Accounting Information Systems An Overview

Accounting
Information Systems
An Overview
CHAPTER 1
1
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?
2
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.
3
• 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
4
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.
5
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
6
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
7
SYSTEMS?
• 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
8
SYSTEMS?
• 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.

9
SYSTEMS?
Organizational Business
Culture Strategy
AIS
AIS design is affected
by information
technology, the
Business strategy, and
the organization’s
Information
culture.
Technology
10
SYSTEMS?
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.
11
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
12
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.
Value Chain
• The process or activities by which a company adds
value to an article, including production,
marketing, and the provision of after-sales service.
13
• Interlinked value-adding activities that convert inputs into
outputs which, in turn, add to the bottom line and help create
competitive advantage.
A value chain typically consists of
(1) Inbound logistics
(2) manufacturing operations,
(3) outbound logistics,
(4) marketing and selling, and
(5) after sales services.
These activities are supported by
(6) purchasing or procurement
(7) research and development
(8) human resource development,
(9) and corporate infrastructure. 14
• “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
15
• 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.
16

include:
17
• 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.
18

– 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.
19

– 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.
20

– Inbound logistics Helping customers to buy
– Operations the organization’s products
or services.
– Marketing and sales A pharmacy Representative
may visit with drug stores,
doctors, etc. to inform
them about their products
and take orders.
21

– Inbound logistics Post-sale support provided to
customers such as repair and
– Operations maintenance function.
– 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.
22

include:
23
• Support activities include:

– Firm infrastructure
Accountants, lawyers, and administration. Includes
the company’s accounting information system.
24

– Human resources
Involves recruiting and hiring new employees,
training employees, paying employees, and
handling employee benefits.
25

– 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.
26
– 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.
27
• 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.
28
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
29
Smith Supply Co. And the outbound logistics of Pharmaceuticals, Inc., links
Inbound Logistics to the inbound logistics of its customers.
Operations
Outbound Logistics
Operations
Marketing & Sales Inbound Logistics
Service Operations
Outbound Logistics
Marketing & Sales
Service
30
Smith Supply Co. The linking of these separate value chains creates a
Inbound Logistics larger system known as a supply chain.
Operations
Outbound Logistics
Operations
Inbound Logistics
Marketing & Sales
Operations
Service
Outbound Logistics
Marketing & Sales
Service
31
Smith Supply Co. The linking of these separate value chains creates a
Inbound Logistics larger system known as a supply chain.
Operations
Outbound Logistics
Operations
Information technology can
facilitate synergistic linkages Marketing & Sales Inbound Logistics
that improve the Service Operations
performance of each Outbound Logistics
company’s value chain. Marketing & Sales
Service
32
AIS AND DECESION MAKING
• 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.
• Semi structured decisions
• Incomplete rules - Require subjective assessments
• EXAMPLE: Deciding whether to sell auto insurance to a customer with a
tainted driving history.
• Unstructured 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 33
• 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
• Management control decisions
• Relate to utilizing resources to accomplish organizational objectives
• EXAMPLE: Budgeting
• Strategic planning decisions
• “what do we want to be, when we grow up”
– Deciding on Organizational objectives
– Preparing Policies to achieve those objectives
• EXAMPLE: Deciding whether to diversify the company into

other product lines
34
• In general, the manager of higher position in the
organization, is most likely to be engaged in:
– Less structured decisions
– Involve in Broader scope decision (strategic planning)
• 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
organizations overall business strategy.
35
THE AIS AND CORPORATE STRATEGY
• Michael Porter suggests that there are two basic
business strategies companies can follow:
– Product-differentiation strategy
A product differentiation strategy involves setting
your product apart from those of our competitors,
i.e., building a “better” product by offering to the
customer with different sizes of pickings, or with
enhanced features, etc.
– Low-cost strategy
A low-cost strategy involves offering a cheaper
product than our competitors. The low cost is made
possible by operating more efficiently.
36
The company can choose other strategies like:
• Variety-based strategic position
• Offering a subset of the industry’s products or services.
• Needs-based strategic position
• Serve most or all of the needs of a particular group of
customers in a target market.
• Access-based strategic position
• Serve a subset of customers who differ from others in terms
of factors such as geographic location or size..
37
• 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.
38
SYSTEMS
DATA
&
INFORMATION
39
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.
40
• 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).
41
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
42
• 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.
43
Any Questions ???
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Accounting Information Systems An Overview

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Accounting

• AIS mainly focus on accountability and control.

Information technology affects

• The objective of most organizations is to provide

• Value is provided by performing a series of

• Value is provided by performing a series of

• Primary activities include:

For a pharmaceutical company, this activity might

• Primary activities include:

For the pharmaceutical company, this step involves

• Primary activities include:

For the pharmaceutical company, this step involves

• Primary activities include:

• Primary activities include:

• Value is provided by performing a series of

• Support activities include:

• Support activities include:

• Support activities include:

For the pharmaceutical company, these activities would

• Information technology can significantly

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

• EXAMPLE: Deciding whether to diversify the company into

• The AIS should help a company adopt and

• Every organization has goals.

The larger and more complicated a system, the more

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

Organizations collect data about:

Information is different from data.

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