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?


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.



• 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.



• 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.


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.”


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).


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


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


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


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


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


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


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


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.


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.


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


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


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



• 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



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.


• Improve Quality and Reduce Costs

• Improve Efficiency

• Improve Sharing Knowledge

• Improve Supply Chain

• Improve Internal Control

• Improve Decision Making



IMPROVE DECISION MAKING

• Identify situations that require action.

• Provide alternative choices.

• Reduce uncertainty.

• Provide feedback on previous decisions.

• Provide accurate and timely information.


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.


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

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