Accounting Information Systems: An Overview Chapter 1 Copyright © 2015 Pearson Education, Inc. 1-1 Learning Objectives • Distinguish between data and information: ▫ Understand the characteristics of useful information. ▫ Explain how to determine the value of information. • Describe the major business processes present in most companies. • Explain what an accounting information system (AIS) is and describe its basic functions. • Explain the role an AIS plays in a company’s value chain. Copyright © 2015 Pearson Education, Inc. 1-2 Systems, Data, and Information • A system is a set of two or more interrelated components that interact to achieve a goal. • Systems are almost always composed of smaller subsystems, each performing a specific function supportive of the larger system. Copyright © 2015 Pearson Education, Inc. Data vs. Information • Data are facts stored in the system ▫ A fact could be a number, date, name, and so on. For example: 2/22/14 ABC Company, 123, 99, 3, 20, 60 Copyright © 2015 Pearson Education, Inc. 1-4 Data vs. Information The previous slide just showed facts, if we put those facts within a context of a sales invoice, for example, it is meaningful and considered information. Invoice Date : 2/22/14 Invoice #: 123 Customer: ABC company Item # 99 Qty 3 Total Invoice Amount Copyright © 2015 Pearson Education, Inc. Price $20 $60 1-5 Systems, Data, and Information • Usually, more information and better information translates into better decisions. • However, when you get more information than you can effectively assimilate, you suffer from information overload. • When you’ve reached the overload point, the quality of decisions declines while the costs of producing the information increases. Copyright © 2015 Pearson Education, Inc. Value of Information • Information is valuable when the benefits exceed the costs of gathering, maintaining, and storing the data. Benefit (i.e., improved decision making) > Cost (i.e., time and resources used to get the information) Copyright © 2015 Pearson Education, Inc. 1-7 What Makes Information Useful? There are seven general characteristics that make information useful: 1. Relevant: information needed to make a decision (e.g., the decision to extend customer credit would need relevant information on customer balance from an A/R aging report) 2. Reliable: information free from error and bias 3. Complete: does not omit important aspects of events or activities 4. Timely: information needs to be provided in time to make the decision Copyright © 2015 Pearson Education, Inc. 1-8 What Makes Information Useful? 5. Understandable: information must be presented in a meaningful manner 6. Verifiable: two independent people can produce the same conclusion 7. Accessible: available when needed Copyright © 2015 Pearson Education, Inc. 1-9 Transactional Information Between Internal and External Parties in an AIS • Business organizations conduct business transactions between internal and external stakeholders. • Internal stakeholders are employees in the organization (e.g., employees and managers). • External stakeholders are trading partners such as customers and vendors as well as other external organizations such as Banks and Government. • The AIS captures the flow of information between these users for the various business transactions. Copyright © 2015 Pearson Education, Inc. 1-10 Interactions Between AIS and Internal and External Parties Copyright © 2015 Pearson Education, Inc. 1-11 Basic Business Processes • Transactions between the business organization and external parties fundamentally involve a “give–get” exchange. These basic business processes are: ▫ Revenue: give goods/service—get cash ▫ Expenditure: get goods/service—give cash ▫ Production: give labor and give raw materials—get finished goods ▫ Payroll: give cash—get labor ▫ Financing: give cash—get cash Copyright © 2015 Pearson Education, Inc. 1-12 What Is an Accounting Information System? • It can be manual or computerized • Consists of ▫ People who use the system ▫ Processes ▫ Technology (data, software, and information technology) ▫ Controls to safeguard information • Thus, transactional data is collected and stored into meaningful information from which business decisions are made and provides adequate controls to protect and secure the organizational data assets. Copyright © 2015 Pearson Education, Inc. 1-13 How Does an AIS Add Value? • A well thought out AIS can add value through effective and efficient decisions. ▫ Having effective decisions means quality decisions ▫ Having efficient decisions means reducing costs of decision making Copyright © 2015 Pearson Education, Inc. 1-14 AIS in the Value Chain • The value chain shows how the different activities within an organization provide value to the customer. • These activities are primary and support activities. ▫ Primary activities provide direct value to the customer. ▫ Support activities enable primary activities to be efficient and effective. Copyright © 2015 Pearson Education, Inc. 1-15 Copyright © 2015 Pearson Education, Inc. 1-16 ROLE OF THE AIS IN THE VALUE CHAIN Smith Supply Co. Inbound Logistics Operations Outbound Logistics Marketing & Sales Service Information technology can facilitate synergistic linkages that improve the performance of each company’s value chain. Copyright © 2015 Pearson Education, Inc. The linking of these separate value chains creates a larger system known as a supply chain. Pharmaceuticals, Inc. Inbound Logistics Operations Outbound Logistics Marketing & Sales Service Customer Pharmacy Inbound Logistics Operations Outbound Logistics Marketing & Sales Service THE AIS AND CORPORATE STRATEGY • The authors believe: ▫ Accounting and information systems should be closely integrated. ▫ The AIS should be the primary information system to provide users with information they need to perform their jobs. Copyright © 2015 Pearson Education, Inc. The CITP Designation • CITP: Certified Information Technology Professional • Identifies CPAs who possess a broad range of technological knowledge and the manner in which information technology (IT) can be used to achieve business objectives • Reflects the AICPA’s recognition of the importance and interrelationship of IT with accounting Copyright © 2015 Pearson Education, Inc.