information it collects about the people who visit its website? eas 1.1 Tis changing the nature of accounting and the role of accountants. Write a two-page report describing what you think will be the nature and the value of the accounting function in a large company inthe future 1.2 The annual report is considered by some to be the single most important printed docu- ‘ment that companies produce. In recent years, annual reports have becomte large docu- ‘ments. They now include such sections as letters to the stockholders, descriptions of the business, operating highlights, financial review, management discussion and analysis, a discussion of company internal controls, segment reporting, inflation data, and the ba sic financial statements, The expansion has been due in part to a general increase in the dogroe of sophistication and complexity in accounting standards and disclosure require- ‘ments for financial reporting, ‘The expansion also is reflective of the change in the composition and level of so- phistication of users. Current users include not only stockholders but also financial and securities analysts, potential investors, lending institutions, stockbrokers, customers, employees, and—whether the reporting company likes it or not—competitors. Thus, a report originally designed as a device for communicating basic financial information row attempts to meet the diverse needs of an ever-expanding audience. Users hold conflicting views on the value of annual reports. Some argue that they fail to provide enough information, whereas others believe disclosures in annual reports have ex- ‘panded to the point where they create information overload. Others argue that the future of ‘most companies depends on acceptance by the investing public and by its customers; therefore, ‘companies should take this opportunity to communicate well-defined corporate strategies. REQUIRED ‘a Identify and discuss the basic factors of communication that must be considered in the presentation of the annual report. cuss the communication problems a corporation faces in preparing the annual report that result from the diversity ofthe users. ¢. Select two types of information found in an annual report, other than the financial Statements and accompanying footnotes, and describe how they are helpful to the users of annual reports. . Discuss at least two advantages and two disadvantages of stating well-defined cor- porate strategies in the annual report,50 PART | CONCEPTUAL FOUNDATIONS OF ACCOUNTING INFORMATION SYSTEMS 13 14, €. Evaluate the effectiveness of annual reports in fulfilling the information needs of the following current and potential users: shareholders, creditors, employees, customers, and financial analysts. f£, Annual reports are public and accessible to anyone, including competitors. Discuss how this affects decisions about what information should be provided in annual re- ports. (CMA Examination, adapted) Alexander Forbes, a diversified financial services organization, is one of the major fi nancial services organizations in Africa, providing financial solutions to individual and corporate customers. Their services include retirement planning, asset and wealth man: agement, medical insurance, and consulting. Headquartered in Johannesburg, South Africa, the company has operations in eight regions across sub-Saharan Africa and the Channel Islands, employing over 3,000 people. It reported operating income of ZAR 3,647 million (South African rand) for the year 2017-18. In recent years, Alexander Forbes has embarked on simplifying the company struc ture to enable better collaboration across divisions. One of the structural changes was the separation of the technology function from the operations function to create an in- formation technology (IT) function as a revenue-generating cluster. ‘The IT function is responsible for modemizing systems to provide, among other services, a single customer view. This made it possible for Alexander Forbes to use IT as a strategic tool. One of the ways in which this is being achieved is the company's health insurance services, ‘The company keeps track of its customers in an integrated database so that cus. tomer care representatives are able to handle queries and transactions for customers ‘across all healthcare products. ‘The database tracks all claims submitted by their customers, including visits made by healthcare professionals, medication, procedures, and treatments. In case of prescrip: tions for which cheaper options, often in the form of generic alternatives, are available, ccustomers are immediately informed via text message to their mobile phones. However, it is often found that customers prefer the more expensive medication rather than the ge neric alternative. A record of co-payment is maintained on the database for such custom: crs since the company does not cover the full cost of relatively expensive medication. Al claims submitted by customers are digitized and can be easily retrieved if any que- ties arise. Customers can also access their historical records through the company's website. Customers can install the company's mobile application to submit claims and ccheck their status, REQUIRED a, Why should Alexander Forbes collect data on the drugs that are prescribed? What could the company do with this data? ». Although customers are informed of cheaper generic alternatives to expensive medi cation, many customers opt for the more latter even though they have to make a co-payment. How can Alexander Forbes use its AIS to persuade pharmacies to en- courage customers to opt for the more affordable generic alternatives? cc. How does digitizing the claims add value to the organization? d. How does the mobile application add value to the organization? c. Use the Internet to find other IT improvements that Alexander Forbes has introduced outside of their healthcare division. Write a short paragraph on each new application oF other newsworthy item you find. ‘Match the description listed in the right column with the correct information character- istic listed in the left column, 1. Access a. A report was carefully designed so that its data was eas- restricted ily comprehended by the reader. 