50 PART I ConCEPTuAl FounDATIonS oF ACCounTIng InFoRmATIon SySTEmS
e. Evaluate the effectiveness of annual reports in fulfilling the information needs of the
following current and potential users: shareholders, creditors, employees, customers,
and financial analysts.
f. Annual reports are public and accessible to anyone, including competitors. Discuss
how this affects decisions about what information should be provided in annual re-
ports. (CMA Examination, adapted)
1.3 Alexander Forbes, a diversified financial services organization, is one of the major fi-
nancial services organizations in Africa, providing financial solutions to individual and
corporate customers. Their services include retirement planning, asset and wealth man-
agement, medical insurance, and consulting. Headquartered in Johannesburg, South
Africa, the company has operations in eight regions across sub-Saharan Africa and the
Channel Islands, employing over 3,000 people. It reported operating income of ZAR
3,647 million (South African rand) for the year 2017–18.
In recent years, Alexander Forbes has embarked on simplifying the company struc-
ture to enable better collaboration across divisions. One of the structural changes was
the separation of the technology function from the operations function to create an in-
formation technology (IT) function as a revenue-generating cluster.
The IT function is responsible for modernizing systems to provide, among other
services, a single customer view. This made it possible for Alexander Forbes to use IT
as a strategic tool. One of the ways in which this is being achieved is the company’s
health insurance services.
The company keeps track of its customers in an integrated database so that cus-
tomer care representatives are able to handle queries and transactions for customers
across all healthcare products.
The database tracks all claims submitted by their customers, including visits made
by healthcare professionals, medication, procedures, and treatments. In case of prescrip-
tions for which cheaper options, often in the form of generic alternatives, are available,
customers are immediately informed via text message to their mobile phones. However,
it is often found that customers prefer the more expensive medication rather than the ge-
neric alternative. A record of co-payment is maintained on the database for such custom-
ers since the company does not cover the full cost of relatively expensive medication.
All claims submitted by customers are digitized and can be easily retrieved if any que-
ries arise. Customers can also access their historical records through the company’s website.
Customers can install the company’s mobile application to submit claims and
check their status.
REQUIRED
a. Why should Alexander Forbes collect data on the drugs that are prescribed? What
could the company do with this data?
b. Although customers are informed of cheaper generic alternatives to expensive medi-
cation, many customers opt for the more latter even though they have to make a
co-payment. How can Alexander Forbes use its AIS to persuade pharmacies to en-
courage customers to opt for the more affordable generic alternatives?
c. How does digitizing the claims add value to the organization?
d. How does the mobile application add value to the organization?
e. Use the Internet to find other IT improvements that Alexander Forbes has introduced
outside of their healthcare division. Write a short paragraph on each new application
or other newsworthy item you find.
1.4. Match the description listed in the right column with the correct information character-
istic listed in the left column.
___ 1. Access a. A report was carefully designed so that its data was eas-
restricted ily comprehended by the reader.
___ 2. Accurate b. A manager working on the weekend needed information
about a customer’s production requests and found it on
the company’s network.
CHAPTER 1 ACCounTIng InFoRmATIon SySTEmS: An ovERvIEW 51
___ 3. Available c. Before production reports are accepted, two clerks
___ 4. Reputable working independently must produce the same
___ 5. Complete information.
___ 6. Concise
___ 7. Consistent d. An accounts receivable aging report included all cus-
___ 8. Current tomer accounts.
___ 9. Objective
___ 10. Relevant e. A report was checked by three different people to make
___ 11. Timely sure it was correct.
___ 12. Useable
___ 13. Understandable f. An accounts receivable aging report is used in credit-
___ 14. Verifiable granting decisions.
g. An accounts receivable aging report was received be-
fore the credit manager had to decide whether to extend
credit to a customer.
h. Needing help with a decision, a manager sought the
opinion of a highly regarded expert.
i. To protect intellectual property, a company encrypted the
data, stored it in a very secure facility, and limited its use to
five people.
j. Tired of keying supplier prices into a database, a pur-
chasing manager insisted the data be sent in machine
readable form.
k. After a lengthy, rambling presentation, a CEO insisted
future presentations contain only pertinent facts and last
no more than 30 minutes.
l. A new manager insisted that monthly reports look the
same so she could compare a new month’s results to
previous months.
m. After making a decision based on outdated data, a new
CFO required all analysis to be conducted with up-to-
date data.
n. Reluctant to rely on his personal feelings about a deci-
sion, a manager sought the opinion of an outside expert.
