c hapter 1 accounting information systems: an overview · –what is the meaning of system, data,...

© 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 1 of 85

C HAPTER 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



• Most systems are composed of smaller

subsystems . . .

• . . . and vice versa!



• 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.



• 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

– Completeness

– Timeliness

– Understandability

It’s presented in a manner you can

comprehend and use.




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.



• Characteristics that make information useful:

– Relevance

– Reliability

– Completeness

– Timeliness


– Verifiability

– Accessibility

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

format you can use.


• 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

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.



• 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

WHAT IS AN AIS?


• 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.





• 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.



• The skills are critical to career success.



• Auditors need to evaluate the accuracy and reliability of information produced by the AIS.






• 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.






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






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




Other careers requiring AIS knowledge:• IT Consultant

• Implementation Team Member

• Business Analyst

• Budget Analyst

• Financial Analyst

• Systems Analyst

• Controller

• Accounting Clerk

• CFO

• Others?




• 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.




• The AIS course complements other

systems courses.

• AIS topics are tested on the new CPA

exam.

• AIS topics impact corporate strategy

and culture.






AIS

Occupational

Culture Strategy

Information

Technology

AIS design is

affected by

information

technology, the

organization’s

strategy, and the

organization’s

culture.




AIS

Occupational

Culture Strategy

Information

Technology

Information technology

affects the company’s

choice of business

strategy. To perform

cost-benefit analyses on

IT changes, you need to

understand business

strategy.




AIS

Occupational

Culture Strategy

Information

Technology

Although culture

affects the design of

the AIS, it’s also true

that the AIS affects

culture by altering

the dispersion and

availability of

information.


• 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.



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


• Although ―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.





These 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.




– 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.




– 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.




These 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, Web site development).

For the pharmaceutical company, these activities

would include research and development to

create new drugs and modify existing ones.




– 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.


• 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.


• Good AIS value chain:

• UPS spends over $1 billion a year on information systems resulting in greater customer control over delivery, higher driver productivity, and lower costs.

• Bad AIS value chain:– Limited Brands tangled integration of over 60

incompatible information systems resulted in 400 trailers trying to jam into a 150 trailer lot.


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.



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.



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.



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.


• 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-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



• 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





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.




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.




choices:



– Access-based strategic position


• 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.




choices:



– 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.


• Predictive data analysis (data

warehousing/mining) adds to competitive

advantage by forecasting future events based on

historical trends.

• EXAMPLE: You can view forecasts of airfares

between major airports based on historical trends

at www.farecast.com.

http://www.farecast.com/


• 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 study.

– 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.

c hapter 1 accounting information systems: an overview · –what is the meaning of system, data,...

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