© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart1 of 43 C HAPTER 1 Accounting Information Systems: An Overview

© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart2 of 43 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

© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart3 of 43 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

© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart4 of 43 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.

© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart5 of 43 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.

© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart6 of 43 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.

© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart7 of 43 SYSTEMS, DATA, AND INFORMATION Characteristics that make information useful: –Relevance –Reliability –Completeness It doesn’t leave out anything that’s important.

© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart8 of 43 SYSTEMS, DATA, AND INFORMATION Characteristics that make information useful: –Relevance –Reliability –Completeness –Timeliness You get it in time to make your decision.

© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart9 of 43 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.

© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart10 of 43 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.

© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart11 of 43 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.

© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart12 of 43 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. 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

© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart13 of 43 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. SYSTEMS, DATA, AND INFORMATION

© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart14 of 43 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?

© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart15 of 43 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?

© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart16 of 43 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

© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart17 of 43 It’s fundamental to accounting. WHY STUDY ACCOUNTING INFORMATION SYSTEMS? 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

© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart18 of 43 It’s fundamental to accounting. The skills are critical to career success. WHY STUDY ACCOUNTING INFORMATION SYSTEMS? Auditors need to evaluate the accuracy and reliability of information produced by the AIS.

© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart19 of 43 It’s fundamental to accounting. The skills are critical to career success. WHY STUDY ACCOUNTING INFORMATION SYSTEMS? 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.

© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart20 of 43 It’s fundamental to accounting. The skills are critical to career success. WHY STUDY ACCOUNTING INFORMATION SYSTEMS? In private industry and not-for-profits, systems work is considered the most important activity performed by accountants.

© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart21 of 43 It’s fundamental to accounting. The skills are critical to career success. WHY STUDY ACCOUNTING INFORMATION SYSTEMS? In management consulting, the design, selection, and implementation of accounting systems is a rapid growth area.

© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart22 of 43 It’s fundamental to accounting. The skills are critical to career success. The AIS course complements other systems courses. WHY STUDY ACCOUNTING INFORMATION SYSTEMS? Other systems courses focus on design and implementation of information systems, databases, expert systems, and telecommunications. ***AIS courses focus on accountability and control.***

© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart23 of 43 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? Makes up about 25% of the Business Environment & Concepts section of the CPA exam.??????

© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart24 of 43 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. CITP and CISACITPCISA AIS topics impact corporate strategy and culture. WHY STUDY ACCOUNTING INFORMATION SYSTEMS?

© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart25 of 43 There is variation in the degree of structure used to make decisions: –Structured decisions ROLE OF THE AIS IN THE VALUE CHAIN 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.

© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart26 of 43 There is variation in the degree of structure used to make decisions: –Structured decisions –Semistructured decisions ROLE OF THE AIS IN THE VALUE CHAIN Incomplete rules Require subjective assessments EXAMPLE: Deciding whether to sell auto insurance to a customer with a tainted driving history.

© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart27 of 43 There is variation in the degree of structure used to make decisions: –Structured decisions –Semistructured decisions –Unstructured decisions ROLE OF THE AIS IN THE VALUE CHAIN Non-recurring and non-routine Require a great deal of subjective assessment EXAMPLE: Deciding whether to begin selling a new type of insurance policy – Geico renter’s insurance

© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart28 of 43 There is also variation in the scope of a decision’s effect: –Operational control decisions ROLE OF THE AIS IN THE VALUE CHAIN Relate to performance of specific tasks Often of a day-to-day nature EXAMPLE: Deciding whether to order inventory

© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart29 of 43 There is also variation in the scope of a decision’s effect: –Operational control decisions –Management control decisions ROLE OF THE AIS IN THE VALUE CHAIN Relate to utilizing resources to accomplish organizational objectives EXAMPLE: Budgeting

© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart30 of 43 There is also variation in the scope of a decision’s effect: –Operational control decisions –Management control decisions –Strategic planning decisions ROLE OF THE AIS IN THE VALUE CHAIN 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

© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart31 of 43 Michael Porter suggests that there are two basic business strategies companies can follow: –Product-differentiation strategy –Low-cost strategy THE AIS AND CORPORATE STRATEGY

© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart32 of 43 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. Examples?? THE AIS AND CORPORATE STRATEGY

© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart33 of 43 Michael Porter suggests that there are two basic business strategies companies can follow: –Product-differentiation strategy –Low-cost strategy THE AIS AND CORPORATE STRATEGY

© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart34 of 43 A low-cost strategy involves offering a cheaper mousetrap than your competitors. The low cost is made possible by operating more efficiently. Examples?? THE AIS AND CORPORATE STRATEGY

© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart35 of 43 Sometimes a company can do both, but they normally have to choose. THE AIS AND CORPORATE STRATEGY

© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart36 of 43 Porter also argues that companies must choose a strategic position among three choices: –Variety-based strategic position THE AIS AND CORPORATE STRATEGY 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 an accounting firm that specializes in forensic accounting

© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart37 of 43 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 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. The Back Store??

© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart38 of 43 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 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?? Perhaps hurricane insurance…

© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart39 of 43 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

© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart40 of 43 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

© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart41 of 43 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

© 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart42 of 43 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