ACCT 402 SEU Objectives of Information Systems Audit Questions

College of Administration and Finance Sciences
Assignment (2)
Deadline: November 11th 2023 @ 23:59
Course Name: Introduction to AIS
Student’s Name:
Course Code: ACCT402
Student’s ID Number:
Semester: 1st
CRN: 13950
Academic Year: 1445 H
For Instructor’s Use only
Instructor’s Name: Dr. Youssef RIAHI
Students’ Grade:
/15
Level of Marks: High/Middle/Low
Instructions – PLEASE READ THEM CAREFULLY
• The Assignment must be submitted on Blackboard (WORD format only) via
allocated folder.
• Assignments submitted through email will not be accepted.
• Students are advised to make their work clear and well presented, marks may be
reduced for poor presentation. This includes filling your information on the cover
page.
• Students must mention question number clearly in their answer.
• Late submission will NOT be accepted.
• Avoid plagiarism, the work should be in your own words, copying from students or
other resources without proper referencing will result in ZERO marks. No
exceptions.
• All answers must be typed using Times New Roman (size 12, double-spaced) font.
No pictures containing text will be accepted and will be considered plagiarism.
• Submissions without this cover page will NOT be accepted.
College of Administration and Finance Sciences
Assignment Question(s):
(Marks 15)
IMPORTANT NOTE: Answer in your own words, DO NOT COPY from slides,
fellow student, or internet source without proper citation.
Assignment Question(s):
Q1
What does Internal Control means? Then explain its two main frameworks.
(5 marks)
Q2
Explain the reasons of hacking? Discuss why has hacking increased in recent years? Give
your opinion on hacking.
(5 marks)
Q3
Explain the objectives of Information Systems Audit?
(2.5 Marks)
Q4
What are the activities of sales order entry? Give two of the threat that may face and what
could be the possible controls for those threats?
Good Luck
(2.5 Marks)
Accounting
Information
Systems
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Accounting
Information
Systems
Thirteenth Edition
Marshall B. Romney
Brigham Young University
Paul John Steinbart
Arizona State University
Boston Columbus Indianapolis New York San Francisco Upper Saddle River
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Library of Congress Cataloging-in-Publication Data
Romney, Marshall B.
Accounting information systems / Marshall B. Romney, Brigham Young University, Paul J. Steinbart,
Arizona State University. — Thirteenth Edition.
   pages cm
Includes index.
ISBN 978-0-13-342853-7 (alk. paper)
1. Accounting—Data processing. 2. Information storage and retrieval systems—Accounting. I. Steinbart,
Paul John. II. Title.
HF5679.R6296 2014
657.0285—dc23
2013044830
10 9 8 7 6 5 4 3 2 1
ISBN 10:
0-13-342853-2
ISBN 13: 978-0-13-342853-7
Brief Contents
Preface  xix
PART I
Conceptual Foundations of Accounting Information
Systems  1
Chapter 1 Accounting Information Systems: An Overview   2
Chapter 2 Overview of Transaction Processing and Enterprise
­Resource Planning Systems   24
Chapter 3 Systems Documentation Techniques   48
Chapter 4 Relational Databases  82
PART II Control and Audit of Accounting Information
Systems  121
Chapter 5 Computer Fraud  122
Chapter 6 Computer Fraud and Abuse Techniques   150
Chapter 7 Control and Accounting Information Systems   188
Chapter 8 Controls for Information Security   228
Chapter 9 Confidentiality and Privacy Controls   260
Chapter 10 Processing Integrity and Availability Controls   286
Chapter 11 Auditing Computer-Based Information Systems   310
PART III Accounting Information Systems Applications   337
Chapter 12 The Revenue Cycle: Sales to Cash Collections   338
Chapter 13 The Expenditure Cycle: Purchasing to Cash
Disbursements  378
Chapter 14 The Production Cycle   414
Chapter 15 The Human Resources Management and Payroll ­Cycle   442
Chapter 16 General Ledger and Reporting System   470
v
vi
Brief Contents
PART IV The REA Data Model   501
Chapter 17 Database Design Using the REA Data Model   502
Chapter 18 Implementing an REA Model in a Relational Database   534
Chapter 19 Special Topics in REA Modeling   556
PART V The Systems Development Process   587
Chapter 20 Introduction to Systems Development and Systems
Analysis  588
Chapter 21 AIS Development Strategies   622
Chapter 22 Systems Design, Implementation, and Operation   650
Glossary  676
Index  697
Contents
Preface  xix
Part I
Conceptual Foundations of Accounting Information
Systems  1
Chapter 1 Accounting Information Systems: An Overview   2
Introduction  3
Information Needs and Business Processes   5
Information Needs  5
Business Processes  6
Accounting Information Systems   10
How an AIS Can Add Value to an Organization   11
The AIS and Corporate Strategy   12
The Role of the AIS in the Value Chain   14
Summary and Case Conclusion   15 ■ Key Terms  16
AIS in Action: Chapter Quiz  16 ■ Discussion Questions  17 ■ Problems  18
Case 1-1 Ackoff’s Management Misinformation Systems   21
AIS in Action Solutions: Quiz Key  22
Chapter 2 Overview of Transaction Processing and Enterprise
­Resource Planning Systems   24
Introduction  25
Transaction Processing: The Data Processing Cycle   26
Data Input  26
Data Storage  27
Data Processing  33
Information Output  33
Enterprise Resource Planning (ERP) Systems   35
Summary and Case Conclusion   38 ■ Key Terms  38
AIS in Action: Chapter Quiz  38 ■ Discussion Questions  39 ■ Problems  40
Case 2-1 Bar Harbor Blueberry Farm   44
AIS in Action Solutions: Quiz Key  45
Chapter 3 Systems Documentation Techniques   48
Introduction  49
Data Flow Diagrams   50
Subdividing the DFD   52
vii
viii
Contents
Flowcharts  56
Types of Flowcharts   57
Program Flowcharts  60
Business Process Diagrams   60
Summary and Case Conclusion   64 ■ Key Terms  64
AIS in Action: Chapter Quiz  64 ■ Comprehensive Problem  65 ■
Discussion Questions  66 ■ Problems  66
Case 3-1 Dub 5  73
AIS in Action Solutions: Quiz Key  74 ■ Comprehensive Problem Solution   76
Chapter 4 Relational Databases  82
Introduction  82
Files Versus Databases  83
Using Data Warehouses for Business Intelligence   84
The Advantages of Database Systems   85
The Importance of Good Data   85
Database Systems  86
Logical and Physical Views of Data   86
Schemas  86
The Data Dictionary   88
DBMS Languages  88
Relational Databases  88
Types of Attributes  88
Designing a Relational Database for S&S, Inc.   90
Basic Requirements of a Relational Database   92
Two Approaches to Database Design   93
Creating Relational Database Queries   93
Query 1  95
Query 2  97
Query 3  98
Query 4  98
Query 5  100
Database Systems and the Future of Accounting   100
Summary and Case Conclusion   101 ■ Key Terms  102
AIS in Action: Chapter Quiz  102 ■ Comprehensive Problem  103 ■
Discussion Questions  104 ■ Problems  104
Case 4-1 Research Project  110
AIS in Action Solutions: Quiz Key  110 ■ Comprehensive Problem Solution   112 ■
Appendix: Data Normalization   114 ■ Summary  117 ■ Second Normalization Example   117
Part II Control and Audit of Accounting Information
Systems  121
Chapter 5 Computer Fraud  122
Introduction  123
AIS Threats  124
Introduction to Fraud   126
Misappropriation of Assets  127
Fraudulent Financial Reporting   128
SAS No. 99: The Auditor’s Responsibility to Detect Fraud   128
Who Perpetrates Fraud and Why   129
The Fraud Triangle  129
Contents
Computer Fraud  134
The Rise in Computer Fraud   134
Computer Fraud Classifications   136
Preventing and Detecting Fraud and Abuse   138
Summary and Case Conclusion   139 ■ Key Terms  140
AIS in Action: Chapter Quiz  140 ■ Discussion Questions  141 ■ Problems  142
Case 5-1 David L. Miller: Portrait of a White-Collar Criminal   144
Case 5-2 Heirloom Photo Plans   145
AIS in Action Solutions: Quiz Key  147
Chapter 6 Computer Fraud and Abuse Techniques   150
Introduction  150
Computer Attacks and Abuse   151
Social Engineering  159
Malware  164
Summary and Case Conclusion   173 ■ Key Terms  174
AIS in Action: Chapter Quiz  175 ■ Discussion Questions  176 ■ Problems  176
Case 6-1 Shadowcrew  184
AIS in Action Solutions: Quiz Key  185
Chapter 7 Control and Accounting Information Systems   188
Introduction  189
Why Threats to Accounting Information Systems are Increasing   189
Overview of Control Concepts   190
The Foreign Corrupt Practices and Sarbanes–Oxley Acts   191
Control Frameworks  192
Cobit Framework  192
COSO’s Internal Control Framework   194
COSO’s Enterprise Risk Management Framework   194
The Enterprise Risk Management Framework Versus the Internal
Control Framework  196
The Internal Environment   196
Management’s Philosophy, Operating Style, and Risk Appetite   197
Commitment to Integrity, Ethical Values, and Competence   197
Internal Control Oversight by the Board of Directors   198
Organizational Structure  198
Methods of Assigning Authority and Responsibility   198
Human Resources Standards that Attract, Develop, and Retain
Competent Individuals  198
External Influences  200
Objective Setting  200
Event Identification  201
Risk Assessment and Risk Response   201
Estimate Likelihood and Impact   202
Identify Controls  203
Estimate Costs and Benefits   203
Determine Cost/Benefit Effectiveness   203
Implement Control or Accept, Share, or Avoid the Risk   203
Control Activities  204
Proper Authorization of Transactions and Activities   204
Segregation of Duties   205
Project Development and Acquisition Controls   207
Change Management Controls   208
ix
x
Contents
Design and Use of Documents and Records   208
Safeguard Assets, Records, and Data   208
Independent Checks on Performance   209
Information and Communication   210
Monitoring  210
Perform Internal Control Evaluations   210
Implement Effective Supervision   210
Use Responsibility Accounting Systems   210
Monitor System Activities  211
Track Purchased Software and Mobile Devices   211
