Introduction To Accounting Information Systems

Chapter 1
INTRODUCTION TO
ACCOUNTING
INFORMATION SYSTEMS
1
Learning Objectives
1. Explain what an accounting information
system (AIS) is and describe the basic
functions it performs.
2. Discuss why studying the design and
management of an AIS is important.
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.
4. Describe and contrast the basic strategies and
strategic positions that a business can adopt.
1-2
Learning Objective 1
Explain what an accounting
information system (AIS) is
and describe the basic
functions it performs.
1-3
Information Systems(IS)
 A System
 consists of interacting parts or components,
 is set up to achieve one or more goals.
 An Information System
 is a set of interrelated subsystems,
 works to collect, process, store, transform, and
distribute information,
 helps to plan, make decisions, and control processes.
 A Firm/Company
 depends on information systems to stay competitive.
4
Information Systems
 A management information system
(MIS) is a system that
 captures data about an
organization
 stores and maintains the data
 provides meaningful information
for management.
5
Information Systems
 An MIS can be viewed as a set of

subsystems that provide
information for such functions as:
 production
 marketing
 human resources
 accounting
 finance
6
Management Information
Systems
 MIS captures
 data about business processes
 aggregates, summarizes, and
organizes data
 produces information that helps
monitor and control business

processes
 ERP systems integrate all aspects of
a firm’s business processes. 7

Accounting
Information System
An AIS is a subset of

an organization’s MIS that
provides:
 accounting and financial
information
 other information obtained in the
routine processing of accounting

transactions
8
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
1-9
What Is An AIS?
 What important functions does the
AIS perform in an organization?
1 It collects and stores data about
activities and transactions.
2 It processes data into information
that is useful for making decisions.
3 It provides adequate controls to
safeguard the organization’s assets.
1-10
The Accounting Field
 The Accounting Field includes

 financial accounting,
 managerial accounting, and
 taxation
 The Accounting System of old is the

 Management Information System (MIS)
which provided
 financial information and
 nonfinancial information
11
Accounting Information Systems
 An Accounting Information System

(AIS) is the information subsystem
within an organization that
accumulates information from the
entity’s various subsystems and
communicates it to the organization’s
information processing subsystem.
 The AIS today should be an enterprise-
wide information system, focused on
business processes. 12
MIS versus AIS
• Historically, a Management Information
System provided financial and
nonfinancial information to internal
users (management).
• The Accounting Information System
provided financial information to both
external and internal users.
• Now, the two systems overlap and
provide much of the same
information focusing on
business processes. 13
AIS: At the Intersection of
Accounting and IS

financial Accounting collect, process,
accounting, Information store, transform,
managerial and distribute
Systems
accounting, and
taxation
14
 An Accounting Information System

(AIS)
 Collection of data and processing
procedures
 Creates needed information for users.
 The AIS today should be

 an enterprise-wide information system,
 focused on business processes.
15
 AIS don’t just support accounting and

finance business processes. They often
create information that is useful to non-
Accountants.
16
An Accounting Information
System
Inputs: Collection of Data/
Information from
Internal/External sources
Data
Repository/
Processes: Sorting, Organizing,
Files,
Calculating
Databases,
etc.
Outputs: Distribution of
Information for Internal/
External Decision Makers
17
An Accounting Information
System
Question
Which of the following is NOT true about accounting information
systems (AISs)?
a. All AISs are computerized.
b. AISs may report both financial and nonfinancial information.
c. AISs, in addition to collecting and distributing large amounts
of data and information, also organize and store data for future
uses.
d. A student who has an interest in both accounting and IT will
find many job opportunities that combine these knowledge and
skills areas.
18
Data versus Information
 Data
raw facts about events that have
no organization or meaning
 Information
data that have been processed and
made meaningful to users
19
MIS versus AIS
A Management Information System

provides
to internal users (management)
 financial information and
 nonfinancial information.
20
MIS versus AIS
The Accounting Information System

provides to both external and internal
users
 financial information
Now, the two systems overlap
to provide the same information
focusing on business processes.
21
MIS versus AIS
Financial To internal
MIS
Nonfinancial users
MIS
systems to provide the same information
overlap to focus on business processes
AIS
AIS To internal
Financial
& external users
22
MIS versus AIS
Question
With respect to computerized AISs, computers:

a. Turn data into information in all cases.
b. Make audit trails easier to follow.
c. Cannot catch mistakes as well as humans.
d. Do not generally process information more
quickly than humans.
23
New Features in AIS
AIS has several new applications today:

