Chapter 1

The Information
System:
An Accountant’s
Perspective

Source: Accounting Information System

By: James Hall
Learning Objectives
At the end of the chapter, student should be able to:

• Explain the primary information flows within the

business environment,
• Differentiate Accounting information systems and
management information systems,
• Discuss the principal features general model for
information systems,
• Explain the difference between financial
transactions from non-financial transactions,
• Discuss the functional areas of a business and their
principal activities, and
Internal & External
Information Flows
Exchanges between
organizations and
external users.

Horizontal flow
supports operations-
level tasks with highly
detailed information
about the many
business transactions
affecting the business
Business operations forms the base of the pyramid. These activities consists of the
product oriented work of the organization:
1. manufacturing
2. sales
3. distribution

Above the base level the organization is divided into three management tiers:

1. Operations management - directly responsible for controlling day-to-day

operations.

2. Middle management - is accountable for the short-term planning and

coordination of activities necessary to accom-
plish organizational objectives.

3. Top management - is responsible for longer-term planning and setting

organizational objectives.
Internal Information Flows

• Horizontal flows of information used

primarily at the operations level to
capture transaction and operations
data
• Vertical flows of information
– downward flows — instructions, quotas,
and budgets
– 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:
–needs to be appropriately
managed
–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?
– A system is called a subsystem when it is
viewed as a component of a larger
system.
– A subsystem is considered a system when
it is the focus of attention.
System Decomposition versus
System Interdependency

• System Decomposition
– the process of dividing the system into
smaller subsystem parts
• System Interdependency
– distinct parts are not self-contained
– they are reliant upon the functioning of
the other parts of the system
– 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
– economic events that affect the assets
and equities of the organization
– e.g., purchase of an airline ticket
• Nonfinancial transactions
– all other events processed by the
organization’s information system
– e.g., an airline reservation — no
commitment by the customer
Transactions

Financial

Transactions User
Information
Decision
Nonfinancial System
Information 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
– financial transactions; e.g., sale of goods
– and nonfinancial transactions that directly affect
the processing of financial transactions; e.g.,
addition of newly approved vendors
• Management Information Systems (MIS)
process
– nonfinancial transactions that are not normally
processed by traditional AIS; e.g., tracking
customer complaints
AIS versus MIS?

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.
• 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.
• 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
2. Data Processing
3. Data Management
4. Information Generation
Transforming the Data into Information

1. Data Collection

• Capturing transaction data

• Recording data onto forms
• Validating and editing the data
Transforming the Data into Information

2. Data Processing

• Classifying • Merging
• Transcribing • Calculating
• Sorting • Summarizing
• Batching • Comparing
Transforming the Data into Information

3. Data Management

• Storing
• Retrieving
• Deleting
Transforming the Data into Information

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
– responsibility
– authority
– accountability
• Segmenting by business function is a
very common method of organizing.
Functional Areas
• Inventory/Materials Management
– purchasing, receiving and stores
• Production
– production planning, quality control,
and maintenance
• Marketing
• Distribution
• Personnel
• Finance
• Accounting
• Computer Services
Accounting Independence
Information reliability requires accounting
independence.

– Accounting activities must be separate and

independent of the functional areas maintaining
resources.
– Accounting supports these functions with
information but does not actively participate.
– Decisions makers in these functions require that
such vital information be supplied by an
independent source to ensure its integrity.
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:
– helps link AIS courses to other accounting
courses
– often easier to understand business processes
when not shrouded in technology
– 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
 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
– attest to fairness of financial statements
– assurance service: broader in scope than
traditional attestation audit
• IT Auditors
– evaluate IT, often as part of external audit
• Internal Auditors
– in-house IS and IT appraisal services