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2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 1 of 43

C HAPTER 1

Accounting InformationSystems:

An Overview


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INTRODUCTION

Questions to be addressed in this chapterinclude: 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?


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SYSTEMS, DATA, AND INFORMATION

A system is:

A set of interrelated components

That interact To achieve a goal


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Most systems are composed of smaller

subsystems . . .

. . . And vice versa!


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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 (asubsystem) of a company might have to

forego its goal of staying within its budget inorder to meet the organizations goal ofdelivering product on time.


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Goal conflict occurs when the activity of asubsystem is not consistent with anothersubsystem or with the larger system.

Goal congruence occurs when thesubsystems goals are in line with theorganizations goals.

The larger and more complicated asystem, the more difficult it is to achievegoal congruence.


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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 eventsAgents who participate in the events


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Information is different from data.

Information is data that have been

organized and processed to providemeaning to a user.

Usually, more information and better

information translates into betterdecisions.


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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 informationincreases.


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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


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Costs may include time and resources spent: Collecting data

Processing data Storing data Distributing information to users


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Costs and benefits of information are oftendifficult to quantify, but you need to try whenyoure making decisions about whether to

provide information.


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Characteristics that make informationuseful:

RelevanceIt reduces uncertainty by helping you predictwhat will happen or confirm what already hashappened.


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RelevanceReliability

Its dependable, i.e., free from error or biasand faithfully portrays events and activities.


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Completeness

It doesnt leave out anything thats important.


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Completeness

Timeliness

You get it in time to make your decision.


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Completeness

Timeliness

UnderstandabilityIts presented in a manner you cancomprehend and use.


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Completeness

Timeliness

Understandability

Verifiability

A consensus notionthe nature of theinformation is such that different people

would tend to produce the same result.


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Characteristics that make informationuseful:Relevance

Reliability

Completeness

Timeliness

Understandability

Verifiability

Accessibility

You can get to it when you need it and in aformat you can use.


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Information is provided to both:

External users

Internal Users



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External users

Internal Users



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External users primarily use information

that is either:

MANDATORY INFORMATIONRequired bya governmental entity, such as Form 10-Ksrequired by the SEC; or

ESSENTIAL INFORMATIONRequired to

conduct business with external parties, suchas purchase orders.



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In providing mandatory or essential

information, the focus should be on:

Minimizing costs Meeting regulatory requirements

Meeting minimum standards of reliability andusefulness



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External users

Internal Users



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Internal users primarily use discretionary

information.

The primary focus in producing thisinformation is ensuring that benefitsexceed costs, i.e., the information has

positive value.



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An AIS is a system that collects, records,stores, and processes data to produceinformation 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?


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The functions of an AIS are to: Collect and store data about events,

resources, and agents.

Transform that data into information thatmanagement can use to make decisionsabout events, resources, and agents.

Provide adequate controls to ensure that the

entitys resources (including data) are: Available when needed

Accurate and reliable

WHAT IS AN AIS?


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Its fundamental to accounting.

WHY STUDY ACCOUNTINGINFORMATION SYSTEMS?

Accounting is an information-providingactivity, so accountants need to

understand:How the system that provides that

information is designed, implementedand used.

How financial information is reported

How information is used to makedecisions


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Other accounting courses focus on howthe information is provided and used.

An AIS course places greater emphasison:

How the data is collected andtransformed

How the availability, reliability, andaccuracy of the data is ensured

AIS courses are not number-crunchingcourses


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The skills are critical to career success.


Auditors need to evaluate the accuracyand reliability of information produced bythe AIS.


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Tax accountants must understand theclients AIS adequately to be confident thatit is providing complete and accurateinformation for tax planning andcompliance work.


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In private industry and not-for-profits,systems work is considered the mostimportant activity performed byaccountants.


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In management consulting, the design,selection, and implementation ofaccounting systems is a rapid growth area.


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The AIS course complements othersystems courses.


Other systems courses focus on design andimplementation of information systems,databases, expert systems, andtelecommunications.

AIS courses focus on accountability andcontrol.


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AIS topics are tested on the new CPAexam.


Makes up about 25% of the BusinessEnvironment & Concepts section of the CPAexam.


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AIS topics are tested on the new CPAexam.

AIS topics impact corporate strategyand culture.



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AIS

OccupationalCulture Strategy

InformationTechnology

AIS design isaffected byinformationtechnology, the

organizationsstrategy, and theorganizationsculture.


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AIS



Information technologyaffects the companyschoice of businessstrategy. To perform

cost-benefit analyses onIT changes, you need tounderstand businessstrategy.


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AIS



While culture affectsthe design of the AIS,its also true that theAIS affects culture byaltering thedispersion andavailability ofinformation.


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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 . . .

ROLE OF THE AIS IN THE VALUE CHAIN


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Well, Mr. PharmaceuticalSalesman, your proposal looksgood, but your prices are about

5% higher than your competitors.


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Thats true, but werecomfortable with thatbecause of the value-added that we bring to

this arrangement.


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What is that value-added,and how do you convert it

into dollars?


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Blahblahblahcustomer serviceblahblah--blah


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While adding value is a commonly usedbuzzword, in its genuine sense, it means makingthe value of the finished component greater thanthe 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



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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

Support activities





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Primary activities include:

Inbound logistics


Receiving, storing, and distributing thematerials that are inputs to theorganizations product or service.

For a pharmaceutical company, this activity

might involve handling incoming chemicalsand elements that will be used to make theirdrugs.


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Inbound logistics

Operations


Transforming those inputs into products orservices.

For the pharmaceutical company, this step

involves combining the raw chemicals andelements with the work of people and equipment toproduce the finished drug product that will be soldto customers.


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Inbound logistics

Operations

Outbound logistics


Distributing products or services to customers.

For the pharmaceutical company, this step involvespackaging and shipping the goods to drug stores,doctors, and hospitals.


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Inbound logistics

Operations

Outbound logistics

Marketing and sales


Helping customers tobuy the organizations

products or services.

A pharmacy rep mayvisit with drug stores,doctors, etc. to inform

them about theirproducts and takeorders.


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Inbound logistics

Operations

Outbound logistics

Marketing and sales

Service


Post-sale support provided tocustomers such as repair andmaintenance function.

A pharmaceutical firm willtypically not be repairing itsproduct (though the product maybe periodically reformulated).

The pharmaceutical company ismore likely to be providingadvisory services to pharmacists,etc.


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Primary activities

Support activities





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Support activities include:

Firm infrastructure


Accountants, lawyers, and administration.

Includes the companys accountinginformation system.


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Firm infrastructure

Human resources


Involves recruiting and hiring newemployees, training employees, payingemployees, and handling employeebenefits.


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Firm infrastructure

Human resources

Technology


Activities to improve the products or services(e.g., R&D, website development).

For the pharmaceutical company, these activitieswould include research and development tocreate new drugs and modify existing ones.


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Firm infrastructure

Human resources

Technology

Purchasing


Buying the resources (e.g.,materials, inventory, fixedassets) needed to carry out theentitys primary activities.

In the pharmaceutical company,the purchasing folks are tryingto get the best combination of

cost and quality in buyingchemicals, supplies, and otherassets the company needs torun its operations.


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Information technology can significantly

impact the efficiency and effectivenesswith which the preceding activities are

carried out.

An organizations value chain can be

connected with the value chains of its

customers, suppliers, and distributors.



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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

OperationsOutbound Logistics

Marketing & Sales

Service

For example, the inbound logistics ofPharmaceuticals, Inc., links to the outboundlogistics of its suppliers.


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Operations

Outbound Logistics

Marketing & Sales

Service


Smith Supply Co.

Inbound Logistics

Operations

Outbound Logistics

Marketing & Sales

Service

Customer Pharmacy

Inbound Logistics


Marketing & Sales

Service

And the outbound logistics ofPharmaceuticals, Inc., links to the inboundlogistics of its customers.


