Accounting Information Systems: An Overview

C
Accounting Information Systems:

An Overview
1
© 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?
2
 A system is:
◦ A set of interrelated components
◦ That interact
◦ To achieve a goal
3
 Most systems are composed of smaller
subsystems . . .
 . . . and vice versa!
4
 Every organization has goals.
◦ The subsystems should be designed to maximize
achievement of the organization’s goals.
◦ Even to the detriment of the subsystem itself.
◦ 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.
5
 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.
6
 The systems concept encourages
integration (i.e., minimizing the duplication
of recording, storing, reporting, and
processing).
 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
7
 Information is different from data.
 Information is data that have been organized
and processed to provide meaning to a user.

 Usually, more information and better
information translates into better decisions.
8
 However, when you get more information
than you can effectively assimilate, you suffer
from information overload.
◦ Example: Final exams week!
 When you’ve reached the overload point, the
quality of decisions declines while the costs
of producing the information increases.
9
Benefits of information
- Cost of producing information
Value of information
Benefits of information may include:

• Reduction of uncertainty
• Improved decisions
• Improved ability to plan and schedule activities
10
Costs may include time and resources spent:

• Collecting data
• Processing data
• Storing data
• Distributing information to users
11
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.
12
 Characteristics that make information useful:
◦ Relevance
It reduces uncertainty by helping you predict

what will happen or confirm what already has
happened.
13
◦ Relevance
◦ Reliability
It’s dependable, i.e., free from error or bias

and faithfully portrays events and activities.
14
◦ Relevance
◦ Reliability
◦ Completeness
It doesn’t leave out anything that’s important.
15
◦ Relevance
◦ Reliability
◦ Completeness
◦ Timeliness
You get it in time to make your decision.
16
◦ Relevance
◦ Reliability
◦ Completeness
◦ Timeliness
◦ Understandability
It’s presented in a manner you can

comprehend and use.
17
◦ Relevance
◦ Reliability
◦ Completeness
◦ Timeliness
◦ Verifiability
A consensus notion—the nature of the
information is such that different people
would tend to produce the same result.
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◦ Relevance
◦ Reliability
◦ Completeness
◦ Timeliness
◦ Verifiability
◦ Accessibility
You can get to it when you need it and in a
format you can use.
19
 Information is provided to both:
◦ External users
◦ Internal users
20
◦ External users
◦ Internal users
21
 External users primarily use information that
is either:
◦ MANDATORY INFORMATION—required by a
governmental entity, Report required by the OJK; or
◦ ESSENTIAL INFORMATION—required to conduct
business with external parties, such as purchase
orders.
22
 In providing mandatory or essential
information, the focus should be on:
◦ Minimizing costs.
◦ Meeting regulatory requirements.
◦ Meeting minimum standards of reliability and
usefulness.
23
◦ External users
◦ Internal users
24
 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.
25
 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.
26
 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
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 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.
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• 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.
– How the availability, reliability, and
accuracy of the data is ensured.
• AIS courses are not number-crunching
courses.
29
 The skills are critical to career success.
• Auditors need to evaluate the accuracy

and reliability of information produced by
the AIS.
30
• 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.
31
• In private industry and not-for-profit,

systems work is considered the most
important activity performed by
accountants.
32
• In management consulting, the design,

selection, and implementation of
accounting systems is a rapid growth area.
33
 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.
34
courses.
 AIS topics are tested on the new CPA exam.
• Makes up about 25% of the Business

Environment & Concepts section of the CPA
exam.
35
courses.
 AIS topics are tested on the new CPA exam.
 AIS topics impact corporate strategy and
culture.
36
Occupational
Culture Strategy
AIS design is
affected by AIS
information
technology, the
organization’s
strategy, and the
organization’s Information
culture. Technology
37
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
38
Occupational
Culture Strategy
Although culture
affects the design of
AIS
the AIS, it’s also true
that the AIS affects
culture by altering
the dispersion and
availability of Information
information. Technology
39
 The objective of most organizations is to
provide value to their customers.
 What does it mean to deliver value?
 Let’s peek in on a conversation at Joe’s
pharmacy . . .
40
Well, Mr. Pharmaceutical
Salesman, your proposal looks
good, but your prices are about
5% higher than your competitors.
41
That’s true, but we’re
comfortable with that
because of the value-
added that we bring to
this arrangement.
42
What is that “value-added,”
and how do you convert it
into dollars?
43
Blah—blah—blah–
customer service–
blah—blah—blah
44
 Although “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.
 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
45
 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.
46
activities referred to as the value chain.
These include:
47
 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.
48
◦ 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.
49
◦ 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.
50
◦ Operations Helping customers to
◦ Outbound logistics 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.
51
Post-sale support provided to
◦ Inbound logisticscustomers such as repair and
◦ Operations maintenance function.
◦ Outbound logistics
◦ Marketing and sales
A pharmaceutical firm will
◦ Service typically not be repairing it’s
product (though the product may
be periodically reformulated).
The pharmaceutical company is
more likely to be providing
advisory services to pharmacists,
etc.
52
activities referred to as the value chain.
These include:
53
 Support activities include:
◦ Firm infrastructure
Accountants, lawyers, and administration.