2. Accurate . A manager working on the weekend needed information about a customer's production requests and found it on the company's network.15. CHAPTER 1 ACCOUNTING INFORMATION SYSTEMS: AN OVERVIEW —— 3. Available cc. Before production reports are accepted, two clerks ‘working independently must produce the same information, —— 4 Reputable 4. An accounts receivable aging report included all cus- tomer accounts. — & Complete €. A report was checked by three different people to make sure it was correct. 6. Concise £. An accounts receivable aging report is used in credit. granting decisions. — 7. Consistent 1g. An accounts receivable aging report was received be- fore the credit manager had to decide whether to extend credit to a customer. — 8& Curent hh, Needing help with a decision, a manager sought the opinion of a highly regarded expert —— 9% Objective i. To protect intellectual property, a company encrypted the data, stored it in a very secure facility, and limited its use to five people, 10, Relevant |. Tited of keying supplier prices into a database, a pur- chasing manager insisted the data be sent in machine readable form. 1. Tinely k. After a lengthy, rambling presentation, a CEO insisted future presentations contain only pertinent facts and last xno more than 30 minutes. 12. Useable 1A new manager insisted that monthly reports look the same so she could compare a new month’s results to previous months. ‘Afler making a decision based on outdated data, a new CFO required all analysis to be conducted with up-to- date data 13, Understandable im 14. Verifiable 1, Reluctant to rely on his personal feelings about a deci- sion, a manager sought the opinion of an outside expert. EC Coaches is a privately held, medium-sized company that operates a fleet of Iux- tury coaches, semi-luxury and commuter buses, and a variety of luxury and standard vchicles. Ranging from five to 60 seaters, these vehicles are leased to tour operators, universities, schools, charitable organizations, and other businesses. To protect their in- vestment in their vehicles and ensure that they provide their customers with vehicles, in immaculate condition, EC Coaches has a maintenance facility where they do basic repairs and maintenance on their vehicles. Scheduled vehicle services are handled by agents according to the maintenance plans agreed at the time of purchase of the vehicle. You were recently hired by EC Coaches and you are cager to demonstrate your ‘worth to the company. Your supervisor asked you to prepare an accounts payable aging report as ofthe end of the year for use in the upcoming audit of the company’s financial statements, REQUIRED a. What is an accounts payable aging report? ’, Why is an accounts payable aging report needed for an audit? cc. What is an accounts payable aging report used for in normal company operations? |. What data will you need to prepare the report? .. Where will you collect the data you need to prepare the report? How will you collect the necessary data for the report? 512 PART | CONCEPTUAL FOUNDATIONS OF ACCOUNTING INFORMATION SYSTEMS 16. 7. ‘g. What will the report look like (i.e., how will you organize the data collected to ereate the information your supervisor needs for the audit)? Prepare an accounts payable aging report template in Excel or another spreadsheet software. hh. How will you distribute the report? How many copies will you make? Who should receive the copies? What security features will you implement? Albert Heijn (or AH) is arguably the largest retail chain in Europe, owning supermarkets, ‘convenience stores, and online shopping services in food and other goods. AH prides itself ‘on establishing the first modern supermarkets. Founded in 1887 in Oostzaan, the Nether lands, Albert Heijn grew from a humble grocery store to a chain of supermarkets. lis first supermarket was established in 1952 and, over the decades, AH has been the shopping destination of choice for the majority of the people living inthe Netherlands, Belgium, and other European countries. The chain comprises more than 850 stores, including more than 200 franchisees. AH is known for being an carly adopter of information technology and has been ‘one of the first supermarkets to take on a loyalty-card program, Customers can avail of a discount with a card called ‘Bonuskaart’ in Dutch, Iti issued to them after their per- sonal information is entered into a database. ‘This provides AH with a mine of information about its customers. It utilizes this information to expand its business and push sales. REQUIRED a. What kind of information do you think AH gathers? ’. How do you think the AH has motivated its customers to sign up for the bonus card program? cc. What can the AH accomplish with the data it collects? Think in terms of strategy and competitive advantage. 