Accounting Information Systems: An

Overview

Presentation Outline

I.I. The Users of Accounting InformationThe Users of Accounting Information

II.II. Information SystemsInformation Systems

III.III. Transaction Processing CyclesTransaction Processing Cycles

IV.IV. The Internal Control ProcessThe Internal Control Process

V.V. Organization Interaction with Organization Interaction with Information SystemsInformation Systems

VI.VI. The Development of SystemsThe Development of Systems

I. The Users of Accounting Information

A.A. External Users of Accounting InformationExternal Users of Accounting Information

B.B. Internal Users of Accounting InformationInternal Users of Accounting Information

C.C. Mandatory vs. Discretionary InformationMandatory vs. Discretionary Information

A. External Users of Accounting Information

Investors

Creditors

Stockholders

Customers and Vendors

Government Agencies

B. Internal Users of Accounting Information

Lower Level Lower Level ManagersManagers

Middle Middle ManagersManagers

Top-Level Top-Level ManagersManagers

Characteristic Characteristic of Informationof Information

Operational Operational ControlControl

Management Management ControlControl

Strategic Strategic PlanningPlanning

SourceSource Largely Largely internalinternal

ExternalExternal

Level of Level of AggregationAggregation

DetailedDetailed

AggregateAggregate

Time HorizonTime Horizon HistoricalHistorical FutureFuture

Required Required AccuracyAccuracy

HighHigh

LowLow

C. Mandatory vs. Discretionary Information

Mandatory InformationMandatory Information

Certain types of Certain types of information must be information must be generated regardless generated regardless

of the cost:of the cost: Government reportsGovernment reports

PayrollPayroll Basic bookkeeping Basic bookkeeping

Evaluation CriteriaEvaluation Criteria For mandatory For mandatory

information, the primary information, the primary concern is minimization concern is minimization

of cost.of cost. In contrast, In contrast,

discretionary information discretionary information should provide greater should provide greater

benefits than the cost of benefits than the cost of generating it. generating it.

II. Information Systems

A. Electronic Data Processing (EDP) or Data Processing (DP)B. Management Information Systems (MIS)

C. Decision Support Systems (DSS)D. Expert Systems (ES)

E. Executive Information Systems (EIS)F. Accounting Information Systems (AIS)

The term information system suggests the use of computer technology in an organization

Hardware

Software

Information System

Data

Information for Decision Making

A. Electronic Data Processing (EDP) or Data Processing (DP)

Use of computer Use of computer technology to perform technology to perform

an organization’s an organization’s transaction-oriented transaction-oriented data processing. DP data processing. DP

systems serve routine, systems serve routine, recurring, general recurring, general information needs.information needs.

B. Management Information Systems (MIS)

Use of computer technology to provide managers with

decision-oriented information beyond what a normal DP

system provides. Subsystems include:

Marketing information system Manufacturing information

system Human resource information

system Financial information system

Functional MIS subsystems provide a logical rather than physical way of implementing the MIS concept in organizations.

C. Decision Support Systems (DSS)

Processes data into a decision Processes data into a decision making format for end making format for end users. Decision support users. Decision support

systems (DSS’s) process systems (DSS’s) process nonroutine information nonroutine information requests on an ad hoc requests on an ad hoc

basis. Requires the use of basis. Requires the use of decision models and decision models and specialized databases specialized databases

beyond what is in a DP beyond what is in a DP system.system.

D. Expert Systems (ES)Emulates an experts decision

making process to provide a decision. Different from DSS

which only provides information for making a

decision. Two components of the ES are as follows:

Knowledge base – special knowledge that an expert

possesses in the decision area. Inference engine – process by

which expert makes the decision.

I know the

answer.

E. Executive Information System (EIS)

Executive information systems tailor

information to the strategic needs of top-

level management. Much of the information

used by top-level management comes from

sources outside the organizations

information system. (i.e., meetings, memos,

television, periodicals, and social activities).

Which direction?

F. Accounting Information Systems (AIS)

A computer-based A computer-based system designed to system designed to

transform accounting transform accounting data into information.data into information. Can also include Can also include

transactions transactions processing cycles, the processing cycles, the

use of information use of information technology, and the technology, and the

development of development of information systems.information systems.

III. Transaction Processing Cycles

A.A. Revenue CycleRevenue Cycle

B.B. Expenditure CycleExpenditure Cycle

C.C. Production CycleProduction Cycle

D.D. Finance CycleFinance Cycle

E.E. Financial Reporting CycleFinancial Reporting Cycle

The transaction processing cycles provide a means of viewing the activities of a

business.

