CHAPTER 1  The information exchanges between

the organization and users in the

external environment:
 Trading partners: customer sales and
billing information, purchase
information, inventory receipts
information.
 Stake holders: financial statements,
tax returns, stock information

Pyramid Model Information Requirements

 The business organization is divided  Each user group has unique
horizontally in several levels of information requirements.
activity.  The higher the level of the
 Business operations form the basis of organization, the greater the need for
the pyramid: more aggregated information and less
 Product-oriented work, like need for detail.
manufacturing, sales, distribution Different Information Systems:
 Three management tiers
Management Tiers:
 Operations Management:
o The controlling of the day-to-
day operations
 Middle Management:
o Short term planning and
coordination of activities
necessary to accomplish
organizational objectives
 Top Management:
o Long-term planning and setting Information in Business
organizational objectives  Information is a business resource
Internal Information Flows that:
 Horizontal flows of information used o needs to be appropriately
primarily at the operations level to managed
capture transaction and operations o is vital to the survival of
data contemporary businesses
 Vertical flows of information, What is a System?
downward flows — instructions, A group of interrelated multiple components
quotas, and budgets, and upward or subsystems that serve a common
flows — aggregated transaction and purpose.
operations data System or subsystem?
External Flow:  A system is called a subsystem when
it is viewed as a component of a larger
system.
  A subsystem is considered a system  It identifies, collects, processes, and
when it is the focus of attention. communicates economic information
System Decomposition versus System about a firm using a wide variety of
Interdependency technologies.
 System Decomposition  It captures and records the financial
o the process of dividing the effects of the firm’s transactions.
system into smaller subsystem  It distributes transaction information
parts to operations personnel to coordinate
 System Interdependency many key tasks.
o distinct parts are not self- AIS versus MIS
contained  Accounting Information Systems (AIS)
o they are reliant upon the process
functioning of the other parts of o financial transactions; e.g., sale
the system of goods
o all distinct parts must be o nonfinancial transactions that
functioning, or the system will directly affect the processing of
fail financial transactions; e.g.,
What is an Information System? addition of newly approved
An information system is the set of formal vendors
procedures by which data are collected,  Management Information Systems
processed into information, and distributed (MIS) process
to users. o nonfinancial transactions that
Transactions are not normally processed by
A transaction is a business event. traditional AIS; e.g., tracking
 Financial transactions customer complaints
o economic events that affect the AIS versus MIS?
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 AIS Subsystems
system  Transaction processing system (TPS)
o e.g., an airline reservation — no o supports daily business
commitment by the customer operations
 General Ledger/ Financial Reporting
System (GL/FRS)
o produces financial statements
and reports
 Management Reporting System (MRS)
What is an Accounting Information o produces special-purpose
System? reports for internal use
 Accounting is an information system. General Model for AIS
 Question:
 Do nothing because ‘uninformed’,
 Do nothing because ‘informed’
 Information content: resolve conflicts,
reduce uncertainty, make decisions
 The distinction between information
and data is very important for IS,
End Users: (About information) p10 because if IS fails to cause users to
 External: Creditors, stockholders, act, the system serves no purpose and
investors, tax authorities: has failed in its primary objective
o Financial statements, tax Data Sources
returns, and reports that the Data sources are financial transactions that
firm has a legal obligation to enter the information system from internal
produce and external sources.
 Suppliers, customers:  External financial transactions are the
o Transaction oriented most common source of data for most
information, like purchase organizations.
orders, billing statements, and o E.g., sale of goods and services,
shipping information purchase of inventory, receipt of
 Internal: Management at all levels cash, and disbursement of cash
o Internal reporting is “what gets (including payroll)
the job done”  Internal financial transactions involve
Internal reporting: the exchange or movement of
 Less structured than external reporting resources within the organization.
 The system designers (including o E.g., movement of raw
accountants) must balance the desires materials into work-in-process
of users against legal and economic (WIP), application of labor and
concerns: overhead to WIP, transfer of WIP
 Adequate control and security into finished goods inventory,
 Proper accountability and depreciation of equipment
 Cost of providing alternative forms of Transforming the Data into Information
information Functions for transforming data into
Data vs. Information (p11) information according to the general AIS
 Data are facts which may or may not model:
be processed: edited, summarized, or 1. Data Collection
refined and have no direct effect on 2. Data Processing
the user 3. Data Management
 Information causes the user to take 4. Information Generation
action that they otherwise could not 1. Data Collection
have taken.  First operational stage in the IS, and is
 Example: Daily report on inventory the most important stage in the
levels system: data must be valid, complete
 Purchase clerk and free from errors.
 Personnel manager  Capturing transaction data
Information:  Recording data onto forms
  Validating and editing the data  Examples: sales order, a report, a
 The collection procedure must be message on a computer screen
designed to collect data only once. Characteristics of Useful Information
2. Data Processing Regardless of physical form or technology,
 Classifying useful information has the following
 Transcribing characteristics:
 Sorting  Relevance: serves a purpose
 Batching  Timeliness: no older than the time
 Merging period of the action it supports
 Calculating  Accuracy: free from material errors
 Summarizing  Completeness: all information
 Comparing essential to a decision or task is
3. Data Management present
 Physical repository for data  Summarization: aggregated in
 Storing; Assigning keys accordance with the user’s needs
 Retrieving Information System Objectives in a
 Deleting Business Context
 The contents follow a logical hierarchy:  The goal of an information system is to
 Attribute support
 Record  the stewardship function of
 File management
Attribute:  management decision making
 It’s a relevant characteristic of an  the firm’s day-to-day operations
entity about which the firm captures Organizational Structure
data.  The structure reflects the
 Example: Student, AR distribution/allocation of
 It must contribute or enhance the  Responsibility
information content of the entity or  Authority and
set.  Accountability throughout the
Record: organization.
 Is the complete set of attributes for a  Firms achieve their overall objectives
single occurrence within an entity by establishing measurable financial
class. goals of their operational units: budget
 Attributes and occurrence? information flows downwards; the
 Customer name: Jak Roberto subordinates’ actions: performance
 Address : Laguna, Philippines info flow upwards to senior mngmt.
 Acc Balance : 989.00 Structure:
 How many attributes? How many  Segmenting by business function is a
records? very common method of organizing.
 How many occurrences of Customer?  To promote internal efficiency through
4. Information Generation specialization of labor and cost-
 Compiling effective resource allocations.
 Arranging  Segmentation:
 Formatting o Geographical location
 Presenting o Product line
 o Business Function
Resources vs. Functional Areas
 Inventory/Materials Management
 purchasing, receiving and stores
 Production
 production planning, quality control,
and maintenance
 Marketing
 Distribution Organization of IT Function in a