 In countering terrorism AIS is using banking
systems to trace the flow of funds and materials
across international borders.
 In preventing accounting scandals AIS is helping
firms to to comply with the Sarbanes-Oxley Act
of 2002.
AIS has benefited from the use of
 WI-FI Technology
Recent Accounting Scandals
The following is a list of recent accounting scandals that were reported:
 Enron 2001  Global Crossing

 Imclone 2001 2002
 Arthur Andersen  Parmalat 2003
2001  NYSE 2003
 Merrill Lynch 2002  WorldCom 2003
 Tyco 2002  HealthSouth 2003
 Adelphia 2002
The Sarbanes-Oxley Act of 2002
Sarbanes-Oxley Act of 2002

 is a strong deterrent to unethical behavior;
 forbids corporations from making personal loans to

executives;
 requires CEOs of companies to personally vouch for
the accuracy and completeness of its financial
statements;
 requires public companies to hire independent, new
auditors to review internal controls;
 requires management to implement and assess
internal controls;
 has created a lot of work for accountants and
information systems auditors.
The Sarbanes-Oxley Act of 2002
Question
Which of the following is not true of The Sarbanes-Oxley Act of
2002?
a. Was enacted as a response to the corporate frauds that left
investors uncertain about U.S. financial markets.
b. Has lead to a decrease in the amount of work done by
auditors and accountants.
c. Forbids corporations from making personal loans to
executives.
d. Requires the Chief Executive Officer of a public company to
take responsibility for the reliability of its financial
statements.
 Discuss why studying the

design and management
of an AIS is important.
1-28
Why Study AIS?
 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.
1-29
Why Study AIS?
 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
1-30
Why Study AIS?
 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
1-31
Why Study AIS?
 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.
1-32
Why Study AIS?
 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.
1-33
Uses of Accounting
Information Systems
 Producing external reports

 Supporting routine activities
 Decision support
 Planning and control
 Implementing internal control
34
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.
1-35
The CITP Designation
 CITP: certified information technology
professional
 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
1-36
Ten Most Important Activities
Performed By Accountants
1. Accounting systems 6. Financial and
and financial reporting economic analyses
2. Long-term strategic 7. Process improvement
planning 8. Computer systems and
3. Managing the operations
accounting and 9. Performance
finance function evaluation
4. Internal Consulting 10. Customer and product
5. Short-term budgeting profitability analyses
1-37
Factors Influencing
Design of the AIS
Organizational
Strategy
Culture
AIS
Information
Technology
1-38
 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.
©2003 Prentice Hall

Business Publishing,
Accounting
Information Systems,
9/e,
Romney/Steinbart 1-39
Business Processes
 A sequence of activities:
 for acquiring goods and
services
 for producing goods and
services
 for selling goods and services
40
Business Processes
 Models of business processes
viewed in terms of transaction
cycles.
 Each transaction cycle involves
several events.
41
Business Processes
 Three main transaction cycles:
 An acquisition (purchasing) cycle is
the process of purchasing and paying
for goods/services.
 A conversion cycle is the process of
transforming resources acquired into
goods/services.
 A revenue cycle is the process of
providing goods or services to
customers and collecting cash.
42
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.
Accounting
9/e,
The Value Chain
 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.
Accounting
9/e,
The Value Chain
Primary Activities
Inbound Outbound
Operations
Logistics Logistics
Marketing
Service
and Sales
Accounting
9/e,
The Value Chain
 The four support activities in the
value chain make it possible for the
primary activities to be performed
efficiently and effectively.

Accounting
9/e,
The Value Chain
Support Activities
Infrastructure Technology
Human
©2003 Prentice Hall Purchasing
BusinessResources
Publishing,
Accounting
9/e,
The Value System
 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
Accounting
9/e, collectively form a value system.

The Supply Chain
Raw Materials
Supplier
Manufacture
r
Distributor
Retailer

Consumer
Accounting
9/e,
How An AIS Can Add Value
To An Organization
 An AIS adds value...
– by providing accurate and timely
information so that five primary value
chain activities can be performed more
effectively and efficiently.

