Chap. I

C
Accounting Information Systems:

An Overview
© 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart
 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?
 Data are
 Discrete, objective facts or observations (symbols,
signals, stimuli),
 Unorganized and unprocessed and on their own have no
mening
 Elementary description of things, events, activities and
transactions that are recorded, and stored.
 Data is raw fact about an event, person or

things…
 Example: yes, yes, no, or 25, 68, 99, 17.5%
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4
 Information
 is Collection of facts organized in such a way that they have
value beyond the facts themselves
 is the data organized so that they have meaning and value to
the recipient.
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5
▪ The value of information directly linked to how it helps
decision makers achieve their organization’s goals
▪ Valuable information:
▪ Can help people and their organizations perform
tasks more efficiently and effectively
▪ If an organization’s information is not valuable:
▪ People can make poor or wrong decisions, costing
thousands, or even millions, of birr.
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6
Benefits of information
- Cost of producing 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.
 Relevance:
• It reduces uncertainty by helping you predict
what will happen or confirm what already has
happened.
 Reliable:
• It’s dependable, i.e., free from error or bias and
faithfully portrays events and activities.
 Completeness:
• It doesn’t leave out anything that’s important.
 Timeliness:
• You get it in time to make your decision.
 Understandability:
• It’s presented in a manner you can comprehend
and use.
 Verifiability:
 A consensus notion—the nature of the information is
such that different people would tend to produce the
same result.
 Accessibility
• You can get to it when you need it and in a format
you can use.
 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, MoR or ERCA, NBE etc; 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.
Managers say they are suffering
36% from poor health due to IO in the
work place
Workers experience significant

stress and poor health due to the
25% volume of information they are
required to process
Employees and executives cite

lack of collaboration or
86% ineffective communication for
workplace failures
 Information overload:
• Is a state of affairs where individuals efficiency in using
information in their work is hampered by the amount of
relevant and potentially useful information available to
them.
• A state in which not all inputs can be processed and
utilized for varied reasons, resulting in potential useful
information received by someone becomes a hindrance, be
it persons or organizations or systems.
• Alternatively, it may be defined as “a subjective
experience of the insufficiency of time needed to make
effective use of information resources available in specific
situations
1–28
 Causes and Impact
▪ Specific instances of causes of IO:
▪ existence of multiple sources of information,
▪ over abundance of information,
▪ difficulty in managing information,
▪ irrelevance/unimportance of information received,
▪ scarcity of time on the part of users, [competing
information/knowledge and evidence to go through],
and so on
▪ Impact of IO:
▪ loss of time,
▪ negative effect on work,
▪ reduced efficiency,
▪ frustration, tiredness, stress,
▪ negative effect on decision quality and
▪ reduced productivity.
1–29
1–30
 A System:
• is a group of interrelated procedures/components with an
identifiable boundary, working together for some purpose.
 A system
• is a group of interacting – interrelated- interconnected-
interdependent elements (subsystems) that constitute a complex
and integrated whole
 A system:
• is an "interconnected" group of elements (subsystems)
"coherently organized" for a goal.
 A system
• is a group of essential parts or subsystems, that can "affect the
behavior and properties of the whole system and none of which
has an independent effect on it"
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33
 The three basic concepts of the system:
• The system was created or designed in such a way that
to complete specific predetermined objectives
• Parts and subparts of the system must have

interdependence and interrelationships among them
• The goals of the organization always have high

priority rather than the goals of the subsystem
o Goal conflict occurs when the activity of a subsystem
is not consistent with another subsystem or with the
larger system.
o Goal congruence occurs when the subsystem’s goals
are in line with the organization’s goals.
o The larger and more complicated a system, the more

difficult it is to achieve goal congruence.
o The systems concept encourages integration (i.e.,

minimizing the duplication of recording, storing,
reporting and processing).
 Organization:
• Implies structure and order
• Can be defined as the arrangement of components that
help to achieve objectives
 Interaction:
• Refers to the manner in which each component functions
with other components of the system; i.e. there should be
an interrelationship between each components of a
system
 Interdependence:
• Means the parts or the components of an organization or
computer system depend on one another
System programming Operations
User analyst 12:12 PM
© 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 36
 Integration:
• Refers to the holism of systems
• Synthesis follows analysis to achieve the central
objective of the organization
• It is concerned with how a system is tied together
• It is more than sharing a physical part of location
• It work together within the system even through each
part performs unique function
 Central objective:
• Common goal
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© 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 37
 Simple vs. Complex
• Simple: easily define system’s output from known inputs;
no need of high level system analysis
 E.g. A college classroom system – Instructors, Students, Text,
Facility – educated citizen
• Complex: Multitude of components and relationships;
processes are not describable with single rule;
unpredictable occurrence of features from the current
specification
 Example: organisms, human brain, social & economic system
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 Open vs. Closed System
• Open: dynamically interact to their environments
 taking inputs and transforming them into outputs to be distributed
into their environments
 exchange of feedback with its external environment
 analyzed & used for adjusting internal systems & necessary information is
transmitted back to the environment
 E.g. Living Organism, organizations

