C

Accounting Information Systems:

An Overview

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 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?

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 A system is:
A set of interrelated components
That interact
To achieve a goal

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 Most systems are composed of smaller subsystems . . .
. . . And vice versa!

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 Every organization has goals.
The susbsystems 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 its goal of staying within its budget in order to meet the
organizations goal of delivering product on time.

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 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.

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 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

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 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.

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 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.

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 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

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 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

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 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.

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 Characteristics that make information useful:
Relevance

It reduces uncertainty by helping you predict

what will happen or confirm what already has
happened.

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 Characteristics that make information useful:
Relevance
Reliability

Its dependable, i.e., free from error or bias

and faithfully portrays events and activities.

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 Characteristics that make information useful:
Relevance
Reliability
Completeness

It doesnt leave out anything thats important.

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 Characteristics that make information useful:
Relevance
Reliability
Completeness
Timeliness

You get it in time to make your decision.

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 Characteristics that make information useful:
Relevance
Reliability
Completeness
Timeliness
Understandability

Its presented in a manner you can

comprehend and use.

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 Characteristics that make information useful:
Relevance
Reliability
Completeness
Timeliness
Understandability
Verifiability
A consensus notionthe nature of the
information is such that different people
would tend to produce the same result.

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 Characteristics that make information useful:
Relevance
Reliability
Completeness
Timeliness
Understandability
Verifiability
Accessibility

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

format you can use.

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 Information is provided to both:
External users
Internal Users

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 Information is provided to both:
External users
Internal Users

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 External users primarily use information that is either:
MANDATORY INFORMATIONRequired by a governmental entity, such
as Form 10-Ks required by the SEC; or
ESSENTIAL INFORMATIONRequired to conduct business with external
parties, such as purchase orders.

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 In providing mandatory or essential information, the focus
should be on:
Minimizing costs
Meeting regulatory requirements
Meeting minimum standards of reliability and usefulness

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 Information is provided to both:
External users
Internal Users

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 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.

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 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.

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 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

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 Its 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
 Its fundamental to accounting.

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

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 Its fundamental to accounting.
The skills are critical to career success.

Auditors need to evaluate the accuracy

and reliability of information produced by
the AIS.

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 Its fundamental to accounting.
The skills are critical to career 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.

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 Its 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.

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 Its 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.

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 Its 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
 Its 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.

Makes up about 25% of the Business

Environment & Concepts section of the CPA
exam.

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 Its 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.

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 Occupational
Culture Strategy

AIS design is
affected by AIS
information
technology, the
organizations
strategy, and the
organizations Information
culture. Technology

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 Occupational
Culture Strategy

Information technology
affects the companys AIS
choice of business
strategy. To perform
cost-benefit analyses on
IT changes, you need to
understand business Information
strategy. Technology

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 Occupational
Culture Strategy

While culture affects AIS

the design of the AIS,
its also true that the
AIS affects culture by
altering the
dispersion and
availability of Information
information. Technology

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 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 . . .

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 Well, Mr. Pharmaceutical
Salesman, your proposal looks
good, but your prices are about
5% higher than your competitors.

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 Thats true, but were
comfortable with that
because of the value-
added that we bring to
this arrangement.

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 What is that value-added,
and how do you convert it
into dollars?

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 Blahblahblah
customer service
blahblah--blah

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 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

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 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.

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 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.

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 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.

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 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
 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.

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 Primary activities include:
Inbound logistics
Operations Helping customers to
Outbound logistics buy the organizations
Marketing and sales products or services.

A pharmacy rep may

visit with drug stores,
doctors, etc. to inform
them about their
products and take
orders.

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 Primary activities include:
Post-sale support provided to
Inbound logistics customers such as repair and
Operations maintenance function.
Outbound logistics
Marketing and sales A pharmaceutical firm will
Service typically not be repairing its
product (though the product may
be periodically reformulated).
The pharmaceutical company is
more likely to be providing
advisory services to pharmacists,
etc.

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 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.

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 Support activities include:
Firm infrastructure

Accountants, lawyers, and administration.

Includes the companys accounting
information system.

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 Support activities include:
Firm infrastructure
Human resources

Involves recruiting and hiring new

employees, training employees, paying
employees, and handling employee
benefits.

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 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.

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 Support activities include:Buying the resources (e.g.,
Firm infrastructure materials, inventory, fixed
Human resources assets) needed to carry out the
Technology entitys primary activities.
Purchasing
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.

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 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.

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 Smith Supply Co. For example, the inbound logistics of
Inbound Logistics Pharmaceuticals, Inc., links to the outbound
Operations logistics of its suppliers.
Outbound Logistics
Pharmaceuticals, Inc.
Marketing & Sales
Inbound Logistics
Service
Operations
Outbound Logistics Customer Pharmacy
Marketing & Sales Inbound Logistics
Service Operations
Outbound Logistics
Marketing & Sales
Service

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 Smith Supply Co. And the outbound logistics of
Inbound Logistics Pharmaceuticals, Inc., links to the inbound
Operations logistics of its customers.
Outbound Logistics
Pharmaceuticals, Inc.
Marketing & Sales
Inbound Logistics
Service
Operations
Outbound Logistics Customer Pharmacy
Marketing & Sales Inbound Logistics
Service Operations
Outbound Logistics
Marketing & Sales
Service

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 Smith Supply Co. The linking of these separate value chains
Inbound Logistics creates a larger system known as a supply
Operations chain.
Outbound Logistics
Pharmaceuticals, Inc.
Marketing & Sales
Inbound Logistics
Service
Operations
Outbound Logistics Customer Pharmacy
Marketing & Sales Inbound Logistics
Service Operations
Outbound Logistics
Marketing & Sales
Service

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 Smith Supply Co. The linking of these separate value chains
Inbound Logistics creates a larger system known as a supply
Operations chain.
Outbound Logistics
Pharmaceuticals, Inc.
Marketing & Sales
Inbound Logistics
Service
Operations
Outbound Logistics Customer Pharmacy
Information
technology can Marketing & Sales Inbound Logistics
facilitate synergistic Service Operations
linkages that improve Outbound Logistics
the performance of Marketing & Sales
each companys value
Service
chain.

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 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.

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 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.

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 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

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 There is also variation in the scope of a decisions effect:
Occupational control decisions

Relate to performance of specific tasks

Often of a day-to-day nature
EXAMPLE: Deciding whether to order
inventory

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 There is also variation in the scope of a decisions effect:
Occupational control decisions
Management control decisions

Relate to utilizing resources to accomplish

organizational objectives
EXAMPLE: Budgeting

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 There is also variation in the scope of a decisions effect:
Occupational control decisions
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
2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 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

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 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.

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 Michael Porter suggests that there are two basic business
strategies companies can follow:
Product-differentiation strategy
Low-cost strategy

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 Michael Porter suggests that there are two basic business
strategies companies can follow:
Product-differentiation strategy
Low-cost strategy

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 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.

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 Michael Porter suggests that there are two basic business
strategies companies can follow:
Product-differentiation strategy
Low-cost strategy

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 A low-cost strategy involves offering a cheaper mousetrap than
your competitors. The low cost is made possible by operating
more efficiently.

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 Sometimes a company can do both, but they normally have to
choose.

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 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, etc.

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 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.

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 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
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.

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 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.

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 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.

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 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.

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 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.

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 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.

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart
 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

2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart