Hapter 1 Accounting Information Systems: An Overview

C HAPTER 1
Accounting Information
Systems:
An Overview
© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 1 of 43
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
• Most systems are composed of smaller

subsystems . . .
• . . . And vice versa!
• 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.
• 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.
• 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
• 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.
• 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.
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
Costs may include time and resources spent:

• Collecting data
• Processing data
• Storing data
• Distributing information to users
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.
• Characteristics that make information

useful:
– Relevance
It reduces uncertainty by helping you predict

what will happen or confirm what already has
happened.

useful:
– Relevance
– Reliability
It’s dependable, i.e., free from error or bias

and faithfully portrays events and activities.

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

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

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

useful:
– Relevance
– Reliability
– CompletenessA consensus notion—the nature of the
information is such that different people
– Timelinesswould tend to produce the same result.
– Verifiability

useful:
– Relevance
– Reliability
– Completeness
– Timeliness
You can get to it when you need it and in a
format you can use.
– Verifiability
– Accessibility
• Information is provided to both:

– External users
– Internal Users

– External users
– Internal Users
• 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.
• In providing mandatory or essential

information, the focus should be on:
– Minimizing costs
– Meeting regulatory requirements
– Meeting minimum standards of reliability and
usefulness

– External users
– Internal Users
• 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?
• 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?
Occupational
Culture Strategy
AIS design is affected

by information
technology, the
organization’s strategy,
AIS
and the organization’s
culture.
Information
Technology
WHY STUDY ACCOUNTING INFORMATION
SYSTEMS?
Occupational
Culture Strategy
Information technology affects

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

design of the AIS, it’s also
true that the AIS affects
culture by altering the AIS
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?
• Let’s peek in on a conversation at Joe’s
pharmacy . . .
Well, Mr. Pharmaceutical Salesman, your

proposal looks good, but your prices are
about 5% higher than your competitors.
That’s true, but we’re

comfortable with that because
of the value-added that we bring
to this arrangement.
What is that “value-added,” and

how do you convert it into
dollars?
Blah—blah—blah–
customer service– blah—
blah--blah
• 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
• 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.

include:
• 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.

– 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.

– 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.

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

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

include:
• Support activities include:

– Firm infrastructure
Accountants, lawyers, and administration.
Includes the company’s accounting
information system.

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

– 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.
Buying the resources (e.g., materials,

inventory, fixed assets) needed to carry
out the entity’s primary activities.
– Human resources In the pharmaceutical company, the
purchasing folks are trying to get the
– Technology best combination of cost and quality in
buying chemicals, supplies, and other
– Purchasing assets the company needs to run its
operations.
• 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.
Smith Supply Co. For example, the inbound logistics of

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

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

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

Inbound Logistics creates a larger system known as a supply
Operations chain.
Outbound Logistics
Marketing & Sales
Inbound Logistics
Service
Operations
Information technology can Outbound Logistics Customer Pharmacy
facilitate synergistic Inbound Logistics
linkages that improve the
Marketing & Sales
performance of each Service Operations
company’s value chain. Outbound Logistics
Marketing & Sales
Service
• 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.

– Semistructured decisions
• Incomplete rules
• Require subjective assessments
• EXAMPLE: Deciding whether to sell auto
insurance to a customer with a tainted
driving history.

– Semistructured decisions
– Non-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
• 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

– Management control decisions
• Relate to utilizing resources to accomplish
organizational objectives
• EXAMPLE: Budgeting

– 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
• 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.
• Michael Porter suggests that there are two

basic business strategies companies can
follow:
– Product-differentiation strategy
– Low-cost strategy

follow:
• 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.

follow:
• A low-cost strategy involves offering a

cheaper mousetrap than your competitors.
The low cost is made possible by
operating more efficiently.
• Sometimes a company can do both, but

they normally have to choose.
• 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.
• Porter also argues that companies must

choose a strategic position among three
choices:
– 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.
• Porter
• Servealso argues
a subset that companies
of customers who differ must
from
othersainstrategic
choose terms of factors suchamong
position as geographic
three
location or size..
choices:
• EXAMPLE: Satellite Internet services are
– Variety-based strategic
intended primarily positionin rural areas
for customers
who cannot getstrategic
– Needs-based DSL or cable services.
position
– Access-based strategic position
• Porter also argues that companies must choose a

strategic position among three choices:
– Needs-based strategic position
– Access-based strategic position
• These strategic positions are not mutually exclusive
and can overlap.
• 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 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 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 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
• What it’s role 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 HAPTER 1

• Most systems are composed of smaller

• Every organization has goals.

• Goal conflict occurs when the activity of a subsystem is

• The systems concept encourages integration (i.e.,

• Information is different from data.

• However, when you get more information than you can

Benefits of information may include:

Costs may include time and resources spent:

• Characteristics that make information

It reduces uncertainty by helping you predict

• Characteristics that make information

It’s dependable, i.e., free from error or bias

• Characteristics that make information

• Characteristics that make information

You get it in time to make your decision.

• Characteristics that make information

• Characteristics that make information

• Characteristics that make information

• Information is provided to both:

• Information is provided to both:

• External users primarily use information that is either:

• In providing mandatory or essential

• Information is provided to both:

• Internal users primarily use discretionary

AIS design is affected

Information technology affects

While culture affects the

• The objective of most organizations is to

Well, Mr. Pharmaceutical Salesman, your

That’s true, but we’re

What is that “value-added,” and

• While “adding value” is a commonly used buzzword, in its genuine

• Value is provided by performing a series of

• Value is provided by performing a series of

• Primary activities include:

For a pharmaceutical company, this activity might

• Primary activities include:

For the pharmaceutical company, this step involves

• Primary activities include:

For the pharmaceutical company, this step involves packaging

• Primary activities include:

• Primary activities include:

• Value is provided by performing a series of

• Support activities include:

• Support activities include:

• Support activities include:

For the pharmaceutical company, these activities would

Buying the resources (e.g., materials,

• Information technology can significantly impact

Smith Supply Co. For example, the inbound logistics of

Smith Supply Co. And the outbound logistics of Pharmaceuticals,

Smith Supply Co. The linking of these separate value chains

Smith Supply Co. The linking of these separate value chains

• There is variation in the degree of

• There is variation in the degree of

• There is variation in the degree of

• Non-recurring and non-routine

• There is also variation in the scope of a

• Relate to performance of specific tasks

• There is also variation in the scope of a

• There is also variation in the scope of a

• In general, the higher a manager is in the