THE INFORMATION SYSTEM: AN ACCOUNTANT'S PERSPECTIVE (CHAPTER 1)
THE INFORMATION ENVIRONMENT
Information is a vital resource to a company, similar to
capital, raw materials, and labor.
The pyramid depicts four strata of information users
(top management, middle management, operations
management, operations personnel) within the business
organization as well as the flow of information (budget,
operating, performance) among those users.  Horizontal
information flows (more detailed, operations-oriented
information) are compared to vertical information flows
(summarized, condensed information).  Also,
information flows to and from the outside environment
involve stakeholders and trading partners.  The picture
demonstrates that the information that flows through a
business organization will vary greatly in terms of
quantity of detail and relevance to users.
What is a system?
Elements of a System
A broad definition of a system: a group of two or
more interrelated components or subsystems which
serve a common purpose.  The key aspect of this
definition is the multiple, interrelated components. The
study of AIS involves the study of how components
relate to one another.
 The perspective or scope of the system defines
whether or not you have a system or a subsystem.
 A system must have at least one purpose, and
serving that purpose is its fundamental job. If a
system is not performing its job, then it should be
replaced.
 System decomposition breaks down the larger
system into smaller subsystems and sub-
components. Decomposition allows us to better
understand the purposes of each of the subsystems
and to determine how the interrelated sub-
components assist in accomplishing their purpose.
The study of subsystem interdependency will make us
aware of the importance of each subsystem within the
larger system and of the consequences of a failure of a
particular subsystem. Some subsystems are critical to
the overall system performance while others are not.
Accountants must anticipate the cost of their possible
failure, and design cost-effective control procedures
A Framework for Information Systems:  The AIS and
the MIS
The information system is the set of formal procedures
by which data are collected, processed into information,
and distributed to users. Information systems process
both financial and nonfinancial information, which are
often processed by the same physical system. There are
two widely acknowledged types of information systems:
the accounting information system and the
management information system. This separation is
conceptual as most information systems are not
physically separated, but rather integrated.
The Accounting Information System
The AIS has three major subsystems:
 The TPS: Transaction Processing System for
daily operations: has three subsystems: the revenue
cycle, the expenditure cycle and the conversion
cycle.
 The GL/FRS: General Ledger/Financial Reporting
System: takes and summarizes the data in the TPS
to update the general ledger accounts and to create
reports that are for both internal and external
users.
 The MRS: Management Reporting System: takes
and summarizes data in the TPS and the GL/FRS to
create reports for internal users. Discretionary
reporting refers to specific contents and formats
that reflect a particular management’s needs.
The Management Information System
Management Information Systems, in addition, process
nonfinancial transactions and provide management
with information that goes beyond the limitations of
AIS.  [Note the groupings under MIS in Figure 1-3:
Financial Management Systems, Marketing Systems,
Production Systems, Human Resource Systems]
The distinction between AIS and MIS systems centers on
the concept of a transaction.
A transaction is an event that affects or is of interest to
the organization and that is processed by its
information system as a unit of work. There are two
types of business transactions: financial and
nonfinancial. 
The Changing Role of Accounting Information
More and more, businesses are demanding integrated
AIS and MIS system information. In response, the
structure of information systems have evolved into
integrated approaches such as REA and ERP models,
and the role of accountants has changed from provider
of financial information to consultant for management
in all functional areas.
Why Distinguish Between AIS and MIS?
Even if businesses are integrating their AIS and MIS
systems, we need to distinguish them because of
existing legal and professional standards designed to
protect the resources of a business from the many
possible risks.
 A financial transaction, the focus of the AIS, is
an economic event that affects the assets and
equities of the organization, is reflected in its
accounts, and is measured in monetary terms.
 Nonfinancial transactions, the focus of the MIS,
include all other business transactions (e.g. adding a
new supplier or potential customer. Until there is
an order, it is not a financial transaction).
 The AIS processes all financial transactions and
those nonfinancial transactions that directly affect
the processing of financial transactions.
AIS Subsystems
Transaction Processing System
The TPS is central to the AIS because it converts
economic events into financial transactions, because it
records those transactions in the accounting journals
and ledgers, and because it distributes essential
financial information to daily operations personnel.
Frequent, similar transactions (shipments, receipts,
payments, etc.) are organized into efficient cycles.  The
three primary transaction cycles are the revenue cycle,
the expenditure cycle, and the conversion cycle.
General Ledger/Financial Reporting Systems
The bulk of the inputs to the GL are from the
transaction cycles. Summaries of these cycles are
