information is a business resource

Like the other business resources of raw materials,

capital, and labor, information is vital to the survival of
the contemporary business organization.

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.

These activities consist of the product-oriented work of
the organization, such as manufacturing, sales, and
distribution. External users fall into two groups
Above the base level, the organization is divided into Trading partners include customer sales and billing
three management tiers: operations management, information, purchase information for suppliers, and
middle management, and top management. inventory receipts information.
Operations management is directly responsible for Stakeholders are entities outside (or inside) the
controlling day-to-day operations. organization with a direct or indirect interest in the firm.
Stockholders, financial institutions, and government
Middle management is accountable for the short-term
agencies are examples of external stakeholders.
planning and coordination of activities necessary to
accomplish organizational objectives. Stockholders, financial institutions, and government
agencies are examples of external stakeholders.
Top management is responsible for longer-term
Information exchanges with these groups include
planning and setting organizational objectives.
financial statements, tax returns, and stock transaction
Every individual in the organization, from business information.
operations to top management, needs information to
1-1a Information Objectives Three fundamental
accomplish his or her tasks
objectives of Information:
information flows in two direction
 To support the firm’s day-to-day operations.
horizontal flow supports operations-level tasks with  To support management decision making.
highly detailed information about the many business  To support the stewardship function of
transactions affecting the firm. This includes management
information about events such as the sale and shipment
of goods, the use of labor and materials in the System generates mental images of computers and
production process, and internal transfers of resources programming.
from one department to another
 System is a group of two or more interrelated
vertical flow distributes information downward from components or subsystems that serve a
senior managers to junior managers and operations common purpose.
personnel in the form of instructions, quotas, and
Some systems are naturally occurring, whereas others
budgets. In addition, summarized information
are artificial
pertaining to operations and other activities flows
upward to managers at all levels.
information system - is the set of formal procedures by Transaction as an event that affects or is of interest to
which data are collected, stored, processed into the organization and is processed by its information
information, and distributed to users. system as a unit of work.

Sales of products to customers, purchases of inventory

from vendors, and cash disbursements and receipts are
Let’s analyze the general definition to gain an examples of financial transactions.
understanding of how it applies to businesses and
information systems. Transactions fall into two classes:

 MULTIPLE COMPONENTS. contain more than  Financial transactions - is an economic event

one part that affects the assets and equities of the
 RELATEDNESS. relates the multiple parts of the organization, is reflected in its accounts, and is
system measured in monetary terms.
 SYSTEM VERSUS SUBSYSTEM. these terms are  Nonfinancial transactions - are events that do
interchangeable. A system is called a not meet the narrow definition of a financial
subsystem when it is viewed in relation to the transaction.
larger system of which it is a part. Likewise, a
subsystem is called a system when it is the
focus of attention.
 PURPOSE. must serve at least one purpose, but
it may serve several.

An automobile is an example of an artificial system that

is familiar to most of us and that satisfies the definition
of a system provided.

Decomposition is the process of dividing the system

into smaller subsystem parts. This is a convenient way
of representing, viewing, and understanding the
relationships among 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.

Information system is the set of formal procedures by

which data are collected, processed into information,
and distributed to users.
The Accounting Information System
Two broad classes of systems emerge from the
decomposition: * AIS subsystems process financial transactions and
nonfinancial transactions that directly affect the
 accounting information system (AIS)
processing of financial transactions.
 management information system (MIS)
 1. Transaction Processing System (TPS) - is central
to the overall function of the information
The AIS is composed of three major subsystems: system
1. transaction processing system (TPS) - supports - it converts economic events into financial
daily business operations with numerous transactions, records financial transactions in
reports, documents, and messages for users the accounting records (journals and ledgers),
throughout the organization; and distributes essential financial.
2. general ledger/financial reporting system -information to operations personnel to support
(GL/FRS) -produces the traditional financial their daily operations
statements, such as the income statement, - deals with business events that occur
balance sheet, statement of cash flows, tax frequently.
returns, and other reports required by law; and
3. management reporting system (MRS) - TPS is central to the overall function of the
provides internal management with information system by converting economic
specialpurpose financial reports and events into financial transactions, recording
information needed for decision making such as financial transactions in the accounting records
budgets, variance reports, and responsibility (journals and ledgers), and distributing essential
reports. financial information to operations personnel to
The Management Information System- MIS processes support their daily operations.
nonfinancial transactions that are not normally
processed by traditional AIS. TPS consists of three transaction cycles:
 expenditure cycle
-Management often requires information that goes  conversion cycle
beyond the capability of AIS  revenue cycle
2. General Ledger/Financial Reporting Systems
* The GLS and the FRS are two closely related
subsystems. Because of their operational
interdependency, however, they are generally
viewed as a single integrated system—the
GL/FRS.
* The FRS measures the status of financial
resources and the changes in those resources
and communicates this information to external
users
* nondiscretionary reporting - the organization
has few or no choices in the information it
provides.
The Need to Distinguish between AIS and MIS
3. Management Reporting System
*SOX legislation requires that corporate management
* The MRS provides the internal financial information
design and implement internal controls over the entire
needed to manage a business. Typical reports produced
financial reporting process.
by the MRS include budgets, variance reports, cost-
1-1c AIS Subsystems volume-profit analyses, and reports using current
(rather than historical) cost data.
* discretionary reporting because the organization can ► Internal financial transactions involve the exchange
choose what information to report and how to present or movement of resources within the organization.

Data Collection - is the first operational stage in the

information system. The objective is to ensure that
event data entering the system are valid, complete, and
free from material errors.

