CHAPTER ONE AN OVERVIEW OF
Objective
Understand the nature of AIS
Describe Business Processes/Activities
/Decisions/ and Information Needs
State the scope of AIS
Understand uses of AIS and Role of Accounts in
Relation to AIS
AN OVERVIEW OF ACCOUNTING INFORMATION SYSTEMS
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.
Example, a college of business is a system composed of various
departments(subsystem).
Moreover, the college itself is a subsystem of the university.
Example: The production department (a subsystem) of a company
The subsystems should be designed to maximize achievement of the
organization’s goals.
How change made to subsystem?
Elements of a system
1. Multiple components: A system must contain more than one part.
2. Relatedness: A common purpose relates the multiple parts of the
system.
Although each part functions independently of the other, all parts
serve a common objective.
3. Purpose: A system must serve at least one purpose, but it serves
several.
System versus subsystem
The distinction between the terms system and subsystem is a matter of perspective.
Goal conflict occurs when one subsystem is not consistent with
other or with the whole system.
Goal congruence occurs when the subsystem’s goals are in line
with organization’s goals.
Itoccurs when a subsystem achieves its goals by contributing to the
organization’s overall goal.
The larger the organization and the more complicated a
system,
the more difficult to achieve goal congruence.
Data are facts that are
collected, recorded, stored, and processed by an information
system.
Businesses need to collect several kinds of data, such as:-
Events:- the activities(event) that take place
Resources:- that are affected by those events
Agents:- people who participate in the event.
For example, Companies needs to collect data about:-
sale (date, total amount),
resource sold (good or service, quantity sold, unit price)&
people who participated (customer, salesperson).
Information is different from data.
Information is data that have been organized and processed to
provide meaning to a user.
Usually, more 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
the costs of producing the information increases.
So
What ?
As a result, Information system designers use
information technology (IT) to help decision makers more
effectively to filter and condense information.
IT- The computers and other electronic devices used to
store, retrieve, transmit, and manipulate data.
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.
Benefits of information
- Cost of producing information
Value of information
Benefits of information may include:
• Reduction of uncertainty
• Improved decisions
• Improved ability to plan and schedule activities
Benefits of information
- Cost of producing information
Value of information
Costs may include time and resources spent:
• Collecting data
• Processing data
• Storing data
• Distributing information to users
Benefits of information
- Cost of producing information
Value of information
•Costs and benefits of information are often difficult to quantify, but you
need to try when you’re making decisions about whether to provide
information.
• VI=The benefit provided by information less the cost of producing it.
Characteristics of Useful Information
Relevant:- Reduces uncertainty, improves decision making.
Reliable:- Free from error or bias; accurately represents organization
events or activities.
Completeness:- Does not omit important aspects of the events or
activities it measures.
Timely:- Provided in time for decision makers to make decisions.
Understandable:- Presented in a useful and intelligible format.
Verifiable:- Two independent, knowledgeable people produce the
same information.
Accessible:- Available to users when they need it and in a format they
can use.
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
Technology is simply a tool to create, maintain, or improve a system.
ACCOUNTING INFORMATION SYSTEM (AIS)
There are six components of an AIS:
1. The people who use the system
2. The procedures and instructions used to collect, process, and store
data
3. The data about the organization and its business activities
4. The software used to process the data
5. The information technology infrastructure, including the computers,
peripheral devices, and network communications devices used in the
AIS
6. The internal controls and security measures
Microsoft’s Dynamics,that
Sage safeguard AISEpicor
Group’s MAS 90, data
Financial management
These six components enable an AIS to fulfill three important business
functions to:
Collect and store data about ERA.
Transform that data into information to make decisions about ERA.
Provide adequate controls to ensure that the entity’s resources
(including data) are:
Available when needed
Accurate and reliable
Information system: is the set of formal
procedures by which
data are collected, processed into
information, and distributed to users.
It can be decomposed into:
Accounting
information system (AIS) and
management information system (MIS)
The Information Flows
The figure below presents an overview of these internal and external
information flows.
Business Processes/Activities/Decisions/ and Information Needs
All organizations:
need information to make effective decisions
have certain business processes in which they are continuously engaged.
• A business process is a set of related, coordinated, and structured
activities and
• tasks that are performed by a person, a computer, or a machine, and
• that help accomplish a specific organizational goal.
Overview of Business Processes, Key Decisions, and Information Needs
• 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 include selling goods to customers, buying inventory from suppliers,
and paying employees
• Transaction processing:
• The process that begins with capturing transaction data and
• Ends with informational output,
• such as the financial statements,
• These exchanges can be grouped into five major business processes or
transaction cycles.
1. Revenue cycle
2. Expenditure cycle
3. production or conversion
4. human resources/payroll cycle
5. financing cycle
•The revenue cycle, where goods and services are sold
• for cash or a future promise to receive cash.
