Chapter 1 The Information System: An Accountant’s Perspective

Internal Information Flows

• Horizonal flows of information used
primarily at the operations level to capture
transaction and operations data.
• Vertical flows of information
o Downward flows – instructions,
quotas, and budgets
o 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.
Information in Business
• Information is a business resource that:
o Needs to be appropriately managed
o Is vital to the survival of contemporary businesses.
What is a System?
• A group of interrelated multiple components or subsystems that serve a
common purpose
• System or Subsystem?
o A system is called a subsystem when it is viewed as a component of
a larger system.
o A subsystem is considered a system when it is the focus of attention.
System Decomposition versus System Interdependency
• System Decomposition
o The process ofdividing the system into smaller subsystem parts
• System Interdependency
o Distinct part are not self-contained
o They are reliant upon the funtioning of the other parts of the system
o All distinct parts must be functioning or the system will fail
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 a business event.
• Financial Transactions
o Economic events that affect the assets and equities of the
organization
o e.g., purchase of an airline ticket
• Nonfinancial Transactions
o All other events processed by the organizations information system
o e.g., an airline reservation – no commitment by the customer
What is an Accounting Information
System?
• Accountingis an information system.
o It identifies, collects,
processes, and
communicates economic
information about a firm using
a wide variety of
technologies.
o It captures and records the
financial effects of the firms
transactions.
o It distributes transactions information to operations personnels to
coordinate many key tasks.
AIS versus MIS
• Accounting Information Systems (AIS) process
o Financial transactions; e.g., sale of goods
o Nonfinancial transactions that directly affect the processiong of
financial transactions; e.g., addition of newly approved vendors
• Management Information Systems (MIS) process
o Nonfinancial transactions that are not normally processed by
traditional AIS; e.g., tracking customer complaints
AIS Subsystems
• Transaction processing system (TPS)
o Supports daily business operations
• General Ledger/Financial Reporting
System (GL/FRS)
o Produces financial statements and
reports
 • Management Reporting System (MRS)
o Produces special-purpose reports for internal use

Data Sources
• Data sources are financial transactions that enter the information system
from internal and external sources.
o External financial transactions are the most common sources of
data for most organizations
o E.g., sale of goods and services, purchase of inventory, receipt of
cash, and disbursement of cash (including payroll)
o Internal financial transactions involve the exchange of
movements of resources within organization.
o E.g., movement of raw materials into work-in-process (WIP),
application of labor and overhead to WIP, tranfer 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
o Capturing transaction data
o Recording data on forms
o Validating and editing the data

2. Data Processing
o Classifying
o Transcribing
o Sorting
o Batching
o Merging
o Calculating
o Summarizing
o Comparing

3. Data Management
o Storing
o Retrieving
o Deleting
 4. Information Generation
o Compiling
o Arranging
o Formatting
o Presenting
Characteristics of Useful Information
• Regardless of physical form or technology, useful information has the
following characteristics:
o Relevance: serves a purpose
o Timeliness: no older than the time period of the action it supports
o Accuracy: free from material errors
o Completeness: all information
essential to a decision or task
is present
o Summarization: aggregated in
accordance with the user’s
needs
Information System Objectives in a
Business Context
• The goal of an information system is
to support
o The stewardship function of management
o Management decision
making
o The firm’s day-to-day
operations
Organization Structure
• The structure of an organization
helps to allocate
o Responsibility
o Authority
o Accountability
• Segmenting by business function is a very common method of organizing.
Function Areas
• Inventory/Materials Management
o Purchasing, receiving, and stores
• Production
o Production planning, quality control and maintenance
 • Marketing
• Distribution
• Personnel
• Finance
• Accounting
• Computer Services
Accounting Independence
• Information reliability requires accounting independence
o Accounting activities must be separate and independent of the
functional areas maintaining resources .
o Accounting supprots these functions with information but does not
actively participate.
o Decisions makers in these functions requires that such vital
information be supplied by an idependent source

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 incompatibilities
• Redundant tasks and data
 • Consolidating tasks usually
segregated
• Difficulty attracting qualified
personnel
• Lack of standard
Manual Process Model
• Transaction processing, information
processing and accounting are
physically performed by people,
usually using paper documents.
• Useful to study because:
o Helps link AIS courses to the other accounting courses
o Often easier to understand business processes when not surrounded
in technology
o Facilitates understanding internal controls
Data Redundancy Problems
• Data Storage – excessive storage
cost pf 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.

