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ACCOUNTING Course Details

INFORMATION SYSTEM Adj A/P Tan Wee Cheng Lect 1 – 6
(Acctg)
A/P James Ang Lect 7 – 12 (MIS)
Tan Wee Cheng
Tutorial classes to start week
biztwc@nus.edu.sg beginning
23 August 2010

Exam 20 November 2010

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Assessment
Textbook
(1) Romney, M. • Participation: 20%
Accounting Information Systems, • Group Project (Acctg): 25% *
11ed.,, Pearson Prentice Hall,,
2009.
• Individual project (MIS): 15%
(Pearson International Edition)
*
(2) Kroenke, D.M. Using MIS, Pearson • Final Exam: 40%
Prentice Hall, Third Edition, 2010. – 50% Accounting & 50% MIS
(For Lectures 7-12)

* Details will be available later.

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ACCOUNTING
Accounting Group Project INFORMATION SYSTEM
• Recording of economic transactions into relevant Lecture 1: Introduction,
manual accounting journals and ledgers.
• Design of chart of accounts & coding techniques
Business Processes &
• Produce all pphysical
y documents relevant to the economic Internal Control
transactions (e.g., sales invoices, goods receipt notes, READINGS:
credit notes, purchase order, payment vouchers, etc),
Chapters 1, 2 (pp 48-56), 6 & 8 (p322-5) (Romney)
• Appropriate authorisation and approval processes; Internal
[pp 56-69 of Cpter 2 to be covered in Lect 2]
control concerns
• Approx. 5 Groups per class will be assigned ; Dateline: 11 Tan Wee Cheng
October 2010
• More details would be announced later. biztwc@nus.edu.sg
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INTRODUCTION
WHAT IS AN AIS?
& BUSINESS PROCESSES
• What an AIS is. • A system that collects, records, stores, and
– Its role in the value chain – Michael Porter’s Model processes data to produce information for
– How it provides information for decision making. decision makers.
– What are the basic strategies and strategic positions an
organization can pursue.
• Basic business processes in which an organization engages
– decisions that need to be made
the _______________
– information required to make those decisions
the ________________
– documentation of key decisions & data
– Concept of internal control & basic principles
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News example: New technology

Is it a manual system, or
replacement for barcodes:
a computerised system?
BOKODES!
• It can be either!
• It can: • http://news.bbc.co.uk/2/hi/technology/8170027.st
– Use advanced technologygy (barcodes,
( , RFIDs,, m BBC 27 July 2009
sophisticated software, scanners); or • 3mm diameter powered tags can store more info
– Be a simple paper-and-pencil system; or than barcodes & 20 meters away!
– Be something in between.
• Technology is simply a tool to create,
maintain, or improve a system.
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WHY STUDY ACCOUNTING

INFORMATION SYSTEMS?
• It’s fundamental to accounting.
Sophisticated IT systems may provide • Accounting is an information-providing activity
the best controls & information, but it to enable businesses to make decisions, so all
business execs need to understand:
is often expensive
p and sometimes not
– How the system that provides that
practicable in all business locations. information is designed, implemented, and
used.
Do not assume unlimited budget & – How financial information is reported.
perfect public utility & support – How information is used to make decisions.
infrastructure.
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Who needs to understand AIS? SYSTEMS, DATA, AND

• Accountant / FC /CFO INFORMATION
• Auditor • Characteristics that make information useful:
• Financial Professional – Relevance it helps cutting cost by dealing with relevant info only
– Reliability
• Consultant
– Completeness
• Those who are in any form of business – Timeliness
»All of You? – Understandability
– Verifiability
Organisation architecture is set up not only for to perform – Accessibility
business activities but to gather & analyse accounting
information. 13 14

WHAT INFLUENCES AIS

ROLE OF THE AIS IN THE
VALUE CHAIN
Occupational • The objective of most organizations is to provide
Culture Strategy value to their customers
________________.
• Making the value of the finished component greater than
the sum of its parts.
• It may mean:
AIS – faster
Making it _________
– Making it more reliable
___________
– Providing better service or advice
– limited supply
Providing something in _________________
– Providing enhanced features
– Customizing it
Information
Technology
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ROLE OF THE AIS IN THE MICHAEL PORTER’S

