Chapter 1

Chapter 1: Accounting Information

Systems:
An Overview

1-1 Systems, Data, and Information

A system “is a set of two or more interrelated components that interact to

achieve a goal”. Systems are almost always composed of smaller
subsystems, each performing a specific function important to and
supportive of the larger system of which it is a part. For example, the
college of business is a system composed of various departments, each of
which is a subsystem. Yet college itself is a subsystem of the university.
Each subsystem is designed to achieve one or more organizational
goals. When the systems concept is used in system development, changes
in subsystems cannot be made without considering the effect on other
subsystems and the system as a whole. Goal conflict occurs when a
decision or action of a subsystem is inconsistent with another subsystem
or the system as a whole. Goal congruence is achieved when a subsystem
achieve its goals while contributing to the organization's overall goal.
Subsystems should maximize organizational goals, even if subsystem
goals are not maximized. The larger the organization and the more
complicated the system, the more difficult it is to achieve goal
congruence.
The systems concept also encourages integration, which is eliminating
duplicate recording, storage, reporting, and other processing activities in
an organization. For example, companies that used to have separate
programs to prepare customer statements, collect cash, and maintain
accounts receivable records now combine these functions into a single
application.

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Data “are facts that are collected, recorded, stored, and processed by
an information system”. Data usually represent observations or
measurements of business activities that are of importance to information
system users. Several kinds of data need to be collected in business, such
as:
● Facts about the activities that take place
● The resources affected by the activities
● The people who participate in the activity

For example, data need to be collected about a sales event (e.g., the
date of the sale, total amount), the resource being sold (e.g., the identity
of the goods or services, the quantity sold, unit price), and the people who
participated in the sale (e.g., the identity of the customer and the
salesperson).
Information “is data that have been organized and processed to
provide meaning to a user”. Users typically need information to make
decisions or to improve the decision-making process. As a general rule,
users can make better decisions as the quantity and quality of information
increase.
However, there are limits to the amount of information the human
mind can effectively absorb and process. Information overload1 occurs
when those limits are passed. Information overload is costly, because
decision-making quality declines while the costs of providing that
information increase. Consequently, information system designers must
consider how advances in information technology (IT) can help decision
makers more effectively.

1
Information overload may be defined as “too much information, and especially
too much trivial information, can overwhelm information users”.

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The value of information is the benefit produced by the information

minus the cost of producing it. The major benefits of information are a
reduction of uncertainty, improved decisions, and a better ability to plan
and schedule activities. The costs are the time and resources spent
collecting, processing, and storing data as well as distributing information
to decision makers. Information costs and benefits are difficult to
quantify and it is difficult to determine the value of information before it
has been produced and utilized. Nevertheless, the expected value of
information should be calculated as effectively as possible so information
is not produced whose costs exceed its benefits.
Table 1-1 on the next page presents seven characteristics that make
information useful and meaningful for decision making.
Information can be provided to both internal and external users. The
information supplied to external users is either mandatory information
required by a governmental entity (such as a report to the Internal
Revenue services [IRS] on taxable income and withholdings) or essential
information required to conduct business with external parties (such as
purchase orders and customer billings). Most internal information is
discretionary information, since choices must be made regarding what
information should be made available, to whom, and how frequently. The
primary consideration in producing mandatory and essential information
is to minimize costs while meeting minimum standards of reliability and
usefulness and meeting regulatory requirements. The primary
consideration in producing discretionary information is that its benefits
exceed its costs. Internal reporting is more difficult than external
reporting because most managerial decisions demand more detailed
information than does external reporting and there are more ways to
report information to internal users than to external users.

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Table 1-1 characteristics of useful information

RELEVANT INFORMATION IS RELEVANT IF IT REDUCES

UNCERTAINTY, IMPROVES DECISION MAKERS'
ABILITY TO MAKE PREDICTIONS, OR
CONFIRMS OR CORRECTS THEIR PRIOR
EXPECTATIONS.
Reliable Information is reliable if it is free from error or bias and
accurately represents the events or activities of the
organization.
Complete Information is complete if it does not omit important
aspects of the underlying events or activities that it
measures.
Timely Information is timely if it is provided in time for
decision makers to make decisions.
Understandable Information is understandable if it is presented in a
useful and intelligible format.
Verifiable Information is verifiable if two knowledgeable people
acting independently would each produce the same
information.
Accessible Information is accessible if it is available to users when
they need it and in a format they can use.

