Ais10 ch01#2

C HAPTER 1
Accounting Information
Systems:
An Overview
2006 Prentice Hall Business Publishing
Accounting Information Systems, 10/e
Romney/Steinbart
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?
Romney/Steinbart
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 .
Romney/Steinbart
SYSTEMS, DATA, AND

INFORMATION
Every organization has goals.
The subsystems should be designed to

maximize achievement of the organizations
goals
Even to the detriment of the subsystem itself
EXAMPLE: The production department (a
subsystem) of a company might have to
forego (be earlier) its goal of staying within
its budget in order to meet the organizations
goal of delivering product on time.
Romney/Steinbart
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
subsystems goals are in line with the
organizations goals.
The larger and more complicated a
system, the more difficult it is to achieve
goal congruence.
Romney/Steinbart
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
Romney/Steinbart
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.
Romney/Steinbart
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 youve reached the overload point,

the quality of decisions declines while the
costs of producing the information
increases.
Romney/Steinbart
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
Romney/Steinbart
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
Romney/Steinbart
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 youre making decisions
about whether to provide information.
Romney/Steinbart
SYSTEMS, DATA, AND

INFORMATION
Characteristics that make

information useful:
Relevance
Romney/Steinbart
SYSTEMS, DATA, AND

INFORMATION

information useful:
Relevance
Reliability
Romney/Steinbart
SYSTEMS, DATA, AND

INFORMATION

information useful:
Relevance
Reliability
Completeness
Romney/Steinbart
SYSTEMS, DATA, AND

INFORMATION

information useful:
Relevance
Reliability
Completeness
Timeliness
Romney/Steinbart
SYSTEMS, DATA, AND

INFORMATION

information useful:
Relevance
Reliability
Completeness
Timeliness
Understandability
Romney/Steinbart
SYSTEMS, DATA, AND

INFORMATION

information useful:
Relevance
Reliability
Completeness
Timeliness
Understandability
Verifiability
Romney/Steinbart
SYSTEMS, DATA, AND

INFORMATION

information useful:
Relevance
Reliability
Completeness
Timeliness
Understandability
Verifiability
Accessibility
Romney/Steinbart
SYSTEMS, DATA, AND

INFORMATION
Information is provided to both:
External users
Internal Users
Romney/Steinbart
SYSTEMS, DATA, AND

INFORMATION
External users primarily use

information that is either:
MANDATORY INFORMATIONRequired by
a governmental entity, such as Form 10Ks required by the SEC (Securities &
Exchange Commission ); or
ESSENTIAL INFORMATIONRequired to
conduct business with external parties,
such as purchase orders.
Romney/Steinbart
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
Romney/Steinbart
SYSTEMS, DATA, AND

INFORMATION
Information is provided to both:
External users
Internal Users
Romney/Steinbart
SYSTEMS, DATA, AND

INFORMATION
Internal users primarily use

discretionary (flexible) information.
The primary focus in producing this
information is ensuring that benefits
exceed costs, i.e., the information
has positive value.
Romney/Steinbart
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.
Romney/Steinbart
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 entitys resources (including data)
are:
Available when needed
Accurate and reliable
Romney/Steinbart
WHY STUDY ACCOUNTING

INFORMATION SYSTEMS?
Its fundamental to accounting.
Accounting is an informationproviding 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
Romney/Steinbart

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 numbercrunching courses
Romney/Steinbart


The skills are critical to career
success.
Auditors need to evaluate the

accuracy and reliability of
information produced by the AIS.
Romney/Steinbart


success.
Tax accountants must understand

the clients AIS adequately to be
confident that it is providing
complete and accurate information
for tax planning and compliance
work.
Romney/Steinbart


success.
In private industry and not-forprofits, accounting systems work is

considered the most important
activity performed by accountants.
Romney/Steinbart


success.
In management consulting, the

design, selection, and
implementation of accounting
systems is a rapid growth area.
Romney/Steinbart


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.
Romney/Steinbart


success.
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.
Romney/Steinbart


success.
The AIS course complements other
systems courses.
AIS topics are tested on the new
CPA exam.
AIS topics impact corporate
strategy and culture.
Romney/Steinbart

Occupational
Culture
AIS design is
affected by
information
technology, the
organizations
strategy, and the
organizations
culture.
Strategy
AIS
Information
Technology
Romney/Steinbart

