AIS Hall Chapter 1

Chapter 1
The Information
System:
An Accountant’s
Perspective
Introduction to Accounting Information

Systems, 7e
James A. Hall
Hall, Introduction to Accounting Information Systems, 7e
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Objectives for Chapter 1
· Understand the primary information flows within the
business environment.
· Understand the difference between accounting
information systems and management information
systems.
· Understand the difference between Financial
transactions and non-financial transactions.
· Know the general model for information systems.
· Be familiar with the functional areas of a business.
· Understand the stages in the evolution of information
systems.
· Understand the relationship between the three roles of
accountants in an information system.
Hall, Introduction to Accounting Information Systems, 7e 2
Internal & External Information Flows

The Pyramid Model
 The business organization is divided

horizontally in several levels of activity.
 Business operations form the basis of the
pyramid:
 Product-oriented work, like manufacturing, sales,
distribution
 Three management tiers

Management Tiers:
 Operations Management:
 The controlling of the day-to-day operations
 Middle Management:
 Short term planning and coordination of activities
necessary to accomplish organizational objectives
 Top Management:
 Long-term planning and setting organizational
objectives

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

External Flow:
 The information exchanges between the

organization and users in the external
environment:
 Trading partners: customer sales and billing
information, purchase information, inventory
receipts information.
 Stake holders: financial statements, tax returns,
stock information

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.

Different Information Systems:

Information in Business
 Information is a business
resource that:
 needs to be appropriately
managed
 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?
 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.

System Decomposition versus
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

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
 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 Information User

Nonfinancial System Decisions
Information
Transactions

What is an Accounting Information
System?
 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 versus MIS
 Accounting Information Systems (AIS)
process
 financial transactions; e.g., sale of goods
 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?
IS
AIS MIS
Financial Human
Marketing Distribution
GLS/FRS TPS MRS Management Resource
Systems Systems
Systems Systems

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

General Model for AIS
Figure 1-5

End Users: (About information)
p10
 External:
 Creditors, stockholders, investors, tax authorities:
• Financial statements, tax returns, and reports that the firm has
a legal obligation to produce
 Suppliers, customers:
• Transaction oriented information, like purchase orders, billing
statements, and shipping information
 Internal:
 Management at all levels
• Internal reporting is “what gets the job done”

Internal reporting:
 Less structured than external reporting

 The system designers (including
accountants) must balance the desires of
users against legal and economic concerns:
 Adequate control and security
 Proper accountability
 Cost of providing alternative forms of information

Data vs. Information (p11)
 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 action
that they otherwise could not have taken.
 Example: Daily report on inventory levels
 Purchase clerk
 Personnel manager

Information:
 Question:
 Do nothing because ‘uninformed’,
 Do nothing because ‘informed’
 Information content: resolve conflicts, reduce
uncertainty, make decisions
 The distinction between information and data
is very important for IS, because if IS fails to
cause users to act, the system serves no
purpose and has failed in its primary oblective
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. Data Management
4. Information Generation

1. Data Collection
 First operational stage in the IS, and is the
most important stage in the system: data must
be valid, complete and free from errors.
 Capturing transaction data
 Recording data onto forms
 Validating and editing the data
 The collection procedure must be designed to
collect data only once.

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

3. Data Management
 Physical repository for data
 Storing; Assigning keys
 Retrieving
 Deleting
 The contents follow a logical hierarchy:
 Attribute
 Record
 File

Attribute:
 It’s a relevant characteristic of an entity about

which the firm captures data.
 Example: Student, AR
 It must contribute or enhance the information
content of the entity or set.

Record:
 Is the complete set of attributes for a single

occurrence within an entity class.
 Attributes and occurrence?
 Customer name: Jak Roberto
 Address : Laguna, Philippines
 Acc Balance : 989.00
 How many attributes? How many records?
 How many occurrences of Customer?
4. Information Generation
 Compiling
 Arranging
 Formatting
 Presenting
 Examples: sales order, a report, a
message on a computer screen

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
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 reflects the distribution/allocation
of
 Responsibility
 Authority and
 Accountability throughout the organization.
 Firms achieve their overall objectives by
establishing measurable financial goals of their
operational units: budget information flows
downwards; the subordinates’ actions:
performance info flow upwards to senior mngmt.
Structure:
 Segmenting by business function is a very

common method of organizing.
 To promote internal efficiency through
specialization of labor and cost-effective
resource allocations.
 Segmentation:
 Geographical location
 Product line
 Business Function
Resources vs. Functional Areas
 Inventory/Materials Management
 purchasing, receiving and stores
 Production
 production planning, quality control, and
maintenance
 Marketing
 Distribution
 Personnel
 Finance
 Accounting
 Computer Services
Accounting Function: p19
 It manages the financial resource of the firm:

 Captures and records the financial effects of the
firms transaction
 Distributes transaction information to operations
personnel to coordinate tasks
 Business operations:
 Inventory control, cost accounting, payroll,
accounts payable, accounts receivable, billing,
fixed asset accounting and general ledger

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.
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 IT Function in a
Centralized System
Figure 1-10
Organizational Structure for a Distributed
Processing System
Figure 1-11
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

AIS models: p24
 Manual processes
 Flat-file systems
 Database approach
 REA model
 ERP system
 Various generations of systems exists across
different organizations and may even coexists
within a single enterprise.