4. What could be some of the disadvantages of the card program? Match each of the following terms with its definition, 1. Accounting a, Exceeding the amount of information a human information system mind can absorb and process, — 2 Axtificial . Use of software and algorithms to find and solve intelligence problems and improve business performance —— 3. Blockehain . The benefit provided by information minus the cost of producing it 4, Business processes d. A set of activities and tasks that help accomplish a specific organizational goal 5. Data cc. An agreement to exchange goods or services in exchange for cash —— 6. Data analytics £. Process of capturing, processing, and storing transaction data for later use and for producing information output — 7. Data dashboard __g, Frequent exchanges such as surrendering cash for inventory and paying employees for labor 8. Expenditure cycle, Activities associated with selling goods and services in exchange for cash or a future promise of cash 9. General ledger and i, Value chain activities that produce, market, and reporting system deliver products to customers and provide post: delivery support 10. Give-get exchange _j. A system that collects, records, stores, and processes data to produce information for decision makersCHAPTER 1 ACCOUNTING INFORMATION SYSTEMS: AN OVERVIEW 53 IL. Goal congruence. Linking all the primary and support activities in a business, 12. Information |. Activities such as firm infrastructure and technol- ogy that enable main activities to be performed efficiently and effectively 13. Machine-readable _m. An organization’s value chain as well as its ven dors, distributors, and customers 14, Primary activities _n, Activities associated with purchasing inventory for resale for cash or a promise to pay cash Production cycle 0, Data ina format that can be processed by a computer Revenue cycle 1p. Computer systems that simulate human intelligence processes such as learning, reasoning, and self-improvement 17. Supply chain 4. Procedures and routines that carry out specific ac- tivities, achieve objectives, or solve problems 18. Support activities 1. Facts collected, recorded, stored, and processed by an information system 19. System . Activities associated with using labor, raw materi- als, and equipment to produce Finished goods 20. Transaction 1. Organized and processed data that provide mean- ing and improve decision making 21, Value chain u, Display of data points and performance indicators in easily understood charts, tables, or gauges 22, Value of ¥. Activities associated with hiring, compensating, information promoting, and terminating employees ‘, Major give-get exchanges that occur frequently in ‘most companies x. Information-processing operations involved in preparing reports for internal and external parties y. Individual digital records linked using cryptogra- phy in a single list called a chain z, A subsystem achieves its goals while contributing to the overall goal 1.8. Classify each of the following items as belonging in the rever resources/payroll, production, or financing cycle ‘a, Pay pay-as-you-earn (PAYE) payroll taxes », Send material requisition to inventory ¢, Issue stock to investors 4. Borrow money from the bank to purchase a new factory . Complete receiving report f. Appoint replacement purchasing clerk 1g, Measure employee performance using a performance management system 1h, Choose suitable supplier of raw materials i. Ensure employees are up to date with the latest tax provision J. Record personal and tax information for new employees Xk. Determine labor needs for the next production run 1. Create purchase requisition m. Transfer employee contribution to medical aid 1. Update work-in-progress file to accumulate cost data ©, Process sales returns p. Prepare a bill of materials xpenditure, human5 PART | CONCEPTUAL FOUNDATIONS OF ACCOUNTING INFORMATION SYSTEMS - Extract sold goods from the warehouse Approve payment after receiving all inventory on receiving report ‘Manage dividend payments Confirm hours worked on automated timekeeping system |. Send unsettled customer accounts to collection agency Pay interest on loan required to buy new factory , Prepare a purchase order AIS in Action Solutions rare 1. Data differ from information in which way? a. Data are output, and information is input. [Incorrect. Data are facts and figures that, once organized, can become information. Therefore, data are inputs, and information is output.) > b. Information is output, and data are input. [Correet.] . Data are meaningful bits of information. (Incorrect. Information is organized and pro- cessed data that provide meaning, 4. There is no difference. [Incorrect, There isa difference. Data are unorganized facts and figures. Information is meaningful, organized, and processed data. 2. The business process that includes goods storage, receiving vendor invoices, and updating payable accounts is called a. the expenditure eycle. [Incorrect. The expenditure cycle involves interactions between an organization and its suppliers.] > b. the revenue cycle. (Correct. The revenue cycle involves interactions between an orga- nization and its customers, such as shipping them goods. €. the production or conversion cycle. [Incorrect. The production eyele involves the trans- formation of raw materials into finished goods.) 