Week 1 CLO 1

Accounting Information Systems

Concept and Components

Class link video:

https://ca-lti.bbcollab.com/recording/200b3801f02144d7be05f25cb2fb37bc

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Learning Objectives
1. Define an accounting information system and explain
characteristics of useful information.

2. Distinguish among data, information and an information system.

3. Distinguish the roles of accountants in providing information and

explain certifications related to accounting information systems.

4. Describe how business processes affect the firm’s value chain.

5. Explain how AIS affects firm value.

6. Describe how AIS assists the firm’s internal business processes.

7. Assess how AIS facilitates the firm’s external business processes.

8. Assess the impact of AIS on firm profitability and stock prices.

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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.

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Why Study AIS?
• The AIS provides useful information. It’s fundamental to
accounting!
• Accountants need to understand:
• How the system is designed, implemented, and used
• How financial information is reported
• How information is used to make decisions

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What Can an AIS Do?
Example: STARBUCKS COFFEE

Starbucks’ information systems 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.
• The best selling coffee on the menu at a particular store.
• Scheduled inventory delivery to every stores in a city.
• Customer selection for loyalty program.

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What Can an AIS Do?
Local company example: ETISALAT
What are the information that AIS can
collect and provide for ETISALAT?
• Customer database, such as personal profiles, stating their
preferences, household income, subscriptions and services,
satisfaction level, etc.
• Third parties connection: such as the suppliers, creditors,
lenders, bankers  parties that have influence on the
company, etc.
• Operational necessities: radio base station, technicians and
specialists, network and sites, etc.

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A Simple Information System

Possible Input Sales at Starbucks, store assets tagging, salary expense

Possible Storage Type of sales coffee, operational data (cups), employee
list, rate, promotions
Possible Seasonal offerings, inventory shrinkage, employee promotion
Processing
Possible Output reports, forecasts, proposals, promotions, dashboards,
business intelligence

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A Simple Information System

Can you think of the possible/suitable items for Netflix?

Possible Input

Possible Storage

Possible Processing

Possible Output

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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

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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.

• Example: Selling price of different toys

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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.

• Garbage-In, Garbage-Out (GIGO)

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Discretionary versus Mandatory
Information
• Discretionary information is information that is not required by
law.

• For example:
• Using an Activity-Based Costing system to determine the overhead costs
associated with each pound of chicken at Tyson Foods.
• Managers must decide if the benefits outweigh the costs.

• Cost-Benefit Analysis: Is the benefit of

disclosing a piece of information
greater than the cost of obtaining such
information?

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Discretionary versus Mandatory
Information
• Mandatory information is information that is required by law.

• For example:
• Form 10-K (Annual Reports that include Financial Statements) and
Tax Returns (for companies listed in the USA)
• See SEC EDGAR for examples of required annual and other
reports required by public companies.
• Since it is required, manager may choose to minimize the costs of
producing this information.

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Use of an Enterprise System
The enterprise system is especially beneficial to all job functions
across department. Throughout the entire process, all related
department can view and update the information.
• For example: when a customer place an order
1. check customer’s credit (good paymaster?), [finance dept.]
2. take an order from a customer, [sales dept.]
3. check inventory at the warehouse (availability), [production dept.]
4. fill the order, [sales dept.]
5. determine when it can be shipped, [logistic dept.]
6. ship the products, [logistic dept.] and
7. create an invoice to bill the customer. [finance dept.]

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Use of an Enterprise System
For example: when a customer place an order
1. check customer’s credit (good paymaster?), [finance dept.]
2. take an order from a customer, [sales dept.]
3. check inventory at the warehouse (availability), [production dept.]
4. fill the order, [sales dept.]
5. determine when it can be shipped, [logistic dept.]
6. ship the products, [logistic dept.] and Receive
SALES
7. create an invoice to bill the customer. [finance dept.] order

Confirm
Schedule order
LOGISTIC
delivery

ERP AIS
system Issue
invoice

Credit
FINANCE
Check rating
PRODUCTION
inventory

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Information Value Chain

• Business processes from various department are connected

together to create value for the company.
• The value chain of a company therefore comprises of internal
business processes and external business processes.
• It could also represent both primary activities and support
activities
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AIS and Internal Business Processes
• AIS usually serves as the foundation for the enterprise
resources planning (ERP) system.

• The enterprise system is a centralized database that collects

data from throughout the company including orders,
customers, sales, inventory, and employees.

• Information across the whole business is thus available to all

authorized personnel within the company in a useful and
timely way.

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AIS and External Business Processes

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Value Chain

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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).

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Where do AIS add value to a Business?
In the Primary Activities?

• 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 firm’s 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.).

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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. 1-22
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The Supply Chain and Supply Chain Managemen
• 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 in the supply chain process
which can be made more efficient using the AIS.

