Chapter 1 – The Information System: An o A subsystem is considered a

Accountant’s Perspective system when it is the focus of

attention.
Objectives for Chapter 1
• Primary information flows within the business System Decomposition VS System
environment Interdependency
• Accounting information systems and  System Decomposition
management information systems o the process of dividing the system
• The general model for information systems into smaller subsystem parts
• Financial transactions from non-financial  System Interdependency
transactions o distinct parts are not self-
• The functional areas of a business contained
• Two main stages in the evolution of information o they are reliant upon the
systems functioning of the other parts of
• Three roles of accountants in an information the system
system o all distinct parts must be
functioning or the system will fail
Internal and External Information Flows
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.
o Financial transactions
 economic events that
affect the assets and
equities of the
organization
 e.g., purchase of an
airline ticket
Internal Information Flows o Nonfinancial transactions
 Horizontal flows of information used  all other events
primarily at the operations level to processed by the
capture transaction and operations data organization’s
 Vertical flows of information information system
o downward flows — instructions,  e.g., an airline
quotas, and budgets reservation — no
o upward flows — aggregated commitment by the
transaction and operations data customer

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.
What is Accounting Information Systems?
Information in Business  Accounting is an information system.
Information is a business resource that: o It identifies, collects, processes,
 needs to be appropriately managed and communicates economic
 is vital to the survival of contemporary information about a firm using a
businesses wide variety of technologies.
o It captures and records the
What is a System? financial effects of the firm’s
 A group of interrelated multiple transactions.
components or subsystems that serve a o It distributes transaction
common purpose information to operations
 System or subsystem? personnel to coordinate many
o A system is called a subsystem key tasks.
when it is viewed as a
component of a larger system.
AIS vs MIS movement of resources within
 Accounting Information Systems (AIS) the organization.
process  E.g., movement of raw
o financial transactions; e.g., sale materials into work-in-
of goods process (WIP),
o and nonfinancial transactions application of labor and
that directly affect the overhead to WIP,
processing of financial transfer of WIP into
transactions; e.g., addition of finished goods inventory,
newly approved vendors and depreciation of
 Management Information Systems (MIS) equipment.
process
o nonfinancial transactions that Transforming the Data into Information
are not normally processed by Functions for transforming data into information
traditional AIS; e.g., tracking according to the general AIS model:
customer complaints 1. Data Collection
a. Capturing transaction data
b. Recording data onto forms
c. Validating and editing the data
2. Data Processing
a. Classifying
b. Transcribing
c. Sorting
d. Batching
e. Merging
AIS Subsystem f. Calculating
 Transaction processing system (TPS) g. Summarizing
o supports daily business h. Comparing
operations 3. Data Management
 General Ledger/ Financial Reporting a. Storing
System (GL/FRS) b. Retrieving
o produces financial statements c. Deleting
and reports 4. Information Generation
 Management Reporting System (MRS) a. Compiling
o produces special-purpose b. Arranging
reports for internal use c. Formatting
d. Presenting
General AIS Model
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
Data Sources
Information System Objectives in a Business
 Data sources are financial transactions
Context
that enter the information system from
The goal of an information system is to support
internal and external sources.
 the stewardship function of management
o External financial transactions
 management decision making
are the most common source of
 the firm’s day-to-day operations
data for most organizations.
 E.g., sale of goods and
Organizational Structure
services, purchase of
 The structure of an organization helps to
inventory, receipt of
allocate
cash, and disbursement
o responsibility
of cash (including
o authority
payroll).
o accountability
o Internal financial transactions
 Segmenting by business function is a very
involve the exchange or
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 Potential Advantages of DDP
independence.  Cost reductions in hardware and data
o Accounting activities must be entry tasks
separate and independent of  Improved cost control responsibility
the functional areas maintaining  Improved user satisfaction since control is
resources. closer to the user level
o Accounting supports these  Backup of data can be improved through
functions with information but the use of multiple data storage sites
does not actively participate.
o Decisions makers in these Potential Disadvantages of DDP
functions require that such vital  Loss of control
information be supplied by an  Mismanagement of company resources
independent source to ensure its  Hardware and software incompatibility
integrity.  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

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 sources, its destination, and the
problem of failing to update all affected accounting rules that must be applied.
files
 Task-Data Dependency - user’s inability to Accountants as System Auditors
obtain additional information as needs  External Auditors
change o attest to fairness of financial
 Data Integration - separate files are statements
difficult to integrate across multiple users 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

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 functions 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