C CHAPTER 1

Accounting Information Sys-

tems:
An Overview
 INTRODUCTION
• Questions to be addressed in this chapter in-
clude:
– 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 business activities in which an or-
ganization engages?
 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 . . .
• . . . And vice versa!
 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
 SYSTEMS, DATA, AND INFORMATION

• Information is different from data.

• Information is data that have been organized and pro-
cessed to provide meaning to a user.
• Usually, more information and better information trans-
lates into better decisions.
• However, when you get more information than you can
effectively assimilate, you suffer from information over-
load.
– Example: Final exams week!
• When you’ve reached the overload point, the quality of
decisions declines while the costs of producing the in-
formation increases.
 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.
 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 compre-
hend and use.
 SYSTEMS, DATA, AND INFORMATION

• Characteristics that make information

useful:
– Relevance
– Reliability
– Completeness
– TimelinessA consensus notion—the nature of the infor-
mation is such that different people would
– Understandability
tend to produce the same result.
– Verifiability
 SYSTEMS, DATA, AND INFORMATION

• Characteristics that make information

useful:
– Relevance
– Reliability
– Completeness
– Timeliness
– Understandability
You can get to it when you need it and in a
– Verifiability
format you can use.
– Accessibility
 SYSTEMS, DATA, AND INFORMATION

• Information is provided to both:

– External users
– Internal Users
 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 Form 10-K’s
required by the SEC; or
– ESSENTIAL INFORMATION—Required to
conduct business with external parties, such
as purchase orders.
 SYSTEMS, DATA, AND INFORMATION

• In providing mandatory or essential infor-

mation, the focus should be on:
– Minimizing costs
– Meeting regulatory requirements
– Meeting minimum standards of reliability and
usefulness
 SYSTEMS, DATA, AND INFORMATION

• Information is provided to both:

– External users
– Internal Users
 SYSTEMS, DATA, AND INFORMATION

• Internal users primarily use discretionary

information.
• The primary focus in producing this infor-
mation 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 in-
formation 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, re-
sources, 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
 WHY STUDY ACCOUNTING INFORMA-
TION SYSTEMS?
• It’s fundamental to accounting.
• Accounting is an information-providing ac-
tivity, so accountants need to understand:
– How the system that provides that in-
formation is designed, implemented and
used.
– How financial information is reported
– How information is used to make deci-
sions
 WHY STUDY ACCOUNTING INFORMA-
TION 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 trans-
formed
– How the availability, reliability, and ac-
curacy of the data is ensured
• AIS courses are not number-crunching
courses
 WHY STUDY ACCOUNTING INFORMA-
TION 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.
 WHY STUDY ACCOUNTING INFORMA-
TION 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 in-
formation for tax planning and compliance
work.
 WHY STUDY ACCOUNTING INFORMA-
TION SYSTEMS?
• It’s fundamental to accounting.
• The skills are critical to career success.
• In private industry and not-for-profits, sys-
tems work is considered the most impor-
tant activity performed by accountants.
 WHY STUDY ACCOUNTING INFORMA-
TION SYSTEMS?
• It’s fundamental to accounting.
• The skills are critical to career success.
• In management consulting, the design, se-
lection, and implementation of accounting
systems is a rapid growth area.
 WHY STUDY ACCOUNTING INFORMA-
TION 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, data-
bases, expert systems, and telecommunica-
tions.
• AIS courses focus on accountability and con-
trol.
 WHY STUDY ACCOUNTING INFORMA-
TION SYSTEMS?
• It’s fundamental to accounting.
• The skills are critical to career success.
• The AIS course complements other
systems courses.
• AIS topics impact corporate strategy
and culture.
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?
ROLE OF THE AIS IN THE VALUE CHAIN

• While “adding value” is a commonly used buzz-

word, 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
– Providing enhanced features
– Customizing it
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
– Support activities
• These activities are sometimes referred to
as “line” and “staff” activities respectively.
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
– Support activities
• These activities are sometimes referred to
as “line” and “staff” activities respectively.
ROLE OF THE AIS IN THE VALUE CHAIN

• Primary activities include:

– Inbound logistics
Receiving, storing, and distributing the ma-
terials 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.
ROLE OF THE AIS IN THE VALUE CHAIN

• Primary activities include:

– Inbound logistics
– Operations
Transforming those inputs into products or ser-
vices.

