Accounting

Information Systems
An Overview
CHAPTER 1
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 INTRODUCTION
• Questions to be addressed in this chapter include:
– 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?
– What is the meaning of system, data, and information?

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 What is
Accounting Information System?
• AIS is a system, which collects, records, stores,
and processes the data to produce information
for decision makers.
• It can be :
– Use advanced technology; or
– a simple paper-and-pencil system; or
– something in between.
• Technology is simply a tool to create, maintain,
or improve a system.

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• A system is a set of two or more interrelated
components that interact each other to achieve a goal.
• Systems are almost and 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

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 AIS focuses on understanding
 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.
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 Functions of an AIS
• It collects and stores data about activities and
transactions such as Events, Resources, and
Agents.(REA)
• Processes or Transforms that data into
information, that, management can use to make
decisions about events, resources, and agents.
• Provides adequate controls to safeguard the
organization’s resources including data,
which should be
• Available when needed
• Accurate and reliable
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 WHY STUDY ACCOUNTING INFORMATION
SYSTEMS?
• It’s fundamental to accounting.
• Accounting is an information-providing activity, so
accountants need to understand:
– How the system that provides the information
is designed, implemented and used.
– How financial information is reported
– How information is used to make decisions

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 WHY STUDY ACCOUNTING INFORMATION
SYSTEMS?
• It’s fundamental to accounting.
• Other accounting courses focus on collecting the
information and presenting to the user.
• Where as AIS places greater emphasis on:
– How the data is collected and transformed
– How the availability, reliability, and accuracy of
the data is ensured

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 WHY STUDY ACCOUNTING INFORMATION
SYSTEMS?
• It’s fundamental to accounting.
• 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.

• AIS mainly focus on accountability and control.

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 WHY STUDY ACCOUNTING INFORMATION
SYSTEMS?
Organizational Business
Culture Strategy

AIS
AIS design is affected
by information
technology, the
Business strategy, and
the organization’s
Information
culture.
Technology

Organizational culture = shared assumptions, values, and beliefs, which governs how people
behave in organizations.
Business strategy is a long term plan of action designed to achieve a particular goal .
Information technology (IT) is the use of computers, storage, networking and other physical
devices, infrastructure and processes to create, process, store, secure and exchange all forms
of electronic data. 10
 WHY STUDY ACCOUNTING INFORMATION
SYSTEMS?

Organizational Business
Culture Strategy

Information technology affects

the company’s choice of AIS
business strategy. To perform
cost-benefit analyses on IT
changes, you need to
understand business strategy.
Eg. Wall mart.
Information
Technology

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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?
Let’s see what is value chain.

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 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.
• The process or activities by which a company adds value to
an article, including production, marketing, and the
provision of after-sales service.

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• 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.
(1) Inbound logistics 
(2) manufacturing operations,
(3) outbound logistics,
(4) marketing and selling, and
(5) after sales services.
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 The Value Chain

Primary Activities

Inbound Outbound
Operations
Logistics Logistics

Marketing
Service
and Sales
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The four support activities in the value chain
make it possible for the primary activities to
be performed efficiently and effectively
(6) purchasing or procurement
(7) research and development
(8) human resource development,
(9) and corporate infrastructure.

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 The Value Chain

Support Activities

Infrastructure Technology

Human
Purchasing
Resources
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• 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.
 The Supply Chain
Raw Materials
Supplier

Manufacturer

Distributor

Retailer

Consumer

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 ROLE OF THE AIS IN THE VALUE CHAIN
• “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. That is the impact realized
from the synergetic(expected output is higher than inputs)
effect of production.
• 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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 ROLE OF THE AIS IN THE VALUE CHAIN

• 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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 ROLE OF THE AIS IN THE VALUE CHAIN

• 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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 ROLE OF THE AIS IN THE VALUE CHAIN

• 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.

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 ROLE OF THE AIS IN THE VALUE CHAIN

• Primary activities include:

– Inbound logistics
– Operations
Transforming those inputs into products or services.

For the pharmaceutical company, this step involves

converting the raw chemicals with the help of people and
equipment to produce the finished drug product that will be
sold to customers.

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 ROLE OF THE AIS IN THE VALUE CHAIN

• Primary activities include:

– 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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 ROLE OF THE AIS IN THE VALUE CHAIN

• Primary activities include:

– Inbound logistics Helping customers to buy
– Operations the organization’s products
or services.
– Outbound logistics
– Marketing and sales A pharmacy Representative
may visit with drug stores,
doctors, etc. to inform
them about their products
and take orders.

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 ROLE OF THE AIS IN THE VALUE CHAIN

• Primary activities include:

– Inbound logistics Post-sale support provided to
customers such as repair and
– Operations maintenance function.
– Outbound logistics
– Marketing and sales A pharmaceutical firm will typically
not be repairing it’s product
– Service (though the product may be
periodically reformulated). The
pharmaceutical company is more
likely to be providing advisory
services to pharmacists, etc.
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 ROLE OF THE AIS IN THE VALUE CHAIN

• 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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 ROLE OF THE AIS IN THE VALUE CHAIN

• Support activities include:

– Firm infrastructure
Accountants, lawyers, and administration. Includes
the company’s accounting information system.

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 ROLE OF THE AIS IN THE VALUE CHAIN

• Support activities include:

– Firm infrastructure
– Human resources
Involves recruiting and hiring new employees,
training employees, paying employees, and
handling employee benefits.

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 ROLE OF THE AIS IN THE VALUE CHAIN

• Support activities include:

– Firm infrastructure
– Human resources
– Technology
Activities to improve the products or services (e.g., R&D,
website development).

For the pharmaceutical company, these activities would

include research and development to create new drugs
and modify existing ones.

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 ROLE OF THE AIS IN THE VALUE CHAIN
• Support activities include:
– Firm infrastructure
– Human resources Buying the resources (e.g., materials,
– Technology inventory, fixed assets) needed to carry
out the entity’s primary activities.
– Purchasing
In the pharmaceutical company, the
purchasing people 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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 ROLE OF THE AIS IN THE VALUE CHAIN

• 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 of its
customers, suppliers, and distributors.

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 ROLE OF THE AIS IN THE VALUE CHAIN

Smith Supply Co. For example, the inbound logistics of Pharmaceuticals,

Inbound Logistics Inc., links to the outbound logistics of its suppliers.
Operations
Outbound Logistics
Marketing & Sales Pharmaceuticals, Inc.
Service Inbound Logistics
Operations
Outbound Logistics Customer Pharmacy
Marketing & Sales Inbound Logistics
Service Operations
Outbound Logistics
Marketing & Sales
Service

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 ROLE OF THE AIS IN THE VALUE CHAIN

Smith Supply Co. And the outbound logistics of Pharmaceuticals, Inc., links
Inbound Logistics to the inbound logistics of its customers.
Operations
Outbound Logistics
Marketing & Sales Pharmaceuticals, Inc.
Service Inbound Logistics
Operations
Outbound Logistics Customer Pharmacy
Marketing & Sales Inbound Logistics
Service Operations
Outbound Logistics
Marketing & Sales
Service

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 ROLE OF THE AIS IN THE VALUE CHAIN

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

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 ROLE OF THE AIS IN THE VALUE CHAIN
Smith Supply Co.
Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
Service
Information technology can
facilitate synergistic linkages
that improve the
performance of each
company’s 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 Customer Pharmacy
Marketing & Sales Inbound Logistics
Service Operations
Outbound Logistics
Marketing & Sales
Service
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 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.

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 Data Needs For Activities
Generic Example Agent
Resource Event
Agent
Sales Transaction Customer
Inventory Sale
Sales
Payment to Supplier
Cashier
Cash Payment

Supplier
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Information and Decision Making

Characteristics of Useful Information

Relevant Timely

Reliable Understandable

Complete Verifiable

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 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. Evaluate the merits of each alternative.
6. Choose and execute the preferred solution.

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 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

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 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.

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 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.

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 Decision Structure

• Unstructured decisions are

nonrecurring and nonroutine.
• An example is:
– Choosing the cover for a magazine.

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 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.

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 Learning Objective 4

• Describe and contrast the basic strategies

and strategic positions that a business can
adopt.

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 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?

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 Information Technology
and Corporate Strategy
• 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.

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 Information Technology
and Corporate Strategy

• Because an AIS functions within an

organization, it should be designed to
reflect the values of that organizational
culture.

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 Strategy and
Strategic Positions

Two Basic Strategies

To be a lower-cost producer than competitors

To differentiate products and services

from competitors

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 Strategy and
Strategic Positions

Three Basic Strategic Positions

Variety-based strategic position

Need-based strategic position

Access-based strategic position

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 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

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 What is the Value
of Information?
• The value of information is the benefit
produced by the information minus the cost of
producing it.

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 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.

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 SYSTEMS
DATA
&
INFORMATION

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 A SYSTEM is :
– A set of interrelated components
– That interact
– To achieve a goal..
• Most systems are composed of smaller
subsystems . . .. . . And vice versa!

• Every organization has goals.

– The sub systems should be designed to maximize in
achievement of the organization’s goals
– 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 organization’s 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 subsystem’s goals
are in line with the organization’s goals.

The larger and more complicated a system, the more

difficult it is to achieve goal congruence.

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

minimizing the duplication of recording, storing,
reporting and processing).
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 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

Information is different from data.

Information is data that have been organized and processed to
provide meaning to a user.

It helps in :
• Reduction of uncertainty
• Improved decisions
• Improved ability to plan and schedule activities
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• Information is provided to both External users and Internal
users.

• Characteristics of information :
– Relevance .. reduces uncertainty
– Reliability .. free from error
– Completeness .. doesn’t leave out anything
– Timeliness … get it in time
– Understandability … comprehend and use
– Verifiability . . give same result for different people
– Accessibility .. can get it when needed.

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 Any Questions ????
THANKS VERY MUCH !!!

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End of Chapter 1

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