CHAPTER 1

ACCOUNTING INFORMATION SYSTEMS:

AN OVERVIEW
Instructors Manual
Learning Objectives:
1. Distinguish between data and information, discuss the
characteristics of useful information and explain how to determine
the value of information
2. Explain what an accounting information system (AIS) is and
describe the basic functions it performs.
3. Discuss why studying accounting information systems is important.
4. Explain the role an AIS plays in a companys value chain and
discuss how the AIS can add value to a business.
5. Discuss how an AIS can provide management with information for
decision making.
6. Compare and contrast the basic strategies and strategic positions
that a business can adopt.
Questions to be addressed in this chapter include:
[Also provided in power point slide #2]
1. What is the meaning of system, data, and information?
2. What is an accounting information system (AIS)?
3. Why is the AIS an important topic to study?
4. What is the role of the AIS in the value chain?
5. How does the AIS provide information for decision making?
6. What are the basic strategies and strategic positions an
organization can pursue?

OUTLINE

Learning Objective One

Distinguish between data and information,
discuss the characteristics of useful
information and explain how to determine the
value of information

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Systems, Data and Information

Systems:
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 subsystem is designed to achieve one or more
organizational goals.
When the Systems Concept is used in systems 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 s a whole.
Goal Congruence is achieved when a subsystem achieves its goals
while contributing to the organizations overall goal
The systems concept also encourages Integration, which is
eliminating duplicate recording, storage, reporting and
other processing activities in an organization.
Data:
Data are fact that are collected, recorded, stored and processed
by an information system
Several kinds of data need to be collected in businesses,
such as:

Facts about the activities that take place

The resources affected by the activities

The people who participate in the activity

Information:
Information is data that have been organized and processed to
provide meaning to a user.
There are limits to the amount of information the human mind
can effectively absorb and process.
Information Overload occurs when those limits are
passed.
However, when you get more information than you can
effectively assimilate, you suffer from information
overload.
Example: Final exams week!

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When youve reached the overload point, the quality of

decisions declines while the costs of producing the
information increases. [Refer to power point slide #9]
The value of information is the benefit produced by the
information minus the cost of producing it.
A good example of the value of information is provided on
page five for the 7-11 Stores in Japan. Each store uses
information for:

Keeps track of the 3,000 items sold in each store and

determines what products are moving, at what time of
the day and under what weather conditions.

Keeps track of customers (what and when they buy). If

their best customers are single men, for example, the
store makes sure it has the fresh rice dishes they
purchase on their lunch hour and at the end of the
workday.

Orders sandwiches and rice dishes from suppliers

automatically. Orders are placed and filled three
times a day so stores can always have fresh food.
Since food orders take as many as 12 hours to prepare,
7-Eleven allows its suppliers to access sales data in
their computers so they can forecast demand.

Coordinates deliveries with suppliers. This allows the

stores to reduce the number of deliveries from 34 to
12 a day, resulting in less clerical receiving time.

Prepares a color graphic display that indicates which

store areas contribute the most to sales and profits.

Table 1-1 on page 6 provides the seven characteristics that

make information useful and meaningful for decision making.
1. Relevant
2. Reliable
3. Complete
4. Timely
5. Understandable
6. Verifiable
7. Accessible

The information provided to external users is either

Mandatory Information required by a governmental entity or

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essential information required to conduct business with

external parties (such as a report to the IRS on taxable
income and withholdings)or
Essential Information required to conduct business with
external parties (such as purchased orders and customer
billings).
Most internal information is Discretionary Information.
Multiple Choice 1
There are several kinds of data that are needed to be
collected in business. Which of the following is not one of
those types of data?
a.
b.
c.
d.

Facts about the activities that take place

Facts about government regulations
The people who participate in the activity
None of the above

Multiple Choice 2
Which of the following are major benefits produced by
information?
a.
b.
c.
d.
e.

Improved decisions
Increase of uncertainty
A better ability to plan and schedule activities
A and B
None of the above

Learning Objective Two

Explain what an accounting information
system (AIS) is and describe the basic
functions it performs.

What Is An Accounting Information System?

An Accounting Information System (AIS) is a system that collects,
records, stores, and processes data to produce information for
decision makers.
This is illustrated in Figure 1-1 on Page 7.

Another definition that is not in the book: An accounting

information system is a unified structure within an entity, such

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as a business firm, that employees physical resources and other

components to transform economic data into accounting information,
with the purpose of satisfying the information needs of a variety
of users.
Six components of an Accounting Information System
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 organizations activities
3. The data about the organization and its business processes
4. The software used to process the organizations 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 in the AIS.
These six components enable an Accounting Information System to
fulfill three important business functions:
1. Collect and store data about organizational activities,
resources, and personnel
2. Transform data into information that is useful for making
decisions so management can plan, execute, control and
evaluate activities, resources and personnel
3. Provide adequate controls to safeguard the organizations
assets, including its data, to ensure that the assets and
data are available when needed and the data are accurate and
reliable.
Multiple Choice 3
The AIS process starts with
a.
b.
c.
d.

