Chapter 1.

The Information System: An Accountant’s Perspective

accounting information systems (AIS) lacks a well-define body of knowledge.

Four major sections

1) Explores the information environment of the firm
2) impact of organizational structure on AIS
3) reviews the evolution of information systems
4) role of accountants as users, designers, and auditors of AIS.

The Information Environment

-information is a business resource

-information flows out from the organization to external users, such as customers, suppliers,
and stakeholders who have an interest in the firm.
-Business operations form the base of the pyramid consist of the product-ori-ented work of the
organization, such as manufacturing, sales, and distribution.
3 management tiers:
1) operations management- is directly responsible for controlling day-to-day operations.
2) middle management- is accountable for the short-term planning and coordination of
activities necessary to accomplish organizational objectives
3) top management- is responsible for longer-term planning and set-ting organizational
objectives.
-horizontal flow supports operations-level tasks with highly detailed information about the
many business transactions affecting the firm.
-vertical flow distributes information downward from senior managers to junior managers
and operations personnel in the form of instructions, quotas, and budgets

Two groups of External users

1) trading partners
2) stakeholders- are entities outside (or inside) the organi-zation with a direct or
indirect interest in the firm. (Stockholders, financial institutions, and
government agencies are examples of external stakeholders. Inside stakeholders
include accountants and internal auditors.)
-Management information is thus more summarized and oriented toward reporting
on overall performance and problems rather than routine operations.
-External stake-holders financial statement information, based on generally accepted
accounting principles (GAAP)
-systems are naturally occurring, whereas others are artificial. All life forms, plant
and animal, are examples of natural systems. Artificial systems are man-made.

Elements of a System

-system-is a group of two or more interrelated components or subsystems that serve a

common purpose.

1) MULTIPLE COMPONENTS. A system must contain more than one part.

2) RELATEDNESS. A common purpose relates the multiple parts of the system.
If a particular component does not contribute to the common goal, then it is
not part of the system.

3) SYSTEM VERSUS SUBSYSTEM. The distinction between the terms system

and subsystem is a mat-ter of perspective.. A system is called a subsystem
when it is viewed in relation to the larger system of which it is a part.
Likewise, a subsystem is called a system when it is the focus of attention.

4) PURPOSE. A system must serve at least one purpose, but it may serve
several. a purpose is its fundamental justification. When a system ceases to
serve a purpose, it should be replaced.

An Example of an Artificial System

let’s assume that the automobile system serves only one purpose: providing conveyance.

-SYSTEM DECOMPOSITION. Decomposition is the process of dividing the system into smaller
sub-system parts. This is a convenient way of representing, viewing, and understanding the
relationships among subsystems. By decomposing a system, we can present the overall
system as a hierarchy and view the relationships between subordinate and higher-level
subsystems.

-SUBSYSTEM INTERDEPENDENCY. A system’s ability to achieve its goal depends on the

effective functioning and harmonious interaction of its subsystems. If a vital subsystem fails
or becomes defective and can no longer meet its specific objective, the overall system will fail
to meet its objective
AN INFORMATION SYSTEMS FRAMEWORK

The information system is the set of formal procedures by which data are collected,
processed into infor-mation, and distributed to users.

-A transaction as an event that affects or is of interest to the organization and is

processed by its information system as a unit of work.( both financial and
nonfinancial events)

-A financial transaction is an economic event that affects the assets and

equities of the organization, is reflected in its accounts, and is measured in
monetary terms.

-Nonfinancial transactions are events that do not meet the narrow definition of a
financial transaction. Important as this information obviously is, it is not a financial
transaction, and the firm has no legal obligation to process it correctly—or at all.

Financial transactions and nonfinancial transactions are closely related and are
often processed by the same physical system.
The Accounting Information System
 The AIS is composed of three major subsystems:
(1) the transaction processing system (TPS), which supports daily business
operations with numerous reports, documents, and messages for users throughout
the organization;
(2) the general ledger/financial reporting system (GL/FRS), which produces the
tradi-tional financial statements required by law
(3) the management reporting system (MRS), which pro-vides internal management
with special-purpose financial reports and information needed for decision making
such as budgets, variance reports, and responsibility reports.

-man-agement information system (MIS)- processes nonfinancial transactions that

are not normally processed by traditional AIS.

TABLE
1-1 EXAMPLES OF MIS APPLICATIONS IN FUNCTIONAL AREAS

Function Examples of MIS Applications

Finance Portfolio management systems

Capital budgeting systems

Marketing Market analysis

New product development
Product analysis

Warehouse organization and

Distribution scheduling
Delivery scheduling
Vehicle loading and allocation
models

Human resource management

Personnel systems
n Job skill tracking system
n Employee benefits system

Transaction Processing System

The TPS is central to the overall function of the information system by converting economic
events into financial transactions, recording financial transactions in the accounting records
(journals and ledgers), and distributing essential financial information to operations
personnel to support their daily operations.
Three transaction cycles:
1)revenue cycle
2) expenditure cycle
3)conversion cycle.