1-2 What is an AIS?

An accounting information system (AIS) “is a system that collects,
records, stores, and processes data to produce information for decision
makers”.
An AIS can be a very simple paper-and-pencil-based manual system, a
very complex system using the very latest in computers and information
technology, or somewhere between these two extremes. Regardless of the
approach taken, the process is the same. The AIS and the people who use
it must still collect, enter, process, store, and report data and information.

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The paper and pencil or the computer hardware and software are merely
the tools used to produce the information.
There are six components of an AIS:
1. The people who operate the system and perform various functions.
2. The procedures and instructions, both manual and automated, involved
in collecting, processing, and storing data about the organization's
activities.
3. The data about the organization and its business processes.
4. The software used to process the organization's data.
5. The information technology infrastructure, including computers,
peripheral devices, and network communications devices used to
collect, store, process, and transmit data and information.
6. The internal controls and security measures that safeguard the data
and the AIS.

1-3 The Role of AIS in the Value Chain

The objective of most organizations is to provide value to their
customers. This requires performing a number of deferent activities.
Figure 1-1 shows that those activities can be conceptualized as forming a
value chain.
An organization's value chain consists of five primary activities that
directly provide value to its customers:
1. Inbound logistics consists of receiving, storing, and distributing the
materials an organization uses to create the services and products it
sells. For example, receiving, handling, and storing steel, glass, and
rubber are some of inbound logistics activities of an automobile
manufacturer.

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2. Operations activities transform inputs into final products or activities.

For example, assembly line activities at an automobile manufacturer
convert raw materials into a finished car.
3. Outbound logistics activities distribute finished products or services to
customers. For example, shipping automobiles to car dealers is an
outbound logistics activity.
4. Marketing and sales activities help customers buy the organization's
products or services. Advertising is an example of a marketing and
sales activity.
5. Service activities provide post-sale support to customers. Examples
include repair and maintenance services.

Figure 1-1 The Value Chain

Supporting Activities

1. Firm infrastructure
2. Human resources
3. Technology
4. Purchasing

1. Inbound 2. Operations 3. Outbound 4. Marketing 5. Service

Logistics Logistics and Sales
Receiving Manufacturing Distribution Advertising Repair
and Storing Repackaging Shipping Selling Maintenance
Materials

Primary Activities

Support activities allow the five primary activities to be performed

efficiently and effectively. They are grouped into four categories:

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1. Firm infrastructure is the accounting, finance, legal, and general

administration activities that allow an organization to function. The
AIS is part of the firm infrastructure.
2. Human resources activities include recruiting, hiring, training, and
providing employee benefits and compensation.
3. Technology activities improve a product or service. Examples include
research and development, investment in new information
technology, Web site development, and product design.
4. Purchasing activities procure raw materials, supplies, machinery, and
buildings used to carry out the primary activities.

Primary and support activity systems have multiple activities. For

example, the sales and marketing system includes market research,
calling on customers, order processing, and credit approval activities.
Information technology can be used to redesign supply chain systems,
yielding tremendous benefits and large cost savings. For example,
Tennessee Valley Authority, a power generator, re-engineered its supply
chain and created an enterprise-wide system that provides up-to-the-
minute information, rather than the current once a day system that it
replaced. The new system replaced 20 smaller and often incompatible
systems and reduced head count by 89 people. The redesigned system is
expected to save $54 million in the first five years of existence.
The primary and support activity systems are subsystems of the value
chain system. In addition, an organization's value chain is itself a part of a
larger system called a supply chain. As shown in Figure 1-2,
organizations interact with suppliers, distributors, and customers.

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By paying attention to the

Raw Materials
interorganizational linkages in its supply
Supplier
chain, a company can improve its
performance by helping the other Manufacture

organizations in the supply chain to improve

their performance. In the opening case, for
Distributor
example, S&S2 can improve its
purchasing and inbound logistics activity
by implementing a just-in-time inventory
Retailer
management system. S&S's costs are
reduced because its purchasing and inbound
Consumer
logistics activities are performed more
efficiently and because less of its capital is
tied up in inventory.

