Chapter 1 - Romney

C
HAPTER 1
Accounting Information Systems: An Overview
2008 Prentice Hall Business Publishing
Accounting Information Systems, 11/e
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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?
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SYSTEMS, DATA, AND INFORMATION

A system is:
A set of interrelated components That interact To achieve a goal
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Most systems are composed of smaller subsystems . . . . . . and vice versa!
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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.
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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 subsystems goals are in line with the organizations goals. The larger and more complicated a system, the more difficult it is to achieve goal congruence.
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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
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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.
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However, when you get more information than 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.
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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
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Costs may include time and resources spent: Collecting data Processing data Storing data Distributing information to users
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Costs and benefits of information are often difficult to quantify, but you need to try when youre making decisions about whether to provide information.
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Characteristics that make information useful:
Relevance
It reduces uncertainty by helping you predict what will happen or confirm what already has happened.
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Relevance Reliability
Its dependable, i.e., free from error or bias and faithfully portrays events and activities.
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Relevance Reliability Completeness
It doesnt leave out anything thats important.
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Relevance Reliability Completeness Timeliness
You get it in time to make your decision.
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Relevance Reliability Completeness Timeliness Understandability
Its presented in a manner you can comprehend and use.
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Relevance Reliability Completeness A consensus notionthe nature of the Timeliness information is such that different people would tend to Understandability produce the same result. Verifiability
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Relevance Reliability Completeness Timeliness Understandability to it when you need it and in a You can get format Verifiability you can use. Accessibility

Information is provided to both:
External users Internal users
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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.
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In providing mandatory or essential information, the focus should be on:
Minimizing costs. Meeting regulatory requirements. Meeting minimum standards of reliability and usefulness.
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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.
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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
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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.
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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.
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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.
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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.
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In private industry and not-for-profit, systems work is considered the most important activity performed by accountants.
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In management consulting, the design, selection, and implementation of accounting systems is a rapid growth area.
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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.
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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.

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.

Occupational Culture
Strategy
AIS design is affected by information technology, the organizations strategy, and the organizations culture.
AIS
Information Technology
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Strategy
Information technology affects the companys choice of business strategy. To perform cost-benefit analyses on IT changes, you need to understand business strategy.
AIS
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Strategy
Although culture affects the design of the AIS, its also true that the AIS affects culture by altering the dispersion and availability of information.
AIS
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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 . . .
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Well, Mr. Pharmaceutical Salesman, your proposal looks good, but your prices are about 5% higher than your competitors.
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Thats true, but were comfortable with that because of the valueadded that we bring to this arrangement.
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What is that value-added, and how do you convert it into dollars?
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Blahblahblah customer service blahblahblah
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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
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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.
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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.
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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.

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.
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Inbound logistics Operations Outbound logistics Marketing and sales
Helping customers to buy the organizations products or services. A pharmacy rep may visit with drug stores, doctors, etc. to inform them about their products and take orders.
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Post-sale support provided to Primary activities include:
customers such as repair and Inbound logistics maintenance function.
Operations A pharmaceutical firm will Outbound logistics typically not be repairing its Marketing andproduct (though the product may sales be periodically reformulated). Service
The pharmaceutical company is more likely to be providing advisory services to pharmacists, etc.

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Support activities include:
Firm infrastructure
Accountants, lawyers, and administration. Includes the companys accounting information system.
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Firm infrastructure Human resources
Involves recruiting and hiring new employees, training employees, paying employees, and handling employee benefits.
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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.

Buying the Support activities include:resources (e.g.,
materials, inventory, fixed Firm infrastructure assets) needed to carry out the Human resources 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.
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Information technology can significantly impact Goodefficiency and effectiveness the AIS value chain: UPS spends over $1 billion a year on with which the preceding activities are information systems resulting in greater carried out. customer control over delivery, higher driver productivity, and lower costs. An organizations value chain can be Bad AIS value chain: connected with the value integration ofover 60 chains of its Limited Brands tangled incompatible information distributors. customers, suppliers, and systems resulted in
400 trailers trying to jam into a 150 trailer lot.
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Smith Supply Co. Inbound Logistics Operations Outbound Logistics Marketing & Sales Service 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
Customer Pharmacy Inbound Logistics Operations Outbound Logistics Marketing & Sales Service
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Smith Supply Co. Inbound Logistics Operations Outbound Logistics Marketing & Sales Service And the outbound logistics of Pharmaceuticals, Inc., links to the inbound logistics of its customers. Pharmaceuticals, Inc. Inbound Logistics Operations Outbound Logistics Marketing & Sales Service

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

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

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.
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Structured decisions Semistructured decisions
Incomplete rules. Require subjective assessments. EXAMPLE: Deciding whether to sell auto insurance to a customer with a tainted driving history.
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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.
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There is also variation in the scope of a decisions effect:
Occupational control decisions
Relate to performance of specific tasks Often of a day-to-day nature. EXAMPLE: Deciding whether to order inventory.
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Occupational control decisions Management control decisions
Relate to utilizing resources to accomplish organizational objectives. EXAMPLE: Budgeting.
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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
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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.