Two rules govern the design of data collection

procedures:

 Relevance
 Efficiency

it. Data Processing - group that manages the computer

resources used to perform the day-to-day processing of
End Users
transactions.
Two general groups:
Database Management database - physical repository
External users - include creditors, stockholders, for financial and nonfinancial data.
potential investors, regulatory agencies, tax
The levels in the data hierarchy:
authorities, suppliers, and customers.
 Data attribute - is the most elemental piece of
Internal users - include management at all levels of the
potentially useful data in the database. An
organization as well as operations personnel.
attribute is a logical and relevant characteristic
DATA VS INFORMATION of an entity about which the firm captures data.
 Record - is a complete set of attributes for a
Data are facts, which may or may not be processed single occurrence within an entity class.
(edited, summarized, or refined) and have no direct  file - is a complete set of attributes for a single
effect on a user’s actions. occurrence within an entity class.
Information causes the user to take an action that he or Database Management Tasks
she otherwise could not, or would not, have taken.
Information is often defined simply as processed data. Database management involves three fundamental
tasks: storage, retrieval, and deletion.
** One person’s information is another person’s data.
Thus, information is not just a set of processed facts  storage - assigns keys to new records and stores
arranged in a formal report. Information triggers users them in their proper location in the database
to take actions that support their day-to-day business  retrieval - the task of locating and extracting an
tasks, resolve conflicts, and plan for the future. existing record from the database for
processing
Data Sources - are financial transactions that enter the  deletion - task of permanently removing
information system from either internal or external obsolete or redundant records from the
sources. database.
► External financial transactions are the most Information generation is the process of compiling,
common source of data. These are economic exchanges arranging, formatting, and presenting information
with other business entities and individuals outside the to users. Information can be an operational
firm. document such as a sales order, a structured report,
or a message on a computer screen. Regardless of Information System Objectives Each organization
physical form, useful information has the following must tailor its information system to the needs of
characteristics: relevance, timeliness, accuracy, its users. Therefore, specific information system
completeness, and summarization. objectives may differ from firm to firm. Three
fundamental objectives are, however, common to
RELEVANCE. The contents of a report or document all systems:
must serve a purpose. This could be to support a
manager’s decision or a clerk’s task. We have
established that only data relevant to a user’s action
have information content. 1. To support the stewardship function of
management. Stewardship refers to
management’s responsibility to properly
manage the resources of the firm. The
TIMELINESS. The age of information is a critical information system provides information about
factor in determining its usefulness. Information resource utilization to external users via
must be no older than the time of the action it traditional financial statements and other
supports. mandated reports. Internally, management
receives stewardship information from various
responsibility reports.
ACCURACY. Information must be free from material 2. 2. To support management decision making.
errors. However, materiality is a difficult concept to The information system supplies managers with
quantify. It has no absolute value; it is a problem- the information they need to carry out their
specific concept. This means that, in some cases, decision-making responsibilities.
information must be perfectly accurate. 3. 3. To support the firm’s day-to-day operations.
The information system provides information to
operations personnel to assist them in the
COMPLETENESS. No piece of information essential efficient and effective discharge of their daily
to a decision or task should be missing. For tasks.
example, a report should provide all necessary ACQUISITION OF INFORMATION SYSTEMS
calculations and present its message clearly and (1) they develop customized systems from
unambiguously. scratch through in-house systems development
activities,
(2) they purchase preprogrammed commercial
systems from software vendors.
SUMMARIZATION. Information should be
aggregated in accordance with the user’s needs.
Larger organizations with unique and frequently
Lowerlevel managers tend to need information that
changing needs engage in in-house
is highly detailed.
development. The formal process by which this
is accomplished is called the system
development life cycle. Smaller 14 PART I
Feedback is a form of output that is sent back to the Overview of Accounting Information Systems
system as a source of data. Feedback may be companies and larger firms that have
internal or external and is used to initiate or alter a standardized information needs are the primary
process. market for commercial software.

Turnkey systems are completely finished and

tested systems that are ready for
implementation. Typically, they are general- 1. Geographic Location. Many organizations
purpose systems or systems customized to a have operations dispersed across the
specific industry. country and around the world.
2. 2. Product Line. Companies that produce
Backbone systems consist of a basic system highly diversified products often organize
structure on which to build. The primary around product lines, creating separate
processing logic is preprogrammed, and the divisions for each. Product segmentation
vendor then designs the user interfaces to suit allows the organization to devote
the client’s unique needs. specialized management, labor, and
resources to segments separately, almost as
Vendor-supported systems are custom (or if they were separate firms.
customized) systems that client organizations 3. . Business Function. Functional
purchase commercially rather than develop in- segmentation divides the organization into
house. Under this approach, the software areas of specialized responsibility based on
vendor designs, implements, and maintains the tasks.
system for its client.
Segmentation by business function is the most common
method of organizing. To illustrate it, we will assume a
ORGANIZATIONAL STRUCTURE
The structure of an organization reflects the manufacturing firm that uses these resources:
materials, labor, financial capital, and information.
distribution of responsibility, authority, and
accountability throughout the organization.
These flows are illustrated in Figure 1-7. Firms
achieve their overall objectives by establishing
measurable financial goals for their operational
units. For example, budget information flows
downward. This is the mechanism by which
senior management conveys to their
subordinates the standards against which they
will be measured for the coming period. The
results of the subordinates’ actions, in the form
of performance information, flow upward to
senior management. Understanding the
distribution pattern of responsibility, authority,
and accountability is essential for assessing user
information needs.

BUSINESS SEGMENTS
Firms organize into segments to promote
internal efficiencies through the specialization
of labor and cost-effective resource allocations.
Managers within a segment can focus their
attention on narrow areas of responsibility to
achieve higher levels of operating efficiency.
Three of the most common approaches include
segmentation by: