Chapter One: An overview of

Accounting Information System

• Accounting is one of a field of study for business majors, and
often called a language of a business, because,
performance of a business will be communicated to
interested users through accounting information.
• Hence, information is the key resource of the business
organizations.
• Like the other business resources of raw materials, capital,
and labor, information is vital to the survival of the
contemporary business organization.
• Therefore the study of accounting information system is a
value adding for accounting and finance students.
SYSTEMS, DATA, AND INFORMATION

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

• Most systems are composed of smaller

subsystems.
• System has;
– Multiple components
– Related subsystems
– Common purpose of subsystems
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 are occurred
– 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 decision 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
• Improved ability to plan and schedule activities
 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
• 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.
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
You get it in time to make your
decision.
 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
– 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
You can get it when you need it and in a
– Accessibility 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 tax authority.
– ESSENTIAL INFORMATION—required to conduct
business with external parties, such as purchase
orders.
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
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

 Scope of AIS

• An accounting information system is

used by companies to collect, store,
manage, process, retrieve, and report
financial data.
• AIS can be used by accountants,
consultants, business analysts, managers,
chief financial officers, auditors, and
regulators.
 Components of AIS

• There are six components of an AIS:

 People who use the system
 Procedures and instructions used to collect, process, and
store data
 Data about the organization and its business activities
 Software used to process the data
 Information technology infrastructure, including the computers,
peripheral devices, and network communications devices used in
the AIS
 Internal controls and security measures that safeguard AIS data
The role of Accountants in relation to AIS

Accountants are primarily involved in three ways:

 Accountants as system users:- all systems that process financial
transactions impact the accounting function in some way. As a
user accountants must provide a clear picture of their needs to the
professionals who design their systems
 Accountants as system designers:- accountants are responsible
for key aspects of the information system, including assessing the
information needs of users, defining the content and format of
output reports, specifying sources of data and determining the
controls necessary to preserve the integrity and efficiency of the
information system.
 Accountants as system auditors
• WHY DO YOU STUDY ACCOUNTING
INFORMATION SYSTEMS?
WHY DO YOU STUDY ACCOUNTING INFORMATION
SYSTEMS?

1. 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.

WHY DO YOU STUDY ACCOUNTING INFORMATION
SYSTEMS?

2. 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.
 WHY DO YOU STUDY ACCOUNTING INFORMATION
SYSTEMS?

3. AIS topics are tested on the new CPA exam.

• Makes up about 25% of the Business
Environment & Concepts section of the CPA
exam.
 WHY DO YOU STUDY ACCOUNTING INFORMATION
SYSTEMS?
4. AIS topics impact corporate strategy and
culture.

Occupational
Culture Strategy

AIS design is affected

by information AIS
technology, the
organization’s
strategy, and the
organization’s culture.
Information
Technology
 WHY DO YOU STUDY ACCOUNTING INFORMATION
SYSTEMS?

Occupational
Culture Strategy

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

Occupational
Culture Strategy

Although culture affects

the design of the AIS, it’s
AIS
also true that the AIS
affects culture by
altering the dispersion
and availability of
information. Information
Technology
THE ROLE OF 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 . . .
THE ROLE OF AIS IN THE VALUE CHAIN

Well, Mr. Pharmaceutical

Salesman, your proposal looks
good, but your prices are about
5% higher than your competitors.
THE ROLE OF 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.
THE ROLE OF AIS IN THE VALUE CHAIN

What is that “value-added,”

and how do you convert it
into dollars?
THE ROLE OF AIS IN THE VALUE CHAIN

Blah—blah—blah–
customer service–
blah—blah—blah
THE ROLE OF AIS IN THE VALUE CHAIN

• 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
 THE ROLE OF AIS IN THE VALUE CHAIN

• Value is provided by performing a series of activities

referred to as the value chain. These include:

– Primary activities(line)

– Support activities( staff)

• These activities are sometimes referred to as “line”
and “staff” activities respectively.
 THE ROLE OF AIS IN THE VALUE CHAIN

1. 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.
THE ROLE OF AIS IN THE VALUE CHAIN

2. 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.
THE ROLE OF AIS IN THE VALUE CHAIN

3. 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.
THE ROLE OF AIS IN THE VALUE CHAIN

4. 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.
THE ROLE OF AIS IN THE VALUE CHAIN

5. 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.
 THE ROLE OF AIS IN THE VALUE CHAIN

B, Support Activities

•Support activities include:

1. Firm infrastructure
Accountants, lawyers, and administration.
Includes the company’s accounting
information system.
THE ROLE OF AIS IN THE VALUE CHAIN

2. Human resources
Involves recruiting and hiring
new employees, training
employees, paying employees,
and handling employee benefits.
THE ROLE OF AIS IN THE VALUE CHAIN

3. 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.
THE ROLE OF AIS IN THE VALUE CHAIN

4. 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.
THE ROLE OF 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.
THE ROLE OF AIS IN THE VALUE CHAIN

• There is variation in the degree of

structure used to make decisions. These
are:
1. Unstructured 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.
THE ROLE OF AIS IN THE VALUE CHAIN

2. Semi structured decisions

• Incomplete rules.
• Require subjective assessments.
• EXAMPLE: Deciding whether to sell auto
insurance to a customer with a tainted driving
history.
THE ROLE OF AIS IN THE VALUE CHAIN

3. 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.
THE ROLE OF AIS IN THE VALUE CHAIN
• There is also variation in the scope of a
decision’s effect:
1. Occupational control decisions
• Relate to performance of specific tasks
• Often of a day-to-day nature.
• EXAMPLE: Deciding whether to order inventory.

2. Management control decisions

• Relate to utilizing resources to accomplish
organizational objectives.
• EXAMPLE: Budgeting.
THE ROLE OF AIS IN THE VALUE CHAIN

3. 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.
THE ROLE OF 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 Supply Chain

Raw Materials
Supplier

Manufacturer

Distributor

Retailer

Consumer

1-58
 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

1. Product-differentiation 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

2. Low-cost 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:
1. 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

2. 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

3. 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.

Note: These strategic positions are not mutually

exclusive and can overlap.
THE AIS AND CORPORATE STRATEGY
• 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 AIS AND CORPORATE STRATEGY
• 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 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

Hence,
–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, and set strategies to achieve
their goal.