Chapter 1
Internal and External Information Flows
Operations Management- day-to-day operations
Middle Management- short-term planning and
coordination of activities
Top Management- long-term planning and setting
organizational objectives
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
Information Objectives
• the stewardship function of management
• management decision making
• the firm’s day-to-day operations
Information System- set of formal procedures by
which data are collected, stored, processed into
information and distributed to users
Transaction- inputs, is an event to the organization
and is processed by information system as a unit of
work
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
Information is a business resource that:
-needs to be appropriately managed
-is vital to the survival of contemporary
businesses
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.
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 Subsystems
— Transaction processing system (TPS)
— supports daily business operations
— General Ledger/ Financial Reporting
System (GL/FRS)
— produces financial statements and
reports
 — Nondiscretionary reporting-
communicates the information to
external users
— Management Reporting System (MRS)
— produces special-purpose reports for
internal use
— Discretionary Reporting- Reports
using current cost data rather than
historical
System Decomposition vs 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
AIS vs MIS
Accounting Information Systems (AIS)
process
— financial transactions; e.g., sale of
goods
— and 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
End users
• External users- creditors, stockholders
• Internal users- management
Data- facts which may or may not be processed
(edited, summarized or refined) have no direct
effect on a user’s actions
Information- causes the user to take an action that
he or she otherwise could not or would not have
taken
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.
— Internal financial transactions
involve the exchange or movement
of resources within the organization.
Transforming the Data into Information
Functions for transforming data into information
according to the general AIS model:
1.Data Collection- first operational stage in the
information system
Capturing transaction data, recording data
into forms, validating and editing the data
2. Data Processing- tasks range from simple to
complex
• Classifying, transcribing, sorting, batching
• Merging, calculating, summarizing,
comparing
3. Data Management- physical repository for
financial and nonfinancial data
Sorting, deleting, retrieving
Data Attribute- most elemental piece of
potentially useful data in database
Record- complete set of attributes for a
single occurrence within an entity class
File- records of an identical class
4. Information Generation- Compiling, arranging,
formatting, presenting
Characteristics of useful information
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- form of output that is sent back to the
system as a source of data
Segmenting by business function is a very common
method of organizing.
Functional Areas
Materials Management- plan and control the
materials inventory of the company
• purchasing- responsible for ordering from
vendors when inventory levels fall to their
reorder points
• receiving- task of accepting the inventory
previously ordered by purchasing
• stores- physical custody of the inventory
received
Production- Conversion Cycle in which raw
materials, labor and plant assets are used to create
finished products
• production planning- scheduling the flow of
materials, labor and machinery to efficiently
meet production needs
• quality control- ensure that the finished
products meet the firm’s quality standards
• maintenance- keeps the firm’s machinery in
running order
Marketing- product promotion, advertising and
market research
Distribution- activity of getting the product to the
customer after the sale
Personnel- effectively manage the employees
Finance- manages the financial resources
Accounting- manages the financial information
resource of the firm
Accounting Independence
Accounting activities must be separate and
independent of the functional areas maintaining
resources.
4 IT Functions
1. Data Processing
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
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
2. Systems Development and Maintenance
Systems development- process by which
organization acquire information systems
 Commercial software (turnkey
systems)- available for both general
accounting use and for industry-specific
applications
System development life cycle-
larger organizations which unique
information needs often develop custom
software through a formal process
Systems maintenance function- responsible
for making changes to existing systems to
accommodate changes in user needs
3. Database Administration- centralized
location that is shared by all authorized end
users
4. Network Administration- responsible for
the effective functioning of the software.
Network- collection of
interconnected computers and
communications devices that allows users
to communicate and access data
Outsourcing the IT function
Cloud Computing- location-independent
computing, where shared data centers deliver
hosted IT services over the internet
a. SaaS- software as a service
b. IaaS- infrastructure as a service
c. PaaS- platform as a service
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.
Accounting 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.
Accounting 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.
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
CHAPTER 2: Introduction to Transaction
Processing
Transaction Cycles:
1.Expenditure cycle- the acquisition of materials,
property, and labor in exchange for cash
The major subsystems of the expenditure
cycle:
o Purchases/accounts payable system- needs to
acquire physical inventory and places ad order with
the vendor
o Cash disbursements system- disburses the fund
to the vendor and records the transaction by
reducing the cash and AP accounts
o Payroll system- collects labor usage data for each
employees
o Fixed asset system- processes transactions
pertaining to the acquisition, maintenance and
disposal of its fixed assets
2. Conversion cycle- is composed of two major
subsystems:
o the production system- involves the planning,
scheduling and control of the physical product
through the manufacturing process
o the cost accounting system- flow of cost
information including labor, overhead and raw
materials related to production
3. Revenue cycle- processing cash sales, credit
sales, and the receipt of cash following a credit sale
The primary subsystems of the revenue cycle:
o Sales order processing- sales order, granting
credit, shipping products, billing customers and
recording these transaction in the accounts (a/r,
inv, expenses and sales)
o Cash receipts- collectiong cash, depositing cash in
the bank and recording these events in the
accounts (a/r, cash)
Manual Systems (documents, Journals and
ledgers)
Documents- provides evidence of an economic
event and maybe used to initiate transaction
processing
• Source Documents - used to capture and
formalize transaction data that the
transaction cycle needs for processing
• Product Documents - are the result of
transaction processing rather than the
triggering mechanism for the process
• Turnaround Documents - are product
documents of one system that become source
documents for another system.
Journals- is a record of a chronological entry.
Documents are the primary source of data
for journals
• Special journals - are used to record
specific
classes of transactions that occur in high volume
• Register is often used to denote
certain types of special journals and to denote
a log
• General journals - to record nonrecurring,
infrequent, and dissimilar transactions
Ledger- is a book of accounts that reflects the
financial effects of the firm’s transactions after
they areposted from the various journals
• General ledgers - which contain the firm’s
account information in the form of highly
summarized control accounts
• Subsidiary ledgers - are kept separately in
various accounting departments of the firm. This
separation provides better control and support of
operations.
Audit Trail- The accounting records described
previously provide an audit trail for tracing
transactions from source documents to the
financial statements.
Digital Accounting Records
Master File- master file generally contains account
data. The general ledger and subsidiary ledgers are
examples of master files. Data values in master files
are updated from transactions.
Transaction file- a temporary file of transaction
records used to change or update data in a master
file. Sales orders, inventory receipts, and cash
receipts are examples of transaction files.
Reference File- stores data that are used as
standards for processing transactions. Other
reference files include price lists used for
preparing customer invoices
Archive File- contains records of past transactions
that are retained for future reference. These
transactions form an important part of the
audit trail.
Flat-file Model- serves as an environment where
end users own their data files rather than share
them with other users
— 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
Database Model Document Flowcharts- clearly depicts the
Database Management system (DBMS)-software separation of functions in the system
system that permits users to access authorized
data only

