C CHAPTER 1

C

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

SYSTEMS, DATA, AND

INFORMATION

Most systems are composed of smaller subsystems

. . .

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

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

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

SYSTEMS, DATA, AND

INFORMATION

Characteristics that make information useful:

Relevance

Reliability

Completeness

Timeliness

SYSTEMS, DATA, AND

INFORMATION

Characteristics that make information useful:

Relevance

Reliability

Completeness

Timeliness

SYSTEMS, DATA, AND

INFORMATION

Characteristics that make information useful:

Relevance

Reliability

Completeness

Timeliness

Understandability

Verifiability

A consensus notion—the nature of the

information is such that different people

would tend to produce the same result.

SYSTEMS, DATA, AND

INFORMATION

Characteristics that make information useful:

Relevance

Reliability

Completeness

Timeliness

Understandability

Verifiability

Accessibility

You can get to it when you need it and in a

format you can use.

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

Internal users primarily use discretionary

information.

The primary focus in producing this information is

ensuring that benefits exceed costs, i.e., the

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.

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

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.

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

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

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.

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.

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.

WHY STUDY ACCOUNTING

INFORMATION SYSTEMS?

AIS

Occupati

onal

Culture

Strategy

AIS design is

affected by

information

technology, the

organization’s

strategy, and the

WHY STUDY ACCOUNTING

INFORMATION SYSTEMS?

AIS

Occupati

onal

Culture

Strategy

Information technology

affects the company’s

choice of business

strategy. To perform

cost-benefit analyses on

WHY STUDY ACCOUNTING

INFORMATION SYSTEMS?

AIS

Occupati

onal

Culture

Strategy

While culture affects

the design of the AIS,

it’s also true that the

AIS affects culture by

altering the

ROLE OF THE AIS IN THE VALUE

CHAIN

The objective of most organizations is to provide

value to their customers.

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

Operations

Outbound logistics

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

ROLE OF THE AIS IN THE VALUE

CHAIN

Support activities include:

Firm infrastructure

Accountants, lawyers, and administration.

Includes the company’s accounting

ROLE OF THE AIS IN THE VALUE

CHAIN

Support activities include:

Firm infrastructure

Human resources

Involves recruiting and hiring new

employees, training employees, paying

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).

ROLE OF THE AIS IN THE VALUE

CHAIN

Support activities include:

Firm infrastructure

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

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

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

The linking of these separate value chains

creates a larger system known as a

supply

chain

.

Information

technology can