HAPTER 1

1. HAPTER 1 Accounting Information Systems: An Overview

2. 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?

3. Tue 21-9 SYSTEMS, DATA, AND INFORMATION • A system is: • A set of interrelated components • That interact • To achieve a goal

4. SYSTEMS, DATA, AND INFORMATION • Most systems are composed of smaller subsystems . . . • . . . And vice versa! • The susbsystems should be designed to maximize achievement of the organization’s goals • Goal conflict vs.goal congruence

5. 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.

6. SYSTEMS, DATA, AND INFORMATION • Data are facts that are collected, recorded, stored, and processed by an information system. • Organizations collect data about: • Events that occur (total amount of sales) • Resources that are affected by those events (items, qty, price) • Agents who participate in the events (customers, salespersons)

7. 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.

8. Mon 20-9 SYSTEMS, DATA, AND INFORMATION • However, when you get more information than you can effectively assimilate, you suffer frominformation 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.

9. 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

10. 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

11. 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.

12. 23-9 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.

13. 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.

14. SYSTEMS, DATA, AND INFORMATION • Characteristics that make information useful: • Relevance • Reliability • Completeness It doesn’t leave out anything that’s important.

15. SYSTEMS, DATA, AND INFORMATION • Characteristics that make information useful: • Relevance • Reliability • Completeness • Timeliness You get it in time to make your decision.

16. 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.

17. 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.

18. SYSTEMS, DATA, AND INFORMATION • 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.

19. SYSTEMS, DATA, AND INFORMATION • External users primarily use information that is either: • MANDATORY INFORMATION—Required by a governmental entity, such as Taxes info. • ESSENTIAL INFORMATION—Required to conduct business with external parties, such as purchase orders. • In providing mandatory or essential information, the focus should be on: • Minimizing costs • Meeting regulatory requirements • Meeting minimum standards of reliability and usefulness

20. 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.

21. 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.

22. 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

23. WHY STUDY ACCOUNTING INFORMATION SYSTEMS? • 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

24. WHY STUDY ACCOUNTING INFORMATION SYSTEMS? • It’s 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

25. WHY STUDY ACCOUNTING INFORMATION SYSTEMS? • It’s fundamental to accounting. • The skills are critical to career success. • Auditors need to evaluate the accuracy and reliability of information produced by the AIS.

26. WHY STUDY ACCOUNTING INFORMATION SYSTEMS? • It’s fundamental to accounting. • The skills are critical to career success. • 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.

27. WHY STUDY ACCOUNTING INFORMATION SYSTEMS? • It’s 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.

28. WHY STUDY ACCOUNTING INFORMATION SYSTEMS? • It’s 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.

29. WHY STUDY ACCOUNTING INFORMATION SYSTEMS? • It’s 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.***

30. WHY STUDY ACCOUNTING INFORMATION SYSTEMS? • It’s 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.

31. WHY STUDY ACCOUNTING INFORMATION SYSTEMS? • It’s 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.

32. 22-9 (2)ROLE OF THE AIS IN THE VALUE 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. (Synergy) • 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

33. ROLE OF THE 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.

34. ROLE OF THE AIS IN THE VALUE CHAIN • Primary activities include: • Inbound logistics • Operations • Outbound logistics • Marketing and sales • Service

35. ROLE OF THE AIS IN THE VALUE CHAIN • Support activities include: • Firm infrastructure • Human resources • Technology • Purchasing

37. ROLE OF THE 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.

38. ROLE OF THE AIS IN THE VALUE CHAIN Smith Supply Co. Inbound Logistics Operations Outbound Logistics Marketing & Sales Service Pharmaceuticals, Inc. Inbound Logistics Operations Outbound Logistics Marketing & Sales Service The linking of these separate value chains creates a larger system known as a supply chain. Customer Pharmacy Inbound Logistics Operations Outbound Logistics Marketing & Sales Service Information technology can facilitate synergistic linkages that improve the performance of each company’s value chain.

39. ROLE OF THE AIS IN THE VALUE CHAIN • There is variation in the degree of structure used to make decisions: • Structured decisions • Repetitive and routine • Can be delegated to lower-level employees • EXAMPLE: Deciding whether to write an auto insurance policy for a customer with a clean driving history.

40. ROLE OF THE AIS IN THE VALUE CHAIN • 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.

41. ROLE OF THE AIS IN THE VALUE CHAIN • There is variation in the degree of structure used to make decisions: • Structured decisions • Semistructured decisions • 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

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

43. ROLE OF THE AIS IN THE VALUE CHAIN • There is also variation in the scope of a decision’s effect: • Operational control decisions • Management control decisions • Relate to utilizing resources to accomplish organizational objectives • EXAMPLE: Budgeting

44. ROLE OF THE AIS IN THE VALUE CHAIN • There is also variation in the scope of a decision’s effect: • Operational 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

45. ROLE OF THE 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

46. Tue 28-9 THE AIS AND CORPORATE STRATEGY • Michael Porter suggests that there are two basic business strategies companies can follow: • Product-differentiation strategy • Low-cost strategy

47. THE AIS AND CORPORATE 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.

48. THE AIS AND CORPORATE STRATEGY • Michael Porter suggests that there are two basic business strategies companies can follow: • Product-differentiation strategy • Low-cost strategy

49. THE AIS AND CORPORATE STRATEGY • 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.

50. THE AIS AND CORPORATE STRATEGY • 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. or oil lubricants.