ACCOUNTING INFORMATION SYSTEM REVIEWER

BUSINESS OPERATIONS at the base of the pyramid

- Consists of the product-oriented work of the organization
(manufacturing, sales and distribution)
OPERATIONS MANAGEMENT
- Directly responsible for controlling day-to-day operations
MIDDLE MANAGEMENT
- Accountable for the short-term planning and coordination of
activities necessary to accomplish organizational objectives
TOP MANAGEMENT
- Responsible for long-term planning and setting organizational
objectives

Information flows in two directions within the organization :

horizontally and vertically

HORIZONTAL FLOW
- Supports operations level tasks with highly detailed information
about the many business transactions affecting the firm;
(1) sale and shipment of goods,
(2) use of labor and materials in the production process, and
(3) internal transfer of resources from one department to another
VERTICAL FLOW
- Distributes information downward from senior managers to junior
managers and operations personnel in the form of instructions,
quotas, and budgets.
- Summarized information pertaining to operations and other
activities flow upward to managers at all levels
EXTERNAL USERS
(1) TRADING PARTNERS
o exchanges include customer sales and billing information,
purchase information for suppliers, and inventory receipts
information
EXTERNAL USERS
(2) STAKEHOLDERS
o are entities inside or outside the organization with a direct or
indirect interest in the firm
External stakeholders :
(1) Stockholders;
(2) Financial institutions;
(3) Government agencies
Internal Stakeholders :
accountants and internal auditors
OPERATIONS MANAGEMENT
- Directly responsible for controlling day-to-day operations

MIDDLE MANAGEMENT
- Accountable for the short-term planning and coordination of
activities necessary to accomplish organizational objectives
TOP MANAGEMENT
- Responsible for long-term planning and setting organizational
objectives
INFORMATION SYSTEM
- Is the set of formal procedures by which data are collected,
processed into information, and distributed to users
- The information system accepts input, called transactions, which
are converted through various processes into output information
that goes to users

TRANSACTION
- is 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 OF TRANSACTIONS

1) 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 terms. Every organization is legally bound to correctly
process these types of transactions.
2) NONFINANCIAL TRANSACTION
– are events that do not meet the narrow definition of a financial
transaction.
The firm has no legal obligation to process it correctly or at all.
AIS is composed of three (3) major subsystems:
(1) Transaction Processing System (TPS)
 – which supports daily business operations with numerous
reports, documents, and messages for users throughout the
organization
(2) General Ledger/Financial Reporting System (GL/FRS)
– which produces the traditional financial statements such as
income statement, balance sheet, statement of cash flows, tax
returns
(3) Management Reporting System (MRS)
– which provides internal management with specialpurpose
financial reports and information needed for decision making
such as budgets, variance reports, and responsibility reports

MANAGEMENT INFORMATION SYSTEM (MIS)

- Processes nonfinancial transactions that are not normally
processed by traditional AIS
A GENERAL MODEL FOR AIS
- The elements of the general model are:
(1) end users;
(2) data sources;
(3) data collection;
(4) data processing;
(5) database management;
(6) information generation;
(7) feedback

(1) END USERS

o Two general groups :
o (a) external;
o (b) internal
 External Users
o include creditors, stockholders, potential investors,
regulatory agencies, tax authorities, suppliers, and customers
Internal Users
o include management at every level of the organization, as
well as operations personnel

DATA vs. 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; simply defined as “processed data”
(2) DATA SOURCES
- Are financial transactions that enter the information system
from both internal and external sources

– sales of goods or services, purchase of inventory,

receipts of cash, disbursement of cash (including
payroll)

– involve exchange or movement of resources within

the organization
(3) DATA COLLECTION
- First operational stage in the information system
 - Objective is to ensure that event data entering the system
are valid, complete and free from material errors
- Most important stage in the system
- Two rules that govern the design of data collection:
(a) Relevance; and
(b) Efficiency
RELEVANCE
– the information system should capture only relevant data

EFFICIENCY
– efficient data collection procedures are designed to collect
data only once; capturing data more than once results to data
redundancy and inconsistency; data redundancy overloads
facilities and reduces the overall efficiency of the system

