Accounting Information Systems:

Essential Concepts and Applications

The Study of Accounting

Information Systems
What Is a System?

A System is an entity consisting of

interacting parts that are coordinated
to achieve one or more common
objectives. Systems must possess
 SYSTEM

INPUT PROCESS OUTPUT

FEEDBACK
INFORMATION SYSTEM

DATA INFORMATION

INPUT PROCESS OUTPUT

FEEDBACK
Data Versus Information
 Data are raw facts and figures that are
processed to produce information
 Information is data that have been
processed and are meaningful and useful to
users. The terms “meaningful” and “useful”
are value-laden terms and usually subsume
other qualities such as timeliness,
relevance, reliability, comparability,
neutrality etc.
 Timeliness principle in accounting refers to the need
for accounting information to be presented to the
users in time to fulfill their decision making needs.
 Relevance - information should be relevant to the
decision making needs of the user. Information is
relevant if it helps users of the financial statements in
predicting future trends of the business.
 Reliability- information is reliable if a user can
depend upon it to be materially accurate and if it
faithfully represents the information that it purports
to present.
 Comparability/Consistency- Financial statements
of one accounting period must be comparable to
another in order for the users to derive meaningful
conclusions about the trends in an entity's financial
performance and position over time.
Neutrality- information contained in the
financial statements must be free from
bias. It should reflect a balanced view of
the affairs of the company without
attempting to present them in a favored
light.
 Functional Steps in Transforming Data
into Information
 Data collection - capturing, recording, validating and
editing data for completeness and accuracy
 Data Maintenance/Processing - classifying, sorting,
calculating data
 Data Management - storing, maintaining and retrieving
data
 Data Control - safeguarding and securing data and
ensuring the accuracy and completeness of the same
 Information Generation - interpreting, reporting, and
communicating information
What Is an Information
System?

 An Information system is a framework in which data is

collected, processed, controlled and managed through stages in
order to provide information to users
 It evolves over time and becomes more formalized as a firm
grows and becomes more complex. It can be a manual or
computerized system
 Firms depend on information systems in order to survive and
stay competitive
 The Universal Data Processing
Model

Storage

Processing

Consumers

Exchange Events
Internal Events
Environmental Events
}
What Is Accounting?

 It is the principal way of organizing and reporting financial

information. It has been called the “language of business.”
 Accounting and information systems comprise the functional area
of business responsible for providing information to the other
areas to enable them to do their jobs and for reporting the results
to interested parties.
 To that end, an accounting system is used to identify, analyze,
measure, record, summarize, and communicate relevant economic
information to interested parties.
Accounting Information
System

An Accounting Information System is a

unified structure that employs physical
resources and components to transform
economic data into accounting information
for external and internal users.
 Management Information Systems

The Role of Information Systems in Business Today

Growing interdependence between ability to use

information technology and ability to implement
corporate strategies and achieve corporate goals
Business firms invest heavily in information systems
to achieve six strategic business objectives:
1. Operational excellence
2. New products, services, and business models
3. Customer and supplier intimacy
4. Improved decision making
5. Competitive advantage
6. Survival

14 © Prentice Hall 2011

 Management Information Systems

The Role of Information Systems in Business Today

Six Strategic Business Objectives

• Operational excellence:
– Improvement of efficiency to attain higher
profitability
– Information systems, technology an
important tool in achieving greater efficiency
and productivity
– Walmart’s RetailLink system links suppliers to
stores for superior replenishment system
15 © Prentice Hall 2011
 Management Information Systems

The Role of Information Systems in Business Today

New products, services, and business

models:
Business model: describes how company
produces, delivers, and sells product or service to
create wealth
Information systems and technology a major
enabling tool for new products, services, business
models
Examples: Apple’s iPod, iTunes, iPhone, iPad,
Google’s Android OS, and Netflix
16 © Prentice Hall 2011
 Management Information Systems

The Role of Information Systems in Business Today

Customer and supplier intimacy:

Serving customers well leads to customers
returning, which raises revenues and profits
Example: High-end hotels that use computers to
track customer preferences and use to monitor
and customize environment
Intimacy with suppliers allows them to provide
vital inputs, which lowers costs
Example: J.C.Penney’s information system
which links sales records to contract
manufacturer
17 © Prentice Hall 2011
 Management Information Systems

The Role of Information Systems in Business Today

Improved decision making

Without accurate information:
Managers must use forecasts, best guesses, luck
Leads to:
• Overproduction, underproduction of goods and services
• Misallocation of resources
• Poor response times
Poor outcomes raise costs, lose customers
Example: Verizon’s Web-based digital dashboard to
provide managers with real-time data on customer
complaints, network performance, line outages, etc.
18 © Prentice Hall 2011
 Management Information Systems

The Role of Information Systems in Business Today

Operational excellence:
Improvement of efficiency to attain higher profitability
New products, services, and business models:
Enabled by technology
Customer and supplier intimacy:
Serving customers raises revenues and profits
Better communication with suppliers lowers costs
Improved decision making
More accurate data leads to better decisions
19 © Prentice Hall 2011
 Management Information Systems

The Role of Information Systems in Business Today

Competitive advantage
Delivering better performance
Charging less for superior products
Responding to customers and suppliers in real
time
Examples: Apple, Walmart, UPS