•The expenditure cycle, where companies purchase inventory for resale or
• raw materials to use in producing products in exchange for cash or a future promise to pay cash.
•The production or conversion cycle, where raw materials are transformed into finished
goods.
•The human resources/payroll cycle, where employees are
• hired, trained, compensated, evaluated, promoted, and terminated.
•The financing cycle, where companies sell shares in the company to investors
• and borrow money, and where investors are paid dividends and interest is paid on loans.
USES OF AIS AND ROLE OF ACCOUNTS IN RELATION TO AIS
The objective of most organizations is to provide value to
their customers.
What does it mean to deliver value?
Let’s peek in on a conversation at Jafar wood business. . .
Well, Mr. Wood Salesman, your proposal looks
good, but your prices are about 5% higher than
your competitors.
That’s true, but we’re comfortable
with that because of the value-
added that we bring to this
arrangement.
What is that “value-added,” and how
do you convert it into Birrs?
customer service
Although “adding value” is a commonly used buzzword, in
its genuine sense,
it means making the value of the finished component
greater than the sum of its parts.
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
referred to as the value chain.
These include:
Primary activities
Support activities
These activities are sometimes referred to as “line” and
“staff” activities respectively.
1. Primary activities include:
1. Inbound logistics
Receiving, storing, and distributing the materials that are inputs to
the organization’s product or service.
For a Wood company, this activity might involve handling incoming
wood and elements that will be used to make their wood products.
2. Operations
Transforming those inputs into products or services.
For the Wood company, this step involves combining the raw
materials and elements with the work of people and equipment to
produce the finished wood product that will be sold to customers.
3. Outbound logistics
Distributing products or services to customers.
For the Wood company, this step involves packaging and shipping
the goods to wood stores, wholesalers, and retailors.
4. Marketing and sales
Helping customers to buy the organization’s products or services.
A Wood business rep may visit with wood stores, market participants,
etc. to inform them about their products and take orders.
5. Service
Post-sale support provided to customers such as repair and
maintenance function.
A wood firm will typically repair it’s product with stated
agreement .
2. Support Activities
Support activities include:
1. Firm infrastructure
Accountants, lawyers, and administration. Includes the
company’s accounting information system.
2. Human resources
Involves recruiting and hiring new employees, training
employees, paying employees, and handling employee
benefits.
3. Technology
Activities to improve the products or services (e.g., R&D, Web site development).
For the Wood company, these activities would include research and
development to create new design and modify existing ones.
4. Purchasing
Buying the resources (e.g., materials, inventory, fixed assets) needed to carry
out the entity’s primary activities.
In the wood company, the purchasing folks are trying to get the best
combination of cost and quality in buying raw materials , supplies, and other
assets the company needs to run its operations.
HOW AN AIS CAN ADD VALUE TO AN ORGANIZATION?
A well-designed AIS can add value to an organization by:
1. Improving the quality and reducing the costs of products or
services.
AIS can monitor machinery so that operators are notified immediately
when the process falls
2. Improving efficiency
JIT
3. Sharing knowledge
4. Improving the efficiency and effectiveness of its supply chain.
5. Improving the internal control structure.
1.3. AIS AND CORPORATE STRATEGY
Michael Porter suggests that there are two basic business strategies
companies can follow:
Product-differentiation strategy
Low-cost strategy
1. Product-differentiation strategy
A product-differentiation strategy involves setting your
product apart from those of your competitors,
Like building a “better” mousetrap by offering one that’s faster,
has enhanced features, etc.
2. Low-cost strategy
A low-cost strategy involves offering a cheaper mousetrap than your
competitors.
The low cost is made possible by operating more efficiently.
Sometimes a company can do both, but they normally have to
choose.
Porter also argues that companies must choose a strategic position
among three choices:
1. Variety-based strategic position
• Offer a subset of the industry’s products or services.
• EXAMPLE: An insurance company that only offers life insurance as
opposed to life, health, property-casualty, etc.
2. Needs-based strategic position
• Serve most or all of the needs of a particular group of customers in a target
market.
• EXAMPLE: The original Farm Bureau-based insurance companies provided a
portfolio of insurance and financial services tailored to the specific needs of
farmers.
3. Access-based strategic position
• Serve a subset of customers who differ from others in terms of factors such as
geographic location or size.
• EXAMPLE: Satellite Internet services are intended primarily for customers in
rural areas who cannot get DSL or cable services.
Note: These strategic positions are not mutually exclusive and can
overlap.
THE AIS AND CORPORATE STRATEGY
The AIS should help a company adopt and maintain its strategic
position.
Requires that data be collected about each activity.
Requires the collection and integration of both financial and
nonfinancial data.
Hence,
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, and
set strategies to achieve their goal.
The End of Chapter one
Any Question
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