Accounting Information System - ACC 124 PDF

ACC 124 Accounting Information System Accounting ▪ It is a systematic process of identifying, recording, measuring, classifying, verifying, summarizing, interpreting, and communicating inancial information ▪ It reveals pro it or loss for a given period, and the value and nature of a irm’s asset...

ACC 124 Accounting Information System Accounting ▪ It is a systematic process of identifying, recording, measuring, classifying, verifying, summarizing, interpreting, and communicating inancial information ▪ It reveals pro it or loss for a given period, and the value and nature of a irm’s assets, liabilities and owners’ equity. f f f Information ▪ Processed form of data used for decision making. Information minimizes uncertainty System ▪ A set of two or more interrelated and dependent components that interact to each other to achieve a goal. ▪ These components may be referred to as a subsystem that performs a speci ic function important to and supportive part of the larger system. f Information System ▪ A combination of hardware, software, infrastructure and trained personnel organized to facilitate planning, control, coordination, and decision making in an organization Accounting Information System ▪ Structure that a business uses to collect, store, manage, process, retrieve, and report both inancial and non- inacial data to enable users make informed decisions f f The Information System: An Accountant Perspective The Information Environment The Information Environment ▪ Like the other business resources of raw materials, capital, and labor, information is vital to the survival of the contemporary business organization. ▪ Every individual in the organization, from business operations to top management, needs information to accomplish his or her tasks. The Information Environment ▪ Business organization are divided horizontally into several levels of activity. ▪ Business operations — such as manufacturing , sales, distribution, etc. form the base ▪ Operations management — directly responsible for controlling day- to-day operations. ▪ Middle management — accountable for the short-term planning and coordination of activities necessary to accomplish organizational objectives. ▪ Top management — responsible for longer-term planning and setting organizational objectives. The Information Environment ▪ The horizontal low supports operations-level tasks with highly detailed information about the many business transactions affecting the irm. ▪ The vertical low distributes summarized information about operations and other activities upward to managers at all levels. ▪ External users fall into two groups: trading partners and stakeholders. f f f  The Information Environment ▪ Exchanges with trading partners include customer sales and billing information, purchase information for suppliers, and inventory receipts information. ▪ Stakeholders are entities outside (or inside) the organization with a direct or indirect interest in the irm. f  What is a System? ▪ Some systems are naturally occurring, whereas others are arti icial. ▪ Natural systems range from the atom—a system of electrons, protons, and neutrons—to the universe— a system of galaxies, stars, and planets. ▪ Arti icial systems are manmade. f f What is a System? ▪ A system is a group of two or more interrelated components or subsystems that serve a common purpose. ▪ A system must contain more than one part (Multiple Components) ▪ A common purpose relates the multiple parts of the system. (Relatedness) ▪ A system is called a subsystem when it is viewed in relation to the larger system of which it is a part. Likewise, a subsystem is called a system when it is the focus of attention. (System VS Subsystem) ▪ Serving a purpose is its fundamental justi ication. (Purpose) f What is a System? What is a System? ▪ System Decomposition is the process of dividing the system into smaller subsystem parts. ▪ Subsystem Interdependency ▪ A system’s ability to achieve its goal depends on the effective functioning and harmonious interaction of its subsystems. What is a System? ▪ Designers of all types of systems need to recognize the consequences of subsystem failure and provide the appropriate level of control. ▪ Control should be provided on a cost-bene it basis. ▪ Information system designers need to identify critical subsystems, anticipate the risk of their failure, and design cost-effective control procedures to mitigate that risk. f Components of a computer- based Information System? ▪ Data ▪ Hardware ▪ Software ▪ Databases ▪ Telecommunications ▪ People ▪ Procedures What is a System? ▪ Data — input that the system takes to produce information ▪ Hardware — consists of computer equipment used to perform input, processing, and output activities. ▪ The trend in the computer industry is to produce smaller, faster, and more mobile hardware What is a System? ▪ Software — the computer programs that govern the operation of the computer ▪ Software consists of the computer programs that govern the operation of the computer. These programs allow a computer to process payroll, send bills to customers, and provide managers with information to increase pro its, reduce costs, and provide better customer service. f What is a System? ▪ Software ▪ Two types of software: ▪ system software, such as Microsoft Windows 10, which controls basic computer operations including start-up and printing, and ▪ applications software, such as Microsoft Of ice, which allows you to accomplish speci ic tasks including word processing or creating spreadsheets. f f What is a