THE INFORMATION ENVIRONMENT

Operation management

- Directly responsible for controlling day-to-day operations.

Middle management

- Accountable for the short-term planning and coordination of activities necessary to

accomplish organizational objectives.

Top management

- Responsible for longer-term planning and setting organizational objectives.

Internal Information Flows

1. Horizontal flows of information used primarily at the operations level to capture transaction and
operations data.
2. Vertical flows of information
- Downward flows: instructions, quotas, and budgets
- Upward flows: aggregated transaction and operations data

External Users fall into two groups:

1. Trading partners (customers, suppliers)

- Exchanges with trading partners include customer sales and billing information, purchase
information for suppliers, and inventory receipts information.
2. Stakeholders
- Outside or inside the organization
- Direct or indirect interest in the firm
- Stockholders, financial institutions, and government agencies are examples of external
stakeholders.
- Exchanges with these groups include financial statements, tax returns, and stock transaction
information.

WHAT IS A SYSTEM?

System

- Generates mental images of computers and programming.

- (1) natural systems- all life forms, plants, and animals
- (2) artificial system- man-made
- A group of two or more interrelated components or subsystems that serve a common
purpose.

Elements of a System

1. Multiple Components
- Must contain more than one part.
2. Relatedness
- A common purpose relates the multiple parts of a system.
- Each part has different function but has one common objective.
3. System versus Subsystem
- The distinction between is a matter of perspective.
- A system is called a subsystem when it is viewed in relation to a larger system of which it is
part.
- A subsystem is called a system when it is the focus of attention.
4. Purpose
- A system must serve at least one purpose, but it may serve several purposes.
- When a system ceases to serve a purpose, it should be replaced.
System Decomposition versus System Interdependency

System Decomposition

- Is the process of dividing the system into smaller sub-system parts.

Subsystem Interdependency

- depends on the effective functioning and harmonious interaction of its subsystems.

- Reliant upon the functioning of the other parts of a system.

AN INFORMATION SYSTEMS FRAMEWORK

Information system

- Set of formal procedures by which data are collected, processed into information, and
distributed to users.
- Accepts input, called transactions, which are converted through various processes into
output information that goes to users.

Transaction

- An event that affects or is of interest to the organization and is processed by its information
system as a unit of work.
- Is a business event.

Financial Transaction

- An economic event that affects the assets and equities of the organization, is reflected in its
accounts, and is measured in monetary terms.
- Examples: sales of products to customers, purchases of inventory from vendors, and cash
disbursements and receipts

Nonfinancial Transaction

- Events that do not meet the narrow definition of a financial transaction.

- Examples: adding a new supplier of raw materials
- The firm has no legal obligation to process it correctly or at all (unlike financial transactions)

Accounting Information System

- Processes financial transactions and nonfinancial transactions that directly affect the
processing of financial transactions.
- 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.
SUBSYSTEMS:

1. Transaction Processing System (TPS)

- Which supports daily business operations with numerous reports, documents, and
messages for users throughout the organization.
2. General Ledger/ Financial Reporting System (GL/FRS)
- Produces the traditional financial statements, such as the income statement, balance
sheet, statement of cash flows, tax returns, and other reports required by law.
3. Management Reporting System (MRS)
- Provides internal management with special-purpose financial reports and information
needed for decision making as budgets, variance reports, and responsibility reports.

Management Information System

- Processes nonfinancial transactions that are not normally processed by traditional AIS.

AIS SUBSYSTEMS

Transaction Processing System

- Central to the overall function of the information system by converting economic events
into financial transactions, recording financial transactions in the accounting records
(journals and ledgers), and distributing essential financial information to operations
personnel to support their daily operations.
- Deals with business events that occur frequently.
 - The TPS consists of three transaction cycles: (1) Revenue Cycle, (2) Expenditure Cycle, (3)
Conversion Cycle

General Ledger/ Financial Reporting Systems

- Two closely related subsystems

- Generally viewed as a single integrated system due to their operational interdependency
- The bulk of the input to the GL portion of the system comes from the transaction cycles.
- FRS measures and reports the status of financial resources and the changes in those
resources. FRS communicates this information primarily to external users.
- Non-discretionary

*Discretionary- the organization can choose what information to report and how to present it.

*Non-discretionary- means that the organization has few or no choices in the information it provides.

Management Reporting Systems

- Provides the internal financial information needed to manage a business.

- Typical reports produced by the MRS include budgets, variance reports, cost-volume-profit
analyses, and reports using current (rather than historical) cost data. (This type of reporting
is called discretionary reporting because the organization can choose what information to
report and how to present it.)

