HAPTER 1 Accounting Information Systems: An Overview © 2006 Prentice Hall Business Publishing ‘Accounting Information Systems, 10le Romney/Steinbart [ROPE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 * Asystem 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 subsystems 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 ee Valle 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 Valu4 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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 — Completene . . _. JA consensus notion—the nature of the — Timeling information is such that different people — Unders tLwould tend to produce the same result. — VerifiabilitySYSTEMS, DATA, AND INFORMATION Characteristics that make information useful: — Relevance — Reliability — Completeness — Timeliness — Underst{you can get to it when you need it and ina — Verifiabilfermat you can use. — 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? is 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? The functions of an AlS 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 © 2006 Prentice Hall Business Publishing ‘Accounting Information Systems, 10/e Romney/Steinbart [PEE emWHY STUDY ACCOUNTING INFORMATION SYSTEMS? * It’s fundamental to accounting. * Other accounting courses focus on how the information is provided and used. * An AlS 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 ©2006 Prentice Hall Business Publishing ‘Accounting Information Systems, 10/e Romney/Steinbart [PEPE em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.+ It’s fundamental to accounting. '* The skills are critical to career success. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart ERED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. ©2006 Prentice Hall Business Publishing ‘Accounting Information Systems, 10/e Romney/Steinbart ETRE em+ The skills are critical to career success. * The AIS course complements other systems courses. '* AIS topics are tested on the new CPA exam. ©2006 Prentice Hall Business Publishing ‘Accounting Information Systems, 10/e Romney/Steinbant EGREO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? Occupational Culture AIS design is affected by information technology, the organization’s Strategy, and the organization’s culture. Os AIS wvWHY STUDY ACCOUNTING INFORMATION SYSTEMS? ‘Occupational Culture Strategy ™ x Information technology AIS affects the company’s | AIS choice of business strategy. To perform t cost-benefit analyses on IT changes, you need to understand business f strategy.WHY STUDY ACCOUNTING INFORMATION SYSTEMS? Occupational Culture 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. AIS ov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? * Let's peek in on a conversation at Joe’s pharmacy...| 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ROLE OF THE AIS IN THE VALUE CHAIN Blah—blah—blah- customer service— blah—blah--blahROLE OF THE AIS IN THE VALUE CHAIN FP While “adding value” is a commonly used buzzword, in its aon be 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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: — 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. ©2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart [ETE em| 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 — Outbound logistics —Marketing and sales | pharmacy rep may buy the organization’s products or services. visit with drug stores, doctors, etc. to inform them about their products and take orders.| ROLE OF THE AIS IN THE VALUE CHAIN * Primary activil Post-sale support provided to — Inbound logi customers such as repair and maintenance function. — Operations — Outbound log) 4 Pharmaceutical firm will : typically not be repairing it’s ~ Marketing an) 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 activitiq Buying the resources (e.g., _E ‘ materials, inventory, fixed pinaster assets) needed to carry out the — Human resourd 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. ce Logistics Pharmaceuticals, Inc. Marketing & Sales a 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. And the outbound logistics of Inbound Logistics Pharmaceuticals, Inc., links to the inbound logistics of its customers. Operations Sup eUns Logics Pharmaceuticals, Inc. Marketing & Sales = Inbound Logistics Service ~ Operations Outbound Logistics Customer Pharmacy Marketing & Sales Inbound Logistics Service Operations [Outbound Lo S Marketing & Sales ServiceROLE OF THE AIS IN THE VALUE CHAIN Smith Supply Co. Inbound Logistics Operations Marketing & Sales Service The linking of these separate value chains creates a larger system known as a supply chain. Pharmaceuticals, Inc. Inbound Logistics Operations Outbound Logistics Customer Pharmacy Marketing & Sales Inbound Logistics Service Operations |“ f Outbound Lo S 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 ichalns ce Logistics Pharmaceuticals, Inc. Marketing & Sales = Inbound Logistics Service ~ Operations Information Outbound Logistics: Customer Fuanyany technology can Marketing & Sales Inbound Logistics facilitate synergistic Service Operations linkages that improve Outbound Lo S the performance of Marketing & Sales each company’s value chain. Service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 — Semistructured decisions — Structured 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: — Occupational 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: — Occupational 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 - Manav mentite control denisiins — Strategi 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 * Serve a subset of customers who differ from others in terms of factors such as geographic location or size.. * EXAMPLE: Satellite Internet services are intended primarily for customers in rural areas who cannot get 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 : Ghoceing a strategic position is. important because it helps a company focus its efforts as opposed to trying to be everyth g to everybody. — EXAMPLE: A radio station that tries to, play all types eat music will probably fel so ifiey 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 h 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 strate: ) — 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.THE AIS AND CORPORATE STRATEGY * The authors believe: — 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.SUMMARY What we’ve learned so far: — The meaning of system, data, and information — What an AIS is * Why it’s 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 strategic positions an organization can pursue * How these interact with the AIS