(4) DATA PROCESSING

- Data requires processing to produce information
- Tasks in the data processing stage range from simple to
complex
- Examples: linear programming models used for production
scheduling applications, statistical techniques for sales
forecasting, and posting and summarizing procedures used
for accounting applications
(5) DATABASE MANAGEMENT
 - Database is the organization’s physical repository for
financial and nonfinancial data
- It can be a filing cabinet or a computer disk
- Levels in data hierarchy :
1. attribute,
2. record, and
3. file
DATA ATTRIBUTE
o is a logical and relevant characteristic of any entity about
which the firm captures data
RECORD
o Is a complete set of attributes for a single occurrence within
an entity class
o Every record in the database must be unique in at least one
attribute; the unique identifier attribute is the primary key
FILES
o Is a complete set of records of an identical class
DATABASE MANAGEMENT TASKS
- It includes three fundamental tasks:
(1) storage;
(2) retrieval; and
(3) deletion
Storage task
- assigns keys to new records and stores them in their proper
location in the database
Retrieval
- is the task of locating and extracting an existing record from
the database for processing
Deletion
- is the task of permanently removing obsolete or redundant
records from the database
(6) INFORMATION GENERATION
- Is the process of compiling, arranging, formatting, and
presenting information to users
- Information can be an operational document such as a sales
order, a structured report, or a message on a computer screen
- Characteristics of a useful information:
(a) Relevance;
(b) Timeliness;
(c) Accuracy;
(d) Completeness;
(e) Summarization
(7) FEEDBACK
- Is a form of output that is sent back to the system as a
source of data
- May be internal or external and is used to initiate or alter a
process

INFORMATION SYSTEM OBJECTIVES

Three fundamental objectives are:
 1) To support the stewardship function of management
2) To support management decision making
3) To support the firm’s day-to-day operations

ACQUISITION OF INFORMATION SYSTEMS

Organizations may obtain information systems in two ways:
1) They develop customized systems from scratch through in-house
systems development activities; and
2) They purchase preprogrammed commercial systems from software
vendors
The formal process by which this is accomplished is called the system
development life cycle.

THREE BASIC TYPES OF COMMERCIAL SOFTWARES

1. TURNKEY SYSTEMS
- are completely finished and tested systems that are ready for
implementation. Typically, they are general-purpose systems or
systems customized to a specific industry.
- The better turnkey systems have built-in software options that
allow the user to customize input, output and processing through
menu choices.
2. BACKBONE SYSTEMS
- Consist of a basic system structure on which to build
- The primary processing logic is preprogrammed, and the vendor
then designs the user interfaces to suit the client’s unique needs
 - A backbone system is a compromise between a custom system and
a turnkey system
- This approach can produce satisfactory results, but customizing the
system is costly
3. VENDOR-SUPPORTED SYSTEMS
- are custom (or customized) systems that client organizations
purchase commercially rather than develop in-house
- Under this approach, the software vendor designs, implements and
maintains the system for its client
B. ORGANIZATIONAL STRUCTURE
o The structure of an organization reflects the distribution of
responsibility, authority and accountability
BUSINESS SEGMENTS
- Business organizations consist of functional units or segments

THREE MOST COMMON APPROACHES INCLUDE

SEGMENTATION BY:
1) Geographic location
- They do this to gain access to resources, markets, or lines of
distribution
2) Product line
- Companies that produce highly diversified products often
organize around product lines, creating separate divisions for each
3) Business function
- Functional segmentation divides the organization into areas of
specialized responsibility based on tasks. Examples are marketing,
production, financing and accounting
FUNCTIONAL SEGMENTATION
MATERIALS MANAGEMENT
- The objective is to plan and control the materials inventory

a) Purchasing
– is responsible for ordering inventory from vendors when
inventory levels fall to their reorder points
b) Receiving
– is the task of accepting the inventory previously ordered by
purchasing; includes counting and checking the physical
condition of these items
c) Stores
– takes physical custody received and releases these
resources into the production process as needed

PRODUCTION
- Occurs in the conversion cycle in which raw materials, labor and
plant assets are used to create finished products
Two activities:
1) Primary manufacturing activities
- shape and assemble raw materials into finished products
2) Production support activities
- ensure that primary manufacturing activities operate efficiently
and effectively