General Ledger/Financial Reporting Systems

-The general ledger system (GLS) and the financial reporting system (FRS) are generally
viewed as a single integrated system—the GL/FRS.
-The bulk of the input to the GL portion of the system comes from the transaction cycles.
-Summaries of transaction cycle activity are processed by the GLS to update the general
ledger control accounts.
-stock transactions, mergers, and lawsuit settlements, for which there may be no formal
processing cycle in place, also enter the GLS through alternate sources.
-The FRS measures and reports the status of financial resources and the changes in those
resources primarily to external users. This type of reporting is called non-discretionary

Management Reporting System

The MRS provides the internal financial information needed to manage a business. Typical
reports pro-duced by the MRS include budgets, variance reports, cost-volume-profit analyses,
and reports using current (rather than historical) cost data. This type of reporting is called
discretionary reporting

A GENERAL MODEL FOR AIS

This is a general model because it describes all information systems, regardless of their
technological architecture.

The elements of the gen-eral model

1) End users
Two general groups:
1)External users include creditors, stockhold-ers, potential investors,
regulatory agencies, tax authorities, suppliers, and customers.
 2) Trading part-ners (customers and suppliers) receive transaction-oriented
information, including purchase orders, billing statements, and shipping documents

DATA VERSUS INFORMATION. Data are facts, which may or may not be processed
(edited, summarized, or refined) and have no direct effect on the user. By contrast,
information causes the user to take an action that he or she otherwise could not, or
would not, have taken. Information is determined by the effect it has on the user, not
by its physical form

2) Data sources are financial transactions that enter the information system
from both internal and external sources.
1)External financial transactions-most common source of data for
most organizations. These are economic exchanges with other business
entities and individuals outside the firm.
2) Internal financial transactions involve the exchange or movement of
resources within the organization

3) Data collection is the first operational stage in the information system. This is the
most important stage in the system..

Two rules govern the design of data collection procedures: relevance(Only data that
ultimately contribute to information are relevant) and efficiency(designed to collect data
only once then be made available to multiple users)
-Data redundancy overloads facilities and reduces the overall efficiency of the
system.
-Inconsistency among redundant data elements can result in inappropriate actions
and bad decisions.

4) data processing- Once collected, data usually require processing to produce

information.
5) Database Management
-database is its physical repository for financial and nonfinancial data. It can be a
filing cabinet or a computer disk.
-DATA ATTRIBUTE is the most elemental piece of potentially useful data in the
database. An attribute is a logical and relevant characteristic of an entity about
which the firm captures data.
-RECORD is a complete set of attributes for a single occurrence within an entity
class.Therefore, every record in the
database must be unique in at least
one attribute. This unique identifier
at-tribute is the primary key.
-file is a complete set of records of an identical class. The organization’s database is
the entire collection of such files.

DATABASE MANAGEMENT TASKS.

1) storage task assigns keys to new records and stores them in their proper location
in the database.
2)Retrieval is the task of locating and extracting an existing record from the database
for processing.
3) Deletion is the task of permanently removing obsolete or redundant records from the
database

6) Information generation is the process of compiling, arranging, formatting, and

presenting information to users
useful information has the following characteristics
a) RELEVANCE. The contents of a report or document must serve a purpose.
b) TIMELINESS. The age of information is a critical factor in determining its
usefulness. Information must be no older than the time of the action it supports.
c) ACCURACY. Information must be free from material errors. However, materiality
is a difficult concept to quantify. It has no absolute value; it is a problem-specific
concept
d) COMPLETENESS. No piece of information essential to a decision or task should
be missing
e) SUMMARIZATION. Information should be aggregated in accordance with the
user’s needs

7) Feedback is a form of output that is sent back to the system as a source of data.
Feedback may be internal or external and is used to initiate or alter a process

Information System Objectives

Three fundamental objectives are, however, common to all systems:

a) To support the stewardship function of management. Stewardship

refers to management’s responsi-bility to properly manage the resources of the firm.
b) To support management decision making.
c)To support the firm’s day-to-day operations..

ACQUISITION OF INFORMATION SYSTEMS

How organizations obtain information systems? Two ways:
1) they develop customized systems from scratch through in-house systems
development activities
2) they purchase preprogrammed commercial systems from software ven-dors.
-System development life cycle –the formal process by which this is accomplished
Three basic types of commercial software

a) Turnkey systems are completely finished and tested systems that are ready for
implementation. Typi-cally, they are general-purpose systems or systems
customized to a specific industry.

b) Backbone systems consist of a basic system structure on which to build. The

primary processing logic is preprogrammed, and the vendor then designs the
user interfaces to suit the client’s unique needs.

c) Vendor-supported systems are custom (or customized) systems that client

organizations purchase commercially rather than develop in-house. Under this
approach, the software vendor designs, imple-ments, and maintains the system
for its client.
-The structure of an organization reflects the distribution of responsibility, authority,
and accountability throughout the organization.
-Business organizations consist of functional units or segments.

