Chapter 1
The Information System:
An Accountant’s Perspective
Introduction to Accounting Information
Systems, 7e
James A. Hall
Hall, Introduction to Accounting Information Systems, 7e
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Objectives for Chapter 1
 Understand the primary information flows within the
business environment.
 Understand the difference between accounting
information systems and management information
systems.
 Understand the difference between Financial
transactions and non-financial transactions.
 Know the general model for information systems.
 Be familiar with the functional areas of a business.
 Understand the stages in the evolution of information
systems.
 Understand the relationship between the three roles of
accountants in an information system.
Hall, Introduction to Accounting Information Systems, 7e
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
2
Internal & External Information Flows
Hall, Introduction to Accounting Information Systems, 7e
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
3
The Pyramid Model
 The business organization is divided
horizontally in several levels of activity.
 Business operations form the basis of the
pyramid:
 Product-oriented work, like manufacturing, sales,
distribution
 Three management tiers
Hall, Introduction to Accounting Information Systems, 7e
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
4
Management Tiers:
 Operations Management:
 The controlling of the day-to-day operations
 Middle Management:
 Short term planning and coordination of activities
necessary to accomplish organizational objectives
 Top Management:
 Long-term planning and setting organizational
objectives
Hall, Introduction to Accounting Information Systems, 7e
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
5
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
Hall, Introduction to Accounting Information Systems, 7e
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
6
External Flow:
 The information exchanges between the
organization and users in the external
environment:
 Trading partners: customer sales and billing
information, purchase information, inventory
receipts information.
 Stake holders: financial statements, tax returns,
stock information
Hall, Introduction to Accounting Information Systems, 7e
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
7
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.
Hall, Introduction to Accounting Information Systems, 7e
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
8
Different Information Systems:
Hall, Introduction to Accounting Information Systems, 7e
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
9
Information in Business
 Information is a business
resource that:
 needs to be appropriately
managed
 is vital to the survival of
contemporary businesses
Hall, Introduction to Accounting Information Systems, 7e
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
10
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.
Hall, Introduction to Accounting Information Systems, 7e
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
11
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
Hall, Introduction to Accounting Information Systems, 7e
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
12
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.
Hall, Introduction to Accounting Information Systems, 7e
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
13
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
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©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
14
Transactions
Financial
Transactions
Nonfinancial
Information
System
Information
User
Decisions
Transactions
Hall, Introduction to Accounting Information Systems, 7e
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
15
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.
Hall, Introduction to Accounting Information Systems, 7e
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
16
AIS versus MIS
 Accounting Information Systems (AIS)
process
 financial transactions; e.g., sale of goods
 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
Hall, Introduction to Accounting Information Systems, 7e
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
17
AIS versus MIS?
IS
AIS
GLS/FRS
TPS
MIS
MRS
Financial
Management
Systems
Marketing
Systems
Distribution
Systems
Human
Resource
Systems
Hall, Introduction to Accounting Information Systems, 7e
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
18
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
Hall, Introduction to Accounting Information Systems, 7e
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
19
General Model for AIS
Figure 1-5
Hall, Introduction to Accounting Information Systems, 7e
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
20
End Users: (About information)
p10
 External:
 Creditors, stockholders, investors, tax authorities:
• Financial statements, tax returns, and reports that the firm has
a legal obligation to produce
 Suppliers, customers:
• Transaction oriented information, like purchase orders, billing
statements, and shipping information
 Internal:
 Management at all levels
• Internal reporting is “what gets the job done”
Hall, Introduction to Accounting Information Systems, 7e
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
21
Internal reporting:
 Less structured than external reporting
 The system designers (including
accountants) must balance the desires of
users against legal and economic concerns:
 Adequate control and security
 Proper accountability
 Cost of providing alternative forms of information
Hall, Introduction to Accounting Information Systems, 7e
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
22
Data vs. Information (p11)
 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 action
that they otherwise could not have taken.
 Example: Daily report on inventory levels
 Purchase clerk
 Personnel manager
Hall, Introduction to Accounting Information Systems, 7e
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
23
Information:
 Question:
 Do nothing because ‘uninformed’,
 Do nothing because ‘informed’
 Information content: resolve conflicts, reduce
uncertainty, make decisions
 The distinction between information and data
is very important for IS, because if IS fails to
cause users to act, the system serves no
purpose and has failed in its primary oblective
Hall, Introduction to Accounting Information Systems, 7e
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
24
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
Hall, Introduction to Accounting Information Systems, 7e
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
25
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
Hall, Introduction to Accounting Information Systems, 7e
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
26
1. Data Collection
 First operational stage in the IS, and is the
most important stage in the system: data must
be valid, complete and free from errors.