1.5. EC Coaches is a privately held, medium-sized company that operates a fleet of lux-
ury coaches, semi-luxury and commuter buses, and a variety of luxury and standard
vehicles. Ranging from five to 60 seaters, these vehicles are leased to tour operators,
universities, schools, charitable organizations, and other businesses. To protect their in-
vestment in their vehicles and ensure that they provide their customers with vehicles
in immaculate condition, EC Coaches has a maintenance facility where they do basic
repairs and maintenance on their vehicles. Scheduled vehicle services are handled by
agents according to the maintenance plans agreed at the time of purchase of the vehicle.
You were recently hired by EC Coaches and you are eager to demonstrate your
worth to the company. Your supervisor asked you to prepare an accounts payable aging
report as of the end of the year for use in the upcoming audit of the company’s financial
statements.
REQUIRED
a. What is an accounts payable aging report?
b. Why is an accounts payable aging report needed for an audit?
c. What is an accounts payable aging report used for in normal company operations?
d. What data will you need to prepare the report?
e. Where will you collect the data you need to prepare the report?
f. How will you collect the necessary data for the report?
52 PART I ConCEPTuAl FounDATIonS oF ACCounTIng InFoRmATIon SySTEmS
g. What will the report look like (i.e., how will you organize the data collected to create
the information your supervisor needs for the audit)? Prepare an accounts payable
aging report template in Excel or another spreadsheet software.
h. How will you distribute the report? How many copies will you make? Who should
receive the copies? What security features will you implement?
1.6. Albert Heijn (or AH) is arguably the largest retail chain in Europe, owning supermarkets,
convenience stores, and online shopping services in food and other goods. AH prides itself
on establishing the first modern supermarkets. Founded in 1887 in Oostzaan, the Nether-
lands, Albert Heijn grew from a humble grocery store to a chain of supermarkets. Its first
supermarket was established in 1952 and, over the decades, AH has been the shopping
destination of choice for the majority of the people living in the Netherlands, Belgium, and
other European countries. The chain comprises more than 850 stores, including more than
200 franchisees.
AH is known for being an early adopter of information technology and has been
one of the first supermarkets to take on a loyalty-card program. Customers can avail of
a discount with a card called ‘Bonuskaart’ in Dutch. It is issued to them after their per-
sonal information is entered into a database.
This provides AH with a mine of information about its customers. It utilizes this
information to expand its business and push sales.
REQUIRED
a. What kind of information do you think AH gathers?
b. How do you think the AH has motivated its customers to sign up for the bonus card
program?
c. What can the AH accomplish with the data it collects? Think in terms of strategy and
competitive advantage.
d. What could be some of the disadvantages of the card program?
