Rym Mabrouk

Learning Objectives
Up on the completion of this chapter, you should be able to:

• Understand the primary information flows within the business environment.

• Understand the difference between accounting information systems and management information systems.

• Understand the difference between a financial transaction and a nonfinancial transaction.

• Know the principal features of the general model for information systems.

• Be familiar with the functional areas of a business and their principal activities.

• Understand the uses of AIS in corporate strategy and in the value chain.

• Understand the role of the accountant in AIS.

 The Information Environment

Like other business resources (e.g. raw materials, capital, and labor), information is vital for the survival of a

business organization. In this regard, we have to recognize information as a business resource. Every business day,

vast quantities of information flow to decision makers and other users to meet a variety of internal needs. In

addition, information flows out from the organization to external users, such as customers, suppliers, and

stakeholders who have an interest in the firm.

Data vs Information
Data are facts stored in the system
A fact could be a number, date , name and so, on
For example:
02/22/14
ABC company, 123
99/3/20/60
sales invoice, for example, it is meaningful and considered information

Invoice date 02/22/14

Invoice number 123
Customer ABC company

Item Qty Price

99 3 $20
Total invoice Amount 60
Value of information
The value of information is the benefits produced by the information minus the costs of producing it,
Benefits :
Reduce uncertainty
Improve decision making
Help planning Information is valuable
Costs: Benefits >> Costs
Time
Ressources
What makes information useful?
There are seven general qualities that make the information useful
1. Relevant
2. Reliable
3. Complete
4. Accessible
5. Timely
6. Understandable
7. Verifiable
Figure 1 presents an overview of these internal and
external information flows
 What is system

A system is a set of two or more interrelated components that interact to achieve a goal. Most systems
are composed of smaller subsystems that support the larger system
Goal conflict occurs when a subsystem is inconsistent with the goals of another subsystem or with the
system as a whole. Whereas,
Goal congruence occurs when a subsystem achieves its goals while contributing to the organization's
overall goal

The larger the organization and the more complicated the system, the more difficult it is to achieve
goal congruence.
Elements of a System :
Regardless of their origin, all systems possess some common elements

Multiple Components: A system must contain more than one part.

Relatedness: A common purpose relates the multiple parts of the system

System versus Subsystem: A system is called a subsystem when it is viewed in relation to the larger system of which
it is a part. Likewise, a subsystem is called a system when it is the focus of attention.

i.g: Animals, plants, and other life forms are systems. They are also subsystems of the ecosystem in which they exist.
From a different perspective, animals are systems composed of many smaller subsystems, such as the circulatory
subsystem and the respiratory subsystem.
Elements of a System :
Purpose: A system must serve at least one purpose, but it may serve several

When a system ceases to serve a purpose, it should be replaced.

Decomposition: Decomposition is the process of dividing the system into smaller subsystem parts.

Subsystem Interdependency:

A system’s ability to achieve its goal depends on the effective functioning and harmonious interaction of its
subsystems. If a vital subsystem fails or becomes defective and can no longer meet its specific objective, the overall
system will fail to meet its objective. Designers of all types of systems need to recognize the consequences of
subsystem failure and provide the appropriate level of control.
 An Information Systems Framework

The information system is the set of formal procedures by

which data are collected, processed into information, and
distributed to users.
An Information Systems Framework
Transaction is an event that affects or is of interest to the organization and is processed by
its information system.
A 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. Sales of products to customers, purchases of inventory from
vendors, and cash disbursements and receipts are examples of financial transactions. Every business organization
is legally bound to correctly process these types of transactions.

Nonfinancial transactions are events that do not meet the narrow definition of a financial transaction. For
example, adding a new supplier of raw materials to the list of valid suppliers is an event that may be processed by
the enterprise’s information system as a transaction. Important as this information obviously is, it is not a financial
transaction, and the firm has no legal obligation to process it correctly or at al
Accounting information system (AIS):

AIS subsystems process financial transactions and nonfinancial transactions that directly affect the processing of
financial transactions.

•The source of information can be different (customer, bank, the government,,,,)

•Financial and non-financial data about ressources, events and agents (REA)

For example, changes to customers’ names and addresses are processed by the AIS to keep the customer file
current. Although not technically financial transactions, these changes provide vital information for processing
future sales to the customer.
Accounting information system (AIS):

The AIS is composed of three major subsystems:

