CHAPTER 1

Accounting Information
Systems: An Overview

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 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? 2
 SYSTEMS, DATA, AND INFORMATION

• In fact, for many, the term system generates mental

images of computers and programming; even though,
the term has much broader applicability.
• Some systems are naturally occurring, whereas
others are artificial.
– Natural systems range from the atom to the
universe. All life forms, plants and animals, are
examples of natural systems.
– Artificial systems are manmade. These systems
include everything from clocks to airplane and
social systems to information systems.
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 Elements of a System
• Regardless of their origin, all systems possess
some common elements. To specify:
– A system is a group of two or more interrelated
components or subsystems that serve a common
purpose. In other words, a system is a set of
interrelated components that interact to achieve a
goal.

• Let’s analyze the general definitions provided

above to gain an understanding of how it applies
to businesses and information systems.
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 Cont…

• Multiple Components
– A system must contain more than one part or
component.
• Relatedness:
– A common purpose relates the multiple parts of
the system.
– Although each part functions independently of the
others, all parts serve a common objective.
– If a particular component does not contribute to
the common goal, then it is not part of the system.

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 Cont…
• System versus Subsystem
– The distinction between the terms system and
subsystem is a matter of perspective.
– For our purposes, these terms are
interchangeable.
– A system is called a subsystem when it is viewed
in relation to the larger system of which it is a
part.
– Likewise, a subsystem is called a system when it
is the focus of attention.
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 Cont…
• Purpose
– A system must serve at least one purpose,
but it may serve several.
– When a system ceases to serve a purpose, it
should be replaced.

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 An Example of an Artificial System

• An automobile is an example of an artificial

system that is familiar to most of us and that
satisfies the definition of a system provided
previously.
• To simplify matters, let’s assume that the
automobile system serves only one purpose:
providing conveyance.
• To do so requires the harmonious interaction of
hundreds or even thousands of subsystems. For
simplicity, Figure 1-1 depicts only a few of these.
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Figure 1-1: Primary Subsystem of an Automobile

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 Cont…
• In the figure, two points are illustrated of
particular importance to the study of information
systems:
– system decomposition and
– subsystem interdependency

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 System Decomposition
• Decomposition is the process of dividing the system
into smaller subsystem parts.
• This is a convenient way of representing, viewing, and
understanding the relationships among subsystems.
• By decomposing a system, we can present the overall
system as a hierarchy and view the relationships
between subordinate and higher level subsystems.
• Each subordinate subsystem performs one or more
specific functions to help achieve the overall
objective of the higher level system.

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 Cont…
• Figure 1-1 shows an automobile decomposed into
four primary subsystems: the fuel subsystem, the
propulsion subsystem, the electrical subsystem,
and the braking subsystem.
• Each contributes in a unique way to the system’s
objective, conveyance. These second level
subsystems are decomposed further into two or
more subordinate subsystems at a third level.
• Each third level subsystem performs a task in
direct support of its second level system.
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 Subsystem Interdependency

• A system’s ability to achieve its goal depends

on the effective functioning and harmonious
interaction of its subsystems.
• If a vital subsystem fails or becomes defective
and can no longer meet its specific objective,
the overall system will fail to meet its
objective.

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 Cont…
• For example, if the fuel pump (a vital subsystem
of the fuel system) fails, then the fuel system fails.
With the failure of the fuel system (a vital
subsystem of the automobile), the entire system
fails.
• On the other hand, when a non-vital subsystem
fails, the primary objective of the overall system
can still be met. For instance, if the radio (a
subsystem of the electrical system) fails, the
automobile can still convey passengers.
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 Con t…
• Designers of all types of systems need to
recognize the consequences of subsystem failure
and provide the appropriate level of control.
• For example, a systems designer may provide
control by designing a backup (redundant)
subsystem that comes into play when the
primary subsystem fails.
• Control should be provided on a cost-benefit
basis. It is neither economical nor necessary to
back up every subsystem.
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 Cont…
• Backup is essential, however, when excessive
negative consequences result from a subsystem
failure.
• Hence, virtually every modern automobile has a
backup braking system, whereas very few have
backup stereo (audio) systems.
• Like automobile designers, information system
designers need to identify critical subsystems,
anticipate the risk of their failure, and design cost-
effective control procedures to mitigate that risk.
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 Goal conflict versus Goal congruence
• 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.

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 Data versus Information
• Data are facts that are collected, recorded,
stored, and processed by an information
system.
– A fact could be a number, date, name, and so on.
– For example:
2/22/14
ABC Company, 123,
99, 3, 20, 60

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 Cont….
• Organizations collect
data about:
– Events that occur
data
– Resources that are data
affected by those events
data
– Agents who participate
in the events
Information

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 Cont…

• Information is data that have been organized and

processed to provide meaning to a user.
• The previous slide just showed facts, if we put those
facts within a context of a sales invoice, for example, it
is meaningful and considered information.
Invoice Date : 2/22/14 Invoice #: 123
Customer: ABC company
Item # Qty Price
99 3 $20
Total Invoice Amount $60 20
 Cont…
• 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.