Management decisions
Data
Information
Software

Multiple Choice 4

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Which of the following statements is false?

a. One of the six components of an AIS includes the
people who operate they system and perform various
functions.
b. An AIS can be a very simple paper-and-pencil-based
manual system.
c. The tools used to produce information does not include
computer hardware.
d. None of the above are false.

Learning Objective Three

Discuss why studying accounting information
systems is important.

Why Study Accounting Information Systems?

The Financial Accounting Standards Board defined accounting as
being an information system.
The Accounting Education Change Commission recommended that
accounting curriculum should emphasize that accounting is an
information identification, development, measurement, and
communication process.
Three essential concepts:
1. The use of information in decision making
2. The nature, design, use and implementation of an
Accounting Information System (AIS)
3. Financial information reporting
Accounting Information Systems (AIS) is unlike other accounting
classes.

Other accounting classes involve

The accounting process
1) Recording the transaction in a journal
2) Posting the journal entries to the general ledger
accounts
3) Preparing financial statements
4) Provide useful information for management decisions
and
5) Yes number crunching

The AIS focuses on understanding how the accounting system

works

AIS Skills Are Important to Your Career Success

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If you are considering a career in accounting, you need to

understand 1) how a system is developed, 2) how it operates
and 3) how is can be properly controlled.
Auditors need to evaluate the accuracy and reliability of
information produced by the AIS.
Auditors must be able to evaluate and understand the
strengths and weaknesses of an AIS
The AICPA has recently created a new credential, the
Certified Information Technology Professional (CITP)
The following website provides more information
regarding benefits, qualifications and FAQs:
http://infotech.aicpa.org/Memberships/Overview+of+The+
Certified+Information+Technology+Professional+Credenti
al.htm
The AIS Course Complements Other Systems Courses
The AIS course differs from information systems courses in
its focus on accountability and control.

Owners have entrusted management with assets and

hold them accountable for their proper use.
Controls are also needed to ensure that the
information produced from that data is both
reliable and accurate.

AIS Topics Are Tested on the New CPA Exam

A new section, Business Environment & Concepts (BIC) was
added to the CPA exam in April 2004.
About 25% of the new section deals with information
technology implications in the business environment.
Note to Instructor: Consider including the following exert from the BIC
section of the CPA exam regarding what to study for concerning the AIS
areas.
The CPA candidate should be able to:

Define and/or understand the implications of data

structure, including the concepts of:
o Data validation
o Record, field, character, array
o Database management systems

Define basic IT concepts such as:

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o Batch processing
o Real-time processing
o Distributed processing
o Physical access controls
o Modification controls
Recognize basic security controls
Identify basic data validation or editing techniques

The Impact of the AIS on Corporate Strategy and Culture

Figure 1-2 on page 10 shows three factors that influence the
design of an AIS: 1) developments in information technology
(IT), 2) business strategy and 3) organizational culture.
The following reasons for studying accounting information systems are
not from our book:
1. As an accountant, you will be closely involved with AISs during your
entire career. Not only will you be a user of these AISs buy you may
possibly become a developer of such systems. Furthermore, as an
auditor, you will be expected to evaluate AISs.
2. Almost all business firms have computers as integral parts of their
information systems. As information has become more vial, the
management of data and the preparation of needed reports have become
more complex and varied functions. You need to acquire the knowledge
and skills that will enable you to apply computer-based AISs in
effectively achieving these functions. Otherwise, you are likely to
be much less productive in employing your accounting knowledge and
skills.
3. Modern-day information systems are also rapidly changing and
improving. They are incorporating new developments from fields like
the Internet and e-commerce, object technology, telecommunications,
and control. You should be aware of these developments and others
that are just emerging, since they will be increasingly common in
the future. With adequate knowledge and skills concerning computerbased information systems, you should be in a position to take
advantage of the opportunities they offer.
Multiple Choice 5
Which of the following statements is false?
a. The AIS course is not a number-crunching course.
b. Auditors need to evaluate and understand only the
weaknesses of an AIS.
c. The CPA Exam is a four section 14-hour exam.
d. One of the factors that influences the design of an AIS
is the organizational culture.

Multiple Choice 6

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A new section, Business Environment & Concepts, was added to the

CPA exam. What percent of the new section deals with information
technology implications in the business environment?
a.
b.
c.
d.

15%
20%
25%
30%

Learning Objective Four

Explain the role an AIS plays in a companys
value chain and discuss how the AIS can add
value to a business.
The Role of the AIS in the Value Chain [Figure 1-3 on Page 11]
The objective of most organizations is to provide value to their
customers.
Note to Instructor: Power point slides #41 through #44 provide an
illustration of the difficulty to measure the dollar amount of the value
added to a product or service.
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.
2. Operations activities transform inputs into final products
or services
3. Outbound logistics activities distribute finished products
or services to customers.
4. Marketing and sales activities help customers buy the
organizations products or services.
5. Service activities provide post-sale support to customers.
Four Categories of Support Activities
1. Firm infrastructure is the accounting, finance, legal and
general administration activities that allow an organization
to function.
2. Human resources activities include recruiting, hiring,
training and providing employee benefits and compensation
3. Technology activities improve a product or service
4. Purchasing activities procure raw materials, supplies,

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machinery and the buildings used to carry out the primary

activities
Supply Chain [Figure 1-4 on Page 11]
Raw Materials Supplier
Manufacturer
Distributor
Retailer
Consumer
How an AIS Can Add Value to an Organization
1. Improving the quality and reducing the costs of products or
services.
2. Improving efficiency. A well-designed AIS can make
operations more efficient by providing more timely
information.
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.
5. Improving the internal control structure
6. Improving decision making
Multiple Choice 7
There are five primary activities that directly provide value to
its customers. Which of these activities involves receiving of
materials used to create a service or product?
a.
b.
c.
d.