Accounting
9/e,
How An AIS Can Add Value
To An Organization
– 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.
Accounting
9/e,
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
©2003 Prentice Hall and processed so that it
is meaningful.
Accounting
9/e,
Data Needs For Activities
Generic Example Agent
Resource Event
Agent
Sales Customer
Transaction
Inventory Sale
Sales
Payment to Supplier
Cashier
Cash
Payment
Accounting
Information Systems, Supplier
9/e,
Information and Decision
Making
Characteristics of Useful Information
Relevant Timely
Reliable Understandable
Complete
Verifiable
Accounting
9/e,
Information and
Decision Making
 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.
Business Evaluate the merits of each alternative.
Publishing,
Accounting
6. Choose and execute the preferred solution.
9/e,
Information and
Decision Making
Decisions can be categorized as follows:
– in terms of the degree of structure that
exists
– by the scope of the decision

Accounting
9/e,
Decision Structure
 Structured decisions are repetitive,
routine, and understood well enough
that they can be delegated to lower-
level employees in the organization.
 An example is:
 Extending credit to customers.
Accounting
9/e,
Decision Structure
 Semistructured decisions are
characterized by incomplete rules for
making the decision and the need for
subjective assessments and judgments
to supplement formal data analysis.
 An example is:
 Setting a marketing budget for a new
product.
Accounting
9/e,
Decision Structure
 Unstructured decisions are
nonrecurring and
nonroutine.
 An example is:
 Choosing the cover for a
magazine.
©2003 Prentice Hall Business Publishing,

Accounting Information Systems, 9/e,
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.
©2003 Prentice Hall Business Publishing,
Accounting Information Systems, 9/e,
 Describe and contrast the basic

strategies and strategic positions that a
business can adopt.

Accounting
9/e,
 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?

Accounting
9/e,
 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
Publishing, an opportunity to modify existing
Business
strategies.
Accounting
9/e,
 Because an AIS functions within an
organization, it should be designed
to reflect the values of that
organizational culture.

Accounting
9/e,
Strategy and
Strategic Positions
Two Basic Strategies
To be a lower-cost producer than competitors
To differentiate products and services

from competitors
Accounting
9/e,
Strategy and
Strategic Positions
Three Basic Strategic Positions
Variety-based strategic position
Need-based strategic position

Access-based strategic position
Accounting
9/e,
Strategy and
Strategic Positions
 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
Accounting
9/e,
What is the Value
of Information?
 The value of information is the benefit
produced by the information minus the
cost of producing it.

Accounting
9/e,
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.
Accounting
9/e,
Accounting in the Information Age
 Financial Accounting
 Managerial Accounting
 Auditing
 Taxation
Accounting and IT
Financial Accounting
 The objective of financial accounting is

 to provide relevant information to
individuals and
groups outside an organization’s
boundaries.
 The users include
 investors,
 tax agencies, and
 creditors.
Financial Accounting
 Inputs
 transactions are measured in monetary units.
 A good audit trail

 information users can follow the flow of data through the
system
 managers can follow source document data from input
through processing to the output (& vice versa)
 The accounting cycle

 parallels the audit trail
 begins with a transaction
 ends with producing financial statements and closing
temporary accounts.
A Financial Accounting
Audit Trail
Financial AIS - Criticisms
& Solutions
Criticism Solutions
 Did not provide Recommended disclosure of
nonfinancial data non-financial performance
measures.
 Financial statements are
periodic. Too much Reporting of disaggregated
aggregation of information tracks sales and
information many of its expenses
continually
 Data is not interactive -
data used in one Extensible business reporting
application are not easily language (XBRL) is emerging
transferable to another as the language
of choice for interactive data
Criticisms of the Financial
Accounting Information System
 Lack of timeliness and usefulness

 Too much aggregation of information
 Segment reporting concerns reporting of
disaggregated information.
 Information overload
Managerial Accounting
• Objective of Managerial Accounting is

to provide relevant information to a
company’s managers, who are internal
parties (or users).
• Three components of managerial
accounting are:
• Cost Accounting
• Budgeting
• Systems study
Managerial Accounting -
Features
Managerial Accounting
 focuses on accounting information
 for internal parties, such as management,
 not for for external investors and creditors.
 is mostly forward-looking.
 is not regulated by generally accepted
accounting principles, nor is mandatory
to prepare.
Managerial Accounting -
Features
 includes both nonmonetary and financial

data.
 is influenced by many business and
nonbusiness disciplines, such as economics,
behavioral science, quantitative methods
 is flexible and frequently involves nonroutine
reporting.
Cost Accounting
Cost accounting assists managers in the

organization’s measuring and controlling the
costs associated with:
acquisitions
processing
distribution
selling activities.
Cost Accounting
Activity-based costing systems assign

overhead to products based on cost
drivers.
Corporate performance measurement
Identifies unfavorable performance
Traces to the department or individual
responsible for the inefficiencies.
Allows management to take
immediate corrective action.
Cost Accounting
• Responsibility accounting
systems help managers trace
unfavorable performance to the
department or individual that
caused the inefficiencies.
82
Cost Accounting
The Balance Scorecard approach uses

