James hall ch 1

1. 1. Accounting Information Systems, 6th edition James A. Hall COPYRIGHT © 2009 South-
Western, a division of Cengage Learning. Cengage Learning and South-Western are
trademarks used herein under license
2. 2. Objectives for Chapter 1 • Primary information flows within the business environment •
Accounting information systems and management information systems • The general model
for information systems • Financial transactions from non-financial transactions • The
functional areas of a business • Two main stages in the evolution of information systems •
Three roles of accountants in an information system
3. 3. Internal & External Information Flows
4. 4. 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
5. 5. 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.
6. 6. Information in Business Information is a business resource that: needs to be
appropriately managed is vital to the survival of contemporary businesses
7. 7. 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.
8. 8. 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
9. 9. 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.
10. 10. 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
11. 11. Transactions Financial Transactions Nonfinancial Transactions Information System User
Decision MakingInformation
12. 12. What is Accounting Information Systems? 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.
13. 13. AIS versus MIS Accounting Information Systems (AIS) process financial transactions;
e.g., sale of goods and 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
14. 14. AIS versus MIS?
15. 15. 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
16. 16. The General AIS Model
17. 17. 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.
18. 18. 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
19. 19. 1. Data Collection Capturing transaction data Recording data onto forms Validating
and editing the data
20. 20. 2. Data Processing Classifying Transcribing Sorting Batching • Merging •
Calculating • Summarizing • Comparing
21. 21. 3. Data Management Storing Retrieving Deleting
22. 22. 4. Information Generation Compiling Arranging Formatting Presenting
23. 23. 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
24. 24. 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
25. 25. Organizational Structure The structure of an organization helps to allocate
responsibility authority accountability Segmenting by business function is a very
common method of organizing.
26. 26. Functional Areas Inventory/Materials Management purchasing, receiving and stores
Production production planning, quality control, and maintenance Marketing Distribution
Personnel Finance Accounting Computer Services
27. 27. 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.
28. 28. The Computer Services Function Centralized Data Processing Distributed Data
Processing Most companies fall in between. All data processing is performed by one or more
large computers housed at a central site that serves users throughout the organization.
Primary areas: database administration data processing systems development systems
maintenance Reorganizing the computer services function into small information processing
units that are distributed to end users and placed under their control
29. 29. Organization of Computer Services Function in a Centralized System
30. 30. Organizational Structure for a Distributed Processing System
31. 31. 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
32. 32. 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
 33. 33. 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
34. 34. The Evolution of IS Models: The Flat-File Model
35. 35. 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
36. 36. The Evolution of IS Models: The Database Model
37. 37. 34 An REA Data Model Example Inventory Line items Sales Party to Sales person Pays
for Cash CollectionsIncreasesCash Made to Customer Cashier Received from Received by
M1MMMMMMMM1111REA
38. 38. 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.
39. 39. 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.
40. 40. 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.
41. 41. 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

Systems Development Life Cycle

Analysis
Conceptual Design
Physical Design
Implementation
O&M
3 Roles of Accountants
users, designers, & evaluators (auditors)
Order of problem resolution
Recognize problem, define problem, specify objectives, analyze feasibility, prepare a proposal

Top-Down
Development approach that starts with broad
organizational goals & the types of decisions
organizational executives make

Net Present Value Method

Discounts after-tax cash flows for a project over
its life to time period zero using the company's
minimum desired rate of return

2 types of Cost Benefit Analysis

1) Net present value method
2) Payback method
Payback Method
a breakeven analysis of total costs & benefits

Feasibility Assessment
 Technology
Economy
Legal
Operational
Schedule

1. users, designers, & evaluators (auditors)

3 Roles of Accountants

TYPE THE ANSWER

2. daily business operations

TPS

TYPE THE ANSWER

3. summarization

Not a database management task

TYPE THE ANSWER

4. Analysis
Conceptual Design
Physical Design
Implementation
O&M

Systems Development Life Cycle

TYPE THE ANSWER

5. operations level, transaction information

 Horizontal Information Flow

TYPE THE ANSWER

5 Matching questions
E
1.
Order of problem resolution

C
2.

Net Present Value Method

A
3.

Account vs. Management Information Systems

D
4.

Transaction processing system does NOT

B
5.

