Ais Assignment Solutions
Ais Assignment Solutions
In spite of the significant and extensive overlap among financial, cost, and
managerial accounting, organizations usually maintain these three
subsystems. Why do you think this is done?
Accounting information system (AIS) follows the principles, concepts, conventions,
standards prescribed on scientific lines while generating the information required for
users (investors, creditors, managers). Further, accounting information system links
the information source (books of accounts), a channel of communication or the output
(financial statements), and the set of users or decision makers (both internal and
external).
Accounting may be sub-divided into several sub-systems of which financial, cost and
management accounting are very significant. Organizations usually maintain these
three subsystems. This is because they provide a base for analysis and interpretation
to make decisions. Therefore, these three subsystems also used by accounting. Let see
them one by one.
1) Financial Accounting
Financial accounting is concerned with collecting, recording, classifying and reporting
business information about economic events that involve a specific accounting entity.
The basis for preparing financial accounting is GAAP enunciated by the accounting
profession. The function of financial accounting is to provide financial information of
the business enterprise to its users.
The purpose of providing this information is:
1. To provide performance information to the enterprise’s management.
2. To communicate the performance report to external users for decision-making.
For example: if one wants to buy a few shares in one of the thriving companies, say
Tata Consultancy Services, WIPRO, Reliance, etc., how does one invest? One way is
to review financial reports, compare the financial performance and conditions of each
company and decide as to where to invest.
The major purpose of financial accounting is to provide such information to the users
in addition to the basic purpose of providing performance information to the
enterprise’s management/owners.
2) Management accounting
Management accounting is the process of identification, measurement, accumulation,
analysis, preparation, interpretation, and communication of financial (and non-
financial) information used by management to plan, evaluate, and control the
organization and to assure appropriate use and accountability for its resources. The
management accountant is expected to provide timely, accurate information
including budgets, standard costs, and variance analyzes, support for so that
planning, organizing, directing and controlling of business operations can be done in
an orderly manner.
Management accounting information helps organization make better decisions. Such
decisions make all organizations become more cost effective and help manufacturing,
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retail and service organizations becomes more profitable. The major objectives of
managerial accounting activity are:
Providing managers with information for decision making and planning
Assisting managers in directing and controlling operational activities
Motivating managers and other employees toward the organizational goals
Measuring the performance of subunits, managers and other employees
within the organization.
Managerial accountants supply all kinds of information to management and act as
strategic business partners in support of management’s role in decision making and
managing the organization’s activities. Measuring managing and continuously
improving operational activities is critical to be organization’s success.
Management accounting provides valuable services to management in all of its
functions. The functions are planning, controlling, coordinating, organizing,
motivating and communicating.
3) Cost accounting
Cost accounting refers to the accounting procedures relating to recording of all
incomes and expenditure and the preparation of periodical statements and reports
with the object of ascertaining and controlling costs. It is thus the formal mechanism
by means of which the cost of products or services are ascertained and controlled.
Cost accounting is primarily concerned with determination of cost of something,
which may be a product, service, a process or an operation. A cost accountant is
primarily charged with the responsibility of providing cost data for whatever
purposes they may be required.
Conclusion
Cost accounting integrates with financial accounting by providing product costing
information for financial statements and with management accounting by providing
some of the quantitative, cost-based information managers need to perform their
tasks. There are multiple external parties and internal parties for which financial
reports are prepared. Any specific accounting method is unlikely to be the preferred
method for all external parties or all internal parties. Indeed, even an individual
manager may prefer accounting method A for one decision and accounting method B
for another decision.
Finally, as per my understanding, Even though those three subsystems are extensively
overlapped each other, organizations maintain the three subsystems separately in
order to provide a base for analysis and interpretation to make better decisions.
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2) What is relevant information? How is the relevance of accounting
information judged? Why is relevance so important for accounting
information?
What is relevant information?
