Chapter 1

Accounting Information Systems: An Overview

1-1
Copyright 2012 Pearson Education
 Learning Objectives

Distinguish between data and information.

Discuss the characteristics of useful information.

Explain how to determine the value of information.

Explain the decisions an organization makes and the information needed to make them.

Identify the information that passes between internal and external parties and an AIS.

Describe the major business processes present in most companies.

Explain what an accounting information system (AIS) is and describe its basic functions.

Discuss how an AIS can add value to an organization.

Explain how an AIS and corporate strategy affect each other.

Explain the role an AIS plays in a companys value chain.

Copyright 2012 Pearson Education 1-2

 What Is a System?
System
A set of two or more
interrelated components
interacting to achieve a
goal

Goal Conflict
Occurs when components
act in their own interest
without regard for overall
goal

Goal Congruence
Occurs when components
acting in their own interest
contribute toward overall
goal.

The larger and more

complicated a system, the
more difficult it is to
achieve goal congruence.

Copyright 2012 Pearson Education 1-3

 Data vs. Information

Data are facts that are

recorded and stored.
Insufficient for decision
making.

Information is processed
data used in decision
making.
Too much information
however, will make it
more, not less, difficult to Information
make decisions. This is
known as Information
Overload.

Copyright 2012 Pearson Education 1-4

 Value of Information

Benefits Costs
Reduce Uncertainty Time & Resources

Improve Decisions
Produce Information
Improve Planning Distribute Information

Improve Scheduling
Benefit $s > Cost $s

Copyright 2012 Pearson Education 1-5

 Business Cycle GiveGet

Copyright 2012 Pearson Education 1-6

 Components of an AIS

People using the system

Procedures and Instructions

For collecting, processing, and storing data

Data

Software

Information Technology (IT) Infrastructure

Computers, peripherals, networks, and so on

Internal Control and Security

Safeguard the system and its data

Copyright 2012 Pearson Education 1-7

 AIS and Business Functions

Collect and store data about organizational:

Activities, resources, and personnel

Transform data into information enabling

Management to:
Plan, execute, control, and evaluate
Activities, resources, and personnel

Provide adequate control to safeguard

Assets and data

Copyright 2012 Pearson Education 1-8

 AIS Value Add

Improve Quality and Reduce Costs of product or service :

ex, AIS can monitor machinery so operators are notified
immediately when performance falls outside acceptable
quality limits. This indirectly helps to maintain product
quality, reduce waste , and lower the cost.

Improve Efficiency: ex, timely info makes JIT more

applicable as it require accurate and up-to-date info
about raw material inventories and their locations.

Improve Sharing Knowledge and expertise: this can

improve operations and provide competitive advantage
. Ex supermarkets update sale folks with new discounts
and prices

Copyright 2012 Pearson Education 1-9

 AIS Value Add

Improve Supply Chain efficiencies and effectiveness : by

cut off many process of ordering and let supplier
manage the inventory by his self.

Improve Internal Control: an AIS with proper internal

control will help protect systems from fraud, errors,
failures, and disasters.

Improve Decision Making: this can be translated in

different ways

Copyright 2012 Pearson Education 1-10

 Improve Decision Making

Identify situations that require action.

Provide alternative choices.

Reduce uncertainty.

Provide feedback on previous decisions.

Provide accurate and timely information.

Copyright 2012 Pearson Education 1-11

 AIS and Corporate Strategy
Organizations have limited
resources, thus investments
to AIS should have greatest
impact on ROI.

Organizations need to
understand:

IT developments

Business strategy

Organizational culture

Will effect and be effected

by new AIS

Copyright 2012 Pearson Education 1-12

 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?

 SYSTEMS, DATA, AND INFORMATION

Every organization has goals.

The subsystems should be designed to
maximize achievement of the
organizations 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
organizations goal of delivering
product on time.
 SYSTEMS, DATA, AND INFORMATION

However, when you get more information then you can

effectively assimilate, you suffer from information
overload.
Example: Final exams week!
When youve reached the overload point, the quality of
decisions declines while the costs of producing the
information increases.
 SYSTEMS, DATA, AND INFORMATION

Characteristics that make information useful:

Relevance

It reduces uncertainty by helping you predict what will

happen or confirm what already has happened.
 SYSTEMS, DATA, AND INFORMATION

Characteristics that make information useful:

Relevance
Reliability

Its dependable, i.e., free from error or bias and

faithfully portrays events and activities.
 SYSTEMS, DATA, AND INFORMATION

Characteristics that make information useful:

Relevance
Reliability
Completeness

It doesnt leave out anything thats important.

