Chapter 1: The Study of Accounting Information Systems

1

• Chapter 1 The Study of Accounting Information
  Systems

Slides Authored by Somnath Bhattacharya,
Ph.D. Florida Atlantic University
2
What Is Accounting?

• It is the principal way of organizing and
  reporting financial information. It has been
  called the language of business.
• Accounting and information systems comprise the
  functional area of business responsible for
  providing information to the other areas to
  enable them to do their jobs and for reporting
  the results to interested parties.
• To that end, an accounting system is used to
  identify, analyze, measure, record, summarize,
  and communicate relevant economic information to
  interested parties.

3
What Is An AIS?

• A system is a set of two or more interrelated
  components that interact to achieve a goal.
• Systems are almost always composed of smaller
  subsystems, each performing a specific function
  supportive of the larger system.
• An accounting information system (AIS) consists
  of
• People
• Procedures
• Data
• Software
• Information technology infrastructure

4
What Is An AIS?

• What important functions does the AIS perform in
  an organization?
• It collects and stores data about activities and
  transactions.
• It processes data into information that is useful
  for making decisions.
• It provides adequate controls to safeguard the
  organizations assets.

5
Why Study AIS?

• To understand how the accounting system works.
• How to collect data about an organizations
  activities and transactions
• How to transform that data into information that
  management can use to run the organization
• How to ensure the availability, reliability, and
  accuracy of that information

6
Why Study AIS?

• Auditors need to understand the systems that are
  used to produce a companys financial statements.
• Tax professionals need to understand enough about
  the clients AIS to be confident that the
  information used for tax planning and compliance
  work is complete and accurate.

7
What Is a System?

• A System is an entity consisting of interacting
  parts that are coordinated to achieve one or more
  common objectives. Systems must possess
• Organization
• Transactions-Journals-Ledgers-Financial
  Statements
• Interrelationships
• The relationship between Subsidiary ledgers and
  the General Ledger
• Integration
• Individual transactions to Financial Statements
• Central Objectives
• Financial Reports, Budgets, Management Reports

8
Data Versus Information

• Data are raw facts and figures that are processed
  to produce information
• Information is data that have been processed and
  are meaningful and useful to users. The terms
  meaningful and useful are value-laden terms
  and usually subsume other qualities such as
  timeliness, relevance, reliability, consistency,
  comparability, etc.

9
Functional Steps in Transforming Data into
Information

• Data collection - capturing, recording,
  validating and editing data for completeness and
  accuracy
• Data Maintenance/Processing - classifying,
  sorting, calculating data
• Data Management - storing, maintaining and
  retrieving data
• Data Control - safeguarding and securing data and
  ensuring the accuracy and completeness of the
  same
• Information Generation - interpreting, reporting,
  and communicating information

10
What Is an Information System?

• An Information system is a framework in which
  data is collected, processed, controlled and
  managed through stages in order to provide
  information to users
• It evolves over time and becomes more formalized
  as a firm grows and becomes more complex. It can
  be a manual or computerized system
• Firms depend on information systems in order to
  survive and stay competitive

11
The Universal Data Processing Model
Storage
Processing
Consumers

Exchange Events Internal Events Environmental
Events
12
Accounting Information System

• An Accounting Information System is a unified
  structure that employs physical resources and
  components to transform economic data into
  accounting information for external and internal
  users.

13
Objectives and Users of AIS

• Support day-to-day operations
• Transaction processing
• Support Internal Decision-Making
• Trend Analyses
• Quantitative Qualitative Data
• Non-transactional sources
• Help fulfill Stewardship Role

14
Resources Required for an AIS

• Processor(s) Manual or Computerized
• Data Base(s) Data Repositories
• Procedures Manual or Computerized
• Input/Output Devices
• Miscellaneous Resources

15
AIS as an MIS Subsystem
Sales/ Marketing
Production Info
AIS
Personnel
Finance
16
Relationship of AIS MIS
MIS
Sales/Marketing
Production
AIS
Personnel
Finance
17
Reasons for Studying Accounting Information
Systems

• Career accountants will be users, auditors, and
  developers of AIS
• Modern-day AIS are complex because of new
  technologies
• Concepts studied in AIS are integrated into every
  other accounting course

18
Information-Oriented Professionals

• An array of professionally trained persons from
  different fields of study have focused on
  providing information to users
• These professionals include system and managerial
  accountants and auditors, system analysts and
  industrial engineers
• Professional certifications are increasing.
  These include Certified Computing Professional,
  Certified Information Systems Auditor, Certified
  Managerial Accountant, Certified Fraud Examiner,
  etc.