Conduct Periodic Audits  211
Employ a Computer Security Officer and a Chief Compliance Officer   212
Engage Forensic Specialists   212
Install Fraud Detection Software   212
Implement a Fraud Hotline   213
Summary and Case Conclusion   213 ■ Key Terms  214
AIS in Action: Chapter Quiz  214 ■ Discussion Questions  216 ■ Problems  216
Case 7-1 The Greater Providence Deposit & Trust Embezzlement   224
AIS in Action Solutions: Quiz Key  225
Chapter 8 Controls for Information Security   228
Introduction  228
Two Fundamental Information Security Concepts   230
Security is a Management Issue, Not Just a Technology Issue   230
Defense-in-Depth and the Time-Based Model of Information Security   231
Understanding Targeted Attacks   232
Preventive Controls  233
People: Creation of a “Security-Conscious” Culture   233
People: Training  234
Process: User Access Controls   235
It Solutions: Antimalware Controls   238
It Solutions: Network Access Controls   238
It Solutions: Device and Software Hardening Controls   243
It Solutions: Encryption   244
Physical Security: Access Controls   245
Change Controls and Change Management   246
Detective Controls  247
Log Analysis  247
Intrusion Detection Systems   248
Penetration Testing  248
Continuous Monitoring  248
Corrective Controls  248
Computer Incident Response Team (CIRT)   249
Chief Information Security Officer (CISO)   249
Patch Management  250
Security Implications of Virtualization and the Cloud   250
Summary and Case Conclusion   251 ■ Key Terms  252
AIS in Action: Chapter Quiz  252 ■ Discussion Questions  253 ■ Problems  254
Case 8-1 Assessing Change Control and Change Management   257
Case 8-2 Role-Play: Designing an Effective Information Security Program   257
AIS in Action Solutions: Quiz Key  258
Contents
Chapter 9 Confidentiality and Privacy Controls   260
Introduction  260
Preserving Confidentiality  261
Identify and Classify Information to be Protected   261
Protecting Confidentiality With Encryption   262
Controlling Access to Sensitive Information   262
Training  264
Privacy  264
Privacy Controls  264
Privacy Concerns  265
Privacy Regulations and Generally Accepted Privacy Principles   267
Encryption  268
Factors that Influence Encryption Strength   269
Types of Encryption Systems   270
Hashing  272
Digital Signatures  272
Digital Certificates and Public Key Infrastructure   274
Virtual Private Networks (VPNS)   275
Summary and Case Conclusion   276 ■ Key Terms  276
AIS in Action: Chapter Quiz  277 ■ Discussion Questions  278 ■ Problems  278
Case 9-1 Protecting Privacy of Tax Returns   282
Case 9-2 Generally Accepted Privacy Principles   282
AIS in Action Solutions: Quiz Key  283
Chapter 10 Processing Integrity and Availability Controls   286
Introduction  286
Processing Integrity  286
Input Controls  287
Processing Controls  289
Output Controls  290
Illustrative Example: Credit Sales Processing   291
Processing Integrity Controls in Spreadsheets   292
Availability  293
Minimizing Risk of System Downtime   293
Recovery and Resumption of Normal Operations   294
Summary and Case Conclusion   298 ■ Key Terms  299
AIS in Action: Chapter Quiz  299 ■ Discussion Questions  300 ■ Problems  301
Case 10-1 Ensuring Systems Availability   306
Case 10-2 Ensuring Process Integrity in Spreadsheets   307
AIS in Action Solutions: Quiz Key  308
Chapter 11 Auditing Computer-Based Information Systems   310
Introduction  311
The Nature of Auditing   312
Overview of the Audit Process   312
The Risk-Based Audit Approach   314
Information Systems Audits   315
Objective 1: Overall Security   315
Objective 2: Program Development and Acquisition   317
Objective 3: Program Modification   318
Objective 4: Computer Processing   319
Objective 5: Source Data   322
Objective 6: Data Files   323
xi
xii
Contents
Audit Software  324
Operational Audits of an AIS   326
Summary and Case Conclusion   326 ■ Key Terms  327
AIS in Action: Chapter Quiz  327 ■ Discussion Questions  328 ■ Problems  329
Case 11-1 Preston Manufacturing   333
AIS in Action Solutions: Quiz Key  333
Part III Accounting Information Systems Applications   337
Chapter 12 The Revenue Cycle: Sales to Cash Collections   338
Introduction  340
Revenue Cycle Information System   341
Process  341
Threats and Controls   342
Sales Order Entry   344
Taking Customer Orders   345
Credit Approval  347
Checking Inventory Availability  349
Responding to Customer Inquiries   351
Shipping  352
Pick and Pack the Order   352
Ship the Order   354
Billing  357
Invoicing  357
Maintain Accounts Receivable  359
Cash Collections  362
Process  362
Threats and Controls   363
Summary and Case Conclusion   365 ■ Key Terms  366
AIS in Action: Chapter Quiz  366 ■ Discussion Questions  367 ■ Problems  367
Case 12-1 Research Project: How CPA Firms Are Leveraging New Developments in IT   375
AIS in Action Solutions: Quiz Key  375
Chapter 13 The Expenditure Cycle: Purchasing to Cash
­Disbursements  378
Introduction  379
Expenditure Cycle Information System   381
Process  381
Threats and Controls   383
Ordering Materials, Supplies, and Services   386
Identifying What, When, and How Much to Purchase   386
Choosing Suppliers  389
Receiving  393
Process  393
Threats and Controls   394
Approving Supplier Invoices   395
Process  395
Threats and Controls   397
Cash Disbursements  399
Process  399
Threats and Controls   399
Contents
Summary and Case Conclusion   401 ■ Key Terms  402
AIS in Action: Chapter Quiz  402 ■ Discussion Questions  403 ■ Problems  404
Case 13-1 Research Project: Impact of Information Technology on Expenditure Cycle Activities,
Threats, and Controls   411
AIS in Action Solutions: Quiz Key  412
Chapter 14 The Production Cycle   414
Introduction  415
Production Cycle Information System   417
Process  418
Threats and Controls   418
Product Design  419
Process  419
Threats and Controls   421
Planning and Scheduling   421
Production Planning Methods   421
Key Documents and Forms   421
Threats and Controls   424
Production Operations  426
Threats and Controls   426
Cost Accounting  428
Process  428
Threats and Controls   429
Summary and Case Conclusion   434 ■ Key Terms  435
AIS in Action: Chapter Quiz  435 ■ Discussion Questions  436 ■ Problems  436
Case 14-1 The Accountant and CIM   439
AIS in Action Solutions: Quiz Key  440
Chapter 15 The Human Resources Management
and Payroll ­Cycle   442
Introduction  443
HRM/Payroll Cycle Information System   444
Overview of HRM Process and Information Needs   444
Threats and Controls   447
Payroll Cycle Activities   449
Update Payroll Master Database   449
Validate Time and Attendance Data   451
Prepare Payroll  453
Disburse Payroll  457
Calculate and Disburse Employer-Paid Benefits Taxes and Voluntary
Employee Deductions  458
Outsourcing Options: Payroll Service Bureaus and Professional
Employer Organizations  459
Summary and Case Conclusion   460 ■ Key Terms  461
AIS in Action: Chapter Quiz  461 ■ Discussion Questions  462 ■ Problems  462
Case 15-1 Research Report: HRM/Payroll Opportunities for CPAs   467
AIS in Action Solutions: Quiz Key  468
Chapter 16 General Ledger and Reporting System   470
Introduction  471
General Ledger and Reporting System   472
Process  472
Threats and Controls   473
xiii
xiv
Contents
Update General Ledger   475
Process  475
Threats and Controls   475
Post Adjusting Entries   478
Process  479
Threats and Controls   479
Prepare Financial Statements   480
Process  480
Threats and Controls   484
Produce Managerial Reports   486
Process  486
Threats and Controls   486
Summary and Case Conclusion   490 ■ Key Terms  491
AIS in Action: Chapter Quiz  491 ■ Discussion Questions  492 ■ Problems  493
Case 16-1 Exploring XBRL Tools   497
Case 16-2 Evaluating a General Ledger Package   497
Case 16-3 Visualization tools for Big Data   497
AIS in Action Solutions: Quiz Key  498
Part IV The REA Data Model   501
Chapter 17 Database Design Using the REA Data Model   502
Introduction  502
Database Design Process   503
Entity-Relationship Diagrams  504
The REA Data Model   505
Three Basic Types of Entities   506
Structuring Relationships: The Basic REA Template   506
Developing an REA Diagram   509
Step 1: Identify Relevant Events   509
Step 2: Identify Resources and Agents   511
Step 3: Determine Cardinalities of Relationships   512
Summary and Case Conclusion   518 ■ Key Terms  519
AIS in Action: Chapter Quiz  519 ■ Comprehensive Problem  522 ■
Discussion Questions  522 ■ Problems  523
Case 17-1 REA Data Modeling Extension   526
AIS in Action Solutions: Quiz Key  526 ■ Comprehensive Problem Solution   530
Chapter 18 Implementing an REA Model in a Relational Database   534
Introduction  535
Integrating REA Diagrams Across Cycles   535
Rules for Combining REA Diagrams   538
Merging Redundant Resource Entities   538
Merging Redundant Event Entities   539
Validating the Accuracy of Integrated REA Diagrams   540
Implementing an REA Diagram in a Relational Database   540
Step 1: Create Tables for Each Distinct Entity and M:N Relationship   540
Step 2: Assign Attributes to Each Table   542
Step 3: Use Foreign Keys to Implement 1:1 and 1:N Relationships   543
Completeness Check  544
Using REA Diagrams to Retrieve Information from a Database   545
Creating Journals and Ledgers   545
Contents
Generating Financial Statements   546
Creating Managerial Reports   547
Summary and Case Conclusion   547 ■ Key Term  548
AIS in Action: Chapter Quiz  548 ■ Comprehensive Problem  549 ■
Discussion ­Questions  549 ■ Problems  550
Case 18-1 Practical Database Design   551
AIS in Action Solutions: Quiz Key  551 ■ Comprehensive Problem Solution   553
Chapter 19 Special Topics in REA Modeling   556
Introduction  557
Additional Revenue and Expenditure Cycle Modeling Topics   557
Additional Revenue Cycle Events and Attribute Placement   557
Additional Expenditure Cycle Events and Attribute Placement   559
