Accounting information system

C HAPTER 1
Accounting Information
Systems:
An Overview
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 1 of 43

INTRODUCTION
• Questions to be addressed in this chapter
include:
– What is the meaning of system, data, and
information?
– What is an accounting information system (AIS)?
– Why is the AIS an important topic to study?
– What is the role of the AIS in the value chain?
– How does the AIS provide information for decision
making?
– What are the basic strategies and strategic positions
an organization can pursue?

SYSTEMS, DATA, AND INFORMATION
• A system is:
– A set of interrelated components
– That interact
– To achieve a goal

• Most systems are composed of smaller
subsystems . . .
• . . . And vice versa!

• Every organization has goals.
– The susbsystems should be designed to
maximize achievement of the organization’s
goals
– Even to the detriment of the subsystem itself
– EXAMPLE: The production department (a
subsystem) of a company might have to
forego its goal of staying within its budget in
order to meet the organization’s goal of
delivering product on time.

• Goal conflict occurs when the activity of a
subsystem is not consistent with another
subsystem or with the larger system.
• Goal congruence occurs when the
subsystem’s goals are in line with the
organization’s goals.
• The larger and more complicated a
system, the more difficult it is to achieve
goal congruence.

• The systems concept encourages integration
(i.e., minimizing the duplication of recording,
storing, reporting and processing).
• Data are facts that are collected, recorded,
stored, and processed by an information system.
• Organizations collect data about:
– Events that occur
– Resources that are affected by those events
– Agents who participate in the events

• Information is different from data.
• Information is data that have been
organized and processed to provide
meaning to a user.
• Usually, more information and better
information translates into better
decisions.

• However, when you get more information
than you can effectively assimilate, you
suffer from information overload.
– Example: Final exams week!
• When you’ve reached the overload point,
the quality of decisions declines while the
costs of producing the information
increases.

Benefits of information
- Cost of producing information
Value of information
Benefits of information may include:
• Reduction of uncertainty
• Improved decisions
• Improved ability to plan and schedule activities

Costs may include time and resources spent:
• Collecting data
• Processing data
• Storing data
• Distributing information to users

Costs and benefits of information are often
difficult to quantify, but you need to try when
you’re making decisions about whether to
provide information.

• Characteristics that make information
useful:
– Relevance
It reduces uncertainty by helping you predict
what will happen or confirm what already has
happened.

useful:
– Relevance
– Reliability
It’s dependable, i.e., free from error or bias
and faithfully portrays events and activities.

useful:
– Relevance
– Reliability
– Completeness
It doesn’t leave out anything that’s important.

useful:
– Relevance
– Reliability
– Completeness
– Timeliness
You get it in time to make your decision.

useful:
– Relevance
– Reliability
– Completeness
– Timeliness
– Understandability
It’s presented in a manner you can
comprehend and use.

useful:
– Relevance
– Reliability
– Completeness
– Timeliness
A consensus notion—the nature of the
information is such that different people
would tend to produce the same result.
– Verifiability

useful:
– Relevance
– Reliability
– Completeness
– Timeliness
You can get to it when you need it and in a
– Verifiability
format you can use.
– Accessibility

• Information is provided to both:
– External users
– Internal Users

– External users
– Internal Users

• External users primarily use information
that is either:
– MANDATORY INFORMATION—Required by
a governmental entity, such as Form 10-K’s
required by the SEC; or
– ESSENTIAL INFORMATION—Required to
conduct business with external parties, such
as purchase orders.

• In providing mandatory or essential
information, the focus should be on:
– Minimizing costs
– Meeting regulatory requirements
– Meeting minimum standards of reliability and
usefulness

– External users
– Internal Users

• Internal users primarily use discretionary
information.
• The primary focus in producing this
information is ensuring that benefits
exceed costs, i.e., the information has
positive value.

WHAT IS AN AIS?
• An AIS is a system that collects, records,
stores, and processes data to produce
information for decision makers.
• It can:
– Use advanced technology; or
– Be a simple paper-and-pencil system; or
– Be something in between.
• Technology is simply a tool to create,
maintain, or improve a system.

WHAT IS AN AIS?
• The functions of an AIS are to:
– Collect and store data about events,
resources, and agents.
– Transform that data into information that
management can use to make decisions
about events, resources, and agents.
– Provide adequate controls to ensure that the
entity’s resources (including data) are:
• Available when needed
• Accurate and reliable

WHY STUDY ACCOUNTING
INFORMATION SYSTEMS?
• It’s fundamental to accounting.
• Accounting is an information-providing
activity, so accountants need to
understand:
– How the system that provides that
information is designed, implemented
and used.
– How financial information is reported
– How information is used to make
decisions

• Other accounting courses focus on how
the information is provided and used.
• An AIS course places greater emphasis
on:
– How the data is collected and
transformed
– How the availability, reliability, and
accuracy of the data is ensured
• AIS courses are not number-crunching
courses

• The skills are critical to career success.
• Auditors need to evaluate the accuracy
and reliability of information produced by
the AIS.

