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This chapter has three key takeaways and introduces students to an Accounting Information System (AIS) and the fundamental concepts that accountants need to understand that business transactions in the form of business processes create data that is used for decision making.
What is the difference between data and information?
Data are just facts that are collected, recorded, and stored in a system. For example, data could be a number, a date, a name of a business. Yet the facts are not meaningful until you place the facts within a context. Then it becomes information.
For example, if the following facts are only shown below:
2/22/14
123
ABC Company
99
3
20
$60.00
The above has no meaning and you could not determine if ABC company is a customer or a vendor that you are doing business with; in addition 123 does not tell you if it’s a product number, an amount, or a number on a form. However, if data is organized and placed in the context of a sales invoice, we now have meaning and the facts are information:
Invoice Date : 2/22/14 Invoice #: 123
Customer: ABC Company
Item # Qty Price
99 3 $20
Total Invoice Amount $60
Compared to the previous slide, the data is organized within the context of a sales invoice and now is meaningful and considered information. With meaningful information, you can make decisions.
Is there such a thing as too much information? Having IT helps us use information more efficiently and effectively. For example, would students be able to do their homework efficiently and effectively without a computer or mobile device?
This is also a good way to get students to think about a “data analytic” mindset. Understanding the concepts in AIS courses will help students understand how to solve accounting problems by thinking about the information they need and where that information comes from in an AIS (see Chapter 4).
Can you think of an example when an organization would go to great costs to gather information and not get their value?
Sometimes, regulations require companies to gather information to be in compliance of new laws (this would be the benefit: compliance), yet the cost of this information may be higher. For example, organizations may have felt in the beginning when Sarbanes–Oxley Act 2002 required publicly held organizations to access the effectiveness of their internal controls (this will be discussed more in Chapter 7) that the costs were much higher than the benefit. To comply with this new act, organizations experienced great costs in the amount of time and resources used to gather the necessary information in order to access the effectiveness of their internal controls. However, with the initial investment, the cost of oversight becomes more reasonable and investors expect companies to have good internal controls.
Using examples in Problem 1.4 is a good exercise to illustrate the characteristics of useful information.
Another example to use and carry throughout the seven characteristics is to use an example of customer credit decisions:
Relevant information is needed to make a customer credit decision; the relevant information would include customer balances, payment history, credit history from other vendors, and so on.
The information is free from bias in making a credit decision; for example, when the information comes from the credit manager and not the sales manager who may have an incentive to extend customer credit to get a sale and the sales commission.
Not having customer payment history is incomplete information to make a decision on extending credit to a customer. If we only know how much the customer purchased in the past, but have no information on how timely the customer makes payments, this is not providing a complete picture to make a credit decision.
If the credit manager makes a decision based upon customer account information activity (sales and payments) from last quarter, it is not timely. For example, a customer may experience recent cash flow problems which would show that their ability to pay on time is getting later and later. If this is a recent trend, using an old report would not be useful in making a good credit decision.
If the customer account information is organized in invoice date order only and not within a customer subgroup, it is not in an understandable format to use that information to make a credit decision on a specific customer because you would have to find each invoice from the date order list.
Information is verifiable if two independent people can produce the same information on how much a customer owes today.
If the accounting system goes down before the credit manager can access the customer information, it will prohibit the credit manager from making a decision.
A good example to walk through with students would be a local restaurant near campus (e.g., a pizza restaurant).
Ask students to put themselves in the shoes of the restaurant owner; what decisions would the owner need to make to run the business successfully?
The students may have many answers that could include decisions about what products (pizzas to sell), what resources are needed to make the pizza (labor, equipment, and ingredients), whom to buy the ingredients from. How many people are needed to work at the restaurant, and what skills are required from employees (pizza maker, waiter, delivery person), and so on.
In essence, all of these decisions can be mapped to a series of business processes and from these decisions identify information that is needed to measure performance.
For example, if the key decision is what types of pizzas should I sell, the processes that may impact this decision would be sales and market information. In addition, vendor information on ingredient costs may play a role here as well (especially if it’s an exotic ingredient, expensive ingredient, or hard to source, e.g., cheese imported from Italy).
At the end of this class exercise, many of these can be mapped to Table 1-2 found on page 6.
Internal stakeholders are employees in the organization (e.g., employees and managers).
External stakeholders are trading partners, such as customers and vendors, as well as other external organizations, such as Banks and Government.
Transaction processing is covered in Chapter 2.
Examining Figure 1-2 provides a great amount of detail and insights as to the flow of information going from the internal and external stakeholders for business processes. Note that this information can be easily mapped to Figure 1-3 which shows the transactional activity “give–get” exchange.
Long Description:
The interaction of the system with various parties appears in the diagram as follows.
Parties
From S and S to the parties
From Parties to S and S
Vendors
Purchase orders
Vendor payments
Goods and services
Vendor invoices
Investors
Dividends
Financial statements
Invest funds
Creditors
Loan payments
Financial statements
Loans
Banks
Deposits
Withdrawals
Bank statements
Customers
Goods and services
Customer invoices
Customer orders
Customer payments
Employees
Wages, salaries and commissions
Labor and services
Management
Managerial reports
Financial statements
Budgets
Accounting entries
Government agencies
Taxes and Reports
Regulations and tax forms
It seems odd that the financing cycle is give cash—get cash; what does this really mean?
It basically means that a business organization can get cash in the form of a bank loan but will need to give that cash back over time in the form of monthly payments to the bank.
Or it may mean that the company can get cash from investors and give equity (which eventually turns into cash in the form of dividend payments).
There are six components to an AIS:
People use the system
Procedures and instructions used to collect, process, and store the data
Data
Software used to process the data
Information technology (i.e., computers)
Internal controls and security
These six components help the AIS fulfill three important business functions:
Collect and store data about organizational activities (through business processes).
Transform data into information so management can make decisions (plan, execute, control and evaluate activities, resources, and personnel).
Provide adequate controls to safeguard the organization’s assets and data.
A good example here is thinking back to the pizza restaurant example in the earlier slides. The owner uses an AIS to determine which pizzas are the most popular. The sales information in the AIS is used to help answer this question and provides the owner with information to know how much of certain ingredients should be on hand to make those popular pizza pies. If ingredients were to run out, then the quality of this decision would be considered poor as there would be many dissatisfied customers. In addition, this information helps the owner not to buy too much of an ingredient to have on hand to where there may be waste if the ingredients go stale.
Taking this example further to each bullet point made above can help students begin to think more about how transactional data provides information for better decision making in an organization.
Blockchains are explained in more detail in Chapter 11.
For example, if the strategy is increase profitability, an organization can increase sales revenue and decrease manufacturing costs. Each of these actions will have different informational needs to measure progress. To increase sales revenue, the company can increase prices, increase volume, or change the product mix. To decrease manufacturing costs, the company can reduce the cost of the inputs into the manufacturing process or improve the process.
Technological developments and advances have an effect on corporate strategy. Data analytics is becoming more widespread in organizations as they continue to take advantage of the technological advancements. An example is the use of predictive analysis.
Please note that students may see primary and then assume secondary is next. This is a common mistake and using the visual from Figure 1-5 in the book also as an example can help mitigate this common misperception.
A basic example involves buying a textbook. Ask the students how they generally buy a textbook (usually they buy it online or go to the bookstore); either way you can walk through the primary and support activities that are needed for them to get their textbook in time for the first day of class!
Long Description:
The value chain for “Primary activities” appears as follows:
Step 1. Inbound Logistics
Step 2. Operations
Step 3. Outbound Logistics
Step 4. Marketing and Sales
Step 5. Service
The “Secondary activities” that influence the primary activities are as follows:
Firm Infrastructure
Human Resources
Technology
Purchasing