MODULE 1

LEARNING OBJECTIVES
1. Distinguish data from information, discuss the characteristics of
useful information, and explain how to determine the value of
information.
2. Explain the decisions an organization makes and the information
needed to make them.
3. Describe the major business processes present in most companies.
4. Discuss how an AIS can add values to an organization.
5. Explain the role an AIS plays in a company's value chain

Overview of Enterprise Resource Planning

 

Most companies designed and programmed custom information system in-

how, which resulted in an array of multiple stand-alone systems that were
designed to the unique needs of the users. Although these systems dealt
efficiently with their designated tasks, they did not provide strategic
decision support at the enterprise level because they lacked the integration
needed for information transfer across organization boundaries. Today the
trend in information systems is toward implementing highly integrated,
enterprise-oriented systems. These are not custom packages designed for
a specific organization. Instead, they are generalized systems that
incorporate the best business practices in use. Organizations mix and
match pre-coded software components to assemble an enterprise
resource planning (ERP) system that best meets their business
requirements. This means that an organization may need to change the
way it conducts business to take full advantage of the ERP.
 
What is ERP?
 

ERP systems are multiple module software packages that evolved

primarily from traditional manufacturing resource planning (MRP II)
systems. The Gartner Group coined the term ERP, which has become
widely used in recent years. The objective of ERP is to integrate key
processes of the organization such as order entry, manufacturing,
procurement and accounts payable, payroll, and human resources. By
doing so, a single computer system can serve the unique needs of each
functional area. Designing one system that serves everyone is an
undertaking of massive proportions. Under the traditional model, each
functional area or department has its own computer system optimized to
the way it does its daily business. ERP combines all of these into a single,
integrated system that accesses a single database to facilitate the sharing
of information and to improve communications across the organization.

ERP systems are modular, with each module using best business practice
is to automate a standard business process. This modular design allows
businesses to add or delete modules as needed. Typical ERP modules
include:
 Financial (general ledger and reporting system) - general Ledger,
accounts receivable, accounts payable, fixed assets, budgeting, cash
management, in preparation of managerial reports and financial
statements.
 Human resources and payroll - human resources, payroll, employee
benefits, training, time and attendance, and government reporting.
 Order to cash (revenue cycle) - sales order entry, shipping, inventory,
cash receipts, commission calculation
 Purchase to pay (disbursement cycle) – purchasing, receipt and
inspection of inventory, inventory and warehouse management, in cash
disbursement.
 Manufacturing (production cycle) – engineering, production
scheduling, bill of materials, work in process, workflow management,
quality control, cost management, and manufacturing processes in
projects.
 Project management – costing, billing, time and expense,
performance units, activity management.
 Customer relationship management - sales and marketing,
commissions, service, customer contact, and call center support.
 System tools - tools for establishing master file data, specifying flow
of information, and access controls.
 

An ERP system, with its centralized database, provides significant

advantages:

 An ERP provides an integrated, enterprise-wide, single view of the

organization's data and financial situation. Storing all corporate
information in a single database breaks down barriers between
departments and streamlines the flow of information.
 Data input is captured or keyed once, rather than multiple times, as it
is entered into different systems. Downloading data from one system to
another is no longer needed.
 Management gains greater visibility into every area of the enterprise
and greater monitoring capabilities. Employees are more productive and
efficient because they can quickly gather data from both inside and
outside their own department.
 The organization gains better access control. An ERP can
consolidate multiple permissions and security models into a single data
access structure.
 Procedures and reports are standardized across business units. This
standardization can be especially valuable with mergers and acquisition
because an ERP system can replace the different systems with a single,
unified system.
 Customer service improves because employees can quickly access
orders, available inventory, shipping information, and past customer
transaction details.
 Manufacturing plants receive new orders in real time, and automation
of manufacturing process leads to increase productivity.
 

Learning Materials
 

Chapter Reading
 

Romney, M.B. (2015). Accounting Information Systems (13th Edition).

London, United Kingdom. Pearson Education Limited.
 

Hall. J.A. (2008). Accounting Information Systems (7th Edition). OH, USA.
Cengage Learning
 

Video (5minutes)  - Why do we need ERP? [Video]. Youtube.