Sale of Services   562
Acquisition of Intangible Services   562
Digital Assets  563
Rental Transactions  563
Additional REA Features   565
Employee Roles  565
M:N Agent–Event Relationships  565
Locations  565
Relationships Between Resources and Agents   565
Production Cycle REA Model   566
Additional Entities—Intellectual Property   566
Production Cycle Events   568
New REA Feature   568
Combined HR/Payroll Data Model   569
HR Cycle Entities   569
Tracking Employees’ Time  570
Financing Activities Data Model   571
Summary and Case Conclusion   572
AIS in Action: Chapter Quiz  575 ■ Discussion Questions  576 ■ Problems  577
Case 19-1 Practical Database Assignment   581
AIS in Action Solutions: Quiz Key  581 ■ Appendix: Extending the REA Model to Include
I­nformation About Policies   585
Part V The Systems Development Process   587
Chapter 20 Introduction to Systems Development and Systems
Analysis  588
Introduction  589
Systems Development  591
The Systems Development Life Cycle   591
The Players  592
Planning Systems Development   593
Planning Techniques  594
Feasibility Analysis  595
Capital Budgeting: Calculating Economic Feasibility   596
Behavioral Aspects of Change   598
Why Behavioral Problems Occur   598
How People Resist Change   598
Preventing Behavioral Problems   599
xv
xvi
Contents
Systems Analysis  600
Initial Investigation  600
Systems Survey  601
Feasibility Study  603
Information Needs and Systems Requirements   603
Systems Analysis Report  605
Summary and Case Conclusion   606 ■ Key Terms  607
AIS in Action: Chapter Quiz  608 ■ Comprehensive Problem  609 ■ Discussion
­Questions  609 ■ Problems  610
Case 20-1 Audio Visual Corporation   617
AIS in Action Solutions: Quiz Key  618 ■ Comprehensive Problem Solution   620
Chapter 21 AIS Development Strategies   622
Introduction  623
Purchasing Software  623
Selecting a Vendor  624
Acquiring Hardware and Software   624
Evaluating Proposals and Selecting a System   625
Development by In-House Information Systems Departments   627
End-User-Developed Software  627
Advantages and Disadvantages of End-User Computing   628
Managing and Controlling End-User Computing   629
Outsourcing the System   630
Advantages and Disadvantages of Outsourcing   630
Business Process Management   631
Internal Controls in a Business Process Management System   632
Prototyping  633
When to Use Prototyping   634
Advantages of Prototyping   634
Disadvantages of Prototyping   635
Computer-Aided Software Engineering   635
Summary and Case Conclusion   636 ■ Key Terms  637
AIS in Action: Chapter Quiz  637 ■ Comprehensive Problem Freedom from Telemarketers—the do
Not Call List   638 ■ Discussion Questions  638 ■ Problems  639
Case 21-1 Professional Salon Concepts   644
AIS in Action Solutions: Quiz Key  646 ■ Comprehensive Problem Solution   649
Chapter 22 Systems Design, Implementation, and Operation   650
Introduction  651
Conceptual Systems Design   651
Evaluate Design Alternatives  651
Prepare Design Specifications and Reports   653
Physical Systems Design   653
Output Design  654
File and Database Design   654
Input Design  655
Program Design  656
Procedures and Controls Design   657
Systems Implementation  658
Implementation Planning and Site Preparation   658
Selecting and Training Personnel   659
Complete Documentation  660
Testing the System   660
Contents
Systems Conversion  661
Operation and Maintenance   662
Summary and Case Conclusion   663 ■ Key Terms  664
AIS in Action: Chapter Quiz  664 ■ Comprehensive Problem Hershey’s Big Bang ERP   665 ■
Discussion Questions  666 ■ Problems  667
Case 22-1 Citizen’s Gas Company   672
AIS in Action Solutions: Quiz Key  673 ■ Comprehensive Problem Solution   675
Glossary  676
Index  697
xvii
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Preface
To the Instructor
This book is intended for use in a one-semester course in accounting information systems at
either the undergraduate or graduate level. Introductory financial and managerial accounting
courses are suggested prerequisites, and an introductory information systems course that covers a computer language or software package is helpful, but not necessary.
The book can also be used as the main text in graduate or advanced undergraduate management information systems courses.
The topics covered in this text provide information systems students with a solid understanding of transaction processing systems that they can then build on as they pursue more indepth study of specific topics such as databases, data warehouses and data mining, networks,
systems analysis and design, computer security, and information system controls.
Enhancements in the Thirteenth Edition
Perhaps the most noticeable change in the thirteenth edition is the change from a two-color
design to a full-color design. This improves the readability of figures and diagrams, making
it easier for students to understand relationships among concepts. We also made extensive
­revisions to the content of the material to incorporate recent developments, while retaining the
features that have made prior editions easy to use. Every chapter has been updated to include
up-to-date examples of important concepts. Specific changes include:
1. Introduction of business process diagrams in Chapter 3 and their use in the five chapters
of Part III to provide an easy-to-understand method for showing the sequential flow of
activities within business processes.
2. More detailed discussion of internal control frameworks: COSO, COSO-ERM, and
­COBIT. In particular, we discuss the new revision to the COSO framework and have updated the discussion of IT controls to reflect the new distinction between governance and
management that was introduced in COBIT 5.
3. Updated discussion of information security countermeasures, including the security and
control implications associated with virtualization and cloud computing. We also moved
the material on change management from Chapter 10 to Chapter 8 to reflect its importance as one of the key layers of defense.
4. Annotation of the data flow diagrams in the five chapters of Part III to include information about when and where major internal control threats exist within each business process. In addition, in each chapter the discussion of controls to mitigate the various threats
has also been revised to explicitly reference the summary table of threats and countermeasures found in each chapter. Each chapter also explicitly discusses how to properly
configure ERP systems to enforce proper segregation of duties.
xix
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Preface
5. Many new end-of-chapter discussion questions and problems, including additional Excel
exercises that are based on articles from the Journal of Accountancy so that students can
develop the specific skills used by practitioners.
6. Many new computer fraud and abuse techniques have been added to help students understand the way systems are attacked.
7. The database chapter has been updated with all new tables and figures so that the Microsoft Access screen shots reflect the latest version of that product. At the request of some
of our loyal adopters, an Appendix to Chapter 4 is included with this edition of the text
that discusses database normalization.
Customizing this Text
Pearson Custom Library can help you customize this textbook to fit how you teach the course.
You can select just the chapters from this text that you plan to cover and arrange them in
the sequence you desire. You even have the option to add your own material or third party
content. In addition, you may choose an alternate version of the REA material presented in
­Chapters 17–19 that uses the Batini style notation instead of the crows feet notation featured
in this book.
To explore how to create a customized version of the book you can contact your Pearson
representative.
Supplemental Resources
As with prior editions, our objective in preparing this thirteenth edition has been to simplify
the teaching of AIS by enabling you to concentrate on classroom presentation and discussion,
rather than on locating, assembling, and distributing teaching materials. To assist you in this
process, the following supplementary materials are available to adopters of the text:
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Solutions Manual prepared by Marshall Romney at Brigham Young University and Paul
John Steinbart at Arizona State University
Instructors Manual prepared by Robyn Raschke at University of Nevada–Las Vegas
Test Item File prepared by Robert Marley at Georgia Southern University
TestGen testing software, a computerized test item file
PowerPoint Presentation slides developed by Robyn Raschke at University of Nevada–
Las Vegas
The thirteenth edition includes an entirely new set of PowerPoint slides that make extensive use of high-quality graphics to illustrate key concepts. The slides do not merely consist
of bullet points taken verbatim from the text, but instead are designed to help students notice
and understand important relationships among concepts. The large number of slides provides
instructors a great deal of flexibility in choosing which topics they wish to emphasize in class.
In addition, you can access all these supplements from the protected instructor area of
www.pearsonhighered.com.
We recognize that you may also wish to use specific software packages when teaching the
AIS course. Contact your Pearson representative to learn about options for bundling this text
(or a customized version) with software packages or other texts such as Peachtree Computerized Practice Set: Comprehensive Assurance and Systems Tool (CAST); Manual AIS Practice
Set: Comprehensive Assurance and Systems Tool (CAST); or CAST: Auditing Simulation, all
written by Laura R. Ingraham and J. Gregory Jenkins, both at North Carolina State University.
