Chapter 1 Accounting Information Systems and Firm Value
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Learning Objectives LO#1 Define an accounting information
system and explain characteristics of useful information. LO#2
Distinguish among data, information and an information system. LO#3
Distinguish the roles of accountants in providing information and
explain certifications related to accounting information systems.
LO#4 Describe how business processes affect the firms value chain.
LO#5 Explain how AIS affects firm value. LO#6 Describe how AIS
assists the firms internal business processes. LO#7 Assess how AIS
facilitates the firms external business processes. LO#8 Assess the
impact of AIS on firm profitability and stock prices. 1-2
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Accountants as Business Analysts Increasingly, the role of an
accountant is to help address business opportunities. To address
such a business opportunity, the accountants need to decide what
information is needed, then build an information system to gather
the necessary information and finally analyze that information to
offer helpful advice to management. 1-3 LO# 1
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Accounting Information Systems An accounting information system
(AIS) is defined as a system that records, processes and reports on
transactions to provide financial and non-financial information to
make decisions and have appropriate levels of internal controls
(security measures to protect sensitive data) for those
transactions. An AIS is important because it provides information
that companies are required to have and also information that can
be used to make important decisions. 1-4 LO# 1
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Why Study AIS? Its fundamental to accounting. Accounting is an
information providing activity, so accountants need to understand:
How the system that provides that information is design,
implemented, and used How financial information is reported How
information is used to make decisions 1-5 LO# 1
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What Can an AIS Do? Imagine Starbucks system, which can track a
variety of things. The number of hours worked by employees all over
the world. The amount of sales taxes to be paid by one store.
Wal-Mart has an extensive information system. 1-6 LO# 1
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A Simple Information System Possible Input: Sales at Starbucks
Possible Storage: Database of all Sales at Starbucks Possible
Processing: Queries of What Sells Best at Night Possible Output:
Reports of What Sells Best at Night 1-7 LO# 1
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Attributes of Useful Information To be useful information must
have these attributes: Relevant information that is capable of
making a difference in a decision Predictive Value Feedback Value
Timely Reliable information that is free from bias and error
Verifiable Representational Faithfulness Neutrality 1-8 LO# 1
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Data vs. Information Data are simply raw facts that describe an
event and have little meaning on their own. Information is defined
as being data organized in a meaningful way to be useful to the
user. Data serves as an input. For example, the sales prices of a
particularly toy might be considered data. However, after
subtracting the cost of goods sold from the sales price to compute
the net profit would be considered information if it helps a
retailer decide whether to carry that particular toy in its
inventory. 1-9 LO# 2
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Information Overload Computers can process and organize a large
amount of data. Too much information causes information overload.
Decision making is hindered. 1-10 LO# 2
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Information Value Chain 1-11 LO# 1
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Discretionary versus Mandatory Information Discretionary
information is information that is not required by law. Using an
ABC system to determine the overheads costs associated with each
pound of chicken at Tyson Foods. Managers must decide if the
benefits of discretionary information outweigh the costs of
obtaining it. 1-12 LO# 2
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Discretionary versus Mandatory Information Mandatory
information is information that is required by law. Examples
include: Form 10-K (Annual Reports that include Financial
Statements) and Tax Returns See SEC EDGAR for examples of required
annual reports for public companies. Since it is required manager
usually choose to minimize the costs of producing this information.
1-13 LO# 2
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Role of Accountants in AISs Designer System Analyst Implementer
Database Administrator User Recording Journal Entries Evaluator
Auditor Manager Controller or CFO 1-14 LO# 3
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Certifications in AIS Certified Information Systems Auditor
(CISA) Perform IT Audits Certified Information Technology
Professional (CITP) Work to effectively and efficiently manage
information while ensuring the datas reliability, security,
accessibility and relevance. Certified Internal Auditor Globally
accepted certification for internal auditors 1-15 LO# 3
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Value Chain 1-16 LO# 4
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Where do AIS add value to a Business? In the Primary
Activities? Inbound logistics are the activities associated with
receiving and storing raw materials and other partially completed
materials, and distributing those materials to manufacturing when
and where they are needed. Operations are the activities that
transform inputs into finished goods and services (e.g. turning
wood into furniture for a furniture manufacturer; building a house
for a home builder). Outbound logistics are the activities that
warehouse and distribute the finished goods to the customers.
Marketing and sales activities identify the needs and wants of
their customers to help attract them to the firms products and buy
them. Service activities provide the support of customers after the
products and services are sold to them (e.g. warranty repairs,
parts, instruction manuals, etc.). 1-17 LO# 4
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Where do AIS add value to a Business? In the Support
Activities? Firm infrastructure activities are all of the
activities needed to support the firm, including the CEO, finance,
accounting, and legal. Human resource management activities include
recruiting, hiring, training and compensating employees. Technology
activities include all of the technologies to support
value-creating activities. These technologies also include research
and development to develop new products or research and development
to determine ways to produce products at a cheaper price.
Procurement activities involve purchasing inputs such as raw
materials, supplies, and equipment. 1-18 LO# 5
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AIS and Internal Business Processes AIS usually serve as the as
the foundation for the enterprise (or ERP) system. The enterprise
system is a centralized database that collects data from throughout
the company including orders, customers, sales, inventory, and
employees. Information is thus available to everyone within the
company in a useful and timely way. 1-19 LO# 6
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Use of ERP System The enterprise system can take an order from
a customer, fill the order, ship it, and then create an invoice to
bill the customer. Used to check customers credit. Check the
inventory levels in the warehouse. Determine when it can be
shipped. Everyone throughout the entire process can view and update
the information. 1-20 LO# 6
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Figure 1.6 AIS and External Business Processes 1-21 LO# 7
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The Supply Chain The supply chain refers to the flow of
materials, information, payments, and services from suppliers all
the way through the customer. There are many processes involved
which can be made more efficient using the AIS. 1-22 LO# 7
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Supply Chain Management Supply Chain Management software can be
used to optimize processes within the supply chain. Determine
levels of inventory in stock and to be ordered. Determine timing to
transferring inventory. 1-23 LO# 7
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Customer Relationship Management This software is used to
manage interactions with customers. Track customer purchases.
Ensure customer satisfaction. Product placement 1-24 LO# 7
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Customer Relationship Management As an example, Amazon.com
keeps a record of their past purchases and product searches and
then uses that information to recommend other similar products for
the customer to consider. Loan officers at a bank learns more about
the financial products currently being used by its banks customers
through its AIS, they will be able to help identify additional bank
products (upselling items such as insurance products, CDs, mutual
funds, etc.) to sell to their clients. LO# 7 1-25
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The Effect of AIS on the Income Statement 1-26 LO# 7
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AIS, Firm Profitability, and Stock Prices As show on the
previous slide, AIS can be used to improve company profits. In
addition, studies show that investments in IT can positively affect
a companys stock price. 1-27 LO# 8
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Summary An accounting information system (AIS) is defined as
being an information system that records, processes and reports on
transactions to provide financial information for decision making
and control. Firms invest in accounting information systems to
create value. The value chain illustrates how during each primary
activity, the product should gain some value. An AIS serves an
important role in enabling value in each primary and supporting
activity. An AIS creates value by managing internal and external
business processes such as enterprise systems, supply chain
management and customer relationship management software. An AIS
system generally helps make business processes more efficient and
effective. A well-designed and well-functioning AIS can be expected
to create value by increasing revenues and reducing expenses. LO# 8
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