The Information System

An Accountant’s Perspective
Purpose

“To place subject AIS in perspective for

accountants.”
The Information Environment
Information

 Is a business resource.
 Vital to the survival of the business organization.
 Flows out from the organization to external users.
Information Flow
 Base of the pyramid
Business operations – consist of product-oriented work of
the organization, such as manufacturing, sales, and
distribution.
Three Management Tiers
Operations Management
- responsible for controlling day-to-day operations
Middle Management
- accountable for short-term planning
- coordinates accomplishment for organizational objectives
Top Management
- responsible for long-term planning
- sets organizational objectives
 Horizontal Flow
- supports operations-level tasks with highly detailed
information about the many business transactions affecting
the firm.
- informations such as sale and shipment of goods, the use
of labor and materials in the production process, internal
transfers of resources from one department to another.

Vertical Flow
- distributes information downward from senior
management to junior managers and operations personnel in
the form of instructions, quotas, and budgets.
 Third Flow
- exchanges between organization and users in the external
environment.
Trading partners
- include customer sales and billing information, purchase
information for suppliers, and inventory receipts
information.

Stakeholders
- entities outside (or inside) the organization with a direct
or indirect interest in the firm.
- include financial statements, tax returns, and stock
information.
What is a system?
– is a group of two or more interrelated components or
subsystems that serve a common purpose.

Natural Systems
- All life forms, plants, and animals. Ranges from atom–a
system of electrons, protons, and neutrons - to the universe–a
system of galaxies, stars, and planets.
Artificial Systems
- man-made. Includes everything from clocks to submarines
and social systems to information.
Elements of a System
 Multiple Components
- contains more than one part.
 Relatedness
- has a common purpose.
 System versus Subsystems
Subsystem – viewed in relation to the larger system of
which its is part.
 Purpose
- serve at least one purpose.
 System Decomposition
- process of dividing system into smaller sub-system parts.
- convenient way of representing, viewing, and
understanding the relationships among subsystems.
 can present the overall system as a hierarchy and view
the relationships between the subordinate and higher
level subsystems.
 Subsystem Interdependency
 system’s ability to achieve its goal depends on the effective
functioning and harmonious interaction of its subsystems.
Information System Designer – needs to identify critical
subsystems, anticipate the risk of their failure, and
design cost-effective control procedures to mitigate
the risk.
Primary Subsystem of an Automobile
An Information Systems Framework

Information System – is the set of formal procedures by which

data are collected, processed into information, and
distributed to users.
Figure 1-3 shows the information system of a manufacturing
firm decomposed into its elemental subsystems.
Transactions – an event that affects or is of interest to the
organization and is processed by its information system as a
unit of work
Two Classes:
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 term. Examples are sales of products,
purchase of inventory, and cash
disbursements and receipts
Nonfinancial transaction – events that do not meet the
narrow definition of a financial transaction. For
example, adding a new supplier of raw materials, it is
an event that may be processed by enterprise’s information
system as a transaction but is not a financial
transaction.
The AIS and MIS
Accounting Information System (AIS) subsystems – process
financial transactions and nonfinancial transactions that
directly affect the processing of financial transactions.

Three major subsystems:

1. Transaction Processing System (TPS) – supports daily
business operations
2. General Ledger/FinancialReporting System (GL/FRS) –
produces the traditional financial statements such as
income statement, balance sheet, etc.
3. Management Reporting System (MIS) – process internal
management with special-purpose financial reports
Management Information System
– processes nonfinancial transactions that are not normally
processed by traditional AIS.
– additional information for production planning and
control, sales forecasting, inventory warehouse
planning, market research, and so on.
MIS Subsystems
AIS Subsystems
 Transaction Processing System - The 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 (journals
and ledgers), and distributing essential financial information
to operations personnel to support their daily operations.
Consist of three transaction cycles; the revenue cycle, the
expenditure cycle, and the conversion cycle.
 General Ledger/Financial Reporting Systems
General Ledger Sytem (GLS) - summaries of transaction
cycle activity are processed to update the general
ledger control accounts.
Financial Reporting Systems - measures and reports the
status of financial resources and the changes in those
resources. It communicates information primarily to
external users.

 Management Reporting System - provides the internal

financial information needed to manage a business.
General Model for AIS

 This is a general model because it describes all information

systems, regardless of their technological architecture. The
elements of the general model are end users, data sources,
data collection, data processing, database management,
information generation, and feedback.
 End Users
External users – include creditors, stockholders,
potential investors, regulatory agencies, tax
authorities, suppliers, and customers.
Internal users - management at every level of the
organization, as well as operations personnel.

Data versus Information

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 an action that he
or she otherwise could not, or would not, have taken.
 Data Sources
- are financial transactions that enter the information
system from both internal and external sources.
External financial transactions - economic exchanges
with other business entities and individuals outside
the firm.
Internal financial transactions - involve the exchange or
movement of resources within the organization.
 Data Collection
- first operational stage in the information system.
- the most important stage in the system.
- two rules govern the design of data collection
procedures: relevance and efficiency.
 Data Processing
Once collected, data usually require processing to produce
information. Tasks in the data processing stage range from
simple to complex.

 Database Management
- physical repository for financial and nonfinancial data.
The levels in the data hierarchy— attribute, record, and
file—are illustrated in Figure 1-6.
 Data Attribute - most elemental piece of potentially useful
data in the database. Each attribute is relevant because it
contributes to the information content of the entire set.

Record - complete set of attributes for a single occurrence

within an entity class. Every record in the database must be
unique in at least one attribute. This unique identifier
attribute is the primary key.

Files - complete set of records of an identical class. The

organization’s database is the entire collection of such files.
 Information Generation
- is the process of compiling, arranging, formatting, and
presenting information to users and has the following
characteristics: relevance, timeliness, accuracy,
completeness, and summarization.

 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. Information should be update
from time to time.
 Accuracy - information must be free from material errors.

 Completeness - No piece of information essential to a

decision or task should be missing.

 Summarization - Information should be aggregated in

accordance with the user’s needs.

 Feedback is a form of output that is sent back to the system

as a source of data. Feedback may be internal or external
and is used to initiate or alter a process.