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Information is a business resource.


Top Management Stakeholder

Middle Management

Operations Management

Operations Personnel Suppliers, Customers, Day-to-Day Operations Information

From Top to Bottom: Budget Information and Instructions

From Bottom to Top: Performance Information

Operations Management is directly responsible for controlling day-to-day operations.

Middle Management is accountable for the short-term planning and coordination of

activities necessary to accomplish organizational objectives.

Top Management is responsible for longer-term planning and selecting organizational


- The vertical flow distributes information downward from senior managers to junior
managers and operations personnel in the form of instructions, quotas, and budgets.
In addition, summarized information pertaining to operations and other activities flows
upward to managers at all levels.
- External users fall into 2 groups: trading partners and stakeholders
- Exchanges with trading partners include customer sales and billing information,
purchase information for suppliers, and inventory receipts information.
- Stakeholders are entities outside the organization with a direct or indirect interest in
the firm.
System is a group of 2 or more interrelated components or subsystems that serve a common

- Multiple Components. A system must contain more than one part.

- Relatedness. A common purpose relates the multiple parts of the system.
- System Versus Subsystem. The distinction between the terms system and subsystem
is a matter of perspective. A system is called subsystem when it is viewed in relation
to the larger system of which it is a part.
- Purpose. A system must serve at least one purpose, but it may serve several.

System Decomposition

- Decomposition is the process of dividing the system into smaller subsystem parts.
This is a convenient way of representing, viewing, and understanding the relationships
among subsystems. By decomposing a system, we can present the overall system as a
hierarchy and view the relationships between subordinate and higher-level

System Interdependency

- A systems ability to achieve its goal depends on the effective functioning and
harmonious interaction of its subsystems. If a vital subsystem fails or becomes
defective and can no longer meet its specific objective, the overall system will fail to
meet its objective.

Information System is the set of formal procedures by which data are collected, processed
into information, and distributed to users.

Transaction as an event that 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 accounts, and is measured in monetary terms.

Nonfinancial Transactions are events that do not meet the narrow definition of a financial

3 Major Subsystems of AIS:

- Transaction Processing System (TPS), which supports daily business operations

with numerous reports, documents, and messages for users throughout the
- General Ledger/Financial Reporting System (GL/FRS), which produces the
traditional financial statements
- Management Reporting System (MRS), which provides internal management with
special-purpose financial reports and information needed for decision making such as
budgets, variance reports, and responsibility reports.

Management Information System processes nonfinancial transactions that are not

normally processed by traditional AIS.

*AIS Subsystems: Finance, Marketing, Distribution, Personnel,

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, and
distributing essential financial information to operations personnel to support their daily
operations. It deals with business events that occur frequently.

GL/FRS. The bulk of the input to the GL portion of the system comes from the transaction
cycles. Summaries of transaction cycle activity are processed by the GLS to update the
general ledger control accounts. The FRS measures and reports the status of financial
resources and the changes in those resources. It communicates this information primarily to
external users.

MRS provides the internal financial information needed to manage a business. It must deal
immediately with many day-to-day business problems, as well as plan and control their

End Users fall into 2 general groups. External users include creditors, stockholder, potential
investors, regulatory agencies, tax authorities, suppliers, and customers. Internal users
include management at every level of the organization, as well as operations personnel.

Data are facts, which may or may not be processed 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. It is often defined simply as processed data.

Data Sources are financial transactions that enter the information system from both internal
and external sources. External financial transactions are the most common source of data
for most organizations.

Data Collection is the first operational stage in the information system. The objective is to
ensure that event data entering the system are valid, complete, and free from material errors.
The most important stage in the system.

Data Processing stage range from simple to complex.

Database Management. The organizations database is its physical repository for financial
and nonfinancial data.

Data Attribute is the most elemental piece of potentially useful data in the database. An
attribute is a logical and relevant characteristic of an entity about which the firm captures

Record is a complete set of attributes for a single occurrence within an entity class.

Files. A file is a complete set of records of an identical class.

Database Management Tasks. Database Management involves 3 fundamental tasks:

storage, retrieval, and deletion.