• Tax accountants must understand the
client’s AIS adequately to be confident that
it is providing complete and accurate
information for tax planning and
compliance work.

• In private industry and not-for-profits,
systems work is considered the most
important activity performed by
accountants.

• In management consulting, the design,
selection, and implementation of
accounting systems is a rapid growth area.

• The AIS course complements other
systems courses.
• Other systems courses focus on design and
implementation of information systems,
databases, expert systems, and
telecommunications.
• AIS courses focus on accountability and
control.

systems courses.
• AIS topics are tested on the new CPA
exam.
• Makes up about 25% of the Business
Environment & Concepts section of the CPA
exam.

systems courses.
• AIS topics are tested on the new CPA
exam.
• AIS topics impact corporate strategy
and culture.

Occupational
Culture Strategy
AIS
Information
Technology
AIS design is
affected by
information
technology, the
organization’s
strategy, and the
organization’s
culture.

Occupational
Culture Strategy
AIS
Information
Technology
Information technology
affects the company’s
choice of business
strategy. To perform
cost-benefit analyses on
IT changes, you need to
understand business
strategy.

Occupational
Culture Strategy
AIS
Information
Technology
While culture affects
the design of the AIS,
it’s also true that the
AIS affects culture by
altering the
dispersion and
availability of
information.

ROLE OF THE AIS IN THE VALUE CHAIN
• The objective of most organizations is to
provide value to their customers.
• What does it mean to deliver value?
• Let’s peek in on a conversation at Joe’s
pharmacy . . .

Well, Mr. Pharmaceutical
Salesman, your proposal looks
good, but your prices are about
5% higher than your competitors.

That’s true, but we’re
comfortable with that
because of the value-added
that we bring to
this arrangement.

What is that “value-added,”
and how do you convert it
into dollars?

Blah—blah—blah–
customer service–
blah—blah--blah

• While “adding value” is a commonly used
buzzword, in its genuine sense, it means making
the value of the finished component greater than
the sum of its parts.
• It may mean:
– Making it faster
– Making it more reliable
– Providing better service or advice
– Providing something in limited supply (like O-negative
blood or rare gems)
– Providing enhanced features
– Customizing it

• Value is provided by performing a series
of activities referred to as the value chain.
These include:
– Primary activities
– Support activities
• These activities are sometimes referred to
as “line” and “staff” activities respectively.

These include:

• Primary activities include:
– Inbound logistics
Receiving, storing, and distributing the
materials that are inputs to the
organization’s product or service.
For a pharmaceutical company, this activity
might involve handling incoming chemicals
and elements that will be used to make their
drugs.

– Operations
Transforming those inputs into products or
services.
For the pharmaceutical company, this step
involves combining the raw chemicals and
elements with the work of people and equipment to
produce the finished drug product that will be sold
to customers.

– Operations
– Outbound logistics
Distributing products or services to customers.
For the pharmaceutical company, this step involves
packaging and shipping the goods to drug stores,
doctors, and hospitals.

– Operations
– Marketing and sales
Helping customers to
buy the organization’s
products or services.
A pharmacy rep may
visit with drug stores,
doctors, etc. to inform
them about their
products and take
orders.

– Operations
– Marketing and sales
– Service
Post-sale support provided to
customers such as repair and
maintenance function.
A pharmaceutical firm will
typically not be repairing it’s
product (though the product may
be periodically reformulated).
The pharmaceutical company is
more likely to be providing
advisory services to pharmacists,
etc.

These include:

• Support activities include:
– Firm infrastructure
Accountants, lawyers, and administration.
Includes the company’s accounting
information system.

– Human resources
Involves recruiting and hiring new
employees, training employees, paying
employees, and handling employee benefits.

– Human resources
– Technology
Activities to improve the products or services
(e.g., R&D, website development).
For the pharmaceutical company, these activities
would include research and development to
create new drugs and modify existing ones.

– Human resources
– Technology
– Purchasing
Buying the resources (e.g.,
materials, inventory, fixed
assets) needed to carry out the
entity’s primary activities.
In the pharmaceutical company,
the purchasing folks are trying
to get the best combination of
cost and quality in buying
chemicals, supplies, and other
assets the company needs to
run its operations.

• Information technology can significantly
impact the efficiency and effectiveness
with which the preceding activities are
carried out.
• An organization’s value chain can be
connected with the value chains of its
customers, suppliers, and distributors.