VALUE CHAIN VALUE CHAIN MODEL
• MICHAEL PORTER’S VALUE CHAIN MODEL
– Harvard Professor, Consultant, Economist • Value is provided by performing a series of
– Porter’s Five Forces Analysis activities referred to as the value chain. These
• Competitive advantage of companies
• Strategic
g positioning
p g
include:
Primary activities
– _________
Support activities
– _________
• A framework to study value chains in
organisations
– Cost leadership / Product differentiation
– How competitive forces shape strategy (1979), Competitive Strategy
(1980), Competitive Advantage (1985), The Competitive Advantage of
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Nations (1990)

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ROLE OF THE AIS IN THE ROLE OF THE AIS IN THE

VALUE CHAIN VALUE CHAIN
• Primary activities include: • Support activities include:
– Inbound logistics (incl receiving, handling & – Firm infrastructure (acc, financial, legal &
storingg of materials)) general admin))
g
– Operations – Human resources
– Outbound logistics – Technology
– Marketing and sales – Purchasing
– Service & Post-Sales Support How can AIS can strengthen a firm’s Value Chain?

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ROLE OF THE AIS IN THE

VALUE CHAIN
• Information technology can significantly • Good AIS value chain:
efficiency
impact the __________ andeffectiveness
________ with • UPS spends over $1 billion a year on
which the pprecedingg activities are carried information systems resulting in greater
customer control over delivery, higher driver
out. productivity, and lower costs.
• An organization’s value chain can be • Bad AIS value chain:
– Limited Brands tangled integration of over 60
connected with the value chains of its incompatible information systems resulted in 400
customers __________,
________, suppliers distributors
and __________. trailers trying to jam into a 150 trailer lot.

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The value chain model identifies: THE AIS AND CORPORATE

• exactly where can it obtain the greatest STRATEGY
strategic system
benefit from ________________, • How has the Internet affected the way value chain
activities are performed?
• what specific activities can be used to create
- Improve inbound and outbound logistics
new pproducts and services,, - Digitize end products (books and musics...)
• how to enhance market penetration, - Reduce costs.
• how to lock in customers and suppliers - Intense price competition can result as barriers to
and entry are low on
the Internet.
• where to lower operational costs.

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Amazon.com, Inc.
Let’s look at • NASDAQ: AMZN
• HQ: Seattle, Washington, USA
• Founded 1994, by Jeff Bezos
• Online bookstore
bookstore, plus VHS
VHS, DVD
DVD, music CDs
A
Amazon.com and MP3s, computer software, video games,
electronics, apparel, furniture, food, toys, etc.
• Amazon Kindle
using Porter’s Value Chain Model • Revenue US$ 25 billion (2009)
• Net income US$ 902 million (2009)
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How does Amazon work?

• Primary activities: How does Amazon manages its activities to achieve
competitive advantage?
– Inbound logistics: seamless linkage with suppliers which means less cost for warehouse
– Operations: stock most popular items, picking, packing
– Outbound logistics: delivery, special deals, PRIME (fixed price delivery),
tie-ups with DHL
– Marketing and sales: website empowers readers, use of Amazon
Associates, readers list, search publisher & wholesaler sites
– Service & Post-Sales Support: returns, rate service

• Support activities: Important aspect of internal architecture

– Firm infrastructure dealing with banks and credit cards companies, copyright law
– Human resources
– Technology website
– Purchasing negotiate with publishers, wholesalers...

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Amazon.com Organisational Architecture,

• Amazon.com wants to be an online retail giant
http://dylan.tweney.com/prophet/980810prophet.htm
Value Chains & AIS
• Filling Amazon's Tall Orders • Organisations are designed so that value is created
primary & ________
through its ________ support activities
http://images.businessweek.com/ss/05/12/amazon/source/1.htm

• Amazon Warehouse's
Warehouse s processing (2.5
min)…see funny comments
http://www.youtube.com/watch?v=i6H7nfHjHtY&feature=related
• Video: Fulfillment by Amazon: (Apr 09) – How
Amazon helps manufacturers - to distribute
products (2 min)
http://www.youtube.com/watch?v=Qt9hkZmbNfU&NR=1
• Information must flow between diff parts of org.
for value to be created & decision rights to be
exercised – hence importance of AIS design
• Withoutempowerment assignmentof decision
__________/_________
rights & appropriate info flow, the org. arch.
cannot function as designed

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INFORMATION NEEDS AND

BUSINESS PROCESSES
• Businesses engage in a variety of processes,
The activities of an organisation including:
– Acquiring capital
can be grouped into major – Buying buildings and equipment Each activity
– Hiring and training employees equ es
requires
b i
business cycles.
l – Purchasing inventory
different types
of decisions.
Let’s look at what kind of –
–
Doing advertising and marketing
Selling goods or services
information interface is needed – Collecting payment from customers Each decision
requires
in these processes… –
–
Paying employees
Paying taxes
different types
of information.