 SYSTEMS, DATA, AND INFORMATION

Characteristics that make information useful:

Relevance
Reliability
Completeness
Timeliness

You get it in time to make your decision.

 SYSTEMS, DATA, AND INFORMATION

Characteristics that make information useful:

Relevance
Reliability
Completeness
Timeliness
Understandability

Its presented in a manner you can comprehend and

use.
 SYSTEMS, DATA, AND INFORMATION

Characteristics that make information useful:

Relevance
Reliability
Completeness
Timeliness
Understandability
A consensus notionthe nature of the information is
such that different people would tend to produce the
Verifiability
same result.
 SYSTEMS, DATA, AND INFORMATION

Characteristics that make information useful:

Relevance
Reliability
Completeness
Timeliness
Understandability
Verifiability
You can get to it when you need it and in a format you
Accessibility
can use.
 SYSTEMS, DATA, AND INFORMATION

Information is provided to both:

External users
Internal users
 SYSTEMS, DATA, AND INFORMATION

Information is provided to both:

External users
Internal users
 SYSTEMS, DATA, AND INFORMATION

External users primarily use information that is either:

MANDATORY INFORMATIONrequired
by a governmental entity, such as
Form 10-K required by the SEC; or
ESSENTIAL INFORMATIONrequired to
conduct business with external parties,
such as purchase orders.
 SYSTEMS, DATA, AND INFORMATION

In providing mandatory or essential information, the focus

should be on:
Minimizing costs.
Meeting regulatory requirements.
Meeting minimum standards of
reliability and usefulness.
 SYSTEMS, DATA, AND INFORMATION

Information is provided to both:

External users
Internal users
 SYSTEMS, DATA, AND INFORMATION

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 entitys resources (including data) are:
Available when needed
Accurate and reliable
 WHY STUDY ACCOUNTING
INFORMATION SYSTEMS?

Its 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.
 WHY STUDY ACCOUNTING
INFORMATION SYSTEMS?

Its fundamental to accounting.

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.
 WHY STUDY ACCOUNTING
INFORMATION SYSTEMS?

Its fundamental to accounting.

The skills are critical to career success.

Auditors need to evaluate the accuracy and

reliability of information produced by the AIS.
 WHY STUDY ACCOUNTING
INFORMATION SYSTEMS?

Its fundamental to accounting.

The skills are critical to career success.

Tax accountants must understand the clients

AIS adequately to be confident that it is
providing complete and accurate information
for tax planning and compliance work.
 WHY STUDY ACCOUNTING
INFORMATION SYSTEMS?

Its fundamental to accounting.

The skills are critical to career success.

In private industry and not-for-profit, systems

work is considered the most important activity
performed by accountants.
 WHY STUDY ACCOUNTING
INFORMATION SYSTEMS?

Its fundamental to accounting.

The skills are critical to career success.

In management consulting, the design,

selection, and implementation of accounting
systems is a rapid growth area.
 WHY STUDY ACCOUNTING
INFORMATION SYSTEMS?

Its fundamental to accounting.

The skills are critical to career success.

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.
 WHY STUDY ACCOUNTING
INFORMATION SYSTEMS?

Its fundamental to accounting.

The skills are critical to career success.

The AIS course complements other 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.
 WHY STUDY ACCOUNTING
INFORMATION SYSTEMS?

Its fundamental to accounting.

The skills are critical to career success.

The AIS course complements other systems courses.

AIS topics are tested on the new CPA exam.

AIS topics impact corporate strategy and culture.

 WHY STUDY ACCOUNTING
INFORMATION SYSTEMS?

Occupational
Culture Strategy

AIS design is
affected by
information
AIS
technology, the
organizations
strategy, and the
organizations
culture. Information
Technology
 WHY STUDY ACCOUNTING
INFORMATION SYSTEMS?

Occupational
Culture Strategy

Information technology affects

the companys choice of AIS
business strategy. To perform
cost-benefit analyses on IT
changes, you need to
understand business strategy.
Information
Technology
 WHY STUDY ACCOUNTING
INFORMATION SYSTEMS?

Occupational
Culture Strategy

Although culture affects

the design of the AIS, its
AIS
also true that the AIS
affects culture by altering
the dispersion and
availability of information.
Information
Technology
 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?

Lets peek in on a conversation at Joes pharmacy . . .

