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

2. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart2 of 43 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?

3. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart3 of 43 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

4. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart4 of 43 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.

5. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart5 of 43 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.

6. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart6 of 43 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

7. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart7 of 43 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.

8. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart8 of 43 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.

9. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart9 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

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

11. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart11 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.

12. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart12 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.

13. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart13 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.

14. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart14 of 43 SYSTEMS, DATA, AND INFORMATION Characteristics that make information useful: –Relevance –Reliability –Completeness It doesn’t leave out anything that’s important.

15. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart15 of 43 SYSTEMS, DATA, AND INFORMATION Characteristics that make information useful: –Relevance –Reliability –Completeness –Timeliness You get it in time to make your decision.

16. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart16 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.

17. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart17 of 43 SYSTEMS, DATA, AND INFORMATION Characteristics that make information useful: –Verifiability A consensus notion—the nature of the information is such that different people would tend to produce the same result.

18. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart18 of 43 SYSTEMS, DATA, AND INFORMATION Characteristics that make information useful: –Accessibility You can get to it when you need it and in a format you can use.

19. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart19 of 43 Information is provided to both: –External users –Internal Users SYSTEMS, DATA, AND INFORMATION

20. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart20 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. SYSTEMS, DATA, AND INFORMATION

21. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart21 of 43 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

22. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart22 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

23. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart23 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?

24. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart24 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?

25. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart25 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

26. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart26 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

27. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart27 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.

28. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart28 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.

29. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart29 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.

30. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart30 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.

31. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart31 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.

32. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart32 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.

33. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart33 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. AIS topics impact corporate strategy and culture. WHY STUDY ACCOUNTING INFORMATION SYSTEMS?

34. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart34 of 43 WHY STUDY ACCOUNTING INFORMATION SYSTEMS? AIS Occupational Culture Strategy Information Technology AIS design is affected by information technology, the organization’s strategy, and the organization’s culture.

35. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart35 of 43 WHY STUDY ACCOUNTING INFORMATION SYSTEMS? AIS Occupational Culture Strategy Information Technology Information technology affects the company’s choice of business strategy. To perform cost-benefit analyses on IT changes, you need to understand business strategy.

36. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart36 of 43 WHY STUDY ACCOUNTING INFORMATION SYSTEMS? AIS Occupational Culture Strategy Information Technology While culture affects the design of the AIS, it’s also true that the AIS affects culture by altering the dispersion and availability of information.

37. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart37 of 43 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

38. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart38 of 43 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

39. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart39 of 43 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

40. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart40 of 43 Primary activities include: –Inbound logistics ROLE OF THE AIS IN THE VALUE CHAIN 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.

41. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart41 of 43 Primary activities include: –Operations ROLE OF THE AIS IN THE VALUE CHAIN 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.

42. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart42 of 43 Primary activities include: –Inbound logistics –Operations –Outbound logistics ROLE OF THE AIS IN THE VALUE CHAIN Distributing products or services to customers. For the pharmaceutical company, this step involves packaging and shipping the goods to drug stores, doctors, and hospitals.

43. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart43 of 43 Primary activities include: –Marketing and sales ROLE OF THE AIS IN THE VALUE CHAIN 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.

44. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart44 of 43 Primary activities include: –Service ROLE OF THE AIS IN THE VALUE CHAIN 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.

45. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart45 of 43 Support activities include: –Firm infrastructure ROLE OF THE AIS IN THE VALUE CHAIN Accountants, lawyers, and administration. Includes the company’s accounting information system.

46. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart46 of 43 Support activities include: –Firm infrastructure –Human resources ROLE OF THE AIS IN THE VALUE CHAIN Involves recruiting and hiring new employees, training employees, paying employees, and handling employee benefits.

47. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart47 of 43 Support activities include: –Firm infrastructure –Human resources –Technology ROLE OF THE AIS IN THE VALUE CHAIN 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 create new drugs and modify existing ones.

48. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart48 of 43 Support activities include: –Purchasing ROLE OF THE AIS IN THE VALUE CHAIN 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.

49. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart49 of 43 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

50. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart50 of 43 Pharmaceuticals, Inc. Inbound Logistics Operations Outbound Logistics Marketing & Sales Service ROLE OF THE AIS IN THE VALUE CHAIN 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.

51. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart51 of 43 Pharmaceuticals, Inc. Inbound Logistics Operations Outbound Logistics Marketing & Sales Service ROLE OF THE AIS IN THE VALUE CHAIN 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.

52. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart52 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.

53. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart53 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.

54. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart54 of 43 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 Non-recurring and non-routine Require a great deal of subjective assessment EXAMPLE: Deciding whether to begin selling a new type of insurance policy

55. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart55 of 43 There is also variation in the scope of a decision’s effect: –Occupational 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

56. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart56 of 43 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 Relate to utilizing resources to accomplish organizational objectives EXAMPLE: Budgeting

57. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart57 of 43 There is also variation in the scope of a decision’s effect: –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

58. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart58 of 43 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 ROLE OF THE AIS IN THE VALUE CHAIN

59. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart59 of 43 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

60. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart60 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

61. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart61 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. THE AIS AND CORPORATE STRATEGY

62. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart62 of 43 A low-cost strategy involves offering a cheaper mousetrap than your competitors. The low cost is made possible by operating more efficiently. Sometimes a company can do both, but they normally have to choose. THE AIS AND CORPORATE STRATEGY

63. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart63 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.

64. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart64 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.

65. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart65 of 43 Porter also argues that companies must choose a strategic position among three choices: –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.

66. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart66 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

67. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart67 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

68. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart68 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

69. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart69 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

70. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart70 of 43 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. THE AIS AND CORPORATE STRATEGY