CHAPTER 1ː the Information System, an
Accountants Perspective
I. The Information Environment
 Business operation – base of the pyramid
o Product oriented work of organization
o Manufacturing
o Sales
o Distribution
 Above the base level
o Operations management – responsible for
controlling day-to-day operations
o Middle management – responsible for short
term planning and coordination of activities
o Top management - responsible for longer
term planning and setting organizational
activities
II. SYSTEM
- A group of two or more interrelated
components or subsystems that serves a
common purpose
- Generates mental images of computers and
programming
o Natural System – range from the atom
(system of electrons, protons, and neutrons),
all life forms such as plant and animals
o Artificial System – man-made (clock,
submarines, social systems, information
systems)
 Multiple Components
o system must contain more than 1 part
(exampleː yoyo)
 Relatedness
o common purpose relates multiple part of the
system
o each part functions independently
o all part serves common objective
 System vs. Subsystem (matter of perspective)
o Subsystem – when system is viewed in
relation to the larger system of which it is a
part
o System – subsystem is called a system
when it is the focus of attention
 Purpose
o System must serve at least one purpose, but
it may serve several
o Its purpose is its fundamental justification
 System Decomposition
o Decomposition is the process of dividing
system into smaller system parts
o Convenient way of representing, viewing,
and understanding relationship among
subsystem
o View the relationships between subordinate
and higher level subsystem
 Subsystem Interdependency
o Subsystems ability to achieve its goal
depends on the effective functioning and
harmonious interaction of its subsystem
III. AN INFORMATION SYSTEMS FRAMEWORK
- Set of formal procedure
data collection – process information –
distribution to users
 Transaction – as an event affects or is of
interest to the organization and is processed by
its information system as a unit of work
 Financial Transaction - is an economic event
that affects the assets and equities of the
organization, is reflected in its account, and is
measured in monetary terms
 Non-financial Transaction – are events that do
not meet the narrow definition of financial
transaction
IV. AN ACCOUNTING INFORMATION SYSTEM
- AIS subsystems process financial
transactions and nonfinancial transactions
that directly affect the processing of financial
transactions.
3 Major Subsystems of AIS
 Transaction Processing System (TPS)
o Supports daily business operation (reports,
documents, and messages for users and
organizations)
 General Ledger / Financial Reporting System
(GL/FRS)
o Produces traditional financial statement -
income statement
-balance sheet
-cash flows
-tax return
 Management Reporting System (MRS)
o Provides internal management with special-
purpose financial reports and information
needed (for decision making)
-budgets
-variance reports
-responsibility reports

V. THE MANAGEMENT INFORMATION SYSTEM
- Process nonfinancial transactions that are
normally processed by traditional
X.
 SOX – this includes the financial reporting
system, the general ledger system, and the
transaction processing systems that supply the
data for financial reporting.
VI. TRANSACTION PROCESSING SYSTEM
- The TPS is central to the overall function of
the information system by converting
economic events into financial transactions,
recording financial transactions in the
accounting records (journals and ledgers),
and distributing essential financial
information to operations personnel to
support their daily operations.
 3 Transaction Cycle
o Revenue Cycle
o Expenditure Cycle
o Conversion Cycle
o management at every level of the
organization, as well as operations
personnel
DATA vs. INFORMATION
 Data - are facts, which may or may not be
processed (edited, summarized, or refined) and
have no direct effect on the user
 Information - causes the user to take an action
that he or she otherwise could not, or would
not, have taken. Information is often defined
simply as processed data.
 Data Sources - are financial transactions that
enter the information system from both
internal and external sources
o External financial transactions are the most
common source of data for most
organizations.

VII. GENERAL LEDGER/ FINANCIAL REPORTING
SYSTEM
- The general ledger system (GLS) and the
financial reporting system (FRS) are two
closely related subsystems.
 FRS measures and reports the status of financial
resources and the changes in those resources.
The FRS communicates this information
primarily to external users. (non-discretionary)
VIII. MANAGEMENT REPORTING SYSTEM
(discretionary)
- provides the internal financial information
needed to manage a business
- Typical reports produced by the MRS
include budgets, variance reports, cost-
volume-profit analyses, and reports using
current (rather than historical) cost data.
o Internal financial transactions involve the
exchange or movement of resources within
the organization
 Data Collection - first operational stage in the
information system. Most important stage in
the system
 Data Processing - range from simple to
complex, include mathematical algorithms
 Data Management - The organization’s
database is its physical repository for financial
and nonfinancial data
o Data Attribute - most elemental piece of
potentially useful data in the database
o Record - complete set of attributes for a
single occurrence within an entity class

IX. END USERS o Files - is a complete set of records of an

identical class
 External Users
o Typical reports produced by the MRS
include budgets, variance reports, cost-
volume-profit analyses, and reports using
current (rather than historical) cost data.