Figure 1-2
The Supply Chain

1-3-1 How an AIS Can Add Value to an

Organization?
As a support activity, the AIS adds value by providing accurate and
timely information so the five primary value chain activities can be
performed more effectively and efficiently. Well-designed AIS can do this
by:
1. Improve the quality and reducing the costs of products or services. For
example, an AIS can monitor machinery so operators are notified
immediately when performance falls outside acceptable quality limits.

2
S&S is a hypothetical company sells consumer electronic devices, we use it as an example.

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This helps maintain product quality. It also reduces the amount of

wasted materials and the costs of having to rework anything.
2. Improving efficiency. A well-designed AIS can make operations more
efficient by providing more timely information. For example, a just-
in-time manufacturing approach requires constant, accurate, up-to-
date information about raw materials inventories and their locations.
3. Sharing knowledge. A well-designed AIS can make it easier to share
knowledge and expertise, perhaps thereby improving operations and
even providing a competitive advantage.
4. Improving the efficiency and effectiveness of its supply chain. For
example, allowing customers to directly access the company's
inventory and sales order entry systems can reduce the costs of sales
and marketing activities. Moreover, if such access reduce the
customers' costs and time of ordering, both sales and customer
retention rates may increase.
5. Improving the internal control structure. Security, control, and privacy
are important issues in today's world. An AIS with the proper internal
control structure can protect systems from problems such as fraud,
errors, equipment and software failures, and natural and political
disasters.
6. Improving decision making. An AIS can improve decision making by
providing accurate information in a timely manner.

1-4 The AIS and Corporate Strategy

There are many opportunities to invest in additional information
technology (IT) to improve decision making. Most organizations,
however, do not have unlimited resources to invest in improving their
information systems. Therefore, it is important to identify which potential
AIS improvements are likely to yield the greatest return. Making this

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decision wisely requires an understanding of the organization's overall

business strategy.

1-4-1 Strategies and Strategic Positions

Michael Porter, world renowned professor of business at Harvard, argues
that there are two basic business strategies that companies can follow:
1. A product differentiation strategy entails adding features or services not
provided by competitors to a product so you can charge customers a
premium price.
2. A low-cost strategy entails striving to be the most efficient producer of
a product or service.

Sometimes a company can succeed in both producing a better product

than its competitors and in doing so at costs below its industry average.
Usually, however, companies must choose between the two basic
strategies. If they concentrate on being the lowest-cost producer, they
have to forego some value-added features that might differentiate their
product. If they focus on product differentiation, they most likely will not
have the lowest costs in their industry. Thus, a business strategy involves
making choices.

End of chapter assignments

Assignment No.1—Choose the right answer:
1. Which of the following is not a characteristic that makes information
useful?
a. It is reliable. b. It is timely. c. It is inexpensive. d. It is relevant.

2. Which of the following is a primary activity in the value chain?

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a. Purchasing. b. Accounting. c. Post-sales service. d. human resource.

3. Top management continually emphasizes and supports investments

designed to improve the efficiency of the manufacturing process. Such
a focus most likely reflects the pursuit of which type of strategy?
a. Product differentiation. b. Low cost. c. Needs-based. d. Variety-based

4. Which of the following is not a means by which information improves

decision making?
a. Increasing information overload. b. Reducing uncertainty.
c. Providing feedback about the effectiveness of prior decisions.
d. Identifying situations requiring management action.

5. In the value chain concept, upgrading IT is considered what kind of

activity?
a. Primary activity. c. Service activity.
b. Support activity. d. Structured activity.

6. Which of the following is a function of an AIS?

a. Reducing the need to identify a strategy and strategic position.
b. Transforming data into useful information.
c. Allocating organizational resources.
d. Automating all decision making.

Assignment No.2—Match the description

listed in the right column with the information
characteristic listed in the left column in the
table on the next page:

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CHARACTERISTIC DESCRIPTION

1. Relevant a. The report was carefully

designed so that data contained in
the report became information to
the reader.
2. Reliable b. The manager was working one
weekend and needed to find some
information about production
requests for a certain customer.
He was able to find the report on
the company's network.
3. Complete c. The data in a report was checked
by two clerks working
independently.
4. Timely d. An accounts receivable aging
report that included all customer
accounts.
5. Understandable e. A report checked by 3 different
people for accuracy.
6. Verifiable f. An accounts receivable aging
report is used in credit granting
decisions.
7. Accessible g. An accounts receivable aging
report was received before the
credit manager had to make a
decision whether to extend credit
to a customer.

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