System? ▪ Databases — an organized collection of facts and information, typically consisting of two or more related data iles. An organization’s database can contain facts and information on customers, employees, inventory, competitors’ sales, online purchases, and much more. f What is a System? ▪ Telecommunications — The electronic transmission of signals for communications, which enables organizations to carry out their processes and tasks through effective computer networks. ▪ With telecommunications, people can work at home or while traveling. This approach to work, often called telecommuting, allows a telecommuter living in England to send his or her work to the United States, China, or any location with telecommunications capabilities. What is a System? ▪ Networks — Connect computers and equipment in a building, around the country, or around the world to enable electronic communication. ▪ Internet — The world’s largest computer network, consisting of thousands of interconnected networks, all freely exchanging information. What is a System? ▪ People — can be the most important element in most computer-based information systems. They make the difference between success and failure for most organizations. Information systems personnel include all the people who manage, run, program, and maintain the system. What is a System? ▪ Procedures — Procedures include the strategies, policies, methods, and rules for using the CBIS, including the operation, maintenance, and security of the computer. ▪ Good procedures can help companies take advantage of new opportunities and avoid potential disasters. Poorly developed and inadequately implemented procedures, however, can cause people to waste their time on useless rules or result in inadequate responses to disasters, such as hurricanes or tornadoes. An Information Systems Framework An Information Systems Framework ▪ An information system is the set of formal procedures by which data are collected, processed into information, and distributed to users. ▪ More often, MIS and AIS functions are integrated to achieve operational ef iciency. ▪ The distinction between AIS and MIS centers on the concept of a transaction. f  An Information Systems Framework ▪ A transaction as an event that affects or is of interest to the organization and is processed by its information system as a unit of work. ▪ A inancial transaction is an economic event that affects the assets and equities of the organization, is re lected in its accounts, and is measured in monetary terms. ▪ Non- inancial transactions are events that do not meet the narrow de inition of a inancial transaction. f f f f f Types of Information System Types of Information System ▪ Transaction Processing System (TPS) ▪ Transaction processing systems (TPSs) are the most widely used information systems. The predominant function of TPSs is to record data collected at the boundaries of organizations, in other words, at the point where the organization transacts business with other parties. They also record many of the transactions that take place inside an organization. Types of Information System ▪ Supply Chain Management Systems ▪ The term “supply chain” refers to the sequence of activities involved in producing and selling a product or service. ▪ Information systems that support these activities and are linked to become one large IS providing information on any stage of a business process are called supply chain management (SCM) systems. Types of Information System ▪ Customer Relationship Management Systems ▪ Customer relationship management (CRM) systems help manage an organization’s relationships with its customers. The term refers to a large variety of information systems, from simple ones that help maintain customer records to sophisticated systems that dynamically analyze and detect buying patterns and predict when a speci ic customer is about to switch to a competitor. f Types of Information System ▪ Customer Relationship Management Systems ▪ When a customer telephones, the representative can view the entire history of the customer’s relationship with the company: anything that the customer has purchased, deliveries made, unful illed orders, and other information that can help resolve a problem or help the customer ind the desired product or service. f f Types of Information System ▪ Customer Relationship Management Systems ▪ The main goals of CRM systems are to increase the quality of customer service, reduce the amount of labor involved in serving customers, and learn as much as possible about the buying habits and service preferences of individual customers. ▪ Effective CRM systems are accessible to both sales and service people. Types of Information System ▪ Business Intelligence Systems ▪ ISs whose purpose is to glean from raw data relationships and trends that might help organizations compete better are called business intelligence (BI) systems. Types of Information System ▪ Decision Support and Expert Systems ▪ Professionals often need to select one course of action from many alternatives. Because they have neither the time nor the resources to study and absorb long, detailed reports of data and information, organizations often build information systems speci ically designed to help make decisions. f Types of Information System ▪ Decision Support and Expert Systems ▪ In Decision and Support and Expert System, There are two systems involve, the decision support systems (DSSs) that rely on models and formulas to produce concise tables or a single number that determines a decision, and the expert systems (ESs) rely on arti icial intelligence techniques to support knowledge-intensive decision-making processes f Types of Information System ▪ Decision Support and Expert Systems ▪ DSSs are programmed to process raw data, make comparisons, and generate information to help professionals glean the best alternatives for inancial investment, marketing strategy, credit approval, and the like. ▪ However, it is important to understand that a DSS is only a decision aid, not an absolute alternative to human decision making. f Types of Information System ▪ Bene its ▪ Improved decision making through better understanding of the business ▪ Increased number of decision alternatives ▪ Faster response to solutions ▪ Improved communication ▪ Time and cost savings f Types of Information System ▪ Geographic Information Systems ▪ In some cases, the information decision makers need is related to a map or loor plan. In such cases, special ISs called geographic information systems ( GISs ) can be used to tie data to physical locations. A GIS application accesses a database that contains data about a building, neighborhood, city, county, state, country, or even the entire world. By representing data on a map in different graphical forms, a user is able to understand promptly a situation taking place in that part of the world and act upon it. f Information Systems in Business Functions Human Resouce ▪ (HR) management systems help mainly in record- keeping, employee evaluation, and employee bene its. Every organization must maintain accurate employee records. Human resource management systems maintain such records, including employees’ pictures, marital status, tax information, and other data that other systems, such as payroll, might use. f Marketing ▪ Marketing’s purpose is to pinpoint the people and organizations most likely to purchase what the organization sells and to promote the appropriate products and services to them. ▪ Marketing ISs provide information that helps management decide how many sales representatives to assign to speci ic products in speci ic geographical areas. The systems identify trends in the demand for the company’s products and services. They also help answer such questions as, “How can an advertising campaign affect our pro it?” f f f  Finance ▪ While accounting systems focus on recording and reporting inancial changes and states, the purpose of inancial systems is to facilitate inancial planning and business transactions. In inance, information systems help organize budgets, manage cash low, analyze investments, and make decisions that could reduce interest payments and increase revenues from inancial transactions. f f f f f f Accounting ▪ In accounting, information systems help record business transactions, produce periodic inancial statements, and create reports required by law, such as balance sheets and pro it-and-loss statements. f f Accounting Information Systems  An Information Systems Framework ▪ AIS subsystems process inancial transactions and non- inancial transactions that directly affect the processing of inancial transactions. ▪ The AIS is composed of three major subsystems: ▪ (1) Transaction Processing System (TPS) ▪ supports daily business operations with numerous reports, documents, and messages for users throughout the organization f f f  An Information Systems Framework ▪ (2) General Ledger/Financial Reporting System (GL/FRS) ▪ produces the traditional inancial statements, such as the income statement, balance sheet, statement of cash lows, tax returns, and other reports required by law ▪ (3) Management Reporting System (MRS) ▪ provides internal management with special-purpose inancial reports and information needed for decision making such as budgets, variance reports, and responsibility reports f f f An Information Systems Framework ▪ Management often requires information that goes beyond the capability of AIS. ▪ As organizations grow in size and complexity, specialized functional areas emerge, requiring additional information for production planning and control, sales forecasting, inventory warehouse planning, market research, and so on.  An Information Systems Framework ▪ A Management Information System (MIS) processes non- inancial transactions that are not normally processed by traditional AIS. ▪ Why Is it Important to Distinguish between AIS and MIS? ▪ Because of the highly integrative nature of modern information systems, management and auditors need a conceptual view of the information system that distinguishes key processes and areas of risk and legal responsibility from the other (non-legally binding) aspects of the system. f An Information Systems Framework A General Model for AIS ▪ The elements of the general model for AIS viewing are (1) end users, (2) data sources, (3) data collection, (4) data processing, (5) database management, (6) information generation, and (7) feedback. ▪ (1) End users fall into two general groups: external and internal. ▪ External users include creditors, stockholders, potential investors, regulatory agencies, tax authorities, suppliers, and customers. ▪ Internal users include management at every level of the organization, as well as operations personnel. A General Model for AIS A General Model for AIS ▪ (2) Data sources are inancial transactions that enter the information system from both internal and external sources. ▪ External Financial Transactions are economic exchanges with other business entities and individuals outside the irm. ▪ Internal inancial transactions involve the exchange or movement of resources within the organization. f f f A General Model for AIS ▪ (3) Data collection is the irst operational stage in the information system. The objective is to ensure that event data entering the system are valid, complete, and free from material errors. ▪ Two rules govern the design of data collection procedures: relevance and ef iciency. f f  A General Model for AIS ▪ The data collection stage should be designed to ilter irrelevant facts from the system. ▪ Ef icient data collection procedures are designed to collect data only once. ▪ (4) Data Processing is the processing of data to produce information. ▪ (5) Database management involves three fundamental tasks: storage, retrieval, and deletion. f f A General Model for AIS ▪ The storage task assigns keys to new records and stores them in their proper location in the database. ▪ Retrieval is the task of locating and extracting an existing record from the database for processing. ▪ Deletion is the task of permanently removing obsolete or redundant records from the database. A General Model for AIS ▪ (6) Information generation is the process of compiling, arranging, formatting, and presenting information to users. ▪ Useful information has the following characteristics: relevance, timeliness, accuracy, completeness, and summarization ▪ The contents of a report or document must serve a purpose. (Relevance) A General Model for AIS ▪ Information must be no older than the time period of the action it supports. (Timeliness) ▪ Information must be free from material errors. (Accuracy) ▪ No piece of information essential to a decision or task should be missing. (Completeness) ▪ Information should be aggregated in accordance with the user’s needs. (Summarization) A General Model for AIS ▪ (7) Feedback may be internal or external and is used to initiate or alter a process ▪ Information System Objectives: ▪ To support the stewardship function of management. ▪ Stewardship refers to management’s responsibility to properly manage the resources of the irm. ▪ To support management decision making ▪ To support the irm’s day-to-day operations f f Acquisition of Information Systems ▪ Two ways of acquiring IS: (1) they develop customized systems from scratch through in-house systems development activities and (2) they purchase pre- programmed commercial systems from software vendors. ▪ System development life cycle is the process of developing systems. ▪ Three basic types of commercial software are turnkey systems, backbone systems, and vendor-supported systems. Acquisition of Information Systems ▪ Turnkey systems are completely inished and tested systems that are ready for implementation. ▪ A backbone system is a compromise between a custom system and a turnkey system. ▪ Vendor-supported systems are custom (or customized) systems that client organizations purchase commercially rather than develop in-house. f Organizational Structure Organizational Structure ▪ The structure of an organization re lects the distribution of responsibility, authority, and accountability throughout the organization. ▪ Business organizations consist of functional units or segments. f Organizational Structure ▪ Three of the most common approaches include segmentation by: ▪ Geographic Location ▪ Product Line ▪ Business Function ▪ Segmentation by business function is the most common method of organizing. Organizational Structure Materials Management ▪ The objective of materials management is to plan and control the materials inventory of the company. ▪ Three Sub-functions of Material Management: ▪ Purchasing is responsible for ordering inventory from vendors when inventory levels fall to their reorder points. Materials Management ▪ Receiving is the task of accepting the inventory previously ordered by purchasing. ▪ Stores takes physical custody of the inventory received and releases these resources into the production process as needed. Production ▪ Production activities occur in the conversion cycle where raw materials, labor, and plant assets are used to create inished products. ▪ In general production fall into two broad classes: (1) primary manufacturing activities and (2) production support activities. f Production ▪ Primary manufacturing activities shape and assemble raw materials into inished products. ▪ Production support activities ensure that primary manufacturing activities operate ef iciently and effectively. ▪ Production Support Activities but are not limited to, the following types of activities: ▪ Production planning ▪ Quality control ▪ Maintenance f f Marketing ▪ The marketing function deals with the strategic problems of product promotion, advertising, and market research. ▪ On an operational level, marketing performs such daily activities as sales order entry. Distribution ▪ Distribution is the activity of getting the product to the customer after the sale. ▪ success depends on illing orders accurately in the warehouse, packaging goods correctly, and shipping them quickly to the customer. f Personnel ▪ Competent and reliable employees are a valuable resource to a business ▪ The objective of the personnel function is to effectively manage this resource. ▪ A well-developed personnel function includes recruiting, training, continuing education, counseling, evaluating, labor relations, and compensation administration.  