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Chapter 1
- 1. www.themegallery.com Financial Information Systems AN-NAJAH NATIONAL UNIVERSITY Faculty of Economics and Social Sciences Department of Finance Dr. Muath Asmar
- 2. Copyright © 2015 Pearson Education, Inc. Financial Information Systems: An Overview Chapter 1 2-1
- 3. Copyright © 2015 Pearson Education, Inc. Learning Objectives • Distinguish between data and information: ▫ Understand the characteristics of useful information. ▫ Explain how to determine the value of information. • Explain fundamental decisions an organization makes: ▫ Understand basic information needed to make them. • Identify the transactional information that passes between internal and external parties and an AIS. • Describe the major business processes present in most companies. • Explain what an accounting information system (AIS) is and describe its basic functions. • Discuss how an AIS can add value to an organization. • Explain how an AIS and corporate strategy affect each other. • Explain the role an AIS plays in a company’s value chain. 1-3
- 4. Copyright © 2015 Pearson Education, Inc. Learning Objectives • Describe the four parts of the data processing cycle and the major activities in each. • Describe documents and procedures used to collect and process transaction data. • Describe the ways information is stored in computer-based information systems. • Discuss the types of information that an AIS can provide. • Discuss how organizations use enterprise resource planning (ERP) systems to process transactions and provide information. 2-4
- 5. Copyright © 2015 Pearson Education, Inc. Data vs. Information • Data are facts stored in the system ▫ A fact could be a number, date, name, and so on. For example: 2/22/14 ABC Company, 123, 99, 3, 20, 60 1-5
- 6. Copyright © 2015 Pearson Education, Inc. Data vs. Information The previous slide just showed facts, if we put those facts within a context of a sales invoice, for example, it is meaningful and considered information. Invoice Date : 2/22/14 Invoice #: 123 Customer: ABC company Item # Qty Price 99 3 $20 Total Invoice Amount $60 1-6
- 7. Copyright © 2015 Pearson Education, Inc. Value of Information • Information is valuable when the benefits exceed the costs of gathering, maintaining, and storing the data. Benefit (i.e., improved decision making) > Cost (i.e., time and resources used to get the information) 1-7
- 8. Copyright © 2015 Pearson Education, Inc. What Makes Information Useful? There are seven general characteristics that make information useful: 1. Relevant: information needed to make a decision (e.g., the decision to extend customer credit would need relevant information on customer balance from an A/R aging report) 2. Reliable: information free from bias 3. Complete: does not omit important aspects of events or activities 4. Timely: information needs to be provided in time to make the decision 1-8
- 9. Copyright © 2015 Pearson Education, Inc. What Makes Information Useful? 5. Understandable: information must be presented in a meaningful manner 6. Verifiable: two independent people can produce the same conclusion 7. Accessible: available when needed 1-9
- 10. Copyright © 2015 Pearson Education, Inc. Organizational Decisions and Information Needed • Business organizations use business processes to get things done. These processes are a set of structured activities that are performed by people, machines, or both to achieve a specific goal. • Key decisions and information needed often come from these business processes. 1-10
- 11. Copyright © 2015 Pearson Education, Inc. Transactional Information Between Internal and External Parties in an AIS • Business organizations conduct business transactions between internal and external stakeholders. • 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. • The AIS captures the flow of information between these users for the various business transactions. 1-11
- 12. Copyright © 2015 Pearson Education, Inc. Interactions Between AIS and Internal and External Parties 1-12
- 13. Copyright © 2015 Pearson Education, Inc. Basic Business Processes • Transactions between the business organization and external parties fundamentally involve a “give–get” exchange. These basic business processes are: ▫ Revenue: give goods / give service—get cash ▫ Expenditure: get goods / get service—give cash ▫ Production: give labor and give raw materials—get finished goods ▫ Payroll: give cash—get labor ▫ Financing: give cash—get cash 1-13
- 14. Copyright © 2015 Pearson Education, Inc. What Is an Accounting Information System? • It can be manual or computerized • Consists of ▫ People who use the system ▫ Processes ▫ Technology (data, software, and information technology) ▫ Controls to safeguard information • Thus, transactional data is collected and stored into meaningful information from which business decisions are made and provides adequate controls to protect and secure the organizational data assets. 1-14