PRODUCTION
 A) Production planning
- involves scheduling the flow of materials, labor and machinery to
efficiently meet production needs
B) Quality control
- monitors the manufacturing process at various points to ensure
that the finished products meet the firm’s quality standards
C) Maintenance
- keeps the firm’s machinery and other manufacturing facilities in
running order
MARKETING
- deals with the strategic problems of product promotion,
advertising, and market research; On an operational level,
marketing performs such daily activities as sales order entry

Distribution
- activity of getting the product to the customer after the sale
Personnel
- objective is to effectively manage employees; a well-developed
personnel function includes; recruiting, training, continuing
education, counseling, evaluating, labor relations, and
compensation administration
Finance
- manages the financial resources of the firm through banking and
treasury activities, portfolio management, credit evaluation, cash
disbursements and cash receipts
Accounting Function
 - manages the financial information resource of the firm
Two important roles in transaction processing;
1) Accounting captures and records the financial effects of the firm’s
transactions
2) Distributes transaction information to operations personnel to
coordinate many of their key tasks

INFORMATION TECHNOLOGY FUNCTION

1. CENTRALIZED DATA PROCESSING MODEL
- all data processing is performed by one or more large computers
housed at a central site that serve users throughout the organization
- In this shared data arrangement, a special independent group—
database administration—headed by the database administrator is
responsible for the security and integrity of the database
2. DISTRIBUTED DATA PROCESSING MODEL
- Involves reorganizing the IT function into small information
processing units (IPUs) that are distributed to end users and placed
under their control
- The loss of control is one of the most serious disadvantages of this
model; other potential problems are inefficient use of resources,
destruction of audit trails, inadequate segregation duties, increased
potential in programming errors and systems failures

THE EVOLUTION OF INFORMATION SYSTEM MODELS

MANUAL PROCESS MODEL
- the oldest and most traditional form of accounting systems
 - This includes tasks such as order-taking, warehousing materials,
manufacturing goods for sale, shipping goods to customers, and
placing orders with vendors
- Includes physical task of record-keeping

FLAT-FILE MODEL
- most associated with the so-called “legacy systems”; these are
large mainframe systems that were implemented in the late 1960s
through 1980s
- This 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.
Problems of this model includes; data storage, data updating, currency of
information, task data dependency

DATABASE MODEL
- Access to data resource is controlled by a database management
system (DBMS)
- DBMS is a special software system that is programmed to know
which data elements each user is authorized to access
THE REA MODEL
- REA
- Resources, Events, and Agents
- is an accounting framework for modeling an organization’s
critical Resources, Events, and Agents and the relationships
between them.
RESOURCES
- are the assets of the organization
 - Identified as objects that are both scarce and under the control of
the enterprise. This departs from the traditional model because it
does not include Accounts Receivable (AR)
EVENTS
- are phenomena that affect changes in resources
- They can result from activities such as production, exchange,
consumption and distribution
AGENTS
- are individuals and departments that participate in an economic
event
- parties both inside and outside the organization with discretionary
power to use or dispose economic resources
- Examples: sales clerks, production workers, shipping clerks,
customers, and vendors

ENTERPRISE RESOURCE PLANNING SYSTEMS

- It is an information system model that enables an organization to
automate and integrate its key business processes. ERP breaks
down traditional functional barriers by facilitating data sharing,
information flows, and the introduction of common business
practices among all organizational users.
- Examples: SAP and Oracle
- ERP packages are sold to client in modules that support standard
processes such as: Asset Management, Financial Accounting,
Human Resources, Industry-Specific Solutions, Plant Maintenance,
Production Planning, Quality Management, Sales and Distribution,
Inventory Management

THE ROLE OF THE ACCOUNTANT

Accountants are primarily involved as:
1) System users
- As end users, accountants must provide a clear picture of their
needs to the professionals who design their systems

- Accountants must specify accounting rules and techniques to be

used, internal control requirements, and special algorithms such as
depreciation models
2) Designers
- The accounting function is responsible for the conceptual system
- The accountant determines the nature of the information required,
its sources, its destination, and the accounting rules that need to be
applied
3) Auditors