Relevant Information: – as defined in accounting terminology-- indicates that
accounting information provides a necessary benefit for the end user. End users of
accounting information are commonly referred to as internal and external business
stakeholders. Internal stakeholders include business owners, managers and
employees. External stakeholders include lenders, investors and the public. External
stakeholders use relevant accounting information to make financing decisions for
small business loans. The capacity of information to make a difference in a decision
by helping users to form predictions about the outcomes of past, present, and future
events or to confirm or correct prior expectations.
This improves the speed with which various internal and external parties receive the
financial statements, which improves the relevance of the information they receive.
Information should be relevant to the decision-making needs of the user.
How is the relevance of accounting information judged?
Accounting information is relevant if it makes a difference in a decision, either by
helping them to evaluate the past, present or future events, or confirming, or
correcting their past evaluations. Relevance is affected by materiality - An item is
material if it is likely to influence decision-making
On the other hand, an information is to be relevant, accounting information must be
capable of making a difference in a decision. Information with no bearing on a decision
is irrelevant. Thus, the following three ingredients can judge the relevance of
accounting information.
1. Predictive value
2. Feedback value and
3. Timeliness are ingredients’ of relevant information.
1. Predictive value: Relevant information helps users predict the ultimate outcome
of past, present, and future events.
2. Feedback (confirmatory) Value: Relevant information also helps users confirm or
correct prior expectations.
3. Timelines: Relevant information is available to decision makers before it loses its
capacity to influence their decisions.
Why is relevance so important for accounting information?
Your accounting department is responsible for business tasks such as payroll,
accounts receivable and inventory control. A comprehensive business planning
process requires the kind of information that your accounting department generates.
When you understand the relevance of accounting data in business decision-making,
then you can better utilize the critical business information being generated each day.
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Let us see the following basic examples:
Financing -your company and potential investors to determine funding needs for the
organization use Accounting data. Your company analyzes revenue to determine how
much money would be available to fund upcoming projects. If there is a gap in
revenue, then you know that you need to seek out funding. Potential investors and
lenders look at your assets and liabilities to determine if your company is a safe
investment or not.
Budgeting: - The constant flow of accounting data relevant to income, purchases,
investments and overhead is critical in creating the budget for the coming year. The
information gathered by the accounting department is used as a baseline to gauge
actual performance for the year and understand the basic costs of company
operations. Sales projections for the next fiscal year are added to the accounting data
to create the company's budgets.
Inventory:- Maintaining proper inventory levels is important in keeping track of
assets and income as inventory gets purchased, stored in the warehouse and then sold
to clients. The accounting department keeps a close eye on the cost of incoming
inventory, how much it costs to finance that inventory until it is sold and the income
realized when the product is sold to a customer. All of that information is relevant to
determining how profitable your organization is and where changes can be made to
lower the costs of inventory.
Growth: -Company growth is carefully outlined in the organizational business plan.
When the company plans its growth, it first looks at historical accounting data to
determine trends in revenue production and understand how the company spends
money. Accounting information is critical in determining how much the company can
take on in liabilities and costs as it tries to make the right decisions on how to expand
profitability.
Income Statement: - Business owners need relevant information when reviewing
their company’s income statement. Relevant information ensures all inventory costs
are included in the company’s cost of goods sold account. Expenses must also be
relevant to the particular sales revenue earned for the accounting period. One-time,
non-recurring expensed charges can quickly distort a company’s income for the
accounting period. Companies must ensure this information is relevant prior to
release for review by external business stakeholders.
Considerations: - Business owners should also be sure accounting information is
accurate and timely. Accurate accounting information ensures all financial
information is recorded properly on the company’s accounting ledger.
Therefore, accounting information system should be relevant. Because every business
decisions stands from relevant accounting information. When there is irrelevant
information, decision makers in each section of financial information users, can made
incorrect decision, which may significantly affects the business’s future condition.
3) Why is benefit-cost a "constraint" and materiality a "threshold point" for
accounting information?
Why is benefit-cost a "constraint" for Accounting information?
Constraints accounting is a financial reporting approach that is consistent with the
framework outlined by the Financial Accounting Standards Board (FASB). Cost /
benefit along with materiality are considered the leading constraints within this
framework.
