1

Chapter 1

The Information System: An Accountant’s Perspective

2

Objectives for Chapter 1

Primary information flows within the business environment Accounting information systems and management information

systems Information and data Three fundamental objectives of all information systems The general model for information systems Financial transactions from non-financial transactions The functional areas of a business Independence between accounting and other business areas The centralized and distributed approaches to data processing Two main stages in the evolution of information systems Three roles of accountants in an information system

Internal & ExternalFlows of Information

TopManagement

MiddleManagement

OperationsManagement

Operations Personnel

Day-to-Day Operations Personnel

Bud

get I

nfor

mat

ion

and

Inst

ruct

ions

Perform

ance InformationCustomers

Stakeholders

Suppliers

4

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

5

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.

6

Information in Business

Information is a business resource: ... needs to be appropriately managed

...is vital to the survival of contemporary businesses

7

What is Information?

Information is processed data that is used to make decisions, resolve conflicts, and/or reduce uncertainty.

8

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.

9

System Decomposition vs. System Interdependency

System Decomposition the process of dividing the system into

smaller subsystem partsSystem 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

10

Examples of Systems

Biological cell human body

Mechanical water heater computer

Others solar system mathematics

E = mc2

11

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.

12

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.

13

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 ticketNonfinancial transactions

all other events processed by the organization’s information system

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

14

Transactions

Financial

Transactions

Nonfinancial

Transactions

Information System

User Decisions

Information

15

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 firm’s transactions

distributes transaction information to operations personnel to coordinate many key tasks

16

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).

17

AIS vs. MIS?

G L S /F R S TP S M R S

A IS

F in an ce M arke tin g P rod u c tion H R S D is trib u tion

M IS

IS

18

AIS vs. MIS: Solutions

Data Warehousing and Enterprise Resource Planning (ERP)

AIS MIS AIS MIS

19

AIS Subsystems

Transaction processing system (TPS) supports daily business operations

General Ledger/ Financial Reporting System (GL/FRS) produces financial statements and

reportsManagement Reporting System (MRS)

produces special-purpose reports for internal use

The General AIS Model

The InformationSystem

DatabaseManagement

DataCollection

DataProcessing

InformationGeneration

The External Environment

InternalSources of Data

InternalEnd Users

ExternalDataSources

ExternalEnd Users

Feedback

The Business Organization

Feedback

21

Transforming the Data into Information

Functions for transforming data into information according to the general AIS model:

1. Data Collection2. Data Processing3. Data Management4. Information Generation

22

1. Data Collection

capturing transaction datarecording data onto formsvalidating and editing the data

23

2. Data Processing

classifyingtranscribingsortingbatchingmergingcalculatingsummarizingcomparing

24

3. Data Management

storingretrievingdeleting

25

4. Information Generation

compilingarrangingformattingpresenting

26

Organizational Structure

The structure of an organization helps to allocate responsibility authority accountability

Segmenting by business function is a very common method of organizing.

27

Functional Areas

Inventory/Materials Management purchasing, receiving, and storage

Production production planning, quality control, and

maintenance Marketing Distribution Personnel Finance Accounting Computer Services

28

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.

29

The Computer Services Function

Centralized Data Processing

Distributed DataProcessing Most companies fall somewhere

in between.

All data processingis performed byone or more largecomputers housedat a central sitethat serves users throughout theorganization.

Primary areas:database administrationdata processingsystems developmentsystems maintenance

Reorganizing thecomputer services function into small information processingunits that are distributedto end users and placed under their control

President

VPMarketing

VP ComputerServices

VPProduction

VPFinance

SystemsDevelopment

Data BaseAdministration

DataProcessing

New SystemsDevelopment

SystemsMaintenance

DataControl

DataPreparation

ComputerOperations

DataLibrary

President

VPMarketing

VPFinance

VPProduction

IPU IPU IPU IPU IPU IPU

VPAdministration

Treasurer Controller ManagerPlant X

ManagerPlant Y

CENTRALIZED COMPUTER SERVICES FUNCTION

DISTRIBUTED ORGANIZATIONALSTRUCTURE

31

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

32

Potential Disadvantages of DDP

Loss of controlMismanagement of organization-wide

resourcesHardware and software incompatibilityRedundant tasks and dataConsolidating tasks usually segregatedDifficulty attracting qualified personnelLack of standards

33

The data is retained in a central location.

Remote IPUs send requests for data.Central site services the needs of

the remote IPUs.The actual processing of the data is

performed at the remote IPU.

Centralized Databases in an IPU Environment: CDB vs. DDP

Program 1

Program 2

Program 3

A,B,C

X,B,Y

L,B,M

User 2Transactions

User 1Transactions

User 3Transactions

Data

The Evolution of IS Models: The Flat-File Model

35

Data Redundancy ProblemsData Storage - excessive storage costs of

paper documents and/or magnetic formData Updating - changes or additions must

be performed multiple timesCurrency of Information - potential

problem of failing to update all affected filesTask-Data Dependency - user’s inability to

obtain additional information as needs change

Data Integration - separate files are difficult to integrate across multiple users

Program 1

Program 2

Program 3

User 2Transactions

User 1Transactions

User 3Transactions

Database

DBMS

A,B,C,X,Y,L,M

The Evolution of IS Models: The Database Model

34

Inventory Line items Sales Party to Salesperson

Pays for

Cash CollectionsIncreases

Cash

Made toCustomer

Cashier

Receivedfrom

Received by

M

1

M

M

M

M

M

M

M

M

1

1

1

1

R E A

An REA Data Model Example

38

REA ModelThe REA model is an accounting framework

for modeling an organization’s economic resources (the assets of the

organization), economic events (phenomena that affect

changes in resources), and economic agents (individuals and

departments that participate in an economic event), and

their interrelationships.

Entity-relationship diagrams are used to model these relationships.

39

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.

40

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.

41

Accountants as System Auditors

External Auditors attest to fairness of financial statements assurance service: broader in scope than

traditional attestation auditIT Auditors

evaluate IT, often as part of external audit

Internal Auditors in-house IS and IT appraisal services