A GENERAL MODEL FOR AIS

 - THIS IS A GENERAL MODEL BECAUSE IT DESCRIBES ALL INFORMATION SYSTEM, REGARDLESS
OF THEIR TECHNOLOGICAL ARCHITECTURE.

End Users

- Fall into two general groups: (1) external and (2) internal.

External Users

- Include creditors, stockholders, potential investors, regulatory agencies, tax authorities,

suppliers, and customers.
- Institutional users such as banks, SEC, and IRS receive information in the form of financial
statements, tax returns, and other reports that the firm has a legal obligation to produce.
- Trading partners (customers and suppliers) receive transaction-oriented information,
including purchase orders, billing statements, and shipping documents.

Internal Users

- Include management at every level of the organization, as well as operations personnel.

Data Versus Information (One person’s information is another person's data)

Data

- Facts, which may or may not be processed and have no direct effect on the user.

Information

- Causes the user to take an action that he or she otherwise could not, or would not, have
taken.
- Often defined simply as processed data.
- Determined by the effect it has on the user, not by its physical form.
- Information allows users to take action to resolve conflicts, reduce uncertainties, and make
decisions.

Data Sources

- Are financial transactions that enter the information system from both internal and external
sources.
- External financial transactions are the most common source of data for most organizations.
Examples: sales of goods and services, purchase of inventory, receipt of cash, disbursement
of cash.
- Internal financial transactions involve the exchange or movement of resources within the
organization. Examples: movement of raw materials into WIP, the application of labor and
 overhead to WIP, the transfer of WIP into finished goods inventory, and the depreciation of
plant and equipment.

Data Collection (MOST IMPORTANT STAGE)

- First operational stage in the information system

- The objective is to ensure that event data entering the system are valid, complete, and free
from material errors.
- This is the most important stage in the system.

Two rules govern the design of data collection procedures: RELEVANCE and EFFICIENCY.

RELEVANCE
- The information system should capture only relevant data.
- Only data that ultimately contribute to information are relevant.
- The data collection stage should be designed to filter irrelevant facts from the system.
EFFICIENCY
- Are designed to collect data only once.
- Capturing the same data more than once leads to data redundancy and inconsistency.

Data Processing

- Data require processing to produce information.

- Examples include mathematical algorithms used for production scheduling applications,
statistical techniques for sales forecasting, and posting and summarizing procedures used
for accounting applications.

Database Management

Database is a physical repository (room, area) for financial and nonfinancial data.

- The levels in the data hierarchy: (1) Attribute, (2) Record, (3) File.
Data Attribute (1)

- Most elemental piece of potentially useful data in the database.

- The absence of any single relevant attribute diminishes or destroys the information content
of the set.

Record (2)

- Complete set of attributes for a single occurrence within an entity class.

- Every record in the database must be unique in at least one attribute.

Files (3)

- Complete set of records of an identical class.

Database Management Task

- Involves three fundamental tasks: storage, retrieval, and deletion.

Storage Tasks

- Assigns keys to new records and stores them in their proper location in the database.
Retrieval Tasks

- Locating and extracting an existing record from the database for processing.

Deletion Tasks

- Permanently removing obsolete or redundant records from the database.

Information Generation

- Process of compiling, arranging, formatting, and presenting information to users.

- Information can be an operational document such as a sales order, structured report, or a
message on a computer screen.
- Characteristics: (1) relevance, (2) timeliness, (3) accuracy, (4) completeness, and (5)
summarization.

Relevance

- Contents of a report or document must serve a purpose.

- Should present only relevant data in its reports.

Timeliness

- Must be no older than the time of the action it supports.

Accuracy

- Information must be free from material errors.

Completeness

- No piece of information essential to a decision or task should be missing.

Summarization

- Information should be aggregated in accordance with the user’s needs.

Feedback

- Is a form of output that is sent back to the system as a source of data.

- Maybe internal or external and is used to initiate or alter a process.

Information System Objectives

1. To support the stewardship function of management.

- Stewardship refers to management’s responsibility to properly manage the resources of the
firm.
- Provides information about resource utilization.
2. To support management decision making.
- Supplies managers with the information they need to carry out their decision-making
responsibilities.
3. To support the firm’s day-to-day operations
 - Provides information to operations personnel to assist them in the efficient discharge of
their daily task.

ACQUISITION OF INFORMATION SYSTEMS

Three Basic Types of Commercial Software:

Turnkey Systems

- Completely finished and tested systems that are ready for implementation.

