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2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 1 of 43

C HAPTER 1

Accounting InformationSystems:

An Overview

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INTRODUCTION

Questions to be addressed in this chapterinclude: What is the meaning of system, data, and

in format ion?

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 decisionmaking?

What are the basic strategies and strategic positionsan organization can pursue?

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SYSTEMS, DATA, AND INFORMATION

A system is:

A set of interrelated components

That interact

To achieve a goal

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Most systems are composed of smaller

subsystems . . .

. . . And vice versa!

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Every organization has goals.

The susbsystems should be designed tomaximize achievement of the organizations

goals Even to the detriment of the subsystem itself

EXAMPLE: The production department (asubsystem) of a company might have to

forego its goal of staying within its budget inorder to meet the organizations goal ofdelivering product on time.

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Goal conflictoccurs when the activity of asubsystem is not consistent with anothersubsystem or with the larger system.

Goal congruenceoccurs when thesubsystems goals are in line with theorganizations goals.

The larger and more complicated asystem, the more difficult it is to achievegoal congruence.

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The systems conceptencourages integration(i.e., minimizing the duplication of recording,storing, reporting and processing).

Dataare facts that are collected, recorded,stored, and processed by an information system.

Organizations collect data about: Eventsthat occur

Resourcesthat are affected by those events Agentswho participate in the events

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Informationis 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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However, when you get more information

than you can effectively assimilate, you

suffer frominformation overload.

Example: Final exams week!

When youve reached the overload point,

the quality of decisions declines while the

costs of producing the informationincreases.

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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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Value of information

Costs may include time and resources spent:

Collecting data

Processing data Storing data

Distributing information to users

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Value of informationCosts 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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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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useful:

Relevance

Reliability

Its dependable, i.e., free from error or bias

and faithfully portrays events and activities.

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useful:

Relevance

Reliability

Completeness

It doesnt leave out anything thats important.

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useful:

Relevance

Reliability

Completeness

Timeliness

You get it in time to make your decision.

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useful:

Relevance

Reliability

Completeness

Timeliness

Understandability

Its presented in a manner you can

comprehend and use.

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useful:

Relevance

Reliability

Completeness

Timeliness

Understandability

Verifiability

A consensus notionthe nature of the

information is such that different people

would tend to produce the same result.

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Characteristics that make informationuseful:

Relevance

Reliability Completeness

Timeliness

Understandability Verifiability

Accessibility

You can get to it when you need it and in aformat you can use.

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Information is provided to both:

External users

Internal Users


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External users

Internal Users


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External users primarily use information

that is either:

MANDATORY INFORMATIONRequired by

a governmental entity, such as Form 10-Ksrequired by the SEC; or

ESSENTIAL INFORMATIONRequired to

conduct business with external parties, suchas purchase orders.


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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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External users

Internal Users


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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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An AIS is a system that collects, records,stores, and processes data to produceinformation 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?

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The functions of an AIS are to:

Collect and store data about events,resources, and agents.

Transform that data into information thatmanagement can use to make decisionsabout events, resources, and agents.

Provide adequate controls to ensure that the

entitys resources (including data) are: Available when needed

Accurate and reliable

WHAT IS AN AIS?

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Its fundamental to accounting.

WHY STUDY ACCOUNTING

INFORMATION SYSTEMS?

Accounting is an information-providingactivity, so accountants need to

understand: How the system that provides that

information is designed, implementedand used.

How financial information is reported

How information is used to makedecisions

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Other accounting courses focus on howthe information is provided and used.

An AIS course places greater emphasison:

How the data is collected andtransformed

How the availability, reliability, andaccuracy of the data is ensured

AIS courses are not number-crunchingcourses

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The skills are critical to career success.



Auditorsneed to evaluate the accuracy

and reliability of information produced bythe AIS.

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Tax accountantsmust understand the

clients AIS adequately to be confident thatit is providing complete and accurateinformation for tax planning andcompliance work.