Includes the company’s accounting
information system.
54
◦ Human resources
Involves recruiting and hiring new

employees, training employees, paying
employees, and handling employee
benefits.
55
◦ 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.
56
 Support activities Buying
include:
the resources (e.g.,
◦ Firm infrastructurematerials, inventory, fixed
◦ Human resources assets) needed to carry out the
◦ Technology entity’s primary activities.
◦ 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.
57
 Information technology can significantly
impact the efficiency and effectiveness with
which• the
Goodpreceding
AIS value activities
chain: are carried out.
• UPS spends over $1 billion a year on
 An organization’s value chain can be
information systems resulting in greater
connectedcustomer
with thecontrol
value over
chains of itshigher
delivery,
customers, suppliers,
driver and distributors.
productivity, and lower costs.
• Bad AIS value chain:
– Limited Brands tangled integration of over 60
incompatible information systems resulted in
400 trailers trying to jam into a 150 trailer lot.
58
Smith Supply Co. For example, the inbound logistics of
Inbound Logistics Pharmaceuticals, Inc., links to the
Operations outbound logistics of its suppliers.
Outbound Logistics
Pharmaceuticals, Inc.
Marketing & Sales
Inbound Logistics
Service Operations
Outbound Logistics Customer Pharmacy
Marketing & Sales Inbound Logistics
Service
Operations
Outbound Logistics
Marketing & Sales
Service
59
Smith Supply Co. And the outbound logistics of
Inbound Logistics Pharmaceuticals, Inc., links to the inbound
Operations logistics of its customers.
Outbound Logistics
Marketing & Sales
Inbound Logistics
Service Operations
Service
Operations
Outbound Logistics
Marketing & Sales
Service
60
Smith Supply Co. The linking of these separate value chains
Inbound Logistics creates a larger system known as a supply
Operations chain.
Outbound Logistics
Marketing & Sales
Inbound Logistics
Service Operations
Service
Operations
Outbound Logistics
Marketing & Sales
Service
61
Smith Supply Co. The linking of these separate value chains
Inbound Logistics creates a larger system known as a supply
Operations chain.
Outbound Logistics
Marketing & Sales
Inbound Logistics
Service Operations
Information Marketing & Sales
technology can Inbound Logistics
Service
facilitate synergistic Operations
linkages that improve Outbound Logistics
the performance of Marketing & Sales
each company’s value
Service
chain.
62
 There is variation in the degree of structure
used to make decisions:
◦ Structured decisions
• Repetitive and routine.

• Can be delegated to lower-level employees.
• EXAMPLE: Deciding whether to write an
auto insurance policy for a customer with a
clean driving history.
63
◦ Semistructured decisions
• Incomplete rules.
• Require subjective assessments.
• EXAMPLE: Deciding whether to sell auto
insurance to a customer with a tainted
driving history.
64
◦ Semistructured decisions
• Non-recurring and non-routine.

• Require a great deal of subjective
assessment.
• EXAMPLE: Deciding whether to begin
selling a new type of insurance policy.
65
 There is also variation in the scope of a
decision’s effect:
◦ Occupational control decisions
• Relate to performance of specific tasks

• Often of a day-to-day nature.
• EXAMPLE: Deciding whether to order
inventory.
66
◦ Management control decisions
• Relate to utilizing resources to accomplish

organizational objectives.
• EXAMPLE: Budgeting.
67
◦ Management control decisions
◦ 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.
68
 In general, the higher a manager is in the
organization, the more likely he/she is to be
engaging in:
◦ Less structured decisions
◦ Broader scope (i.e., strategic planning) decisions
69
 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.
70
 Michael Porter suggests that there are two
basic business strategies companies can
follow:
◦ Product-differentiation strategy
◦ Low-cost strategy
71
follow:
72
 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.
73
follow:
74
 A low-cost strategy involves offering a
cheaper mousetrap than your competitors.
The low cost is made possible by operating
more efficiently.
75
 Sometimes a company can do both, but they
normally have to choose.
76
 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.
77
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.
78
• Servea astrategic
choose subset of position
customersamong
who differ from
three
others in terms of factors such as geographic
choices:
location or size.
◦
•Needs-based
EXAMPLE: strategic
Satellite position
Internet services are
intended primarily for customers in rural areas
◦ Access-based strategic position
who cannot get DSL or cable services.
79
choices:
◦ Needs-based strategic position
◦ Access-based strategic position
 These strategic positions are not mutually
exclusive and can overlap.
80
 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.
81
 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.
82
 The AIS should help a company adopt and
• Predictive
maintain data analysis
its strategic (data
position.
warehousing/mining)
◦ Requires adds toabout
that data be collected competitive
each activity.
advantage by forecasting future events based on
◦ Requires the collection and integration of both
historical trends.
financial and nonfinancial data.
• EXAMPLE: You can view forecasts of airfares
between major airports based on historical trends
at www.farecast.com.
83
 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.
84
 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.
85

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Accounting Information Systems:

and processed to provide meaning to a user.

information translates into better decisions.

Benefits of information may include:

Costs may include time and resources spent:

Costs and benefits of information are often

It reduces uncertainty by helping you predict

It’s dependable, i.e., free from error or bias

It doesn’t leave out anything that’s important.

You get it in time to make your decision.

It’s presented in a manner you can

information is ensuring that benefits exceed

• Auditors need to evaluate the accuracy

• Tax accountants must understand the

• In private industry and not-for-profit,

• In management consulting, the design,

• Other systems courses focus on design and

• Makes up about 25% of the Business

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

Accountants, lawyers, and administration.

Involves recruiting and hiring new

Activities to improve the products or services

For the pharmaceutical company, these activities

• Repetitive and routine.

• Non-recurring and non-routine.

• Relate to performance of specific tasks

• Relate to utilizing resources to accomplish

• The “what do we want to be when we grow

• Offer a subset of the industry’s

• Serve most or all of the needs of a particular

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