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Chapter 1
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© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
HAPTER 1
Accounting Information Systems:
An Overview
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart 2 of 352 of 27
INTRODUCTION
• Questions to be addressed in this chapter include:– What is the meaning of system, data, and information?
– Describe the major business processes present in most companies.
– What is an accounting information system (AIS)?– What is the role of the AIS in the value chain?– How does the AIS provide information for decision
making?
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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.
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart 4 of 354 of 27
SYSTEMS, DATA, AND INFORMATION
• Data are facts that are collected, recorded, stored, and processed by an information system.
• Information is different from data.• Information is data that have been organized
and processed to provide meaning to a user.• Usually, more information and better information
translates into better decisions.
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SYSTEMS, DATA, AND INFORMATION
• 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.
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What Makes Information Useful?
• Necessary characteristics:– Relevant
• “The capacity of information to make a difference in a decision by helping users to form predictions about the outcomes of past, present, and future events or to confirm or correct prior expectations.”
– Reliable• “The quality of information that assures that information
is reasonably free from error and bias and faithfully represents what it purports to represent.”
– Complete• “The inclusion in reported information of everything
material that is necessary for faithful representation of the relevant phenomena.”
© 2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart 7 of 357 of 27
What Makes Information Useful?
– Timely• “Having information available to a decision maker
before it loses its capacity to influence decisions.”– Understandable
• “The quality of information that enables users to perceive its significance.”
– Verifiable• “The ability through consensus among measurers to
ensure that information represents what it purports to represent or that the chosen method of measurement has been used without error or bias.”
– Accessible• Available when needed (see Timely) and in a useful
format (see Understandable).
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BUSINESS PROCESSES
• A transaction is:– An agreement between two entities to
exchange goods or services; OR– Any other event that can be measured in
economic terms by an organization.
• EXAMPLES:– Sell goods to customers– Depreciate equipment
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BUSINESS PROCESSES
• Many business processes are paired in give-get exchanges.
• Basic exchanges can be grouped into five major transaction cycles:– Revenue cycle– Expenditure cycle– Production cycle– Human resources/payroll cycle– Financing cycle
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BUSINESS PROCESSES
• Transactions in the revenue cycle:
MAJOR GIVE-GET• Give goods or services; get
cash
OTHER TRANSACTIONS• Handle customer inquiries• Take customer orders• Approve credit sales• Check inventory availability• Initiate back orders• Pick and pack orders• Ship goods• Bill customers
• Update sales and Accts Rec. for sales
• Receive customer payments• Update Accts Rec. for
collections• Handle sales returns,
discounts, and bad debts• Prepare management reports• Send info to other cycles
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BUSINESS PROCESSES
• Transactions in the expenditure cycle:
MAJOR GIVE-GET:• Give cash; get goods or
services
OTHER TRANSACTIONS• Requisition goods and
services• Process purchase orders to
vendors• Receive goods and services• Store goods• Receive vendor invoices
• Update accounts payable for purchase
• Approve invoices for payment• Pay vendors• Update accounts payable for
payment• Handle purchase returns,
discounts, and allowances• Prepare management reports• Send info to other cycles
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BUSINESS PROCESSES
• Transactions in the HR/payroll cycle:
MAJOR GIVE-GET:• Give cash; get labor
OTHER TRANSACTIONS• Recruit, hire, and train
employees• Evaluate and promote
employees• Discharge employees• Update payroll records
• Pay employees• Process timecard and
commission data• Prepare and distribute
payroll• Calculate and disburse tax
and benefit payments• Prepare management reports• Send info to other cycles
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BUSINESS PROCESSES
• Transactions in the production cycle:
MAJOR GIVE-GET:• Give labor and raw materials;
Get finished goods
OTHER TRANSACTIONS• Design products• Forecast, plan, and schedule
production• Requisition raw materials• Manufacture products
• Store finished goods• Accumulate costs for
products• Prepare management reports• Send info to other cycles
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BUSINESS PROCESSES
• Transactions in the financing cycle:
MAJOR GIVE-GET:• Give cash; get cash
OTHER TRANSACTIONS• Forecast cash needs• Sell securities to investors• Borrow money from lenders
• Pay dividends to investors and interest to lenders
• Retire debt• Prepare management reports• Send info to other cycles
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Business Cycle Give–Get
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BUSINESS PROCESSES
• Many accounting software packages implement the different transaction cycles as separate modules.– Not every module is needed in every
organization, e.g., retail companies don’t have a production cycle.
– Some companies may need extra modules.– The implementation of each transaction cycle
can differ significantly across companies.
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WHAT IS AN AIS?
• An AIS is a system that collects, records, stores, and processes data to produce information for decision makers.
• It can:– Use advanced technology; or– Be a simple paper-and-pencil system; or– Be something in between.
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COMPONENTS OF AN AIS
• People using the system• Procedures and Instructions
– For collecting, processing, and storing data
• Data• Software• Information Technology (IT) Infrastructure
– Computers, peripherals, networks, and so on
• Internal Control and Security– Safeguard the system and its data
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WHAT IS AN AIS?
• The functions of an AIS are to:– Collect and store data about events,
resources, and agents.– Transform that data into information that
management can use to make decisions about events, resources, and agents.
– Provide adequate controls to ensure that the entity’s resources (including data) are:
• Available when needed• Accurate and reliable
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ROLE OF THE AIS IN THE VALUE CHAIN
• The objective of most organizations is to provide value to their customers.
• What does it mean to deliver value?• It may mean:
– Making it faster– Making it more reliable– Providing better service or advice– Providing something in limited supply (like O-negative
blood or rare gems)– Providing enhanced features– Customizing it
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ROLE OF THE AIS IN THE VALUE CHAIN
• Value is provided by performing a series of activities to a product or service before it is sold to a customer. These include:– Primary activities– Support activities
• These activities are sometimes referred to as “line” and “staff” activities respectively.
• At each activity the product or service gains value.
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Value Chain
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ROLE OF THE AIS IN THE VALUE CHAIN
Pharmaceuticals, Inc.
Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
Service
Smith Supply Co.
Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
Service
Customer Pharmacy
Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
Service
The linking of these separate value chains creates a larger system known as a supply chain.
Information technology can facilitate synergistic linkages that improve the performance of each company’s value chain.
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• Improve Quality and Reduce Costs
• Improve Efficiency
• Improve Sharing Knowledge
• Improve Supply Chain
• Improve Internal Control
• Improve Decision Making
ROLE OF THE AIS IN THE VALUE CHAIN
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IMPROVE DECISION MAKING
• Identify situations that require action.
• Provide alternative choices.
• Reduce uncertainty.
• Provide feedback on previous decisions.
• Provide accurate and timely information.
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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.
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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