GROUP 9 – BSA 2B

Joshua Deo Acosta

Hyacinth Aquino
Maricel Edrozo
Thricia Mae Ignacio
Monique Eline Pedro
Shanaya Singson
 Chapter 1
The Information System:
An Accountant’s
Perspective
Overview:
• Information environment of the firm
– System’s concept
– Flows of information through an
organization
– AIS versus MIS
• Impact of organization structure on AIS
– Functional areas  Accounting
• Evolution of IS: IS models
• Role of the accountants as users,
designers, and auditors of AIS 3
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.
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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

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Internal & External Information Flows

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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

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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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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

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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.

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Different Information Systems:

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Information in Business
• Information is a business resource
that:
– needs to be appropriately managed
– is vital to the survival of
contemporary businesses

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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 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 14
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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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
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Transactions

Financial

Transactions Information User

Nonfinancial System Decisions
Information

Transactions

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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.
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 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
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AIS versus MIS?

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Why AIS vs. MIS?
• SOX (Surbanes-Oxley) legislation:
– Internal controls MUST be designed and
implemented by management, covering the
entire financial reporting process: financial
reporting-, GL-, and TPS
– Management must certify these controls
– External auditors must express an opinion
on effectiveness
• Problem: IS are integrated
• Solution: Role players need a
conceptual view of IS: see page 9 21
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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General Model for AIS

Figure 1-5

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End Users: (About information) p10
• External stakeholders:
– 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”
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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

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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

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Information:
• 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 objective
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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
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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

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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. 30
2. Data Processing

• Classifying • Merging
• Transcribing • Calculating
• Sorting • Summarizing
• Batching • Comparing

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3. Data Management
• Physical repository for data
– Storing; Assigning keys
– Retrieving
– Deleting
• The contents follow a logical
hierarchy:
– Attribute
– Record
– File
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Attribute:
• It’s a relevant characteristic of an entity
about which the firm captures data.
• Entity: Student, AR
• Attribute of Student, AR?
• It must contribute or enhance the
information content of the entity or set.

33
Record:
• Is the complete set of attributes for a
single occurrence within an entity class.
• Attributes and occurrence?
• Customer name: Buthelezi
• Address : Box 111, Eskhawini
• Acc Balance : 989.00
• How many attributes? How many records?
• How many occurrences of Customer?

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4. Information Generation
• Compiling
• Arranging
• Formatting
• Presenting
• Examples: sales order, a report, a
message on a computer screen

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 Characteristics of Useful
Information
• Regardless of physical form or technology, useful
information has the following characteristics:
Relevance
- the content of the document must serves a
purpose
- must present relevant data in its report.
Timeliness
- no older than the time period of the action it
supports
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Accuracy
- free from material errors
Completeness
- No piece of information essential to a
decision or task should be missing.
Summarization
- aggregated in accordance with the
user’s needs
Feedback
- output that is sent back to the system as
a source of data internal or external.
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Information System Objectives
• The goal of an information system is
to support:
1. The stewardship function of
management
2. Management decision making
3. The firm’s day-to-day operations 38
Acquisition of Information System

1. Develop customized system

2. Purchased pre-programmed commercial

system

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 3 Basic Types of Commercial
Software
1. Turnkey System
- completely finished and ready for
implementation.
2. Backbone System
- consists of a basic system structure
on which to build.
3. Vendor-supported System
- Purchased commercially rather than
develop in-house 40
Organizational Structure

• The structure reflects the

distribution/allocation of
 Responsibility
 Authority and,
 Accountability throughout the organization.
• Segmenting by business function is a very
common method of organizing.
• To promote internal efficiency through
specialization of labor and cost-effective
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resource allocations.
 3 Most Common Approach
1. Geographical Location
- Many organizations have operations dispersed across
the country, they do this do gain resources and market.
2. Product Line
- Companies that produce highly diversified products
often organize around product lines, creating separate
divisions for each
Example: San Miguel
3. Business Function
- divides the organization into areas of specialized
responsibility based on tasks
Example: Marketing, production, accounting and finance
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Functional Segmentation
• Inventory/Materials Management
– The objective of materials management is to plan
and control the materials inventory of the company.
 Purchasing
 Receiving and
 Stores
• Production
– Production activities occur in the conversion cycle
where raw materials, labor, and plant assets are
used to create finished products.
– Specific activities are determined by the nature of
the products being manufactured
1. Primary manufacturing activities
2. Production support activities
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- Types of activities:
Production planning
Quality control, and
Maintenance
• Marketing
- The marketing function deals with the
strategic problems of product promotion,
advertising, and market research.
• Distribution
- It is the activity of getting the product
to the customer after the sale.
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• Personnel
- The objective of the personnel
function is to effectively manage this resource.
• Finance
- Manages the financial resources of the
firm and also administers the daily flow of
cash in and out of the firm.
• Accounting
- manages the financial information
resource of the firm
• Computer Services

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Accounting Function:

• 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

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Value of Information

- value of information to users is

determined by its reliability.
- Information must possess attributes
(relevance, accuracy, timeliness,
completeness, and summarization)

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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.