 Personnel Centralized System

 Finance
 Accounting
 Computer Services
Accounting Function: p19
 It manages the financial resource of
the firm:
 Captures and records the financial
effects of the firms transaction
 Distributes transaction information to
operations personnel to coordinate
tasks
 Business operations:
o Inventory control, cost
accounting, payroll, accounts
payable, accounts receivable,
Organizational Structure for a
billing, fixed asset accounting
Distributed Processing System
and general ledger
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
Potential Advantages of DDP
require that such vital information be
 Cost reductions in hardware and data
supplied by an independent source to
entry tasks
ensure its integrity.
 Improved cost control responsibility
The Computer Services Function
 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
Data Redundancy Problems
AIS models: p24
 Data Storage - excessive storage costs
 Manual processes
of paper documents and/or magnetic
 Flat-file systems
form
 Database approach
 Data Updating - changes or additions
 REA model
must be performed multiple times
 ERP system
 Currency of Information - potential
 Various generations of systems exists
problem of failing to update all
across different organizations and may
affected files
even coexists within a single
 Task-Data Dependency - user’s
enterprise.
inability to obtain additional
Manual Process Model
information as needs change
 Transaction processing, information
 Data Integration - separate files are
processing, and accounting are
difficult to integrate across multiple
physically performed by people,
users
usually using paper documents.