19

• The Business Environment and the AIS

20
The Business Firm as a System
Organizations functions
AIS Transaction Cycles
Business Events from Operations
Figure 2-1
21
System Characteristics of Business Firms

• Objectives
• Environment
• Constraints
• Input-Process-Output
• Feedback
• Controls
• Subsystems

22
Examples of AIS Subsystems(Merchandising)
No Planning/Control, Investment, or Production
Cycles reflected here
23
Examples of AIS Subsystems Service Firm Revenue
No Purchasing, Production, Planning/Control,
Investment Cycles reflected here
24
Examples of AIS Subsystems Production Cycle
No Revenue, and Investment Cycles reflected here
25
Organizational Structure in Business Firms

• Hierarchical
• Matrix Blend functional and project-oriented
  structures
• Decentralized
• Network

26
A Networked Organizational Structure
Consultant Training
Marketing Consulting Services
Consultant Recruitment
Operation Management
Customer Project Team
Customer Services Management
Figure 2-5
27
The Operational System of a Manufacturing Firm
Figure 2-7
28
Useful Data Elements Concerning a Business Event

• The nature of the element and when it occurred
• Which agents were involved
• What kinds of resources were involved and in what
  quantities
• Where the event took place

29
Data ManagementSome Specifics
30
Some More Specifics

• The manual activity of journalizing transactions
  is equivalent to the computerized recording of
  transactions in a transaction file
• In general, manual accounting journals are
  equivalent to computerized transaction files
• Similarly, manual general ledger and subsidiary
  ledgers are equivalent to computerized Master
  files. e.g., There is typically 1 record in the
  general ledger for each account in an entitys
  chart of accounts
• Examples of Master files include
• Accounts Receivable Master File
• Accounts Payable Master File
• Inventory Master File

31

• AIS Enhancements Through Information Technology
  and Networks

32
Importance of IT and Computer Networks to
Accountants

• To use, evaluate, and develop a modern AIS,
  accountants must be familiar with IT
• Computers enable accountants to perform their
  duties more quickly, accurately, and consistently
  than by manual methods
• Software such as electronic spreadsheets aid
  accountants in analyzing financial statements and
  in developing budgets

33
IT Components of Interest to Accountants

• Devices for data entry
• Data Processing
• Data Communication
• Information Generation
• Data Bases
• Data Modeling concepts
• Evaluation of internal controls in AIS
• Variety of software packages
• Computer Networks

34
Networks Accountants

• Because they transmit data and information,
  networks are an integral part of AIS
• Networks are vulnerable to high level risk thus
  requiring special controls and security measures.
• Need to prevent loss of accounting records
  information
• Need to ensure accuracy of data
• Networks may be used to consolidate data into
  financial information

35
Gains from IT for Accountants

• Faster processing of transactions and other data
• Greater accuracy in computations of and
  comparisons with data
• Lower cost of processing each transaction
• More timely preparation of reports and other
  outputs
• More concise storage of data, with greater
  accessibility when needed
• Wider range of choices for entering data and
  providing outputs
• Higher productivity for employees and managers,
  who learn to use computers effectively in their
  routine and decision-making responsibilities

36
Task Matching to Computers

• Manual
• Exceptional/infrequent transactions
• Setting objectives and policy-making judgments
• New problems
• Supervising employees
• Social communications
• Making complex strategic decisions

• Computerized
• Collecting and processing large volumes of
  routine transactions
• Storing large quantities of data and information
• Monitoring and controlling continuous processes
• Answering specific inquiries based on stored data
• Preparing complex analyses and extensive reports
• Helping gather data and understanding the
  relationships between all types of decisions