For example, the inbound logistics of
Pharmaceuticals, Inc., links to the
outbound logistics of its suppliers.
Pharmaceuticals, Inc.
Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
Service
Smith Supply Co.
Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
Service
Customer Pharmacy
Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
Service

And the outbound logistics of
Pharmaceuticals, Inc., links to the inbound
logistics of its customers.
Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
Service
Smith Supply Co.
Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
Service
Customer Pharmacy
Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
Service

The linking of these separate value chains
creates a larger system known as a supply
chain.
Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
Service
Smith Supply Co.
Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
Service
Customer Pharmacy
Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
Service

The linking of these separate value chains
creates a larger system known as a supply
chain.
Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
Service
Smith Supply Co.
Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
Service
Customer Pharmacy
Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
Service
Information
technology can
facilitate synergistic
linkages that improve
the performance of
each company’s value
chain.

• There is variation in the degree of
structure used to make decisions:
– Structured decisions
• Repetitive and routine
• Can be delegated to lower-level employees
• EXAMPLE: Deciding whether to write an
auto insurance policy for a customer with a
clean driving history.

– Semistructured decisions
• Incomplete rules
• Require subjective assessments
• EXAMPLE: Deciding whether to sell auto
insurance to a customer with a tainted
driving history.

– Semistructured decisions
• Non-recurring and non-routine
• Require a great deal of subjective
assessment
• EXAMPLE: Deciding whether to begin
selling a new type of insurance policy

• There is also variation in the scope of a
decision’s effect:
– Occupational control decisions
• Relate to performance of specific tasks
• Often of a day-to-day nature
• EXAMPLE: Deciding whether to order
inventory

– Management control decisions
• Relate to utilizing resources to accomplish
organizational objectives
• EXAMPLE: Budgeting

– Management control decisions
– Strategic planning decisions
• The “what do we want to be when we grow
up” types of questions
• Involves establishing
– Organizational objectives
– Policies to achieve those objectives
• EXAMPLE: Deciding whether to diversify the
company into other product lines

• In general, the higher a manager is in the
organization, the more likely he/she is to
be engaging in:
– Less structured decisions
– Broader scope (i.e., strategic planning)
decisions

THE AIS AND CORPORATE STRATEGY
• Corporations have:
– Unlimited opportunities to invest in technology
– Limited resources to invest in technology
• Consequently, they must identify the
improvements likely to yield the highest
return.
• This decision requires an understanding of
the entity’s overall business strategy.

• Michael Porter suggests that there are two
basic business strategies companies can
follow:
– Product-differentiation strategy
– Low-cost strategy

follow:

• A product differentiation strategy involves
setting your product apart from those of
your competitors, i.e., building a “better”
mousetrap by offering one that’s faster,
has enhanced features, etc.

follow:

• A low-cost strategy involves offering a
cheaper mousetrap than your competitors.
The low cost is made possible by
operating more efficiently.

• Sometimes a company can do both, but
they normally have to choose.

• Porter also argues that companies must
choose a strategic position among three
choices:
– Variety-based strategic position
• Offer a subset of the industry’s
products or services.
• EXAMPLE: An insurance company
that only offers life insurance as
opposed to life, health, property-casualty,
etc.

choices:
– Needs-based strategic position
• Serve most or all of the needs of a particular
group of customers in a target market.
• EXAMPLE: The original Farm Bureau-based
insurance companies provided a portfolio of
insurance and financial services tailored to the
specific needs of farmers.

choices:
– Access-based strategic position
• Serve a subset of customers who differ from
others in terms of factors such as geographic
location or size..
• EXAMPLE: Satellite Internet services are
intended primarily for customers in rural areas
who cannot get DSL or cable services.

choices:
– Access-based strategic position
• These strategic positions are not
mutually exclusive and can overlap.

• Choosing a strategic position is important
because it helps a company focus its efforts as
opposed to trying to be everything to everybody.
– EXAMPLE: A radio station that tries to play all types
of music will probably fail.
• It’s critical to design the organization’s activities
so they reinforce one another in achieving the
selected strategic position. The result is
synergy, which is difficult for competitors to
imitate.

• The growth of the Internet has profoundly
affected the way value chain activities are
performed:
– Inbound and outbound logistics can be streamlined
for products that can be digitized, like books and
music.
– The Internet allows companies to cut costs, which
impacts strategy and strategic position.
– Because the Internet is available to everyone, intense
price competition can result. The outcome may be
that many companies shift from low-cost to product-differentiation
strategies.
– The Internet may impede access-based strategic
positions.

• The AIS should help a company adopt
and maintain its strategic position.
– Requires that data be collected about each
activity.
– Requires the collection and integration of both
financial and nonfinancial data.

• The authors believe:
– Accounting and information systems should
be closely integrated.
– The AIS should be the primary information
system to provide users with information they
need to perform their jobs.

SUMMARY
• What we’ve learned so far:
– The meaning of system, data, and
information
– What an AIS is
• Why it’s an important topic to stody
• What its role is in the value chain
• How it provides information for decision making
– What are the basic strategies and strategic
positions an organization can pursue
• How these interact with the AIS

Accounting information system

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