Accounting Information Systems (AIS)

Introduction: S&S Inc.

• Scott Parry and Susan Gonzalez form S&S, Inc., to sell consumer electronic devices.
• Parry and Gonzalez decide to pursue a “clicks and bricks” strategy.
• They plan to hold the grand opening of S&S in five weeks.
What types of important decisions do Scott and Susan have to make?
• How to organize their accounting records.
• How to design a set of procedures to ensure that they meet all of their government obligations.
• How to price their products.
• Whether to extend credit, on what terms, and how to accurately track what customers owe and have
paid
• How to hire, train, and supervise their employees
• How to keep track of cash flows.
• The appropriate product mix and quantities to carry
• What functionality to provide on their website
Introduction
• This chapter defines an accounting information system (AIS).
• It discusses why AIS is an important topic to study.
• It describes how an AIS adds to an organization’s value chain.
• It describes and contrasts the basic strategies that a business can pursue.

Learning Objective 1
Explain what an accounting information system (AIS) is and describe the basic functions it performs.

The Information Environment

• We begin the study of AIS with the recognition that information is a business resource.
• Every business day, vast quantities of information flow to decision makers and other users to meet a
variety of internal needs.
 • While most of the information is expressed in traditional monetary terms, some is expressed as ratios,
percentages, or units. Traditionally, accountants have limited their concern to monetary amounts. This
was understandable for the era of manual accounting systems because the cost of capturing and
processing data was far more expensive than is the case today.
• But a contemporary view of accounting must expand to include any data that are either directly or
indirectly reflected in the financial statements whether in this or in the future accounting periods.
Thus, hours worked, units processed or even planned, employee vacation days earned, and customer
telephone numbers are all data that are captured, processed, stored, and reported by the accounting
system and that represent information used for decision making by managers.
What Is an AIS?
• A system is a set of two or more interrelated components that interact to achieve a goal.
• Systems are almost always composed of smaller subsystems, each performing a specific function
supportive of the larger system.
An accounting information system (AIS) consists of:
• People
• Procedures
• Data
• Software
• Information technology infrastructure
What important functions does the AIS perform in an organization?
• It collects and stores data about activities and transactions.
• It processes data into information that is useful for making decisions.
• It provides adequate controls to safeguard the organization’s assets.

Learning Objective 2
Discuss why studying the design and management of an AIS is important.

In Statement of Financial Accounting Concepts No. 2, The FASB...

• Defined accounting as an information system.
• Stated that the primary objective of accounting is to provide information useful to decision makers.
The Accounting Education Change Commission recommended that the accounting curriculum should provide
students with a solid understanding of three essential concepts:
1. The use of information in decision making
2. The nature, design, use and implementation of an AIS
3. Financial information reporting
To understand how the accounting system works.
– How to collect data about an organization’s activities and transactions.
– How to transform that data into information that management can use to run the organization.
– How to ensure the availability, reliability, and accuracy of that information.
Auditors need to understand the systems that are used to produce a company’s financial statements.
Tax professionals need to understand enough about the client’s AIS to be confident that the information used
for tax planning and compliance work is complete and accurate.
• One of the fastest growing types of consulting services entails the design, selection, and
implementation of new Accounting Information Systems.
• A survey conducted by the Institute of Management Accountants (IMA) indicates that work relating to
accounting systems was the single most important activity performed by corporate accountants.

Information Technology and Corporate Strategy

The same survey conducted by the Institute of Management Accountants (IMA) also indicates that the second
most important job activity of corporate accountants is long-term strategic planning.

The CITP (Certified Information Technology Professional) Designation

• Identifies CPAs who possess a broad range of technological knowledge and the manner in which
information technology (IT) can be used to achieve business objectives
• Reflects the AICPA’s recognition of the importance and interrelationship of IT with accounting

Ten Most Important Activities Performed by Accountants

1. Accounting systems and financial reporting
2. Long-term strategic planning
3. Managing the accounting and finance function
4. Internal Consulting
5. Short-term budgeting
6. Financial and economic analyses
7. Process improvement
8. Computer systems and operations
9. Performance evaluation
10. Customer and product profitability analyses

Learning Objective 3
Explain the role played by the AIS in a company’s value chain and discuss ways that the AIS can add value to a
business.