Figure 3-1
37
Limitations of Infoages Legacy AIS

• Large portion of personnel time and effort spent
  on systems maintenance
• Little time effort for value-added services
• Little flexibility to changing business
  conditions
• Financial and Operational data not integrated
• Difficult to generate data with both financial
  and non-financial components
• The transaction processing systems focus on chart
  of accounts classification
• Ignore the multidimensional aspects of
  transactions
• Files related to applications are not integrated
• Inefficiencies of the manual system remodeled in
  automated form
• Business processes and accounting procedures not
  analyzed and improved upon prior to conversion to
  automated form
• System not geared to generate timely
  decision-support information
• Computer programmers required to write new
  programs for ad hoc queries

38
Types of Network Architectures

• Wide-Area Networks
• Formed among computers and inter-connected
  devices that are geographically distant from one
  another
• Local-Area Networks
• A type of distributed network created when two or
  more linked computers are grouped within a
  limited geographical area

39
Centralized WANs - I

• Concentrates all application processing at one
  geographical location
• Consists essentially of one (or a cluster of)
  central mainframe computer(s) and one or more
  physically remote terminals
• Typically all hardware, software, and data
  processing personnel are located at corporate
  headquarters
• Advantages include
• the concentrated computing power of a large
  processor
• low operating costs per transaction leading to
  economies of scale
• can facilitate the use of a database approach
• facilitate better security provisions
• allow for greater standardization and
  professional planning and control of
  information-related activities

40
Centralized WANs - II

• Best suited for
• Firms with centralized organizational structures
• Firms with homogeneous operations
• Firms with low processing activity at remote
  sites
• Examples include
• Savings and loan institutions
• Banks with many ATMs and branches
• Merchandizing chains
• Motels
• Airlines
• Drawbacks include
• Inflexibility
• Expensive and complicated software needed
• Vulnerable to disasters as a result of complete
  dependence on central computer
• Not user-friendly

41
Distributed WANs - I

• This links fully functional computers in
  different geographical locations.
• Each remote site processes its own applications.
  However, users may not have easy access to
  centralized data or be able to transmit data and
  information rapidly.
• Computers may be interconnected by data
  communications hardware and software to other
  remote sites and to a central computer facility
  to form an enterprise-wide network.

42
Distributed WANs - II

• Distributed databases are useful when
• Large volumes of data need to be processed at
  remote locations
• Managers and employees need very fast access to
  data on a frequent basis
• Databases may be distributed by replication or
  partition.
• Replication Copies of files from the main data
  base are stored at remote locations
• Partition Segments of files are allocated to
  various locations within the network
• This avoids data redundancy, but increases the
  complexity of transmitting data throughout the
  network
• Likely to become the dominant approach as
  technology improves
• At present most data bases are a hybrid of the
  two approaches

43
Benefits of Distributed WANs

• Can be responsive to diverse needs of users
• Enable network facilities to be used efficiently
  since processing jobs can be routed to unused
  computer systems in the network
• Are robust against individual computer failures
• Flexible and adaptable to change
• Best suited for firms with
• Decentralized organizational structures
• Diverse operations or user groups
• Clustered functions at various locations
• Multiple products
• Manufacturing operations
• A variety of services

44
Drawbacks of Distributed WANs

• Difficulty in maintaining adequate control and
  security
• Each distributed processing location needs its
  own set of controls and security measures
• Given the smallness of each location,
  organizational independence is not easily
  achieved
• Managers may sacrifice control and security for
  greater productivity
• Difficulty and cost of coordinating the
  relatively independent and sometimes incompatible
  computer systems
• Added costs for multiple computers, other system
  components, and communication services

45
LANs

• A LAN may be connected to other LANs and/or WANs
  via hardware devices known as gateways or bridges
• At the heart of a LAN is the workstation
• Microcomputer-based workstation
• Traditional workstation
• Super workstation