What is SAP? Why do we need ERP? Beginner Tutorial  (Links to an external site.)
 Accounting Information Systems: An Overview
 

We begin this topic by explaining important terms and discussing the kinds
of information that organizations need and the business processes used to
produce that information. We continue with an exploration of what add
Accounting Information System is, how an AIS adds value to an
organization, how an AIS and corporate strategy affect each other, and the
role of the AIS in the value chain.

What is Accounting Information Systems?

WHAT IS A SYSTEM?
 

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. For example, a college of business is a system
composed of various departments, each of which is a subsystem.
Moreover, the college itself is a subsystem of the university.
 

ELEMENTS OF A SYSTEM
Regardless of the origin, all systems possess some common elements.
Multiple Components. A system must contain more than one part. For
example, a yo-yo carved from a single piece of wood and attached to a
string is a system. Without a string, it is not a system.
Relatedness. A common purpose relates the multiple parts of the system.
Although each part functions independently of the others, all parts serve a
common objective. If a particular component does not contribute to the
common goal, then it is not part of the system. For instance, a pair of ice
skates and a volleyball net are both components; however, they lack a
common purpose, and thus do not form a system.
System Versus Subsystem. The distinction between the terms system
and subsystem is a matter of perspective. For our purposes, these terms
are interchangeable. 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. Animals, plants, and other
life forms are systems. They are also subsystems of the ecosystem in
which they exist. From a different perspective, animals are systems com-
posed of many smaller subsystems, such as the circulatory subsystem and
the respiratory subsystem.
Purpose. A system must serve at least one purpose, but it may serve
several. Whether a system provides a measure of time, electrical power, or
information, serving a purpose is its fundamental justification. When a
system ceases to serve a purpose, it should be replaced.
 

THE ACCOUNTING INFORMATION SYSTEMS

AIS subsystems process financial transactions and nonfinancial
transactions that directly affect the processing of financial transactions. For
example, changes to customers’ names and addresses are processed by
the AIS to keep the customer file current. Although not technically financial
transactions, these changes provide vital information for processing future
sales to the customer.
The AIS is composed of three major subsystems: (1) the transaction
processing system (TPS), which supports daily business operations with
numerous reports, documents, and messages for users throughout the
organization; (2) the general ledger/financial reporting system (GL/FRS),
which produces the traditional financial statements, such as the income
statement, balance sheet, statement of cash flows, tax returns, and other
reports required by law; and (3) the management reporting system (MRS),
which provides internal management with special-purpose financial reports
and information needed for decision making such as budgets, variance
reports, and responsibility reports. 
 

THE MANAGEMENT INFORMATION SYSTEMS

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. The management information system (MIS) processes
nonfinancial transactions that are not normally processed by traditional AIS.
  

A FRAMEWORK FOR INFORMATION SYSTEMS

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 cost of products or

services. For example, an AIS can monitor machinery so operators are
notified immediately when performance falls outside acceptable quality
limits. This helps maintain product quality, reduces waste, and lowers
costs.
2. Improving efficiency. For example, timely information makes a just-
in-time manufacturing approach possible, as it requires constant,
accurate, up-to-date information, about raw materials inventories and
their locations.
3. Sharing knowledge. Sharing knowledge and expertise can improve
operations and provide a competitive advantage. For example, CPA
firms use their information systems to share best practices and to
support communication between offices. Employees can search the
corporate database, identify experts to provide assistance for a
particular client; thus, a CPA firm’s international expertise can be made
available to any local client.
4. Improving the efficiency and effectiveness of its supply
chain. For example, allowing customers to directly access inventory and
sales order entry systems can reduce sales in marketing costs, thereby
increasing customer retention rates.
5. Improving the internal control structure. An AIS with the proper
internal control structure can help protect systems from fraud, errors,
system failures, and disasters.
6. Improving decision-making.
 

THE ROLE OF THE AIS IN THE VALUE CHAIN

To provide value to their customers, most organizations perform a number
of different activities. Figure above shows that those activities can be
conceptualized as forming a value chain consisting of five primary
activities that directly provide value to customers:

1. Inbound logistics consists of receiving, storing, and distributing the

materials an organization uses to create the services and products it
sells. For example, an automobile manufacturer receives, handles, and
stores steel, glass, and rubber.
2. Operations activities transform inputs into final products or services.
For example, assembly line activities convert raw materials into a
finished car.
3. Outbound logistics activities distribute finished products or services
to customers. An example is shipping automobiles to car dealers.
4. Marketing and sales activities help customers buy the organization’s
products or services. Advertising is an example of a marketing and sales
activity.
5. Service activities provide post-sale support to customers. Examples
include repair and maintenance services.