To the Student
As did previous editions, the thirteenth edition of Accounting Information Systems is designed
to prepare you for a successful accounting career whether you enter public practice, industry,
or government. All of you will be users of accounting information systems. In addition to being
users, some of you will become managers. Others will become internal and external auditors,
Preface
and some of you will become consultants. Regardless of your role, you will need to understand
how accounting information systems work in order to effectively measure how cost-effectively
they perform, to assess their reliability and that of the information produced, or to lead the
redesign and implementation of new and better systems. Mastering the material presented in
this text will give you the foundational knowledge you need in order to excel at all those tasks.
This text discusses important new IT developments, such as virtualization and the move
to cloud computing, because such developments affect business processes and often cause
organizations to redesign their accounting systems to take advantage of new capabilities. The
focus, however, is not on IT for the sake of IT, but on how IT affects business processes and
controls. Indeed, new IT developments not only bring new capabilities, but also often create
new threats and affect the overall level of risk. This text will help you understand these issues
so that you can properly determine how to modify accounting systems controls to effectively
address those new threats and accurately assess the adequacy of controls in those redesigned
systems. We also discuss the effect of recent regulatory developments, such as the SEC mandate to use XBRL and the pending switch from GAAP to IFRS, on the design and operation
of accounting systems.
In addition to technology- and regulatory-driven changes, companies are responding to
the increasingly competitive business environment by reexamining every internal activity in
an effort to reap the most value at the least cost. As a result, accountants are being asked to
do more than simply report the results of past activities. They must take a more proactive role
in both providing and interpreting financial and nonfinancial information about the organization’s activities. Therefore, throughout this text we discuss how accountants can improve the
design and functioning of the accounting information system (AIS) so that it truly adds value
to the organization by providing management with the information needed to effectively run
an organization.
Key Learning Objectives
When you finish reading this text, you should understand the following key concepts:
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The basic activities performed in the major business cycles
What data needs to be collected to enable managers to plan, evaluate, and control the
business activities in which an organization engages
How IT developments can improve the efficiency and effectiveness of business
processes
How to design an AIS to provide the information needed to make key decisions in each
business cycle
The risk of fraud and the motives and techniques used to perpetrate fraud
The COSO and COSO-ERM models for internal control and risk management, as well as
the specific controls used to achieve those objectives
The Control Objectives for Information and Related Technology (COBIT) Framework
for the effective governance and control of information systems and how IT affects the
implementation of internal controls
The AICPA’s Trust Services framework for ensuring systems reliability by developing procedures to protect the confidentiality of proprietary information, maintain
the privacy of personally identifying information collected from customers, assure
the availability of information resources, and provide for information processing
integrity
Fundamentals of information security
Goals, objectives, and methods for auditing information systems
Fundamental concepts of database technology and data modeling and their effect on
an AIS
The tools for documenting AIS work, such as REA diagrams, data flow diagrams,
­business processing diagrams, and flowcharts
The basic steps in the system development process to design and improve an AIS
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Preface
Features to Facilitate Learning
To help you understand these concepts the text includes the following features:
1. Each chapter begins with an integrated case that introduces that chapter’s key concepts and topics and identifies several key issues or problems that you should be able
to solve after mastering the material presented in that chapter. The case is referenced
throughout the chapter and the chapter summary presents solutions to the problems and
issues raised in the case.
2. Focus Boxes and real-world examples to help you understand how companies are using
the latest IT developments to improve their AIS.
3. Hands-on Excel exercises in many chapters to help you hone your computer skills.
Many of these exercises are based on “how-to” tutorials that appeared in recent issues of
the Journal of Accountancy.
4. Numerous problems in every chapter provide additional opportunities for you
to demonstrate your mastery of key concepts. Many problems were developed
from reports in current periodicals. Other problems were selected from the various
­professional examinations, including the CPA, CMA, CIA, and SMAC exams. Each
chapter also has one or more cases that require more extensive exploration of specific topics.
5. Chapter quizzes at the end of each chapter enable you to self-assess your understanding
of the material. We also provide detailed explanations about the correct answer to each
quiz question.
6. Extensive use of Full-Color Graphics. The text contains hundreds of figures, diagrams,
flowcharts, and tables that illustrate the concepts taught in the chapters. Color is used to
highlight key points.
7. Definitions of key terms are repeated in the glossary margins in each chapter. In addition, a comprehensive glossary located at the back of the book makes it easy to look up
the definition of the various technical terms used in the text.
8. Extensive on-line support at Pearson’s content-rich, text-supported Companion Website
at www.pearsonhighered.com/romney/.
Excel Homework Problems
Accountants need to become proficient with Excel because it is a useful tool for tasks related
to every business process. That is why each of the chapters in the business process section
contains several homework problems that are designed to teach you new Excel skills in a context related to one of the business processes discussed in the chapter.
As with any software, Microsoft regularly releases updates to Microsoft Office, but not
everyone always immediately switches. Eventually, however, during your career you will periodically move to a newer version of Excel. When you do, you will find that sometimes you
need make only minor changes to existing spreadsheets, but other times you may have to
make more significant changes because the newer version of Excel now incorporates different
features and functions.
So how do you keep abreast of changes? And how can you learn new Excel skills “on the
job” to simplify tasks that you now find yourself doing repeatedly? You could pay to take a
course, but that can be costly, time-consuming and may not always be timely. Alternatively,
you can develop life-long learning skills to continuously update your knowledge. One important way to do this is to begin now to save copies of two types of articles that regularly appear
in the Journal of Accountancy. The first is the monthly column titled “Technology Q&A,”
which often contains answers to questions about how do you do something in a newer version
of Excel that you know how to do in an older version. The second type of article is a complete
tutorial about a powerful way to use one or more Excel functions to automate a recurring task.
Often, this second type of article has an online spreadsheet file that you can download and use
to follow along with the example and thereby teach yourself a new skill.
Preface
The Journal of Accountancy web site maintains an archive of these articles that you can
search to see if there is one that addresses a task that is new for you. Even if the article explains how to do something (such as create a pivot table) in an older version of Excel, in most
cases you will find that many of the steps have not changed. For those that have, if you read
the old way to do it as described in the article, you can then use Excel’s built-in help feature to
see how to do the same task in the newer version that you are now using.
The Excel homework problems in the five business process chapters in this textbook let
you practice using Journal of Accountancy articles to help you develop new skills with Excel.
Many of the problems reference a Journal of Accountancy tutorial article. Some are written
for the version of Excel that you currently use, in which case it will be straightforward to
follow the article to solve the problem. Others, however, were written for earlier versions of
Excel, which gives you an opportunity to practice learning how to use Excel’s help functions
to update the steps in the tutorial.
Content and Organization
This text is divided into five parts, each focused on a major theme.
Part I: Conceptual Foundations of Accounting
Information Systems
Part I consists of four chapters which present the underlying concepts fundamental to an
understanding of AIS. Chapter 1 introduces basic terminology and provides an overview of
AIS topics. It discusses how an AIS can add value to an organization and how it can be used
to help organizations implement corporate strategy. It also discusses the types of information companies need to successfully operate and introduces the basis business processes that
produce that information. It concludes by describing the role of the AIS in an organization’s
value chain.
Chapter 2 introduces transaction processing in automated systems, presenting basic information input/output, processing, and data storage concepts. You will see the wide range of
data that must be collected by the AIS. This information helps you to understand what an AIS
does; as you read the remainder of the book, you will see how advances in IT affect the manner in which those functions are performed. Chapter 2 also introduces you to Enterprise Resource Planning (ERP) systems and discusses their importance and uses in modern business.
Chapter 3 covers three of the most important tools and techniques used to understand,
evaluate, design, and document information systems: data flow diagrams, business process
diagrams, and flowcharts. You will learn how to read, critique, and create systems documentation using these tools.
Chapter 4 introduces the topic of databases, with a particular emphasis on the relational
data model and creating queries in Microsoft Access. The chapter also introduces the concept
of business intelligence.
Part II: Control and Audit of Accounting Information Systems
The seven chapters in Part II focus on threats to the reliability of AIS and applicable controls
for addressing and mitigating the risks associated with those threats. Chapter 5 introduces
students to the different kinds of threats faced by information systems, primarily focusing on
the threat of fraud. The chapter describes the different types of fraud and explains how fraud is
perpetrated, who perpetrates it, and why it occurs.
Chapter 6 discusses computer fraud and abuse techniques. Three major types of computer
fraud are discussed: computer attacks and abuse, social engineering, and malware. The chapter explains the dozens of ways computer fraud and abuse can be perpetrated.
Chapter 7 uses the COSO framework, including the expanded enterprise risk management (COSO-ERM) model, to discuss the basic concepts of internal control. It also introduces
the COBIT framework which applies those concepts to IT, thereby providing a foundation for
effective governance and control of information systems.
xxiii
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Preface
Chapter 8 focuses on information security. It introduces the fundamental concepts of defense-in-depth and the time-based approach to security. The chapter provides a broad survey
of a variety of security topics including access controls, firewalls, encryption, and incident
detection and response.
Chapter 9 discusses the many specific computer controls used in business organizations
to achieve the objectives of ensuring privacy and confidentiality, and includes a detailed explanation of encryption.
Chapter 10 addresses the controls necessary to achieve the objectives of accurate processing of information and ensuring that information is available to managers whenever and
wherever they need it.
