ACCOUNTING INFORMATION SYSTEM (PRELIM) o Storing data

o Distributing information to users

Chapter 1: ACCOUNTING INFORMATION SYSTEMS

SYSTEM Costs and benefits of information are often difficult to quantify, but
you need to try when you’re making decisions about whether to
 A set of interrelated components that interact to achieve a provide information.
goal

 Most systems are composed of smaller subsystems, which

should be designed to maximize achievement of the Characteristics that make information useful:
organization’s goals
RELEVANCE

GOAL CONFLICT
occurs when the activity of a
subsystem is not consistent
with another subsystem or with
the larger system
GOAL CONGRUENCE It reduces uncertainty by helping you predict what will happen or
confirm what already has happened.
occurs when the subsystem’s
goals are in line with the
organization’s goals.
RELIABILITY
The larger and more complicated It’s dependable, i.e., free from error or bias and faithfully portrays
a system, the more difficult it is to events and activities.
achieve goal congruence

COMPLETENESS
It doesn’t leave out anything that’s important.
SYSTEMS CONCEPT

encourages integration (i.e., minimizing the duplication of recording,

storing, reporting, and processing). TIMELINESS
You get it in time to make your decision.
DATA

are facts that are collected, recorded, stored, and processed by an

information system. UNDERSTABILITY
It’s presented in a manner you can comprehend and use.
Organizations collect data about:

o Events that occur

o Resources that are affected by those events VERIFIABILITY
o Agents who participate in the events
A consensus notion—the nature of the information is such that
different people would tend to produce the same result.

INFORMATION

is data that have been organized and processed to provide meaning to ACCESSIBILITY
a user.
You can get to it when you need it and in a format you can use.
more information and better information translate into better
decisions. Information is provided to both:

However, when you get more information than you can effectively o External users
assimilate, you suffer from information overload. o Internal users

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
Benefits of information may include: - Cost of producing information
o Reduction of uncertainty
o Improved decisions Value of information
o Improved ability to plan and schedule activities

Costs may include time and resources spent: EXTERNAL USERS

o Collecting data
primarily use information that is either:
o Processing data

MANDATORY INFORMATION—required by a
governmental entity, such as Form 10-K 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
usefulness.
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.
ACCOUNTING INFORMATION SYSTEM (AIS)
is a system that collects, records, stores, and processes data to
produce information for decision makers.
It can:
o Use advanced technology; or
o Be a simple paper-and-pencil system; or
o Be something in between.
o 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
WHY STUDY ACCOUNTING INFORMATION SYSTEMS?
1.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.
Other accounting courses focus on how the information is provided
and used.
and 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.
2. The skills are critical to career 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.
3. 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.
4. AIS topics are tested on the new CPA exam
Makes up about 25% of the Business Environment & Concepts
section of the CPA exam.
5. AIS topics impact corporate strategy and culture
AIS design is affected by information technology, the organization’s
strategy, and the organization’s culture.
o Outbound logistics
Information technology affects the company’s choice of business
strategy. To perform cost-benefit analyses on IT changes, you need to Distributing products or services to customers.
understand business strategy.
For the pharmaceutical company, this step involves packaging and
Although culture affects the design of the AIS, it’s also true that the shipping the goods to drug stores, doctors, and hospitals.
AIS affects culture by altering the dispersion and availability of
information.
o Marketing and sales

Helping customers to buy the organization’s products or services.

ROLE OF THE AIS IN THE VALUE CHAIN
A pharmacy rep may visit with drug stores, doctors, etc. to inform
Although “adding value” is a commonly used buzzword, in its
them about their products and take orders.
genuine sense, it means making the value of the finished component
greater than the sum of its parts.

It may mean: o Service

 Making it faster Post-sale support provided to customers such as repair and
maintenance functions.
 Making it more reliable
A pharmaceutical firm will typically not be repairing it’s product
 Providing better service or advice (though the product may be periodically reformulated). The
pharmaceutical company is more likely to be providing advisory
 Providing something in limited supply (like O-negative services to pharmacists, etc.
blood or rare gems)

 Providing enhanced features

 Customizing it
SUPPORT ACTIVITIES

o Firm infrastructure

Accountants, lawyers, and administration. Includes the company’s

Value is provided by performing a series of activities referred to as accounting information system.
the VALUE CHAIN. These include:

Primary activities
o Human resources
Support activities
Involves recruiting and hiring new employees, training employees,
These activities are sometimes referred to as “line” and “staff” paying employees, and handling employee benefits.
activities respectively.

o Technology
PRIMARY ACTIVITIES
Activities to improve the products or services (e.g., R&D, Website
o Inbound logistics development).

Receiving, storing, and distributing the materials that are inputs to the For the pharmaceutical company, these activities would include
organization’s product or service. research and development to create new drugs and modify existing
ones.
For a pharmaceutical company, this activity might involve handling
incoming chemicals and elements that will be used to make their
drugs.
o Purchasing

Buying the resources (e.g., materials, inventory, fixed assets) needed

o Operations to carry out the entity’s primary activities.

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.
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.
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 There is variation in the degree of structure used to make
of its customers, suppliers, and distributors. decisions:

1. Structured decisions

Good AIS value chain: Bad AIS value chain:  Repetitive and routine.

UPS spends over $1 billion a Limited Brands tangled  Can be delegated to lower-level employees.
year on information systems integration of over 60
resulting in greater customer incompatible information  EXAMPLE: Deciding whether to write an auto insurance
control over delivery, higher systems resulted in 400 trailers policy for a customer with a clean driving history.
driver productivity, and lower trying to jam into a 150 trailer
2. Semistructured decisions
costs. lot.
 Incomplete rules.

 Require subjective assessments.

 EXAMPLE: Deciding whether to sell auto insurance to a

customer with a tainted driving history.

3. Structured Decisions

 Non-recurring and non-routine.

 Require a great deal of subjective assessment.

Role of the AIS in the Value Chained
 EXAMPLE: Deciding whether to begin selling a new type
of insurance policy.

There is also variation in the scope of a decision’s effect:

1. Occupational Control Decisions

 Relate to performance of specific tasks

 Often of a day-to-day nature.

 EXAMPLE: Deciding whether to order inventory.

2. Management Control Decisions

 Relate to utilizing resources to accomplish organizational

objectives.

 EXAMPLE: Budgeting.

3. 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

The linking of these separate value chains creates a larger system likely he/she is to be engaging in:
known as a supply chain.
 Less structured decisions
Information technology can facilitate synergistic linkages that
improve the performance of each company’s value chain.  Broader scope (i.e., strategic planning) decisions
THE AIS AND CORPORATE STRATEGY
overlap.
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:
1. Product-differentiation 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.
2. 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:
1. 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.
2. 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.
3. Access-based strategic position
 Serve a subset of customers who differ from others in terms
of factors such as geographic location or size.
 EXAMPLE: Satellite Internet services are intended
primarily for customers in rural areas who cannot get DSL
or cable services.
These strategic positions are not mutually exclusive and can
 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.
 Predictive data analysis (data warehousing/mining) adds to
competitive advantage by forecasting future events based
on historical trends.
 EXAMPLE: You can view forecasts of airfares between
major airports based on historical trends 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.
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 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.