Chapter 1

Role and Purpose of

Accounting Information Systems
Outline
Learning objectives
Definition of AIS
AIS importance
AIS generic structure
Information literacy
Learning objectives
1. Define accounting information systems.
2. Discuss why AIS is an important area of study for future
accountants.
3. Compare and contrast AIS with other areas of accounting.
4. Explain the structure of most AIS.
5. Locate and evaluate information sources on AIS.
 Accounting

Accounting is the process of identifying,

measuring, and communicating economic
information to permit informed judgments and
decisions by users of the information.
 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.

For example, the sales prices of a particularly toy might be

considered data.
However, after subtracting the cost of goods sold from the
sales price to compute the net profit would be considered
information if it helps a retailer decide whether to carry that
particular toy in its inventory. 1-6
Discretionary versus Mandatory Information
Mandatory information is information that is
required by law.
Examples include: Form 10-K (Annual Reports that
include Financial Statements) and Tax Returns
See SEC EDGAR for examples of required annual
reports for public companies.
Since it is required, manager usually choose to
minimize the costs of producing this information.
Discretionary versus Mandatory Information
Discretionary information is information that is not
required by law.
Using an ABC system to determine the overheads
costs associated with each pound of chicken at Tyson
Foods.
Managers must decide if the benefits of discretionary
information outweigh the costs of obtaining it.
System
A system is a set of interacting or
interdependent component parts forming
a complex or intricate whole
A group of devices or artificial objects or
an organization forming a network
especially for distributing something or
serving a common purpose
 Definition of AIS
An accounting information system is:

A set of interrelated activities, documents and

technologies
Designed to collect data, process it and report
information
To a diverse group of internal and external
decision makers in organizations
Definition of AIS
Activities Documents
Business processes Purchase orders
Sales / collection Remittance advices
Acquisition / payment
Conversion
Financing Technologies
Human resource General ledger software
Accounting cycle steps ERP systems

Which steps in the accounting cycle do

you recall from previous study?
The Accounting Cycle
 Economic Events
Event: a happening of consequence to an entity
Two types of events:
External event - involves the interaction between the entity
and its outside environment
The sale of inventory to a customer
The payment of the payroll
Internal event occurs entirely within the entity
Transferring raw materials into the production process
 Transactions
A transaction refers to any economic event
(external or internal) that is recognized (and should
be recorded) in the financial statements
because they affect
assets,
liabilities
and/or stockholders equity.
Accounting Transactions...
 Recognition and Measurement in Financial
Statements
Remember that financial accounting is a
communication process
the goal is to get appropriate information for external
decision makers.
Accountants as journalists
Which events should be communicated (recognized) in the
financial statements?
How (and/or when) should these events be measured in the
statements?
 Recognition and Measurement

Recognition: formal recording I know I need

of economic events in the to record this...
accounting records

...but at
current value Measurement:
or historical quantification of the
cost? effects on the entity
Definition of AIS
Data
Stacks of sales invoices
Receipts for the payment of
rent
Information
General purpose financial
statements
Cost variance analysis
Decision makers
Management (internal)
Shareholders (external)
Organizations
For profit (Microsoft)
Not for profit (Red Cross)
Governmental (State of
California)
Why Study AIS?
Its fundamental to accounting.
Accounting is an information providing activity,
so accountants need to understand:
How the system that provides that
information is designed, implemented, and
used
How financial information is reported
How information is used to make decisions
AIS importance
Developing a strong AIS helps achieve some of the
components of the FASB Conceptual Framework of
Accounting
 Objectives of Financial Reporting

Primary objective
provide economic information so that users can
make informed decisions
Primary Objective of
Financial Reporting

Provide information
for decision-making

Extend credit $$??

Borrow $$??

Invest?? Loan $$??

Start new business?? Sell stocks or bonds??