performance measurements in:
 financial performance
 customer knowledge
 internal business processes
 learning and growth
Budgeting
 Definition
 a financial projection for the future
and valuable managerial planning

aid
 Useful
 for managerial control and to
compare
actual results to budgeted results.
 Influence
 on all the subsystems within an
organization.
Systems Study
 Because of managerial accountants’
ability to understand internal financial
systems, organizations may hire them
to perform system studies.
 Many systems studies use the team
approach.
 The team may include marketing
specialists, computer experts, production
managers, engineers and industrial
psychologists.
Steps in Systems Study
 Planning
 Develop strategic plans
 Analysis
 Review current system
 Design
 Design new system
 Implementation and Follow-up
 Put the new system in place and continue
to monitor it
Auditing
 Traditional role
 to evaluate the accuracy and
completeness of a corporation’s financial
statements
 Present role
 in the assurance business; the business of
providing third-party testimony that a
client complies with a given statute, law,
or similar requirement
Auditing
 CPA Trust Services

 include online privacy evaluations,
security audits, testing the integrity of
information processing systems
 assessing availability of IT services, and
systems confidentiality testing.
Assurance Services identified by the
AICPA Special Committee
 Risk Assessment
 Business Performance
Measurement
 Information Systems Reliability
 Electronic Commerce
 Health Care Performance
Measurement
 Eldercare Plus
Taxation
Taxation software
are examples of AISs
enable users to create and store copies of
trial tax returns
help examine consequences of alternate
tax strategies
print specific portions of a return
transmit completed copies of a tax return
to the appropriate government agency
Taxation
Professionals can use taxation software

to access electronic tax libraries on
CDs or online
to research challenging tax questions
to get more up-to-date tax
information
access databases of federal and state
tax laws, tax court rulings, court
decisions,
and technical advice.
Careers in Accounting
Information Systems
Systems consultants
 provide help with information systems
in
 Designing information systems,
 selecting hardware and software, or
 reengineering business processes.
Value-added resellers (VARs)

 sell a certain software program and
Careers in Accounting
Information Systems
Information systems auditors

 analyze risks associated with computerized
information systems
 can show organizations ways that their
computer systems could be penetrated
 can be licensed as Certified Information
Systems Auditors (CISA)
 can obtain the certification from the
Information Systems Audit and Control
Association (ISACA)
Planning for Disaster
 Planning assures that operations
continue after disaster
 IT particularly vulnerable to man-
made attacks, such as viruses and
worms
 Under auditing standard No. 60,
absence of disaster plan needs to
be reported.
 Plan needs to be tested regularly.

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Introduction To Accounting Information Systems

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Chapter 1

 provides meaningful information

 An MIS can be viewed as a set of

 aggregates, summarizes, and

monitor and control business

a firm’s business processes. 7

An AIS is a subset of

routine processing of accounting

 The Accounting Field includes

 The Accounting System of old is the

 An Accounting Information System

Accounting Information Systems

 An Accounting Information System

 The AIS today should be

 AIS don’t just support accounting and

A Management Information System

The Accounting Information System

With respect to computerized AISs, computers:

AIS has several new applications today:

The following is a list of recent accounting scandals that were reported:

 Enron 2001  Global Crossing

Sarbanes-Oxley Act of 2002

 forbids corporations from making personal loans to

 Discuss why studying the

 Producing external reports

©2003 Prentice Hall

©2003 Prentice Hall

9/e, collectively form a value system.

©2003 Prentice Hall

©2003 Prentice Hall

– Improving decision making capabilities.

– increasing the sharing of knowledge.

A well-designed AIS can also help an

©2003 Prentice Hall

©2003 Prentice Hall Business Publishing,

 Describe and contrast the basic

©2003 Prentice Hall

©2003 Prentice Hall

– how IT developments can be used to

implement existing organizational

©2003 Prentice Hall

To be a lower-cost producer than competitors

To differentiate products and services

Variety-based strategic position

Need-based strategic position

©2003 Prentice Hall

– Transforming data into information that

©2003 Prentice Hall

systems integrate all aspects of a

 The objective of financial accounting is

 A good audit trail

 The accounting cycle

 Lack of timeliness and usefulness

• Objective of Managerial Accounting is

 includes both nonmonetary and financial

Cost accounting assists managers in the

Activity-based costing systems assign

The Balance Scorecard approach uses

and valuable managerial planning

 CPA Trust Services

Professionals can use taxation software

 selecting hardware and software, or

 reengineering business processes.