Accounting Information Systems

Fifteenth Edition

Chapter 1
Accounting Information
Systems: An Overview

Lec. 1

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Learning Objectives
• Distinguish between data and information:
– Discuss the characteristics of useful information.
– Explain how to determine the value of information.
• Explain the decisions an organization makes:
– The information needed to make them.
– The major business processes present in most
companies.
• Explain how an AIS adds value to an organization:
– How it affects and is affected by corporate strategy.
– The role of AIS in a value chain.

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Some main concepts
▪ A system is a set of two or more interrelated components
that interact to achieve a goal. Most systems are composed
of smaller subsystems that support the larger system.
For example: a college of business is a system composed of
various departments, each of which is a subsystem. Moreover,
the college itself is a subsystem of the university.

▪ Goal conflict occurs when a subsystem’s goals are

inconsistent with the goals of another subsystem or with the
system as a whole.

▪ Goal congruence occurs when a subsystem achieves its

goals while contributing to the organization’s overall goal.
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Distinguishing Between Data and
Information
• Data are facts that are collected, recorded, stored, and
processed by an information system.
– A fact could be a number, date, name, and so on.

Sales Data Resource Data People Data

Date: 2/22/14 Good & services Customers

Customer: A B C Quantity sold Salesperson
Company Unit price Employees
Invoice no.: 123
Price: $60

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Data v s. Information
ersu

• The previous slide just showed data; if we organize the

data 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 # Qty Price
99 3 $20
Total Invoice Amount $60
• Then, information is data that have been organized &
processed to provide a meaning & improve the decision
making process.

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Data v s. Information
ersu

Processing
Data Information

As a rule, users make better decisions as the quantity and quality

of information increase. However, there are limits to the amount of
information the human mind can absorb and process.

Information overload occurs when those limits are passed,

resulting in a decline in decision-making quality and an increase in
the cost of providing that information.

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Decision Quality
Thus

• Information system designers use Information

Technology (I T) to help decision makers more effectively
filter and condense information.

• For example, Walmart has over 500 terabytes (trillions of

bytes) of data in its data warehouse. That is equivalent to
2,000 miles of bookshelves, or about 100 million digital
photos. Walmart has invested heavily in IT so it can
effectively collect, store, analyze, and manage data to
provide useful information.
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Value of Information
• Information is valuable when the benefits exceed the
costs of gathering, maintaining, and storing the data.
▪ Benefits (i.e., improved decision making, reduce
uncertainty, improve ability for planning)

▪ Costs (i.e., time and resources used to get the information)

Thus

The value of information = benefits produced by information

minus the cost of producing it.

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What Makes Information Useful? (1 of 2)
There are 14 general characteristics that make information
useful (summarized in 7 characteristics in (Table 1-1) in the
book).
1. Relevant: reduces uncertainty and improves decision
making, or confirms or corrects prior expectations
2. Reliable: free from error or bias
3. Complete: does not omit important aspects of events or
activities
4. Timely: provided in time for decision maker to make
decisions
5. Understandable: easily comprehended and interpreted
6. Verifiable: two independent people can produce the
same information
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What Makes Information Useful? (2 of 2)

8. Access restricted: limit access to authorized parties

9. Accurate: accurate, correct, and free of error
10. Available: available to users when needed
11. Reputable: perceived as true and credible
12. Concise: clear, brief, but comprehensive
13. Consistent: presented in the same format over time
14. Current: up to the present data and time
15. Objective: unbiased, impartial
16. Useable: easy to use for different task

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Machine-Readable Format
• Data is most useful when it is in a machine-readable
format that can be read and processed by a computer.

• eXtensible Business Reporting Language (XBRL) is an

example of a machine-readable format that can improve
many of the characteristics that make information useful
and facilitate providing digital business reporting.

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Information Needs and Business
Processes
• Business organizations use business processes to get
things done. A business process is a set of related,
coordinated, and structured activities and tasks performed
by people, machines, or both to achieve a specific
organizational goal.
• Key decisions and information needed often come from
these business processes (See Table 1-2 in the book)
Business Process Key Decisions Information Needed

Acquire Capital How much? Cash flow projections

Find investors/borrow Pro forma financial

funds Statements
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Figure 1.1 The Components of an
Information System

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Transactional Information Between
Internal and External Parties in an AI S
• Business organizations conduct business transactions,
which is an agreement between two entities to exchange
goods, services, or any other event that can be measured
in economic terms by an organization.

• Transaction data is used to create financial statements and

is called transaction processing.

• The flow of information between these users for the

various business activities involves a give-get exchange
grouped into business processes or transaction cycles.