Information System

A. account is financial transactions or transactions that closely affect finances

B. set of procedures by which data is collected, processed, & distributed
C. Discounts after-tax cash flows for a project over its life to time period zero using
the company's minimum desired rate of return
D. report on the status of financial investments
E. Recognize problem, define problem, specify objectives, analyze feasibility,
prepare a proposal

5 Multiple choice questions

1. affects the equities & assets

1. Feasibility Assessment
2. Horizontal information flow
3. Financial Transaction
 4. Vertical information flow
2. financial statements & reports
1. MRS
2. FRS
3. Financial Transaction
4. TPS
3. Development approach that starts with broad organizational goals & the types of
decisions organizational executives make
1. Payback Method
2. Vertical information flow
3. Net Present Value Method
4. Top-Down
4. Technology
Economy
Legal
Operational
Schedule
1. Feasibility Assessment
2. Vertical information flow
3. Horizontal information flow
4. Financial Transaction
5. event that affects or is of interest to the organization and is processed by its information
system as a unit of work
1. Transaction processing system does NOT
2. Information System
3. Systems Development Life Cycle
4. Transaction

4 True/False questions

1. special-purpose reports for internal use → FRS

True False should be mrs

2. between levels of management ex: budgets & instructions → Horizontal information flow
 True False vertical info flow

3. 1) Net present value method

2) Payback method → 3 Roles of Accountants

True False 2 types of cost benefit analysis

4. a breakeven analysis of total costs & benefits → Payback Method

True False

CHAPTER 1

THE INFORMATION SYSTEM: AN ACCOUNTANT’S PERSPECTIVE

REVIEW QUESTIONS
1. Operational, operations management, middle management, and
top management. Horizontal flows support operation-level tasks. The
information is highly detailed about the day-to-day operations.
Vertical flows distribute summarized information to managers at all
levels, and this information flows upward. Instructions, quotas, and
budgets also flow downward.
2. Data are facts that are collected in a “raw” form and made
meaningful through processes such as sorting, aggregating,
classifying, mathematically manipulating, and summarizing. The
meaningful data is considered to be information.
3. AISs process financial transactions and certain nonfinancial
transactions that directly affect the processing financial transactions.
The external financial reporting documents of AIS are subject to legal
and professional standards. Consequently, management and
accountants have greater legal responsibility for AIS applications
than for MIS applications. The MIS processes nonfinancial
transactions that are outside the scope of the AIS. MIS applications
expand the information set provided to such areas as production,
sales, marketing, and inventory management. MIS often draws from
and builds on data from the AIS.
4. Revenue cycle, expenditure cycle, and conversion cycle.
5. Reports used by management, which the company is not
obligated by law, regulation, or contract to provide. These are often
used for internal problem-solving issues rather than by external
constituents.
6. Relevance, accuracy, completeness, summarization, and
timeliness.
7. Relevance and efficiency.
8. Data attribute (field), record, file, and database.
9. Storage, retrieval, and deletion.
10. Feedback is output that is sent back to the system as a source of
data. Feedback is useful because it can be used to initiate or adjust
the system processes.
11. a. to support the stewardship function of management,
b. to support the decision-making processes of managers, and
c. to support the day-to-day operations of the firm.
12. Stewardship is the responsibility of management to properly
utilize the resources of the firm entrusted to them. Information systems
provide management with reports to better manage the resources and
also provide responsibility reports by which management may be
evaluated.
13. a. Materials Management
1. purchasing
2. receiving
3. stores
b. Production
 1. production planning
2. quality control
3. maintenance
c. Marketing
1. advertising
2. market research
3. sales order processing
d. Distribution
1. warehousing
2. shipping
e. Personnel
1. recruiting
2. training
3. benefits
4. counseling
f. Finance
1. portfolio management
2. treasury
3. credit
 4. cash disbursement
5. cash receipt
g. Accounting
1. inventory control
2. cost accounting
3. payroll
4. accounts payable
5. accounts receivable
6. billing
7. fixed-asset accounting
8. general ledger
h. Computer Service
1. data processing
2. systems development and maintenance
3. database administration
14. Internal auditors are responsible for in-house appraisal of the
financial reporting system. Internal auditors are concerned with
deterring and detecting fraud and for conducting EDP audits.
External auditors are independent CPAs engaged by the firm to attest
to the completeness and accuracy of the financial statements. External
auditors work together with the internal auditors.
15. The database administrator is responsible for the security and
integrity of data stored in a central database.
16. The role of the accounting function is to manage the financial
information resources of the firm. First, the accountants must capture
and record business events of a firm and their financial impact.
Secondly, the accounting function distributes transaction information
to decision makers and operations personnel to help them coordinate
their many tasks. The accountants must also assign accountability for
each of these tasks.
17. In a centralized data processing approach, the computer services
function is centrally located. The databases are housed in one place
where all of the data processing occurs by one or more main
computers. All systems development and maintenance work for the
entire organization is performed by systems professionals. End users
wishing to have new systems or features must submit a formal request
to this group and are usually prioritized and placed in a queue.
 In a distributed data-processing approach, the CPUs are spread out
and control over data and processing is at the information processing
unit (IPU) level. Thus, end users have more influence over the systems
development projects, which are typically handled by systems
professionals at the IPU level.

