Chapter 1

Accounting
Information
Systems and Firm
Value

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 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.
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 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.

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 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.

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 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

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 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 has an extensive information
system.

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 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

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 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

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 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 particularly toy might be

considered data. However, after subtracting the cost of goods
sold from the sales price to compute the net profit would be
considered information if it helps a retailer decide whether to
carry that particular toy in its inventory.

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 LO# 2

Information Overload

• Computers can process and organize a

large amount of data.

• Too much information causes information

overload.
– Decision making is hindered.

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 LO# 1

Information Value Chain

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 LO# 2

Discretionary versus Mandatory Information

• Discretionary information is information that

is not required by law.
– Using an ABC system to determine the overheads
costs associated with each pound of chicken at Tyson
Foods.
– Managers must decide if the benefits of discretionary
information outweigh the costs of obtaining it.

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 LO# 2

Discretionary versus Mandatory Information

• 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 reports
for public companies.
– Since it is required manager usually choose to
minimize the costs of producing this information.

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 LO# 3

Role of Accountants in AISs

• Designer
– System Analyst
• Implementer
– Database Administrator
• User
– Recording Journal Entries
• Evaluator
– Auditor
• Manager
– Controller or CFO

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 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

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 LO# 4

Value Chain

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 LO# 4
Where do AIS add value to a Business? In the Primary
Activities?

• 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.).

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 LO# 5
Where do AIS add value to a Business? In the Support
Activities?

• 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.

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 LO# 6

AIS and Internal Business Processes

• AIS usually serve as the 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 is thus available to everyone within the

company in a useful and timely way.

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 LO# 6

Use of ERP 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.
– Used to check customers 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.

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 LO# 7

Figure 1.6 AIS and External Business Processes

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 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 which

can be made more efficient using the AIS.

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 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 to be
ordered.
– Determine timing to transferring inventory.

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 LO# 7

Customer Relationship Management

• This software is used to manage

interactions with customers.
– Track customer purchases.
– Ensure customer satisfaction.
– Product placement

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 LO# 7

Customer Relationship Management

• As an example, Amazon.com keeps a record of their

past purchases and product searches and then uses
that information to recommend other similar
products for the customer to consider.
• Loan officers at a bank learns more about 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.
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 LO# 7

The Effect of AIS on the Income Statement

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 LO# 8

AIS, Firm Profitability, and Stock Prices

• As show on the previous slide, AIS can be

used to improve company profits.

• In addition, studies show that investments

in IT can positively affect a company’s
stock price.

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 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.

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