Chapter 1

The Information System: An Accountants Perspective

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
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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
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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:

... needs to be appropriately managed ...is vital to the survival of contemporary businesses
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What is Information?

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

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.
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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
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Examples of Systems
Biological
cell human body

Mechanical
water heater computer

Others
solar system mathematics

E = mc2
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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.

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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.

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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
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Transactions
Financial Transactions Nonfinancial

Information System

User Decisions Information

Transactions

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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
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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).
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AIS vs. MIS?

IS

AIS

MIS

GLS/FRS

TPS

MRS

Finance

Marketing

Production

HRS

Distribution

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AIS vs. MIS: Solutions

Data Warehousing and Enterprise Resource Planning (ERP)

AIS

MIS

AIS

MIS

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

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2. Data Processing
classifying transcribing sorting batching merging calculating summarizing comparing
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3. Data Management
storing retrieving deleting

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4. Information Generation
compiling arranging formatting presenting

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

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

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Functional Areas
Inventory/Materials Management purchasing, receiving, and storage Production production planning, quality control, and maintenance Marketing Distribution Personnel Finance Accounting Computer Services
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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.

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The Computer Services Function

Distributed Data Processing
Reorganizing the computer services function into small information processing units that are distributed to end users and placed under their control

Most companies fall somewhere in between.

Centralized Data Processing

All data processing is performed by one or more large computers housed at a central site that serves users throughout the organization. Primary areas: database administration data processing systems development 29 systems maintenance

CENTRALIZED COMPUTER SERVICES FUNCTION

President

VP Marketing Systems Development New Systems Development Systems Maintenance

VP Computer Services Data Base Administration Data Control

VP Production Data Processing

VP Finance

Data Computer Preparation Operations

Data Library

DISTRIBUTED ORGANIZATIONAL STRUCTURE

President
VP Finance VP Administration Manager Plant X VP Production Manager Plant Y

VP Marketing

Treasurer

Controller

IPU

IPU

IPU

IPU

IPU

IPU

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
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Potential Disadvantages of DDP

Loss of control Mismanagement of organization-wide resources Hardware and software incompatibility Redundant tasks and data Consolidating tasks usually segregated Difficulty attracting qualified personnel Lack of standards

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Centralized Databases in an IPU Environment: CDB vs. DDP

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.

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The Evolution of IS Models: The Flat-File Model

User 1 Transactions

Data Program 1 A,B,C

User 2 Transactions

Program 2
User 3 Transactions

X,B,Y

Program 3

L,B,M

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 - users inability to obtain additional information as needs change Data Integration - separate files are difficult to integrate across multiple users 35

The Evolution of IS Models: The Database Model

User 1 Transactions

Database Program 1 D B M S A, B, C, X, Y, L, M

User 2 Transactions

Program 2
User 3 Transactions

Program 3

An REA Data Model Example

R
Inventory
M Line items M

E
M

A
1
Party to

Sales
M M

Sales person

Pays for
M 1

Made to
1

Customer

Cash

Increases

Cash Collections M

Received from

1
Received by

Cashier
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REA Model
The REA model is an accounting framework for modeling an organizations 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 38 these relationships.

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.
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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.
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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

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