Outbound logistics
Human resources
Inbound logistics
Service activities

Multiple Choice 8
An AIS can add value to an organization. Which of the values could
involve just-in-time manufacturing?
a. Improving
chain
b. Improving
c. Improving
d. Improving

the efficiency and effectiveness of its supply

the internal control structure
decision making
efficiency

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Learning Objective Five

Discuss how an AIS can provide management
with information for decision making.

Providing Information for Decision Making

Information can improve decision making in several ways:

It identities situations requiring management action.

It provides a basis for choosing among alternative actions

by reducing uncertainty

Information about the results of pervious decisions provides

valuable feedback that can be used to improve future
decisions.

An AIS can improve decision making by providing accurate

information in a timely manner.

Decision Structure
Structured decisions are repetitive, routine, and understood
well enough that they can be delegated to lower-level
employees in the organization.
Semistructured decisions are characterized by incomplete
decision making rules and the need for subjective
assessments and judgments to supplement formal data
analysis.
Unstructured decisions are nonrecurring and nonroutine
Decision Scope
Operational control relates to the effective and efficient
performance of specific tasks.
Management control relates to the effective and efficient
use of resources for accomplishing organizational objectives
Strategic planning relates to establishing organizational
objectives and policies for accomplishing those objectives

Multiple Choice 9

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There are five steps in the decision making process which include:
a)
b)
c)
d)
e)

evaluate ways to solve the problem

implement the solution
identify the problem
collect and interpret information
select a solution methodology

What is the correct sequence/order of these five steps?

a.
b.
c.
d.

c),
c),
c),
c),

a),
d),
d),
e),

d),
e),
a),
a),

e)
a)
e)
d)

and
and
and
and

b)
b)
b)
b)

Multiple Choice 10
Which of the following would be considered as an unstructured
decisions?
a.
b.
c.
d.
e.

Decision about extending a customers credit limit

Selecting basic research projects to undertake
Establishing a market budget for a new product
A and C
All of the above

Learning Objective Six

Compare and contrast the basic strategies
and strategic positions that a business can
adopt.

The AIS and Corporate Strategy

Strategies and Strategic Positions
Two Basic Business Strategies
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
Three Basic Strategic Positions:
1. A variety-based strategic position involves producing
or providing a subset of the industrys products or
services
2. A needs-based strategic position involves trying to
serve most or all of the needs of a particular group

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of customers in a target market

3. An access-based strategic position involves serving a
subset of customers who differ from other customers in
terms of factors such as geographic location or size
These three basic strategic positions are not mutually
exclusive and often overlap.
Designing the organizations activities so they mutually
reinforce one another results in synergy. This is where
the entire system of organizational activities is greater
than the sum of each individual part.
Information Technology and Business Strategy
Figure 1-2 on page 10 shows how IT developments can affect
business strategy.
For example, the growth of the Internet has affected
the way many value chain activities are performed.
The Internet makes a companys products available
almost anywhere
Other technological advance include predictive
analysis which used data warehouses and complex
algorithms to forecast future events.
An organizations AIS plays an important role in
helping it adopt and maintain a strategic position.
Multiple Choice 11
Which of the following statements are true?
a. A company using the lowest-cost producer strategy can
have some value-added features.
b. Synergy is where the entire system of organizational
activities is equal to the sum of each individual part.
c. Predictive analysis provides an educated guess of what
one may expect to see in the near future.
d. AARP focusing on retirees is an example of a varietybased strategic position.
e. B and C

Multiple Choice 12

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If every company in a given industry to uses the Internet to adopt

a low-cost strategy, then the effect may be problematic. The types
of problems include:
a. Intense price competition among firms with price cuts
being passed on to the customer rather than the company.
b. Affect the relative desirability of following the three
strategic positions; variety-based strategic, needs-based
strategic position and access-based strategic position.
c. Cannot use the Internet to gain a sustainable long-term
competitive advantage vis--vis its competitors.
d. All of the above are types of problems.
ANSWERS to Multiple Choice Questions:
Multiple
Choice
Number
1
2
3
4
5
6

Multiple
Choice
Answer
B
D
B
C
B
C

Multiple
Choice
Number
7
8
9
10
11
12

Multiple
Choice
Answer
C
D
C
B
C
D

References Used:
1. Michael E. Porter and Victor E. Millar, How Information Gives
You Competitive Advantage Harvard Business Review, (JulyAugust 1985), pp. 149-160.
2. Michael E. Porter, What Is Strategy? Harvard Business Review
(November-December 1996), pp. 61-78.

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