Chapter 11 describes principles and techniques for the audit and evaluation of internal
control in a computer-based AIS and introduces the topic of computer-assisted auditing.
Part III: Accounting Information Systems Applications
Part III focuses on how a company’s AIS provides critical support for its fundamental business processes. Most large and many medium-sized organizations use enterprise resource
planning (ERP) systems to collect, process, and store data about their business processes, as
well as to provide information reports designed to enable managers and external parties to
assess the organization’s efficiency and effectiveness. To make it easier to understand how an
ERP system functions, Part III consists of five chapters, each focusing on a particular business process.
Chapter 12 covers the revenue cycle, describing all the activities involved in taking customer orders, fulfilling those orders, and collecting cash.
Chapter 13 covers the expenditure cycle, describing all the activities involved in ordering,
receiving, and paying for merchandise, supplies, and services.
Chapter 14 covers the production cycle, with a special focus on the implications of recent
cost accounting developments, such as activity-based costing, for the design of the production
cycle information system.
Chapter 15 covers the human resources management/payroll cycle, focusing primarily on
the activities involved in processing payroll.
Chapter 16 covers the general ledger and reporting activities in an organization, discussing topics such as XBRL, the balanced scorecard, the switch from GAAP to IFRS, and the
proper design of graphs to support managerial decision making.
Each of these five chapters explains the three basic functions performed by the AIS: efficient transaction processing, provision of adequate internal controls to safeguard assets (including data), and preparation of information useful for effective decision making.
Part IV: The REA Data Model
Part IV consists of three chapters that focus on the REA data model, which provides a conceptual tool for designing and understanding the database underlying an AIS. C
­ hapter 17
introduces the REA data model and how it can be used to design an AIS database. The
chapter focuses on modeling the revenue and expenditure cycles. It also demonstrates
how the REA model can be used to develop an AIS that can not only generate traditional
financial statements and reports but can also more fully meet the information needs of
management.
Chapter 18 explains how to implement an REA data model in a relational database system. It also shows how to query a relational database in order to produce various financial
statements and management reports.
Chapter 19 explains how to develop REA data models of the production, HR/payroll, and
financing cycles. It also discusses a number of advanced modeling issues, such as the acquisition and sale of intangible products and services and rental transactions.
Preface
Part V: The Systems Development Process
Part V consists of three chapters that cover various aspects of the systems development process. Chapter 20 introduces the systems development life cycle and discusses the introductory steps of this process (systems analysis, feasibility, and planning). Particular emphasis is
placed on the behavioral ramifications of change.
Chapter 21 discusses an organization’s many options for acquiring or developing an AIS
(e.g., purchasing software, writing software, end-user-developed software, and outsourcing)
and for speeding up or improving the development process (business process reengineering,
prototyping, and computer-assisted software engineering).
Chapter 22 covers the remaining stages of the systems development life cycle (conceptual
design, physical design, implementation, and operation and maintenance) and emphasizes the
interrelationships among the phases.
Acknowledgments
We wish to express our appreciation to all supplements authors for preparing the various supplements that accompany this edition. We thank Martha M. Eining of the University of Utah
and Carol F. Venable of San Diego State University for preparing the comprehensive cases included on our Web site. We are also grateful to Iris Vessey for her contributions to the problem
material. We thank Bill Heninger of Brigham Young University for allowing us to use portions
of his database normalization tutorial to create the Appendix to Chapter 4.
Perhaps most importantly, we are indebted to the numerous faculty members throughout
the world who have adopted the earlier editions of this book and who have been generous
with their suggestions for improvement. We are especially grateful to the following faculty
who participated in reviewing the thirteenth edition throughout various stages of the revision
process:
Dr. Linda Bressler, University of Houston–Downtown
Elizabeth Carlson, University of Southern Florida–Sarasota/Manatee
Gregory J. Gerard, Florida State University
Lois S. Mahoney, Eastern Michigan University
Robert Marley, Georgia Southern University
We are grateful for permission received from four professional accounting organizations to use problems and unofficial solutions from their past professional examinations in
this book. Thanks are extended to the American Institute of Certified Public Accountants for
use of the CPA Examination materials, to the Institute of Certified Management Accountants
for use of CMA Examination materials, to the Institute of Internal Auditors for use of CIA
Examination materials, and to the Society of Management Accountants of Canada for use of
SMAC Examination materials. We also wish to thank Netsuite, Inc., for providing permission
to use screenshots of their software throughout the text.
Of course, any errors in this book remain our responsibility. We welcome your comments
and suggestions for further improvement.
Finally, we want to thank our wives and families for their love, support, and encouragement. We also want to thank God for giving us the ability to start and complete this book.
— Marshall B. Romney
Provo, Utah
—Paul John Steinbart
Tempe, Arizona
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Conceptual Foundations
of Accounting
Information Systems
pa r t
I
Chapter 1
Accounting Information
­Systems: An Overview
Chapter 2
Overview of Transaction
­Processing and Enterprise
­Resource Planning (ERP)
Chapter 3
Systems Documentation
Techniques
Chapter 4
Relational Databases
1
Chapter
1
Accounting Information
Systems: An Overview
Learning Objectives
After studying this chapter, you should be able to:
1. Distinguish data from information, discuss the characteristics of useful information, and explain how to determine the value of information.
2. Explain the decisions an organization makes and the information needed to
make them.
3. Identify the information that passes between internal and external parties
and an accounting information system (AIS).
4. Describe the major business processes present in most companies.
5. Explain what an AIS is and describe its basic functions.
6. Discuss how an AIS can add value to an organization.
7. Explain how an AIS and corporate strategy affect each other.
8. Explain the role an AIS plays in a company’s value chain.
In tegrat i ve Case
S&S
After working for years as a regional manager for a retail organization, Scott Parry opened
his own business with Susan Gonzalez, one of his district managers, as his partner. They
formed S&S to sell appliances and consumer electronics. Scott and Susan pursued a “clicks
and bricks” strategy by renting a building in a busy part of town and adding an electronic
storefront.
Scott and Susan invested enough money to see them through the first six months. They
will hire 15 employees within the next two weeks—3 to stock the shelves, 4 sales representatives, 6 checkout clerks, and 2 to develop and maintain the electronic storefront.
Scott and Susan will host S&S’s grand opening in five weeks. To meet that deadline, they
have to address the following important issues:
1. What decisions do they need to make to be successful and profitable? For example:
a. How should they price products to be competitive yet earn a profit?
2
b. Should they extend credit, and, if so, on what terms? How can they accurately
track what customers owe and pay?
c. How should they hire, train, and supervise employees? What compensation and
benefits package should they offer? How should they process payroll?
d. How can they track cash inflows and outflows to avoid a cash squeeze?
e. What is the appropriate product mix? What inventory quantities should they
carry, given their limited showroom space?
2. What information do Scott and Susan need to make those decisions?
a. What information do the external entities they interact with need?
b. What information do management and other employees need?
c. How can they gather, store, and disseminate that information?
3. What business processes are needed, and how should they be carried out?
4. What functionality should be provided on the website?
Although Scott and Susan could use an educated guess or “gut feeling” to make these
decisions, they know they can make better decisions if they obtain additional information.
A well-designed AIS can solve these issues and provide the information they need to make
any remaining decisions.
Introduction
We begin this chapter by explaining important terms and discussing the kinds of information that organizations need and the business processes used to produce that information. We
continue with an exploration of what an accounting information system (AIS) is, how an AIS
adds value to an organization, how an AIS and corporate strategy affect each other, and the
role of the AIS in the value chain.
A system is a set of two or more interrelated components that interact to achieve a goal.
Most systems are composed of smaller subsystems that support the larger system. For example, a college of business is a system composed of various departments, each of which is a
subsystem. Moreover, the college itself is a subsystem of the university.
Each subsystem is designed to achieve one or more organizational goals. Changes in subsystems cannot be made without considering the effect on other subsystems and on the system
as a whole. Goal conflict occurs when a subsystem’s goals are inconsistent with the goals of
another subsystem or with the system as a whole. Goal congruence occurs when a subsystem
achieves its goals while contributing to the organization’s overall goal. The larger the organization and the more complicated the system, the more difficult it is to achieve goal congruence.
system – Two or more interrelated
components that interact to
achieve a goal, often composed
of subsystems that support the
larger system.
goal conflict – When a subsystem’s goals are inconsistent with
the goals of another subsystem
or the system as a whole.
goal congruence – When a subsystem achieves its goals while
contributing to the organization’s overall goal.
3
4
Part I
Conceptual Foundations of Accounting Information Systems
data – Facts that are collected,
recorded, stored, and processed by a system.
information – Data that have
been organized and processed
to provide meaning and improve decision-making.
information overload – Exceeding the amount of information
a human mind can absorb and
process, resulting in a decline in
decision-making quality and an
increase in the cost of providing
information.
Information technology (IT) – The
computers and other electronic
devices used to store, retrieve,
transmit and manipulate data.
value of information – The
benefit provided by information
less the cost of producing it.
Data are facts that are collected, recorded, stored, and processed by an information system. Businesses need to collect several kinds of data, such as the activities that take place, the
resources affected by the activities, and the people who participate in the activity. For example, the business needs to collect data about a sale (date, total amount), the resource sold (good
or service, quantity sold, unit price), and the people who participated (customer, salesperson).
Information is data that have been organized and processed to provide meaning and improve the decision-making process. As a rule, users make better decisions as the quantity and
quality of information increase.
