Chapter

Introduction to AIS

Learning Objectives

The Information System Organisational Structure and 1.1 The Information System 1.3 Organisational Structure Environment Accounting Function Environment and Accounting Function Definition of AIS Accounting Information and 1.1.1 Definition of AIS 1.4 Accounting Information AIS Framework Decision Making 1.1.2 AIS Framework and Decision Making Transaction Processing System Accountants Roles in AIS 1.2 Transaction Processing System 1.5 Accountants Roles in AIS Overview of TPS (TPS) Components of TPS 1.2.1 Overview of TPS 1.2.2 Components of TPS

Learning Objective

The Information System Environment

What is Accounting?
is a Accounting
system that Identifies

Records information Relevant Reliable Comparable to help users make better decisions. that is Communicates

Info vs. data

Data is Information is a

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

Internal & External Flows of Information

Top Management
Middle Management Operations Management Customers Operations Personnel Day-to-Day Operations Personnel

Stakeholders

Suppliers

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

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.

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.

System Decomposition vs. 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

Examples of Systems
Biological cell human body Mechanical water heater computer Others solar system mathematics

E = mc2

Learning Objective

Definition of AIS

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.

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 firms day-to-day operations.

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 organizations information system e.g., an airline reservation--no commitment by the customer

What is Accounting Information Systems?

Accounting is an information system which identifies, collects, processes, and communicates economic information about an entity to a wide variety of people regardless of the technology captures and records the financial effects of the firms transactions distributes transaction information to operations personnel to coordinate many key tasks

AIS Functions
The functions of an AIS are to: Collect, record and store data about events, resources, and agents. Transform that data into information that management can use to make decisions about events, resources, and agents. Provide adequate controls to ensure that the entitys resources (including data) are: Available when needed Accurate and reliable

Why Study Accounting Information Systems?

Its fundamental to accounting.
Accounting is an information-providing activity, so accountants need to understand: How the system that provides that information is designed, implemented and used. How financial information is reported How information is used to make decisions Other accounting courses focus on how the information is provided and used. An AIS course places greater emphasis on: How the data is collected and transformed How the availability, reliability, and accuracy of the data is ensured AIS courses are not number-crunching courses

Why Study Accounting Information Systems?

The skills are critical to career success.
Auditors need to evaluate the accuracy and reliability of information produced by the AIS. Tax accountants must understand the clients AIS adequately to be confident that it is providing complete and accurate information for tax planning and compliance work. In private industry and not-for-profits, systems work is considered the most important activity performed by accountants. In management consulting, the design, selection, and implementation of accounting systems is a rapid growth area.

Why Study Accounting Information Systems?

The AIS course complements other systems courses. Other systems courses focus on design and
implementation of information systems, databases, expert systems, and telecommunications. AIS courses focus on accountability and control.

AIS topics are tested on the new CPA exam.

Makes up about 25% of the Business Environment & Concepts section of the CPA exam.

AIS topics impact corporate strategy and culture.

AIS vs. MIS

Accounting 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. Management Information Systems (MISs) process nonfinancial transactions that are not normally processed by traditional AISs (e.g., tracking customer complaints).

AIS vs. MIS?

IS

AIS

MIS

GLS/FRS

TPS

MRS

Finance

Marketing

Production

HRS

Distribution

The General AIS Model

The External Environment The Information System

Database Management

External Data Sources

Data Collection

Data Processing

Information Generation

External End Users

Feedback Internal Sources of Data Internal End Users

The Business Organization Feedback

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

1. Data Collection
capturing transaction data recording data onto forms validating and editing the data

2. Data Processing
classifying transcribing sorting batching merging calculating summarizing comparing

3. Data Management

storing retrieving deleting

4. Information Generation

compiling arranging formatting presenting

Learning Objective

AIS Framework and Transaction Processing System (TPS)

AIS Framework

A. Objectives B. Components C. Subsystems

A. AIS Objectives
What important functions does the AIS perform in an organization? 1. It collects and stores data about activities and transactions. 2. It processes data into information that is useful for making decisions. 3. It provides adequate controls to safeguard the organizations assets