Three of the most common approaches include segmentation by:

a) Geographic A convenient way to manage such operations is to organize the

management of the firm around each geographic segment as a quasi-
autonomous entity.

b) Product Line. Companies that produce highly diversified products often

organize around product lines, creating separate divisions for each.

c) Business Function. Functional segmentation divides the organization into

areas of specialized responsibility based on tasks.

FUNCTIONAL SEGMENTATION-is the most common method of organizing the study

of information systems, the accounting and information technology (IT) functions are
given separate and more detailed treatment.
Materials Management

The objective of materials management is to plan and control the materials inventory
of the company. A manufacturing firm must have sufficient inventories on hand to
meet its production needs and yet avoid excessive inventory levels.
Three sub-functions:

a) Purchasing is responsible for ordering inventory from vendors when inventory

levels fall to their reorder points.

b) Receiving is the task of accepting the inventory previously ordered by

purchasing

c) Stores takes physical custody of the inventory received and releases these
resources into the production process as needed.

Production

Production activities occur in the conversion cycle in which raw materials, labor, and
plant assets are used to create finished products.
Classes:
1) primary manufacturing activities- shape and assemble raw materials into finished
products

2)production support activities- ensure that primary manufacturing activities operate

efficiently and effectively

-Production planning involves scheduling the flow of materials, labor, and

machinery to efficiently meet production needs.
-Quality control monitors the manufacturing process at various points to ensure
that the finished products meet the firm’s quality standards.
-Maintenance keeps the firm’s machinery and other manufacturing facilities
in running order.

Marketing- The marketing function deals with the strategic problems of product
promotion, advertising, and market research.
Distribution-is the activity of getting the product to the customer after the sale.

Personnel- The objective of the personnel function is to effectively manage this resource
Finance- manages the financial resources of the firm through banking and treasury activities,
portfolio management, credit evaluation, cash disbursements, and cash receipts

Finance

The finance function manages the financial resources of the firm through banking
and treasury activities, portfolio management, credit evaluation, cash disbursements,
and cash receipts. Because of the cyclical na-ture of business, many firms swing
between positions of excess funds and cash deficits. In response to these cash flow
patterns, financial planners seek lucrative investments in stocks and other assets
and low-cost lines of credit from banks. The finance function also administers the
daily flow of cash in and out of the firm.

THE ACCOUNTING FUNCTION

The accounting function manages the financial information resource of the firm.
Two important roles in transaction processing.
1) accounting captures and records the financial effects of the firm’s
transactions.
2) transaction information to operations personnel to coordinate many
of their key tasks.

-The value of information to a user is determined by its reliability.

Accounting Independence- Information reliability rests heavily on the concept of accounting

independence. Simply stated, account-ing activities must be separate and independent

THE INFORMATION TECHNOLOGY FUNCTION

- IT function is associated with the information resource.

 1) centralized data processing model, all data processing is performed by one or more
large com-puters housed at a central site that serve users throughout the
organization. End users compete for these resources on the basis of need. The IT
function is usually treated as a cost center whose operating costs are charged back
to the end users

DATABASE ADMINISTRATION. Centrally organized companies maintain their data resources

in a central location that is shared by all end users

DATA PROCESSING. The data processing group manages the computer resources used to
perform the day-to-day processing of transactions

FUNCTIONS

1)Data control- this function was responsible for receiving batches of transaction
documents for processing from end users and then distribut-ing computer output (documents
and reports) back to the users
 2) data conversion function transcribes transaction data from source (paper)
documents to digital media (tape or disk) suitable for com-puter processing by the central
computer, which is managed by the computer operations group
3)Computer Operations
4) Data library is a room often adjacent to the computer center that provides safe
storage for the off-line data files, such as magnetic tapes and removable disk packs
- data librarian who is responsible for the receipt, storage, retrieval, and
custody of data files controls access to the library.

-systems development- is responsible for analyzing user needs and for designing new systems
to satisfy those needs
- End users are those for whom the system is built.(MANAGERS)
-systems maintenance- assumes responsibility for keeping it current with user needs

Distributed Data Processing- An alternative to the centralized model. It involves reorganizing

the IT function into small in-formation processing units (IPUs) that are distributed to end
users and placed under their control.

DISADVANTAGES OF DDP

- loss of control
- inefficient use of resources
- destruc-tion of audit trails
- inadequate segregation of duties
- increased potential for programming errors and systems failures
- lack of standards

ADVANTAGES OF DDP
- Cost reductions
- Improved cost control responsibility
-improved user satisfaction
- Backup
The Evolution of Information System Models
1) manual process model is the oldest and most traditional form of accounting systems.
Manual systems constitute the physical events, resources, and personnel that
characterize many business processes
2) flat-file approach is most often associated with so-called legacy systems. These are
large mainframe systems that were implemented in the late 1960s through the 1980s
task-data dependency- user’s inability to obtain additional information as his or her needs
change.