- Storage task assigns keys to new records and stores them in their proper location in
the database.
- Retrieval is the task of locating and extracting an existing record from the database
for processing.
- Deletion is the task of permanently removing obsolete or redundant records from the

Information Generation is the process of compiling, arranging, formatting, and presenting

information to users. 4 characteristics:

- Relevance. The contents of a report or document must serve a purpose.

- Timeliness. The age of information is a critical factor in determining its usefulness.
- Accuracy. Information must be free from material errors.
- Completeness. No piece of information essential to a decision or task should be

Feedback is a form of output that is sent back to the system as a source of data. May be
internal or external and is used to initiate or alter a process.

Information System Objectives

- To support the stewardship function of management

- To support management decision making
- To support the firms day-to-day operations

Turnkey Systems are completely finished and tested systems that are ready for

Backbone Systems consist of a basic system structure on which to build.

Vendor-supported Systems are custom systems that client organizations purchase

commercially rather than develop in-house.
Materials Management

- Purchasing is responsible for ordering inventory from vendors when inventory levels
fall to their reorder points.
- Receiving is the task of accepting the inventory previously ordered by purchasing.
- Stores takes physical custody of the inventory received and releases these resources
into the production process as needed.


- Primary manufacturing activities shape and assemble raw materials into finished
- 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 at various points to ensure that the
finished products meet the firms quality standards.

Maintenance keeps the firms machinery and other manufacturing facilities in running

Data Processing group managers the computer resources used to perform the day-to-day
processing of transactions. It may consist of the following functions: data control, data
conversion, computer operations, and the data library.

Distributed Data Processing (DDP) is an alternative to the centralized model. Its topic is
quite broad, touching on such related topics as end-user computing, commercial software,
networking, and office automation. It involves reorganizing the IT function into small
information processing units that are distributed to end users and placed under their control.

Flat-File Model describes an environment in which individual data files are not related to
other files.

- Data Storage
- Data Updating
- Currency of Information

Task-Data Dependency. Another problem with the flat-file approach is the users inability
to obtain additional information as his or her needs change.
Database Management System (DBMS) is a special software system that is programmed to
know which data elements each user is authorized to access.

REA is an accounting framework for modeling an organizations critical resources, events,

and agents and the relationships between them.

- Resources are the assets of the organization. They are defined as objects that are both
scarce and under the control of the enterprise.
- Events are phenomena that affect changes in resources. Can result from activities
such as production, exchange, consumption, and distribution.
- Agents are individuals and departments that participate in an economic event.

Enterprise Resource Planning (ERP) is an information system model that enables an

organization to automate and integrate its key business processes.

Assurance Services are professional services, including the attest function, that are
designed to improve the quality of information, both financial and nonfinancial, used by
decision makers.

IT Auditing is usually performed as part of a broader financial audit.


Expenditure Cycle. Business activities begin with the acquisition of materials, property, and
labor in exchange for cash.

- Purchases/Accounts Payable System. Recognizes the need to acquire physical

inventory and places an order with the vendor.
- Cash Disbursements System. When the obligation created in the purchases system
is due, the cash disbursements system authorizes the payment, disburses the funds
to the vendor, and records the transaction by reducing the cash and accounts payable
- Payroll System. Collects labor usage data for each employee, computes the payroll,
and disburses paychecks to the employees.
- Fixed Asset System. Processes transactions pertaining to the acquisition,
maintenance, and disposal of its fixed assets.

Conversion Cycle is composed of 2 major subsystems:

- Production system involves the planning, scheduling, and control of the physical
product through the manufacturing process. Includes determining raw material
requirements, authorizing the work to be performed and the release of raw materials
into production,
- Cost accounting system monitors the flow of cost information related to production.

Revenue Cycle involves processing cash sales, credit sales, and the receipt of cash following
a credit sale. Also have a physical and a financial component.

- Sales order processing

- Cash receipts


Source Documents are used to capture and formalize transaction data that the transaction
cycle needs for processing.

Product Documents are the result of transaction processing rather than the triggering
mechanism for the process.

Turnaround Documents are product documents of one system that become source
documents for another system.

JOURNALS a record of a chronological entry.