The Value Chain

• The ultimate goal of any business is to provide value to its customers.
• A business will be profitable if the value it creates is greater than the cost of producing its products or
services.
• An organization’s value chain consists of nine interrelated activities that collectively describe
everything it does.
• The five primary activities consist of the activities performed in order to create, market, and deliver
products and services to customers and also to provide post-sales services and support.
 • The four support activities in the value chain make it
possible for the primary activities to be performed efficiently
and effectively.

• The value chain concept can be extended by recognizing that organizations must interact with
suppliers, distributors, and customers.
• An organization’s value chain and the value chains of its suppliers, distributors, and customers
collectively form a value system.

How an AIS can add Value to an Organization

• providing accurate and timely information so that five primary value chain activities can be performed
more effectively and efficiently.
• improving the quality and reducing the costs of products or services.
• improving efficiency.
• Improving decision making capabilities.
• increasing the sharing of knowledge.

A well-designed AIS can also help an organization profit by improving the efficiency and effectiveness of its
supply chain.
Information and Decision Making
What is information?
• The term data refers to any and all of the facts that are collected, stored, and processed by an
information system.
• Information is data that has been organized and processed so that it is meaningful.
• Data are facts, which may or may not be processed (edited, summarized, or refined) and have no direct
effect on the user
The Information System (IS)
• An information system (IS) or management information system (MIS) is a manmade system that
consists of an integrated set of computer-based and manual components established to collect, store,
and manage data and to provide output information to users.

What is decision making? Decision making involves the following

steps:
1. Identify the problem.
2. Select a method for solving the problem.
3. Collect data needed to execute the decision model.
4. Interpret the outputs of the model.
5. Evaluate the merits of each alternative.
6. Choose and execute the preferred solution.

Management Decision Making (Summary)

1. Intelligence: Searching the environment for
conditions calling for a decision.
2. Design: Inventing, developing, and
analyzing possible courses of action.
3. Choice: Selecting a course of action.
Decisions can be categorized as follows:
– in terms of the degree of structure that exists
– by the scope of the decision
Structured decisions - are repetitive, routine, and understood well enough that they can be delegated to
lower-level employees in the organization.
– E.g. Extending credit to customers.
Semi-structured decisions - are characterized by incomplete rules for making the decision and the need for
subjective assessments and judgments to supplement formal data analysis.
– E.g. Setting a marketing budget for a new product.
Unstructured decisions are nonrecurring and non-routine.
– E.g. Choosing the cover for a magazine.

Decision Scope
• Decisions vary in terms of the scope of their effect.
• Operational control is concerned with the effective and
efficient performance of specific tasks.
• Management control is concerned with the effective and
efficient use of resources for accomplishing organizational
objectives.
• Strategic planning is concerned with establishing
organizational objectives and policies for accomplishing those
objectives.

Learning Objective 4
Describe and contrast the basic strategies and strategic positions that a business can adopt.

Information Technology and Corporate Strategy

• New developments in IT affect the design of an AIS.
• What basic requirements are needed to evaluate the costs and benefits of new IT developments?
• Develop a basic understanding of corporate strategies.
– how IT developments can be used to implement existing organizational strategies.
– how IT developments can be used to create an opportunity to modify existing strategies
• Because an AIS functions within an organization, it should be designed to reflect the values of that
organizational culture.
What role does the AIS play in helping organizations adopt and maintain a strategic position?
• Data collection about each activity
• Transforming data into information that can be used by management to coordinate those activities
What is the Value of Information?
– The value of information is the benefit produced by the information minus the cost of producing it.

The Role of the AIS

• The Internet makes strategy more important than
ever
• Enterprise resource planning (ERP) systems
integrate all aspects of a company’s operations with
its traditional AIS.
• The key feature of ERP systems is the integration of
financial data and other nonfinancial operating data.