Accounting Information Systems An Introduction

© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 1 of 43
C HAPTER 1 ϼ
Accounting Information
Systems:
An Overview

INTRODUCTION ϼ
• Questions to be addressed in this chapter
include:
1. Basic Concepts system, data, and
information
2. Accounting information system (AIS)
defined?
3. Why study AIS
4. Role of the AIS in the value chain
5. AIS and decision making

SYSTEMS, DATA, AND INFORMATION ϼ
• A system is:
– A set of interrelated components
– That interact
– To achieve a goal
1

SYSTEMS, DATA, AND INFORMATION
• Most systems are composed of smaller
subsystems . . .
• . . . And vice versa!
1

• 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.
1

• 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.
1

• 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
1

• 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.
Data for one may
be information for
otherone
1

• However, when you get more information
than you can effectively assimilate, you
suffer from information overload.
– Example: internet searches,
• When you’ve reached the overload point,
the quality of decisions declines, while the
costs of producing the information
increases, with every increase in
information unit
1

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
1

Costs may include time and resources spent:
• Collecting data
• Processing data
• Storing data
• Distributing information to users
1

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.
1

• Characteristics that make information
useful:
– Relevance
It reduces uncertainty by helping you predict
what will happen or confirm what already has
happened.
1

useful:
– Relevance
– Reliability
It’s dependable, i.e., free from error or bias
and faithfully portrays events and activities.
1

useful:
– Relevance
– Reliability
– Completeness
It doesn’t leave out anything that’s important.
1

useful:
– Relevance
– Reliability
– Completeness
– Timeliness
You get it in time to make your decision.
1

useful:
– Relevance
– Reliability
– Completeness
– Timeliness
– Understandability
It’s presented in a manner you can
comprehend and use.
1

useful:
– Relevance
– Reliability
– Completeness
– Timeliness
– Verifiability
A consensus notion—the nature of the
information is such that different people
would tend to produce the same result.
1

useful:
– Relevance
– Reliability
– Completeness
– Timeliness
– Verifiability
– Accessibility I
You can get to it when you need it and in a
format you can use.
1
There may be
tradeoffs involved

• Information is provided to both:
– External users
– Internal Users
1

– External users
– Internal Users
1

• 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.
1

• In providing mandatory or essential
information, the focus should be on:
– Minimizing costs
– Meeting regulatory requirements
– Meeting minimum standards of reliability and
usefulness
1

– External users
– Internal Users
1

• 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.
1

• 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?
2

• 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
WHAT IS AN AIS?
2

• It’s fundamental to accounting.
WHY STUDY ACCOUNTING
INFORMATION SYSTEMS?
• 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
3

• 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
3

• The skills are critical to career success.
• Auditors need to evaluate the accuracy
and reliability of information produced by
the AIS.
3

• 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.
3

• In private industry and not-for-profits,
systems work is considered the most
important activity performed by
accountants.
3

• In management consulting, the design,
selection, and implementation of
accounting systems is a rapid growth area.
3

• 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.
3

• The AIS course complements other
systems courses.
• AIS topics are tested on the new CPA
exam. Let’s hope for CA exams
• AIS topics impact corporate strategy and
culture (sorry this is story telling, where I am weak)
3

AIS
Occupational
Culture Strategy
Information
Technology
AIS design is
affected by
information
technology, the
organization’s
strategy, and the
organization’s
culture.
3

AIS
Occupational
Culture Strategy
Information
Technology
While culture affects
the design of the AIS,
it’s also true that the
AIS affects culture by
altering the
dispersion and
availability of
information.
3

• The objective of most organizations is to
provide value to their customers.
• What does it mean to deliver value?
• Let’s peek in on a conversation at Joe’s
pharmacy . . .
ROLE OF THE AIS IN THE VALUE CHAIN
4

Well, Mr. Pharmaceutical
Salesman, your proposal looks
good, but your prices are about
5% higher than your competitors.
4