For the pharmaceutical company, this step in-

volves combining the raw chemicals and elements
with the work of people and equipment to produce
the finished drug product that will be sold to cus-
tomers.
ROLE OF THE AIS IN THE VALUE CHAIN

• 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.
ROLE OF THE AIS IN THE VALUE CHAIN

• Primary activities include:

– Inbound logistics Helping customers to
– Operations buy the organization’s
products or services.
– Outbound logistics
– Marketing and sales A pharmacy rep may
visit with drug stores,
doctors, etc. to inform
them about their prod-
ucts and take orders.
ROLE OF THE AIS IN THE VALUE CHAIN

• Primary activities include:

Post-sale support provided to
customers such as repair and
– Inbound logistics
maintenance function.
– Operations
– Outbound logistics
A pharmaceutical firm will typi-
– Marketing andcally not be repairing it’s product
sales
(though the product may be peri-
– Service odically reformulated). The
pharmaceutical company is more
likely to be providing advisory
services to pharmacists, etc.
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
– Support activities
• These activities are sometimes referred to
as “line” and “staff” activities respectively.
ROLE OF THE AIS IN THE VALUE CHAIN

• Support activities include:

– Firm infrastructure
Accountants, lawyers, and administration.
Includes the company’s accounting informa-
tion system.
ROLE OF THE AIS IN THE VALUE CHAIN

• Support activities include:

– Firm infrastructure
– Human resources
Involves recruiting and hiring new employ-
ees, training employees, paying employees,
and handling employee benefits.
ROLE OF THE AIS IN THE VALUE CHAIN

• 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 cre-
ate new drugs and modify existing ones.
ROLE OF THE AIS IN THE VALUE CHAIN

• Support activitiesBuying
include:
the resources (e.g., ma-
terials, inventory, fixed assets)
– Firm infrastructure
needed to carry out the entity’s
– Human resources primary activities.
– Technology
– Purchasing In the pharmaceutical company,
the purchasing folks are trying
to get the best combination of
cost and quality in buying chem-
icals, supplies, and other assets
the company needs to run its
operations.
ROLE OF THE AIS IN THE VALUE CHAIN

• Information technology can significantly

impact the efficiency and effectiveness
with which the preceding activities are car-
ried out.
• An organization’s value chain can be con-
nected with the value chains of its cus-
tomers, suppliers, and distributors.
ROLE OF THE AIS IN THE VALUE CHAIN

Smith Supply Co. For example, the inbound logistics of

Inbound Logistics Pharmaceuticals, Inc., links to the out-
Operations bound logistics of its suppliers.
Outbound Logistics
Marketing & Sales Pharmaceuticals, Inc.
Inbound Logistics
Service
Operations
Outbound Logistics Customer Pharmacy
Marketing & Sales Inbound Logistics
Service Operations
Outbound Logistics
Marketing & Sales
Service
ROLE OF THE AIS IN THE VALUE CHAIN

Smith Supply Co. And the outbound logistics of Pharmaceu-

Inbound Logistics ticals, Inc., links to the inbound logistics of
Operations its customers.
Outbound Logistics
Marketing & Sales Pharmaceuticals, Inc.
Inbound Logistics
Service
Operations
Outbound Logistics Customer Pharmacy
Marketing & Sales Inbound Logistics
Service Operations
Outbound Logistics
Marketing & Sales
Service
ROLE OF THE AIS IN THE VALUE CHAIN

Smith Supply Co. The linking of these separate value chains

Inbound Logistics creates a larger system known as a supply
Operations chain.
Outbound Logistics
Marketing & Sales Pharmaceuticals, Inc.
Inbound Logistics
Service
Operations
Outbound Logistics Customer Pharmacy
Marketing & Sales Inbound Logistics
Service Operations
Outbound Logistics
Marketing & Sales
Service
 ROLE OF THE AIS IN THE VALUE CHAIN

Smith Supply Co. The linking of these separate value chains

Inbound Logistics creates a larger system known as a supply
Operations chain.
Outbound Logistics
Marketing & Sales Pharmaceuticals, Inc.
Inbound Logistics
Service
Operations
Outbound Logistics Customer Pharmacy
Information technol-
ogy can facilitate Marketing & Sales Inbound Logistics
synergistic linkages Service Operations
that improve the per- Outbound Logistics
formance of each Marketing & Sales
company’s value Service
chain.
 THE AIS AND CORPORATE STRATEGY

• Corporations have:
– Unlimited opportunities to invest in technology
– Limited resources to invest in technology
• Consequently, they must identify the im-
provements likely to yield the highest re-
turn.
• This decision requires an understanding of
the entity’s overall business strategy.
 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

• 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.
 SUMMARY
• What we’ve learned so far:
– The meaning of system, data, and informa-
tion
– What an AIS is
• Why it’s an important topic to study
• What its role is in the value chain
• How it provides information for decision making
• How corporate strategy interact with the AIS