Support activities allow the five primary activities to be performed efficiently

and effectively. They are grouped into four categories:

1. Firm infrastructure is the accounting, finance, legal, and general

administration activities that allow an organization to function. The AIS is
part of the firm infrastructure.
2. Human resources activities include recruiting, hiring, training, and
compensating employees.
3. Technology activities improve a product or service. Example
includes research and development, investments in IT, and product
design.
4. Purchasing activities procure raw materials, supplies, machineries,
and the buildings used to carry out the primary activities.
Data Versus Information

GENERAL MODEL FOR ACCOUNTING INFORMATION SYSTEMS

Data are facts, which may or may not be processed (edited, summarized,
or refined) and have no direct effect on the user. By
contrast, information causes the user to take an action that he or she
otherwise could not, or would not, have taken. Information is often defined
simply as processed data. This is an inadequate definition. Information is
determined by the effect it has on the user, not by its physical form. For
example, a purchasing agent receives a daily report listing raw material
inventory items that are at low levels. This report causes the agent to place
orders for more inventory. The facts in this report have information content
for the purchasing agent. However, this same report in the hands of the
personnel manager is a mere collection of facts, or data, causing no action
and having no information content.
We can see from this example that one person’s information is another
person’s data. Thus, information is not just a set of processed facts
arranged in a formal report. Information allows users to take action to
resolve conflicts, reduce uncertainty, and make decisions. We should note
that action does not necessarily mean a physical act. For instance, a
purchasing agent who receives a report showing that inventory levels are
adequate will respond by ordering nothing. The agent’s action to do nothing
is a conscious decision, triggered by information and different from doing
nothing because of being uninformed.
The distinction between data and information has pervasive implications for
the study of information systems. If output from the information system fails
to cause users to act, the system serves no purpose and has failed in its
primary objective.
DATA SOURCES
Data sources are financial transactions that enter the information system
from both internal and external sources. External financial transactions are
the most common source of data for most organizations. These are
economic exchanges with other business entities and individuals outside
the firm. Examples include the sale of goods and services, the purchase of
inventory, the receipt of cash, and the disbursement of cash (including
payroll). Internal financial transactions involve the exchange or movement
of resources within the organization. Examples include the movement of
raw materials into work-in-process (WIP), the application of labor and
overhead to WIP, the transfer of WIP into finished goods inventory, and the
depreciation of plant and equipment.
 

DATA COLLECTION
Data collection is the first 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. In many respects, this is the most
important stage in the system. Should transaction errors pass through data
collection undetected, the system may process the errors and generate
erroneous and unreliable output. This, in turn, could lead to incorrect
actions and poor decisions by the users.
Two rules govern the design of data collection procedures: relevance and
efficiency. The information system should capture only relevant data. A
fundamental task of the system designer is to determine what is and what
is not relevant. He or she does so by analyzing the user’s needs. Only data
that ultimately contribute to information (as defined previously) are relevant.
The data collection stage should be designed to filter irrelevant facts from
the system.
Efficient data collection procedures are designed to collect data only once.
These data can then be made available to multiple users. Capturing the
same data more than once leads to data redundancy and inconsistency.
Information systems have limited collection, processing, and data storage
capacity. Data redundancy overloads facilities and reduces the overall
efficiency of the system. Inconsistency among redundant data elements
can result in inappropriate actions and bad decisions.
 

DATA PROCESSING
Once collected, data usually require processing to produce information.
Tasks in the data processing stage range from simple to complex.
Examples include mathematical algorithms (such as linear programming
models) used for production scheduling applications, statistical techniques
for sales forecasting, and posting and summarizing procedures used for
accounting applications.
 

