What is an Information System?

CHAPTER 1: THE It is the set of formal procedures by which data are

INFORMATION SYSTEM (AN collected, processed into information, and distributed to
users.
ACCOUNTANT’S PERSPECTIVE
Transactions
Internal Information Flows It is a business event.
• Horizontal flows - used primarily at the operations • Financial transactions - economic events that affect
level to capture transaction and operations data. the assets and equities of the organization
• Vertical flows (e.g., purchase of an airline ticket)
- Downward: Instructions, quotas, budgets • Nonfinancial transactions - all other events
- Upward: Aggregated transaction and operations processed by the organization’s information system
data (e.g., an airline reservation – no commitment by the
customer)
Information Requirements
• Each user group has unique information What is Accounting Information System (AIS)?
requirements. Accounting is an Information System.
• The higher the level of the organization, the greater • It identifies, collects, processes, and communicates
the need for more aggregated information and less economic information about a firm using a wide
need for detail. variety of technologies.
• It captures and records the financial effects of the
Information in Business firm’s transactions.
Information is a business resource that: • It distributes transaction information to operations
• Needs to be appropriately managed personnel to coordinate many key tasks.
• Is vital to the survival of contemporary businesses
AIS vs. MIS
What is a System? • Accounting Information Systems (AIS)
A group of interrelated multiple components or - Financial transactions
subsystems that serve a common purpose. (e.g., sale of goods)
• System is called a subsystem when it is viewed as a - Nonfinancial transactions directly affect the
component of a larger system. processing of financial transactions
• Subsystem is considered a system when it is the (e.g., addition of newly approved vendors)
focus of attention. • Management Information Systems (MIS)
- Nonfinancial transactions not normally
System Decomposition processed by traditional AIS
• The process of dividing the system into smaller (e.g., tracking customer complaints)
subsystem parts.
AIS Subsystems
System Interdependency • Transaction Processing System (TPS)
• Distinct parts are not self-contained. - Supports daily business operations.
• They are reliant upon the functioning of the other • General Ledger/Financial Reporting System
parts of the system. (GL/FRS)
• All distinct parts must be functioning or the system - Produces financial statements and reports.
will fail. • Management Reporting System (MRS)
- Produces special-purpose reports for internal
use
Data Sources • Summarization – aggregated in accordance with the
Financial transactions that enter the information system user’s needs.
from internal and external sources.
• External Financial Transactions – most common IS Objectives in a Business Context
source of data. The goal of an Information System is to support:
- sale of goods and services • Stewardship function of management
- purchase of inventory • Management decision making
- receipt of cash • Firm’s day-to-day operations
- disbursement of cash including payroll
• Internal Financial Transactions – exchange or Organizational Structure
movement of resources. Structure of an organization helps to allocate:
- movement of raw materials into WIP - responsibility
- application of labor and OH to WIP - authority
- transfer of WIP into finished goods inventory - accountability
- depreciation of equipment • Segmenting by business function is a very common
method of organizing.
Functions for Transforming Data into Information • Functional areas:
• Data Collection - inventory/materials management
- capturing transaction data - production
- recording data onto forms - marketing
- validating and editing the data - distribution
• Data Processing - personnel
- classifying - finance
- transcribing - accounting
- sorting - computer services
- batching
- merging Accounting Independence
- calculating Information reliability requires Accounting
- summarizing Independence.
- comparing • Accounting activities must be separate and
• Data Management independent of the functional areas maintaining
- storing resources.
- retrieving • Accounting supports functions with information but
- deleting does not actively participate.
• Information Generation • Decision makers require that vital information be
- compiling supplied by an independent source to ensure
- arranging integrity.
- formatting
- presenting Computer Services Function
• Distributed Data Processing (DDP) - reorganizing
Characteristic of Useful Information into small information processing units distributed
• Relevance – serves a purpose to end users and placed under their control.
• Timeliness – no older than the time period • Centralized Data Processing - all data processing is
• Accuracy – free from material errors performed by one or more large computers housed
• Completeness – all information essential to a at a central site.
decision or task is present
 Primary Areas: • Data Integration – separate files are difficult to
- database administration integrate across multiple users.
- data processing
- systems development REA Model
- systems maintenance • An accounting framework for modeling an
organization’s
Potential Advantages of DDP - Resources – assets
• Cost reductions in hardware and data entry tasks - Events – affect changes in resources
• Improved cost control responsibility - Agents – individuals and departments
• Improved user satisfaction • Interrelationships among resources, events, and
• Better backup through multiple data storage sites agents.
• Entity-Relationship Diagrams (ERD) – often used to
Potential Disadvantages of DDP model these relationships.
• Loss of control
• Mismanagement of resources Accountants as Information System Users
• Hardware/software incompatibility • Must clearly convey needs to system designers
• Redundant tasks and data • Should actively participate in systems development
• Consolidating tasks usually segregated
• Difficulty attracting qualified personnel Accountants as System Designers
• Lack of standards • Accounting Function – responsible for the
conceptual system.
Manual Process Model • Computer Function – responsible for the physical
Transaction processing, information processing, and system.
accounting are physically performed by people using • Conceptual system defines:
paper documents. - Nature of required information
• Useful to study because: - Sources and destinations
- helps link AIS courses to other accounting - Accounting rules to apply
courses.
- easier to understand business processes Accountants as System Auditors
without technology. • External auditors
- facilitates understanding internal controls. - Attest to fairness of financial statements
- Assurance service: broader in scope than
Evolution of IS Models traditional attestation audit
• The Flat-file Model • IT auditors
• The Database Model - Evaluate IT systems
• Internal auditors
Data Redundancy Problems - In-house IS/IT appraisal services
• 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
 • Journals – a record of chronological entry.
CHAPTER 2: INTRODUCTION - Special journals – specific classes of high-
TO TRANSACTION frequency transactions
- General journal – nonrecurring, infrequent,
PROCESSING dissimilar transactions
• Ledgers – a book of financial accounts.
Financial Transactions - General ledger – shows activity for each
An economic event that affects the assets and equities account in the chart of accounts
of the firm, is reflected in its accounts, and is measured - Subsidiary ledger – shows detailed activity for
in monetary terms. each account type