Michael Porter suggests that there are two basic business strategies companies can follow:
Product-differentiation strategy Low-cost strategy
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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.
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A low-cost strategy involves offering a cheaper mousetrap than your competitors. The low cost is made possible by operating more efficiently.
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Sometimes a company can do both, but they normally have to choose.
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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, propertycasualty, etc.

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 also argues that companies must Serve a subset of customers who differ from choose ain terms of factors such as geographic others strategic position among three location choices: or size.
EXAMPLE: Satellite Internet services are Variety-based strategic position in rural areas intended primarily for customers Needs-based strategic cable services. who cannot get DSL or position
Access-based strategic position
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Variety-based strategic position 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.
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.
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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 productdifferentiation strategies. The Internet may impede access-based strategic positions.

The AIS should analysis company adopt and Predictive data help a (data maintain its strategic adds to competitive warehousing/mining) position.
advantage by forecasting future about each Requires that data be collectedevents based on historical trends. activity. EXAMPLE: You can view forecasts of airfares Requires major airports based on historical trends between the collection and integration of both financial and nonfinancial data. at www.farecast.com.
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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.
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SUMMARY
What weve learned so far:
The meaning of system, data, and information. What an AIS is. Why its an important topic to study. 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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C

Accounting Information Systems: An Overview

2008 Prentice Hall Business Publishing

Accounting Information Systems, 11/e

2008 Prentice Hall Business Publishing

Accounting Information Systems, 11/e

SYSTEMS, DATA, AND INFORMATION

2008 Prentice Hall Business Publishing

Accounting Information Systems, 11/e

SYSTEMS, DATA, AND INFORMATION

2008 Prentice Hall Business Publishing

Accounting Information Systems, 11/e

SYSTEMS, DATA, AND INFORMATION

2008 Prentice Hall Business Publishing

Accounting Information Systems, 11/e

SYSTEMS, DATA, AND INFORMATION

SYSTEMS, DATA, AND INFORMATION

2008 Prentice Hall Business Publishing

Accounting Information Systems, 11/e

SYSTEMS, DATA, AND INFORMATION

2008 Prentice Hall Business Publishing

Accounting Information Systems, 11/e

SYSTEMS, DATA, AND INFORMATION

2008 Prentice Hall Business Publishing

Accounting Information Systems, 11/e

SYSTEMS, DATA, AND INFORMATION

2008 Prentice Hall Business Publishing

Accounting Information Systems, 11/e

SYSTEMS, DATA, AND INFORMATION

2008 Prentice Hall Business Publishing

Accounting Information Systems, 11/e

SYSTEMS, DATA, AND INFORMATION

2008 Prentice Hall Business Publishing

Accounting Information Systems, 11/e

SYSTEMS, DATA, AND INFORMATION

2008 Prentice Hall Business Publishing

Accounting Information Systems, 11/e

SYSTEMS, DATA, AND INFORMATION

2008 Prentice Hall Business Publishing

Accounting Information Systems, 11/e

SYSTEMS, DATA, AND INFORMATION

2008 Prentice Hall Business Publishing

Accounting Information Systems, 11/e

SYSTEMS, DATA, AND INFORMATION

2008 Prentice Hall Business Publishing

Accounting Information Systems, 11/e

SYSTEMS, DATA, AND INFORMATION

2008 Prentice Hall Business Publishing

Accounting Information Systems, 11/e

SYSTEMS, DATA, AND INFORMATION

2008 Prentice Hall Business Publishing

Accounting Information Systems, 11/e

SYSTEMS, DATA, AND INFORMATION

SYSTEMS, DATA, AND INFORMATION

2008 Prentice Hall Business Publishing

Accounting Information Systems, 11/e

SYSTEMS, DATA, AND INFORMATION

2008 Prentice Hall Business Publishing

Accounting Information Systems, 11/e

SYSTEMS, DATA, AND INFORMATION

2008 Prentice Hall Business Publishing

Accounting Information Systems, 11/e

SYSTEMS, DATA, AND INFORMATION

2008 Prentice Hall Business Publishing