1.7. Match each of the following terms with its definition.
___ 1. Accounting a. Exceeding the amount of information a human
information system mind can absorb and process
___ 2. Artificial b. Use of software and algorithms to find and solve
intelligence problems and improve business performance
___ 3. Blockchain c. The benefit provided by information minus the
cost of producing it
___ 4. Business processes
d. A set of activities and tasks that help accomplish a
___ 5. Data specific organizational goal
___ 6. Data analytics e. An agreement to exchange goods or services in
exchange for cash
___ 7. Data dashboard
f. Process of capturing, processing, and storing
___ 8. Expenditure cycle transaction data for later use and for producing
information output
___ 9. General ledger and
reporting system g. Frequent exchanges such as surrendering cash for
inventory and paying employees for labor
___ 10. Give-get exchange
h. Activities associated with selling goods and services
in exchange for cash or a future promise of cash
i. Value chain activities that produce, market, and
deliver products to customers and provide post-
delivery support
j. A system that collects, records, stores, and processes
data to produce information for decision makers
CHAPTER 1 ACCounTIng InFoRmATIon SySTEmS: An ovERvIEW 53
___ 11. Goal congruence k. Linking all the primary and support activities in a
___ 12. Information business
___ 13. Machine-readable l. Activities such as firm infrastructure and technol-
___ 14. Primary activities ogy that enable main activities to be performed
___ 15. Production cycle efficiently and effectively
___ 16. Revenue cycle
m. An organization’s value chain as well as its ven-
___ 17. Supply chain dors, distributors, and customers
___ 18. Support activities
___ 19. System n. Activities associated with purchasing inventory for
___ 20. Transaction resale for cash or a promise to pay cash
___ 21. Value chain
___ 22. Value of o. Data in a format that can be processed by a computer
information p. Computer systems that simulate human
intelligence processes such as learning, reasoning,
and self-improvement
q. Procedures and routines that carry out specific ac-
tivities, achieve objectives, or solve problems
r. Facts collected, recorded, stored, and processed
by an information system
s. Activities associated with using labor, raw materi-
als, and equipment to produce finished goods
t. Organized and processed data that provide mean-
ing and improve decision making
u. Display of data points and performance indicators
in easily understood charts, tables, or gauges
v. Activities associated with hiring, compensating,
promoting, and terminating employees
w. Major give-get exchanges that occur frequently in
most companies
x. Information-processing operations involved in
preparing reports for internal and external parties
y. Individual digital records linked using cryptogra-
phy in a single list called a chain
z. A subsystem achieves its goals while contributing
to the overall goal
1.8. Classify each of the following items as belonging in the revenue, expenditure, human
resources/payroll, production, or financing cycle.
a. Pay pay-as-you-earn (PAYE) payroll taxes
b. Send material requisition to inventory
c. Issue stock to investors
d. Borrow money from the bank to purchase a new factory
e. Complete receiving report
f. Appoint replacement purchasing clerk
g. Measure employee performance using a performance management system
h. Choose suitable supplier of raw materials
i. Ensure employees are up to date with the latest tax provision
j. Record personal and tax information for new employees
k. Determine labor needs for the next production run
l. Create purchase requisition
m. Transfer employee contribution to medical aid
n. Update work-in-progress file to accumulate cost data
o. Process sales returns
p. Prepare a bill of materials
54 PART I ConCEPTuAl FounDATIonS oF ACCounTIng InFoRmATIon SySTEmS
q. Extract sold goods from the warehouse
r. Approve payment after receiving all inventory on receiving report
s. Manage dividend payments
t. Confirm hours worked on automated timekeeping system
u. Send unsettled customer accounts to collection agency
v. Pay interest on loan required to buy new factory
w. Prepare a purchase order
AIS in Action Solutions
QUIZ KEY
1. Data differ from information in which way?
a. Data are output, and information is input. [Incorrect. Data are facts and figures that,
once organized, can become information. Therefore, data are inputs, and information
is output.]
▶ b. Information is output, and data are input. [Correct.]
c. Data are meaningful bits of information. [Incorrect. Information is organized and pro-
cessed data that provide meaning.]
d. There is no difference. [Incorrect. There is a difference. Data are unorganized facts and
figures. Information is meaningful, organized, and processed data.]
2. The business process that includes goods storage, receiving vendor invoices, and updating
payable accounts is called
a. the expenditure cycle. [Incorrect. The expenditure cycle involves interactions between
an organization and its suppliers.]
▶ b. the revenue cycle. [Correct. The revenue cycle involves interactions between an orga-
nization and its customers, such as shipping them goods.]
c. the production or conversion cycle. [Incorrect. The production cycle involves the trans-
formation of raw materials into finished goods.]
d. the financing cycle. [Incorrect. The financing cycle deals with interactions between an
organization and its lenders and owners.]
3. Which of the following is a primary activity in the value chain?
a. purchasing [Incorrect. This is a support activity.]
b. accounting [Incorrect. This is a firm infrastructure support activity.]
▶ c. post-sales service [Correct. Service is a primary activity.]
d. human resource management [Incorrect. This is a support activity.]