• Closed: nearly no interaction with and not influenced by the
environment;
 its operation is relatively independent of its environment
 E.g. Dry Battery, Watch
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39
Chapter I
 Adaptive vs. Non-Adaptive

• Adaptive System – changing behavior based on its
environment; react to what other agents are doing; tailoring
the response based on the problem
• Non-Adaptive System - fail to adopt to the environment;
steady/stable/fixed
 Natural/man-made (solar system/organization)
 Conceptual/physical (social system or theory/production
system)
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1–45
 There is no single universally utilized
definition for an IS.
 There are different perspectives/views
for an IS
• Technology
• Social
• Socio-technical
• Process
1–46
 An Information System is an arrangement of people,
data, processes, interfaces, networks and technology
that interact for the purpose of supporting & improving
both day-to-day operations in a business as well as
supporting the problem solving and decision making
needs of management.
 Example: ATMs, airline reservation systems, course
registration systems
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55
 An Information System is a set of people,
procedures and resources that collects,
transforms and disseminates information in an
organization.
 An Information System is a system that

accepts data resources as an input and
processes them to information products as output
from and to the environment.
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56
▪ 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.
▪ 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
 Fundamental to Accounting
• Hence, accountants need to know how:
– the AIS is designed, implemented, and used.
– financial information is reported.
– 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.
– the availability, reliability, and accuracy of the data is ensured.
• AIS courses are not number-crunching courses.
 The skills are critical to 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-profit, 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.
 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
Although culture AIS

affects the design of
the AIS, it’s also true
that the AIS affects
culture by altering
the dispersion and
availability of Information
information. Technology
 The objective of most organizations is to
provide value to their customers.
 A business will be profitable if the value
it creates is greater than the cost of
producing its products or services.
 Value provided by performing a series
of activities referred to as the value chain.
 What does it mean to deliver value? Or
Adding value?
 Adding value: means making the value of the
finished component greater than the sum of its
parts.
 Not clear?
▪ 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 ornaments)
▪ Providing enhanced features
▪ Customizing it
 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.
 These activities are sometimes referred to as
“line” and “staff” activities respectively.
 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.
AIS in the Value Chain Creation
1–85
 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.
• Inbound logistics Helping customers to
• Operations buy the organization’s
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.
Post-sale support provided to
customers such as repair and
maintenance function.
• Operations
A pharmaceutical firm will
typically not be repairing it’s
• Marketing and sales
• Service product (though the product may
be periodically reformulated).
The pharmaceutical company is
more likely to be providing
advisory services to pharmacists,
etc.
 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.
 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, Web site 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
• 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.
✓ An AIS adds value...
✓by providing accurate and timely
information so that five primary value chain
activities can be performed more effectively
and efficiently.
98
– An AIS adds value by:
• 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.
 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
 involves setting your product apart from those of your
competitors
• 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.
 Porter also
• Serve argues
a subset that companies
of customers must
who differ from
choose
othersa instrategic position
terms of factors suchamong three
as geographic
choices:
location or size.
• EXAMPLE: Satellite Internet services are
intended primarily for customers in rural areas
• Needs-based strategic
who cannot get DSL orposition
cable services.
• Access-based strategic position
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
• Predictive data help a company
analysis (data adopt
andwarehousing/mining)
maintain its strategic
adds toposition.
competitive
advantage
• Requires thatby forecasting
data future
be collected events
about based on
each
historical trends.
activity.
• EXAMPLE: You can view forecasts of airfares
• Requires the collection and integration of both
between major airports based on historical trends
financial and nonfinancial data.
at www.farecast.com.
 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.
 What we’ve learned so far:
• The meaning of system, data, and information.
• What an AIS is.
• Why it’s 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:

 Data is raw fact about an event, person or

Benefits of information may include:

Costs may include time and resources spent:

Costs and benefits of information are often

Workers experience significant

Employees and executives cite

• Parts and subparts of the system must have

• The goals of the organization always have high

o The larger and more complicated a system, the more

o The systems concept encourages integration (i.e.,

 E.g. Living Organism, organizations

 Adaptive vs. Non-Adaptive

 An Information System is a system that

Although culture AIS

 An organization’s value chain and the value

Receiving, storing, and distributing the

For a pharmaceutical company, this activity

Transforming those inputs into products or

For the pharmaceutical company, this step

Distributing products or services to customers.

For the pharmaceutical company, this step involves

Involves recruiting and hiring new

Activities to improve the products or services

For the pharmaceutical company, these activities

• Offer a subset of the industry’s

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