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In private industryand not-for-profits,

systems work is considered the mostimportant activity performed byaccountants.

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In management consulting, the design,

selection, and implementation ofaccounting systems is a rapid growth area.

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The AIS course complements othersystems courses.



Other systems courses focus on design andimplementation of information systems,databases, expert systems, andtelecommunications.

AIS courses focus on accountability andcontrol.

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AIS topics are tested on the new CPA

exam.



Makes up about 25% of the BusinessEnvironment & Concepts section of the CPAexam.

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AIS topics are tested on the new CPA

exam.

AIS topics impact corporate strategy

and culture.



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AIS

Occupational

Culture Strategy

Information

Technology

AIS design is

affected by

information

technology, the

organizationsstrategy, and the

organizations

culture.

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AIS

Occupational

Culture Strategy

Information

Technology

Information technology

affects the companys

choice of business

strategy. To perform

cost-benefit analyses on

IT changes, you need to

understand business

strategy.

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AIS

Occupational

Culture Strategy

Information

Technology

While culture affects

the design of the AIS,

its also true that the

AIS affects culture byaltering the

dispersion and

availability of

information.

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The objective of most organizations is to

provide value to their customers.

What does it mean to deliver value?

Lets peek in on a conversation at Joes

pharmacy . . .

ROLE OF THE AIS IN THE VALUE CHAIN

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Well, Mr. Pharmaceutical

Salesman, your proposal looks

good, but your prices are about

5% higher than your competitors.

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Thats true, but were

comfortable with that

because of the value-

added that we bring to

this arrangement.

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What is that value-added,

and how do you convert it

into dollars?

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Blahblahblah

customer service

blahblah--blah

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While adding value is a commonly usedbuzzword, in its genuine sense, it means makingthe value of the finished component greater thanthe 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-negativeblood or rare gems)

Providing enhanced features

Customizing it


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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.


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These include:

Primary activities

Support activities




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Primary activities include:

Inbound logistics


Receiving, storing, and distributing the

materials that are inputs to the

organizations product or service.

For a pharmaceutical company, this activity

might involve handling incoming chemicalsand elements that will be used to make their

drugs.

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Inbound logistics

Operations


Transforming those inputs into products or

services.

For the pharmaceutical company, this step

involves combining the raw chemicals andelements with the work of people and equipment to

produce the finished drug product that will be sold

to customers.

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Inbound logistics

Operations

Outbound logistics


Distributing products or services to customers.

For the pharmaceutical company, this step involvespackaging and shipping the goods to drug stores,

doctors, and hospitals.

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Inbound logistics

Operations

Outbound logistics

Marketing and sales


Helping customers to

buy the organizations

products or services.

A pharmacy rep may

visit with drug stores,

doctors, etc. to inform

them about theirproducts and take

orders.

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Inbound logistics

Operations

Outbound logistics

Marketing and sales

Service


Post-sale support provided to

customers such as repair and

maintenance function.

A pharmaceutical firm willtypically not be repairing its

product (though the product may

be periodically reformulated).

The pharmaceutical company ismore likely to be providing

advisory services to pharmacists,

etc.

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These include:

Primary activities

Support activities




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Support activities include:

Firm infrastructure


Accountants, lawyers, and administration.

Includes the companys accountinginformation system.

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Firm infrastructure

Human resources


Involves recruiting and hiring new

employees, training employees, paying

employees, and handling employee

benefits.

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Firm infrastructure

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.

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Firm infrastructure

Human resources

Technology

Purchasing


Buying the resources (e.g.,

materials, inventory, fixed

assets) needed to carry out the

entitys primary activities.

In the pharmaceutical company,

the purchasing folks are trying

to get the best combination of

cost and quality in buyingchemicals, supplies, and other

assets the company needs to

run its operations.

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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.


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Pharmaceuticals, Inc.