The term cost / benefit constraint refers to an accounting constraint that states the cost
of providing information must be measured against the benefit derived from the use
of that same information.
From a practical standpoint, the cost portion of this constraint is fairly easy to
quantify. For example, there are costs associated with gathering, assembling, storing,
processing, analyzing, auditing, and disseminating data.
The benefits associated with this information are oftentimes more difficult to
quantify. For example, the information may provide the preparer and reader with a
more accurate assessment of taxes owed or resources available to the
business. However, assigning a value to this information is sometimes problematic.
In practice, companies oftentimes require a cost / benefit analysis when establishing
or modifying their internal accounting processes.
The intent of allowing the cost constraint is to keep businesses from incurring
excessive costs as part of their financial reporting obligations, especially in comparison
to the benefit obtained by readers of the financial statements.
The benefits derived from information should exceed the cost of providing it. The
evaluation of benefits and costs is substantially a judgmental process. Furthermore,
the costs are not necessarily borne by those users who enjoy the benefits, and often a
broad range of external users enjoys the benefits of the information.
Financial reporting information helps capital providers make better decisions, which
results in more efficient functioning of capital markets and a lower cost of capital for
the economy as a whole. Individual entities also enjoy benefits, including improved
access to capital markets, favorable effect on public relations, and perhaps lower costs
of capital. The benefits may also include better management decisions because
financial information used internally is often based at least partly on information
prepared for general-purpose financial reporting purposes.
Cost is a pervasive constraint on the information that can be provided by financial
reporting. Reporting financial information imposes costs, and it is important that
those costs are justified by the benefits of reporting that information.
Therefore, when the cost incurred for obtaining an accounting information is greater
than its benefit, there is a great constraint for achieving what an organization wants
to do. There must be a greater benefit from its cost incurred. Due to this, cost-benefit
analysis becomes the main constraint for accounting information system.
Why materiality is a "threshold point" for accounting information?
Information is material if its omission or misstatement could influence the economic
decisions of users taken on the basis of the financial statements (IASB Framework).
While the cost-benefit constraint of accounting may limit the scope of the financial
information provided in an effort to control reporting costs, the materiality constraint
allows companies to omit certain information that is immaterial and will not have an
impact or influence on information users. In other words, companies must include all
information that has a material impact on their overall financial performance.
Companies determine the materiality of information based on its relative size and
importance. When the amount involved is relatively small or the nature of the
information at issue is unimportant, companies may resort to the materiality
constraint not to report the information
Materiality therefore relates to the significance of transactions, balances and errors
contained in the financial statements. Materiality defines the threshold or cutoff point
after which financial information becomes relevant to the decision-making needs of
the users. Information contained in the financial statements must therefore be
complete in all material respects in order for them to present a true and fair view of
the affairs of the entity.
When information is immaterial and irrelevant for decision-making, companies can
omit. On the other hand, material and relevant information has significance influence
on decision-making and must be reported. Then materiality here plays an important
role to identify which information is relevant and which one is not. Due to this
materiality becomes a “threshold point” or “cut off” point for accounting information.
4) Is it important to have a clear understanding of the foundations of accounting
to appreciate accounting information fully? Why or why not?
There must be a clear understanding of the foundations of accounting to appreciate
accounting information fully.
In order to fully appreciate the potential impact accounting information systems have
on the accounting profession, an understanding of what accounting encompasses
(foundations) is necessary.
Over the years, accounting has evolved from what many would call a “checks and
balance” system to a much more complex system involving complicated activities
such as calculating taxes and garnishments, auditing financial statements and
processing payroll to name a few. It would be reasonable to think that advanced
technology such as accounting information systems would only enhance the
production of these activities.
Now let us define what Accounting is?