• Supply Chain Management software can be used to optimize

processes within the supply chain.
• Determine levels of inventory in stock and the amount to be
ordered.
• Determine timing to transferring inventory.

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Customer Relationship Management
• This software is used to manage interactions with
customers and may include the following:
• Track customer purchases
• Ensure customer satisfaction
• Product placement

For example, Amazon.com keeps a record of a customer’s

past purchases and product searches and then uses that
information to recommend other similar products for
customer’s consideration.

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The Effect of AIS on the Income Statement

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IT Strategic Role
• What role does IT have for the organization?
1. Automate, i.e., replacing human labor
in automating business processes –
digitize your medical records.

2. Transform, i.e., fundamentally

redefine business processes and
relationships
– IT allows Ebay and Amazon to develop a
business model based on IT

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IT Strategic Role
• What role does IT have for the organization?
3. Informate-up, i.e., provide information
about business activities to senior
management Summarize performance for senior
management (digital dashboards, etc.)

4. Informate-down, i.e., provide information

about business activities to employees
across the firm Give information to all levels of
the organization to empower decision making.
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Accountants as Business Analysts
• Role of an accountant is expanding!
• Helps identify business opportunities
• The accountants’ role include:
• to decide what information is needed (identifying);
• to build an information system to gather information (recording);
• to analyze that information to offer helpful advice to management
(communicating).

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Role of Accountants in AIS
• Designer
• Manager
(System Analyst)
Controller or CFO

• User
Record Journal • Evaluator
Entries Auditor

• Implementer
Database Administrator
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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 data’s reliability, security, accessibility and
relevance.
• Certified Internal Auditor (CIA)
• Globally accepted certification for internal auditors

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Summary
1. 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.
2. 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.
3. An AIS creates value by managing internal and external business
processes such as enterprise systems, supply chain management
and customer relationship management software.
4. 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.
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Question 1
In 2002, John Deere’s $4 billion commercial and consumer equipment division
implemented supply chain management software and reduced its inventory by
$500 million. As sales continued to grow, they have been able to keep their
inventory growth flat.
How did the supply chain management software
implementation allow them to reduce inventory on hand?
How did this allow them to save money? Which income
statement accounts (e.g., revenue, cost of goods sold, SG&A
expenses, interest expense, etc.) would this affect?
• Suggested answer should cover the following points:
• The SCM  Whilst ensuring the availability of the inventory at all times, the level of
inventory can be maintained at the lowest units to reduce inventory costs.
• SCM also ensures that the best suppliers can be selected to supply high quality
product at the cheapest cost.
• Inventory costs include the space to rent (eg: warehouse), inventory shrinkage (due
to theft, damages, expired, obsolete, etc.), internal control (security guard, security
systems, etc.). All these costs are reflected in the COGS and the SG&A expenses in
the Income Statement.
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Question 2
Dell Computer used Customer Relationship Management Software called IdeaStorm
to collect customer feedback. This customer feedback led the company to build
select consumer notebooks and desktops pre-installed with the Linux platform.
Dell• also
Dell decided
also decided to continue
to continue offering
offering Windows
Windows 7 as a7pre-
as a pre-installed operating
system
installed option system
operating in response
option toin
customer
responserequests. Where does this fit in the
to customer
valueWhere
requests. chain? does
Howthis
will fit
this
in help Dell create
the value chain?value? By listening to the customer
How will
and Dell
this help meeting their
create needs,
value? By will this increase
listening revenues or decreases expenses?
to the customer
and meeting their needs, will this increase revenues or
decreases expenses?
• Suggested answer should cover the following points:
• The CRM  captures customers’ profile, preferences, shopping habit, level of
satisfaction, customer feedback, loyalty club, promotions, revenue generation, etc.
• CRM collects feedback from customers on the existing products, therefore able to
provide several options for product improvements, substitutions, discontinuation, etc.
• It can also assist in collecting feedback on the pilot test prior to introducing/launching a
new product into the market, based on customers’ need and preferences.
• Data captured in the CRM may assist Dell in making analysis on how revenue can be
increased and the operating costs reduced.
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Question 3
A recent article suggests:

•A monumental change is emerging in accounting: the movement

away from the decades-old method of periodic financial
statement reporting and its lengthy closing process, and toward
issuing financial statements on a real-time, updated basis . . .
real-time financial reporting provides financial information on a
daily basis. Current technology allows for financial events to be
identified, measured, recorded, and reported electronically, with
no paper documentation. (Source: Real-Time Accounting, The
CPA Journal, April 2005 Issue).

•Would a shift toward real-time financial statements make the

financial information more useful or less useful? More or less
relevant? More or less reliable?
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Week 1 CLO 1
Accounting Information Systems
Concept and Components

Do you have issue(s) related to

any of the lessons in this chapter?

Let’s discuss!

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