B. AIS Components
An AIS consists of: People Procedures Data Software Information technology infrastructure Have 4 components: Inputs Processes Outputs feedback

C. AIS Subsystems
There are 3 subsystems: 1. Transaction Processing System (TPS) 2. General Ledger/ Financial Reporting System (GL/FRS) 3. Management Reporting System (MRS)

1. Transaction Processing System (TPS)

Supports daily business operations Converting economic events into financial transactions Recording financial transactions in the accounting records (journals and ledgers) Distributing essential financial information to operating personnel Consists of: 1. Revenue Cycle Activities of selling goods or services and collecting payment for those sales. 2. Expenditure Cycle Activities of buying and paying for goods or services. 3. Conversion Cycle Activities of converting raw materials and labor into finished goods.

2. General Ledger/Financial Reporting System

Produces financial statements and reports Consists of two closely related subsystems: (a) General Ledger System Process the summaries of transaction cycle activity from the transaction cycles to update the general ledger control accounts. (b) Financial Reporting System Measures and reports the status of financial resources and changes in those resources.

3. Management Reporting System (MRS)

Produces special-purpose reports for internal use budgets, variance reports, cost-volume-profit analyses ad report using current (rather than historical) cost data.

Learning Objective

Organisational Structure and Accounting Function

Organizational Structure
The structure of an organization helps to allocate responsibility authority accountability

Responsibility, Authority and Accountability

President

Vice President Marketing

Vice President Production

Vice President Finance

Vice President Computer Services

Manager Plant 1

Manager Plant 2

Manager Plant 3

Responsibility and Authority Accountability

Manager Unit 1

Manager Unit 2

Manager Unit 3

Segmentations
Segmenting by business function is a very common method of organizing. Geographic location Product line Business function Inventory/Materials Management
Production Marketing Distribution Personnel Finance Accounting Computer Services

Learning Objective

Accounting Information and Decision Making

Characteristics that make information useful

Relevance Reliability Completeness Timeliness Understandability Verifiability Accessibility

Characteristics of Useful Information

Relevant - Reduces uncertainty, improves decision makers ability to make predictions Reliable Free from error and bias and accurately represents the events or activities of the organization.

Complete - Does not omit important aspects of the underlying events or activities that is measures

Characteristics of Useful Information

Timely Provided in time to enable decision makers to use it to make decisions

Understandable - Presented in a useful and intelligible format Verifiable - Two knowledgeable people acting independently each produce the same information

Accounting Independence
Information reliability independence: requires accounting

Accounting activities must be separate and independent of the functional areas maintaining resources. Ex: - Accounting monitors and records the movement of raw materials into production. - Accounting authorizes purchases of raw materials Accounting supports these functions with information but does not actively participate.

Learning Objectives

Decision scope and structure

Decision Structure
Decisions vary in terms of the degree to which they are structured. 3 categories: Structured decisions repetitive, routine, and understood well enough that they can be delegated Semistructured decisions need for subjective assessments and judgments. Unstructured decisions nonrecurring and nonroutine.

Decision Scope
Operational control Management control Strategic planning

Decision Scope
Decisions vary in terms of the scope of their effect. Operational control is concerned with the effective and efficient performance of specific tasks. Management control is concerned with the effective and efficient use of resources for accomplishing organizational objectives.

Decision Scope
Strategic planning is concerned with establishing organizational objectives and policies for accomplishing those objectives.

Decision Making (Scope vs. Structure)

Strategic planning -------- Unstructured Management control -------- Semi structured Operational control -------- Structured

Learning Objectives

Accountants Roles in AIS

ACCOUNTANT AS
IS 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.

ACCOUNTANT 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.

ACCOUNTANT 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

Learning Objectives

Careers in accounting

Roles of Accountants With Respect to an AIS

Financial accountants prepare financial information for external decision-making in accordance with GAAP Managerial accountants prepare financial information for internal decision-making

Roles of Accountants With Respect to an AIS

Auditors - evaluate controls and attest to the fairness of the financial statements. Accounting managers control all accounting activities of a firm. Tax specialists - develop information that reflects tax obligations of the firm. Consultants - devise specifications for the AIS.

End of Chapter 1