1. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Introduction to Accounting Information Systems, 7e James A. Hall Chapter 1 The Information System: An Accountant’s Perspective

2. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Overview:  Information environment of the firm  System’s concept  Flows of information through an organization  AIS versus MIS  Impact of organization structure on AIS  Functional areas  Accounting  Evolution of IS: IS models  Role of the accountants as users, designers, and auditors of AIS 2

3. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Objectives for Chapter 1  Understand the primary information flows within the business environment.  Understand the difference between accounting information systems and management information systems.  Understand the difference between Financial transactions and non-financial transactions.  Know the general model for information systems.  Be familiar with the functional areas of a business.  Understand the stages in the evolution of information systems.  Understand the relationship between the three roles of accountants in an information system. 3

4. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Pyramid Model  The business organization is divided horizontally in several levels of activity.  Business operations form the basis of the pyramid:  Product-oriented work, like manufacturing, sales, distribution  Three management tiers 4

5. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Internal & External Information Flows 5

6. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Management Tiers:  Operations Management:  The controlling of the day-to-day operations  Middle Management:  Short term planning and coordination of activities necessary to accomplish organizational objectives  Top Management:  Long-term planning and setting organizational objectives 6

7. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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 7

8. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. External Flow:  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 8

9. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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. 9

10. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Different Information Systems: 10

11. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Information in Business  Information is a business resource that:  needs to be appropriately managed  is vital to the survival of contemporary businesses 11

12. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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. 12

13. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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 13

14. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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. 14

15. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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 15

16. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Transactions 16 Financial Transactions Nonfinancial Transactions Information System User Decisions Information

17. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. What is an Accounting Information System?  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. 17

18. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. AIS versus MIS  Accounting Information Systems (AIS) process  financial transactions; e.g., sale of goods  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 18

19. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 19 AIS versus MIS?

20. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Why AIS vs. MIS?  SOX (Surbanes-Oxley) legislation:  Internal controls MUST be designed and implemented by management, covering the entire financial reporting process: financial reporting-, GL-, and TPS  Management must certify these controls  External auditors must express an opinion on effectiveness  Problem: IS are integrated  Solution: Role players need a conceptual view of IS: see page 9 20

21. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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 21

22. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. General Model for AIS 22 Figure 1-5

23. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. End Users: (About information) p10  External stakeholders:  Creditors, stockholders, investors, tax authorities: Financial statements, tax returns, and reports that the firm has a legal obligation to produce  Suppliers, customers: Transaction oriented information, like purchase orders, billing statements, and shipping information  Internal:  Management at all levels Internal reporting is “what gets the job done” 23

24. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Internal reporting:  Less structured than external reporting  The system designers (including accountants) must balance the desires of users against legal and economic concerns:  Adequate control and security  Proper accountability  Cost of providing alternative forms of information 24

25. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Data vs. Information (p11)  Data are facts which may or may not be processed: edited, summarized, or refined and have no direct effect on the user  Information causes the user to take action that they otherwise could not have taken.  Example: Daily report on inventory levels  Purchase clerk  Personnel manager 25

26. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Information:  Information content: resolve conflicts, reduce uncertainty, make decisions  The distinction between information and data is very important for IS, because if IS fails to cause users to act, the system serves no purpose and has failed in its primary objective 26

27. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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 27

28. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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 28

29. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1. Data Collection  First operational stage in the IS, and is the most important stage in the system: data must be valid, complete and free from errors.  Capturing transaction data  Recording data onto forms  Validating and editing the data  The collection procedure must be designed to collect data only once. 29

30. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 2. Data Processing Classifying Transcribing Sorting Batching 30 Merging Calculating Summarizing Comparing

31. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 3. Data Management  Physical repository for data  Storing; Assigning keys  Retrieving  Deleting  The contents follow a logical hierarchy:  Attribute  Record  File 31

32. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Attribute:  It’s a relevant characteristic of an entity about which the firm captures data.  Entity: Student, AR  Attribute of Student, AR?  It must contribute or enhance the information content of the entity or set. 32

33. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Record:  Is the complete set of attributes for a single occurrence within an entity class.  Attributes and occurrence?  Customer name: Buthelezi  Address : Box 111, Eskhawini  Acc Balance : 989.00  How many attributes? How many records?  How many occurrences of Customer? 33

34. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4. Information Generation  Compiling  Arranging  Formatting  Presenting  Examples: sales order, a report, a message on a computer screen 34

35. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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 35

36. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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 36

37. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Organizational Structure  The structure reflects the distribution/allocation of  Responsibility  Authority and  Accountability throughout the organization.  Firms achieve their overall objectives by establishing measurable financial goals of their operational units (eg, budget information flows downwards); the subordinates’ actions (eg, performance info flow upwards to senior mngmt) 37

38. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Structure:  Segmenting by business function is a very common method of organizing.  To promote internal efficiency through specialization of labor and cost-effective resource allocations.  Segmentation:  Geographical location  Product line  Business Function 38

39. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Functional Areas: (result of functional segmentation)  Inventory/Materials Management  purchasing, receiving and stores  Production  production planning, quality control, and maintenance  Marketing  Distribution  Personnel  Finance  Accounting  Computer Services 39

40. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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:  Inventory control, cost accounting, payroll, accounts payable, accounts receivable, billing, fixed asset accounting and general ledger 40

41. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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. 41

42. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Computer Services Function 42 Centralized Data Processing Distributed Data Processing Most companies fall 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

43. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Organization of IT Function in a Centralized System 43 Figure 1-10

44. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Organizational Structure for a Distributed Processing System 44 Figure 1-11

45. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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 45

46. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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 46

47. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. AIS models: p24  Manual processes  Flat-file systems  Database approach  REA model  ERP system  Various generations of systems exists across different organizations and may even coexists within a single enterprise. 47

48. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Manual Process Model  Transaction processing, information processing, and accounting are physically performed by people, usually using paper documents. 48

49. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Evolution of IS Models: The Flat-File Model 49 Figure 1-12

50. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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 50

51. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Evolution of IS Models: The Database Model 51 Figure 1-13

52. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 52 Associations and Multiplicity:  Association is a naturally occurring relationship between objects, such as when a customer is associated with its orders. Example: A customer object can find and inquire about its orders: A customer places an Order. Each Order object is associated with Products, and an Order includes a product  Multiplicity: is the number of associations between objects  Entity-Relationship diagrams (ERD) are often used to model these relationships

53. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 53 Association & ER diagram: E EE RR

54. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 54 Multiplicity: 1 : 1 One-to-one:  a department has a HOD  and a HOD leads a Department.

55. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 55 Multiplicity: 1 : M One to many:  One Customer places many Orders,  And an Order belongs to one Customer:

56. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 56 Multiplicity: M : N Many to many:  A product may fall into multiple categories  One category includes many products

57. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. REA Model  The REA model is an accounting framework for modeling an organization’s  economic resources; e.g., assets  economic events; i.e., affect changes in resources  economic agents; i.e., individuals and departments that participate in an economic event  Interrelationships among resources, events and agents. 57

58. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 34 An REA Data Model Example 58 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 1 1 1 1 R E A

59. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ERP system: p31  Enables an organization to automate and integrate its key business processes:  Facilitate data sharing through a single/optimized database  Information flows  Common business practices among all users  Modules: Asset management, financial accounting, HR, Plant maintenance, production planning, quality management, sales and distribution, inventory management 59

60. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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. 60

61. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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. 61

62. Hall, Introduction to Accounting Information Systems, 7e ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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 62