Manual Process Model
 Transaction processing, information processing,

and accounting are physically performed by
people, usually using paper documents.
 Useful to study because:
 helps link AIS courses to other accounting courses
 often easier to understand business processes when
not shrouded in technology
 facilitates understanding internal controls

The Evolution of IS Models:
The Flat-File Model
Figure 1-12

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
The Evolution of IS Models: The Database
Model
Figure 1-13

An REA Data Model Example
R E A
M M M 1
Inventory Line items
Sales Party to Sales
M person
M
1
Pays for Made to
Customer
1
M
M Received
1 M Cash from
Cash Increases
Collections M 1 Cashier
Received 34
Hall, Introduction to Accounting Information Systems, 7e
by 50
REA Model
 The REA model is an accounting framework
for modeling an organization’s
 economic resources; e.g., assets
 economic events; i.e., affect changes in resources
 economic agents; i.e., individuals and departments
that participate in an economic event
 Interrelationships among resources, events and
agents
 Entity-relationship diagrams (ERD) are often
used to model these relationships.
ERP system: p31
 Enables an organization to automate and

integrate its key business processes:
 Facilitate data sharing
 Information flows
 Common business practices among all users
 Modules: Asset management, financial
accounting, HR, Plant maintenance,
production planning, quality management,
sales and distribution, inventory management
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

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Chapter 1

Introduction to Accounting Information

Hall, Introduction to Accounting Information Systems, 7e 3

 The business organization is divided

Hall, Introduction to Accounting Information Systems, 7e 4

Hall, Introduction to Accounting Information Systems, 7e 5

 Horizontal flows of information used primarily

Hall, Introduction to Accounting Information Systems, 7e 6

 The information exchanges between the

Hall, Introduction to Accounting Information Systems, 7e 7

 Each user group has unique information

Hall, Introduction to Accounting Information Systems, 7e 8

Hall, Introduction to Accounting Information Systems, 7e 9

Hall, Introduction to Accounting Information Systems, 7e 10

 A group of interrelated multiple components or

Hall, Introduction to Accounting Information Systems, 7e 11

Hall, Introduction to Accounting Information Systems, 7e 12

An information system is the set of

Hall, Introduction to Accounting Information Systems, 7e 13

Hall, Introduction to Accounting Information Systems, 7e 14

Transactions Information User

Hall, Introduction to Accounting Information Systems, 7e 15

Hall, Introduction to Accounting Information Systems, 7e 17

Hall, Introduction to Accounting Information Systems, 7e 18

 Transaction processing system (TPS)

Hall, Introduction to Accounting Information Systems, 7e 19

Hall, Introduction to Accounting Information Systems, 7e 20

Hall, Introduction to Accounting Information Systems, 7e 21

 Less structured than external reporting

Hall, Introduction to Accounting Information Systems, 7e 22

 Data are facts which may or may not be

Hall, Introduction to Accounting Information Systems, 7e 23

Hall, Introduction to Accounting Information Systems, 7e 25

Hall, Introduction to Accounting Information Systems, 7e 26

Hall, Introduction to Accounting Information Systems, 7e 27

Hall, Introduction to Accounting Information Systems, 7e 28

Hall, Introduction to Accounting Information Systems, 7e 29

 It’s a relevant characteristic of an entity about

Hall, Introduction to Accounting Information Systems, 7e 30

 Is the complete set of attributes for a single

Hall, Introduction to Accounting Information Systems, 7e 32

 The goal of an information system is

 Segmenting by business function is a very

 It manages the financial resource of the firm:

Hall, Introduction to Accounting Information Systems, 7e 38

 Information reliability requires accounting

Reorganizing the All data processing

Hall, Introduction to Accounting Information Systems, 7e 43

Hall, Introduction to Accounting Information Systems, 7e 44

Hall, Introduction to Accounting Information Systems, 7e 45

 Transaction processing, information processing,

Hall, Introduction to Accounting Information Systems, 7e 46

Hall, Introduction to Accounting Information Systems, 7e 47

Hall, Introduction to Accounting Information Systems, 7e 49

 Enables an organization to automate and

Hall, Introduction to Accounting Information Systems, 7e 53

 The accounting function is responsible for the

Hall, Introduction to Accounting Information Systems, 7e 54

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