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– Paying vendors 32

INFORMATION NEEDS AND

BUSINESS CYCLES
BUSINESS PROCESSES
• Types of information needed for decisions: • The business transaction cycle is a process
– Financial that:
– Nonfinancial – Begins with capturing data about a transaction.
– Internal sources – Ends with an information output, such as
– External sources financial statements.

By improving business processes leading to efficient

production, Toyota has become the largest automobile
manufacturer in the world, a title held by General Motors for
almost 100 years. 33 34

BUSINESS CYCLES REVENUE CYCLE

• Five major transaction cycles: • The revenue cycle involves interactions
– Revenue cycle
_________ with your customers.
– Expenditure cycle
___________
– Production cycle
– Human resources/payroll cycle
Give Get
– Financing cycle
Goods Cash

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EXPENDITURE PRODUCTION
CYCLE CYCLE
• The expenditure cycle involves interactions
with your suppliers. • In the production cycle, raw materials and
labor are transformed into finished goods.

Give Raw Get

Give Get Materials & Finished
Cash Goods Labor Goods

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HUMAN RESOURCES/
BUSINESS CYCLES
PAYROLL CYCLE
• The human resources cycle involves • Every transaction cycle:
interactions with your employees. – Relates to other cycles.
– Interfaces with the general ledger and reporting
system, which generates information for
management and external parties.
Give Get
Cash Labor

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BUSINESS CYCLES BUSINESS CYCLES

• Many accounting software packages
implement the different transaction cycles
as separate modules.
– Not every module is needed in every
organization, e.g., retail companies don’t have a
production cycle.
– Some companies may need extra modules.
– The implementation of each transaction cycle
can differ significantly across companies.
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• However the cycles are implemented, it is
critical that the AIS be able to:
– Accommodate the information needs of
managers.
– Integrate financial and nonfinancial data.
– Serve the control objectives of the organisation.
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OVERVIEW OF CONTROL OVERVIEW OF CONTROL

CONCEPTS CONCEPTS
(COSO – Committee of Sponsoring Organizations of the Treadway Commission, USA)
process
• Internal control is a ____________ because:
• Internal control is theprocess
______ implemented by the board of – It permeates an organization’s operating activities.
directors, management, and those under their direction to – It is an integral part of basic management activities.
provide reasonable assurance that the following control
objectives are achieved: reasonable rather than
• Internal control provides ___________,
– Assets (including data) are safeguarded. absolute,
b l t assurance, because
b complete
l t assurance is
i
– Records are maintained in sufficient detail to accurately and fairly difficult or impossible to achieve and prohibitively
reflect company assets. expensive.
accurate/reliable – A______ and r_______ information is provided.
reasonable – There is __________ assurance that financial reports are prepared in
accordance with GAAP.
Operational efficiency – __________________ is promoted and improved.
– Adherence to prescribed managerial policies is encouraged.
– The organization complies with applicable laws and regulations.
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OVERVIEW OF CONTROL OVERVIEW OF CONTROL

CONCEPTS CONCEPTS
• Internal control systems have inherent limitations, • Internal controls perform three important
including:
functions:
– They are susceptible to errors and poor decisions.
– They can be overridden by management or by collusion of – Preventive controls
two or more employees
employees. • Deter problems before they arise.
arise
• Internal control objectives are often at odds with each
other.
– EXAMPLE: Controls to safeguard assets may also reduce
operational efficiency.

