Romney Ch01

© 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 1 of 85

C HAPTER 1

Accounting Information Systems:

An Overview


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?


SYSTEMS, DATA, AND INFORMATION

• A system is:– A set of interrelated components– That interact– To achieve a goal



• Every organization has goals.– The subsystems should be designed to

maximize achievement of the organization’s 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 organization’s goal of delivering product on time.



• 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.



• 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



• 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.



• 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.



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






Costs may include time and resources spent:• Collecting data• Processing data• Storing data• Distributing information to users






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.



• Characteristics that make information useful:– Relevance

It reduces uncertainty by helping you predict what will happen or confirm what already has happened.



• Characteristics that make information useful:– Relevance– Reliability

It’s dependable, i.e., free from error or bias and faithfully portrays events and activities.



• Characteristics that make information useful:– Relevance– Reliability– Completeness

It doesn’t leave out anything that’s important.



• Characteristics that make information useful:– Relevance– Reliability– Completeness– Timeliness

You get it in time to make your decision.



• Characteristics that make information useful:– Relevance– Reliability– Completeness– Timeliness– Understandability

It’s presented in a manner you can comprehend and use.



• 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.



• 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.


• Information is provided to both:– External users– Internal users






• External users primarily use information that is either:– MANDATORY INFORMATION—required by a

governmental entity, such as Form 10-K required by the SEC; or

– 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.






• 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.



• 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.

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

WHAT IS AN AIS?


• It’s fundamental to accounting.

WHY STUDY ACCOUNTING INFORMATION SYSTEMS?

• 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.



• 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.




• 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 exam.






• AIS topics are covered in the exam. AIS topics impact corporate strategy and culture.




AIS

OccupationalCulture Strategy

InformationTechnology

AIS design is affected by information technology, the organization’s strategy, and the organization’s culture.



AIS



Information technology affects the company’s choice of business strategy. To perform cost-benefit analyses on IT changes, you need to understand business strategy.



AIS



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.


• The objective of most organizations is to provide value to their customers.

• What does it mean to deliver value?

• Let’s peek in on a conversation at Joe’s pharmacy . . .

ROLE OF THE AIS IN THE VALUE CHAIN



Well, Mr. Pharmaceutical Salesman, your proposal looks good, but your prices are about

5% higher than your competitors.



That’s true, but we’re comfortable with that because of the value-added that we bring to

this arrangement.


• 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 gems)– Providing enhanced features– Customizing it



• 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.







• Primary activities include:– Inbound logistics


Receiving, storing, and distributing the materials 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.


• 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.


• 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.


• Primary activities include:– Inbound logistics– Operations– Outbound logistics– Marketing and sales


Helping customers to buy the organization’s products or services.

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


• Primary activities include:– Inbound logistics– Operations– Outbound logistics– Marketing and sales– Service


Post-sale support provided to customers such as repair and maintenance function.

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.






• Support activities include:– Firm infrastructure


Accountants, lawyers, and administration. Includes the company’s accounting information system.


• Support activities include:– Firm infrastructure– Human resources


Involves recruiting and hiring new employees, training employees, paying employees, and handling employee benefits.


• Support activities include:– Firm infrastructure– Human resources– 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.


• Support activities include:– Firm infrastructure– Human resources– Technology– 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.


• 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.


• Good AIS value chain:• UPS spends over $1 billion a year on

information systems resulting in greater customer control over delivery, higher driver productivity, and lower costs.

• Bad AIS value chain:– Limited Brands tangled integration of over 60

incompatible information systems resulted in 400 trailers trying to jam into a 150 trailer lot.


Pharmaceuticals, Inc.

Inbound Logistics

Operations

Outbound Logistics

Marketing & Sales

Service


Smith Supply Co.

Inbound Logistics

Operations

Outbound Logistics

Marketing & Sales

Service

Customer Pharmacy

Inbound Logistics

Operations

Outbound Logistics

Marketing & Sales

Service

For example, the inbound logistics of Pharmaceuticals, Inc., links to the outbound logistics of its suppliers.



Inbound Logistics

Operations

Outbound Logistics

Marketing & Sales

Service


Smith Supply Co.

Inbound Logistics

Operations

Outbound Logistics

Marketing & Sales

Service

Customer Pharmacy

Inbound Logistics

Operations

Outbound Logistics

Marketing & Sales

Service

And the outbound logistics of Pharmaceuticals, Inc., links to the inbound logistics of its customers.



Inbound Logistics

Operations

Outbound Logistics

Marketing & Sales

Service


Smith Supply Co.

Inbound Logistics

Operations

Outbound Logistics

Marketing & Sales

Service

Customer Pharmacy

Inbound Logistics

Operations

Outbound Logistics

Marketing & Sales

Service

The linking of these separate value chains creates a larger system known as a supply chain.



Inbound Logistics

Operations

Outbound Logistics

Marketing & Sales

Service


Smith Supply Co.

Inbound Logistics

Operations

Outbound Logistics

Marketing & Sales

Service

Customer Pharmacy

Inbound Logistics

Operations

Outbound Logistics

Marketing & Sales

Service

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.


• 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.


• 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.


• 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.


• There is also variation in the scope of a decision’s effect:– Occupational control decisions


• Relate to performance of specific tasks• Often of a day-to-day nature.• EXAMPLE: Deciding whether to order

inventory.


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


• Relate to utilizing resources to accomplish organizational objectives.

• EXAMPLE: Budgeting.


• There is also variation in the scope of a decision’s 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.


• 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



• 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.

THE AIS AND CORPORATE STRATEGY


• 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.






• A low-cost strategy involves offering a cheaper mousetrap than your competitors. The low cost is made possible by operating more efficiently.



• 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.


• 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.


• 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.


• 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.



• 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.



• 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.



• 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.


• Predictive data analysis (data warehousing/mining) adds to competitive advantage by forecasting future events based on historical trends.


SUMMARY

• What we’ve learned so far:– The meaning of system, data, and information.– 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.– What are the basic strategies and strategic positions

an organization can pursue.• How these interact with the AIS.

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Romney Ch01