Three Transaction Cycles Flow of Economic Events into the General Ledger
• Expenditure Cycle – time lag due to credit relations • Customer’s Order → Sales Order → Sales Journal
with suppliers. • Post to General Ledger and Accounts Receivable
- Physical component – acquisition of goods Subsidiary Ledger
- Financial component – cash disbursements to • Periodically reconcile Subsidiary Ledger to General
the supplier Ledger
- Subsystems:
o Purchasing/Accounts Payable Computer-Based Systems
o Cash Disbursements • Audit Trail is less observable in computer-based
o Payroll systems than traditional manual systems.
o Fixed Assets • Data entry and computer programs are the physical
• Conversion Cycle trail.
- Production system – planning, scheduling, and • Data are stored in magnetic files.
control of the physical product through the
manufacturing process Computer Files
- Cost accounting system – monitors the flow of • Master File – account data
cost information related to production (e.g., general ledger, subsidiary file)
• Revenue Cycle – time lag due to credit relations • Transaction File – temporary file containing
with customers. transactions since last update
- Physical component – sales order processing • Reference File – relatively constant information
- Financial component – cash receipts (e.g., tax tables)
- Subsystems: • Archive File – past transactions for reference
o Sales Order Processing
o Cash Receipts Documentation Techniques
• Entity Relationship Diagram (ERD) – shows
Manual System Accounting Records relationships between entities.
• Source Documents – capture and formalize - Entities: Resources, Events, Agents
transaction data. - Cardinalities: one-to-one, one-to-many, many-
• Product Documents – result of transaction to-many
processing. • Data Flow Diagrams (DFD) – uses symbols for
• Turnaround Documents – product document of one logical representation of processes, data sources,
system that becomes a source document for flows, and entities.
another.
• Document Flowcharts – show relationship among • Edit Run – identifies clerical errors and places them
processes and documents, contain more details into an error file.
than DFD, and depict separation of functions. • Sort Run – places the transaction file in the same
• System Flowcharts – show relationships between order as the master file using a primary key.
input sources, programs, and output products; • Update Run – changes the value of appropriate
depict media used. fields in the master file.
• Program Flowcharts – illustrate program logic. • Backup Procedure – original master continues to
exist and new master file is created.
Modern Systems vs. Legacy Systems
• Modern Systems Characteristics Advantages of Batch Processing
- client-server based • Organizations can increase efficiency by grouping
- real-time processing large numbers of transactions into batches rather
- relational database tables than processing each event separately.
- high degree process integration and data • Batch processing provides control over the
sharing transaction process via control figures.
• Legacy Systems Characteristics
- mainframe-based Real-Time Systems
- batch oriented • Process transactions individually when economic
- flat files (early legacy systems) event occurs.
- hierarchical and network databases (later legacy • No time lag between economic event and
systems) processing.
- single-user environment • Require greater resources since they require
dedicated processing capacity; cost differentials are
Database Backup Procedures decreasing.
• Backup master file before update • Have longer systems development time.
• Recovery program restores pre-update version

Computer-Based Accounting Systems

Two broad classes of systems:
• Batch Systems
• Real-Time Systems

Batch Processing Systems

• A group of similar transactions that are accumulated
over time and then processed together.
• Transactions must be independent of one another
during the time period over which the transactions
are accumulated.
• Time lag exists between the event and the
processing.

Steps in Batch Processing

• Keystroke – source documents are transcribed to
magnetic tape for processing.