Accounting Information Systems: An Overview

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Accounting Information Systems An Overview
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Presentation Outline

1. The Users of Accounting Information
2. Information Systems
3. Transaction Processing Cycles
4. The Internal Control Process
5. Organization Interaction with Information Systems
6. The Development of Systems

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I. The Users of Accounting Information

1. External Users of Accounting Information
2. Internal Users of Accounting Information
3. Mandatory vs. Discretionary Information

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A. External Users of Accounting Information
Creditors
Investors
Stockholders
Customers and Vendors
Government Agencies
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B. Internal Users of Accounting Information
Lower Level Managers Middle Managers Top-Level Managers
Characteristic of Information Operational Control Management Control Strategic Planning
Source Largely internal External
Level of Aggregation Detailed Aggregate
Time Horizon Historical Future
Required Accuracy High Low
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C. Mandatory vs. Discretionary Information

• Mandatory Information
• Certain types of information must be generated
  regardless of the cost
• Government reports
• Payroll
• Basic bookkeeping

• Evaluation Criteria
• For mandatory information, the primary concern is
  minimization of cost.
• In contrast, discretionary information should
  provide greater benefits than the cost of
  generating it.

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II. Information Systems
The term information system suggests the use of
computer technology in an organization

1. Electronic Data Processing (EDP) or Data
   Processing (DP)
2. Management Information Systems (MIS)
3. Decision Support Systems (DSS)
4. Expert Systems (ES)
5. Executive Information Systems (EIS)
6. Accounting Information Systems (AIS)

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A. Electronic Data Processing (EDP) or Data
Processing (DP)

• Use of computer technology to perform an
  organizations transaction-oriented data
  processing. DP systems serve routine, recurring,
  general information needs.

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B. Management Information Systems (MIS)

• Use of computer technology to provide managers
  with decision-oriented information beyond what a
  normal DP system provides. Subsystems include
• Marketing information system
• Manufacturing information system
• Human resource information system
• Financial information system

Functional MIS subsystems provide a logical
rather than physical way of implementing the MIS
concept in organizations.
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C. Decision Support Systems (DSS)

• Processes data into a decision making format for
  end users. Decision support systems (DSSs)
  process nonroutine information requests on an ad
  hoc basis. Requires the use of decision models
  and specialized databases beyond what is in a DP
  system.

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D. Expert Systems (ES)
I know the answer.

• Emulates an experts decision making process to
  provide a decision. Different from DSS which
  only provides information for making a decision.
  Two components of the ES are as follows
• Knowledge base special knowledge that an expert
  possesses in the decision area.
• Inference engine process by which expert makes
  the decision.

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E. Executive Information System (EIS)

• Executive information systems tailor information
  to the strategic needs of top-level management.
• Much of the information used by top-level
  management comes from sources outside the
  organizations information system. (i.e.,
  meetings, memos, television, periodicals, and
  social activities).

Which direction?
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F. Accounting Information Systems (AIS)

• A computer-based system designed to transform
  accounting data into information.
• Can also include transactions processing cycles,
  the use of information technology, and the
  development of information systems.

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III. Transaction Processing Cycles
The transaction processing cycles provide a means
of viewing the activities of a business.

1. Revenue Cycle
2. Expenditure Cycle
3. Production Cycle
4. Finance Cycle
5. Financial Reporting Cycle

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A. Revenue Cycle

• Events related to the distribution of goods and
  services to other entities and the collection of
  related payments

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B. Expenditure Cycle

• Events related to the acquisition of goods and
  services from other entities and the settlement
  of related obligations.

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C. Production Cycle

• Events related to the transformation of resources
  into goods and services.

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D. Finance Cycle

• Events related to the acquisition and management
  of capital funds, including cash. The treasurer
  is responsible for the finances of the business.

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E. Financial Reporting Cycle

• Not an operating cycle
• This cycle obtains accounting and operating data
  from other cycles and processes this data so that
  financial reports can be prepared.
• A controller is in charge of the accounting
  function.

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IV. The Internal Control Process
Since management is far removed from the scene of
operations in a large organization, personal
supervision of employees is often replaced with
various control techniques.

1. Definition of Internal Control
2. The Five Elements of the Internal Control Process
3. Segregation of Accounting Functions
4. The Internal Audit Function

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A. Definition of Internal Control

• Internal control is a process designed to provide
  reasonable assurance regarding the achievement of
  objectives relating to
• Reliability of financial reporting
• Effectiveness and efficiency of operations
• Compliance with applicable laws and regulations

The concept of internal control structure is
based on two major premises managements
responsibility and reasonable assurance.
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B. Five Elements of the Internal Control Process

• Control environment Overall values and
  integrity of organization.
• Risk assessment Identification and evaluation
  of risks (Potential loss x Probability
  Exposure).
• Control activities Activities undertaken to
  reduce probability of loss due to significant
  risks.
• Information and communication Communicating
  information about the control environment and
  control activities.
• Monitoring Keeping watch over and changing
  internal controls so that they function
  effectively and efficiently.

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C. Segregation of Accounting Functions
I kept the records and the cash.

• Segregate the following duties
• Authorization
• Record keeping
• Custody of assets

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D. Internal Audit Function

• Internal auditing is an independent appraisal
  function charged with monitoring and assessing
  compliance with organizational policies and
  procedures.

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V. Organization Interaction With Information
Systems

1. The Steering Committee
2. End-User Computing
3. Quick-Response Technology

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A. The Steering Committee

• A committee advising the Chief Information
  Officer that is composed of high-level members of
  user functions such as manufacturing and
  marketing. The committee provides a means by
  which managers from other areas can influence the
  information services process.

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B. End-User Computing (EUC)

• Functional end users do their own information
  processing activities through an EUC application
  such as a database that uses a query language
  feature to generate specific information needed
  by the end user to make decisions. (See Fig. 1.7
  on p. 13)

Potential EUC Problems

• Inadequate system development May solve wrong
  problem or have poor documentation.
• Ineffective use of resources Underutilized
  equipment or inefficient design.
• Data integrity and security problems
  Inadvertent alteration of data or failure to
  implement security controls.

See contrast to traditional approach in Figure
1.8 on page 14.
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C. Quick-Response Technology

1. Just-In-Time
2. Web Commerce
3. Electronic Data Interchange
4. Extensible Business Reporting Language
5. Computer Integrated Manufacturing
6. Electronic Payment Systems

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1. Just-in-Time

• Purchase orders for inventory items are made on a
  demand-pull basis rather than a fixed interval
  push basis to restock store inventory levels.
  Adds flexibility to meet customer needs and
  reduces product rework.

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2. Web Commerce

• Provides worldwide availability of products on a
  single computer.
• Specially trained CPAs offer the Web Trust seal
  to sites that meet certain security and privacy
  criteria.

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3. Electronic Data Interchange

• Electronic data interchange (EDI) is the direct
  computer-to-computer exchange of business
  documents via a communications network. EDI
  differs from e-mail in that EDI messages are
  created and interpreted by computers without
  human intervention. Also makes use of universal
  product code (UPC) bar code. (See Fig. 1.10 on
  p. 15)

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4. Extensible Business Reporting Language

• Extensible Business Reporting Language (XBRL) is
  a language that facilitates the exchange over the
  Internet of all kinds of business documents and
  financial statements. The SEC permits companies
  to file their financial reports electronically
  using XBRL format.

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5. Computer-Integrated Manufacturing (CIM)

• Components of CIM typically include
  computer-aided design (CAD) workstations,
  real-time production monitoring and control
  systems, and order inventory and control systems.
• Makes use of scanner technology and
  machine-readable bar codes.

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6. Electronic Payment Systems

• Electronic funds transfer (EFT) systems are
  electronic payment systems in which processing
  and communication are primarily or totally
  electronic.

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VI. The Development of Systems

1. Blueprinting
2. Systems Development
3. Behavioral Considerations

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A. Blueprinting

• The company uses generic or industry standard
  stock blueprints rather than designing its own
  system.

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B. Systems Development
A systems development project ordinarily consists
of three phases systems analysis, systems
design, systems implementation. The procedure
attempts of improve information quality, internal
control, and minimize cost. The systems approach
consists of six steps
The Result of Poor Systems Development

1. Statement of system objective(s)
2. Creation of alternatives
3. Systems analysis
4. Systems design
5. Systems implementation
6. Systems evaluation

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C. Behavioral Considerations

• The users of systems should be included
  throughout the steps of systems development.
• Users provide valuable input into what is needed
  and must accept the system that is developed.

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Summary

1. Five Types of Information Systems
2. Five Transaction Processing Cycles
3. The Internal Control Process
4. Steering Committee and EUC
5. Quick-Response Technology
6. The Steps of Systems Development