1. Chapter 1 The Information System: An Accountant’s Perspective
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2. The Information Environment
Like other business Resources i.e.
Materials
Capital
Labor etc.
Information is vital for survival of contemporary business
Every business has vast quantities of information to flow
Internal flow as well as external flow

3. The Information Environment
Division of business organization
Horizontally in several levels
Base Level
Product oriented work i.e. Manufacturing, Sales, distribution
Operations management level
Manages operations
Middle Management level
Short term planning
Top management level
Long term planning

4. Internal & External Information Flows

5. 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 4

6. External Information Flows
Exchange of information between organization and user in external environment
Trading partners
Customer sales, billing information, purchase info,
Stakeholders (entities having interest in firms)
Stockholders, Financial institutions, govt., etc.

7. Information Requirements
Each user group has unique information requirements.
higher level needs information in aggregated and summarized form
Lower levels needs detailed information 6

8. What is a System?
A group of interrelated multiple components or subsystems that serve a common purpose
Multiple components
System must contain more than one part
E.g. yo-yo
Relatedness
Although each part work independently
But interrelated
Components which are not interrelated are not part of a system e.g. ice skates and volley ball net
Purpose
System must serve at least one purpose
May serve several 7

9. What is a System? 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.

10. Primary Subsystems of an Automobile
Fuel System
Propulsion
System
Electrical
System
Brake System
Fuel Tank
Engine
Lights
Brake
Pedal
Fuel Pump
Trans-
mission
Ignition
Master
Cylinder
Rear
Axle
Radio
Brake lines
Carburetor
Wheels
Battery
Disk

11. System Decomposition versus System Interdependency
the process of dividing the system into smaller subsystem parts
Each subordinate system helps higher level system achieving its overall objective
System Interdependency
Parts are reliant upon each other
If vital system fails Primary objective can’t be achieved
If a non-vital system fails primary objective can still be achieved 8

12. 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. 9

13. Information System? 11

14. 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. 3

15. Accounting Information Management Information
Information System
Accounting Information
System (AIS)
Management Information
System (MIS)
GL/FRS
TPS
MRS
Financial
Management
System
Marketing
System
Production
System
Human
Resource
System
Expenditure
Cycle
Conversion
cycle
Revenue
Cycle
Purchase
system
Cost
Accounting
Sales
Processing
System
Cash
disbursement
Material
Requirement
& planning
Cash
Receipt
System
Payroll
Processing
Fixed
assets

16. AIS Subsystems Transaction processing system (TPS)
supports daily business operations
Processes daily transactions
General Ledger/ Financial Reporting System (GL/FRS)
produces financial statements and reports
Management Reporting System (MRS)
produces special-purpose reports for internal use
Budgets, Variances, Responsibility reports, Trends 12

17. 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 10

18. Transactions Financial Transactions User Information Decision System
Making
Information
Nonfinancial
Transactions 10

19. Management Information System
Non-financial transactions that are not normally processed by traditional AIS; e.g., tracking customer complaints, scheduling deliveries etc.

20. Examples of MIS applications in Functional Areas
Production
Production planning and control Systems, job Scheduling Systems
Finance
Portfolio Management systems
Capital Budgeting systems
Marketing
Market Analysis
New Production Development
Product Analysis
Distribution
Warehouse Organization & scheduling
Delivery scheduling
Vehicle Loading and Allocation Models
Personnel
Human Resource Management Systems
Job Skill Tracking system
Employee Benefits System

21. AIS versus MIS Accounting Information Systems (AIS) processes
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
Non-financial transactions that are not normally processed by traditional AIS; e.g., tracking customer complaints, scheduling deliveries etc. 11

22. The General AIS Model 13

23. 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).

24. Data Sources
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.

25. 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 8

26. 1. Data Collection Capturing transaction data
Recording data onto forms
Validating and editing the data
Two Rules govern the data collection
Relevance
Efficiency (collection only once) 9

27. 2. Data Processing Classifying Transcribing Sorting Batching Merging
Calculating
Summarizing
Comparing 10

28. 3. Database Management Data Attributes Record Files
Database Management Tasks
Storing
Retrieving
Deleting

29. 4. Information Generation
Compiling
Arranging
Formatting
Presenting 13

30. Characteristics of Useful Information
Relevance
Only data relevant to user’s action is information
Irrelevancies waste resources
Timeliness
Age of information is critical in decision making
E.g. weekly reports will not serve purpose

31. Characteristics of Useful Information
Accuracy
Must be free of errors free
Always prefect information is not available
Sometimes we compromise accuracy for time
Completeness
no piece of information be missing for decision making
Summarization
Information must be aggregated according to user’s needs

32. Information System Objectives
The goal of an information system is to support
the stewardship function of management
Means to manage resources efficiently
management decision making
the firm’s day-to-day operations 19

33. Acquisition of information Systems
In house
develop customized systems from scratch
Firms with frequently changing needs do so
Larger firms are mostly indulged
Formal process SDLC to develop system
Purchase of pre-programmed commercial systems
Smaller companies mostly use these
And larger with standardized information needs

34. Acquisition of information Systems
Basic Types of Commercial Software
Turnkey systems
Completely finished and tested
Also called “off the shelf”
Built in software options to customize input. Output etc.
Examples of this approach, Peachtree, Quickbooks, SAP, Oracle financials

35. Acquisition of information Systems
Backbone Systems
Primary processing logic is pre-programmed
Vendors design the interface
Is compromise between custom and turnkey systems
Vendor-supported systems
Custom systems
Purchased commercially
Software developer designs, implements and maintain system

36. Organizational Structure
The structure of an organization helps to allocate
responsibility
authority
accountability
Segmenting by business function is a very common method of organizing. 21

37. Organizational Structure
Segmenting
Geographic Location
Product Line
Business Finance

38. Functional Areas Inventory/Materials Management purchasing,
receiving and
stores
Production
production planning,
quality control,
and maintenance 22

39. Functional Areas Marketing Distribution Need recognition
Idea development
Product promotion
advertisement
Distribution
Make the product available where required
channels

40. Functional Areas Personnel Finance
Recruiting, training, continuing education, counseling, evaluating, compensation management
Finance
Portfolio management
Credit evaluation
Cash disbursement

41. Functional Areas Accounting Two important roles
Captures and records the financial effects
Distributes information to operations

43. 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. 20

44. The Computer Services Function
Distributed Data
Processing
Centralized Data
Processing
Most companies fall in between.
Reorganizing the
computer services
function into small
information processing
units that are distributed
to end users and
placed under their control
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 25

45. Information data Finance Marketing Computer Services Resources
Production
Distribution
Accounting
Information
data

46. Organization of Computer Services Function in a Centralized System

47. Organizational Structure for a Distributed Processing System

48. 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

49. Potential Disadvantages of DDP
Loss of control
Mismanagement of company resources
Hardware and software incompatibility
Redundant tasks and data
Consolidating incompatible activities
Difficulty attracting qualified personnel
Lack of standards

50. 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

51. The Evolution of IS Models: The Flat-File Model

52. 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 4

53. The Evolution of IS Models: The Database Model
Solves the following problems of the flat file approach
no data redundancy - except for primary keys, data is only stored once
single update
current values
task-data independence - users have access to the full domain of data available to the firm
A database is a set of computer files that minimizes data redundancy and is accessed by one or more application programs for data processing.
The database approach to data storage applies whenever a database is established to serve two or more applications, organizational units, or types of users.
A database management system (DBMS) is a computer program that enables users to create, modify, and utilize database information efficiently. 6

54. 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. 26

55. 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. 27

56. 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 28