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
SYSTEMS, DATA, AND
INFORMATION
 Most systems are composed of smaller
subsystems . . .
 . . . And vice versa!
SYSTEMS, DATA, AND
INFORMATION
 Every organization has goals.
 The susbsystems should be designed to
maximize achievement of the organization’s
goals
 Even to the detriment 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.
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.
SYSTEMS, DATA, AND
INFORMATION
 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
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.
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.
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
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
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.
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.
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.
SYSTEMS, DATA, AND
INFORMATION
 Characteristics that make information
useful:
 Relevance
 Reliability

 Completeness

It doesn’t leave out anything that’s important.

SYSTEMS, DATA, AND
INFORMATION
 Characteristics that make information
useful:
 Relevance
 Reliability

 Completeness

 Timeliness
You get it in time to make your decision.
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.
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
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
SYSTEMS, DATA, AND
INFORMATION
 Information is provided to both:
 External users
 Internal Users
SYSTEMS, DATA, AND
INFORMATION
 Information is provided to both:
 External users
 Internal Users
SYSTEMS, DATA, AND
INFORMATION
 External users primarily use information
that is either:
 MANDATORY INFORMATION—Required
by a governmental entity, such as Form 10-
K’s required by the SEC; or
 ESSENTIAL INFORMATION—Required to
conduct business with external parties, such
as purchase orders.
SYSTEMS, DATA, AND
INFORMATION
 In providing mandatory or essential
information, the focus should be on:
 Minimizing costs
 Meeting regulatory requirements

 Meeting minimum standards of reliability

and usefulness
SYSTEMS, DATA, AND
INFORMATION
 Information is provided to both:
 External users
 Internal Users
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.
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?
 Accounting information system is a
collection of resources such as people and
equipment that transform financial data into
information.
 It includes the following components
 People- who process the data
 Procedures- both manual and automated
 Data-being processed
 Software- that transform data
 IT infrastructure- computers, printers, and other
devices
Continued…
 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
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
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
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.
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.
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.
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.
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.
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.
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.
WHY STUDY ACCOUNTING
INFORMATION SYSTEMS?

Organizational
Culture Strategy

AIS design is
affected by AIS
information
technology, the
organization’s
strategy, and the
organization’s Information
culture. Technology
WHY STUDY ACCOUNTING
INFORMATION SYSTEMS?

Organizational
Culture Strategy

Information technology
affects the company’s AIS
choice of business
strategy. To perform
cost-benefit analyses on
IT changes, you need to
understand business Information
strategy. Technology
WHY STUDY ACCOUNTING
INFORMATION SYSTEMS?

Organizational
Culture Strategy

While 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?
 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
Well, Mr. Pharmaceutical
Salesman, your proposal looks
good, but your prices are about
5% higher than your competitors.
ROLE OF THE AIS IN THE VALUE
CHAIN
That’s true, but we’re
comfortable with that
because of the value-
added that we bring to
this arrangement.
ROLE OF THE AIS IN THE VALUE
CHAIN

What is that “value-added,”

and how do you convert it
into dollars?
ROLE OF THE AIS IN THE VALUE
CHAIN
Blah—blah—blah–
customer service–
blah—blah--blah
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
 Support activities

 These activities are sometimes referred

to as “line” and “staff” activities
respectively.
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
 Support activities

 These activities are sometimes referred

to as “line” and “staff” activities
respectively.
ROLE OF THE AIS IN THE VALUE
CHAIN
 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.
ROLE OF THE AIS IN THE VALUE
CHAIN
 Primary activities include:
 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.
ROLE OF THE AIS IN THE VALUE
CHAIN
 Primary activities include:
 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.
ROLE OF THE AIS IN THE VALUE
CHAIN
 Primary activities include:
 Inbound logistics Helping customers to
 Operations buy the organization’s
products 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.
ROLE OF THE AIS IN THE VALUE
CHAIN
 Primary activities include:
Post-sale support provided to
customers such as repair and
 Inbound logistics
maintenance function.
 Operations
A pharmaceutical firm will
 Outbound logistics
typically not be repairing it’s
 Marketing and sales
product (though the product may
 Service be periodically reformulated).
The pharmaceutical company is
more likely to be providing
advisory services to pharmacists,
etc.
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
 Support activities

