Accounting Information Systems: An Overview

  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?

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 SYSTEMS, DATA, AND INFORMATION • Most systems are composed of smaller subsystems . . . • . . . And vice versa! SYSTEMS, DATA, AND INFORMATION • Every organization has goals. – The susbsystems 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. 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. 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 processed to provide meaning to a user. • Usually, more information and better information translates into better decisions. SYSTEMS, DATA, AND INFORMATION • 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. SYSTEMS, DATA, AND INFORMATION Benefits of information - Cost of producing information Value of information SYSTEMS, DATA, AND INFORMATION Benefits of information - Cost of producing information Value of information SYSTEMS, DATA, AND INFORMATION Benefits of information - Cost of producing information Value of information SYSTEMS, DATA, AND INFORMATION • Characteristics that make information useful: – Relevance SYSTEMS, DATA, AND INFORMATION • Characteristics that make information useful: – Relevance – Reliability SYSTEMS, DATA, AND INFORMATION • Characteristics that make information useful: – Relevance – Reliability – Completeness SYSTEMS, DATA, AND INFORMATION • Characteristics that make information useful: – Relevance – Reliability – Completeness – Timeliness SYSTEMS, DATA, AND INFORMATION • Characteristics that make information useful: – Relevance – Reliability – Completeness – Timeliness – Understandability SYSTEMS, DATA, AND INFORMATION • Characteristics that make information useful: – Relevance – Reliability – Completeness – Timeliness – Understandability – Verifiability SYSTEMS, DATA, AND INFORMATION • Characteristics that make information useful: – Relevance – Reliability – Completeness – Timeliness – Understandability – Verifiability – 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 information, 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 information 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 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 WHY STUDY ACCOUNTING INFORMATION SYSTEMS? • It’s fundamental to accounting. WHY STUDY ACCOUNTING INFORMATION SYSTEMS? • It’s fundamental to accounting. WHY STUDY ACCOUNTING INFORMATION SYSTEMS? • It’s fundamental to accounting. • The skills are critical to career success. WHY STUDY ACCOUNTING INFORMATION SYSTEMS? • It’s fundamental to accounting. • The skills are critical to career success. WHY STUDY ACCOUNTING INFORMATION SYSTEMS? • It’s fundamental to accounting. • The skills are critical to career success. WHY STUDY ACCOUNTING INFORMATION SYSTEMS? • It’s fundamental to accounting. • The skills are critical to career success. WHY STUDY ACCOUNTING INFORMATION SYSTEMS? • It’s fundamental to accounting. • The skills are critical to career success. • The AIS course complements other systems courses. 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. 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. WHY STUDY ACCOUNTING INFORMATION SYSTEMS? WHY STUDY ACCOUNTING INFORMATION SYSTEMS? WHY STUDY ACCOUNTING INFORMATION SYSTEMS? 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? • Let’s peek in on a conversation at Joe’s pharmacy . . . ROLE OF THE AIS IN THE VALUE CHAIN ROLE OF THE AIS IN THE VALUE CHAIN ROLE OF THE AIS IN THE VALUE CHAIN ROLE OF THE AIS IN THE VALUE CHAIN 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. • 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 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 ROLE OF THE AIS IN THE VALUE CHAIN • Primary activities include: – Inbound logistics – Operations ROLE OF THE AIS IN THE VALUE CHAIN • Primary activities include: – Inbound logistics – Operations – Outbound logistics ROLE OF THE AIS IN THE VALUE CHAIN • Primary activities include: – Inbound logistics – Operations – Outbound logistics – Marketing and sales ROLE OF THE AIS IN THE VALUE CHAIN • Primary activities include: – Inbound logistics – Operations – Outbound logistics – Marketing and sales – Service 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 ROLE OF THE AIS IN THE VALUE CHAIN • Support activities include: – Firm infrastructure – Human resources ROLE OF THE AIS IN THE VALUE CHAIN • Support activities include: – Firm infrastructure – Human resources – Technology ROLE OF THE AIS IN THE VALUE CHAIN • Support activities include: – Firm infrastructure – Human resources – Technology – Purchasing 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. ROLE OF THE AIS IN THE VALUE CHAIN Pharmaceuticals, Inc. Inbound Logistics Operations Outbound Logistics Marketing & Sales Service ROLE OF THE AIS IN THE VALUE CHAIN Pharmaceuticals, Inc. Inbound Logistics Operations Outbound Logistics Marketing & Sales Service ROLE OF THE AIS IN THE VALUE CHAIN Pharmaceuticals, Inc. Inbound Logistics Operations Outbound Logistics Marketing & Sales Service ROLE OF THE AIS IN THE VALUE CHAIN Pharmaceuticals, Inc. Inbound Logistics Operations Outbound Logistics Marketing & Sales Service ROLE OF THE AIS IN THE VALUE CHAIN • There is variation in the degree of structure used to make decisions: – Structured decisions ROLE OF THE AIS IN THE VALUE CHAIN • There is variation in the degree of structure used to make decisions: – Structured decisions – Semistructured decisions ROLE OF THE AIS IN THE VALUE CHAIN • There is variation in the degree of structure used to make decisions: – Structured decisions – Semistructured decisions – Structured decisions ROLE OF THE AIS IN THE VALUE CHAIN • There is also variation in the scope of a decision’s effect: – Occupational control decisions ROLE OF THE AIS IN THE VALUE CHAIN • There is also variation in the scope of a decision’s effect: – Occupational control decisions – Management control decisions ROLE OF THE AIS IN THE VALUE CHAIN • There is also variation in the scope of a decision’s effect: – Occupational control decisions – Management control decisions – Strategic planning decisions 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 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. THE AIS AND CORPORATE STRATEGY • Michael Porter suggests that there are two basic business strategies companies can follow: – Product-differentiation strategy – Low-cost 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 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. THE AIS AND CORPORATE STRATEGY • Michael Porter suggests that there are two basic business strategies companies can follow: – Product-differentiation strategy – Low-cost strategy 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. THE AIS AND CORPORATE STRATEGY • Sometimes a company can do both, but they normally have to choose. THE AIS AND CORPORATE STRATEGY • Porter also argues that companies must choose a strategic position among three choices: – Variety-based strategic position THE AIS AND CORPORATE STRATEGY • Porter also argues that companies must choose a strategic position among three choices: – Variety-based strategic position – Needs-based strategic position THE AIS AND CORPORATE STRATEGY • 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 THE AIS AND CORPORATE STRATEGY • 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. THE AIS AND CORPORATE STRATEGY • 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 AIS AND CORPORATE STRATEGY • 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 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 information – What an AIS is • Why it’s 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 strategic positions an organization can pursue • How these interact with the AIS