- 15. Copyright © 2015 Pearson Education, Inc. How Does an AIS Add Value? • A well thought out AIS can add value through effective and efficient decisions. ▫ Having effective decisions means quality decisions ▫ Having efficient decisions means reducing costs of decision making 1-15
- 16. Copyright © 2015 Pearson Education, Inc. AIS and Strategy • An AIS is influenced by an organization’s strategy. • A strategy is the overall goal the organization hopes to achieve (e.g., increase profitability). • Once an overall goal is determined, an organization can determine actions needed to reach their goal and identify the informational requirements necessary to measure how well they are doing in obtaining that goal. 1-16
- 17. Copyright © 2015 Pearson Education, Inc. AIS in the Value Chain • The value chain shows how the different activities within an organization provide value to the customer. • These activities are primary and support activities. ▫ Primary activities provide direct value to the customer. ▫ Support activities enable primary activities to be efficient and effective. 1-17
- 18. Copyright © 2015 Pearson Education, Inc. 1-18
- 19. Copyright © 2015 Pearson Education, Inc. Data Processing Cycle 2-19
- 20. Copyright © 2015 Pearson Education, Inc. Data Input Steps in Processing Input are: • Capture transaction data triggered by a business activity (event). • Make sure captured data are accurate and complete. • Ensure company policies are followed (e.g., approval of transaction). 2-20
- 21. Copyright © 2015 Pearson Education, Inc. Data Capture • Information collected for an activity includes: ▫ Activity of interest (e.g., sale) ▫ Resources affected (e.g., inventory and cash) ▫ People who participated (e.g., customer and employee) • Information comes from source documents. 2-21
- 22. Copyright © 2015 Pearson Education, Inc. Source Documents • Captures data at the source when the transaction takes place ▫ Paper source documents ▫ Turnaround documents ▫ Source data automation (captured data from machines, e.g., Point of Sale scanners at grocery store) 2-22
- 23. Copyright © 2015 Pearson Education, Inc. Data Storage • Important to understand how data is organized ▫ Chart of accounts  Coding schemas that are well thought out to anticipate management needs are most efficient and effective. ▫ Transaction journals (e.g., Sales) ▫ Subsidiary ledgers (e.g., Accounts receivable) ▫ General ledger Note: With the above, one can trace the path of the transaction (audit trail). 2-23
- 24. Copyright © 2015 Pearson Education, Inc. Audit trail for Invoice #156 for $1,876.50 sold to KDR Builders 2-24
- 25. Copyright © 2015 Pearson Education, Inc. Computer-Based Storage Data is stored in master files or transaction files. 2-25
- 26. Copyright © 2015 Pearson Education, Inc. Data Processing Four types of processing (CRUD): • Creating new records (e.g., adding a customer) • Reading existing data • Updating previous record or data • Deleting data Data processing can be batch processed (e.g., post records at the end of the business day) or in real- time (process as it occurs). 2-26
- 27. Copyright © 2015 Pearson Education, Inc. Information Output The data stored in the database files can be viewed • Online (soft copy) • Printed out (hard copy) ▫ Document (e.g., sales invoice) ▫ Report (e.g., monthly sales report) ▫ Query (question for specific information in a database, e.g., What division had the most sales for the month?) 2-27
- 28. Copyright © 2015 Pearson Education, Inc. 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 analytics • Value chain • Primary activities • Support activities • Supply chain 1-28
- 29. Copyright © 2015 Pearson Education, Inc. Key Terms • Data processing cycle • Source documents • Turnaround documents • Source data automation • General ledger • Control account • Coding • Sequence code • Block code • Group code • Mnemonic code • Chart of accounts • General ledger • Specialized journal • Audit trail • Entity • Attributes • Field • Record • Data value • File • Master file • Transaction file • Database • Batch processing • Online, real-time processing • Document • Report • Query • Enterprise resource planning (ERP) system 2-29
Editor's Notes
- This chapter is a good overview of the details that will be forthcoming in the text. This is also a good opportunity to put the class in perspective and how it relates to the other financial accounting courses that the students are taking. For example, students taking financial accounting classes understand the transaction focusing only on the proper debit and credit accounts and how the financial statements are prepared. This chapter provides a good pathway to connect those concepts from the journal entries to understanding the flow of the accounting information in a system from the detailed level (i.e., subledgers) to the general ledger and then to the financial statements or management reports necessary to make business decisions.
