Chapter 1

The Information System: Information in Business

An Accountant’s Perspective  Information is a business resource that:
Objectives for Chapter 1  needs to be appropriately managed
 Understand the primary information flows  is vital to the survival of contemporary
within the business environment. businesses
 Understand the difference between accounting
information systems and management What is a System?
information systems.  A group of interrelated multiple components or
 Understand the difference between financial subsystems that serve a common purpose
transactions and non-financial transactions.  System or subsystem?
 Know the general model for information  A system is called a subsystem when it
systems. is viewed as a component of a larger
 Be familiar with the functional areas of a system.
business.  A subsystem is considered a system
 Understand the stages in the evolution of when it is the focus of attention.
information systems. System Decomposition versus System
 Understand the relationship between the three Interdependency
roles of accountants in an information system.  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
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.
Internal Information Flows Transactions
 Horizontal flows of information used primarily  A transaction is a business event.
at the operations level to capture transaction  Financial transactions
and operations data  economic events that affect the assets
 Vertical flows of information and equities of the organization
 downward flows — instructions,  e.g., purchase of an airline ticket
quotas, and budgets  Nonfinancial transactions
 upward flows — aggregated transaction  all other events processed by the
and operations data organization’s information system
Information Requirements  e.g., an airline reservation — no
 Each user group has unique information commitment by the customer
requirements.
 The higher the level of the organization, the
greater the need for more aggregated
information and less need for detail.
 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 Data Sources
many key tasks.  Data sources are financial transactions that
AIS versus MIS enter the information system from internal and
 Accounting Information Systems (AIS) process external sources.
 financial transactions; e.g., sale of  External financial transactions are the
goods most common source of data for most
 nonfinancial transactions that directly organizations.
affect the processing of financial • E.g., sale of goods and services,
transactions; e.g., addition of newly purchase of inventory, receipt
approved vendors of cash, and disbursement of
 Management Information Systems (MIS) cash (including payroll)
process  Internal financial transactions involve
 nonfinancial transactions that are not the exchange or movement of
normally processed by traditional AIS; resources within the organization.
e.g., tracking customer complaints • 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
Transforming the Data into Information
Functions for transforming data into information
according to the general AIS model:
1. Data Collection
2. Data Processing
AIS Subsystems 3. Data Management
 Transaction processing system (TPS) 4. Information Generation
 supports daily business operations 1. Data Collection
 General Ledger/ Financial Reporting System  Capturing transaction data
(GL/FRS)  Recording data onto forms
 produces financial statements and  Validating and editing the data
reports 2. Data Processing
 Management Reporting System (MRS) • Classifying
 produces special-purpose reports for • Transcribing
internal use • Sorting
• Batching
 3. Data Management • Finance
• Storing • Accounting
• Retrieving • Computer Services
• Deleting Accounting Independence
4. Information Generation • Information reliability requires accounting
• Compiling independence.
• Arranging • Accounting activities must be separate
• Formatting and independent of the functional areas
• Presenting maintaining resources.
Characteristics of Useful Information • Accounting supports these functions
• Regardless of physical form or technology, with information but does not actively
useful information has the following participate.
characteristics: • Decisions makers in these functions
• Relevance: serves a purpose require that such vital information be
• Timeliness: no older than the time supplied by an independent source to
period of the action it supports ensure its integrity.
• 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
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
Organizational Structure
• The structure of an organization helps to
allocate
• responsibility
• authority
• accountability
• Segmenting by business function is a very
common method of organizing.
Functional Areas
• Inventory/Materials Management
• purchasing, receiving and stores
• Production
• production planning, quality control,
and maintenance
• Marketing
• Distribution
• Personnel
 Data Redundancy Problems
Potential Advantages of DDP  Data Storage - excessive storage costs of paper
 Cost reductions in hardware and data entry documents and/or magnetic form
tasks  Data Updating - changes or additions must be
 Improved cost control responsibility performed multiple times
 Improved user satisfaction since control is  Currency of Information - potential problem of
closer to the user level failing to update all affected files
 Backup of data can be improved through the  Task-Data Dependency - user’s inability to
use of multiple data storage sites obtain additional information as needs change
Potential Disadvantages of DDP  Data Integration - separate files are difficult to
 Loss of control integrate across multiple users
 Mismanagement of company resources
 Hardware and software incompatibility
 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:
 helps link AIS courses to other
accounting courses
 often easier to understand business
processes when not shrouded in
technology
 facilitates understanding internal
controls
 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
 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 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.

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