REA Model
• The REA model is an accounting
framework for modeling an
organization’s
o Economic resources; e.g.,
assets
o economic events; i.e., affect
changes in resources
 o economic agents; i.e.,
individuals and departments
that participate in an
economic event
o interrelationship among
resources, events and agents
• Entity-relationship diagrams (ERD)
are often used to model these
relationship.
Accounting as Information Systems User
• 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 Designer
• The accounting function is responsible for the conceptual system, while
the computer functions is responsible for the physical system.
• The conceptual system determines the nature of the information requires,
its sources, its destination, and the accounting rules that must be applied.
Accountants as System Auditors
• External Auditors
o Attest to fairness of financial statements
o Assurance service: broader in scope than traditional attestation
audit
• IT Auditors
o Evaluate IT, often as part of external audit
• Internal Auditors
o In-house IS and IT appraisal services
CHAPTER 2 INTRODUCTION TO TRANSACTION PROCESSING
A Financial Transaction is...
• an economic event that affects the assets and equities of the firm, is
reflected in its accounts, and is measured in monetary terms.
• similar types of transactions are grouped together into three transaction
cycles:
o the expenditure cycle
o the conversion cycle
o the revenue cycle
Each Cycle has Two Primary Subsystems
• Expenditure Cycle: time lag between the two due to credit relations with
suppliers:
o physical component (acquisition of goods)
o financial component (cash disbursements to the supplier)
• Conversion Cycle :
o the production system (planning, scheduling, and control of the
physical product through the manufacturing process)
o the cost accounting system (monitors the flow of cost information
related to production)
• Revenue Cycle: time lag between the two due to credit relations with
customers :
o physical component (sales order processing)
o financial component (cash receipts)
Manual System Accounting Records
• Source Documents - used to capture and formalize transaction data
needed for transaction processing
• Product Documents - the result of transaction processing
• Turnaround Documents - a product document of one system that
becomes a source document for another system
• Journals - a record of chronological entry
o special journals - specific classes of transactions that occur in high
frequency
o general journal - nonrecurring, infrequent, and dissimilar
transactions
• Ledger - a book of financial accounts
o general ledger - shows activity for each account listed on the chart
of accounts
o subsidiary ledger - shows activity by detail for each account type
Computer-Based Systems
• The audit trail is less observable in
computerbased systems than
traditional manual systems.
• The data entry and computer
programs are the physical trail.
• The data are stored in magnetic
files.
Computer Files
• Master File - generally contains account data (e.g., general ledger and
subsidiary file)
• Transaction File - a temporary file containing transactions since the last
update
• Reference File - contains relatively constant information used in processing
(e.g., tax tables, customer addresses)
• Archive File - contains past transactions for reference purposes.

Documentation Techniques
• Documentation in a CB environment is necessary for many reasons.
• Five common documentation techniques:
o Entity Relationship Diagram
o Data Flow Diagrams
o Document Flowcharts
o System Flowcharts
o Program Flowcharts

Entity Relationship Diagram (ERD)

• A documentation technique to represent the relationship between entities
in a system.
• The REA model version of ERD is widely used in AIS. REA uses 3 types of
entities:
o resources (cash, raw materials)
o events (release of raw materials into the production process)
o agents (inventory control clerk, vendor, production worker)
Cardinalities
• Represent the numerical mapping between entities:
o one-to-one
o one-to-many
 o many-to-many
Data Flow Diagrams (DFD)…
• use symbols to represent the
processes, data sources, data flows,
and entities in a system
• represent the logical elements of
the system
• do not represent the physical system

System Flowcharts…
• illustrate the relationship among processes and the documents that flow
between them
• contain more details than data flow diagrams
• clearly depict the separation of functions in a system

System Flowcharts…
• are used to represent the relationship between the key elements--input
sources, programs, and output products--of computer systems
• depict the type of media being used (paper, magnetic tape, magnetic
disks, and terminals)
• in practice, not much difference between document and system
flowcharts
Modern Systems versus Legacy Systems
• Modern systems characteristics:
o client-server based and process transactions in real time
o use relational database tables
o have high degree of process integration and data sharing
o some are mainframe based and use batch processing
 • Some firms employ legacy systems for certain aspects of their data
processing.
o Accountants need to understand legacy systems.
• Legacy systems characteristics:
o mainframe-based applications
o batch oriented
o early legacy systems use flat files for data storage
o later legacy systems use hierarchical and network databases
o data storage systems promote a single-user environment that
discourages information integration

Computer-Based Accounting Systems

• Two broad classes of systems:
o batch systems
o real-time systems
Batch Processing
 • A batch is a group of similar transactions that are accumulated over time
and then processed together.
• The transactions must be independent of one another during the time
period over which the transactions are accumulated in order for batch
processing to be appropriate.
• A time lag exists between the event and the processing.

Steps in Batch Processing/Sequential File

• Keystroke - source documents are transcribed by clerks to magnetic tape
for processing later
• Edit Run - identifies clerical errors in the batch and places them into an error
file
• Sort Run - places the transaction file in the same order as the master file
using a primary key
• Update Run - changes the value of appropriate fields in the master file to
reflect the transaction
• Backup Procedure - the original master continues to exist and a new master
file is created.

Advantages of Batch Processing

• Organizations can increase efficiency by grouping large numbers of
transactions into batches rather than processing each event separately.
• Batch processing provides control over the transaction process via control
figures.
Real-Time Systems…
 • process transactions individually at the moment the economic event
occurs
• have no time lag between the economic event and the processing
• generally require greater resources than batch processing since they
require dedicated processing capacity; however, these cost differentials
are decreasing
• oftentimes have longer systems development time

Why Do So Many AIS Use Batch Processing?

• AIS processing is characterized by high-volume, independent transactions,
such are recording cash receipts checks received in the mail.
• The processing of such high-volume checks can be done during an off-
peak computer time.
• This is one reason why batch processing maybe done using real-time data
collection.

Uses of Coding in AIS

• Concisely represent large amounts of complex information that would
otherwise be unmanageable
• Provide a means of accountability over the completeness of the
transactions processed
• Identify unique transactions and accounts within a file
• Support the audit function by providing an effective audit trail
Sequential Codes
• Represent items in sequential order
• Used to prenumber source documents
 • Track each transaction processed
• Identify any out-of-sequence documents
• Disadvantages:
o arbitrary information
o hard to make changes and insertions
Block Codes
• Represent whole classes by assigning each class a specific range within the
coding scheme
• Used for chart of accounts
o The basis of the general ledger
• Allows for the easy insertion of new codes within a block
o Don’t have to reorganize the coding structure
• Disadvantage:
o arbitrary information

Alphabetic Codes
• Used for many of the same purposes as numeric codes
• Can be assigned sequentially or used in block and group coding
techniques
• May be used to represent large numbers of items