A. Revenue Cycle

Events related to the Events related to the distribution of goods distribution of goods and services to other and services to other

entities and the entities and the collection of related collection of related

paymentspayments

B. Expenditure Cycle

Events related to the Events related to the acquisition of goods acquisition of goods

and services from and services from other entities and the other entities and the settlement of related settlement of related

obligations.obligations.

C. Production Cycle

Events related to the Events related to the transformation of transformation of

resources into goods resources into goods and services.and services.

D. Finance Cycle

Events related to the Events related to the acquisition and acquisition and

management of capital management of capital funds, including cash. funds, including cash.

The treasurer is The treasurer is responsible for the responsible for the

finances of the finances of the business.business.

E. Financial Reporting Cycle

Not an operating cycleNot an operating cycle This cycle obtains This cycle obtains

accounting and operating accounting and operating data from other cycles and data from other cycles and processes this data so that processes this data so that financial reports can be financial reports can be

prepared.prepared. A controller is in charge A controller is in charge

of the accounting of the accounting function.function.

IV. The Internal Control Process

A.A. Definition of Internal ControlDefinition of Internal ControlB.B. The Five Elements of the Internal Control The Five Elements of the Internal Control

ProcessProcessC.C. Segregation of Accounting FunctionsSegregation of Accounting Functions

D.D. The Internal Audit FunctionThe Internal Audit Function

Since management is far removed from the scene of operations in a large organization, personal

supervision of employees is often replaced with various control techniques.

A. Definition of Internal ControlInternal control is a process Internal control is a process designed to provide reasonable designed to provide reasonable

assurance regarding the assurance regarding the achievement of objectives achievement of objectives

relating to:relating to: Reliability of financial Reliability of financial

reportingreporting Effectiveness and efficiency of Effectiveness and efficiency of

operationsoperations Compliance with applicable Compliance with applicable

laws and regulationslaws and regulations

The concept of internal control structure is based on two major premises: management’s responsibility and reasonable assurance.

B. Five Elements of the Internal Control Process

Control environment – Overall values and integrity of Control environment – Overall values and integrity of organization.organization.

Risk assessment – Identification and evaluation of risks Risk assessment – Identification and evaluation of risks (Potential loss x Probability = Exposure).(Potential loss x Probability = Exposure).

Control activities – Activities undertaken to reduce Control activities – Activities undertaken to reduce probability of loss due to significant risks.probability of loss due to significant risks.

Information and communication – Communicating Information and communication – Communicating information about the control environment and control information about the control environment and control

activities.activities. Monitoring – Keeping watch over and changing Monitoring – Keeping watch over and changing internal controls so that they function effectively and internal controls so that they function effectively and

efficiently.efficiently.

C. Segregation of Accounting Functions

Segregate the following Segregate the following duties:duties:

AuthorizationAuthorization

Record keepingRecord keeping

Custody of assetsCustody of assets

I kept the records and

the cash.

D. Internal Audit Function

Internal auditing is an Internal auditing is an independent appraisal independent appraisal function charged with function charged with

monitoring and monitoring and assessing compliance assessing compliance with organizational with organizational

policies and policies and procedures.procedures.

V. Organization Interaction With Information Systems

A.A. The Steering CommitteeThe Steering Committee

B.B. End-User ComputingEnd-User Computing

C.C. Quick-Response TechnologyQuick-Response Technology

A. The Steering CommitteeA committee advising the A committee advising the

Chief Information Chief Information Officer that is Officer that is

composed of high-level composed of high-level members of user members of user functions such as functions such as

manufacturing and manufacturing and marketing. The marketing. The

committee provides a committee provides a means by which means by which

managers from other managers from other areas can influence the areas can influence the information services information services

process.process.

B. End-User Computing (EUC)Functional end users do Functional end users do

their own information their own information processing activities processing activities

through an EUC through an EUC application such as a application such as a database that uses a database that uses a

query language feature query language feature to generate specific to generate specific

information needed by information needed by the end user to make the end user to make decisions. (See Fig. decisions. (See Fig.

1.7 on p. 13)1.7 on p. 13)

Inadequate system Inadequate system development – May solve development – May solve wrong problem or have wrong problem or have poor documentation.poor documentation.

Ineffective use of resources Ineffective use of resources – Underutilized equipment – Underutilized equipment or inefficient design.or inefficient design.