Chapter 1—The Information System: An Accountant’s Perspective

TRUE/FALSE

1. Information is a business resource.

ANS: T PTS: 1

2. IT outsourcing is location-independent computing.

ANS: F PTS: 1

3. Transaction processing systems convert non-financial transactions

into financial transactions.
 ANS: F PTS: 1

4. Information lacking reliability may still have value.

ANS: F PTS: 1

5. A balance sheet prepared in conformity with GAAP is an example of

discretionary reporting.

ANS: F PTS: 1

6. The Management Reporting System provides the internal financial

information needed to manage a business.

ANS: T PTS: 1

7. Most of the inputs to the General Ledger System come from the
Financial Reporting System.

ANS: F PTS: 1

8. When preparing discretionary reports, organizations can choose

what information to report and how to present it.

ANS: T PTS: 1

9. Retrieval is the task of permanently removing obsolete or redundant

records from the database.

ANS: F PTS: 1

10. Systems development represents 80 to 90 percent of the total cost of

a computer system.
 ANS: F PTS: 1

11. The database administrator is responsible for the security and

integrity of the database.

ANS: T PTS: 1

12. Custom software is completely finished, tested, and ready for

implementation.

ANS: F PTS: 1

13. The internal auditor represents the interests of third-party outsiders.

ANS: F PTS: 1

14. Information Technology (IT) audits can be performed by both

internal and external auditors.

ANS: T PTS: 1

15. Custom software is the most affordable systems development option.

ANS: F PTS: 1

16. A database is a collection of interconnected computers and

communications devices that allows users to communicate, access
data and applications, and share information and resources.

ANS: F PTS: 1

17. Systems maintenance consumes the majority of a system’s total

costs.
 ANS: T PTS: 1

18. Cloud computing is a practice in which the organization sells its IT

resources to a third-party outsourcing vendor then leases back IT
services from the vendor for a contract period.

ANS: F PTS: 1

19. A potential benefit of cloud computing is that the client firm does
not need to know where its data are bring processed.

ANS: F PTS: 1

20. One of the greatest disadvantages of database systems is that all

data is always available to all users.

ANS: F PTS: 1

21. Under SOX legislation public accounting firms are no longer

allowed to provide consulting services to audit clients.

ANS: T PTS: 1

22. Under SOX legislation public accounting firms are no longer

allowed to provide consulting services to their clients.

ANS: F
NOTE: They may not provide such services to audit clients, but may
still provide them to non-audit clients

PTS: 1

MULTIPLE CHOICE
1. Which of the following is not a business resource?
a. raw material
b. labor
c. information
d. all are business resources

ANS: D PTS: 1

2. Which level of management is responsible for short-term planning

and coordination of activities necessary to accomplish organizational
objectives?
a. operations management
b. middle management
c. top management
d. line management

ANS: B PTS: 1

3. Which level of management is responsible for controlling day-to-

day operations?
a. top management
b. middle management
c. operations management
d. executive management

ANS: C PTS: 1

4. Location-independent computing in which shared data centers

deliver hosted IT services over the Internet.
a. IT outsourcing
b. Network administration
 c. Cloud computing
d. Custom software

ANS: C PTS: 1

5. The value of information for users is determined by all of the

following but
a. reliability
b. relevance
c. convenience
d. completeness

ANS: C PTS: 1

6. An example of a nonfinancial transaction is

a. sale of products
b. cash disbursement
c. log of customer calls
d. purchase of inventory

ANS: C PTS: 1

7. An example of a financial transaction is

a. the purchase of computer
b. a supplier’s price list
c. a delivery schedule
d. an employee benefit brochure

ANS: A PTS: 1
 8. Which subsystem is not part of the Accounting Information System?
a. Transaction Processing System
b. Expert System
c. General Ledger/Financial Reporting System
d. Management Reporting System

ANS: B PTS: 1

9. The major difference between the Financial Reporting System (FRS)

and the Management Reporting System (MRS) is the
a. FRS provides information to internal and external users;
the MRS provides information to internal users
b. FRS provides discretionary information; the MRS provides
nondiscretionary information
c. FRS reports are prepared using information provided by the
General Ledger System; the MRS provides information to
the General Ledger System
d. FRS reports are prepared in flexible, nonstandardized
formats; the MRS reports are prepared in standardized,
formal formats

ANS: A PTS: 1

10. The purpose of the Transaction Processing System includes all of

the following except
a. converting economic events into financial transactions
b. recording financial transactions in the accounting records
c. distributing essential information to operations personnel to
support their daily operations
d. measuring and reporting the status of financial resources
and the changes in those resources
ANS: D PTS: 1