However, there are limits to the amount of information the human mind can absorb and
process. Information overload occurs when those limits are passed, resulting in a decline in
decision-making quality and an increase in the cost of providing that information. Information
system designers use information technology (IT) to help decision makers more effectively
filter and condense information. For example, Walmart has over 500 terabytes (trillions of
bytes) of data in its data warehouse. That is equivalent to 2,000 miles of bookshelves, or about
100 million digital photos. Walmart has invested heavily in IT so it can effectively collect,
store, analyze, and manage data to provide useful information.
The value of information is the benefit produced by the information minus the cost of
producing it. Benefits of information include reduced uncertainty, improved decisions, and
improved ability to plan and schedule activities. The costs include the time and resources
spent to produce and distribute the information. Information costs and benefits can be 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 that the costs of producing the information do not exceed its benefits.
To illustrate the value of information, consider the case of 7-Eleven. When a Japanese company licensed the very successful 7-Eleven name from Southland Corporation, it invested heavily
in IT. However, the U.S. stores did not. Each 7-Eleven store in Japan was given a computer that:
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Keeps track of the 3,000 items sold in each store and determines what products are moving, at what time of day, and under what weather conditions.
Keeps track of what and when customers buy to make sure it has in stock the products
most frequently purchased.
Orders sandwiches and rice dishes from suppliers automatically. Orders are placed and
filled three times a day so that stores always have fresh food. In addition, suppliers can
access 7-Eleven sales data electronically so that they can forecast demand.
Coordinates deliveries with suppliers. This reduces 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.
Average daily sales of 7-Eleven Japan were 30% higher and its operating margins almost
double those of its closest competitor. What happened to Southland and its 7-Eleven stores
in the United States? Profits declined, and Southland eventually had to file for bankruptcy.
7-Eleven Japan came to the company’s rescue and purchased 64% of Southland.
Table 1-1 presents seven characteristics that make information useful and meaningful.
Table 1-1 Characteristics of Useful Information
Relevant
Reliable
Complete
Timely
Understandable
Verifiable
Accessible
Reduces uncertainty, improves decision making, or confirms or corrects
prior expectations.
Free from error or bias; accurately represents organization events or
activities.
Does not omit important aspects of the events or activities it measures.
Provided in time for decision makers to make decisions.
Presented in a useful and intelligible format.
Two independent, knowledgeable people produce the same
information.
Available to users when they need it and in a format they can use.
CHAPTER 1 Accounting Information Systems: An Overview
5
Information Needs and Business Processes
All organizations need information in order to make effective decisions. In addition, all organizations have certain business processes in which they are continuously engaged. A business
process is a set of related, coordinated, and structured activities and tasks that are performed
by a person, a computer, or a machine a computer or a machine, and that help accomplish a
specific organizational goal.
To make effective decisions, organizations must decide what decisions they need to make,
what information they need to make the decisions, and how to gather and process the data
needed to produce the information. This data gathering and processing is often tied to the basic business processes in an organization. To illustrate the process of identifying information
needs and business processes, let’s return to our S&S case study.
business process – A set of related, coordinated, and structured
activities and tasks, performed
by a person, a computer, or a
machine that help accomplish a
specific organizational goal.
Information Needs
Scott and Susan decide they must understand how S&S functions before they can identify the
information they need to manage S&S effectively. Then they can determine the types of data
and procedures they will need to collect and produce that information. They created Table 1-2
Table 1-2 Overview of S&S’s Business Processes, Key Decisions, and Information Needs
Business Processes
Key Decisions
Information Needs
Acquire capital
How much
Find investors or borrow funds
If borrowing, obtaining best terms
Size of building
Amount of equipment
Rent or buy
Location
How to depreciate
Experience requirements
How to assess integrity and competence of
applicants
How to train employees
What models to carry
How much to purchase
How to manage inventory (store, control,
etc.)
Which vendors
Which media
Content
Markup percentage
Offer in-house credit
Which credit cards to accept
If offering credit, what terms
How to handle cash receipts
Cash flow projections
Pro forma financial statements
Loan amortization schedule
Capacity needs
Building and equipment prices
Market study
Tax tables and depreciation regulations
Acquire building and equipment
Hire and train employees
Acquire inventory
Advertising and marketing
Sell merchandise
Collect payments from customers
Pay employees
Amount to pay
Deductions and withholdings
Process payroll in-house or use outside
service
Pay taxes
Payroll tax requirements
Sales tax requirements
Pay vendors
Whom to pay
When to pay
How much to pay
Job descriptions
Applicant job history and skills
Market analyses
Inventory status reports
Vendor performance
Cost analyses
Market coverage
Pro forma income statement
Credit card costs
Customer credit status
Customer account status
Accounts receivable aging report
Accounts receivable records
Sales (for commissions)
Time worked (hourly employees)
W-4 forms
Costs of external payroll service
Government regulations
Total wage expense
Total sales
Vendor invoices
Accounts payable records
Payment terms
6
Part I
Conceptual Foundations of Accounting Information Systems
transaction – An agreement between two entities to exchange
goods or services, such as selling inventory in exchange for
cash; any other event that can
be measured in economic terms
by an organization.
transaction processing – Process
of capturing transaction data,
processing it, storing it for later
use, and producing information
output, such as a managerial
report or a financial statement.
give-get exchange – Transactions that happen a great many
times, such as giving up cash
to get inventory from a supplier and giving employees a
paycheck in exchange for their
labor.
business processes or
­transaction cycles – The major
give-get exchanges that occur
frequently in most companies.
revenue cycle – Activities associated with selling goods and
services in exchange for cash or
a future promise to receive cash.
expenditure cycle – Activities associated with purchasing inventory for resale or raw materials
in exchange for cash or a future
promise to pay cash.
to summarize part of their analysis. It lists S&S’s basic business processes, some key decisions that need to be made for each process, and information they need to make the decisions.
Scott and Susan realize that the list is not exhaustive, but they are satisfied that it provides
a good overview of S&S. They also recognize that not all the information needs listed in the
right-hand column will be produced internally by S&S. Information about payment terms for
merchandise purchases, for example, will be provided by vendors. Thus, S&S must effectively
integrate external data with internally generated data so that Scott and Susan can use both
types of information to run S&S.
S&S will interact with many external parties, such as customers, vendors, and governmental agencies, as well as with internal parties such as management and employees.
To get a better handle on the more important interactions with these parties, they prepared
Figure 1-1.
Business Processes
Scott decides to reorganize the business processes listed in Table 1-2 into groups of related
transactions. A transaction is an agreement between two entities to exchange goods or services or any other event that can be measured in economic terms by an organization. Examples
include selling goods to customers, buying inventory from suppliers, and paying employees.
The process that begins with capturing transaction data and ends with informational output,
such as the financial statements, is called transaction processing. Transaction processing is
covered in more depth in Chapter 2.
Many business activities are pairs of events involved in a give-get exchange. Most organizations engage in a small number of give-get exchanges, but each type of exchange happens
many times. For example, S&S will have thousands of sales to customers every year in exchange
for cash. Likewise, S&S will continuously buy inventory from suppliers in exchange for cash.
These exchanges can be grouped into five major business processes or transaction
cycles:
●
●
The revenue cycle, where goods and services are sold for cash or a future promise to receive cash. This cycle is discussed in Chapter 12.
The expenditure cycle, where companies purchase inventory for resale or raw materials
to use in producing products in exchange for cash or a future promise to pay cash. This
cycle is discussed in Chapter 13.
Interactions between
S&S and External and
Internal Parties
Customer Orders
Purchase Orders
Figure 1-1
Vendors
Goods & Services
Goods & Services
Vendor Invoices
Customer Invoices
Vendor Payments
Customer Payments
Invest Funds
Investors
Loans
Creditors
Labor & Services
Dividends
Financial Statements
Customers
Accounting
Information
System
at S&S
Wages, Salaries
& Commissions
Employees
Managerial Reports &
Loan Payments
Financial Statements
Financial Statements
Budgets &
Management
Accounting Entries
Banks
Deposits
Regulations & Tax Forms
Withdrawals
Taxes & Reports
Bank Statements
Government
Agencies
CHAPTER 1 Accounting Information Systems: An Overview
●
●
●
The production or conversion cycle, where raw materials are transformed into finished
goods. This cycle is discussed in Chapter 14.
The human resources/payroll cycle, where employees are hired, trained, compensated,
evaluated, promoted, and terminated. This cycle is discussed in Chapter 15.
The financing cycle, where companies sell shares in the company to investors and borrow money, and where investors are paid dividends and interest is paid on loans.
These cycles process a few related transactions repeatedly. For example, most revenue
cycle transactions are either selling goods or services to customers or collecting cash for those
sales. Figure 1-2 shows the main transaction cycles and the give-get exchange inherent in each
cycle.
These basic give-get exchanges are supported by a number of other business activities.
For example, S&S may need to answer a number of customer inquiries and check inventory
levels before it can make a sale. Likewise, it may have to check customer credit before a credit
sale is made. Accounts receivable will have to be increased each time a credit sale is made
and decreased each time a customer payment is received. Table 1-3 lists the major activities in
each transaction cycle.
Give
Cash
Funds
Funds
Expenditure Cycle
Human Resources/Payroll Cycle
Get Goods/
Raw
Materials
Give
Cash
Get
Labor
Data
Data
Data
General Ledger & Reporting System
Data
Data
Labor
Get
Finished
Goods
Give
Raw
Materials
Finished
Goods
Revenue Cycle
Give
Goods
Raw
Materials
Production Cycle
Give
Labor
Get
Cash
human resources/payroll cycle Activities associated with hiring,
training, compensating, evaluating, promoting, and terminating
employees.
financing cycle – Activities associated with raising money by
selling shares in the company to
investors and borrowing money
as well as paying dividends and
interest.