 Capturing transaction data
 Recording data onto forms
 Validating and editing the data
 The collection procedure must be designed to
collect data only once.
Hall, Introduction to Accounting Information Systems, 7e
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
27
2. Data Processing
•
•
•
•
Classifying
Transcribing
Sorting
Batching
•
•
•
•
Merging
Calculating
Summarizing
Comparing
Hall, Introduction to Accounting Information Systems, 7e
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
28
3. Data Management
 Physical repository for data
 Storing; Assigning keys
 Retrieving
 Deleting
 The contents follow a logical hierarchy:
 Attribute
 Record
 File
Hall, Introduction to Accounting Information Systems, 7e
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
29
Attribute:
 It’s a relevant characteristic of an entity about
which the firm captures data.
 Example: Student, AR
 It must contribute or enhance the information
content of the entity or set.
Hall, Introduction to Accounting Information Systems, 7e
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
30
Record:
 Is the complete set of attributes for a single
occurrence within an entity class.
 Attributes and occurrence?
 Customer name: Buthelezi
 Address
: Box 111, Eskhawini
 Acc Balance : 989.00
 How many attributes? How many records?
 How many occurrences of Customer?
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©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
31
4. Information Generation





Compiling
Arranging
Formatting
Presenting
Examples: sales order, a report, a
message on a computer screen
Hall, Introduction to Accounting Information Systems, 7e
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
32
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
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©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
33
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
Hall, Introduction to Accounting Information Systems, 7e
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
34
Organizational Structure
 The structure reflects the distribution/allocation
of
 Responsibility
 Authority and
 Accountability throughout the organization.
 Firms achieve their overall objectives by
establishing measurable financial goals of their
operational units: budget information flows
downwards; the subordinates’ actions:
performance info flow upwards to senior mngmt.
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©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
35
Structure:
 Segmenting by business function is a very
common method of organizing.
 To promote internal efficiency through
specialization of labor and cost-effective
resource allocations.
 Segmentation:
 Geographical location
 Product line
 Business Function
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©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
36
Resources vs. Functional Areas
 Inventory/Materials Management
 purchasing, receiving and stores
 Production
 production planning, quality control, and
maintenance
 Marketing
 Distribution
 Personnel
 Finance
 Accounting
 Computer Services
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37
Accounting Function: p19
 It manages the financial resource of the firm:
 Captures and records the financial effects of the
firms transaction
 Distributes transaction information to operations
personnel to coordinate tasks
 Business operations:
 Inventory control, cost accounting, payroll,
accounts payable, accounts receivable, billing,
fixed asset accounting and general ledger
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©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
38
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.
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©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
39
The Computer Services Function
Distributed Data
Processing
Most companies fall in between.
Reorganizing the
computer services
function into small
information processing
units that are distributed
to end users and
placed under their control
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
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©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
40
Organization of IT Function in a
Centralized System
Figure 1-10
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©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
41
Organizational Structure for a Distributed
Processing System
Figure 1-11
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42
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
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©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
43
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
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©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
44
AIS models: p24






Manual processes
Flat-file systems
Database approach
REA model
ERP system
Various generations of systems exists across
different organizations and may even coexists
within a single enterprise.
Hall, Introduction to Accounting Information Systems, 7e
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
45
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
Hall, Introduction to Accounting Information Systems, 7e
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
46
The Evolution of IS Models:
The Flat-File Model
Figure 1-12
Hall, Introduction to Accounting Information Systems, 7e
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
47
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
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©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
48
The Evolution of IS Models: The Database
Model
Figure 1-13
Hall, Introduction to Accounting Information Systems, 7e
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
49
An REA Data Model Example
R
Inventory
E
M
Line items
A
M
M
Sales
1
Party to
M
Sales
person
M
1
Pays for
Made to
Customer
1
M
Cash
1
M
Increases
M
Cash
Collections M
Received
from
1 Cashier
Received
34
Hall, Introduction to Accounting Information Systems, 7e
50
by
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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.
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51
ERP system: p31
 Enables an organization to automate and
integrate its key business processes:
 Facilitate data sharing
 Information flows
 Common business practices among all users
 Modules: Asset management, financial
accounting, HR, Plant maintenance,
production planning, quality management,
sales and distribution, inventory management
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©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
52
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.
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©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
53
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.
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©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
54
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
Hall, Introduction to Accounting Information Systems, 7e
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
55