 These activities are sometimes referred

to as “line” and “staff” activities
respectively.
ROLE OF THE AIS IN THE VALUE
CHAIN
 Support activities include:
 Firm infrastructure
Accountants, lawyers, and administration.
Includes the company’s accounting
information system.
ROLE OF THE AIS IN THE VALUE
CHAIN
 Support activities include:
 Firm infrastructure
 Human resources

Involves recruiting and hiring new

employees, training employees, paying
employees, and handling employee
benefits.
ROLE OF THE AIS IN THE VALUE
CHAIN
 Support activities include:
 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.
ROLE OF THE AIS IN THE VALUE
CHAIN
 Support activities include:
Buying the resources (e.g.,
materials, inventory, fixed
 Firm infrastructure
assets) needed to carry out the
 Human resources entity’s 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.
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.
ROLE OF THE AIS IN THE VALUE
CHAIN
Smith Supply Co. For example, the inbound logistics of
Inbound Logistics Pharmaceuticals, Inc., links to the
Operations outbound logistics of its suppliers.
Outbound Logistics
Pharmaceuticals,
Marketing & Sales Inc.
Service Inbound Logistics
Operations Customer Pharmacy
Outbound Logistics Inbound Logistics
Marketing & Sales Operations
Service Outbound Logistics
Marketing & Sales
Service
ROLE OF THE AIS IN THE VALUE
CHAIN
Smith Supply Co. And the outbound logistics of
Inbound Logistics Pharmaceuticals, Inc., links to the inbound
Operations logistics of its customers.
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
ROLE OF THE AIS IN THE VALUE
CHAIN
Smith Supply Co. The linking of these separate value chains
Inbound Logistics creates a larger system known as a supply
Operations chain.
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
ROLE OF THE AIS IN THE VALUE
CHAIN
Smith Supply Co. The linking of these separate value chains
Inbound Logistics creates a larger system known as a supply
Operations chain.
Outbound Logistics
Pharmaceuticals, Inc.
Marketing & Sales
Inbound Logistics
Service
Operations
Outbound Logistics Customer Pharmacy
Information
Marketing & Sales Inbound Logistics
technology can
facilitate synergistic Service Operations
linkages that improve Outbound Logistics
the performance of Marketing & Sales
each company’s value
Service
chain.
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.
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.
ROLE OF THE AIS IN THE VALUE
CHAIN
 There is variation in the degree of
structure used to make decisions:
 Structured decisions
 Semi structured 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
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
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
ROLE OF THE AIS IN THE VALUE
CHAIN
 There is also variation in the scope of a
decision’s effect:
 Occupational 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
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
THE AIS AND CORPORATE
STRATEGY
 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
of the entity’s overall business strategy.
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
 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 that’s
faster, has enhanced features, etc.
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 low-cost strategy involves offering a
cheaper mousetrap than your
competitors. The low cost is made
possible by operating more efficiently.
THE AIS AND CORPORATE
STRATEGY
 Sometimes a company can do both, but
they normally have to choose.
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, property-
casualty, etc.
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.
THE AIS AND CORPORATE
STRATEGY
 Porter
 Servealso argues
a subset that companies
of customers must
who differ from
choose
others ain strategic position
terms of factors suchamong three
as geographic
location or size..
choices:
 EXAMPLE: Satellite Internet services are
 Variety-based strategic position
intended primarily for customers in rural areas
 Needs-based
who cannot getstrategic position
DSL or cable services.
 Access-based strategic position
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.
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.
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 product-
differentiation strategies.
 The Internet may impede access-based strategic
positions.
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.
 Accounting and information systems should be closely
integrated.
 The AIS should be the primary information system to
provide users with information they need to perform
their jobs.
The End