Accounting Information Systems: An Overview (Chapter 1 Study Notes)

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Accounting Information Systems: An Overview

Introduction

This chapter introduces the concept of Accounting Information Systems (AIS), their role in business decision-making, and their value within organizations. It covers the distinction between data and information, the characteristics of useful information, major business processes, and how AIS supports organizational strategy and the value chain.

Distinguishing Between Data and Information

Understanding the difference between data and information is fundamental in accounting and business processes.

Data: Raw facts collected, recorded, and stored in a system. Examples include numbers, dates, names (e.g., 2/22/14, ABC Company, 123, 99, 3, 20, 60).
Information: Data that has been organized and processed to be meaningful and useful for decision-making. For example, when data is structured as a sales invoice, it becomes information.

Example:

Invoice Date: 2/22/14
Invoice #: 123
Customer: ABC Company
Item #: 99, Qty: 3, Price: $20
Total Invoice Amount: $60

Decision Quality

High-quality information improves decision-making. However, excessive information can lead to information overload, reducing decision quality. Information Technology (IT) helps filter and condense information for effective decision-making.

Value of Information

Information is valuable when its benefits exceed the costs of gathering, maintaining, and storing it.

Formula:

Benefit: Improved decision making
Cost: Time and resources used to obtain the information

Characteristics of Useful Information

Seven general characteristics make information useful:

Relevant: Needed to make a decision (e.g., customer credit decisions require A/R aging reports).
Reliable: Free from errors and bias.
Complete: Does not omit important aspects of events or activities.
Timely: Provided in time to make the decision.
Understandable: Presented in a meaningful manner.
Verifiable: Two independent people can reach the same conclusion given the same information.
Accessible: Available when needed.

Information Needs and Business Processes

Organizations use business processes—sets of related, coordinated, and structured activities—to achieve specific goals. Key decisions and information often arise from these processes.

Transactional Information in AIS

Business transactions are agreements between entities to exchange goods, services, or other measurable events. Transaction data is processed to create financial statements, a process known as transaction processing. The flow of information involves a give-get exchange within business processes or transaction cycles.

Interactions Between AIS and Internal/External Parties

An AIS facilitates interactions between the organization and various stakeholders, including vendors, investors, creditors, banks, customers, employees, management, and government agencies.

External Party	Interaction with AIS	Internal Party
Vendors	Purchase Orders, Goods & Services, Vendor Invoices, Vendor Payments	Customers
Investors	Invest Funds, Dividends, Financial Statements	Employees
Creditors	Loans, Loan Payments, Financial Statements	Management
Banks	Deposits, Withdrawals, Bank Statements	Government Agencies

Basic Business Processes

Business processes are structured around "give-get" exchanges:

Revenue Cycle: Give goods/services—get cash
Expenditure Cycle: Get goods/services—give cash
Production Cycle: Give labor/raw materials—get finished goods
Payroll Cycle: Give cash—get labor
Financing Cycle: Give cash—get cash (e.g., loans, investments)

What Is an Accounting Information System (AIS)?

An Accounting Information System (AIS) is a system that collects, records, stores, and processes data to produce information for decision makers. It consists of:

People who use the system
Processes (procedures and instructions)
Technology (data, software, and IT)
Controls to safeguard information

Functions of AIS:

Collects input
Stores data
Processes data into output (information)
Provides adequate controls

How Does an AIS Add Value to an Organization?

A well-designed AIS can add value by:

Improving quality and reducing costs of products/services
Improving efficiency
Sharing knowledge
Enhancing supply chain efficiency and effectiveness
Strengthening internal control structure
Improving decision making

AIS and Corporate Strategy

An AIS is shaped by an organization's strategy, which is its overall goal (e.g., increasing profitability). Once the goal is set, the organization determines the actions and information needed to achieve and measure progress toward that goal.

AIS in the Value Chain

The value chain links together activities that provide value to the customer. Activities are classified as:

Primary activities: Directly provide value (e.g., inbound logistics, operations, outbound logistics, marketing & sales, service)
Support activities: Enable primary activities to be efficient and effective (e.g., firm infrastructure, human resources, technology, purchasing)

The supply chain extends the value chain to include suppliers, distributors, and customers.

Support Activities	Primary Activities
Firm Infrastructure	Inbound Logistics: Receiving and storing materials
Human Resources	Operations: Manufacturing, repackaging
Technology	Outbound Logistics: Distribution, shipping
Purchasing	Marketing and Sales: Advertising, selling
	Service: Repair, maintenance

Key Terms

System
Goal conflict
Goal congruence
Data
Information
Information technology (IT)
Information overload
Value of information
Business process
Transaction
Transaction processing
Give-get exchange
Revenue cycle
Expenditure cycle
Production (conversion) cycle
Human resource/payroll cycle
Financing cycle
General ledger and reporting system
Accounting information system (AIS)
Predictive analysis
Value chain
Primary activities
Support activities
Supply chain