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 Cont…
• Benefits of information
– Reduction of uncertainty
– Improved decisions
– Improved ability to plan and schedule activities
• Cost of producing information: include time
and resources spent:
– Collecting data
– Processing data
– Storing data
– Distributing information to users
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 Cont…
• 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.
• Value of information: the benefits produced by
possessing and using the information minus the
cost of producing it. Information is of value when
the benefits received from using or acting upon it
outweighs the cost to produce the information.
Benefit $’s > Cost $’s
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 Characteristics that make information useful
• Relevance: “The capacity of information to make a
difference in a decision by helping users to form
predictions about the outcomes of past, present, and
future events or to confirm or correct prior
expectations.”
• Reliability: “The quality of information that assures that
information is reasonably free from error and bias and
faithfully represents what it purports to represent.”
• Completeness: “The inclusion in reported information
of everything material that is necessary for faithful
representation of the relevant phenomena.”
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 Cont…
• Timeliness: “Having information available to a
decision maker before it loses its capacity to
influence decisions.”
• Understandability: “The quality of information
that enables users to perceive its significance.”
• Verifiability: A consensus notion—the nature of
the information is such that different people
would tend to produce the same result.
• Accessibility: You can get to it when you need it
and in a format you can use.
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 Users of Information
• Information is provided to both:
– External users
– Internal users
• External users primarily use information that is
either:
– MANDATORY INFORMATION—required by a
governmental entity or
– ESSENTIAL INFORMATION—required to conduct
business with external parties, such as purchase
orders.

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 Cont…
• In providing mandatory or essential information,
the focus should be on:
– Minimizing costs.
– Meeting regulatory requirements.
– Meeting minimum standards of reliability and
usefulness.
• 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. 27
Internal & External Information Flows

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 Internal Information Flows
• Horizontal flows of information used primarily at the
operations level to capture transaction and
operations data
• Vertical flows of information
– downward flows — instructions, quotas, and
budgets
– upward flows — aggregated transaction and
operations data

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 Information Requirements
• Each user group has unique information
requirements.
• The higher the level of the organization, the
greater the need for more aggregated information
and less need for detail.

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 Information in Business
• Information is a business resource that:
– needs to be appropriately managed
– is vital to the survival of contemporary
(modern) businesses

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 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.

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 Components of an AIS

• People using the system

• Procedures and Instructions
– For collecting, processing, and storing data
• Data
• Software
• Information Technology (IT) Infrastructure
– Computers, peripherals (eg. Printer), networks, and so
on
• Internal Control and Security
– Safeguard the system and its data
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 The functions of an AIS
• To collect and store data about events, resources,
and agents.
• To transform that data into information that
management can use to make decisions about
events, resources, and agents.
• To provide adequate controls to safeguard the
entity’s resources (including data).

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 WHY STUDY AIS?
• 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.
• 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.
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 Cont…
• 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.
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 Cont…

• 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.
• AIS topics are tested on the new CPA exam.
– Makes up about 25% of the Business Environment & Concepts section of
the CPA exam.
• AIS topics impact corporate strategy and culture.
– AIS design is affected by information technology, the organization’s strategy,
and the organization’s culture.
– Information technology affects the company’s choice of business strategy.
To perform cost-benefit analyses on IT changes, you need to understand
business strategy.
– 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.
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 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?
• 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 jewelry)
– Providing enhanced features
– Customizing it

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 Cont…
• 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.

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 Primary activities
• Inbound logistics: Receiving, storing, and distributing
the materials that are inputs to the organization’s
product or service. For instance, 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 instance, 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. 40
 Cont…
• Outbound logistics: Distributing products or services to
customers. For instance, for the pharmaceutical company, this
step involves packaging and shipping the goods to drug stores,
doctors, and hospitals.
• Marketing and sales: Helping customers to buy the
organization’s products or services. A pharmacy representative
may visit with drug stores, doctors, etc. to inform them about
their products and take orders.
• Service: Post-sale support provided to customers such as repair
and maintenance function. For instance, 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.
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 Support activities
• 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.
• 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.
• 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.
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Cont…

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 Cont…
• 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.
• For example, the inbound logistics of Pharmaceuticals, Inc., links
to the outbound logistics of its suppliers.
• And the outbound logistics of Pharmaceuticals, Inc., links to the
inbound logistics of its customers.
• 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.
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 Cont..

Smith Supply Co.

Inbound Logistics
Supply chain
Operations
Outbound Logistics
Marketing & Sales Pharmaceuticals, Inc.
Service Inbound Logistics
Operations
Outbound Logistics
Customer Pharmacy
Marketing & Sales
Inbound Logistics
Service
Operations
Outbound Logistics
Marketing & Sales
Service
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 Types of decisions
• There is variation in the degree of structure
used to make decisions:
– Structured decisions
– Semi structured decisions
– Unstructured decisions

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 Cont…
• 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.

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

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 Cont…
• Unstructured 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.

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 Cont…
• There is also variation in the scope of a
decision’s effect:
– Occupational control decisions
– Management control decisions
– Strategic planning decisions

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 Cont…
• Occupational control decisions
– Relate to performance of specific tasks
– Often of a day-to-day nature.
– EXAMPLE: Deciding whether to order inventory.

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

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 Cont…
• 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.

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 Cont…
• 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

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 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.

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 Cont…
• Michael Porter suggests that there are two
basic business strategies companies can follow:
– Product-differentiation strategy
– Low-cost 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.
56
 Cont…
• 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.

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 Cont…
• 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.
– 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.
– 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.
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 Cont…
• 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.
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 Cont…
• 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.

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 Cont…
• 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 End!
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