- What is the difference between data and information? Data are just facts that are 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 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 placed within the context of a sales invoice now has meaning and is considered information.
- 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.
- 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 thru 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 which could include decisions about what products (pizzas to sell), what resources are needed to make the pizza (labor, equipment, and ingredients), Who 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 its an exotic ingredient, expensive ingredient, or hard to source, e.g., cheese imported from Italy).
- Examining Figure 1-1 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 1-2 which shows the transactional activity “give-get” exchange.
- 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).
- 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 their may be waste if the ingredients go stale.
- 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, 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.
- 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 as well 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!
- The data processing cycle is a descriptive means of demonstrating the operations performed on data to make the information meaningful for decisions. Using the revenue cycle as an example, the Data Input would include the sales activity between the company and the customer involving the resources of inventory and cash (when money is ultimately collected from the customer). Walking through the basic activities found on Table 2-1 in the text for the revenue cycle involves the sales order as the initial source document for the data input. This information is stored and often updated once other activities occur for this transaction in the revenue cycle such as an update to the sales record when the order shipped from the warehouse. As seen in Table 2-1, the various activities that occur throughout the revenue cycle can impact the sales record and require updating of new information once that activity happens. The information that management can retrieve from the AIS can be in the form of reports such as Customer Sales Report.
- It is important to emphasize Table 2-1 in the text as this sets the stage for understanding the transaction cycles and the source documents associated with those activities in the transaction cycle. A solid foundational understanding of: Activities Source documents associated with the activity Information flows (i.e., debit and credit postings in the ledger) This helps the student understand how to establish controls for this information in the subsequent chapters. For example, the text in Chapter 2 does mention that prenumbering documents is a good control, a good question to ask students is why do they think prenumbering of the source documents would be important to have in an organization? This gets them thinking more intuitively based on their own experiences as a consumer and it may not make learning controls seem like memorizing a list and seem more like something that a student can think about as they understand the details and fit it to a bigger picture. Another good class discussion is thinking about all the data that is collected using sensors (e.g., RFID tags). How much of this data would be important for the organization to capture?
- The importance of data storage cannot be stressed enough. Many organizations change and evolve, but rarely do accountants have the luxury to really think ahead to organize how they want the information to be stored. Yet many AIS allow you to run special reports based on the coding schemas in the chart of accounts. For example, if your organization is expanding, is it important to have individual location financials as well as roll them up into regional financials? The coding schema of the chart of accounts, if not well thought out, can limit an organization and cause additional work; however, if the schema is well thought out, it can be more efficient to get the information to management.
- Figure 2-2 from the text shows how the different ledgers and journals are used to trace the path of one transaction found in Table 2-3 (invoice # 156 from KDR Builders). This example, should also reinforce the accounting knowledge for the student as they may understand the debit and credit of a sale transaction but not necessarily understand how the AIS would store that transactional data. A good question to ask the students is why are there transactional journals and subledgers and not just one big general ledger? As they may have learned in their introductory accounting class, this becomes a very large file and it is easier to parcel out the information that is specific to the transaction (e.g., sales or purchasing) and the associated subsidiary ledgers.
- Its important to understand how the data aggregates as this will be useful in subsequent chapters for designing query (questions) of the data or reports. Students should be thinking about what information is in master files and what would be in transaction files. It is helpful to refer to slide 2-5 such that master files usually include “resource” and “people” data and the transaction file is the activity or event data that is captured. Thus, there is the following hierarchy: Database includes Files (master/transaction) which include Records (entities) which include Attributes (individual fields)
- Queries are shown in Chapter 4 and a are a very useful tool used in accounting to get specific information out of a database.