The AIS and Its
Subsystems
Get
Cash
Funds
Give
Cash
production or conversion cycle Activities associated with using
labor, raw materials and equipment to produce finished goods.
Figure 1-2
Financing Cycle
Information
for Both
Internal
and
External
Users
7
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Part I
Conceptual Foundations of Accounting Information Systems
Table 1-3 Common Cycle Activities
Transaction Cycle
Major Activities in the Cycle
Revenue
Receive and answer customer inquiries
Take customer orders and enter them into the AIS
Approve credit sales
Check inventory availability
Initiate back orders for goods out of stock
Pick and pack customer orders
Ship goods to customers or perform services
Bill customers for goods shipped or services performed
Update (increase) sales and accounts receivable
Receive customer payments and deposit them in the bank
Update (reduce) accounts receivable
Handle sales returns, discounts, allowances, and bad debts
Prepare management reports
Send appropriate information to the other cycles
Request goods and services be purchased
Prepare, approve, and send purchase orders to vendors
Receive goods and services and complete a receiving report
Store goods
Receive vendor invoices
Update (increase) accounts payable
Approve vendor invoices for payment
Pay vendors for goods and services
Update (reduce) accounts payable
Handle purchase returns, discounts, and allowances
Prepare management reports
Send appropriate information to the other cycles
Recruit, hire, and train new employees
Evaluate employee performance and promote employees
Discharge employees
Update payroll records
Collect and validate time, attendance, and commission data
Prepare and disburse payroll
Calculate and disburse taxes and benefit payments
Prepare employee and management reports
Send appropriate information to the other cycles
Design products
Forecast, plan, and schedule production
Request raw materials for production
Manufacture products
Store finished products
Accumulate costs for products manufactured
Prepare management reports
Send appropriate information to the other cycles
Forecast cash needs
Sell stock/securities to investors
Borrow money from lenders
Pay dividends to investors and interest to lenders
Retire debt
Prepare management reports
Send appropriate information to the other cycles
Expenditure
Human Resources/Payroll
Production
Financing
CHAPTER 1 Accounting Information Systems: An Overview
Notice that the last activity listed in Table 1-3 for each transaction cycle is “Send appropriate information to the other cycles.” Figure 1-2 shows how these various transaction cycles
relate to one another and interface with the general ledger and reporting system, which is
used to generate information for both management and external parties. The general ledger
and reporting system is discussed in more depth in Chapter 16.
In many accounting software packages, the various transaction cycles are implemented
as separate modules. Not every organization needs to implement every module. Retail stores
like S&S, for example, do not have a production cycle and would not implement that module. Moreover, some organizations have unique requirements. Financial institutions, for example, have demand deposit and installment-loan cycles that relate to transactions involving
customer accounts and loans. In addition, the nature of a given transaction cycle differs across
different types of organizations. For example, the expenditure cycle of a service company,
such as a public accounting or a law firm, does not normally involve processing transactions
related to the purchase, receipt, and payment for merchandise that will be resold to customers.
Each transaction cycle can include many different business processes or activities. Each
business process can be relatively simple or quite complex. Focus 1-1 shows how Toyota’s
Focus 1-1
general ledger and reporting
system – Information-processing
operations involved in updating
the general ledger and preparing reports for both management and external parties.
Improving Business Processes Helps Drive Toyota’s Success
Toyota’s Georgetown, Kentucky, manufacturing plant, its
largest in North America, is the size of 156 football fields,
employs 7,000 people, and produces a new car every 55
seconds. Because Toyota produces a high-quality car at a
lower cost than its competitors, it is the largest automobile manufacturer in the world, a title General Motors had
for almost 100 years.
A major factor in its success is the Toyota Production System (TPS), which is a set of philosophies, principles, and business processes supported by IT. Its goal is
to improve continually so Toyota has the most effective
and most efficient manufacturing and business processes
possible. Toyota willingly shares TPS and its manufacturing and business processes with its suppliers to help them
improve their quality and efficiency. It also shares TPS with
its competitors, knowing that by the time they duplicate it
Toyota will have greatly improved TPS.
The following are some of the principles and business
processes on which TPS is built and which Toyota’s information systems must support and enable:
• Performance-monitoring software warns assembly
line workers of equipment problems. Workers stop
production whenever necessary to prevent or correct
defects.
• Their just-in-time (JIT) inventory system is one of the
most sophisticated in the world. Driverless carts take
parts to assembly stations when they are needed so
inventory does not pile up. Suppliers must meet rigid
delivery standards. Four hours before they are needed,
Toyota software electronically tells Johnson Controls
exactly what car seats are needed for each car and the
exact order in which they must be shipped.
9
• Continuous improvement is a critical and ongoing process. No process or detail is too small or insignificant
to improve. Technology is especially important in the
continuous improvement process. This emphasis on
continuous improvement creates a culture that values
continuous learning and embraces change.
• Electronic displays connected to the manufacturing
equipment help workers monitor the assembly line.
Information is communicated by light colors (green
means the process is operating correctly, yellow means
a problem is being investigated, and red means the
assembly line has stopped) and by printed messages
(which machine malfunctioned, its speed and temperature when it broke down, and who was operating the
machine).
• Electronic quality control devices, such as an electronic
sensor on a tool or a beam of light, monitor a process.
These devices let a computer know when a tool is not
used or a required part is not picked up and used at
the appropriate time.
• More than half of Toyota’s information systems employees work in operations at its plants so they can
accompany executives, team leaders, and factory
workers when they go to solve assembly line problems.
In summary, Toyota has a clear and in-depth understanding of the business processes that make it successful,
continuously improves those processes, and understands
the role information systems play in managing, supporting, and facilitating those processes.
Source: Mel Duvall, “What’s Driving Toyota?” Baseline Magazine,
September 5, 2006.
10
Part I
Conceptual Foundations of Accounting Information Systems
attention to continuously improving its business processes has helped it become the largest
and most profitable automobile manufacturer in the world.
After preparing Tables 1-2 and 1-3 and Figures 1-1 and 1-2, Scott and Susan believe they
understand S&S well enough to begin shopping for an information system. Susan recalled a
previous employer that had several separate information systems, because their software was
not designed to accommodate the information needs of all managers. She also vividly recalled
attending one meeting where she witnessed the negative effects of having multiple systems.
The head of marketing had one report on year-to-date sales by product, the production manager had a different report that contained different sales figures, and the controller’s report,
which was produced by the general ledger system, had yet a third version of year-to-date
sales. Over an hour was wasted trying to reconcile those different reports! Susan vowed that
she would make sure that S&S did not ever find itself in such a mess. She would make sure
that any system selected would have the capability to integrate both financial and nonfinancial
data about S&S’s various business processes so that everyone could pull information from the
same system.
Accounting Information Systems
accounting information system A system that collects, records,
stores, and processes data to
produce information for decision makers. It includes people,
procedures and instructions,
data, software, information
technology infrastructure, and
internal controls and security
measures.
It has often been said that accounting is the language of business. If that is the case, then
an accounting information system (AIS) is the intelligence—the information-providing
­vehicle—of that language.
Accounting is a data identification, collection, and storage process as well as an information development, measurement, and communication process. By definition, accounting is an
information system, since an AIS collects, records, stores, and processes accounting and other
data to produce information for decision makers. This is illustrated in Figure 1-3.
An AIS can be a paper-and-pencil manual system, a complex system using the latest in
IT, or something in between. Regardless of the approach taken, the process is the same. The
AIS must collect, enter, process, store, and report data and information. The paper and pencil
or the computer hardware and software are merely the tools used to produce the information.
This text does not distinguish an AIS from other information systems. Instead, our viewpoint is that the AIS can and should be the organization’s primary information system and that
it provides users with the information they need to perform their jobs.
There are six components of an AIS:
1. The people who use the system
2. The procedures and instructions used to collect, process, and store data
3. The data about the organization and its business activities
4. The software used to process the data
5. The information technology infrastructure, including the computers, peripheral devices,
and network communications devices used in the AIS
6. The internal controls and security measures that safeguard AIS data
These six components enable an AIS to fulfill three important business functions:
1. Collect and store data about organizational activities, resources, and personnel. Organizations have a number of business processes, such as making a sale or purchasing raw
materials, which are repeated frequently.
Figure 1-3
An AIS Processes Data
to Produce Information
for Decision Makers
AIS
AIS
Data
Decision
Information
User
CHAPTER 1 Accounting Information Systems: An Overview
2. Transform data into information so management can plan, execute, control, and evaluate
activities, resources, and personnel. Decision making is discussed in detail later in this
chapter.
3. Provide adequate controls to safeguard the organization’s assets and data. Control concepts are discussed in detail in Chapters 5–11.
Since accounting data comes from an AIS, AIS knowledge and skills are critical to an
accountant’s career success. Interacting with an AIS is one of the most important activities
that accountants perform. Other important AIS-related activities include designing information systems and business process improvements, as discussed in Chapters 20 to 22. Focus 1-2
explains a specialty to designate that certain CPAs (Certified Public Accountants) have an indepth knowledge of AIS topics.
How an AIS Can Add Value to an Organization
A well-designed AIS can add value to an organization by:
1. Improving 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. This helps maintain product quality, reduces waste,
and lowers costs.
2. Improving efficiency. For example, timely information makes a just-in-time manufacturing approach possible, as it requires constant, accurate, up-to-date information about raw
materials inventories and their locations.