20 © Prentice Hall 2011

 Management Information Systems

The Role of Information Systems in Business Today

Survival
Information technologies as necessity of business
May be:
Industry-level changes, e.g. Citibank’s
introduction of ATMs
Governmental regulations requiring record-
keeping
• Examples: Toxic Substances Control Act, Sarbanes-
Oxley Act

21 © Prentice Hall 2011

The Business Firm as a System

Organization Organization’s
Environment functions
of the Firm Information
Business System AIS Transaction
Firm Cycles
Operational
Business Events
System
from Operations
 TYPES OF INFORMATION SYSTEMS
KIND OF SYSTEM GROUPS SERVED

STRATEGIC LEVEL SENIOR MANAGERS

MANAGEMENT LEVEL MIDDLE MANAGERS

KNOWLEDGE DATA WORKERS

LEVEL

OPERATIONAL OPERATIONAL
LEVEL MANAGERS
TYPES OF SYSTEMS
Management Information
System (MIS)
provides information that organizations
require to manage themselves efficiently
and effectively.
Management information systems are
typically computer systems used for
managing five primary components:
5 Primary Components of MIS

1.) Hardware
2.) Software
 3.) Data (information for decision making)
 4.) Procedures (design,development and
documentation)
 5.) People (individuals, groups, or
organizations).
 Relationship of AIS & MIS

MIS

Sales/Marketing Human Resources

Finance Production AIS

Order entry/Sales
Billing/A.Rec./Cash receipts

Purchasing/A. Pay.

Inventory

Payroll
General ledger

Production
AIS is composed of three
major subsystems:

Transaction Processing System (TPS)

General Ledger/Financial Reporting
System (GL/FRS)
Management Reporting System
(MRS)
Transaction Processing
System (TPS)

supports daily business operations with

numerous reports, documents, and
messages for users throughout the
organization
General Ledger/Financial
Reporting System (GL/FRS)

produces the traditional financial

statements, such as the income statement,
balance sheet, statement of cash flows,
tax returns, and other reports required by
law
Management Reporting
System (MRS)

provides internal management with

special-purpose financial reports and
information needed for decision making
such as budgets, variance reports, and
responsibility reports.
AIS as an MIS Subsystem

Sales/ Production
Marketing Info

AIS

Human Resources Finance

GENERAL MODEL FOR AIS

End users
Data sources
Data collection
Data processing
Database management
Information generation
Feedback
Users of AIS
 Internal users (Primary  External users (Secondary
Users) Users)
 Management  Creditors (Creditors include
suppliers as well as lenders of
 Employees finance such as banks)
 Owners  Tax Authorities
 Investors
 Customers
 Regulatory Authorities
Objectives of AIS
 Support day-to-day operations
Transaction processing
 Support Internal Decision-Making
Trend Analyses
Quantitative & Qualitative Data
Non-transactional sources
 Help fulfill Stewardship Role
Resources Required for an AIS

 Processor(s): Manual or Computerized

 Data Base(s): Data Repositories
 Procedures: Manual or
Computerized
 Input/Output Devices
 Miscellaneous Resources
Introduction: S&S Inc.

Scott Parry and Susan Gonzalez form S&S,

Inc., to sell consumer electronic devices.
Parry and Gonzalez decide to pursue a “clicks
and bricks” strategy.
They plan to hold the grand opening of S&S
in five weeks.

©2003 Prentice Hall Business Publishing,

Accounting Information Systems, 9/e,
Romney/Steinbart
1-37
 Introduction: S&S, Inc.

What types of important decisions do Scott and

Susan have to make?
How to organize their accounting records
How to design a set of procedures to ensure that they
meet all of their government obligations
How to price their products

1-38
Introduction: S&S, Inc.
Whether to extend credit, on what terms, and
how to accurately track what customers owe and
have paid
How to hire, train, and supervise their
employees
How to keep track of cash flows
The appropriate product mix and quantities to
carry
What functionality to provide on their website

1-39
 Reasons for Studying Accounting
Information Systems

 Career accountants will be users, auditors, and

developers of AIS
 Modern-day AIS are complex because of new
technologies
 Concepts studied in AIS are integrated into every
other accounting course
 Information-Oriented
Professionals
 An array of professionally trained persons from different fields
of study have focused on providing information to users
 These professionals include system and managerial
accountants and auditors, system analysts and
industrial engineers
 Professional certifications are increasing. These include
Certified Computing Professional, Certified Information
Systems Auditor, Certified Managerial Accountant,
Certified Fraud Examiner, etc.
Roles of Accountants With
Respect to an AIS

 Financial accountants prepare

financial information for external
decision-making in accordance with
GAAP
 Managerial accountants prepare
financial information for internal
decision-making
Roles of Accountants With
Respect to an AIS
 Auditors - evaluate controls and attest to the
fairness of the financial statements.
 Accounting managers - control all
accounting activities of a firm.
 Tax specialists - develop information that
reflects tax obligations of the firm.
 Consultants - devise specifications for the
AIS.
Ethical Standards for
Consulting

 Professional competence
 Exercise due professional care
 Plan and supervise all work
 Obtain relevant data to support reasonable
recommendations
 Maintain integrity and objectivity
 Understand and respect the responsibilities of all parties
 Disclose any conflicts of interest