Accounting Information Systems

C HAPTER 1
Accounting Information Systems: An Overview
2006 Prentice Hall Business Publishing
Accounting Information Systems, 10/e
Romney/Steinbart
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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?
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Tue 21-9 SYSTEMS, DATA, AND INFORMATION

A system is:
A set of interrelated components That interact To achieve a goal
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SYSTEMS, DATA, AND INFORMATION

Most systems are composed of smaller subsystems . . . . . . And vice versa! The susbsystems should be designed to maximize achievement of the organizations goals Goal conflict vs. goal congruence
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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 subsystems goals are in line with the organizations goals. The larger and more complicated a system, the more difficult it is to achieve goal congruence.

Data are facts that are collected, recorded, stored, and processed by an information system. Organizations collect data about:
Events that occur (total amount of sales) Resources that are affected by those events (items, qty, price) Agents who participate in the events (customers, salespersons)

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.
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Mon 20-9 SYSTEMS, DATA, AND INFORMATION

However, when you get more information than you can effectively assimilate, you suffer from information overload.
Example: Final exams week!
When youve reached the overload point, the quality of decisions declines while the costs of producing the information increases.
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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
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Costs may include time and resources spent: Collecting data Processing data Storing data Distributing information to users
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Costs and benefits of information are often difficult to quantify, but you need to try when youre making decisions about whether to provide information.
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23-9 SYSTEMS, DATA, AND INFORMATION

Characteristics that make information useful:
Relevance
It reduces uncertainty by helping you predict what will happen or confirm what already has happened.

Relevance Reliability
Its dependable, i.e., free from error or bias and faithfully portrays events and activities.

Relevance Reliability Completeness
It doesnt leave out anything thats important.

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

Relevance Reliability Completeness Timeliness Understandability
Its presented in a manner you can comprehend and use.

Relevance Reliability Completeness A consensus notionthe nature of the Timeliness information is such that different people would tend to produce the same result. Understandability Verifiability

Relevance Reliability Completeness Timeliness Understandability You can get to it when you need it and in a format you can use. Verifiability Accessibility

External users primarily use information that is either:
MANDATORY INFORMATIONRequired by a governmental entity, such as Taxes info. ESSENTIAL INFORMATIONRequired 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

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 entitys resources (including data) are:
Available when needed Accurate and reliable
WHY STUDY ACCOUNTING INFORMATION SYSTEMS?

Its 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

Its fundamental to accounting.
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

Its 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 clients 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-profits, 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.

Its fundamental to accounting. The skills are critical to career success. 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.***

Its fundamental to accounting. The skills are critical to career success. The AIS course complements other systems courses. AIS topics are tested on the new CPA exam.
Makes up about 25% of the Business Environment & Concepts section of the CPA exam.

Its fundamental to accounting. The skills are critical to career success. The AIS course complements other systems courses. AIS topics are tested on the new CPA exam. AIS topics impact corporate strategy and culture.
22-9 (2)ROLE OF THE AIS IN THE VALUE CHAIN

While 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. (Synergy) 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
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 - line Support activities - staff
These activities are sometimes referred to as line and staff activities respectively.

Primary activities include:
Inbound logistics Operations Outbound logistics Marketing and sales Service

Support activities include:
Firm infrastructure Human resources Technology Purchasing

Information technology can significantly impact the efficiency and effectiveness with which the preceding activities are carried out. An organizations value chain can be connected with the value chains of its customers, suppliers, and distributors.

Smith Supply Co. Inbound Logistics Operations Outbound Logistics Marketing & Sales Service Information technology can facilitate synergistic linkages that improve the performance of each companys 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 Marketing & Sales Service
Customer Pharmacy Inbound Logistics Operations Outbound Logistics Marketing & Sales Service

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.

Structured decisions Semistructured decisions
Incomplete rules Require subjective assessments EXAMPLE: Deciding whether to sell auto insurance to a customer with a tainted driving history.

Structured decisions Semistructured decisions 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

There is also variation in the scope of a decisions effect:
Operational control decisions
Relate to performance of specific tasks Often of a day-to-day nature EXAMPLE: Deciding whether to order inventory

Operational control decisions Management control decisions
Relate to utilizing resources to accomplish organizational objectives EXAMPLE: Budgeting

Operational control decisions 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

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
Tue 28-9 THE AIS AND CORPORATE STRATEGY

Michael Porter suggests that there are two basic business strategies companies can follow:
Product-differentiation strategy Low-cost strategy
THE AIS AND CORPORATE STRATEGY

A product differentiation strategy involves setting your product apart from those of your competitors, i.e., building a better mousetrap by offering one thats faster, has enhanced features, etc.

