Romney CH 01 Baru

C
HAPTER 1
Accounting Information
Systems:
An Overview
2008 Prentice Hall Business Publishing
Accounting Information Systems, 11/e
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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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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 subsystems should be designed to
maximize achievement of the organizations
goals.
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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.
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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
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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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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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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
A consensus notionthe nature of the
Timeliness
information is such that different people
would tend to produce the same result.
Understandability
Verifiability
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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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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-K
required by the SEC; or
ESSENTIAL INFORMATIONrequired to
conduct business with external parties, such
as 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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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
entitys resources (including data) are:
Available when needed
Accurate and reliable
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WHY STUDY ACCOUNTING

INFORMATION SYSTEMS?
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.
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Occupational
Culture
AIS design is
affected by
information
technology, the
organizations
strategy, and the
organizations
culture.
Strategy
AIS
Information
Technology
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Occupational
Culture
Information technology
affects the companys
choice of business
strategy. To perform
cost-benefit analyses on
IT changes, you need to
understand business
strategy.
Strategy
AIS
Information
Technology
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Occupational
Culture
Although culture
affects the design of
the AIS, its also true
that the AIS affects
culture by altering
the dispersion and
availability of
information.
Strategy
AIS
Information
Technology
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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?
Lets peek in on a conversation at Joes
pharmacy . . .
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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 valueadded 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
blahblahblah
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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
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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 chemicals
and 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 and
elements 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 involves
packaging 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 their
products and take
orders.
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Post-sale
support provided to
Primary activities
include:
customers such as repair and

Inbound logistics
maintenance function.
Operations
A pharmaceutical firm will
Outbound logistics
typically not be repairing its
Marketing andproduct
sales (though the product may
be periodically reformulated).
Service
The pharmaceutical company is

more 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 accounting
information 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, Web site development).
For the pharmaceutical company, these activities
would include research and development to
create new drugs and modify existing ones.
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the resources (e.g.,
Support activitiesBuying
include:
materials, inventory, fixed

Firm infrastructure
assets) needed to carry out the
Human resources
entitys primary activities.
Technology
In the pharmaceutical company,
Purchasing
the 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.
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Information technology can significantly
impact
the efficiency
and effectiveness
Good
AIS value chain:
UPS
with which
the
preceding
are
spends
over $1 activities
billion a year
on
information systems resulting in greater
carried out.
customer control over delivery, higher
driver productivity,
and lower
An organizations
value chain
cancosts.
be
Bad AIS value chain:
connected
with the value chains of its
Limited Brands tangled integration of over 60
incompatible
information
resulted in
customers,
suppliers,
and systems
distributors.
400 trailers trying to jam into a 150 trailer lot.
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Smith Supply Co.
Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
Service
For example, the inbound logistics of

Pharmaceuticals, Inc., links to the
outbound logistics of its suppliers.
Pharmaceuticals, Inc.
Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
Service
Customer Pharmacy
Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
Service
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Smith Supply Co.
Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
Service
And the outbound logistics of

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

creates a larger system known as a supply
chain.
Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
Service
Customer Pharmacy
Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
Service
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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.
Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
Service
Customer Pharmacy
Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
Service
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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 subjective
assessment.
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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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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follow:
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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follow:
Low-cost strategy
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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, but
they normally have to choose.
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SUMMARY
What weve learned so far:
The meaning of system, data, and information.

What an AIS is.
Why its an important topic to study.
What its role is in the value chain.
How it provides information for decision making.
What are the basic strategies and strategic positions
an organization can pursue.
How these interact with the AIS.
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C

2008 Prentice Hall Business Publishing

Accounting Information Systems, 11/e

2008 Prentice Hall Business Publishing

Accounting Information Systems, 11/e

SYSTEMS, DATA, AND INFORMATION

2008 Prentice Hall Business Publishing

Accounting Information Systems, 11/e

SYSTEMS, DATA, AND INFORMATION

2008 Prentice Hall Business Publishing

Accounting Information Systems, 11/e

SYSTEMS, DATA, AND INFORMATION

2008 Prentice Hall Business Publishing

Accounting Information Systems, 11/e

SYSTEMS, DATA, AND INFORMATION

Accounting Information Systems, 11/e

SYSTEMS, DATA, AND INFORMATION

2008 Prentice Hall Business Publishing

Accounting Information Systems, 11/e

SYSTEMS, DATA, AND INFORMATION

2008 Prentice Hall Business Publishing

Accounting Information Systems, 11/e

SYSTEMS, DATA, AND INFORMATION

When youve reached the overload point,

Accounting Information Systems, 11/e

SYSTEMS, DATA, AND INFORMATION

2008 Prentice Hall Business Publishing

Accounting Information Systems, 11/e

SYSTEMS, DATA, AND INFORMATION

2008 Prentice Hall Business Publishing

Accounting Information Systems, 11/e

SYSTEMS, DATA, AND INFORMATION

2008 Prentice Hall Business Publishing

Accounting Information Systems, 11/e

SYSTEMS, DATA, AND INFORMATION

2008 Prentice Hall Business Publishing

Accounting Information Systems, 11/e

SYSTEMS, DATA, AND INFORMATION

2008 Prentice Hall Business Publishing

Accounting Information Systems, 11/e

SYSTEMS, DATA, AND INFORMATION

2008 Prentice Hall Business Publishing

Accounting Information Systems, 11/e

SYSTEMS, DATA, AND INFORMATION

2008 Prentice Hall Business Publishing

Accounting Information Systems, 11/e

SYSTEMS, DATA, AND INFORMATION

2008 Prentice Hall Business Publishing

Accounting Information Systems, 11/e

SYSTEMS, DATA, AND INFORMATION

2008 Prentice Hall Business Publishing

Accounting Information Systems, 11/e

SYSTEMS, DATA, AND INFORMATION

Accounting Information Systems, 11/e

SYSTEMS, DATA, AND INFORMATION

2008 Prentice Hall Business Publishing

Accounting Information Systems, 11/e

SYSTEMS, DATA, AND INFORMATION

2008 Prentice Hall Business Publishing

Accounting Information Systems, 11/e

SYSTEMS, DATA, AND INFORMATION

2008 Prentice Hall Business Publishing