Accounting Information Systems: An Overview

AIS 1
Accounting Information Systems:

An Overview
INTRODUCTION

Questions to be addressed 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

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
A consensus notion—the nature of the
– Timelinessinformation 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
• It’s 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

It’s fundamental to accounting.
• The skills are critical to career
success.
• Auditors need to evaluate the accuracy
and reliability of information produced by
the AIS.

success.
• 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.

success.
• In private industry and not-for-profits,
systems work is considered the most
important activity performed by
accountants.

success.
• In management consulting, the design,
selection, and implementation of
accounting systems is a rapid growth area.


The skills are critical to career
success.
• The AIS course complements other
• Other systems
systems courses.
courses focus on design and
implementation of information systems,
databases, expert systems, and
telecommunications.
• AIS courses focus on accountability and
control.


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.


success.

The AIS course complements other
systems courses.

AIS topics are tested on the new CPA
exam.
• AIS topics impact corporate strategy
and culture.
Occupational
Culture Strategy
AIS design is
affected by AIS
information
technology, the
organization’s
strategy, and the
organization’s Information
culture. Technology
Occupational
Culture Strategy
Information technology
affects the company’s AIS
choice of business
strategy. To perform
cost-benefit analyses on
IT changes, you need to
understand business Information
strategy. Technology
Occupational
Culture Strategy
While culture affects

the design of the AIS,
AIS
it’s 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?

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
 Support activities


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.

 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.

 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.

 Inbound logistics Helping customers to
 Operations buy the organization’s
products or services.
 Outbound logistics
– Marketing and sales A pharmacy rep may
visit with drug stores,
doctors, etc. to inform
them about their
products and take
orders.

Post-sale support provided to
customers such as repair and
maintenance function.
 Operations
A pharmaceutical firm will
 Outbound logistics
typically not be repairing it’s
 Marketing and sales
product (though the product may
– Service be periodically reformulated).
The pharmaceutical company is
more likely to be providing
advisory services to pharmacists,
etc.

These include:
 Primary activities
– Support activities


Support activities include:
– Firm infrastructure
Accountants, lawyers, and administration.
Includes the company’s accounting
information system.

 Firm infrastructure
– 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.

Buying the resources (e.g.,
materials, inventory, fixed
assets) needed to carry out the
 Human resources entity’s primary activities.
 Technology
In the pharmaceutical company,
– Purchasing 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.
Smith Supply Co. For example, the inbound logistics of

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

Inbound Logistics Pharmaceuticals, Inc., links to the inbound
Operations logistics of its customers.
Outbound Logistics
Marketing & Sales
Inbound Logistics
Service
Operations
Service Operations
Outbound Logistics
Marketing & Sales
Service
Smith Supply Co. The linking of these separate value chains

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

Inbound Logistics creates a larger system known as a supply
Operations chain.
Outbound Logistics
Marketing & Sales
Inbound Logistics
Service
Operations
Information
technology can Marketing & Sales Inbound Logistics
facilitate synergistic Service Operations
linkages that improve Outbound Logistics
the performance of Marketing & Sales
each company’s value
Service
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.

There is variation in the degree of
 Structured decisions
– Semistructured decisions
• Incomplete rules
• Require subjective assessments
• EXAMPLE: Deciding whether to sell auto
insurance to a customer with a tainted
driving history.

There is variation in the degree of
 Structured decisions
 Semistructured decisions
– Structured 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

There is also variation in the scope of a
 Occupational control decisions
– Management control decisions
• Relate to utilizing resources to accomplish
organizational objectives
• EXAMPLE: Budgeting

There is also variation in the scope of a
 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

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

can follow:
– Product-differentiation strategy
 Low-cost strategy

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.

can follow:
 Product-differentiation strategy
– Low-cost strategy

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.

Porter also argues that companies must
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.

Porter
• Servealso argues
a subset that companies
of customers who differ must
from
choose
othersainstrategic position
terms of factors suchamong three
as geographic
location or size..
choices:
• EXAMPLE: Satellite Internet services are
intended primarily for customers in rural areas
 Needs-based
who cannot getstrategic position
DSL or cable services.
– Access-based strategic position

Porter also argues that companies must
choices:
 Needs-based strategic position
 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

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AIS 1

Accounting Information Systems:

• Goal conflict occurs when the activity of a

• Information is different from data.

Benefits of information may include:

Costs may include time and resources spent:

• Characteristics that make information

• Characteristics that make information

• Characteristics that make information

• Characteristics that make information

• Characteristics that make information

• Characteristics that make information

• Characteristics that make information

While culture affects

Well, Mr. Pharmaceutical

That’s true, but we’re

What is that “value-added,”

For a pharmaceutical company, this activity

For the pharmaceutical company, this step

For the pharmaceutical company, this step involves

For the pharmaceutical company, these activities

Smith Supply Co. For example, the inbound logistics of

Smith Supply Co. And the outbound logistics of

Smith Supply Co. The linking of these separate value chains

Smith Supply Co. The linking of these separate value chains

• There is variation in the degree of

• There is also variation in the scope of a

• Porter also argues that companies must

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