Accounting Information Systems PDF

Page | 1 CHAPTER 1 THE INFORMATION ENVIRONMENT Learning Outcomes: After studying the chapter, you should:  Understand the primary information flows within the business environment.  Understand the difference between accounting information sy...

Page | 1 CHAPTER 1 THE INFORMATION ENVIRONMENT Learning Outcomes: After studying the chapter, you should:  Understand the primary information flows within the business environment.  Understand the difference between accounting information systems and management information systems.  Understand the difference between a financial transaction and a non-financial transaction.  Know the principal features of the general model for information systems.  Be familiar with the functional areas of a business and their principal activities.  Understand the stages in the evolution of information systems.  Understand the relationship between external auditing, internal auditing, and information technology auditing. The pyramid shows the business organization divided horizontally into several levels of activity. Business operations form the base of the pyramid. These activities consist of the product-oriented work of the organization, such as manufacturing, sales, and distribution. 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 setting organizational objectives. Page | 2 Internal & External Information Flows Internal Information Flows  Horizontal flows of information used primarily at the operations level to capture transaction and operations data. Horizontal flow supports operations-level tasks with highly detailed information about the many business transactions affecting the firm. This includes information about events such as the sale and shipment of goods, the use of labor and materials in the production process, and internal transfers of resources from one department to another.  Vertical flows of information  downward flows — instructions, quotas, and budgets  upward flows — aggregated transaction and operations data  External users fall into two groups: trading partners and stakeholders. Page | 3   Exchanges with trading partners include customer sales and billing information, purchase information for suppliers, and inventory receipts information. 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. Information in Business  Information is a business resource that:  needs to be appropriately managed  is vital to the survival of contemporary businesses  Management information is thus more summarized and oriented toward reporting on overall performance and problems rather than routine operations. The information must identify potential problems in time for management to take corrective action. 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. Page | 4 Elements of a System MULTIPLE COMPONENTS - A system must contain more than one part. RELATEDNESS - A common purpose relates the multiple parts of the system. SYSTEM VERSUS SUBSYSTEM. PURPOSE - A system must serve at least one purpose, but it may serve several. 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 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. 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 Page | 5   Nonfinancial transactions - all other events processed by the organization’s information system e.g., an airline reservation — no commitment by the customer What is an Accounting Information System?  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. AIS versus MIS  Accounting Information Systems (AIS) process financial transactions; e.g., sale of goods nonfinancial transactions Page | 6  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 AIS Subsystems  Transaction processing system (TPS) - supports daily business operations. 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. The TPS consists of three transaction cycles: the revenue cycle, the expenditure cycle, and the conversion cycle. Each cycle captures and processes different types of financial transactions.  General Ledger/ Financial Reporting System (GL/FRS) - produces financial statements and reports. Summaries of transaction cycle activity are processed by the GLS to update the general ledger control accounts.  Management Reporting System (MRS) - produces special- purpose reports for internal use. This type of reporting is called discretionary reporting because the organization can choose what information to report and how to present it. Page | 7 General Model for AIS The elements of the general model: End Users - External users include creditors, stockholders, 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 (edited, summarized, or refined) and have no direct effect on the user. By contrast, information causes the user to take an action that he or she otherwise could not, or would not, have taken. Information is often defined simply as processed data. Page | 8  Data Processing Database Management - The organization’s database is its physical repository for financial and nonfinancial data. We use the term database in the generic sense. It can be a filing cabinet or a computer disk. DATA ATTRIBUTE - The 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 data. RECORD - A 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. Page | 9 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 Transforming the Data into Information Functions for transforming data into information according to the general AIS model: 1. Data Collection Capturing transaction data Recording data onto forms Validating and editing the data 2. Data Processing Classifying Merging Transcribing Calculating Summarizing Sorting Comparing Batching 3. Data Management Page | 10   Storing - task assigns keys to new records and stores them in their proper location in the database  Retrieving - the task of locating and extracting an existing record from the database for processing. After processing is complete, the storage task restores the updated record to it place in the database.  Deleting - the task of permanently removing obsolete or redundant records from the database. 4. Information Generation  Compiling  Arranging  Formatting  Presenting 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  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. Page | 11 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 Organizational Structure  The structure of an organization helps to allocate  responsibility  authority  accountability  Segmenting by business function is a very common method of organizing. Functional Areas  Inventory/Materials Management - The objective of materials management is to plan and control the materials inventory of the company.  Purchasing - responsible for ordering inventory from vendors when inventory levels fall to their reorder points.  Receiving - the task of accepting the inventory previously ordered by purchasing. Receiving activities include counting and checking the physical condition of these items.  Stores - takes physical custody of the inventory received and releases these resources into the production process as needed.  Production - production planning, quality control, and maintenance  Marketing - The marketing function deals with the strategic problems of product promotion, advertising, and market research. Page | 12   Distribution - the activity of getting the product to the customer after the sale. This is a critical step.  Personnel - Competent and reliable employees are a valuable resource to a business. The objective of the personnel function is to effectively manage this resource.  Finance - The finance function manages the financial resources of the firm through banking and treasury activities, portfolio management, credit evaluation, cash disbursements, and cash receipts.  Accounting - manages the financial information resource of the firm. In this regard, it plays two important roles in transaction processing. First, accounting captures and records the financial effects of the firm’s transactions. Second, the accounting function distributes transaction information to operations personnel to coordinate many of their key tasks.  Computer Services 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. The Computer Services Function Page | 13  1. Distributed Data Processing - Reorganizing the computer services function into small information processing units that are distributed to end users and placed under their control 2. Centralized Data Processing - 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.  DATABASE ADMINISTRATION. Centrally organized companies maintain their data resources in a central location that is shared by all end users  DATA PROCESSING. The data processing group manages 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.  SYSTEMS DEVELOPMENT AND MAINTENANCE. The information needs of users are met by two related functions: systems development and systems maintenance 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 Potential Disadvantages of DDP Page | 14   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 Manual Process Model  Transaction processing, information processing, and accounting are physically performed by people, usually using paper documents.  Useful to study because: a. helps link AIS courses to other accounting courses b. often easier to understand business processes when not shrouded in technology c. facilitates understanding internal controls  The Flat-File Model - The flat-file model describes an environment in which individual data files are not related to other files. End users in this environment own their data files rather than share them with other users. Thus, stand-alone applications rather than integrated systems perform data processing. 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 Page | 15   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 THE DATABASE MODEL  An organization can overcome the problems associated with flat files by implementing the database model to data management. REA Model  The REA model is an accounting framework for modeling an organization’s a. economic resources; e.g., assets b. economic events; i.e., affect changes in resources c. economic agents; i.e., individuals and departments that participate in an economic event d. Interrelationships among resources, events and agents  Entity-relationship diagrams (ERD) are often used to model these relationships. 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. Accountants as System Designers Page | 16   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. 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 Page | 17