3. Sharing knowledge. Sharing knowledge and expertise can improve operations and provide a competitive advantage. For example, CPA firms use their information systems
to share best practices and to support communication between offices. Employees can
search the corporate database to identify experts to provide assistance for a particular client; thus, a CPA firm’s international expertise can be made available to any local client.
4. Improving the efficiency and effectiveness of its supply chain. For example, allowing
customers to directly access inventory and sales order entry systems can reduce sales and
marketing costs, thereby increasing customer retention rates.
Focus 1-2
CITP—An IT Specialty Designation for CPAs
The American Institute of Certified Public Accountants
(AICPA) offers several specialty designations for CPAs.
The CITP (Certified Information Technology Professional)
designation reflects the AICPA’s recognition of the importance of IT and its interrelationship with accounting.
A CITP possesses a broad range of business, managerial,
and technological knowledge, making it possible for the
CITP to understand how organizations use IT to achieve
their business objectives. To obtain a CITP certification,
a person must demonstrate a mastery of the following
topics: information system management, business intelligence, fraud, risk assessment, internal control concepts,
and how to test and evaluate an information system.
There are many reasons to earn the CITP certification:
• Because only CPAs can be CITPs, this certification further differentiates you from others in the marketplace.
• It affirms your value as an IT specialist and increases
your value to your employer or clients.
Based on information from http://www.aicpa.org
• It is a great “calling card” for IT people who want to
be leaders in industry, public practice, government, or
academia.
• It opens the doors to new technology-related roles
and opportunities.
• Automatic membership in the IT Section, which allows
you to meet, share best practices, network, and communicate with other CITPs. You can also receive CITP
newsletters and other communications, attend CITP
Webinars, receive CITP member discounts, and access exclusive CITP resources and content on the CITP
Web site.
To qualify for the CITP designation, you must:
• Be a CPA and a member of the AICPA
• Pass the CITP exam
• In the 5 years preceding your application, meet the
1000 hour experience and the 75 hour continuing professional education requirements
11
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Part I
Conceptual Foundations of Accounting Information Systems
5. Improving the internal control structure. An AIS with the proper internal control structure can help protect systems from fraud, errors, system failures, and disasters.
6. Improving decision making. Improved decision making is vitally important and is discussed below in more detail.
Decision making is a complex, multistep activity: identify the problem, collect and interpret information, evaluate ways to solve the problem, select a solution methodology, and
implement the solution. An AIS can provide assistance in all phases of decision making. Reports can help to identify potential problems. Decision models and analytical tools can be
provided to users. Query languages can gather relevant data to help make the decision. Various
tools, such as graphical interfaces, can help the decision maker interpret decision model results, evaluate them, and choose among alternative courses of action. In addition, the AIS can
provide feedback on the results of actions.
An AIS can help improve decision making in several ways:
●
●
●
●
●
It can identify situations requiring management action. For example, a cost report with a
large variance might stimulate management to investigate and, if necessary, take corrective action.
It can reduce uncertainty and thereby provide a basis for choosing among alternative
actions.
It can store information about the results of previous decisions, which provides valuable feedback that can be used to improve future decisions. For example, if a company
tries a particular marketing strategy and the information gathered indicates that it did
not succeed, the company can use that information to select a different marketing
strategy.
It can provide accurate information in a timely manner. For example, Walmart has an
enormous database that contains detailed information about sales transactions at each of
its stores. It uses this information to optimize the amount of each product carried at each
store.
It can analyze sales data to discover items that are purchased together, and can use such
information to improve the layout of merchandise or to encourage additional sales of related items. For example, Amazon uses its sales database to suggest additional books for
customers to purchase.
Focus 1-3 discusses how IT adds value to UPS.
The AIS and Corporate Strategy
predictive analysis – The use of
data warehouses and complex
algorithms to forecast future
events, based on historical
trends and calculated probabilities.
Since most organizations have limited resources, it is important to identify the AIS improvements likely to yield the greatest return. Making a wise decision requires an understanding of
the organization’s overall business strategy. To illustrate, consider the results of a CIO magazine survey of 500 Chief Information Officers. Asked to identify the three most important skill
sets for a CIO, over 75% put strategic thinking and planning on their list.
Figure 1-4 shows three factors that influence the design of an AIS: developments in IT,
business strategy, and organizational culture. It is also important to recognize that the design
of the AIS can also influence the organization’s culture by controlling the flow of information
within the organization. For example, an AIS that makes information easily accessible and
widely available is likely to increase pressures for more decentralization and autonomy.
IT developments can affect business strategy. For example, the Internet has profoundly affected the way many activities are performed, significantly affecting both strategy and strategic positioning. The Internet dramatically cuts costs, thereby helping companies to implement
a low-cost strategy. If every company used the Internet to adopt a low-cost strategy, then the
effects might be problematic. Indeed, one possible outcome may be intense price competition
among firms, with the likely result that most of the cost savings provided by the Internet get
passed on to the industry’s customers, rather than being retained in the form of higher profits.
Moreover, because every company can use the Internet to streamline its activities, a company
is unlikely to gain a sustainable long-term competitive advantage.
Many other technological advances affect company strategy and provide an opportunity to
gain a competitive advantage. An example is predictive analysis, which uses data warehouses
CHAPTER 1 Accounting Information Systems: An Overview
Focus 1-3
The Use of Technology by UPS
UPS used to invest heavily in training its employees to perform tasks in less time but spent little money on IT. Today,
because of the value IT adds to its business, UPS spends
well over $1 billion a year on IT. That is much more than it
spends on trucks and about as much as it spends on airplanes. UPS has 4,700 employees devoted to developing
and maintaining proprietary software and a website that
20 million people visit each day. Its 15 mainframe computers and 9,000 servers allow UPS customers to control each
shipment (16 million a day) from the time a delivery order
is initiated to the time it arrives at its destination. Here is
how the system works:
• Customers use UPS software or the UPS website to initiate a delivery. They create, print, and attach labels to
their shipment containing detailed sender information
and the time the shipment should arrive.
• They schedule a pickup time electronically.
• The UPS system routes the label information to the distribution center closest to the shipment’s destination.
• At the distribution center, proprietary software uses
the destination, desired arrival time, traffic and
weather conditions, and street information (one-way
streets, etc.) to create the most efficient delivery route.
Drivers have handheld computers with a global positioning system (GPS) that guides their routes.
• The system creates a label that specifies where to
put the shipment on the delivery truck so the earliest
shipments are nearest the driver. Drivers average 100
pickups and deliveries a day, and boxes loaded out of
order can delay the driver up to 30 minutes.
• Customers can use the UPS website to track their shipment. The GPS allows UPS to predict accurately the
shipment’s approximate arrival time.
• The handheld computer is programmed to beep at
the driver if a shipment is delivered to the wrong address or forgotten.
UPS’s commitment to IT has produced dramatic results. Recent system improvements allowed drivers to
make seven to nine more stops each day, reduced the
number of miles UPS drives each year by 1.9 million, and
saved over $600 million per year in operating costs.
However, UPS is not congratulating itself on how well
it has used IT to improve its business. The UPS system is a
work in progress. UPS continues to innovate and find ways
to use IT to become even more efficient and better serve
the customer.
Source: Corey Dade, “How UPS Went from Low-Tech to an IT
Power—and Where It’s Headed Next,” The Wall Street Journal,
July 24, 2006, R4.
and complex algorithms to forecast future events, based on historical trends and calculated
probabilities. Predictive analysis provides an educated guess of what one may expect to see
in the near future, allowing companies to make better business decisions and improve their
processes. FedEx uses predictive analysis to predict, with 65% to 90% accuracy, how customers respond to price changes and new services. Blue Cross Blue Shield of Tennessee uses a
neural-based predictive model to predict the health care that specific patients will need, the
severity of illnesses, and organ failures. Stock market analysts are using predictive analysis to
predict short-term trends in the stock market.
An organization’s AIS plays an important role in helping it adopt and maintain a strategic position. Achieving a close fit among activities requires that data be collected about each
Figure 1-4
Business
Strategy
Organizational
Culture
AIS
Information
Technology
Factors Influencing
Design of the AIS
13
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Part I
Conceptual Foundations of Accounting Information Systems
activity. It is also important that the information system collect and integrate both financial
and nonfinancial data about the organization’s activities.
The Role of the AIS in the Value Chain
value chain – Linking together
of all the primary and support
activities in a business. Value
is added as a product passes
through the chain.
primary activities – Value
chain activities that produce,
market, and deliver products
and services to customers and
provide post-delivery service
and support.
support activities – Value chain
activities such as firm infrastructure, technology, purchasing,
and human resources that
enable primary activities to
be performed efficiently and
effectively.
supply chain – An extended
system that includes an organization’s value chain as well as
its suppliers, distributors, and
customers.
To provide value to their customers, most organizations perform a number of different activities. Figure 1-5 shows that those activities can be conceptualized as forming a value chain
consisting of five primary activities that directly provide value to 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, an automobile manufacturer receives, handles, and stores steel, glass, and rubber.
2. Operations activities transform inputs into final products or services. For example, assembly line activities convert raw materials into a finished car.
3. Outbound logistics activities distribute finished products or services to customers. An
example is shipping automobiles to car dealers.
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.
Support activities allow the five primary activities to be performed efficiently and effectively. They are grouped into four categories:
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 compensating
employees.
3. Technology activities improve a product or service. Examples include research and development, investments in IT, and product design.
4. Purchasing activities procure raw materials, supplies, machineries, and the buildings
used to carry out the primary activities.
Using IT to redesign supply chain systems yields tremendous benefits and cost savings.
For example, Tennessee Valley Authority, a power generator, reengineered its supply chain and
crea…