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Information Technology: Data Processing

• Centralized Data Processing

- is performed by one or more large computers
housed at a central site that serve users
throughout the organization.
Primary Areas:
 Database Administration- maintain their data resources
in a central location that is shared by all end users
Data Processing- manages the computer resources used
to perform the day-to-day processing of transactions.
System Development & Maintenance- responsible for
analyzing user needs and for designing new systems

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• Participants in system development
System Professionals- include systems
analysts, database designers, and
programmers who design and build the system
End Users- those for whom the system is built.
Example: managers, operation personnel
Stakeholders- individuals inside or outside the
firm who have an interest in the system but are
not end users.

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Organization of IT Function in a
Centralized System

Figure 1-10
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Distributed Data Processing (DDP)
- DDP is the alternative of centralized
data
- It involves reorganizing the IT function
into small information processing units
(IPUs) that are distributed to end users and
placed under their control.)
- DDP is a mixed bag of advantages &
disadvantages;

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Organizational Structure for a Distributed
Processing System

Figure 1-11
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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
- ability to back up computing facilities to
protect against potential disaster.

54
Potential Disadvantages of DDP
 Loss of control
- inefficient use of resources, destruction of
audit trails, inadequate segregation of
duties.
 Mismanagement of company resources
-
 Hardware and software incompatibility
- Such hardware and software
incompatibilities can degrade and disrupt
communications between organizational
units.
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• Redundant tasks and data
- systems development activities distributed
throughout the firm can result in each user area
reinventing the wheel.
• Consolidating tasks usually segregated
- distribution of the IT function to individual user
areas results in the creation of units that may not
permit the necessary separation of incompatible
functions.
• Difficulty attracting qualified personnel
• Lack of standards

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Evolution of Information
System Models
• Each new model evolved because of the
shortcomings and limitations of its predecessor.

1. Manual Process Model

- It is the oldest and most traditional form of
accounting systems.
- Transaction processing, information
processing, and accounting are physically
performed by people, usually using paper
documents (manual records).

57
2. Flat-file system
- Most often associated with legacy system
- It is implemented in late 1960’s through the
1980’s
- This model describes an environment in
which individual data files are not related to
other files.
• Data Redundancy Problems
Data Storage- an efficient information system
captures data once and can make this single
source available to all users who need it.
Data Updating- changes or additions must be
performed multiple times
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Currency Information- potential problem of
failing to update all the user files affected by a
change in status.
Task- Data Dependency- user’s inability to
obtain additional information as his or her
needs change.
Data Integration- separate file are difficult to
integrate across multiple users.
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60
3. Database Model
- An organization can overcome the problems
associated with flat files by implementing the
database model to data management.
- Access to the data resource is controlled by a
database management system (DBMS).
Database Management System
- is a special software system that is
programmed to know which data elements each
user is authorized to access.
- Is specialize software responsible for
managing the database.

61
62
4. REA Model (Resources, events and
agents)
- this model was proposed in 1982 as a
theoretical model for accounting.
- is an accounting framework for modeling an
organization’s critical resources, events, and
agents (REA) and the relationships between them.
• Key element of REA model
 Resources- economic resources are the assets of the
organization
 Events- economic events are those that affect changes in
resources.
 Agents- economic agents are individuals and departments that
participate in an economic event.

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 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
by 64
 Enterprise Resource Planning
System (ERP)
• is an information system model that enables an
organization to automate and integrate its key
business processes:
– Facilitate data sharing through a
single/optimized database
– Information flows
– Common business practices among all users
• ERP packages are sold to client organizations in
modules that support standard processes. Some
common ERP modules include:

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Asset Management
Financial Accounting
Human Resources
Plant Maintenance
Production Planning
Quality Management
Sales and distribution
Inventory Management

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Roles of Accountants
• Accountants are primarily involved in three
ways: as system users, designers, and
auditors.
1. Accountants as Information System Users
- . As end users, accountants must provide a
clear picture of their needs to the
professionals who design their systems
- The accountant should actively participate
in systems development
projects to ensure appropriate
systems design.
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2. Accountants as System Designers

- The accounting function is responsible for

the conceptual system, while the computer
function is responsible for the physical
system.
 Conceptual system determines the nature of
the information required, its sources, its
destination, and the accounting rules that
must be applied.
 Physical System is the medium and method
for capturing and presenting the information.

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3. Accountants as System Auditors
 Auditing is a form of independent attestation
performed by an expert—the auditor—who
expresses an opinion about the fairness of a
company’s financial statements.
External Auditors
– attest to fairness of financial statements
– often called independent auditing
 Internal Auditors
– attests to the effectiveness of a client’s IT controls to
establish their degree of compliance with prescribed
standards.
– perform a wide range of activities on behalf of the
organization
IT Auditors
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– evaluate IT, often as part of external audit