utilized to update the GL control accounts.  Non-
frequent or unique transactions are entered with
specialized methods. The FRS reports the status of
financial resources and the changes in those resources,
primarily for external users (typically termed
“nondiscretionary reporting” because the content and
format are typically required by professional or
regulatory standards such as GAAP, IRS, GAAS).
Management Reporting System
The MRS provides the internal financial information
needed by management. Managers need this
information to plan, execute and control their
operations (e.g., budgets, variances, price lists, etc.).
These are typically termed “discretionary” reporting
because the content and format for each of these
reports can be determined by each organization.
A General Model for AIS
Data versus Information:  invoices.
Data are raw or processed measurements of fact that
have no direct effect on the users.
Information is data that causes a user to take an action
that he or she would not have taken without receiving
that information. This definition depends on the effect
on the users. Data for one person may be information
for another person. If an information system does not
create a reaction in the designed-for user, the
information system may fail in its purpose.
Data Sources
External sources of financial transactions are those
involving other legal entities: sales, purchases,
payments, etc. Internal sources of financial transactions
usually involve the movement of resources within a
business: moving materials into production, adding
labor costs to inventories, etc.
Data Collection
This first step is crucial, if not the most important, phase
of the system since here lies the first and best
opportunity to ensure that data is valid, correct, and
free from material errors. Two rules govern data
collection: relevance and efficiency. Only data that
contributes to the user’s information needs are
relevant. Efficient procedures collect data once, and
make them available to a variety of users. Redundancy
in data collection can lead to inconsistencies and poor
decisions.
Data Processing
Many times, raw data needs to be processed before it is
considered information to the user. Processing can be
as simple as sorting events alphabetically or adding up
like events, or as complex as statistical modeling. 
Database Management
Database management involves the tasks of storing,
retrieving, and deleting collected and processed data.
Data is typically represented in a logical hierarchy from
smallest to largest where:
 Data attributes refer to the most elemental
characteristics of a record such as the address of a
supplier, or the unit cost of an inventory item. Each
attribute must logically pertain to the record and
must be relevant in terms of affecting the user.
Attributes are often called columns or fields.
 A record refers to the set of attributes for a
single occurrence within an entity class, such as a
customer, an invoice, or a piece of machinery. Each
record must have a unique identifier attribute,
termed the “primary key,” to distinguish it from the
other records (e.g., social security number for each
student). Other fields may have secondary
purposes, for example, for summarizing purposes
(e.g., total sales), and these attributes are termed
“secondary keys.”
 A file is a complete set of similar records for an
identical class, for example, all customers or all
 A database is the organization’s collection of
files. Database management involves the storage,
retrieval and deletion of data.
 INFORMATION GENERATION
Data is compiled, arranged, formatted, and presented
to make it meaningful and useful to end users. To be
effective, information must be relevant, timely,
accurate, complete, and summarized.  Without these
characteristics, information will lack value to external
users, such as creditors, stockholders, and potential
investors, and to internal users, such as management
and operations personnel.
 Relevance: the data must serve a purpose.
 Timeliness: the data is received by the user
before the decision is made. The data must be no
older than the time period of the action that it
supports.
 Accuracy: the data is free from material errors.
The user’s purpose determines the degree of
accuracy needed. Accuracy usually trades off with
timeliness.
 Completeness: no relevant related data is
missing.
 Summarization: the data is aggregated to the
level demanded by the user’s purposes.

FEEDBACK

Feedback is decision related to a system output that is

sent back to the system as a source of data. Feedback
may be internal or external, for example, ordering low
stock items, or changing your credit policies.

 INFORMATION SYSTEM OBJECTIVES

The objectives of information systems are:

 to support management in its responsibility for

the firm's resources
 to support management in decision making, and
 to support the day-to-day operations of the
firm.

The Accounting Function

The accounting function captures and records the firm's

financial transactions in the database (sales, payments)
and distributes transaction information throughout the
organization.

The Value of Information

Information value is determined by its reliability.

Reliable information must have integrity, that is, it must
be relevant, accurate, complete, summarized, and
timely since users will be depending on it, both
internally and externally. (Bad examples: selling
inventory you do not have to sell, or promising a
schedule that cannot be met!)

Accounting Independence

Reliability of accounting information is founded on the

concept that the accounting department
is independent from the other operational departments
that maintain physical custody of the assets of the
business. Independence ensures integrity of the
recorded data.