Documentation Techniques
The Data Flow Diagram (DFD)- uses symbols to
represent the entities, processes,
data flows, and data stores that pertain to a System Flowcharts a graphical representation of a
system. system that describes the physical relationships
between its key entities.

Entity Relationship (ER) Diagrams- a

documentation technique used to represent the
relationship between entities. Program Flow Chart- Every program represented in
a system flowchart should have a supporting
program flowchart that describes its logic.

Record Layout Diagrams- used to reveal the
internal structure of the records that constitute a
file or database table.
Transaction Processing Models
Information time frame:
o Batch System: Lag exists between time
when the economic event occurs and when
it is recorded.
o Real time system: Processing takes place
when the economic event occurs.
Resources:
o Batch system: Generally, fewer resources
(hardware, programming, training) are
required.
o Real time system: More resources are
required than for batch processing.
Operational efficiency:
Operational efficiency:
o Batch system: Certain records are
processed after the event to avoid
operational delays.
o Real time system: All records pertaining to
the event are processed immediately.
Data Coding Schemes
Data coding involves creating simple numeric or
alphanumeric codes to represent complex
economic phenomena that facilitate efficient data
processing.
Primary and secondary keys (data coding)
a. A system WITHOUT codes
b. A system WITH codes
Numeric and Alphabetic Coding Schemes
Sequential Codes- Represent items in some
sequential order (ascending or descending)
Advantages:
1. Supports reconciliation of a batch
transactions
2. It alerts the management to the possibility
of missing transactions
Disadvantages:
1. Sequential codes carry no information content
beyond their order in the sequence.
2. Difficult to change.
3. In applications where record types must be
group together logically and where additions and
deletions occur regularly, this coding scheme is
inappropriate.
Block Codes- A variation in sequential codes partly
remedies the disadvantages just described
Advantage:
1. It allows for the insertion of new codes within a
block without having to reorganize the entire
coding structure.
Disadvantage:
1. The information content of the block code is not
readily apparent.
Group Codes- (numeric) group codes are used to
represent complex items or events involving two or
more pieces of related data.
Advantages:
1. They facilitate representation of large amounts
of diverse data.
2.They allow complex data structures to be
represented in a hierarchal form that is logical and
more easily remembered by humans.
3. They permit detailed analysis and reporting both
within an item class and across different classes of
items.
Disadvantages:
1. They tend to be overused
2. Increase storage cost
3. Promote clerical errors
4. Increase processing time and effort
Alphabetic Codes- Used with the same purpose of
the numeric codes. May be assigned sequentially
(alphabetical) or may be used in block and group
coding techniques
Advantage:
1. The capacity to represent large number of items
(alphanumeric codes)
Disadvantages:
1. With numeric codes, there is difficulty in
rationalizing the meaning of codes that have been
sequentially assigned
2. Users tend to have difficulty sorting records that
are coded alphabetically

Mnemonic Codes- Alphabetic in characters in a

form of acronyms and other combinations that
convey meaning
Advantage:
1. Does not require the user to memorize meaning
Disadvantage:
1. They have limited ability to represent items
within a class