Accounting Information Systems, 6th edition James A. Hall

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Objectives for Chapter 1y Primary information flows within the business environment y Accounting information systems and management information systems y The general model for information systems y Financial transactions from non-financial transactions y The functional areas of a business y Three roles of accountants in an information system

Internal & External Information Flows

Internal Information Flowsy Horizontal flows of information used primarily at the

operations level to capture transaction and operations data y Vertical flows of informationy downward flows y upward flows

instructions, quotas, and budgets aggregated transaction and operations

data

Information Requirementsy Each user group has unique information requirements. y The higher the level of the organization, the greater

the need for more aggregated information and less need for detail.

Information in Businessy Information is a business resource that:y needs to be appropriately managed y is vital to the survival of

contemporary businesses

What is a System?y A group of interrelated multiple components or

subsystems that serve a common purpose y System or subsystem?y A system is called a subsystem when it is viewed as a

component of a larger system. y A subsystem is considered a system when it is the focus of attention.

System Decomposition versus System Interdependencyy System Decomposition y the process of dividing the system into smaller subsystem parts y System Interdependency y distinct parts are not self-contained y they are reliant upon the functioning of the other parts of the system y 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.

Transactionsy A transaction is a business event. y Financial transactions y economic events that affect the assets and equities of the organization y e.g., purchase of an airline ticket y Nonfinancial transactions y all other events processed by the organization s information system y e.g., an airline reservation no commitment by the customer

TransactionsFinancial Transactions Nonfinancial Transactions Information System User Decision Making

Information

What is Accounting Information Systems?y Accounting is an information system.

y It identifies, collects, processes, and

communicates economic information about a firm using a wide variety of technologies. y It captures and records the financial effects of the firm s transactions. y It distributes transaction information to operations personnel to coordinate many key tasks.

AIS versus MISy Accounting Information Systems (AIS) processy financial transactions; e.g., sale of goods y and nonfinancial transactions that directly affect the

processing of financial transactions; e.g., addition of newly approved vendors

y Management Information Systems (MIS)

process

y nonfinancial transactions that are not normally

processed by traditional AIS; e.g., tracking customer complaints

AIS Subsystemsy Transaction processing system (TPS)y supports daily business operations

y General Ledger/ Financial Reporting System

(GL/FRS)y produces financial statements and reports

y Management Reporting System (MRS)y produces special-purpose reports for internal use

The General AIS Model

Data Sourcesy Data sources are financial transactions that entery External financial transactions are the most common

the information system from internal and external sources.source of data for most organizations.y

E.g., sale of goods and services, purchase of inventory, receipt of cash, and disbursement of cash (including payroll).

y Internal financial transactions involve the exchange or

movement of resources within the organization.y

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 InformationFunctions 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 Collectiony Capturing transaction data y Recording data onto forms y Validating and editing the data

2. Data Processingy Classifying y Transcribing y Sorting y Batching

Merging Calculating Summarizing Comparing

3. Data Managementy Storing y Retrieving y Deleting

4. Information Generationy Compiling y Arranging y Formatting y Presenting

Characteristics of Useful Informationy Regardless of physical form or technology, useful

information has the following characteristics:y Relevance: serves a purpose

y Timeliness: no older than the time period of the action

it supports y Accuracy: free from material errors y Completeness: all information essential to a decision or task is present y Summarization: aggregated in accordance with the user s needs

Information System Objectives in a Business Contexty The goal of an information system is to supporty the stewardship function of management y management decision making y the firm s day-to-day operations

Functional Areasy Inventory/Materials Management y purchasing, receiving and stores y Production y production planning, quality control, and maintenance y Marketing y Distribution y Personnel y Finance y Accounting y Computer Services

Manual Process Modely Transaction processing, information processing, and

accounting are physically performed by people, usually using paper documents. y Useful to study because:y helps link AIS courses to other accounting courses y often easier to understand business processes when not

shrouded in technology y facilitates understanding internal controls

Accountants as Information System Usersy Accountants must be able to clearly convey their needs

to the systems professionals who design the system. y The accountant should actively participate in systems development projects to ensure appropriate systems design.

Accountants as System Designersy The accounting function is responsible for the

conceptual system, while the computer function is responsible for the physical system. y 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 Auditorsy External Auditors y attest to fairness of financial statements y assurance service: broader in scope than traditional attestation audit y IT Auditors y evaluate IT, often as part of external audit y Internal Auditors y in-house IS and IT appraisal services