46
Peer-to-Peer LANs

• In smaller LANs, every workstation functions as
  both a client and a server
• This allows all users to share data and files on
  all workstations
• Called peer-to-peer network since no workstations
  are dedicated to perform only server functions
• Compared to a server network, peer-to-peer
  networks are less costly, easier to install, and
  compare well against server networks of similar
  size
• Number expected to significantly increase in the
  near future

47
Server Networks

• May interconnect hundreds of workstations
• More difficult to manage and interpret than
  peer-to-peer networks
• Provide greater security than peer-to-peer
  networks
• At least one workstation is dedicated to
  performing specific server tasks
• Examples include
• Servers
• Database servers
• Print servers
• Communications servers
• Transaction processing servers
• Large server networks often contain multiple
  servers

48
The Network Operating System

• In peer-to-peer networks, the Network Operating
  Software (NOS) is installed in each user
  workstation
• In a server network, most of the NOS is installed
  in the file server and a portion also resides in
  each workstation
• To run centralized LAN applications, the NOS
  installed in the file server interacts with the
  NOS and the local operating system installed in
  the workstation. The client workstation NOS
  initiates a request to the file server NOS to
  load files and programs into the client
  workstations RAM
• In a peer-to-peer network, a client NOS initiates
  a request to another client NOS, which also
  functions as a server, to load the requested
  files and/or programs into RAM

49
More Networks

• Examples of pre-developed network configurations
  resident in Network Interface Cards include
  Ethernet, Token Ring, and ARC-net
• The International Standards Organization has
  issued the Open Systems Interconnection (OSI)
  model
• Open Systems Architecture
• Seamless exchange of data, files, and software
  between LANs and WANs built with multiple
  vendors hardware, software, and networking
  components

50
Client/Server Networks

• This model splits data processing between a user
  workstation (client) and one or more servers
• Majority of servers are dedicated database
  servers, thereby enabling client to share data
  and files, conduct database searches, and update
  the database
• One of the fastest growing segments of IT

51
Cooperative Client/Server Computing

• Most commonly implemented mode of client/server
  architecture
• Facilitates the optimal sharing of computer
  resources since the client(s) and server(s)
  jointly process the data
• Clients typically employ Graphical User
  Interfaces (GUIs)
• Data-processing locale is transparent to the user

52
Network Topologies

• The STAR and RING topologies apply to both
  distributed WANs and LANs
• The BUS topology applies only to LANs
• All three found in client/server networks
• All three may be combined to form hybrid
  configurations

53
The STAR Configuration
Figure 3-3a
54
The RING Configuration
Figure 3-3b
55
The BUS Configuration
Figure 3-3c
56
Enterprise-wide Processing and Data Systems

• Enterprise-wide on-line transaction processing
  systems collect and process mission-critical
  accounting and operational applications
• Enterprise Resource Planning Systems (ERP) such
  as SAP R/3 overcome the limitations of legacy
  applications
• Firms typically develop two types of On-line
  Analytical Processing (OLAP) systems that
  supplement ERP or legacy systems
• A firm can model the relevant aspects of business
  events contained within the business processes
  allowing for the use of relational
  database-related query language commands
• Firms can create a data mart or data warehouse to
  generate predefined reports for executives and
  other managers

57
Data Marts and Data Warehouses

• Both Data Marts and Data Warehouses organize and
  store copies of informational or decision
  support data
• A Data Mart stores copies of decision support
  data in a data base for a portion of a company
• A Data Warehouse stores copies of decision
  support data in an integrated data base for an
  entire enterprise
• As opposed to applications-oriented data in
  legacy systems, data in a data mart or warehouse
  are stored by subject areas (e.g., customers)
• Data may be stored in both summarized or raw
  form
• Both have drill down and data mining features

58
Specialized Inter-organizational Systems/Networks

• Internet Commerce and Electronic Commerce
• Point-of-Sale Systems/Networks
• Electronic Funds Transfer (EFT) Systems
• Electronic Data Interchange (EDI) Systems
• Value Added Networks (VANs)
• The Internet (TCP/IP)
• The World Wide Web (WWW)
• Hypertext information retrieval system
• Intranets
• Extranets