Special Journal used to record specific classes of transactions that occur in high volume.

Register is often used to denote certain types of special journals.

General Journals to record nonrecurring, infrequent, and dissimilar transactions.

LEDGERS a book of accounts that reflect the financial effects of the firms transactions after
they are posted from the various journals.

General Ledger summarizes the activity for each of the organizations accounts.

Subsidiary Ledgers are kept in various accounting departments of the firm, including
inventory, accounts payable, payroll, and accounts receivable.

Audit Trail for tracing transactions from source documents to the financial statements.

Master File generally contains accounts data. General ledger and subsidiary ledgers are
examples of master files.

Transaction File is a temporary file of transaction records used to change or update data in
a master file. Sales orders,

Reference File stores data that are used as standards for processing transactions.

Archive File contains records of past transactions that are retained for future reference.

Data Flow Diagram (DFD) uses symbols to represent the entities, processes, data flows, and
data stores that pertain to a system.

Entity Name Input source or output destination of data

Process Description A process that is triggered or supported by data

Data Store Name A store of data such as a transaction file, a master file, or a reference file

Arrow Direction of data flow

Entity Relationship Diagram (ERD) is a documentation technique used to represent the

relationship between entities. Entities are physical resources, events, inventory, receiving
cash, and agents about which the org. wishes to capture data. Cardinality is the numeric
mapping between entity instances.

Data Model is the blueprint for what ultimately will become the physical database.

System Flowchart is the graphical representation of the physical relationships among key
elements of a system.

- Terminal

- Source Document/Hard Copy

- Manual Operation

- File for storing source documents and reports

- Accounting records
- Calculated batch total

- On-page connector

- Off-page connector

- Description of process or comments

- Document flowline
- Computer Process

- Direct Access Storage

- Magnetic Tape

- Terminal input/output device

- Video Display Device


Ethics pertains to the principles of conduct that individuals use in making choices and
guiding their behavior in situations that involve the concepts of right and wrong.

Business Ethics involves finding the answers to questions: how do managers decide what is
right in conducting their business? And once managers have recognized what is right, how
do they achieve it?

Ethical Responsibility. Seeking a balance between these consequences is the managers

ethical responsibility.

Proportionality. The benefit from a decision must outweigh the risks.

Computer Ethics is the analysis of the nature and social impact of computer technology and
the corresponding formulation and justification of policies for the ethical use of such
Privacy people desire to be in full control of what and how much information about
themselves is available to others, and to whom it is available.

Security is an attempt to avoid such undesirable events as a loss of confidentiality or data


Sarbanes-Oxley Act (SOX) is the most significant securities law since the SEC Acts of 1933
and 1934.

Conflicts of Interest the companys code of ethics should outline procedures for dealing
with actual or apparent conflicts of interest between personal and professional relationships.

FRAUD denotes a false representation of a material fact made by one party to another party
with the intent to deceive and induce the other party to justifiably rely on the fact to his or
her detriment.

Employee fraud is generally designed to directly convert cash or other assets to the
employees personal benefit.

Management fraud is more insidious than employee fraud because it often escapes detection
until the organization has suffered irreparable damage or loss.

Fraud Triangle consists of 3 factors:

- Situational Pressure which includes personal or job-related stresses that could coerce
an individual to act dishonestly
- Opportunity which involves direct access to assets and/or access to information that
controls assets
- Ethics which pertains to ones character and degree of moral opposition to acts of

Fraudulent Statements are associated with management fraud.

Corruption involves an executive, manager, or employee of the organization in collusion with

an outsider.

Bribery involves giving, offering, soliciting, or receiving things of value to influence an official
in the performance of his or her lawful duties.
Illegal Gratuity involves giving, receiving, offering, or soliciting something of value because
of an official act that has been taken.

Skimming involves stealing cash from an organization before it is recorded on the

organizations books and records.

Lapping in which the cash receipts clerk first steals and cashes a check from A. As account
is not credited.

Check Tampering involves forging or changing in some material way a check that the
organization has written to a legitimate payee.

Payroll Fraud is the distribution of fraudulent paychecks to existent and/or nonexistent