Chapter 1

The Information System: An Accountant’s Perspective

Internal & External Information Flows

Internal Information Flows

 Horizontal flows of information
used primarily at the operations level to
capture transaction and operations data
 Vertical flows of information
o downward flows — instructions, quotas,
and budgets
o upward flows — aggregated transaction
and operations data

Information Requirements
 Each user group has unique information requirements.
 The higher the level of the organization, the greater the need for more aggregated
information and less need for detail.

Information in Business
Information is a business resource that:
o needs to be appropriately managed
o is vital to the survival of contemporary businesses

What is a System?
A group of interrelated multiple components or subsystems that serve a common purpose
 System or subsystem?
o A system is called a subsystem when it is viewed as a component of a larger
system.
o A subsystem is considered a system when it is the focus of attention.

System Decomposition versus System Interdependency

 System Decomposition
o the process of dividing the system into smaller subsystem parts
 System Interdependency
o distinct parts are not self-contained
o they are reliant upon the functioning of the other parts of the system
o all distinct parts must be functioning or the system will fail

What is an Information System?

An information system is the set of formal procedures by which data are collected, processed
into information, and distributed to users.
Transactions
A transaction is a business event.
 Financial transactions
o economic events that affect the assets and equities of the organization
o e.g., purchase of an airline ticket
 Nonfinancial transactions
o all other events processed by the organization’s information system
o e.g., an airline reservation — no commitment by the customer

Financial

Transactions
Information User Decision
Information
Nonfinancial System Making

Transactions

What is Accounting Information Systems?

Accounting is an information system.
 It identifies, collects, processes, and communicates economic information about a
firm using a wide variety of technologies.
 It captures and records the financial effects of the firm’s transactions.
 It distributes transaction information to operations personnel to coordinate many
key tasks.

AIS versus MIS

 Accounting Information Systems (AIS) process
o financial transactions; e.g., sale of goods
o and nonfinancial transactions that directly affect the processing of financial transactions;
e.g., addition of newly approved vendors
 Management Information Systems (MIS) process
o nonfinancial transactions that are not normally processed by traditional AIS; e.g., tracking
customer complaints

IS

AIS MIS

GLS/FRS TPS MRS Finance Marketing Production HRS Distribution

AIS Subsystems
 Transaction processing system (TPS)
supports daily business operations
 General Ledger/ Financial Reporting System (GL/FRS)
produces financial statements and reports
 Management Reporting System (MRS)
produces special-purpose reports for internal use

The General AIS Model

Data Sources
Data sources are financial transactions that enter the information system from internal and
external sources.
 External financial transactions are the most common source of data for most
organizations.
o E.g., sale of goods and services, purchase of inventory, receipt of cash, and
disbursement of cash (including payroll).
 Internal financial transactions involve the exchange or movement of resources
within the organization.
o E.g., movement of raw materials into work-in-process (WIP), application of
labor and overhead to WIP, transfer of WIP into finished goods inventory, and
depreciation of equipment.

Transforming the Data into Information

Functions for transforming data into information according to the general AIS model:
1. Data Collection  Batching
 Capturing transaction data  Merging
 Recording data onto forms  Calculating
 Validating and editing the  Summarizing
data  Comparing

2. Data Processing 3. Data Management

 Classifying  Storing
 Transcribing  Retrieving
 Sorting  Deleting
4. Information Generation
 Compiling
 Arranging
 Formatting
 Presenting

Characteristics of Useful Information

Regardless of physical form or technology, useful information has the following characteristics:
 Relevance: serves a purpose
 Timeliness: no older than the time period of the action it supports
 Accuracy: free from material errors
 Completeness: all information essential to a decision or task is present
 Summarization: aggregated in accordance with the user’s needs

Information System Objectives in a Business Context

The goal of an information system is to support
 the stewardship function of management
 management decision making
 the firm’s day-to-day operations

Organizational Structure
 The structure of an organization helps to allocate
o responsibility
o authority
o accountability
 Segmenting by business function is a very common method of organizing.