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Operations

Outbound Logistics

Marketing & Sales

Service


Smith Supply Co.

Inbound Logistics

Operations

Outbound Logistics

Marketing & Sales

Service

Customer Pharmacy

Inbound Logistics


Marketing & Sales

Service

The linking of these separate value chainscreates a larger system known as a supplychain.


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Operations

Outbound Logistics

Marketing & Sales

Service


Smith Supply Co.

Inbound Logistics

Operations

Outbound Logistics

Marketing & Sales

Service

Customer Pharmacy

Inbound Logistics


Marketing & Sales

Service

The linking of these separate value chainscreates a larger system known as a supplychain.

Informationtechnology can

facilitate synergisticlinkages that improvethe performance ofeach companys valuechain.


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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 anauto insurance policy for a customer with aclean driving history.


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Semistructured decisions


Incomplete rules

Require subjective assessments

EXAMPLE: Deciding whether to sell auto

insurance to a customer with a tainteddriving history.


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Semistructured decisions



Non-recurring and non-routine

Require a great deal of subjectiveassessment

EXAMPLE: Deciding whether to beginselling a new type of insurance policy


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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 orderinventory


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decisions effect:


Management control decisions


Relate to utilizing resources to accomplishorganizational objectives

EXAMPLE: Budgeting


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decisions effect:


Management control decisions

Strategic planning decisions


The what do we want to be when we growup types of questions

Involves establishing Organizational objectives

Policies to achieve those objectives

EXAMPLE: Deciding whether to diversify thecompany into other product lines


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In general, the higher a manager is in the

organization, the more likely he/she is tobe engaging in:

Less structured decisions

Broader scope (i.e., strategic planning)decisions



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Corporations have:

Unlimited opportunities to invest in technology

Limited resources to invest in technology

Consequently, they must identify theimprovements likely to yield the highest

return.

This decision requires an understanding ofthe entitys overall business strategy.

THE AIS AND CORPORATE STRATEGY


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Michael Porter suggests that there are two

basic business strategies companies canfollow:

Product-differentiation strategy

Low-cost strategy



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Low-cost strategy



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A product differentiation strategy involves

setting your product apart from those ofyour competitors, i.e., building a better

mousetrap by offering one thats faster,has enhanced features, etc.



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Low-cost strategy



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A low-cost strategy involves offering a

cheaper mousetrap than your competitors.The low cost is made possible by

operating more efficiently.



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Sometimes a company can do both, but

they normally have to choose.



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Porter also argues that companies must

choose a strategic position among threechoices:

Variety-based strategic position


Offer a subset of the industrysproducts or services.

EXAMPLE: An insurance companythat only offers life insurance asopposed to life, health, property-casualty, etc.


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Needs-based strategic position


Serve most or all of the needs of a particulargroup of customers in a target market.

EXAMPLE: The original Farm Bureau-basedinsurance companies provided a portfolio ofinsurance and financial services tailored to thespecific needs of farmers.


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Access-based strategic position


Serve a subset of customers who differ fromothers in terms of factors such as geographiclocation or size..

EXAMPLE: Satellite Internet services areintended primarily for customers in rural areaswho cannot get DSL or cable services.


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Access-based strategic position

These strategic positions are notmutually exclusive and can overlap.



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Choosing a strategic position is importantbecause it helps a company focus its efforts asopposed to trying to be everything to everybody.

EXAMPLE: A radio station that tries to play all typesof music will probably fail.

Its critical to design the organizations activitiesso they reinforce one another in achieving the

selected strategic position. The result issynergy, which is difficult for competitors toimitate.



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The growth of the Internet has profoundlyaffected the way value chain activities areperformed: Inbound and outbound logistics can be streamlined

for products that can be digitized, like books andmusic. 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 strategicpositions.



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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 bothfinancial and nonfinancial data.



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The authors believe:

Accounting and information systems shouldbe closely integrated.

The AIS should be the primary informationsystem to provide users with information theyneed to perform their jobs.



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SUMMARY

What weve learned so far: The meaning of system, data, and

information

What an AIS is Why its an important topic to stody

What its role is in the value chain

How it provides information for decision making

What are the basic strategies and strategicpositions an organization can pursue How these interact with the AIS

Core Concepts of


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Core Concepts ofACCOUNTING INFORMATION SYSTEMSMoscove, Simkin & Bagranoff

John Wiley & Sons, Inc.

Developed by:S. Bhattacharya, Ph.D.Florida Atlantic University

Ch t 1


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Chapter 1Accounting Information Systems and the Accountant

Introduction

What are Accounting InformationSystems?

Accounting in the Information Age

Careers in Accounting Information

Systems


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Chapter Quotation

The accounting industry has always been paper-driven. Now it is becoming technology driven.Maureen Link, 3G Technology Will Change the WayYou Work, Pennsylvania CPA Journal (Spring 2003),p. 19.

The American Institute of Certified PublicAccountants (AICPA) has projected that two of thetop technology issues facing the accountingprofession during the first several years of the 21stcentury are: Information security and controls within

information systems, andElectronic commerce


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The Information Age

In the information age, fewer workers aremaking products, and a large segment of

the employee population is involved inproducing, analyzing, and distributinginformation.

Knowledge workers comprise much of the

labor force. A major contributor to the information

age is the Internet.


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An Information System

A System is an entity consisting ofinteracting parts or components that areattempt to achieve one or more goals.

An Information system is a set ofinterrelated subsystems that work togetherto collect, process, store, transform, and

distribute information for planning, decisionmaking, and control.

Firms depend on information systems in

order to stay competitive.


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AIS: At the Intersection of Accounting andIS

Accounting

Information

Systems

Accounting Information

Systems


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Accounting Information Systems

An Accounting Information System(AIS) is the information subsystem

within an organization thataccumulates information from theentitys various subsystems andcommunicates it to the organizations

information processing subsystem. The AIS today should be an enterprise-

wide information system, focused on

business processes.


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An Accounting Information System

Inputs: Data/Information from

Internal/External sources

Processes: Sort, Organize,

Calculate

Outputs: Information for Internal/

External Decision Makers

Data

Repository/

Files,

Databases,

Etc.


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Data are raw facts about

events that have noorganization or meaning.

Information is data thathave been processed and is

meaningful and useful tousers.

Data versus Information


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MI S versus AI S

Historically, a Management Information

System provided financial and nonfinancial

information to internal users (management).

The Accounting Information System providedfinancial information to both external and

internal users.

Now, the two systems overlap and

provide much of the sameinformation focusing on

business processes.


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Accounting in the Information Age

Financial Accounting

Managerial Accounting

Auditing

Taxation

Wh D A i I f i S


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Why Do Accounting Information SystemsFail?

Hardware problems

Software problems

People problems Data problems

Processing procedures


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Whats New in AIS?

Countering terrorism

New accounting scandals

The Sarbanes-Oxley Act of 2002 The Jobs & Growth Tax Relief

Reconciliation Act of 2003

WI-FI Technology


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Examples of Recent Accounting Scandals

Enron 2001

Imclone 2001

Arthur Andersen 2001

Merrill Lynch 2002

Tyco 2002

Adelphia 2002

Global Crossing 2002

Parmalat 2003

NYSE 2003

WorldCom 2003

HealthSouth 2003

T f A ti I f ti


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

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Taxonomy of Accounting InformationSystems


Cost Accounting Budgeting Systems Study


An Accounting Information System


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

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The objective of financial accounting is toprovide relevant information to individuals andgroups outsidean organizations boundaries.

Users include investors, tax agencies, andcreditors.

Objectives achieved through preparation offinancial statements.

The Financial Accounting Information


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2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart102 of

The Financial Accounting InformationSystem

Inputs are transactions measured inmonetary units.

The audit trail enables information users

to follow the flow of data through thesystem.

Audit trail parallels the accounting cycle,which begins with a transaction and ends

with producing financial statements andclosing temporary accounts.

A good audit trail permits managers tofollow source document data from inputthrough processing to the datas location


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A Financial Accounting Audit Trail

TransactionProcessing

Output

Input

Financial Starementsand other external

reports

Trial Balance

Ledgers

Journals

Files of Source Documents

Source Documents

Criticisms of the Financial Accounting


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Criticisms of the Financial AccountingInformation System

Lack of timeliness and usefulness

Too much aggregation of information

Segment reporting concerns reporting ofdisaggregated information.

Information overload


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Objective of Managerial Accounting is to

provide relevant information to a companys

managers, who are internal parties (or users). Three components of managerial accounting

are:

Cost Accounting

Budgeting

Systems study


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Features of Managerial Accounting

Providing accounting information forinternal parties, rather than external.

Information is mostly forward-looking.

Not regulated by GAAP and not mandatoryto prepare.

Reports include both non-monetary andfinancial data.

Influenced by many business and non-business disciplines.

Information is flexible and frequentlyinvolves non-routine reporting.


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Cost Accounting

Cost accounting assists managers in

functions related to an organizations

acquisition, processing, distribution and

selling activities.

Activity-based costing systems assign

overhead to products based on cost drivers.

Responsibility accounting systems helpmanagers trace unfavorable performance

to the department or individual that caused

the inefficiencies.


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Performance measures are beingused for long-term profitability and to

encourage certain employeebehavior.

The balance scorecard approachuses performance measurements in

four categories to evaluate andpromote certain activities andbehaviors.

Cost Accounting


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Budgeting

A budget is a financial projection forthe future and thus is a valuablemanagerial planningaid.

Budgets are used for managerialcontrol. Actual results are comparedto budgeted results.

The budgetary function in the AISaffects all the subsystems within anorganization.


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Systems Study

Because of managerial accountantsability to understand internal financial

systems, organizations may hire them toperform system studies.

Many systems studies use the teamapproach.

The team may include marketing specialists,computer experts, production managers,engineers and industrial psychologists.


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Steps in Systems Study

PlanningDevelop strategic plans

Analysis

Review current system

DesignDesign new system

Implementation and Follow-upPut the new system in place and continue to

monitor it


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Auditing

Auditing has become a matureindustry.

Accountants are focusing on additionalassurance services in arenas otherthan financial reporting.

CPA WebTrust is a service that

provides assurance that a companyengaged in electronic commerce canprovide the goods and services

purchased as promised.

Assurance Services identified by the AICPA Special


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Assurance Services identified by the AICPA SpecialCommittee

Risk Assessment

Business Performance Measurement

Information Systems Reliability

Electronic Commerce

Health Care Performance

Measurement Eldercare Plus

T i


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Taxation

Information technology enables the

automation of income tax returns.

Electronic tax libraries and on-line taxservices make it easier for accountants to

perform tax research.



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Careers in Accounting InformationSystems

Systems consultants provide helpwith issues concerning information

systems.Designing information systems,

selecting hardware and software, orreengineering business processes.

Value-added resellers (VARs) sell acertain software program andprovide consulting services to

com anies.



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Careers in Accounting InformationSystems

Information systems auditors concernthemselves with analyzing risks associated

with computerized information systems.Professional hackers can show organizations

ways that their computer system could bepenetrated.

Information systems auditors can belicensed as Certified Information SystemsAuditors (CISA).

Information Systems Audit and ControlAssociation (ISACA) certifies a CISA.


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Copyright

Copyright 2005 John Wiley & Sons, Inc. All rights reserved.

Reproduction or translation of this work beyond that permitted in

Section 117 of the 1976 United States Copyright Act without theexpress written permission of the copyright owner is unlawful.

Request for further information should be addressed to the

Permissions Department, John Wiley & Sons, Inc. The purchaser may

make backup copies for his/her own use only and not for distribution

or resale. The Publisher assumes no responsibility for errors,omissions, or damages, caused by the use of these programs or from

the use of the information contained herein.

Ch t 1


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