Backbone Systems

- Consists of a basic system structure on which to build.

- Compromise between a custom system and a turnkey system

Vendor-supported Systems

- Are custom systems that client organizations purchase commercially rather than develop in-
house.

ORGANIZATIONAL STRUCTURE
- Reflects the distribution of responsibility, authority, and accountability throughout the
organization.

BUSINESS SEGMENTS

- Firms organize into segments to promote internal efficiencies through the specialization of
labor and cost-effective resource allocations.

- Managers within a segment can focus their attention on narrow ideas of responsibility to
achieve higher levels of operating efficiency.

Three of the Most Common Approaches include Segmentation by:

1. Geographic Location
- Many organizations have operations dispersed across the country and around the world.
They do this to gain access to resources, makers, or lines of distribution.
2. Product Line
- Allows the organization to devote specialized management, labor, and resources to
segments separately, almost as if they were separate firms.
3. Business Functions
- Functional segmentation divides the organization into areas of specialized responsibility
based on tasks.
- The functional areas are determined according to the flow of primary resources through the
firm.
- Examples of business function segments are marketing, production, finance, and accounting.
FUNCTIONAL SEGMENTATION

- Segmentation by business function is the most common method of organizing.

- The titles of functions and even the functions themselves will vary greatly among
organizations, depending on their size and line of business.

Materials Management

- To plan and control the materials inventory of the company.

Subfunctions:

1. Purchasing
- Responsible for ordering inventory from vendors when inventory levels fall to their reorder
points.
2. Receiving
- Task of accepting the inventory previously ordered by purchasing.
3. Stores
- Takes physical custody of the inventory received and releases these resources into
production process as needed.

Production

- Occurs in the conversion cycle in which raw materials, labor, and plant assets are used to
create finished products.
- Primary Manufacturing Activities: shape and assemble raw materials into finished products.
- Production Support Activities: ensure that primary manufacturing activities operate
efficiently and effectively.
(1) Production Planning- scheduling the flow of materials, labors, and machinery to
efficiently meet production needs.
(2) Quality Control- monitors the manufacturing process at various points to ensure that
the finished product meet the firm’s quality standards.
(3) Maintenance- keeps the firm’s machinery and other manufacturing facilities in running
order.

Marketing

- Deals with the strategic problems of product promotion, advertising, and market research.

Distribution

- Activity of getting the product to the customer after the sale.

Personnel

- Competent and reliable employees are a valuable resource to a business.

- The objective of the personnel function is to effectively manage this resource.
- Includes recruiting, training, continuing education, counseling, evaluating, labor relations,
and compensation administration.
Finance

- Manages the financial resources of the firm through banking and treasury activities,
portfolio management, credit evaluation, cash disbursements, and cash receipts.
- Administers the daily flow of cash in and out of the firm.

THE ACCOUNTING FUNCTION

- Manages the financial information resource of the firm.

- Accounting captures and records the financial effects of the firm’s transactions.
- Accounting function distributes transaction information to operations personnel to
coordinate many of their key tasks.

The Value of Information

- The value of information to a user is determined by its reliability.

- Effective decisions require information that has a high degree of reliability.

Accounting Independence

- Information reliability rests heavily on the concept of accounting independence.

- Accounting activities must be separate and independent of the functional areas that
maintain custody of physical resources.

THE INFORMATION TECHNOLOGY(IT) FUNCTION

Centralized Data Processing

- All data processing is performed by one or more large computers housed at a central site
that serve users throughout the organization.

Database Administration

- Centrally organized companies maintain their data resources in a central location that is
shared by all end users.

Data Processing

- Manages the computer resources used to perform the day-to-day processing of

transactions.

Functions:

1. Data Control
- Responsible for receiving batches of transaction documents for processing from end users
and then distributing computer output back to users.
2. Data Conversion
 - Transcribes transaction data from source documents to digital media suitable for computer
processing by the central computer, which is managed by the computer operations group.
3. Computer Operations
4. Data Library
- Room often adjacent to the computer center that provides safe storage for the offline data
files, such as magnetic tapes and removable disk packs.

Systems Development and Maintenance

- The information needs of users are met by two related functions: systems development and
systems maintenance.

Distributed Data Processing

- Involves reorganizing the IT function into small information units that are distributed to end
users and placed under their control.

THE EVOLUTION OF INFORMATION SYSTEM

1. Manual Process Model

- Oldest and most traditional form of accounting system,
- Constitutes the physical task and events