Generically defined, accounting is the keeping of financial records. The general
public that has not been exposed to accounting curriculum tend to believe accounting
is simply adding and subtracting amounts from a beginning number to get an ending
number, much like balancing a checkbook. However, any student that has been
exposed to accounting curriculum will express that it is much more complicated than
the simple adding and subtracting of numbers. Accounting encompasses a large scope
of potentially complicating activities such as calculating taxes and garnishments,
producing and distributing financial statements, auditing financial statements, and
processing payroll. These tasks have become a part of the accounting
profession through years of development of social and economic structures of
countries and markets around the world. These developments have led the accounting
profession to become more complicated. As the profession has evolved, so have the
technological tools used to assist accountants in the profession. The use of technology
in the accounting profession has led to the development of several accounting
information systems software options. To understand better accounting information
systems and the impact this technology has had on the accounting profession, it is
important to take a brief look at the history of accounting.
According to Farag (2009), “the committee on Accounting History of the American
Accounting Association… describe[s] accounting history as … the study of evolution
in accounting thought, practices, and institutions in response to changes in the
environment and societal needs” (n.p.). Accounting, as it is currently known, only
began to take shape in the fourteenth century; however, ancient Egyptians developed
a system of basic accounting as early as 3200-3000 B.C. In Pharaonic Egypt, a new
social organization arose, creating a need for some type of accounting structure.
As a result of industrialization around the world, new organizational forms came
about as the owners separated from the entities causing substantial changes in the
accounting profession. As the industrial revolution brought an industry focused
economy rather than the agricultural focused economy previously in place, some form
of checks and balances had to be put in place to keep large companies and
corporations compliant with the public’s wants and the economy’s needs. The modern
accounting profession filled these needs. As with all things in the world today, the
accounting profession has been impacted by the technological world.
Unfortunately, technology has often been used to simply automate existing manual
processes and methodologies, instead of first restating problems and reengineering
processes in light of new technologies and capabilities." Accounting information
systems have been developed to assist accountants with the increased scope of the
profession, brought about by developments in the world’s social and economic fronts.
There are several different types of systems available to companies large and small
alike. Some of these systems are industry based, while others are more generic for
small or multi-business use; however, all “computerized accounting systems enhance
functionality of various accounting departments by increasing just in time accounting
information.
Accounting information systems have been developed to assist accountants with the
increased scope of the profession, brought about by developments in the world’s
social and economic fronts. There are several different types of systems available to
companies large and small alike. Some of these systems are industry
based, while others are more generic for small or multi-business use; however, all
“computerized accounting systems enhance functionality of various accounting
departments by increasing just in time accounting information. By enhancing
timeliness of financial information, accountants can prepare reports and operations
analysis that provides management an accurate view of current operations. The
number of financial reports has been improved by computerized systems. Cash flow
statements, market shares reports and departmental profit and loss are now more
accessible with computerized systems.
In the modern world most companies especially in advanced economies, the process
of accounting cycle is done by computerized accounting system. Information should
be relevant for different interested parties. Relevant information is generated from the
process of accounting cycle started from bookkeeping up to preparation of financial
statements. This needs a competent profession of accountancy. Competent profession
of accountancy is also begins with acquiring of valuable skills about accounting, its
history, foundations and way of doing activities. Without such understanding on
accounting profession, it is unable to generate relevant information for users and
simultaneously for appreciation of accounting information system.
Therefore, fully appreciation of accounting information systems based on the
accounting profession, an understanding of what accounting encompasses
(foundations) is necessary and important.
5) Discuss the interactions between technological developments in information
processing and the complexity of business needs for information.
The information processing view thus posits that information processing capabilities
and needs must be aligned. Information processing capabilities need to be balanced
with the extent to which decision makers' information requirements are met. Higher
performance standards entail less availability of slack resources and thus higher
processing needs to achieve the goals. The information processing view then sees the
linkage between a key organizational resource (information) and its management (i.e.,
the use of information) as an organization's most critical performance factor.
Organizations and information systems have a mutual influence on each other. The
information needs of an organization affect the design of information systems and an
organization must be open itself to the influences of information systems in order to
more fully benefit from new technologies. The organization's environment, culture,
structure, standard operating procedures, politics and management decisions are
mediating factors that influence the interaction between information technology and
organizations.