 Useful to study because:
The Evolution of IS Models: The
o helps link AIS courses to other
Database Model
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 An REA Data Model Example
 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
REA Model sources, its destination, and the
 The REA model is an accounting accounting rules that must be applied.
framework for modeling an Accountants as System Auditors
organization’s  External Auditors
o economic resources; e.g., assets o attest to fairness of financial
o economic events; i.e., affect statements
changes in resources o assurance service: broader in
o economic agents; i.e., scope than traditional
individuals and departments attestation audit
that participate in an economic  IT Auditors
event o evaluate IT, often as part of
o Interrelationships among external audit
resources, events and agents  Internal Auditors
 Entity-relationship diagrams (ERD) are o in-house IS and IT appraisal
often used to model these services
relationships.
ERP system: p31
 Enables an organization to automate
and integrate its key business
processes:
o Facilitate data sharing
o Information flows
o Common business practices
among all users
 Modules: Asset management, financial
accounting, HR, Plant maintenance,
production planning, quality
management, sales and distribution,
inventory management
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
CHAPTER 2
Transaction Processing System (Tps)
The transaction processing system (TPS) is
an activity consisting of three major
subsystems called cycles: the revenue cycle,
the expenditure cycle, and the conversion
cycle. While each cycle performs different
specific tasks and supports different
objectives, they share common
characteristics.
Transaction Cycles
Expenditures Cycle
-Acquisition of materials, property, and labor
in exchange for cash.
 The major subsystems of the
expenditure cycle:
o Purchases/accounts payable
system
o Cash disbursements system
o Payroll system
o Fixed asset system

Conversion Cycle
-Composed of two major subsystems:
 Production system
 Cost accounting system
Revenue Cycle
-Firms sell their finished goods to customers.
This is the processing of cash sales, credit
sales, and the receipt of cash following a
credit sale
 The primary subsystems of the
revenue cycle:
o Sales order processing
o Cash receipts

Relationship Between Transaction

Cycles
Manual System Accounting Records
A document provides evidence of an Journals

economic event and may be used to initiate -a record of chronological entry

transaction processing. Some documents are  special journals - specific classes of

a result of transaction processing. transactions that occur in high

Source Documents - used to capture and frequency

formalize transaction data needed for  general journal - nonrecurring,

transaction processing  infrequent, and dissimilar

transactions
Ledger
- a book of financial accounts
 general ledger - shows activity
o for each account listed on the
chart of accounts
 subsidiary ledger - shows activity by
Product Documents - the result of
detail for each account type
transaction processing
Flow of Information from Economic
Event into the General Ledger

Turnaround Documents - a product

document of one system that becomes a Audit Trail
source document for another system The accounting records described
previously provide an audit trail for tracing
transactions from source documents to the
financial statements. Of the many purposes
of the audit trail, most important to
accountants is the yearend audit. Although
the study of financial auditing falls outside
the scope of this text, the following
thumbnail sketch of the audit process will
demonstrate the importance of the audit Entity Relationship Diagram (ERD)
trail. The external auditor periodically  A documentation technique to
evaluates the financial statements of publicly represent the relationship between
held business organizations on behalf of its entities in a system.
stockholders and other interested parties.  The REA model version of ERD is
widely used in AIS. REA uses 3 types
of entities:
 resources (cash, raw materials)
 events (release of raw materials into
the production process)
 agents (inventory control clerk,

Computer Based Systems vendor, production worker)

