CH 1

ADAMA UNIVERSITY
ACCOUNTING
INFORMATION SYSTEM
CHAPTER 1
Accounting Information
Systems:
An Overview
INTRODUCTION
• 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?
SYSTEMS, DATA, AND INFORMATION
• 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 subsystems should be designed to maximize
achievement of the organization’s goals.
– Even to the detriment(bad) 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.
• 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).
• 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.
• Usually, more information and better
information translates into better decisions.
• 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.
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
Costs may include time and resources spent:

• Collecting data
• Processing data
• Storing data
• Distributing information to users
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.
• Characteristics that make information

useful:
– Relevance
It reduces uncertainty by helping you predict what
will happen or confirm what already has happened.

useful:
– Relevance
– Reliability
It’s dependable, i.e., free from error or bias and
faithfully portrays events and activities.

useful:
– Relevance
– Reliability
– Completeness
It doesn’t leave out anything that’s important.

useful:
– Relevance
– Reliability
– Completeness
– Timeliness
You get it in time to make your decision.

useful:
– Relevance
– Reliability
– Completeness
– Timeliness
– Understandability
It’s presented in a manner you can comprehend
and use.

useful:
– Relevance
– Reliability
– Completeness
A consensus notion—the nature of the information
– Timelinessis such that different people would tend to produce
– the same result.
Understandability
– Verifiability

useful:
– Relevance
– Reliability
– Completeness
– Timeliness
– Understandability
You can get to it when you need it and in a format
– you can use.
Verifiability
– Accessibility
• Information is provided to both:

– External users
– Internal users

– External users
– Internal users
• External users primarily use information that is

either:
– MANDATORY INFORMATION—required by a
governmental entity,
– 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 and
usefulness.

– External users
– Internal users
• 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.
WHAT IS AN AIS?
• 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.
WHAT IS AN AIS?
• 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
OTHER ACCOUNTING COURSES
Vs
AIS
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 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.
• 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.
• 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.
• 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.

courses.
• AIS topics are tested on the new CPA exam.
• Makes up about 25% of the Business Environment &

Concepts section of the CPA exam.
courses.
• AIS topics are tested on the new CPA exam.
• AIS topics impact corporate strategy and
culture.
Occupational
Culture Strategy
AIS design is affected by

information technology, the AIS
organization’s strategy,
and the organization’s
culture.
Information
Technology
Occupational
Culture Strategy
Information technology
affects the company’s choice AIS
of business strategy. To
perform cost-benefit
analyses on IT changes, you
need to understand business
strategy. Information
Technology
Occupational
Culture Strategy
Although culture affects

the design of the AIS,
AIS
it’s also true that the
AIS affects culture by
altering the dispersion
and availability of
information. Information
Technology
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 peek in on a conversation at Joe’s
pharmacy . . .
Well, Mr. Pharmaceutical Salesman,

your proposal looks good, but your
prices are about 5% higher than
your competitors.
That’s true, but we’re

comfortable with that because of
the value-added that we bring to
this arrangement.
What is that “value-added,” and how

do you convert it into dollars?
Blah—blah—blah–
customer service– blah
—blah—blah
• 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
• 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.

include:
• 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.

– 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.

– Operations
– Outbound logistics
Distributing products or services to customers.
Link between an organization and its customers
For the pharmaceutical company, this step involves

packaging and shipping the goods to drug stores, doctors,
and hospitals.

– Inbound logistics Helping customers to buy
– the organization’s products
Operations
or services.
– Outbound logistics
– Marketing and sales A pharmacy rep may visit
with drug stores, doctors,
etc. to inform them about
their products and take
orders.
• Primary activities
Post-sale include:
support provided to customers such
as repair and maintenance function.
– OperationsA pharmaceutical firm will typically not be
– Outboundrepairing
logistics it’s product (though the product
may be periodically reformulated). The
– Marketingpharmaceutical
and sales company is more likely to be
– Service providing advisory services to pharmacists,
etc.

include:
• Support activities include:

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

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

– 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.
• Support activities Buying

include:
the resources (e.g.,
materials, inventory, fixed assets)
needed to carry out the entity’s
– Human resources primary activities.
– Technology
In the pharmaceutical company, the
– Purchasing 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 theAIS
• Good efficiency and effectiveness with
value chain:
which• the
UPSpreceding
spends overactivities
$1 billion a are
yearcarried
on out.
information systems resulting in greater
• An organization’s value
customer control overchain canhigher
delivery, be driver
productivity,
connected with theand lowerchains
value costs. of its
• Bad AIS value chain:
customers, suppliers, and distributors.
– Limited Brands tangled integration of over 60
incompatible information systems resulted in 400 trailers
trying to jam into a 150 trailer lot.
Smith Supply Co. For example, the inbound logistics of

Inbound Logistics Pharmaceuticals, Inc., links to the
outbound logistics of its suppliers.
Operations
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
Smith Supply Co. And the outbound logistics of

Inbound Logistics Pharmaceuticals, Inc., links to the inbound
logistics of its customers.
Operations
Outbound Logistics
Marketing & Sales
Inbound Logistics
Service
Operations
Service Operations
Outbound Logistics
Marketing & Sales
Service
Smith Supply Co. The linking of these separate value chains

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

Inbound Logistics creates a larger system known as a supply
chain.
Operations
Outbound Logistics
Marketing & Sales
Inbound Logistics
Service
Operations
Information
technology can Marketing & Sales Inbound Logistics
facilitate synergistic Service Operations
linkages that improve Outbound Logistics
the performance of Marketing & Sales
each company’s value
Service
chain.

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ADAMA UNIVERSITY

• Most systems are composed of smaller

• Every organization has goals.

• Goal conflict occurs when the activity of a

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

• Information is different from data.

• However, when you get more information than

Benefits of information may include:

Costs may include time and resources spent:

• Characteristics that make information

• Characteristics that make information

• Characteristics that make information

• Characteristics that make information

• Characteristics that make information

• Characteristics that make information

• Characteristics that make information

• Information is provided to both:

• Information is provided to both:

• External users primarily use information that is

• In providing mandatory or essential

• Information is provided to both:

• Internal users primarily use discretionary

• An AIS is a system that collects, records,

• The functions of an AIS are to:

• It’s fundamental to accounting.

• Makes up about 25% of the Business Environment &

AIS design is affected by

Although culture affects

• The objective of most organizations is to

Well, Mr. Pharmaceutical Salesman,

That’s true, but we’re

What is that “value-added,” and how

• Although “adding value” is a commonly used buzzword,

• 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:

• Value is provided by performing a series of

• Support activities include:

• Support activities include:

• Support activities include:

For the pharmaceutical company, these activities would

• Support activities Buying

• Information technology can significantly

Smith Supply Co. For example, the inbound logistics of

Smith Supply Co. And the outbound logistics of

Smith Supply Co. The linking of these separate value chains

Smith Supply Co. The linking of these separate value chains

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