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Accounting Information

Systems: An Overview
Chapter 1

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Learning Objectives
• Distinguish between data and information:
▫ Understand the characteristics of useful information.
▫ Explain how to determine the value of information.

• Explain fundamental decisions an organization makes:


▫ Understand basic information needed to make them.

• Identify the transactional information that passes between internal and external
parties and an AIS.

• Describe the major business processes present in most companies.

• Explain what an accounting information system (AIS) is and describe its basic
functions.

• Discuss how an AIS can add value to an organization.

• Explain how an AIS and corporate strategy affect each other.

• Explain the role an AIS plays in a company’s value chain.


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Data vs. Information
• Data are raw facts stored in the system
▫ A fact could be a number, date, name,
and so on.
For example:
2/22/14
ABC Company, 123,
99, 3, 20, 60

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Data vs. Information
The previous slide just showed facts, if we put those
facts 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


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Value of Information
• Information is valuable when the benefits exceed
the costs of gathering, maintaining, and storing
the data.
• Benefit (i.e.) - Cost (i.e.,)

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Information Systems,
Fundamentals of
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Organizational Decisions and
Information Needed
• Business organizations use business
processes to get things done. These processes
are a set of related, coordinated and structured
activities that are performed by people,
machines, or both to achieve a specific goal.
• Key decisions and information needed often
come from these business processes.

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INFORMATION NEEDS AND BUSINESS
PROCESSES
• Businesses engage in a variety of processes,
including:
• Acquiring capital
• Buying buildings and equipment
• Hiring and training employees
• Purchasing inventory
• Doing advertising and marketing
• Selling goods or services
• Collecting payment from customers
• Paying employees
• Paying taxes
• Paying vendors
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INFORMATION NEEDS AND BUSINESS PROCESSES
Business Processes Key Decision Information Needs

How much Cash Flow projections


Acquire Capital Pro forma ( forecasted) financial
Find investors or borrow funds
statements
If borrowing, obtaining best terms Loan amortization schedule

Size of Bldg Capacity needs


Acquire buildings and
equipment Amount of Equipment Building and equipment prices
Rent or Buy Market Study
Location Tax tables

Experience requirements Job description, Applicant job


Hiring and training employees How to assess integrity and
Applicant job history and skills
competence of applicants
How to train employees

Purchasing inventory
What models/ type to carry Market Analysis
How much to purchase Inventory Status Report
How to manage inventory Vendor Performance
Which vendor
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INFORMATION NEEDS AND BUSINESS PROCESSES
Business Processes Key Decision Information Needs

Doing advertising and


marketing Which media Cost Analysis

Content Market Coverage

Selling goods or services Markup percentage Forcasted income statement


Which credit cards to accept Credit card cost

Collecting payment from If offering credit, what terms Customer account status
customers How to handle cash receipts A/R aging report
A/R records

Amount Pay Sales ( for commission )


Paying employees Time worked ( hourly
Deductions and withholdings
employees )
Process payroll in-house or W-4 forms ( Social Security
use outside service
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INFORMATION NEEDS AND BUSINESS PROCESSES

Business Processes Key Decision Information Needs


Payroll tax requirements Government regulations
Paying taxes
Sales tax requirements Total wage expense
Total Sales

Whom to pay Vendor invoices


Paying vendors
When to pay A/P records
How much to pay Payment terms

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Transactional Information Between
Internal and External Parties in an AIS
• Business organizations conduct business
transactions between internal and external
stakeholders.
• Internal stakeholders are employees in the
organization (e.g., employees and managers).
• External stakeholders are trading partners such as
customers and vendors as well as other external
organizations such as Banks and Government.
• The AIS captures the flow of information between
these users for the various business transactions.
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Interactions Between AIS and Internal
and External Parties

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Basic Business Processes
• Transactions between the business organization
and external parties fundamentally involve a
“give–get” exchange ( each happens many
times). These basic business processes are:
Revenue: give goods / give service—get cash
Expenditure: get goods / get service—give cash
Production: give labor and give raw materials—
get finished goods
Human resource /Payroll: give cash—get labor
Financing: give cash—get cash
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• Other transactions in the revenue cycle include:

• Handle customer inquiries • Update sales and Accts Rec.


• Take customer orders for sales
• Approve credit sales • Receive customer payments
• Check inventory availability • Update Accts Rec. for
• Initiate back orders collections
• Pick and pack orders • Handle sales returns,
discounts, and bad debts
• Ship goods
• Prepare management reports
• Bill customers
• Send info to other cycles

Note that the last activity in any cycle


is to send information to other cycles.

