Chapter 1 Accounting Information Systems and Firm Value Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1 Learning Objectives • LO#1 Define an accounting information system and explain characteristics of useful information. • LO#2 Distinguish among data, information and an information system. • LO#3 Distinguish the roles of accountants in providing information and explain certifications related to accounting information systems. • LO#4 Describe how business processes affect the firm’s value chain. • LO#5 Explain how AIS affects firm value. • LO#6 Describe how AIS assists the firm’s internal business processes. • LO#7 Assess how AIS facilitates the firm’s external business processes. • LO#8 Assess the impact of AIS on firm profitability and stock prices. Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-2 LO# 1 Accountants as Business Analysts • Increasingly, the role of an accountant is to help address business opportunities. • To address such a business opportunity, the accountants need to decide what information is needed, then build an information system to gather the necessary information and finally analyze that information to offer helpful advice to management. Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-3 LO# 1 Accounting Information Systems • An accounting information system (AIS) is defined as a system that records, processes and reports on transactions to provide financial and non-financial information to make decisions and have appropriate levels of internal controls (security measures to protect sensitive data) for those transactions. • An AIS is important because it provides information that companies are required to have and also information that can be used to make important decisions. Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-4 LO# 1 Why Study AIS? • It’s fundamental to accounting. – Accounting is an information providing activity, so accountants need to understand: • How the system that provides that information is design, implemented, and used • How financial information is reported • How information is used to make decisions Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-5 LO# 1 What Can an AIS Do? • Imagine Starbucks’ system, which can track a variety of things. – The number of hours worked by employees all over the world. – The amount of sales taxes to be paid by one store. • Wal-Mart also has an extensive information system. – Tracks purchases. – Reports purchases to its key suppliers to help them establish demand for their products to assist them in planning. Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-6 LO# 1 A Simple Information System Possible Input: Sales at Starbucks Possible Storage: Database of all Sales at Starbucks Possible Processing: Queries of What Sells Best at Night Possible Output: Reports of What Sells Best at Night Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-7 LO# 1 Attributes of Useful Information • To be useful information must have these attributes: – Relevant – information that is capable of making a difference in a decision • Predictive Value • Feedback Value • Timely – Reliable – information that is free from bias and error • Verifiable • Representational Faithfulness • Neutrality Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-8 LO# 2 Data vs. Information • Data are simply raw facts that describe an event and have little meaning on their own. • Information is defined as being data organized in a meaningful way to be useful to the user. Data serves as an input. • For example, the sales prices of a particular toy might be considered data. However, after subtracting the cost of goods sold from the sales price to compute the margin would only be considered information if it helps a retailer decide whether to carry that particular toy in its inventory. Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-9 LO# 2 Information Overload • Computers can process and organize a large amount of data. • Too much information causes information overload. – Decision making is hindered. Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-10 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. LO# 1 Information Value Chain Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-11 Discretionary versus Mandatory Information LO# 2 • Discretionary information is information that is not required by law. – Using an Activity-Based Costing system to determine the overhead costs associated with each pound of chicken at Tyson Foods. – Managers must decide if the benefits of discretionary information outweigh the costs of obtaining that information. Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-12 Discretionary versus Mandatory Information LO# 2 • Mandatory information is information that is required by law. – Examples include: Form 10-K (Annual Reports that include Financial Statements) and Tax Returns • See SEC EDGAR for examples of required annual and other reports required by public companies. – Since it is required, manager may choose to minimize the costs of producing this information. Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-13 Role of Accountants in AIS LO# 3 • Designer – System Analyst • Implementer – Database Administrator • User – Record Journal Entries • Evaluator – Auditor • Manager – Controller or CFO Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-14 LO# 3 Certifications in AIS • Certified Information Systems Auditor (CISA) – Perform IT Audits • Certified Information Technology Professional (CITP) – Work to effectively and efficiently manage information while ensuring the data’s reliability, security, accessibility and relevance. • Certified Internal Auditor – Globally accepted certification for internal auditors Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-15 LO# 4 Value Chain Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-16 Where do AIS add value to a Business? In the Primary Activities? • • • • • LO# 4 Inbound logistics are the activities associated with receiving and storing raw materials and other partially completed materials, and distributing those materials to manufacturing when and where they are needed. Operations are the activities that transform inputs into finished goods and services (e.g. turning wood into furniture for a furniture manufacturer; building a house for a home builder). Outbound logistics are the activities that warehouse and distribute the finished goods to the customers. Marketing and sales activities identify the needs and wants of their customers to help attract them to the firm’s products and buy them. Service activities provide the support of customers after the products and services are sold to them (e.g. warranty repairs, parts, instruction manuals, etc.). Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-17 Where do AIS add value to a Business? In the Support Activities? LO# 5 • Firm infrastructure activities are all of the activities needed to support the firm, including the CEO, finance, accounting, and legal. • Human resource management activities include recruiting, hiring, training and compensating employees. • Technology activities include all of the technologies to support value-creating activities. These technologies also include research and development to develop new products or research and development to determine ways to produce products at a cheaper price. • Procurement activities involve purchasing inputs such as raw materials, supplies, and equipment. Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-18 LO# 6 AIS and Internal Business Processes • AIS usually serves as the foundation for the enterprise (or ERP) system. • The enterprise system is a centralized database that collects data from throughout the company including orders, customers, sales, inventory, and employees. • Information across the whole business is thus available to everyone within the company in a useful and timely way. Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-19 LO# 6 Use of an Enterprise System • The enterprise system can take an order from a customer, fill the order, ship it, and then create an invoice to bill the customer. Examples of its use might include – Used to check customer’s credit. – Check the inventory levels in the warehouse. – Determine when it can be shipped. • Everyone throughout the entire process can view and update the information. Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-20 LO# 7 Figure 1.6 AIS and External Business Processes Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-21 LO# 7 The Supply Chain • The supply chain refers to the flow of materials, information, payments, and services from suppliers all the way through the customer. • There are many processes involved in the supply chain process which can be made more efficient using the AIS. Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-22 LO# 7 Supply Chain Management • Supply Chain Management software can be used to optimize processes within the supply chain. – Determine levels of inventory in stock and the amount to be ordered. – Determine timing to transferring inventory. Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-23 LO# 7 Customer Relationship Management • This software is used to manage interactions with customers and may include the following: – Track customer purchases – Ensure customer satisfaction – Product placement Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-24 LO# 7 Customer Relationship Management • As an example, Amazon.com keeps a record of a customer’s past purchases and product searches and then uses that information to recommend other similar products for the customer to consider. • By banks tracking the financial products currently being used by its bank’s customers through its AIS, they will be able to help identify additional bank products (upselling items such as insurance products, CD’s, mutual funds, etc.) to sell to their clients. Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-25 LO# 7 The Effect of AIS on the Income Statement Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-26 LO# 8 AIS, Firm Profitability, and Stock Prices • As shown on the previous slide, AIS can be used to improve company profits. • In addition, studies show that investments in IT can positively impact a company’s stock price. Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-27 LO# 8 IT Strategic Role • What role does IT have for the organization? – Automate, i.e., replacing human labor in automating business processes – digitize your medical records. – Informate-up, i.e., provide information about business activities to senior management • Summarize performance for senior management (digital dashboards, etc.) – Informate-down, i.e., provide information about business activities to employees across the firm • Give information to all levels of the organization to empower decision making. – Transform, i.e., fundamentally redefine business processes and relationships – IT allows Ebay and Amazon to develop a business model based on IT Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-28 LO# 8 Which IT Investments Most Affect Stock Prices? Stock Market Increase Around AIS Investment Announcements AIS Investment Strategic Role Automate Informate* Transform 0.05% 0.40% 1.51% Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-29 LO# 8 Summary • An accounting information system (AIS) is defined as being an information system that records, processes and reports on transactions to provide financial information for decision making and control. • Firms invest in accounting information systems to create value. The value chain illustrates how during each primary activity, the product should gain some value. An AIS serves an important role in enabling value in each primary and supporting activity. • An AIS creates value by managing internal and external business processes such as enterprise systems, supply chain management and customer relationship management software. • An AIS system generally helps make business processes more efficient and effective. A well-designed and well-functioning AIS can be expected to create value by increasing revenues and reducing expenses. Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-30 LO# 1 Questions A recent article suggests: • A monumental change is emerging in accounting: the movement away from the decades-old method of periodic financial statement reporting and its lengthy closing process, and toward issuing financial statements on a real-time, updated basis . . . real-time financial reporting provides financial information on a daily basis. Current technology allows for financial events to be identified, measured, recorded, and reported electronically, with no paper documentation. (Source: Real-Time Accounting, The CPA Journal, April 2005 Issue). • Would a shift toward real-time financial statements make the financial information more useful or less useful? More or less relevant? More or less reliable? Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-31 LO# 1 Questions • In 2002, John Deere’s $4 billion commercial and consumer equipment division implemented supply chain management software and reduced its inventory by $500 million. As sales continued to grow, they have been able to keep their inventory growth flat. – How did the supply chain management software implementation allow them to reduce inventory on hand? How did this allow them to save money? Which income statement accounts (e.g., revenue, cost of goods sold, SG&A expenses, interest expense, etc.) would this affect? • Dell Computer used Customer Relationship Management Software called IdeaStorm to collect customer feedback. This customer feedback led the company to build select consumer notebooks and desktops pre-installed with the Linux platform. – Dell also decided to continue offering Windows 7 as a pre-installed operating system option in response to customer requests. Where does this fit in the value chain? How will this help Dell create value? By listening to the customer and meeting their needs, will this increase revenues or decreases expenses? Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-32
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