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OVERVIEW OF CONTROL OVERVIEW OF CONTROL

CONCEPTS CONCEPTS
• Internal controls perform three important • Internal controls perform three important
functions: functions:
– Preventive controls – Preventive controls
– Detective controls – Detective controls
• Discover problems quickly when they do arise. – Corrective controls
• Remedy problems that have occurred by:
– Identifying the cause;
– Correcting the resulting errors; and
– Modifying the system to prevent future
problems of this sort.
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OVERVIEW OF CONTROL OVERVIEW OF CONTROL

CONCEPTS CONCEPTS
• Internal controls are often classified as: • Internal controls are often classified as:
– General controls – General controls
• Those designed to make sure an organization’s – Application controls
control environment is stable and well managed.
• Prevent,, detect,, and correct transaction errors and
• They
Th apply l to
t all
ll sizes
i and
d types
t off systems.
t fraud.
• Examples: Security management controls. • Concerned with accuracy, completeness, validity,
and authorization of the data captured, entered into
the system, processed, stored, transmitted to other
systems, and reported.

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OVERVIEW OF CONTROL CONTROL OBJECTIVES

CONCEPTS
• An effective system of internal controls should • In ALL cycles, a well-designed AIS should provide adequate
exist in all organizations to: controls to ensure that the following objectives are met:
– All transactions are properly authorized.
– Help them achieve their missions and goals. – All recorded transactions are valid.
– Minimize surprises.
p – All valid and authorized transactions are recorded.
recorded
– All transactions are recorded accurately.
– Assets are safeguarded from loss or theft.
– Business activities are performed efficiently and effectively.
– The company is in compliance with all applicable laws and
regulations.
– All disclosures are full and fair.

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Internal Control Basic principles of internal

• Sarbanes-Oxley Act (2002) – after Enron scandal – CEO & CFO of
US listed corporations must certify financial statements & annual control
report must contain internal control report.
– Enron scandal: bankruptcy of Enron (largest US corporate bankruptcy at • Management of the internal environment (p229-
that time) & dissolution of Arthur Andersen (one of the then Big 5 235)
accounting firms)
– Wikipedia: “Enron's stock rose from the start of the 1990s to 1998 by – Board of directors/independent directors/audit
311% The stock increased by 56% in 1999 and a further 87% in
311%…The committee
2000…By December 31, 2000, Enron’s stock was priced at $83.13 and its
market capitalization exceeded $60 billion, 70 times earnings and six – Corporate commitment to integrity, ethical values &
times book value, an indication of the stock market’s high expectations competence
about its future prospects. In addition, Enron was rated the most
innovative large company in America in Fortune's Most Admired – Organisational structure
Companies survey.” – Authority/responsibility/documented procedures
– Fraud – False accounting, hidden losses in undisclosed subsidiaries, etc.
– HR standards/quality of personnel/pre-recruitment, on-
• Singapore Companies (Amendment) Act amended in 2002 to require
financial statements to comply with “prescribed accounting standards” job training

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Basic principles of internal Basic principles of internal

control control
• Control activities (p241-250) • Information & Communication (p250)
– Proper authorisation of transactions & activities: – Audit trail
appropriate personnel & within scope – Accurate recording & timely reporting
– Segregation of duties/checks and balances: – Reconciliations & matching of documents
• Authorisation, recording & custody functions
• Systems
y controls,, e.g.,
g , data entryy controls,, batch
– Design
D i & use off documents
d t & records
d
control totals, processing controls (p322-325)
– Safeguard assets , records & data
– Independent checks on performance
• Monitoring (p251) / Period Audits
• Top-level review – Internal verification by independent persons
• Analytical review • Documentation of transaction & evidence of
• Reconciliation of two independently maintained sets of records authorisation
• Actual quantities vs recorded amounts
– Backup of data ; prenumbering of documents
• Double entry accounting
• Independent review 55
• Physical controls 56

SUMMARY
Akan Datang…Coming Soon…
• What an AIS is.
– What its role is in the value chain.
• GL and Reporting System
– Porter’s Value Chain Analysis & How AIS can help.
– How it provides information for decision making. • Revenue Cycle
– What are the basic strategies and strategic positions an • Expenditure Cycle
organization can pursue.
• Basic business processes in which an organization engages
• Production Cycle
– the decisions that need to be made • HR & Payroll Cycle
– the information required to make those decisions
– What objectives are key in the design of business processes? Business processes & document flow in these
– Basics of internal control systems/cycles

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Noticeable diagrams:
- Page 54 Fig. 202
- Page 33 Fig. 1-3
- Page 51/52 Table 2-1, Fig 2-1
- Page 322, Page 227

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