C HAPTER 1
Accounting Information
Systems:
An Overview
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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
organization’s goals
• Goal conflict vs.
goal congruence
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SYSTEMS, DATA, AND INFORMATION
• 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.
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SYSTEMS, DATA, AND INFORMATION
• 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)
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SYSTEMS, DATA, AND INFORMATION
• 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 you’ve reached the overload point,
the quality of decisions declines while the
costs of producing the information
increases.
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SYSTEMS, DATA, AND INFORMATION
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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SYSTEMS, DATA, AND INFORMATION
Benefits of information
- Cost of producing information
Value of information
Costs may include time and resources spent:
• Collecting data
• Processing data
• Storing data
• Distributing information to users
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SYSTEMS, DATA, AND INFORMATION
Benefits of information
- Cost of producing information
Value of information
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.
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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.
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SYSTEMS, DATA, AND INFORMATION
• Characteristics that make information
useful:
– Relevance
– Reliability
It’s dependable, i.e., free from error or bias
and faithfully portrays events and activities.
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SYSTEMS, DATA, AND INFORMATION
• Characteristics that make information
useful:
– Relevance
– Reliability
– Completeness
It doesn’t leave out anything that’s important.
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SYSTEMS, DATA, AND INFORMATION
• Characteristics that make information
useful:
– Relevance
– Reliability
– Completeness
– Timeliness
You get it in time to make your decision.
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SYSTEMS, DATA, AND INFORMATION
• Characteristics that make information
useful:
– Relevance
– Reliability
– Completeness
– Timeliness
– Understandability
It’s presented in a manner you can
comprehend and use.
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SYSTEMS, DATA, AND INFORMATION
• Characteristics that make information
useful:
– Relevance
– Reliability
– Completeness
A consensus notion—the nature of the
– Timeliness
information is such that different people
would tend to produce the same result.
– Understandability
– Verifiability
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SYSTEMS, DATA, AND INFORMATION
• Characteristics that make information
useful:
– Relevance
– Reliability
– Completeness
– Timeliness
– Understandability
You can get to it when you need it and in a
format you can use.
– Verifiability
– Accessibility
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SYSTEMS, DATA, AND INFORMATION
• External users primarily use information that is
either:
– MANDATORY INFORMATION—Required by a
governmental entity, such as Taxes info.
– 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
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SYSTEMS, DATA, AND INFORMATION
• 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.
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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.
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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
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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 that
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 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
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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.
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WHY STUDY ACCOUNTING
INFORMATION SYSTEMS?
• It’s fundamental to accounting.
• The skills are critical to career success.
• 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.
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WHY STUDY ACCOUNTING
INFORMATION SYSTEMS?
• It’s fundamental to accounting.
• The skills are critical to career success.
• In private industry and not-for-profits,
systems work is considered the most
important activity performed by
accountants.
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WHY STUDY ACCOUNTING
INFORMATION SYSTEMS?
• It’s fundamental to accounting.
• The skills are critical to career success.
• In management consulting, the design,
selection, and implementation of
accounting systems is a rapid growth area.
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WHY STUDY ACCOUNTING
INFORMATION SYSTEMS?
• It’s 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.***
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WHY STUDY ACCOUNTING
INFORMATION SYSTEMS?
• It’s 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.
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WHY STUDY ACCOUNTING
INFORMATION SYSTEMS?
• It’s 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.
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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
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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 - line
– Support activities - staff
• 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
– Operations
– Outbound logistics
– Marketing and sales
– Service
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ROLE OF THE AIS IN THE VALUE CHAIN
• Support activities include:
– Firm infrastructure
– Human resources
– Technology
– Purchasing
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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.
Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
Service
Information
technology can
facilitate synergistic
linkages that improve
the performance of
each company’s value
chain.
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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
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ROLE OF THE AIS IN THE VALUE CHAIN
• 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.
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ROLE OF THE AIS IN THE VALUE CHAIN
• There is variation in the degree of
structure used to make decisions:
– Structured decisions
– Semistructured decisions
• Incomplete rules
• Require subjective assessments
• EXAMPLE: Deciding whether to sell auto
insurance to a customer with a tainted
driving history.
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ROLE OF THE AIS IN THE VALUE CHAIN
• There is variation in the degree of
structure used to make decisions:
– 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
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ROLE OF THE AIS IN THE VALUE CHAIN
• There is also variation in the scope of a
decision’s effect:
– Operational control decisions
• Relate to performance of specific tasks
• Often of a day-to-day nature
• EXAMPLE: Deciding whether to order
inventory
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ROLE OF THE AIS IN THE VALUE CHAIN
• There is also variation in the scope of a
decision’s effect:
– Operational control decisions
– Management control decisions
• Relate to utilizing resources to accomplish
organizational objectives
• EXAMPLE: Budgeting
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ROLE OF THE AIS IN THE VALUE CHAIN
• There is also variation in the scope of a
decision’s effect:
– 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
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ROLE OF THE AIS IN THE VALUE CHAIN
• 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
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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
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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 that’s faster,
has enhanced features, etc.
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THE AIS AND CORPORATE STRATEGY
• Michael Porter suggests that there are two
basic business strategies companies can
follow:
– Product-differentiation strategy
– Low-cost strategy
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THE AIS AND CORPORATE 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.
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THE AIS AND CORPORATE STRATEGY
• 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, propertycasualty, etc. or oil lubricants.
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THE AIS AND CORPORATE STRATEGY
• Porter also argues that companies must
choose a strategic position among three
choices:
– 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.
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THE AIS AND CORPORATE STRATEGY
• Porter
also
argues
that companies
• Serve
a subset
of customers
who differmust
from
choose
position
among
three
othersainstrategic
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
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THE AIS AND CORPORATE STRATEGY
• Porter also argues that companies must
choose a strategic position among three
choices:
– Variety-based strategic position
– Needs-based strategic position
– Access-based strategic position
• These strategic positions are not
mutually exclusive and can overlap.
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THE AIS AND CORPORATE STRATEGY
• 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.
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THE AIS AND CORPORATE STRATEGY
• 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.
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THE AIS AND CORPORATE STRATEGY
• 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.
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