4. Which transaction cycle includes interactions between an organization and its suppliers?
a. revenue cycle [Incorrect. The revenue cycle involves interactions between an organiza-
tion and its customers.]
▶ b. expenditure [Correct.]
c. human resources/payroll cycle [Incorrect. The human resources/payroll cycle involves
interactions between an organization and its employees, government, and potential
hires.]
d. general ledger and reporting system [Incorrect. The general ledger and reporting sys-
tem receives summary information from all cycles.]
5. Which of the following is NOT a means by which information improves decision making?
▶ a. increases information overload [Correct. Decision makers receiving too much infor-
mation have difficulty incorporating all of the information into their decision frame-
work, and, as a result, decision quality can be reduced rather than improved.]
b. reduces uncertainty [Incorrect. More reliable information leads to less uncertainty and
thus better decisions.]
c. provides feedback about the effectiveness of prior decisions [Incorrect. Knowledge of
effective and ineffective decisions can lead to better decisions in the future.]
CHAPTER 1 ACCounTIng InFoRmATIon SySTEmS: An ovERvIEW 55
d. identifies situations requiring management action [Incorrect. Identifying the need for
management action can lead to improved decision making.]
6. In the value chain concept, upgrading IT is considered what kind of activity?
a. primary activity [Incorrect. Investing in IT is a support activity.]
▶ b. support activity [Correct. Technology activities, including investing in IT, are consid-
ered a support activity.]
c. service activity [Incorrect. The value chain includes only primary and support activi-
ties. A service activity is a type of primary activity.]
d. structured activity [Incorrect. The value chain includes only primary and support ac-
tivities. A structured activity is neither a primary nor a secondary activity.]
7. When a subsystem’s goals are inconsistent with the goals of another subsystem, or with
the system as a whole, it is called
▶ a. goal conflict. [Correct. When a subsystem’s goals are inconsistent with the goals of
another subsystem or the system as a whole.]
b. goal congruence. [Incorrect. When a subsystem achieves its goals while contributing
to the organization’s overall goal.]
c. neither of these. [Incorrect.]
8. Which of the following is a function of an AIS?
a. reducing the need to identify a strategy and strategic position [Incorrect. An AIS does
not reduce the need to identify a strategy. It provides information to executives for the
purpose of making strategic decisions.]
▶ b. transforming data into useful information [Correct. This is one of the primary func-
tions of an AIS.]
c. allocating organizational resources [Incorrect. Decision makers allocate resources, and
the purpose of the AIS is to provide information to the decision makers so that they can
make the allocation.]
d. automating all decision making [Incorrect. The AIS provides information to decision
makers; it is not designed to automate all decision making.]
9. A firm, its suppliers, and its customers collectively form which of the following?
▶ a. supply chain [Correct. The supply chain is made up of the firm, its suppliers, and
customers.]
b. value chain [Incorrect. The value chain is made up of primary and support activities
within the firm.]
c. ERP system [Incorrect. An ERP system integrates all aspects of an organization’s ac-
tivities into one system.]
d. AIS [Incorrect. The AIS is made up of the human and capital resources within an orga-
nization that are responsible for collecting and processing transactions and preparing
financial information.]
10. A performance report about all approved vendors during the previous 12 months is infor-
mation MOST needed in which business process?
a. paying vendors [Incorrect. To pay a vendor, a company needs to know whether mer-
chandise ordered was received in good condition. They do not need a 12-month history
of vendor performance.]
▶ b. acquiring inventory [Correct. Companies want to acquire inventory from companies
that have performed well in the past. A vendor performance report would disclose
whether the vendor shipped inventory on time, whether the inventory was of the re-
quested quality, whether the prices were as agreed upon, etc.]
c. selling merchandise [Incorrect. A 12-month history of vendor performance is usually
not very helpful in trying to sell products to customers. More important would be cus-
tomer tastes and preferences, customer credit status, etc.]
d. paying employees [Incorrect. It is very rare for an employee’s pay to be based on a
12-month history of vendor performance. More important are hours worked, annual
salary, sales figures to calculate commissions, etc.]