Functional Areas
 Inventory/Materials Management
o purchasing, receiving and stores
 Production
o production planning, quality control, and maintenance
 Marketing
 Distribution
 Personnel
 Finance
 Accounting
 Computer Services

Accounting Independence
 Information reliability requires accounting independence.
o Accounting activities must be separate and independent of the functional areas
maintaining resources.
o Accounting supports these functions with information but does not actively participate.
 o Decisions makers in these functions require that such vital information be supplied by an
independent source to ensure its integrity.

The Computer Services Function

Distributed Centralized
Data Most companies fall in between. Data
Processing Processing

Reorganizing the computer All data processing is performed by

services function into small one or more large computers
information processing units that housed at a central site that serves
are distributed to end users and users throughout the organization.
placed under their control
Primary areas:
database administration
data processing
systems development
systems maintenance

Organization of Computer Services Function

in a Centralized System Organizational Structure for a Distributed
Processing System

Potential Advantages of DDP

 Cost reductions in hardware and
data entry tasks
 Improved cost control
responsibility
 Improved user satisfaction since
control is closer to the user level
 Backup of data can be improved
through the use of multiple data storage sites
Potential Disadvantages of DDP
 Loss of control
 Mismanagement of company resources
 Hardware and software incompatibility
 Redundant tasks and data
 Consolidating tasks usually segregated
 Difficulty attracting qualified personnel
 Lack of standards

Manual Process Model

 Transaction processing, information processing, and accounting are physically
performed by people, usually using paper documents.
 Useful to study because:
o helps link AIS courses to other accounting courses
o often easier to understand business processes when not shrouded in technology
o facilitates understanding internal controls

The Evolution of IS Models: The Flat-File Model

Data Redundancy Problems
 Data Storage - excessive storage costs of paper documents and/or magnetic form
 Data Updating - changes or additions must be performed multiple times
 Currency of Information - potential problem of failing to update all affected files
 Task-Data Dependency - user’s inability to obtain additional information as needs
change
 Data Integration - separate files are difficult to integrate across multiple users

The Evolution of IS Models: The Database Model

An REA Data Model Example

A
R E
M M M 1 Sales
Inventory Line items Sales Party to
M Person
M

Pays for
1
Made to Customer

1
M
Received
M
1 M Cash from
Cash Increases Collections M Cashier
1
Received
by
REA Model
 The REA model is an accounting framework for modeling an organization’s
o economic resources; e.g., assets
o economic events; i.e., affect changes in resources
o economic agents; i.e., individuals and departments that participate in an economic
event
o Interrelationships among resources, events and agents
 Entity-relationship diagrams (ERD) are often used to model these relationships.

Accountants as Information System Users

 Accountants must be able to clearly convey their needs to the systems professionals
who design the system.
 The accountant should actively participate in systems development projects to ensure
appropriate systems design.

Accountants as System Designers

 The accounting function is responsible for the conceptual system, while the computer
function is responsible for the physical system.
 The conceptual system determines the nature of the information required, its sources,
its destination, and the accounting rules that must be applied.

Accountants as System Auditors

 External Auditors
o attest to fairness of financial statements
o assurance service: broader in scope than traditional attestation audit
 IT Auditors
o evaluate IT, often as part of external audit
 Internal Auditors
o in-house IS and IT appraisal services
 CHAPTER 1: The Information System: An Accountant’s Perspective
e. key, record, file.
1. Which of the following is NOT a financial transaction?
a. purchase of products 8. Which is NOT an accountant’s primary role in information
b. cash receipts systems?
c. update valid vendor file a. system user
d. sale of inventory b. system auditor
c. system designer
2. The following are subsystems of the Accounting d. system programmer
Information System, EXCEPT
a. Transaction Processing System. 9. Which of the following is NOT an objective of all
b. Human Resources System. information systems?
c. General Ledger/Financial Reporting System. a. support for the stewardship function of
d. Management Reporting System. management
b. support for management decision making
3. Which of the following is NOT a purpose of the c. support for the day-to-day operations of the firm
Transaction Processing System? d. all of the above are objectives
a. managing and reporting on the status of financial
investments 10. Which of the following best describes the activities of
b. converting economic events into financial the materials management function?
transactions a. purchasing, receiving, and inventory control
c. distributing essential information to operations b. receiving, sales, distribution, and purchasing
personnel to support their daily operations c. receiving, storage, purchasing, and accounts
d. recording financial transactions in the accounting payable
records d. purchasing, receiving, and storage
e. purchasing, storage, and distribution
4. The objectives of the data collection activity of the
general model for AIS are to collect data that are 11. Which of the following best describes the activities of
a. relevant and redundant. the production function?
b. efficient and objective. a. maintenance, inventory control, and production
c. efficient and redundant. planning
d. efficient and relevant. b. production planning, quality control,
manufacturing, and cost accounting
5. Which of the following is NOT a characteristic of effective c. quality control, production planning,
information? manufacturing, and payroll
a. relevance d. maintenance, production planning, storage, and
b. accuracy quality control
c. summarization e. manufacturing, quality control, and maintenance
d. precision
12. Which of the following best describes the activities of
the accounting function?
6. Which of the following is NOT a database management
a. inventory control, accounts payable, fixed assets,
task?
and payroll
a. retrieval
b. fixed assets, accounts payable, cash
b. storage
disbursements, and cost accounting
c. summarization
c. purchasing, cash receipts, accounts payable, cash
d. deletion
disbursements, and payroll
d. inventory control, cash receipts, accounts payable,
7. When viewed from the highest to most elemental level,
cash disbursements, and payroll
the data hierarchy is
e. inventory control, cost accounting, accounts
a. attribute, record, file.
payable, cash disbursements, and payroll
b. record, attribute, key.
c. file, record, attribute.
13. Which statement best describes the issue of distributed
d. file, record, key.
data processing (DDP)?
 a. The centralized and DDP approaches are mutually
exclusive; an organization must choose one
approach or the other.
b. The philosophy and objective of the organization’s
management will determine the extent of DDP in
the firm.
c. In a minimum DDP arrangement, only data input
and output are distributed, leaving the tasks of
data control, data conversion, database
5. Information System Categorization
management, and data processing to be centrally
Classify the following items as either:
managed.
TPS—transaction processing system
d. The greatest disadvantage of a totally distributed
FRS—financial reporting system
environment is that the distributed IPU locations
MRS—management reporting system
are unable to communicate and coordinate their
a. Variance reports
activities.
b. Sales order capture
e. Although hardware (such as computers, database
c. Balance sheet
storage, and input/output terminals) can be
d. Budgets
effectively distributed, the systems development
e. Purchase order preparation
and maintenance tasks must remain centralized
f. Tax returns
for better control and efficiency.
g. Sales summary by product line
h. Cash disbursements preparation
14. Which of the following is a disadvantage of distributed
i. Annual report preparation
data processing?
j. Invoice preparation
a. End-user involvement in systems operation is
k. Cost-volume-profit analysis
decreased.
6. Flat-File versus Database Model
b. Disruptions due to mainframe failures are
Outline the traditional problems associated with the
increased.
flat-file model that are resolved by the database model.
c. The potential for hardware and software
incompatibility across the organization is
11. Characteristics of Useful Information
increased.
All records in a file must be uniquely identifiable in at
d. The time between project request and completion
least one attribute, which is its primary key. Drawing on
is increased.
your general knowledge of accounting, identify the
e. All of the above are disadvantages.
primary key for the following types of accounting
records.
PROBLEMS
Record Type Primary Key
1. Users of Information Accounts Receivable Customer Number
Classify the following users of information as either: Accounts Payable
I—internal user Inventory
T—external user: trading partner Customer Sales Orders
S—external user: stakeholder Purchase Orders to
a. Internal Revenue Service vendors
b. Inventory control manager Cash Receipts (checks)
c. Board of directors from customers
d. Customers Cash Disbursements
e. Lending institutions (checks) to vendors
f. Securities and Exchange Commission Employee Payroll
g. Stockholders Earnings records
h. Chief executive officer
i. Suppliers 12. Data Attributes
j. Bondholders Drawing from your basic accounting knowledge, list the
relevant data attributes that constitute the record
3. AIS Model types below. Identify which attribute is the primary key
Examine the diagram below and determine what for the record.
essential mechanism is missing. Record Type Attribute
Accounts Payable record
Inventory record
Customer Sales Orders
record
Purchase Orders to
vendors
Cash Receipts (checks)
from customers
Employee Payroll
Earnings records