 Qualitative Characteristics of Accounting
Information
Qualitative (i.e., non-numerical) characteristics that make
statements useful:
Understandability: can vary with background of user
for those who are willing to learn to use it properly
Relevance: information makes a difference in decisions
 Qualitative Characteristics
Reliability: information must be free of error and bias
dependable in representing the events that it claims to
represent

3 parts to reliability:
Verifiability It should be possible to check whether its free from
error
Representational Faithfulness Information should correspond to
actual events
Neutrality - unbiased
 Qualitative Characteristics
Comparability: should be able to compare with other
companies
not necessarily uniformityalternative methods are
acceptable
disclosure allows reader to make adjustments for these
differences
Consistency: allows comparisons for the same
company from one accounting period to next
Qualitative Characteristics

Comparability
between companies

Consistency
from one period to the next
Characteristics of Useful Information
 Accounting Assumptions

Economic Time
Entity Period

Going Monetary
Concern Unit
 Economic Entity Concept
Each entity has its own books, records and financial
statements that are separate from owners
No intermingling of personal and business assets and
liabilities & income and expenses

Business
Books &
Records
 Going Concern

Assume business will continue

indefinitely
 Monetary Unit
Used in preparing statements as a medium of
exchange in the country in which the business is
located (e.g. U.S. dollar, Japanese yen, Mexican
peso, etc.)
Assumes economic measure is relatively stable;
no adjustment for inflation made in financial
statements
 Time Period Assumption
Assumes it is possible to break up an entitys earnings
in discrete time periods (a month, quarter, year)
Although we cannot know how successful a business is until
the end of its life, we need information before then, so we
report at even intervals of time, for example, annually
Necessary to provide users with financial results on a
timely basis
Requires use of estimates
1 2 3

4 5 6 7 8 9 10

11 12 13 14 15 16 17

18 19 20 21 22 23 24

25 26 27 28 29 30 31
Accounting Assumptions
 Constraints in Accounting
Materiality: Will a transaction affect the judgment of
someone relying on the financial data?
closely related to relevance, but deals with the magnitude of an
error
threshold varies from one company to the next
Conservatism: in a choice between reporting equally likely
outcomes, choose the less optimistic
For those situations in which there exist uncertainty
 Accounting Principles

Constraints In Accounting
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
1-36
Information Overload
Computers can process and organize a large
amount of data.

Too much information causes information

overload.
Decision making is hindered.
AIS importance
Broad business perspective
competencies
Studying AIS helps students
develop many of the core
competencies suggested by
the American Institute of

Functional Personal Certified Public Accountants

competencies competencies
 AICPA CORE COMPETENCY FRAMEWORK
The AICPA Core Competency Framework, developed by educators
for educators, defines a set of skills-based competencies needed
by all students entering the accounting profession, regardless
of the career path they choose
(public/industry/government/nonprofit) or the specific accounting
services they will perform.
The Framework focuses on skills and is not structured around
traditional subject/content areas or accounting services.
A skills-based curriculum is advocated, because the body of knowledge and
the accounting profession are changing so rapidly.
Although knowledge requirements will change with time, the core set of
competencies identified by the Framework will have long-term value and
will support a variety of career opportunities for the future CPA.
AICPA CORE COMPETENCY FRAMEWORK
Functional Competencies: technical competencies
most closely aligned with the value contributed by
accounting professionals

Personal Competencies: individual attributes and

values

Broad Business Perspectives Competencies:

perspectives and skills relating to understanding of
internal and external business contexts
AICPA CORE COMPETENCY FRAMEWORK & CPA EXAM

FUNCTIONAL CATEGORY SKILL TESTED ON THE CPA EXAM

Decision Modeling

Leverage Technology Research relevant financial accounting, tax, auditing and

attestation literature
Measurement Analyze and interpret business information;
Render judgment based on available business information
Reporting Communicate business information

Research Research relevant financial accounting, tax, auditing and

attestation literature
Risk Analysis Render judgment based on available business information
AICPA CORE COMPETENCY FRAMEWORK & CPA EXAM

BROAD BUSINESS PERSPECTIVE SKILL TESTED ON THE CPA EXAM

CATEGORY
Industry/Sector Perspective Analyze and interpret business information

International/Global Perspective

Legal/Regulatory Perspective Gain an understanding of key business terms, facts

Leverage Technology
Marketing/Client Perspective
Resource Management
Strategic/Critical Thinking
and processes
Gain an understanding of key business terms, facts
and processes
Analyze and interpret business information
AICPA CORE COMPETENCY FRAMEWORK & CPA EXAM

PERSONAL CATEGORY SKILL TESTED ON THE CPA EXAM

Communication Communicate business information

Interaction

Leadership

Leverage Technology

Problem Solving/Decision Making Render judgment based on available business information

Professional Demeanor

Project Management
Role of Accountants in AIS
Designer
System Analyst
Implementer
Database Administrator
User
Recording Journal Entries
Evaluator
Auditor
Manager
Controller or CFO
AIS importance
Acquiring knowledge about AIS helps students
learn more about common business processes

Sales / collection process

Acquisition / payment process
Conversion process
Human resource process
Financing process
AIS importance
Which business process is associated with each
of the following activities:
a. Collecting cash from clients
b. Issuing capital stock
c. Manufacturing automobiles
d. Paying employees
e. Purchasing inventory on account
AIS and Internal Business Processes
AIS usually serve as the as the foundation for the
enterprise (or ERP) system.

The enterprise system is a centralized database that

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

Information is thus available to everyone within the

company in a useful and timely way.
 Use of ERP System
The enterprise system can take an order from a
customer, fill the order, ship it, and then create an
invoice to bill the customer.
Used to check customers credit.
Check the inventory levels in the warehouse.
Determine when it can be shipped.

Everyone throughout the entire process can view

and update the information.
 The Supply Chain
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 which can

be made more efficient using the AIS.
 Supply Chain Management
Supply Chain Management software can be
used to optimize processes within the supply
chain.
Determine levels of inventory in stock and to be
ordered.
Determine timing to transferring inventory.
 Customer Relationship Management
This software is used to manage interactions
with customers.
Track customer purchases.
Ensure customer satisfaction.
Product placement
 Customer Relationship Management
As an example, Amazon.com keeps a record of their
past purchases and product searches and then uses
that information to recommend other similar products
for the customer to consider.
Loan officers at a bank learns more about the
financial products currently being used by its banks
customers through its AIS, they will be able to help
identify additional bank products (upselling items such
as insurance products, CDs, mutual funds, etc.) to
sell to their clients.
AIS generic structure

Internal control

Input Process Output Storage

 AIS generic structure
Inputs: source documents (ex: sales invoice,
purchase orders)
Processes: processing tools, steps in the
accounting cycle
Outputs: general purpose financial statements,
internal reports
Storage: customer master file
Internal controls: separation of duties (custody,
authority, and recordkeeping), backup of data
AIS generic structure: Inputs
What kinds of source documents will system
users need?
Should the source documents be paper-based,
electronic, or both?
How many copies of each source documents
contain will be required?
What information should the documents contain?
AIS generic structure: Process
Which processing tools should the AIS use?
Should the tools be manual, computer-
based, or both?
If computer-based tools are used in the AIS,
which software and hardware packages
should be implemented?
AIS generic structure: Outputs
Beyond the general-purpose financial
statements, what other reports will
managers and system users need?
How should the AIS be designed to facilitate
their production?
AIS generic structure: Storage
How should data be stored? On paper?
Electronically? Both?
Where should data be stored? Locally?
Remotely? Both?
How long should data be stored?
Under what conditions can/should data be
destroyed?
AIS generic structure: Internal
Controls
What controls are necessary to promote
information integrity in the AIS?
What behavioral effects are the controls
likely to have?
Are the controls cost-effective?
Information literacy

Sometimes called information competence

The ability to find, evaluate, use and

communicate information in all of its various

formats
Information literacy
Criteria for evaluating information

Authority: Who created it? Why?

Accuracy: Is the source identified? Is the

information accurate?
Information literacy
Criteria for evaluating information
Objectivity: Does it include advertising? Is it
available freely?
Currency: How old is the information?
Coverage: Does the information have sufficient
depth?
The Effect of AIS on the Income Statement
 AIS, Firm Profitability, and Stock Prices
As show on the previous slide, AIS can be
used to improve company profits.

In addition, studies show that investments in IT

can positively affect a companys stock price.
 IT Strategic Role
What role does IT have for the organization?
Automate, i.e., replacing human labor in automating business
processes
digitize your medical records.
Informate-up, i.e., provide information about business activities to
senior management
Summarize performance for senior management (digital dashboards, etc.)
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.
Transform, i.e., fundamentally redefine business processes and
relationships
IT allows Ebay and Amazon to develop a business model based on IT
Which IT Investments Most Affect Stock Prices?

Stock Market Increase Around AIS Investment

Announcements

AIS Investment Strategic Role

Automate Informate Transform
0.05% 0.40% 1.51%