Michael Porter suggests that there are two basic business strategies companies can follow:
Product-differentiation strategy Low-cost strategy

A low-cost strategy involves offering a cheaper mousetrap than your competitors. The low cost is made possible by operating more efficiently. Sometimes a company can do both, but they normally have to choose.

Porter also argues that companies must choose a strategic position among three choices:
Variety-based strategic position
Offer a subset of the industrys products or services. EXAMPLE: An insurance company that only offers life insurance as opposed to life, health, propertycasualty, etc. or oil lubricants.

Variety-based strategic position 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. Or Retirees.

Porter also argues that companies Serve a subset of customers who differmust from choose ain strategic position among three others terms of factors such as geographic location or size.. choices:
EXAMPLE: Satellite Internet services are Variety-based strategic position intended primarily for customers in rural areas Needs-based strategic position who cannot get DSL or cable services.
Access-based strategic position

Variety-based strategic position Needs-based strategic position Access-based strategic position
These strategic positions are not mutually exclusive and can overlap.

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.
Its critical to design the organizations activities so they reinforce one another in achieving the selected strategic position. The result is synergy, which is difficult for competitors to imitate.

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 productdifferentiation strategies. The Internet may impede access-based strategic positions.

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.

Accounting Information Systems

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C HAPTER 1

Accounting Information Systems: An Overview

2006 Prentice Hall Business Publishing

Accounting Information Systems, 10/e

2006 Prentice Hall Business Publishing

Accounting Information Systems, 10/e

Tue 21-9 SYSTEMS, DATA, AND INFORMATION

2006 Prentice Hall Business Publishing

Accounting Information Systems, 10/e

SYSTEMS, DATA, AND INFORMATION

SYSTEMS, DATA, AND INFORMATION

SYSTEMS, DATA, AND INFORMATION

SYSTEMS, DATA, AND INFORMATION

2006 Prentice Hall Business Publishing

Accounting Information Systems, 10/e

Mon 20-9 SYSTEMS, DATA, AND INFORMATION

2006 Prentice Hall Business Publishing

Accounting Information Systems, 10/e

SYSTEMS, DATA, AND INFORMATION

2006 Prentice Hall Business Publishing

Accounting Information Systems, 10/e

SYSTEMS, DATA, AND INFORMATION

2006 Prentice Hall Business Publishing

Accounting Information Systems, 10/e

SYSTEMS, DATA, AND INFORMATION

2006 Prentice Hall Business Publishing

Accounting Information Systems, 10/e

23-9 SYSTEMS, DATA, AND INFORMATION

2006 Prentice Hall Business Publishing

Accounting Information Systems, 10/e

SYSTEMS, DATA, AND INFORMATION

2006 Prentice Hall Business Publishing

Accounting Information Systems, 10/e

SYSTEMS, DATA, AND INFORMATION

2006 Prentice Hall Business Publishing

Accounting Information Systems, 10/e

SYSTEMS, DATA, AND INFORMATION

2006 Prentice Hall Business Publishing

Accounting Information Systems, 10/e

SYSTEMS, DATA, AND INFORMATION

2006 Prentice Hall Business Publishing

Accounting Information Systems, 10/e

SYSTEMS, DATA, AND INFORMATION

2006 Prentice Hall Business Publishing

Accounting Information Systems, 10/e

SYSTEMS, DATA, AND INFORMATION

SYSTEMS, DATA, AND INFORMATION

In providing mandatory or essential information, the focus should be on:

SYSTEMS, DATA, AND INFORMATION

2006 Prentice Hall Business Publishing

Accounting Information Systems, 10/e

Technology is simply a tool to create, maintain, or improve a system.

2006 Prentice Hall Business Publishing

Accounting Information Systems, 10/e

WHY STUDY ACCOUNTING INFORMATION SYSTEMS?

2006 Prentice Hall Business Publishing

Accounting Information Systems, 10/e

WHY STUDY ACCOUNTING INFORMATION SYSTEMS?

2006 Prentice Hall Business Publishing

Accounting Information Systems, 10/e

WHY STUDY ACCOUNTING INFORMATION SYSTEMS?

2006 Prentice Hall Business Publishing

Accounting Information Systems, 10/e

WHY STUDY ACCOUNTING INFORMATION SYSTEMS?