 The audit trail is less observable in

computer-based systems than
traditional manual systems.
 The data entry and computer Cardinalities

programs are the physical trail.  Represent the numerical mapping

 The data are stored in magnetic files. between entities:

  one-to-one

Magnetics Files  one-to-many

 Master File - generally contains  many-to-many

account data (e.g., general ledger and

subsidiary file)
 Transaction File - a temporary file
containing transactions since the last
update
 Reference File - contains relatively
constant information used in
processing (e.g., tax tables, customer
Data Flow Diagrams (DFD)…
addresses)
 use symbols to represent the
 Archive File - contains past
processes, data sources, data flows,
transactions for reference purposes
and entities in a system
 represent the logical elements of the
Documentation Techniques
system
Documentation in a CB environment is
 do not represent the physical system
necessary for many reasons.
Data Flow Diagram Symbols

Five common documentation

techniques:
 Entity Relationship Diagram
 Data Flow Diagrams
 Document Flowcharts
 System Flowcharts
 Program Flowcharts
 Processes
System Flowcharts…
 illustrate the relationship among
processes and the documents that
flow between them
 contain more details than data flow
diagrams
 clearly depict the separation of
functions in a system Program Flowcharts…
Symbol Set for Representing Manual  illustrate the logic used in programs
Procedures
Program Flowchart Symbols

Computer-Based Accounting Systems

 Two broad classes of systems:
o batch systems
o real-time systems
Batch Processing
System Flowcharts…  A batch is a group of similar
 are used to represent the relationship transactions that are accumulated
between the key elements--input over time and then processed
sources, programs, and output together.
products--of computer systems  The transactions must be
 depict the type of media being used independent of one another during
 (paper, magnetic tape, magnetic the time period over which the
disks, and terminals) transactions are accumulated in
 in practice, not much difference order for batch processing to be
between document and system appropriate.
flowcharts  A time lag exists between the
Symbol Set for Representing Computer event and the processing.
Real-Time Systems…
 process transactions individually
at the moment the economic event
occurs
 have no time lag between the
economic event and the processing
  generally, require greater  Concisely represents a large amount
resources than batch processing of complex information that would
since they require dedicated otherwise be manageable.
processing capacity; however, these  Provide a means of accountability over
cost differentials are decreasing the completeness of the transactions
 oftentimes have longer systems processed.
development time  Identify unique transactions and
accounts within a file.
Alternative Data Processing Approaches  Support the audit function by
 Legacy Systems versus Modern providing an effective audit trail.
Systems
 Updating master files from Numeric and Alphabetic Coding
transactions Schemes
 Database back-up procedures 1. Sequential Codes
 Real-time processing  Represent items in some sequential
order (ascending or descending)
Data Coding Schemes  Common application: pre-
 Data coding involves creating simple numbering source documents
numeric or alphanumeric codes to  These numbers become
represent complex economic transaction numbers
phenomena that facilitate efficient
data processing. 2. Block Codes
 Example: primary and  A variation in sequential codes that
secondary keys (data coding) partly remedies the disadvantages
just described
 This approach can be used to
represent whole classes of items by
restricting each class to a specific
range within the coding scheme
- A common application of block coding is
the construction of a chart of accounts.
 Each account type is represented by a
a. A system WITHOUT codes
unique range of codes or blocks.
 Balance sheet and income statement
account classifications and
subclassifications can be depicted.
 In this example, each of the accounts
consists of a three-digit code.
b. A system WITH codes  The first digit is the blocking digit and
represents the account classification;
for example, current assets, liabilities,
or operating expense.
 The other digits in the code are
Data Coding Schemes
sequentially assigned.
Other uses of data coding in AIS:
3. Group Codes
 (numeric) group codes are used to
represent complex items or events
involving two or more pieces of related
data. The code consists of zones or
fields that possess specific meaning.

4. Alphabetical Codes
 Used with the same purpose of the
numeric codes
 May be assigned sequentially
(alphabetical) or may be used in block
and group coding techniques.

5. Mnemonic Code
 Alphabetic in characters in a form of
acronyms and other combinations that
convey meaning