DATABASE MANAGEMENT
The organization’s database is its physical repository for financial and
nonfinancial data. We use the term database in the generic sense. It can
be a filing cabinet or a computer disk. Regardless of the database’s
physical form, we can represent its contents in a logical hierarchy.
Data Attribute. The data attribute is the most elemental piece of potentially
useful data in the database. An attribute is a logical and relevant
characteristic of an entity about which the firm captures data. The attributes
shown in Figure above are logical because they all relate sensibly to a
common entity— accounts receivable (AR). Each attribute is also relevant
because it contributes to the information content of the entire set. As proof
of this, the absence of any single relevant attribute diminishes or destroys
the information content of the set. The addition of irrelevant or illogical data
would not enhance the information content of the set.
Record. A record is a complete set of attributes for a single occurrence
within an entity class. For example, a particular customer’s name, address,
and account balance is one occurrence (or record) within the AR class. To
find a particular record within the database, we must be able to identify it
uniquely. Therefore, every record in the database must be unique in at
least one attribute. This unique identifier attribute is the primary key.
Because no natural attribute (such as customer name) can guarantee
uniqueness, we typically assign artificial keys to records. The key for the
AR records in Figure above is the customer account number. This is the
only unique identifier in this record class. The other attributes possess
values that may also exist in other records. For instance, multiple
customers may have the same name, sales amounts, credit limits, and
balances. Using any one of these as a key to find a record in a large
database would be a difficult task. These nonunique attributes are,
however, often used as secondary keys for categorizing data. For example,
the account balance attribute can be used to prepare a list of customers
with balances greater than $10,000.
Files. A file is a complete set of records of an identical class. For example,
all the AR records of the organization constitute the AR file. Similarly, files
are constructed for other classes of records such as inventory, accounts
payable, and payroll. The organization’s database is the entire collection of
such files.
DATABASE MANAGEMENT TASKS. Database management involves
three fundamental tasks: storage, retrieval, and deletion. 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. After processing is complete, the storage
task restores the updated record to its place in the database. Deletion is
the task of permanently removing obsolete or redundant records from the
database.
https://youtu.be/VOeotRZaQt4

INFORMATION GENERATION
Information generation is the process of compiling, arranging, formatting,
and presenting information to users. Information can be an operational
document such as a sales order, a structured report, or a message on a
computer screen. Regardless of physical form, useful information has the
following characteristics: relevance, timeliness, accuracy, completeness,
and summarization.

1. RELEVANCE. The contents of a report or document must serve a

purpose. This could be to support a manager’s decision or a clerk’s task.
We have established that only data relevant to a user’s action have
information content. Therefore, the information system should present
only relevant data in its reports. Reports containing irrelevancies waste
resources and may be counterproductive to the user. Irrelevancies
detract attention from the true message of the report and may result in
incorrect decisions or actions.
2. TIMELINESS. The age of information is a critical factor in determining
its usefulness. Information must be no older than the time of the action it
supports. For example, if a manager makes decisions daily to purchase
inventory from a supplier based on an inventory status report, then the
information in the report should be no more than a day old.
3. ACCURACY. Information must be free from material errors.
However, materiality is a difficult concept to quantify. It has no absolute
value; it is a problem-specific concept. This means that, in some cases,
in- formation must be perfectly accurate. In other instances, the level of
accuracy may be lower. Material error exists when the amount of
inaccuracy in information causes the user to make poor decisions or to
fail to make necessary decisions. We sometimes must sacrifice absolute
accuracy to obtain timely information. Often, perfect information is not
available within the user’s decision time frame. Therefore, in providing
information, system designers seek a balance between information that
is as accurate as possible, yet timely enough to be useful.
4. COMPLETENESS. No piece of information essential to a decision or
task should be missing. For example, a report should provide all
 necessary calculations and present its message clearly and
unambiguously.
5. SUMMARIZATION. Information should be aggregated in accordance
with the user’s needs. Lower- level managers tend to need information
that is highly detailed. As information flows upward through the
organization to top management, it becomes more summarized.
 
Overview of Transaction Cycles and Business
Processes
 

The transaction cycle process most of the firm’s economic activities. These
cycles exist in all types of businesses – both profit-seeking and not-for-
profit types. For instance, every business (1) incurs expenditures for
resources, (2) provides added value through its products or services, (3)
receives revenue from outside sources.
 

Transaction Cycles and Business Processes

 

Business process is a set of related, coordinated, in structured activities

and tasks that are performed by a person, a computer, a machine, and that
help accomplish a specific organizational goal.
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 good to customers, buying inventory
from suppliers, and paying employees. The process that begins with
capturing transaction data and ends with informational output such as the
financial statements, is called transaction processing.
Many business activities are pairs of events involved in a give-get
exchange. Most organizations engage in a small number of give-get
exchanges, but each type of exchange happens many times. These
exchanges can be grouped into five major business processes or
transaction cycles:
 

 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.