 ROLE OF THE AIS IN THE VALUE CHAIN

Well, Mr. Pharmaceutical Salesman, your

proposal looks good, but your prices are
about 5% higher than your competitors.
ROLE OF THE AIS IN THE VALUE CHAIN

Thats true, but were

comfortable with that because
of the value-added that we
bring to this arrangement.
ROLE OF THE AIS IN THE VALUE CHAIN

What is that value-added,

and how do you convert it into
dollars?
ROLE OF THE AIS IN THE VALUE CHAIN

Blahblahblah
customer service
blahblahblah
 ROLE OF THE AIS IN THE VALUE CHAIN

Although 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
 ROLE OF THE AIS IN THE VALUE CHAIN

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.
 ROLE OF THE AIS IN THE VALUE CHAIN

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.
 ROLE OF THE AIS IN THE VALUE CHAIN

Primary activities include:

Inbound logistics

Receiving, storing, and distributing the

materials that are inputs to the organizations
product or service.

For a pharmaceutical company, this activity

might involve handling incoming chemicals and
elements that will be used to make their drugs.
 ROLE OF THE AIS IN THE VALUE CHAIN

Primary activities include:

Inbound logistics
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.
 ROLE OF THE AIS IN THE VALUE CHAIN

Primary activities include:

Inbound logistics
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.
 ROLE OF THE AIS IN THE VALUE CHAIN

Primary activities include:

Inbound logistics
Helping customers to
Operations buy the organizations
Outbound logistics products or services.
Marketing and sales
A pharmacy rep may
visit with drug stores,
doctors, etc. to inform
them about their
products and take
orders.
 ROLE OF THE AIS IN THE VALUE CHAIN

Primary activities include:

Post-sale support provided to
Inbound logistics
customers such as repair and
Operationsmaintenance function.
Outbound logistics
A pharmaceutical firm will typically
and
Marketing not besales
repairing its product (though
Service the product may be periodically
reformulated). The pharmaceutical
company is more likely to be
providing advisory services to
pharmacists, etc.
 ROLE OF THE AIS IN THE VALUE CHAIN

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.
 ROLE OF THE AIS IN THE VALUE CHAIN

Support activities include:

Firm infrastructure

Accountants, lawyers, and administration.

Includes the companys accounting information
system.
 ROLE OF THE AIS IN THE VALUE CHAIN

Support activities include:

Firm infrastructure
Human resources

Involves recruiting and hiring new employees,

training employees, paying employees, and
handling employee benefits.
 ROLE OF THE AIS IN THE VALUE CHAIN

Support activities include:

Firm infrastructure
Human resources
Technology

Activities to improve the products or services (e.g.,

R&D, Web site development).

For the pharmaceutical company, these activities

would include research and development to create
new drugs and modify existing ones.
 ROLE OF THE AIS IN THE VALUE CHAIN

Support activities include:

Buying the resources (e.g.,
Firm infrastructure
materials, inventory, fixed assets)
Human resources
needed to carry out the entitys
primary activities.
Technology
Purchasing 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.
 ROLE OF THE AIS IN THE VALUE CHAIN

Information technology can significantly impact the

efficiency and effectiveness with which the preceding
activities are carried out.
Good AIS value chain:
UPS spends
An organizations value over
chain$1
can be connected
billion a year onwith
the valueinformation
chains of its customers, suppliers,in
systems resulting and
greater
distributors.
customer control over delivery, higher
driver productivity, and lower costs.
Bad AIS value chain:
Limited Brands tangled integration of over 60
incompatible information systems resulted in 400 trailers
trying to jam into a 150 trailer lot.
 ROLE OF THE AIS IN THE VALUE CHAIN

Smith Supply Co. For example, the inbound logistics of

Inbound Logistics Pharmaceuticals, Inc., links to the outbound logistics
Operations of its suppliers.
Outbound Logistics
Marketing & Sales Pharmaceuticals,
Service Inc.

Inbound Logistics
Customer Pharmacy
Operations Inbound Logistics
Operations
Outbound Logistics Outbound Logistics
Marketing & Sales
Marketing & Sales
Service
Service
 ROLE OF THE AIS IN THE VALUE CHAIN

Smith Supply Co. And the outbound logistics of Pharmaceuticals, Inc.,

Inbound Logistics links to the inbound logistics of its customers.
Operations
Outbound Logistics
Marketing & Sales Pharmaceuticals,
Service Inc.