4, the financing cycle. (Incorrect, The financing cycle deals with interactions between an organization and its lenders and owners.) 3, Which of the following is a primary activity in the value chain? a. purchasing [Incorrect. This is a support activity.) '. accounting [Incorrect. This isa firm infrastructure support activity.] > c. post-sales service [Cotrect. Service is a primary activity.) 4, human resource management [Incorrect. This is a support activity.) 4, Which transaction cycle includes interactions between an organization and its suppliers? a. revenue cyele [Incorrect, The revenue cycle involves interactions between an organiza- tion and its customers.] > b. expenditure [Correct.] . human resources/payroll eycle [Incorrect. The human resources/payroll eycle involves interactions between an organization and its employees, government, and potential hires.) 4, general ledger and reporting system (Incorrect. The general ledger and reporting sys~ tem receives summary information from all eycles.] ‘5. Which of the following is NOT a means by which information improves decision making? > a, increases information overload [Correct. Decision makers receiving too much infor- ‘mation have difficulty incorporating all of the information into their decision frame- work, and, as a result, decision quality can be reduced rather than improved.) b. reduces uncertainty [Incorrect, More reliable information leads to less uncertainty and thus better decisions.) €. provides feedback about the effectiveness of prior decisions (Incorrect. Knowledge of effective and ineffective decisions can lead to better decisions in the future.)6 10. CHAPTER 1 ACCOUNTING INFORMATION SYSTEMS: AN OVERVIEW 4, identifies situations requiring management action [Incorrect, Identifying the need for ‘management action can lead to improved decision making.] In the value chain concept, upgrading IT is considered what kind of activity? a. primary activity [Incorrect, Investing in IT is a support activity.] b. support activity (Correct, Technology activities, including investing in IT, are consid ered a support activity.) €. service activity [Incorrect. The value chain includes only primary and support activi- ties. A service activity isa type of primary activity 4, structured activity [Incorrect. The value chain includes only primary and support ac~ tivities. A structured activity is neither a primary nor a secondary activity,] ‘When a subsystem’s goals are inconsistent with the goals of another subsystem, or with the system as a whole, itis called a goal conflict, (Correct. When a subsystem’s goals are inconsistent with the goals of another subsystem or the system as a whole.) », goal congruence. [Incorrect, When a subsystem achieves its goals while contributing to the organization's overall goal.) . neither of these. [Incorrect] . Which of the following is a function of an AIS? a. reducing the need to identify a strategy and strategic position [Incorrect. An AIS does not reduce the need to identify a strategy. It provides information to executives for the purpose of making strategic decisions.] », transforming data into useful information (Correct. This is one of the primary func tions of an AIS.] c. allocating organizational resources (Incorrect. Decision makers allocate resources, and the purpose of the AIS is to provide information to the decision makers so that they can ‘make the allocation. d. automating all decision making [Incorrect. The AIS provides information to decision makers; it is not designed to automate all decision making.] A firm, its suppliers, and its customers collectively form which of the following? a. supply chain [Correct. The supply chain is made up of the firm, its suppliers, and customers.) b. value chain [Incorrect. The value chain is made up of primary and support activities, within the firm.] ¢. ERP system [Incorrect. An ERP system integrates all aspects of an organization's ac tivities into one system.] 4. AIS [Incorrect. The AIS is made up of the human and capital resources within an orga nization that are responsible for collecting and processing transactions and preparing financial information.] ‘A performance report about all approved vendors during the previous 12 months is infor mation MOST needed in which business process? a. paying vendors [Incorrect. To pay a vendor, a company needs to know whether mer chandise ordered was received in good condition. They do not need a 12-month history of vendor performance.] b. acquiring inventory [Correct. Companies want to acquire inventory from companies that have performed well in the past. A vendor performance report would disclose whether the vendor shipped inventory on time, whether the inventory was of the re quested quality, whether the prices were as agreed upon, et.] ¢. selling merchandise (Incorrect. A 12-month history of vendor performance is usually not very helpful in trying to sell products to customers. More important would be cus tomer tastes and preferences, customer credit status, etc] 4. paying employees (Incorrect. It is very rare for an employee's pay to be based on a 12-month history of vendor performance. More important are hours worked, annual salary, sales figures to calculate commissions, etc] 55