Data integrity and security Data integrity and security problems – Inadvertent problems – Inadvertent alteration of data or alteration of data or failure to implement failure to implement security controls.security controls.

Potential EUC Problems

See contrast to traditional approach in Figure 1.8 on page 14.

C. Quick-Response Technology

1.1. Just-In-TimeJust-In-Time

2.2. Web CommerceWeb Commerce

3.3. Electronic Data InterchangeElectronic Data Interchange

4.4. Extensible Business Reporting LanguageExtensible Business Reporting Language

5.5. Computer Integrated ManufacturingComputer Integrated Manufacturing

6.6. Electronic Payment SystemsElectronic Payment Systems

1. Just-in-Time

Purchase orders for Purchase orders for inventory items are inventory items are

made on a “demand-made on a “demand-pull” basis rather than pull” basis rather than a fixed interval “push” a fixed interval “push” basis to restock store basis to restock store

inventory levels. inventory levels. Adds flexibility to Adds flexibility to

meet customer needs meet customer needs and reduces product and reduces product

rework.rework.

2. Web Commerce

Provides worldwide Provides worldwide availability of availability of

products on a single products on a single computer.computer.

Specially trained Specially trained CPAs offer the Web CPAs offer the Web

Trust seal to sites that Trust seal to sites that meet certain security meet certain security and privacy criteria.and privacy criteria.

3. Electronic Data Interchange

Electronic data interchange (EDI) is the direct Electronic data interchange (EDI) is the direct computer-to-computer exchange of business computer-to-computer exchange of business

documents via a communications network. EDI documents via a communications network. EDI differs from e-mail in that EDI messages are created differs from e-mail in that EDI messages are created

and interpreted by computers without human and interpreted by computers without human intervention. Also makes use of universal product intervention. Also makes use of universal product

code (UPC) bar code. (See Fig. 1.10 on p. 15)code (UPC) bar code. (See Fig. 1.10 on p. 15)

4. Extensible Business Reporting Language

Extensible Business Reporting Language (XBRL) is Extensible Business Reporting Language (XBRL) is a language that facilitates the exchange over the a language that facilitates the exchange over the Internet of all kinds of business documents and Internet of all kinds of business documents and

financial statements. The SEC permits companies financial statements. The SEC permits companies to file their financial reports electronically using to file their financial reports electronically using

XBRL format.XBRL format.

5. Computer-Integrated Manufacturing (CIM)

Components of CIM Components of CIM typically include typically include

computer-aided design computer-aided design (CAD) workstations, real-(CAD) workstations, real-

time production time production monitoring and control monitoring and control

systems, and order systems, and order inventory and control inventory and control

systems.systems. Makes use of scanner Makes use of scanner technology and machine-technology and machine-

readable bar codes.readable bar codes.

6. Electronic Payment Systems

Electronic funds transfer Electronic funds transfer (EFT) systems are (EFT) systems are electronic payment electronic payment systems in which systems in which processing and processing and

communication are communication are primarily or totally primarily or totally

electronic.electronic.

VI. The Development of Systems

A.A. BlueprintingBlueprinting

B.B. Systems DevelopmentSystems Development

C.C. Behavioral ConsiderationsBehavioral Considerations

A. Blueprinting

The company uses The company uses generic or industry generic or industry

standard stock standard stock blueprints rather than blueprints rather than

designing its own designing its own system.system.

B. Systems Development

1.1. Statement of system Statement of system objective(s)objective(s)

2.2. Creation of Creation of alternativesalternatives

3.3. Systems analysisSystems analysis4.4. Systems designSystems design5.5. Systems Systems

implementationimplementation6.6. Systems evaluationSystems evaluation

The Result of Poor Systems

Development

A systems development project ordinarily consists of three phases: systems analysis, systems design, systems

implementation. The procedure attempts of improve information quality, internal control, and minimize cost.

The systems approach consists of six steps:

C. Behavioral Considerations

The users of systems The users of systems should be included should be included throughout the steps of throughout the steps of systems development.systems development.

Users provide valuable Users provide valuable input into what is input into what is needed and must needed and must accept the system that accept the system that is developed.is developed.

Summary

I.I. Five Types of Information SystemsFive Types of Information Systems

II.II. Five Transaction Processing CyclesFive Transaction Processing Cycles

III.III. The Internal Control ProcessThe Internal Control Process

IV.IV. Steering Committee and EUCSteering Committee and EUC

V.V. Quick-Response TechnologyQuick-Response Technology

VI.VI. The Steps of Systems DevelopmentThe Steps of Systems Development