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Figure 1.2 Interactions Between S&S
and External and Internal Parties

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Basic Business Processes
• Transactions between the business organization and
external parties fundamentally involve a “give–get”
exchange. These basic business processes are:

▪ Revenue cycle: give goods / give service get cash

▪ Expenditure cycle: give cash get goods / get service
▪ Production cycle: give labor and raw materials get
finished goods
▪ Human Resources or Payroll cycle: give cash get
trained labour
▪ Financing cycle: give cash (shares) get cash
(borrowed money)

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Basic Business Processes

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Basic Business Processes

The previous fig. shows how these various transaction

cycles relate to one another and interface with the
general ledger and reporting system, which is used to
generate information for both management and
external parties.

In many accountings’ software packages, the various

transaction cycles are implemented as separate
modules. Not every organization needs to implement
every module. Retail stores like S&S, for example, do
not have a production cycle and would not implement
that module.

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Basic Business Processes

Moreover, some organizations have unique

requirements. Financial institutions, for example, have
demand deposit and installment-loan cycles that relate
to transactions involving customer accounts and loans.

In addition, the nature of a given transaction cycle

differs across different types of organizations. For
example, the expenditure cycle of a service company,
such as a public accounting or a law firm, does not
normally involve processing transactions related to
merchandise company.

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What Is an Accounting Information
System (AI S)?
• A I S is a system that collects, records, stores, and
processes data to produce information for decision
makers.
• AIS Consists of:
– People who use the system
– Processes (procedures and instructions to be followed)
– Technology (data, software, and information
technology)
– Internal Controls to safeguard information
• Thus, an AI S collects and stores data, transforms that data
into information, and provides adequate controls.

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How Does an AI S Add Value to an
Organization?
• A well thought out AIS can add value to an
organization by:
– Improving the quality and reducing the costs of
products or services
– Improving efficiency
– Sharing knowledge
– Improving efficiency and effectiveness of its supply
chain
– Improving the internal control structure
– Improving decision making

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How Does an AI S Can Help Improve
Decision Making
▪ Identify situations requiring management action. For
example, a cost report with a large variance might
stimulate management to investigate and, if necessary,
take corrective action.
▪ Reduce uncertainty and thereby provide a basis for
choosing among alternative actions.
▪ Store information about the results of previous
decisions, which provides valuable feedback that can be
used to improve future decisions.
▪ Provide accurate information in a timely manner.
▪ Analyze sales data to discover items that are purchased
together.
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AIS and Corporate Strategy
• Three factors can influence the design of an AIS

Development Business
in IT Strategy

Organizational
Culture

▪ Artificial intelligence (AI) is the use of computer systems

to simulate human intelligence processes such as learning,
reasoning, and self-improvement.
• AI can be used in the following fields
– Business, Education, Finance, Healthcare

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Data Analytics
• Data analytics is the use of software and algorithms to
find and solve problems and improve business
performance.

• Analytics can help improve decision making by

– Identifying a problem/issue for management to resolve.
– Collecting the data needed to solve the problem,
analyze it, and make recommendations to
management on how to resolve it.
– Integrating actionable insights into the systems used to
make decisions.

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Blockchain
• Blockchain represents individual digital records, called blocks,
linked together using cryptography in a single list, called a
chain.
• Blockchains are best known for their crucial role in
cryptocurrency systems, such as Bitcoin
• Blockchain has several significant advantages, including
– accuracy, transparency, data consistency, trust,
– no need for third parties, single set of books, reduced cost,
– decentralization, efficiency, privacy, security, and
provenance
• There are also significant challenges to its adoption including
political and regulatory issues.

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Cloud Computing, Virtualization, and
the Internet of Things

• Cloud computing is the use of a browser to remotely

access software, data storage, hardware, and applications.

• Virtualization is the running of multiple systems

simultaneously on one physical computer.

• Internet of Things (IoT) refers to the embedding of

sensors in a multitude of devices (lights, heating and air
conditioning, appliances, etc.) so that those devices can
now connect to the Internet.

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AI S and Corporate Strategy
• An AI S is influenced by an organization’s strategy.

• A strategy is the overall goal the organization hopes to

achieve (e.g., increase profitability).

• Once an overall goal is determined, an organization can

determine actions needed to reach their goal and identify
the informational requirements (both financial and
nonfinancial) necessary to measure how well they are
doing in obtaining that goal.

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AI S in the Value Chain
• The value chain links together the different activities
within an organization that provide value to the customer.

– Value chain activities are primary and support

activities.
▪ Primary activities provide direct value to the
customer.
▪ Support activities enable primary activities to be
efficient and effective.

• A supply chain is an extended system that includes the

organization’s value chain as well as its suppliers,
distributors, and customers.
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Figure 1.6 The Value Chain

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Supply Chain
• An organization’s value chain is a part of a larger system
called a supply chain.
• a supply chain is the network of all the individuals,
organizations, resources, activities and technology
involved in the creation and sale of a product.
• A supply chain encompasses everything from the delivery
of source materials from the supplier to the manufacturer
through to its eventual delivery to the end user.

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Supply Chain

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Any Questions

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