Accounting Information Systems An Overview

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Chapter 1

Learning Objectives Explain what an accounting information

system (AIS) is and describe the basic functions it performs.

Discuss why studying the design and management of an AIS is important.

Explain the role played by the AIS in a company’s value chain and discuss ways that the AIS can add value to a business.

Describe and contrast the basic strategies and strategic positions that a business can adopt.

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Introduction: S&S Inc.

Scott Parry and Susan Gonzalez form S&S, Inc., to sell consumer electronic devices.

Parry and Gonzalez decide to pursue a “clicks and bricks” strategy.

They plan to hold the grand opening of S&S in five weeks.

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Introduction: S&S, Inc.

What types of important decisions do Scott and Susan have to make?

How to organize their accounting records

How to design a set of procedures to ensure that they meet all of their government obligations

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Introduction: S&S, Inc.

Whether to extend credit, on what terms, and how to accurately track what customers owe and have paid

How to hire, train, and supervise their employees

How to keep track of cash flows The appropriate product mix and quantities to carry

What functionality to provide on their website

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Important decisions, continued

What Is An AIS? 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.

An accounting information system (AIS) consists of: People Procedures Data Software Information technology infrastructure

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What Is An AIS? What important functions does the AIS perform in an organization?

1 It collects and stores data about activities and transactions.

2 It processes data into information that is useful for making decisions.

3 It provides adequate controls to safeguard the organization’s assets.

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Why Study AIS?

In Statement of Financial Accounting Concepts No. 2, The FASB...

– defined accounting as an information system.

– stated that the primary objective of accounting is to provide information useful to decision makers.

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Why Study AIS? The Accounting Education Change

Commission recommended that the accounting curriculum should provide students with a solid understanding of three essential concepts:1. The use of information in decision

making2. The nature, design, use and

implementation of an AIS3. Financial information reporting

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Why Study AIS? To understand how the accounting system works. How to collect data about an organization’s activities and transactions

How to transform that data into information that management can use to run the organization

How to ensure the availability, reliability, and accuracy of that information

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Why Study AIS?

Auditors need to understand the systems that are used to produce a company’s financial statements.

Tax professionals need to understand enough about the client’s AIS to be confident that the information used for tax planning and compliance work is complete and accurate.

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Why Study AIS? One of the fastest growing types of consulting services entails the design, selection, and implementation of new Accounting Information Systems.

A survey conducted by the Institute of Management Accountants (IMA) indicates that work relating to accounting systems was the single most important activity performed by corporate accountants.

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Ten Most Important Activities Performed By Accountants

1. Accounting systems and financial reporting

2. Long-term strategic planning

3. Managing the accounting and finance function

4. Internal Consulting5. Short-term

budgeting

6. Financial and economic analyses

7. Process improvement8. Computer systems

and operations9. Performance

evaluation10. Customer and

product profitability analyses

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Factors InfluencingDesign of the AIS

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OrganizationalCulture Strategy

InformationTechnology

AIS

Data, Information & Systems

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Figure 1.1 Input-process-output

System – capturing inputs

Manual keying Scanning through barcode technology

Scanning through image scanners Magnetic ink character recognition

Voice recognition Optical mark readers

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System – processes

Processes are the sets of activities that are

performed on the inputs into the system.

Examples Format checks on data Validity checks on data Sorting Totalling

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System – outputs

Outputs refer to what is obtained from a system, or the result of what the systemdoes.

Examples: Receipts Invoices Monthly Sales Report

Outputs are normally the starting pointwhen designing a system.

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Data, Information & Systems

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Figure 1.3 Several subsystems make up this corporate accounting system.

External users of accounting information

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Internal users of accounting information

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Information Systems

A management information system (MIS) is a system that captures data about an organization

stores and maintains the data provides meaningful information for management.

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Information Systems An MIS can be viewed as a set of subsystems that provide information for such functions as: production marketing human resources accounting finance

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Information Systems MIS captures

data about business processes aggregates, summarizes, and organizes data

produces information that helps monitor and control business processes

ERP systems integrate all aspects of a firm’s business processes.

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Information Systems An AIS is a subset of an organization’s MIS thatprovides:

accounting and financial information

other information obtained in the routine processing of accounting transactions

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Computer-Integrated Manufacturing (CIM)

Components of CIM typically include computer-aided design (CAD) workstations, real-time production monitoring and control systems, and order inventory and control systems.

Makes use of scanner technology and machine-readable bar codes.

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Advantages: The materials requirements relating to demands for products are determined beforehand, so that the materials are transferred to the production areas in time for production starts

Production orders are scheduled to accommodate the manufacturing capacity

Data are validated upon online entry, so that errors are detected more quickly and reprocessing delays due to undetected errors are reduced

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Advantages: Inventory and production order records are updated in a timely manner from materials requisitions, labor-time entries, and move tickets

Accounting-related processing is simplified, since transactions are posted without sorting to online files

Control reports such as cost variance analyses are prepared for managers

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A configuration for CIM

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Logisticsdata base

Accountingdata base

Cost Accounting

InventoryControl

ProductCosting

AutomatedHandling

Warehousing

Manufacturing

CAMFMS

Robotics

ProductionPlanning

MRP

JIT

Engineering

CAD

Benefits of CIM systems Greater flexibility in meeting the changing needs of customers