That’s true, but we’re
comfortable with that
because of the value-
added that we bring to
this arrangement.
4

What is that “value-added,”
and how do you convert it
into dollars?
4

Blah—blah—blah–
customer service–
blah—blah--blah
4

• 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.
• 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
– …
4

• 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.
4

These include:
4

• 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.
4

– 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.
4

– 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.
4

– Operations
– Marketing and sales
Helping customers to
buy the organization’s
products or services.
A pharmacy rep may
visit with drug stores,
doctors, etc. to inform
them about their
products and take
orders.
4

– Operations
– Marketing and sales
– Service
Post-sale support provided to
customers such as repair and
maintenance function.
A pharmaceutical firm will
typically not be repairing it’s
product (though the product may
be periodically reformulated).
The pharmaceutical company is
more likely to be providing
advisory services to pharmacists,
etc.
4

These include:
4

• Support activities include:
– Firm infrastructure
Accountants, lawyers, and administration.
Includes the company’s accounting
information system.
4

– Human resources
Involves recruiting and hiring new
employees, training employees, paying
employees, and handling employee
benefits.
4

– 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.
4

– Human resources
– Technology
– Purchasing
Buying the resources (e.g.,
materials, inventory, fixed
assets) needed to carry out the
entity’s primary activities.
In the pharmaceutical company,
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.
4

4

Pharmaceuticals, Inc.
Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
Service
Smith Supply Co.
Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
Service
Customer Pharmacy
Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
Service
For example, the inbound logistics of
Pharmaceuticals, Inc., links to the outbound
logistics of its suppliers.
4

Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
Service
Smith Supply Co.
Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
Service
Customer Pharmacy
Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
Service
And the outbound logistics of
Pharmaceuticals, Inc., links to the inbound
logistics of its customers.
4

Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
Service
Smith Supply Co.
Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
Service
Customer Pharmacy
Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
Service
The linking of these separate value chains
creates a larger system known as a supply
chain.
4

Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
Service
Smith Supply Co.
Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
Service
Customer Pharmacy
Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
Service
The linking of these separate value chains
creates a larger system known as a supply
chain.
Information
technology can
facilitate synergistic
linkages that improve
the performance of
each company’s value
chain.
4

• Effective AIS and ERP systems facilitate,
– Improving Quality
– Reducing Costs
– Improve efficiency
– Sharing knowledge
– Supply chain improvement
– Improved control (privacy, security etc.)
– Improved decision making due to quality
information
4

• AIS facilitate Decision Making by
– Identifying the problem / situation
– Providing quality information for alternatives
– Providing feedback information on previous
decisions
AIS and Decision Making
5

• As to the frequency, formality and
structure of the decisions, there are three
types of 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.
5

• There is variation in the degree of
structure used to make decisions:
– Semistructured decisions
• Incomplete rules
• Require subjective assessments
• EXAMPLE: Deciding whether to sell auto
insurance to a customer with a tainted
driving history.
5

• There is variation in the degree of
structure used to make 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
5

• There is also variation in the scope of a
decision’s effect:
– Shop floor control decisions
• Relate to performance of specific tasks
• Often of a day-to-day nature
• EXAMPLE: Deciding whether to order
inventory
5

– Shop floor control decisions
– Operational control decisions
• Relate to utilizing resources to accomplish
organizational objectives
• EXAMPLE: Budgeting
5

– Shop floor decisions
– Operational 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
5

• 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
5

• AIS facilitate Decision Making by
– Identifying the problem / situation
– Providing quality information for alternatives
– Providing feedback information on previous
decisions
5

Checkout
• System, Data, Information
• Define Accounting Information System
• Draw Value Chain for what we do at IBA
• Think of some decision made at IBA that you
think was not good; and consider what
information will you provide to the decision
making authorities form the existing systems, to
convince them make different decision
• Assignment 1 is live on LMS,

Accounting Information Systems An Introduction

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