Occupational
Culture
While culture affects
the design of the AIS,
its also true that the
AIS affects culture by
altering the
dispersion and
availability of
information.
Strategy
AIS
Information
Technology
Information
technology affects
the companys
choice of business
strategy. To
perform costbenefit analyses on
IT changes, you
need to understand
business strategy.
Romney/Steinbart
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?
Lets peek in on a conversation at
Joes pharmacy . . .
Romney/Steinbart

CHAIN
Well, Mr. Pharmaceutical

Salesman, your proposal looks
good, but your prices are about
5% higher than your competitors.
Romney/Steinbart

CHAIN
Thats true, but were
comfortable with that
because of the valueadded that we bring to
this arrangement.
Romney/Steinbart

CHAIN
What is that value-added,
and how do you convert it
into dollars?
Romney/Steinbart

CHAIN
Blahblahblah
customer service
blahblah--blah
Romney/Steinbart

CHAIN
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 Onegative blood or rare gems/arts)
Providing enhanced features
Customizing it
Romney/Steinbart

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.
Romney/Steinbart

CHAIN
Primary activities include:
Inbound logistics
Receiving, storing, and distributing the
materials that are inputs to the
organizations product or service.
For a pharmaceutical company, this activity
might involve handling incoming chemicals
and elements that will be used to make their
drugs.
Romney/Steinbart

CHAIN
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.
Romney/Steinbart

CHAIN
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.
Romney/Steinbart

CHAIN

Helping customers to
Inbound logistics
Operations
Outbound logistics
Marketing and sales
buy the organizations

products or services.
A pharmacy rep may
visit with drug stores,
doctors, etc. to inform
them about their
products and take
orders.
Romney/Steinbart

CHAIN
Primary
Post-sale support provided to

customers
such as repair and
activities
include:
maintenance function.
Inbound logistics
Operations A pharmaceutical firm will
typically not be repairing its
Outbound logistics
product (though the product may
Marketing and
be sales
periodically reformulated).
The pharmaceutical company is
Service
more likely to be providing

advisory services to pharmacists,
etc.
Romney/Steinbart

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.
Romney/Steinbart

CHAIN
Support activities include:
Firm infrastructure
Accountants, lawyers, and administration.
Includes the companys accounting
information system.
Romney/Steinbart

CHAIN
Firm infrastructure
Human resources
Involves recruiting and hiring new
employees, training employees, paying
employees, and handling employee benefits.
Romney/Steinbart

CHAIN
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.
Romney/Steinbart

CHAIN
Buying the resources (e.g.,
Support activities
materials,
inventory, fixed
include:
assets) needed to carry out the
Firm infrastructure
entitys primary activities.
Human resources
In the pharmaceutical company,
Technology
the purchasing folks are trying
Purchasing
to get the best combination of
cost and quality in buying
chemicals, supplies, and other
assets the company needs to
run its operations.
Romney/Steinbart

CHAIN
Information technology can

significantly impact the efficiency and
effectiveness with which the
preceding activities are carried out.
An organizations value chain can be
connected with the value chains of its
customers, suppliers, and
distributors.
Romney/Steinbart

CHAIN
Smith Supply Co.

Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
Service
For example, the inbound logistics of

Pharmaceuticals, Inc., links to the
outbound logistics of its suppliers.
Pharmaceuticals,
Inc.
Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
Service
Customer
Pharmacy
Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
Service
Romney/Steinbart

CHAIN
Smith Supply Co.

Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
Service
And the outbound logistics of

Pharmaceuticals, Inc., links to the inbound
logistics of its customers.
Pharmaceuticals,
Inc.
Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
Service
Customer
Pharmacy
Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
Service
Romney/Steinbart

CHAIN
Smith Supply Co.

Inbound Logistics
Operations
Outbound Logistics
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
Marketing & Sales
Service
Customer
Pharmacy
Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
Service
Romney/Steinbart

CHAIN
Smith Supply Co.

Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
Service
Information
technology can
facilitate synergistic
linkages that improve
the performance of
each companys value
chain.
The linking of these separate value

chains creates a larger system
known as a supply chain.
Pharmaceuticals,
Inc.
Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
Service
Customer
Pharmacy
Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
Service
Romney/Steinbart
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 entitys overall business strategy.
Romney/Steinbart

STRATEGY
Michael Porter suggests that there

are two basic business strategies
companies can follow:
Product-differentiation strategy
Low-cost strategy
Romney/Steinbart

STRATEGY
A product differentiation strategy

involves setting your product apart
from those of your competitors, i.e.,
building a better mousetrap by
offering one thats faster, has
enhanced features, etc.
Romney/Steinbart

STRATEGY
Michael Porter suggests that there

are two basic business strategies
companies can follow:
Product-differentiation strategy
Low-cost strategy
Romney/Steinbart

STRATEGY
A low-cost strategy involves offering

a cheaper mousetrap than your
competitors. The low cost is made
possible by operating more
efficiently.
Romney/Steinbart

STRATEGY
Sometimes a company can do both,

but they normally have to choose.
Romney/Steinbart

STRATEGY
Porter also argues that companies

must choose a strategic position
among three choices:
Variety-based strategic position
Offer a subset of the

industrys products or
services.
EXAMPLE: An insurance
company that only offers life
insurance as opposed to life,
health, property-casualty,
Romney/Steinbart

STRATEGY
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.
Romney/Steinbart

STRATEGY
Porter
also argues that companies
Serve a subset of customers who differ
must
choose
position
from
othersainstrategic
terms of factors
such as
geographic
location or size.
among
three choices:
EXAMPLE: Satellite
Internet
services are
Variety-based
strategic
position
intended primarily for customers in rural
Needs-based
strategic
areas who cannot
get position
DSL or cable
services.
Access-based
strategic position
Romney/Steinbart

STRATEGY
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.
Romney/Steinbart

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.
Its critical to design the organizations activities

so they reinforce one another in achieving the
selected strategic position. The result is
synergy, which is difficult for competitors to
imitate.
Romney/Steinbart

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.
Romney/Steinbart

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.
Romney/Steinbart

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.
Romney/Steinbart
SUMMARY
What weve learned so far:
The meaning of system, data, and

information
What an AIS is
Why its 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
Romney/Steinbart

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C HAPTER 1

Accounting Information Systems, 10/e

Questions to be addressed in this chapter

What is the meaning of system, data, and

2006 Prentice Hall Business Publishing

Accounting Information Systems, 10/e

SYSTEMS, DATA, AND

A set of interrelated components

Most systems are

2006 Prentice Hall Business Publishing

Accounting Information Systems, 10/e

SYSTEMS, DATA, AND

Every organization has goals.

The subsystems should be designed to

2006 Prentice Hall Business Publishing

Accounting Information Systems, 10/e

SYSTEMS, DATA, AND

Goal conflict occurs when the activity of a

2006 Prentice Hall Business Publishing

Accounting Information Systems, 10/e

SYSTEMS, DATA, AND

The systems concept encourages

Events that occur

2006 Prentice Hall Business Publishing

Accounting Information Systems, 10/e

SYSTEMS, DATA, AND

Information is different from data.

2006 Prentice Hall Business Publishing

Accounting Information Systems, 10/e

SYSTEMS, DATA, AND

However, when you get more information

Example: Final exams week!

When youve reached the overload point,

2006 Prentice Hall Business Publishing

Accounting Information Systems, 10/e

SYSTEMS, DATA, AND

2006 Prentice Hall Business Publishing

Accounting Information Systems, 10/e

SYSTEMS, DATA, AND

Accounting Information Systems, 10/e

SYSTEMS, DATA, AND

2006 Prentice Hall Business Publishing

Accounting Information Systems, 10/e

SYSTEMS, DATA, AND

Characteristics that make

2006 Prentice Hall Business Publishing

Accounting Information Systems, 10/e

SYSTEMS, DATA, AND

Characteristics that make

2006 Prentice Hall Business Publishing

Accounting Information Systems, 10/e

SYSTEMS, DATA, AND

Characteristics that make

2006 Prentice Hall Business Publishing

Accounting Information Systems, 10/e

SYSTEMS, DATA, AND

Characteristics that make

2006 Prentice Hall Business Publishing

Accounting Information Systems, 10/e

SYSTEMS, DATA, AND

Characteristics that make

2006 Prentice Hall Business Publishing

Accounting Information Systems, 10/e