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Finished Goods

Revenue Expenditure Production


Cycle Cycle Cycle

General Ledger
and Reporting • The Revenue Cycle
System ▫ Gets finished
goods from the
production cycle.
▫ Provides funds to
the financing
cycle.
Human Res./ Financing ▫ Provides data to
Payroll Cycle the general ledger
Cycle and reporting
system.

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Back
• Transactions in the expenditure cycle:

• MAJOR GIVE-GET: • Update accounts payable for


• Give cash; get goods or purchase
services • Approve invoices for payment
• OTHER TRANSACTIONS • Pay vendors
• Requisition goods and • Update accounts payable for
services payment
• Process purchase orders to • Handle purchase returns,
vendors discounts, and allowances
• Receive goods and services • Prepare management reports
• Store goods • Send info to other cycles
• Receive vendor invoices

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Raw
Mats.
Revenue Expenditure Production
Cycle Cycle Cycle

Data
General Ledger
and Reporting • The Expenditure
System Cycle
▫ Gets funds from
the financing
cycle.
▫ Provides raw
materials to the
Human Res./ Financing production cycle.
Payroll Cycle Cycle ▫ Provides data to
the general ledger
and reporting
system.
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• Transactions in the production cycle:

• MAJOR GIVE-GET: • Store finished goods


• Give labor and raw materials; • Accumulate costs for
Get finished goods products
• OTHER TRANSACTIONS • Prepare management reports
• Design products • Send info to other cycles
• Forecast, plan, and schedule
production
• Requisition raw materials
• Manufacture products

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Finished Goods

Raw
Mats.
Revenue Expenditure Production
Cycle Cycle Cycle

General Ledger
and Reporting • The Production
System Cycle:
▫ Gets raw materials
from the
expenditure cycle.
▫ Gets labor from the
HR/payroll cycle.
Human Res./ Financing ▫ Provides finished
Payroll Cycle Cycle goods to the revenue
cycle.
▫ Provides data to the
general ledger and
reporting system.
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• Transactions in the HR/payroll cycle:
• MAJOR GIVE-GET: • Pay employees
• Give cash; get labor • Process timecard and
• OTHER TRANSACTIONS commission data
• Recruit, hire, and train • Prepare and distribute
employees payroll
• Evaluate and promote • Calculate and disburse tax
employees and benefit payments
• Discharge employees • Prepare management reports
• Update payroll records • Send info to other cycles

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Revenue Expenditure Production
Cycle Cycle Cycle

General Ledger
and Reporting • The HR/Payroll
System Cycle:
▫ Gets funds from
the financing cycle
▫ Provides labor to
the production
Human Res./ Funds cycle.
Financing
Payroll Cycle Cycle ▫ Provides data to
the general ledger
and reporting
system.
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• Transactions in the financing cycle:
• MAJOR GIVE-GET: • Pay dividends to investors
• Give cash; get cash and interest to lenders
• OTHER TRANSACTIONS • Retire debt
• Forecast cash needs • Prepare management reports
• Sell securities to investors • Send info to other cycles
• Borrow money from lenders

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Revenue Expenditure Production
Cycle Cycle Cycle

General Ledger
and Reporting • The Financing
System Cycle:
▫ Gets funds from
the revenue cycle.
▫ Provides funds to
the expenditure
and HR/payroll
Human Res./ Funds Financing cycles.
Payroll Cycle Cycle ▫ Provides data to
the general ledger
and reporting
system.
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What Is an Accounting Information
System?
• It can be manual or computerized
• Consists of
▫ People who use the system
▫ Processes/ procedures used to collect, process, store
data
▫ IT infrastructure (data, software, and information
technology)
▫ Internal Controls to safeguard information
• Thus, transactional data is collected and stored into
meaningful information from which business
decisions are made and provides adequate controls
to protect and secure the organizational data assets.
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How Does an AIS Add Value?

• A well thought out AIS can add value through


effective and efficient decisions.
▫ Having effective decisions means quality decisions
▫ Having efficient decisions means reducing costs of
decision making

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AIS and Strategy
• An AIS 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 necessary to measure how well
they are doing in obtaining that goal.

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AIS in the Value Chain
• The value chain shows how the different
activities within an organization provide value to
the customer.
• These activities are primary and support
activities.
▫ Primary activities provide direct value to the
customer.
▫ Support activities enable primary activities to be
efficient and effective.

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