Inbound Logistics

Operations

Outbound Logistics

Marketing & Sales

Service


Smith Supply Co.

Inbound Logistics

Operations

Outbound Logistics

Marketing & SalesService

Customer Pharmacy

Inbound Logistics

OperationsOutbound Logistics

Marketing & Sales

Service

For example, the inbound logistics ofPharmaceuticals, Inc., links to the outbound

logistics of its suppliers.

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Inbound Logistics

Operations

Outbound Logistics

Marketing & Sales

Service


Smith Supply Co.

Inbound Logistics

Operations

Outbound Logistics


Customer Pharmacy

Inbound Logistics


Marketing & Sales

Service

And the outbound logistics ofPharmaceuticals, Inc., links to the inbound

logistics of its customers.

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Inbound Logistics

Operations

Outbound Logistics

Marketing & Sales

Service


Smith Supply Co.

Inbound Logistics

Operations

Outbound Logistics


Customer Pharmacy

Inbound Logistics


Marketing & Sales

Service

The linking of these separate value chainscreates a larger system known as a supply

chain.

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Inbound Logistics

Operations

Outbound Logistics

Marketing & Sales

Service


Smith Supply Co.

Inbound Logistics

Operations

Outbound Logistics


Customer Pharmacy

Inbound Logistics


Marketing & Sales

Service

The linking of these separate value chainscreates a larger system known as a supply

chain.

Information

technology can

facilitate synergisticlinkages that improve

the performance of

each companys value

chain.

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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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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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Semistructured decisions



Non-recurring and non-routine

Require a great deal of subjectiveassessment

EXAMPLE: Deciding whether to begin

selling a new type of insurance policy

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There is also variation in the scope of a

decisions effect:

Occupational 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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decisions effect:


Management control decisions


Relate to utilizing resources to accomplish

organizational objectives

EXAMPLE: Budgeting

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decisions effect:


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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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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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 ofthe entitys overall business strategy.

THE AIS AND CORPORATE STRATEGY

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Michael Porter suggests that there are two

basic business strategies companies can

follow:

Product-differentiation strategy

Low-cost strategy


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Michael Porter suggests that there are two

basic business strategies companies can

follow:

Product-differentiation strategy

Low-cost strategy


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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.


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A low-cost strategy involves offering a

cheaper mousetrap than your competitors.

The low cost is made possible by

operating more efficiently.


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Sometimes a company can do both, butthey normally have to choose.


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Porter also argues that companies mustchoose a strategic position among three

choices:

Variety-based strategic position


Offer a subset of the industrys

products or services.

EXAMPLE: An insurance companythat only offers life insurance as

opposed to life, health, property-

casualty, etc.

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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.

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choices:



Access-based strategic position


Serve a subset of customers who differ from

others in terms of factors such as geographic

location or size..

EXAMPLE: Satellite Internet services areintended primarily for customers in rural areas

who cannot get DSL or cable services.

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choices:



Access-based strategic position

These strategic positions are notmutually exclusive and can overlap.


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Choosing a strategic position is importantbecause 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 issynergy, which is difficult for competitors to

imitate.


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The growth of the Internet has profoundlyaffected the way value chain activities areperformed: Inbound and outbound logistics can be streamlined

for products that can be digitized, like books andmusic.

The Internet allows companies to cut costs, whichimpacts strategy and strategic position.

Because the Internet is available to everyone, intenseprice competition can result. The outcome may bethat many companies shift from low-cost to product-differentiation strategies.

The Internet may impede access-based strategicpositions.


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S CO O S G

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The authors believe:

Accounting and information systems should

be closely integrated.

The AIS should be the primary informationsystem to provide users with information they

need to perform their jobs.


SUMMARY

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SUMMARY

What weve learned so far: The meaning of system, data, and

in format ion

What an AIS is Why its an important topic to stody What its role is in the value chain

How it provides information for decision making

What are the basic strategies and strategicpositions an organization can pursue How these interact with the AIS

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