Inbound Logistics
Customer Pharmacy
Operations Inbound Logistics
Operations
Outbound Logistics Outbound Logistics
Marketing & Sales
Marketing & Sales
Service
Service
 ROLE OF THE AIS IN THE VALUE CHAIN

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

Inbound Logistics
Customer Pharmacy
Operations Inbound Logistics
Operations
Outbound Logistics Outbound Logistics
Marketing & Sales
Marketing & Sales
Service
Service
 ROLE OF THE AIS IN THE VALUE CHAIN

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

Inbound Logistics
Customer Pharmacy
Information technology
can facilitate synergistic Operations Inbound Logistics
linkages that improve the Operations
performance of each Outbound Logistics Outbound Logistics
companys value chain. Marketing & Sales
Marketing & Sales
Service
Service
 ROLE OF THE AIS IN THE 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.
 ROLE OF THE AIS IN THE VALUE CHAIN

There is variation in the degree of structure used to make

decisions:
Structured decisions
Semistructured decisions

Incomplete rules.
Require subjective assessments.
EXAMPLE: Deciding whether to sell auto insurance
to a customer with a tainted driving history.
 ROLE OF THE AIS IN THE VALUE CHAIN

There is variation in the degree of structure used to make

decisions:
Structured decisions
Semistructured decisions
Unstructured 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.
 ROLE OF THE AIS IN THE VALUE CHAIN

There is also variation in the scope of a decisions effect:

Occupational/ operational control
decisions

Relate to performance of specific tasks

Often of a day-to-day nature.
EXAMPLE: Deciding whether to order inventory.
 ROLE OF THE AIS IN THE VALUE CHAIN

There is also variation in the scope of a decisions effect:

Occupational or operational control
decisions
Management control decisions

Relate to utilizing resources to accomplish

organizational objectives.
EXAMPLE: Budgeting.
 ROLE OF THE AIS IN THE VALUE CHAIN

There is also variation in the scope of a decisions effect:

Occupational control decisions
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.
 ROLE OF THE AIS IN THE VALUE CHAIN

In general, the higher a manager is in the organization,

the more likely 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 entitys

overall business strategy.
 THE AIS AND CORPORATE STRATEGY

Michael Porter suggests that there are two basic business

strategies companies can follow:
Product-differentiation strategy
Low-cost strategy
 THE AIS AND CORPORATE STRATEGY

Michael Porter suggests that there are two basic business

strategies companies can follow:
Product-differentiation strategy
Low-cost strategy
 THE AIS AND CORPORATE STRATEGY

A product-differentiation strategy involves setting your

product apart from those of your competitors, i.e.,
building a better mousetrap by offering one thats
faster, has enhanced features, etc.
 THE AIS AND CORPORATE STRATEGY

Michael Porter suggests that there are two basic business

strategies companies can follow:
Product-differentiation strategy
Low-cost strategy
 THE AIS AND CORPORATE STRATEGY

A low-cost strategy involves offering a cheaper

mousetrap than your competitors. The low cost is made
possible by operating more efficiently.
 THE AIS AND CORPORATE STRATEGY

Sometimes a company can do both, but they normally

have to choose.
 THE AIS AND CORPORATE STRATEGY

Porter also argues that companies must choose a

strategic position among three choices:
Variety-based strategic position

Offer a subset of the industrys

products or services.
EXAMPLE: An insurance company
that only offers life insurance as
opposed to life, health, property-
casualty, etc.
 THE AIS AND CORPORATE STRATEGY

Porter also argues that companies must choose a

strategic position among three choices:
Variety-based strategic position
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.
 THE AIS AND CORPORATE STRATEGY

Porter also argues that companies must choose a

strategic
Serve aposition
subsetamong three choices:
of customers who differ from others in
terms of factors suchstrategic
Variety-based position
as geographic location or size.
Needs-based
EXAMPLE: Satellite strategic position
Internet services are intended
primarily for customers in rural areas who cannot get
Access-based
DSL or cable services.strategic position
 THE AIS AND CORPORATE STRATEGY

Porter also argues that companies must choose a

strategic position among three choices:
Variety-based strategic position
Needs-based strategic position
Access-based strategic position
These strategic positions are not mutually exclusive and
can overlap.
 THE AIS AND CORPORATE STRATEGY

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.

Its critical to design the organizations

activities so they reinforce one another
in achieving the selected strategic
position. The result is synergy, which is
difficult for competitors to imitate.
 THE AIS AND CORPORATE STRATEGY

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 AND CORPORATE STRATEGY

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.