Accounting Information Systems, 10th edition

James A. Hall
 Objectives for Chapter 1
 Recognize the primary information flows within the business
environment
 Differentiate accounting information systems and
management information systems
 Know the principal features of the general model for
information systems
 Differentiate financial transactions from non-financial
transactions
 Understand the organizational structure and the functional
areas of a business
 Distinguish external, internal and advisory services as they
relate to AIS
Internal & External Information Flows
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 Objectives
To support the firm’s day-to-day operations
To support management decision making
To support the stewardship function of
manangement
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.
Transactions
A transaction is an event that affects or is of
interest to the organization and is processed by its
information system as a unit of work.
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 organization’s
information system
e.g., an airline reservation — no commitment by the
customer
Transactions
Financial

Transactions User
Information
Decision
Nonfinancial System
Information Making

Transactions
What is Accounting Information
Systems?
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 many
key tasks.
AIS Subsystems
Transaction processing system (TPS)
supports daily business operations
General Ledger/ Financial Reporting System
(GL/FRS)
produces financial statements and reports
Management Reporting System (MRS)
produces special-purpose reports for internal use
AIS versus MIS
Accounting Information Systems (AIS) process
financial transactions; e.g., sale of goods and
nonfinancial transactions that directly affect the
processing of financial transactions; e.g., addition of
newly approved vendors
Management Information Systems (MIS)
process
nonfinancial transactions that are not normally
processed by traditional AIS; e.g., tracking customer
complaints
AIS versus MIS?
AIS SUBSYSTEMS:
1. Transaction Processing System
3 TRANSACTION CYCLES
Revenue Cycle
Expenditure Cycle
Conversion Cycle
2. General Ledger/Financial Reporting Systems-
Nondiscretionary Reporting
3. Management Reporting System-Discretionary
Reporting
The General AIS Model
Data Sources
Data sources are financial transactions that
enter the information system from internal and
external sources.
External financial transactions are the most common
source of data for most organizations.
 E.g., sale of goods and services, purchase of inventory, receipt of
cash, and disbursement of cash (including payroll).
Internal financial transactions involve the exchange or
movement of resources within the organization.
 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
3. Database Management
1. Data Collection
Capturing transaction data
Recording data into forms
Validating and editing the data

TWO RULES THAT GOVERN THE DESIGN OF

DATA COLLECTION PROCEDURES:
1. Relevance
2. Efficiency
2. Data Processing
Classifying • Merging
Transcribing
• Calculating
Sorting
Batching • Summarizing
• Comparing
3. Database Management
LEVELS IN THE DATA HEIRARCHY
[Link] ATTRIBUTE
[Link]
[Link]

3 FUNDAMENTAL TASKS OF DATABASE MGMT.

TASKS
Storing
Retrieving
Deleting
4. Information Generation
Compiling
Arranging
Formatting
Presenting
Characteristics of Useful Information
Regardless of physical form or technology, useful
information has the following characteristics:
Relevance: serves a purpose
Timeliness: no older than the time period of the action it
supports
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
Feedback: form of output that is sent back to the system
as a source of data.
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
Finance
Accounting
Accounting Independence
Information reliability requires accounting
independence.
Accounting activities must be separate and
independent of the functional areas maintaining
resources.
Decisions makers in these functions require that
such vital information be supplied by an
independent source to ensure its integrity.
4 Information Technology
functions
Data processing
Centralized or Distributed Data Processing
Systems development and maintenance
Database administration
Network administration
 The Computer Services Function
Distributed Data Centralized Data
Processing Most companies fall in between. Processing

Reorganizing the All data processing

computer services is performed by
function into small one or more large
information processing computers housed
units that are distributed at a central site
to end users and that serves users
placed under their control throughout the
organization.

Primary areas:
database administration
data processing
systems development
systems maintenance
Organization of Computer Services Function in a Centralized System
Organizational Structure for a Distributed Processing
System
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
Potential Disadvantages of DDP
Loss of control
Mismanagement of company resources
Hardware and software incompatibility
Redundant tasks and data
Consolidating tasks usually segregated
Difficulty attracting qualified personnel
Lack of standards
Data Redundancy Problems
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
Data Integration - separate files are difficult
to integrate across multiple users
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