Finance ▪ The inance function manages the inancial resources of the irm through banking and treasury activities, portfolio management, credit evaluation, cash disbursements, and cash receipts f f f The Accounting Function ▪ The accounting function manages the inancial information resource of the irm ▪ The value of information to a user is determined by its reliability. ▪ Effective decisions require information that has a high degree of reliability. f f  The Accounting Function ▪ The Accounting function plays two important roles in transaction processing: ▪ accounting captures and records the inancial effects of the irm’s transactions i.e. movement of raw materials from the warehouse into production, shipments of the inished products to customers, cash lows into the irm and deposits in the bank ▪ accounting function distributes transaction information to operations personnel to coordinate many of their key tasks. f f f f f  The Accounting Function ▪ Information reliability rests heavily on the concept of accounting independence. ▪ For example, accounting monitors and records the movement of raw materials into production and the sale of inished goods to customers. Accounting authorizes purchases of raw materials and the disbursement of cash payments to vendors and employees. Accounting supports these functions with information but does not actively participate in the physical activities. f The Information Technology Function ▪ 2 structures: ▪ Centralized Data Processing Approach ▪ Distributed Data Processing Approach The Information Technology Function ▪ In centralized data processing model, all data processing is performed by one or more large computers housed at a central site that serve users throughout the organization. ▪ IT areas of operations: database administration, data processing, and systems development and maintenance The Information Technology Function ▪ In this shared data arrangement, a special independent group—database administration— headed by the database administrator is responsible for the security and integrity of the database ▪ The data processing group manages the computer resources used to perform the day-to-day processing of transactions. The Information Technology Function ▪ The information needs of users are met by two related functions: systems development and systems maintenance ▪ systems development is responsible for the analysis user needs and for designing new systems to satisfy those needs. ▪ The participants in system development include systems professionals, end users, and stakeholders. The Information Technology Function ▪ Systems professionals include systems analysts, database designers, and programmers who design and build the system ▪ End users are those for whom the system is built. ▪ Stakeholders are individuals inside or outside the irm who have an interest in the system but are not end users. f The Information Technology Function ▪ An alternative to the centralized model is the concept of distributed data processing (DDP). ▪ DDP involves reorganizing the IT function into small information processing units (IPUs) that are distributed to end users and placed under their control. ▪ IPUs may be distributed according to business function, geographic location, or both. The Information Technology Function ▪ Disadvantages of DDP: loss of control, inef icient use of resources, the destruction of audit trails, inadequate segregation of duties, an increased potential for programming errors and systems failures, and the lack of standards f The Information Technology Function ▪ Speci ic Problems that might result: ▪ Mismanagement of organization-wide resources ▪ Hardware and software incompatibility ▪ Redundant tasks ▪ Consolidating Incompatible Activities ▪ Hiring quali ied professionals ▪ Lack of standards. f f The Information Technology Function ▪ Mismanagement of organization-wide resources ▪ Those opposed to DDP argue that distributing responsibility for Information processing services (such as computer operations, programming, data conversion, and database management) will inevitably lead to their mismanagement and suboptimal utilization. The Information Technology Function ▪ Hardware and software incompatibility ▪ Working independently, decision makers may settle on dissimilar and incompatible operating systems, technology platforms, spreadsheet programs, word processors, and database packages which can degrade and disrupt communications between organizational units. The Information Technology Function ▪ Redundant tasks ▪ Data common to many users may be recreated for each IPU, resulting in a high level of data redundancy. The Information Technology Function ▪ Consolidating incompatible activities ▪ Within a single IPU, the same person may program applications, perform program maintenance, enter transaction data into the computer, and operate the computer equipment which represents a fundamental violation of internal control. The Information Technology Function ▪ Hiring quali ied professionals ▪ End-user managers may lack the knowledge to evaluate the technical credentials and relevant experience of candidates applying for a position as a computer professional f The Information Technology Function ▪ Lack of standards ▪ Because of the distribution of responsibility in the DDP environment, standards for developing and documenting systems, choosing programming languages, acquiring hardware and software, and evaluating performance may be unevenly applied or non-existent.  The Information Technology Function ▪ Advantages of DDP are related to cost savings, increased user satisfaction, and improved operational ef iciency ▪ Speci ic advantages: ▪ Cost reductions ▪ Powerful yet inexpensive small scale, which can cost-effectively perform specialized functions, have changed the economics of data processing dramatically ▪ Improved cost control responsibility ▪ Improved user satisfaction ▪ Backup f f End of Chapter p