 Internal Users
 Database Management Task
3 Fundamental Tasks
o Storage Task - assigns keys to new records
and stores them in their proper location in
the database
o Retrieval - task of locating and extracting
an existing record from the database for
processing
o Deletion - is the task of permanently
removing obsolete or redundant records
from the database
 Information Generation - is the task of
permanently removing obsolete or redundant
records from the database
o Relevance - must serve a purpose
o Timeliness - age of information is a critical
factor in determining its usefulness
o Accuracy - Information must be free from
material errors
o Completeness - No piece of information
essential to a decision or task should be
missing
o Summarization - Information should be
aggregated in accordance with the user’s
needs
 Feedback
o is a form of output that is sent back to the
system as a source of data
o may be internal or external
 Information Objective
1. To support the stewardship function of
management
2. To support management decision making.
3. To support the firm’s day-to-day operations.
XI. Acquisition Information System
 Turnkey System
- finished and tested systems that are ready
for implementation
- customized to a specific industry
- have built-in software options that allow the
user to customize input, output, and
processing through menu choices
 Backbone System
- pre-programmed
- consist of a basic system structure
- Vendor then designs the user interfaces to
suit the client’s unique needs
 Vendor-Supported System
- Customized
- purchase commercially rather than develop
in-house
- software vendor designs, implements, and
maintains the system for its client
XII. Organizational Structure
- reflects the distribution of responsibility,
authority, and accountability throughout
the organization
 Business Segment
o Geographic Location
- organizations have operations dispersed
across the country and around the world
- each geographic segment as a quasi-
autonomous entity
o Product Line
- Companies that produce highly diversified
products often organize around product
lines, creating separate divisions for each
o Business Function
- Functional segmentation divides the
organization into areas of specialized
responsibility based on tasks
 Functional Segmentation
o Segmentation by business function is the most
common method of organizing

XIII. Materials Management
- The objective of materials management is
to plan and control the materials inventory
of the company
3 Sub functionsː
o Purchasing - responsible for ordering inventory
from vendors
o Receiving - accepting the inventory previously
ordered by purchasing
o Stores - takes physical custody of the inventory
received
XIV. Production
- Production activities occur in the conversion
cycle in which raw materials, labor, and
plant assets are used to create finished
products
o Primary manufacturing activities shape and
assemble raw materials into finished products
o Production support activities ensure that
primary manufacturing activities operate
efficiently and effectively.
 Production planning involves scheduling the flow
of materials, labor, and machinery to efficiently
meet production needs.
 Quality control monitors the manufacturing
process
 Maintenance keeps the firm’s machinery and
other manufacturing facilities in running order.
XV. Marketing
- deals with the strategic problems of product
promotion, advertising, and market
research.
 Distribution - activity of getting the product to the
customer after the sale
 Personnel - Competent and reliable employees
are a valuable resource to a business
 Finance - manages the financial resources of the
firm through banking and treasury activities,
portfolio management, credit evaluation, cash
disbursements, and cash receipts
 The Accounting Function
- manages the financial information resource
of the firm
 Value Information
- The value of information to a user is
determined by its reliability
A marketing manager signed a contract with a customer
to supply a large quantity of product by a certain
deadline
 Accounting Independence
- Information reliability rests heavily on the
concept of accounting independence
XVI. The Information Technology Function
- IT function is associated with the
information resource
 Centralized Data Processing - all data processing
is performed by one or more large computers
housed at a central site that serve users
throughout the organization
 Data Base Administration - Centrally organized
companies maintain their data resources in a
central location that is shared by all end users
XVII. Systems Development and Maintenance
 Systems Professionals - Systems professionals
gather facts about the user’s problem, analyse the
facts, and formulate a solution
 End Users - Systems professionals gather facts
about the user’s problem, analyze the facts, and
formulate a solution. Managers who receive
reports
 Stakeholders - individuals inside or outside the
firm who have an interest in the system but are
not end users
XVIII. Distributed Date processing

- reorganizing the IT function into small

information processing units (IPUs) that are
distributed to end users and placed under
XX. The REA Model
their control
 REA - is an accounting framework for modeling an
 Disadvantagesː
organization’s critical resources, events, and
- Mismanagement of organization-wide
agents (REA) and the relationships between them
resources.
- Hardware and software incompatibility o Resources
- Redundant tasks - assets of the organization
- Consolidating incompatible activities - objects that are both scarce and under the
- Hiring qualified professionals control
- Lack of standards o Events
- phenomena that affect changes in resources
 Advantagesː
- can result from activities such as
- Cost reductions.
production, exchange, consumption, and
- Improved cost control responsibility.
distribution
- Improved user satisfaction
- critical information
- Backup
o Agents
XIX. The Evolution of Information System Models - individuals and departments that
participate in an economic event
 Manual processing model - They are parties both inside and outside the
- the oldest and most traditional form of organization
accounting systems.

 The Flat-File Model

- These are large mainframe systems that
were implemented in the late 1960s
through the 1980s.
- Most often associated with so-called legacy
systems
- describes an environment

 Data Storage
- An efficient information system captures
and stores data only once and makes this
single source available to all users who need
it

 Data Updating
- data stored in files that require periodic
updating to reflect changes

 Currency of Information
- performing multiple updates

 Task-Data Dependency
- user’s inability to obtain additional
information as his or her needs change