1 Chapter 1 The Information System: An Accountant’s Perspective

2 Objectives for Chapter 1  Primary information flows within the business environment  Accounting information systems and management information systems  Information and data  Three fundamental objectives of all information systems  The general model for information systems  Financial transactions from non-financial transactions  The functional areas of a business  Independence between accounting and other business areas  The centralized and distributed approaches to data processing  Two main stages in the evolution of information systems  Three roles of accountants in an information system

Internal & External Flows of Information Top Management Middle Management Operations Management Operations Personnel Day-to-Day Operations Personnel Budget Information and Instructions Performance Information Customers Stakeholders Suppliers

4 Internal Information Flows zHorizontal flows of information used primarily at the operations level to capture transaction and operations data zVertical flows of information ydownward flows--instructions, quotas, and budgets yupward flows--aggregated transaction and operations data

5 Information Requirements zEach user group has unique information requirements. zThe higher the level of the organization, the greater the need for more aggregated information and less need for detail.

6 Information in Business zInformation is a business resource: y... needs to be appropriately managed y...is vital to the survival of contemporary businesses

7 What is Information? zInformation is processed data that is used to make decisions, resolve conflicts, and/or reduce uncertainty.

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

9 System Decomposition vs. System Interdependency zSystem Decomposition ythe process of dividing the system into smaller subsystem parts zSystem Interdependency ydistinct parts are not self-contained ythey are reliant upon the functioning of the other parts of the system yall distinct parts must be functioning or the system will fail

10 Examples of Systems zBiological ycell yhuman body zMechanical ywater heater ycomputer zOthers ysolar system ymathematics E = mc 2

11 What is an Information System? zAn information system is the set of formal procedures by which data are collected, processed into information, and distributed to users.

12 Information System Objectives in a Business Context zThe goal of an information system is to support y...the stewardship function of management. y...management decision making. y...the firm’s day-to-day operations.

13 Transactions zA transaction is a business event. zFinancial transactions yeconomic events that affect the assets and equities of the organization ye.g., purchase of an airline ticket zNonfinancial transactions yall other events processed by the organization’s information system ye.g., an airline reservation--no commitment by the customer

14 Transactions Financial Transactions Nonfinancial Transactions Information System User Decisions Information

15 What is Accounting Information Systems? zAccounting is an information system which yidentifies, collects, processes, and communicates economic information about an entity to a wide variety of people regardless of the technology ycaptures and records the financial effects of the firm’s transactions ydistributes transaction information to operations personnel to coordinate many key tasks

16 AIS vs. MIS zAccounting Information Systems (AISs) process financial (e.g., sale of goods) and nonfinancial transactions (e.g., addition of newly approved vendor) that directly affect the processing of financial transactions. zManagement Information Systems (MISs) process nonfinancial transactions that are not normally processed by traditional AISs (e.g., tracking customer complaints).

17 AIS vs. MIS?

18 AIS vs. MIS: Solutions zData Warehousing and Enterprise Resource Planning (ERP) AISMISAISMIS

19 AIS Subsystems zTransaction processing system (TPS) ysupports daily business operations zGeneral Ledger/ Financial Reporting System (GL/FRS) yproduces financial statements and reports zManagement Reporting System (MRS) yproduces special-purpose reports for internal use

The General AIS Model The Information System Database Management Data Collection Data Processing Information Generation The External Environment Internal Sources of Data Internal End Users External Data Sources External End Users Feedback The Business Organization Feedback

21 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

22 1. Data Collection zcapturing transaction data zrecording data onto forms zvalidating and editing the data

23 2. Data Processing zclassifying ztranscribing zsorting zbatching zmerging zcalculating zsummarizing zcomparing

24 3. Data Management zstoring zretrieving zdeleting

25 4. Information Generation zcompiling zarranging zformatting zpresenting

26 Organizational Structure zThe structure of an organization helps to allocate yresponsibility yauthority yaccountability zSegmenting by business function is a very common method of organizing.

27 Functional Areas zInventory/Materials Management ypurchasing, receiving, and storage zProduction yproduction planning, quality control, and maintenance zMarketing zDistribution zPersonnel zFinance zAccounting zComputer Services

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

29 The Computer Services Function Centralized Data Processing Distributed Data Processing Most companies fall somewhere in between. All data processing is performed by one or more large computers housed at a central site that serves users throughout the organization. Primary areas: database administration data processing systems development systems maintenance Reorganizing the computer services function into small information processing units that are distributed to end users and placed under their control

President VP Marketing VP Computer Services VP Production VP Finance Systems Development Data Base Administration Data Processing New Systems Development Systems Maintenance Data Control Data Preparation Computer Operations Data Library President VP Marketing VP Finance VP Production IPU VP Administration TreasurerController Manager Plant X Manager Plant Y CENTRALIZED COMPUTER SERVICES FUNCTION DISTRIBUTED ORGANIZATIONAL STRUCTURE

31 Potential Advantages of DDP zCost reductions in hardware and data entry tasks zImproved cost control responsibility zImproved user satisfaction since control is closer to the user level zBackup of data can be improved through the use of multiple data storage sites

32 Potential Disadvantages of DDP zLoss of control zMismanagement of organization-wide resources zHardware and software incompatibility zRedundant tasks and data zConsolidating tasks usually segregated zDifficulty attracting qualified personnel zLack of standards

33 zThe data is retained in a central location. zRemote IPUs send requests for data. zCentral site services the needs of the remote IPUs. zThe actual processing of the data is performed at the remote IPU. Centralized Databases in an IPU Environment: CDB vs. DDP

Program 1 Program 2 Program 3 A,B,C X,B,Y L,B,M User 2 Transactions User 1 Transactions User 3 Transactions Data The Evolution of IS Models: The Flat-File Model

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

Program 1 Program 2 Program 3 User 2 Transactions User 1 Transactions User 3 Transactions Database DBMSDBMS A, B, C, X, Y, L, M The Evolution of IS Models: The Database Model

34 Inventory Line items Sales Party to Sales person Pays for Cash Collections Increases Cash Made to Customer Cashier Received from Received by M 1 M M M M M M M M R E A An REA Data Model Example

38 REA Model zThe REA model is an accounting framework for modeling an organization’s yeconomic resources (the assets of the organization), yeconomic events (phenomena that affect changes in resources), and yeconomic agents (individuals and departments that participate in an economic event), and ytheir interrelationships. zEntity-relationship diagrams are used to model these relationships.

39 Accountants as Information System Users zAccountants must be able to clearly convey their needs to the systems professionals who design the system. zThe accountant should actively participate in systems development projects to ensure appropriate systems design.

40 Accountants as System Designers zThe accounting function is responsible for the conceptual system, while the computer function is responsible for the physical system. zThe conceptual system determines the nature of the information required, its sources, its destination, and the accounting rules that must be applied.

41 Accountants as System Auditors zExternal Auditors yattest to fairness of financial statements yassurance service: broader in scope than traditional attestation audit zIT Auditors yevaluate IT, often as part of external audit zInternal Auditors yin-house IS and IT appraisal services