The figure shows the two-way relationship between organizations and information
technology
This complex two-way relationship is mediated by many factors, not the least of which
are the decisions made—or not made—by managers. Other factors mediating the
relationship include the organizational culture, structure, politics, business processes,
and environment.
From a technical view, an organization is a formal, legal, social structure that processes
resources, or inputs, to produce outputs. The firm is seen as infinitely malleable, with
capital and labor substituting for each other quite easily.
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The technical microeconomic definition of the organization.
In the microeconomic definition of organizations, capital and labor (the primary
production factors provided by the environment) are transformed by the firm through
the production process into products and services (outputs to the environment). The
products and services are consumed by the environment, which supplies additional
capital and labor as inputs in the feedback loop.
A behavioral definition of an organization is that it is a collection of rights, privileges,
obligations, and responsibilities that is balanced over time through conflict and
conflict resolution. This definition suggests that building new information systems or
rebuilding old ones involves much more than a technical rearrangement of machines
or workers. Technological change requires changes in who owns and controls
information, who has the right to access and update that information, and who makes
decisions about whom, when, and how.
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All modern organizations can be seen as bureaucracies, which share some essential
characteristics: clear division of labor, hierarchy, explicit rules and procedures,
impartial judgments, technical qualifications for positions, and maximum
organizational efficiency. Additionally, all organizations develop routines and
business procedures, politics, and cultures. Business processes are collections of
routines, or standard operating procedures (SOPs), which enable a firm's efficiency.
Organizational politics reflects the political struggles due to divergent concerns and
perspectives of individuals and groups within the organization. Political resistance is
one of the great difficulties of bringing about organizational change. Organizational
culture is the set of fundamental assumptions about what products the organization
should produce, how it should produce them, where, and for whom. Organizational
culture is a powerful unifying force that restrains political conflict. However,
technological change that threatens commonly held cultural assumptions usually
meets great resistance.
No two organizations are identical. Organizations have different structures, goals,
constituencies, leadership styles, tasks, and surrounding environments. Differences in
these characteristics will affect the type of information systems used by the
organization.
Organizations have different social and physical environments, which exert a
powerful influence on the organization's structure. Information systems help
organizations respond to their surrounding environments, from which they draw
resources and to which they supply goods and services. Information systems are key
tools for environmental scanning, helping managers identify external changes that
might require an organizational response.
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Environments shape what organizations can do, but organizations can influence their
environments and decide to change environments altogether. Information technology
plays a critical role in helping organizations perceive environmental change and in
helping organizations act on their environment.
The Mintzberg classification of organizations includes five categories:
1. Entrepreneurial structure: Young, small firm, such as a small startup business,
in a fast-changing environment. It has a simple business structure and is
managed by an entrepreneur serving as its single chief executive officer.
2. Machine bureaucracy: Large bureaucracy, such as a midsize manufacturing
firm, existing in a slowly changing environment, producing standard products.
A centralized management team and centralized decision-making dominate it.
3. Divisionalized bureaucracy: Combination of multiple machine bureaucracies,
such as a Fortune 500 firm, each producing a different product or service, all
topped by one central headquarters.
4. Professional bureaucracy: Knowledge-based organization (such as law firms,
school systems, hospitals) where goods and services depend on the expertise
and knowledge of professionals. Dominated by department heads with weak
centralized authority.
5. Adhocracy: Task force organization (such as a consulting firm) that must
respond to rapidly changing environments. Consists of large groups of
specialists organized into short-lived multidisciplinary teams and has weak
central management.
Organizations also differ in their ultimate goals, the types of power used to achieve
them, the groups and constituencies they serve, the nature of leadership within the
organization, the tasks performed, and the technology used.
Conclusion
As discussed above, there are different organizations, which have different goal,
technological innovation, information system and etc. as the complexity of the
organization becomes high, there technological information need also becomes high
accordingly. Because higher organizations need more technologically organized
information systems than those lower ones. They have also efficient technologically
processed information system for maintaining their status to be competitive.