Savings in the material inventory investment

Increased quality in products Optimal scheduling of production, with dynamic adjustments as conditions change or new orders are received

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Benefits of CIM systems Shorter production cycle times Improved productivity of employees and hence reduced labor costs

Continuous monitoring of production operations, with immediate feedback of control problems as they arise

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Benefits of CIM systems Savings in paperwork costs, since most interactions are performed via computer and records are stored electronically

Better utilization of all production facilities

Greater accessibility of information, including the ability to provide ad hoc reports for planning and control

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Just-In-Time (JIT) Production

Doing more with less inventory

smoothing the flow of material to arrive just as it is needed

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Role of Accountants in Relation to AIS User

Manager Consultant Evaluator Provider of accounting and tax services

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Evolution of AIS

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Accounting and IS – a changing relationship

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Role of accounting andaccounting information

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The Value ChainThe objective of most organizations is to provide value to their customers.What does it mean to deliver value?Adding value means making the value of the finished product greater than the sum of its parts.It may mean:

Making it faster Making it more reliable Providing better service or advice Customizing it

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The Value Chain

Value Chain models the firm as a chain of value-creating activities.

Its ultimate goal is to maximize value creation while minimizing costs.

The value chain framework is a powerful analysis tool for strategic planning.

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http://en.wikipedia.org/wiki/Strategic_planning

The Value Chain

Only if these things are arranged into systems and systematic activates will it become possible to produce something for which customers are willing to pay a price.

The ability to perform particular activities and to manage the linkages between these activities is a source of competitive advantage 11/17/22

InboundLogistics Operations Outbound

Logistics

M arketingand sales

Service

The Value Chain

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Primary Activities

InboundLogistics

OutboundLogisticsOperations

Marketingand Sales Service

The Value Chain

The four support activities in the value chain make it possible for the primary activities to be performed efficiently and effectively.

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The Value Chain

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Support Activities

Infrastructure

HumanResources

Technology

Purchasing

The Value System

The value chain concept can be extended by recognizing that organizations must interact with suppliers, distributors, and customers.

An organization’s value chain and the value chains of its suppliers, distributors, and customers collectively form a value system.

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The Value System

The term ‘Margin’ implies that organizations realize a profit margin that depends on their ability to manage the linkages between all activities in the value chain.

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The Supply Chain

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Raw Materials Supplier

Manufacturer

Distributor

Retailer

Consumer

The Supply Chain

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How An AIS Can Add ValueTo An Organization

– An AIS adds value by:– improving the quality and reducing the costs of products or services.

– improving efficiency.– Improving decision making capabilities.

– increasing the sharing of knowledge.A well-designed AIS can also help an organization profit by improving the efficiency and effectiveness of its supply chain.

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1. Improving the quality of products. Example: AIS monitors machines… signal to operators

when operation falls outside acceptable quality limits.

2. Improving efficiency.Example:• IT system provides detailed, timely, &

accurate information about production schedules for suppliers.

• Enable the company to locate raw materials.

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3. Improve Decision Making. Example: Wal-Mart data base about sales transactions used to

analyzes sales patterns to:• Find which items are purchased together to

improve layout.• Optimize the amount of each product carried at

each store.4. Sharing Knowledge.Example:• Accounting, auditing, & consulting firms (best

practices to serve customers).• Amazon.com (availability of products).• Compaq (24 hours on line customer services).

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Hewlett-Packard engineers developed a metric called break-even time (BET) to measure the effectiveness of its product development cycle

BET measures the time from the beginning of product development work until the product has been introduced and has generated enough profit to pay back the investment originally made in its development

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Information and Decision Making

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Characteristics of Useful Information

Understandable

Verifiable

TimelyRelevant

Reliable

Complete

Information and Decision Making

What is decision making? Decision making involves the following steps:

1. Identify the problem.2. Select a method for solving the problem.3. Collect data needed to execute the decision model.4. Interpret the outputs of the model.5. Evaluate the pro’s and con’s of each alternative.6. Choose and execute the preferred solution.

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Information andDecision Making Structured decisions

Semi structured decisions

Unstructured decisions

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Decision Structure

Structured decisions are repetitive, routine, and understood well enough that they can be delegated to lower-level employees in the organization.

An example is: Extending credit to customers.

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Decision Structure Semistructured decisions are characterized by incomplete rules for making the decision and the need for subjective assessments and judgments to supplement formal data analysis.

An example is: Setting a marketing budget for a new product.

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Decision Structure

Unstructured decisions are nonrecurring and nonroutine.

An example is: Choosing the cover for a magazine.

AIS and Corporate Strategy

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How IT affects Business StrategyExample: The internet provided the opportunity for companies to cut cost (implement a low cost strategy), through: eliminating intermediaries, lower levels of inventory, on line order entry and processing,…etc.

Once copied by other organizations it is no longer a competitive advantage. This will motivate companies to differentiate their products (implement a product differentiation strategy).

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How IT affects Business StrategyExample: Digitizing products like songs, books, softwares (Amazon.com).

24 hours on line customer service (Compaq, dell, HP, IBM).

Tracking the order (Fedex).

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Accounting Information Systems An Overview

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