(1) the transaction processing system (TPS), which supports daily business operations with numerous reports,
documents, and messages for users throughout the organization;
Three examples of transaction processing systems are as follows:
•ATM (Automated Teller Machines)
•Order processing systems
•Airline seat reservation system
(2) the general ledger/financial reporting system (GL/FRS), which produces the traditional financial statements,
such as the income statement, balance sheet, statement of cash flows, tax returns, and other reports required by
law; and
(3) the management reporting system (MRS), which provides internal management with special-purpose financial
reports and information needed for decision making such as budgets, variance reports, and responsibility reports.
A General Model for AIS
General model for AIS
 1.1.5. Information System Objectives
Each organization must tailor its information system to the needs of its users. Therefore, specific information system
objectives may differ from firm to firm. Three fundamental objectives are, however, common to all systems:
1. To support the stewardship function of management: Stewardship refers to management’s responsibility to
properly manage the resources of the firm. The information system provides information about resource utilization
to external users via traditional financial statements and other mandated reports. Internally, management receives
stewardship information from various responsibility reports.
2. To support management decision making: The information system supplies managers with the information they
need to carry out their decision-making responsibilities.
3. To support the firm’s day-to-day operations: The information system provides information to operations
personnel to assist them in the efficient and effective discharge of their daily tasks.
 1.2. Business process and information
needs
The process that begins with capturing transaction data and ends with informational output, such as the financial
statements, is called transaction processing. Many business activities are pairs of events involved in a give-get exchange.
Most organizations engage in a small number of give-get exchanges, but each type of exchange happens many times. These
exchanges can be grouped into five major business processes or transaction cycles:
The revenue cycle, where goods and services are sold for cash or a future promise to receive cash.
The expenditure cycle, where companies purchase inventory for resale or raw materials to use in producing products in
exchange for cash or a future promise to pay cash.
The production or conversion cycle, where raw materials are transformed into finished goods.
The human resources/payroll cycle, where employees are hired, trained, compensated, evaluated, promoted, and
terminated.
The financing cycle, where companies sell shares in the company to investors and borrow money and where investors are
paid dividends and interest is paid on loans.
These cycles process a few related transactions repeatedly. For example, most revenue cycle transactions are either selling
goods or services to customers or collecting cash for those sales.
 1.3. Uses of AIS
How an AIS Can Add Value to an Organization A well designed AIS can add value to an organization by:

1) Improving the quality and reducing the costs of products or services.

2) Improving efficiency.

3) Sharing knowledge.

4) Improving the efficiency and effectiveness of its supply chain.

5) Improving the internal control structure.

6) Improving decision making.

 1.3. Uses of AIS
An AIS can provide assistance in all phases of decision making.
Reports can help to identify potential problems.
Decision models and analytical tools can be provided to users.
Query languages can gather relevant data to help make the decision.
Various tools, such as graphical interfaces, can help the decision maker interpret decision model results, evaluate
them, and choose among alternative courses of action.
In addition, the AIS can provide feedback on the results of actions.
The AIS and Corporate Strategy Since most organizations have limited resources, it is important to identify the AIS
improvements likely to yield the greatest return. Making a wise decision requires an understanding of the organization's overall
business strategy. To illustrate, consider the results of a CJO magazine survey of five hundred Chief Information Officers. Asked to
identify the three most important skill sets for a CIO, over 75% put strategic thinking and planning on their list. It is also
important to recognize that the design of the AIS can also influence the organization's culture by controlling the flow of
information within the organization. For example, an AIS that makes information easily accessible and widely available is likely to
increase pressures for more decentralization and autonomy. IT developments can affect business strategy. For example, the
Internet has profoundly affected the way many activities are performed, significantly affecting both strategy and strategic
positioning. An organization's AIS plays an important role in helping it adopt and maintain a strategic position. Achieving a close
fit among activities requires that data be collected about each activity. It is also important that the information system collect
and integrate both financial and non-financial data about the organization's activities
The Role of the AIS in the Value Chain To provide value to their customers, most organizations perform a number
of different activities. 1) Inbound logistics, consists of receiving, storing, and distributing the materials an
organization uses to create the services and products it sells. For example, an automobile manufacturer receives,
handles, and stores steel, glass, and rubber. 2) Operations activities transform inputs into final products or
services. For example, assembly line activities convert raw materials into a finished car. 3) Outbound logistics
activities distribute finished products or services to customers. An example is shipping automobiles to car dealers.
4) Marketing and sales activities help customers buy the organization's products or services. Advertising is an
example of a marketing and sales activity. 5) Service activities provide post-sale support to customers. Examples
include repair and maintenance services. Support activities allow the five primary activities to be performed
efficiently and effectively. They are grouped into four categories: 1) Firm infrastructure: is the accounting, finance,
legal, and general administration activities that allow an organization to function. The AIS is part of the firm
infrastructure. 2) Human resources: activities include recruiting, hiring, training, and compensating employees. 3)
Technology: activities improve a product or service. Examples include research and development, investments in
IT, and product design. 4) Purchasing activities procure raw materials, supplies, machinery, and the buildings used
to carry out the primary activities. An organization's value chain is a part of a larger system called a supply chain.
Organizations interacts with its suppliers and distributors. By paying attention to its supply chain, a company can
improve its performance by helping the others in the supply chain to improve their performance
1.4. The Role of the Accountant Since accounting data comes from an AIS, AIS knowledge and skills are critical to an accountant's career success. Interacting with an AIS is one of the most
important activities that accountants perform. Other important AIS-related activities include designing internal control systems and business process improvements. Accountants are primarily
involved in three ways: as system users, designers, and auditors. Accountants as Users In most organizations, the accounting function is the single largest user of IT. All systems that process
financial transactions impact the accounting function in some way. As end users, accountants must provide a clear picture of their needs to the professionals who design their systems. For
example, the accountant must specify accounting rules and techniques to be used, internal control requirements, and special algorithms such as depreciation models. The accountant’s
participation in systems development should be active rather than passive. The principal cause of design errors that result in system failure is the absence of user involvement. Accountants as
System Designers An appreciation of the accountant’s responsibility for system design requires a historic perspective that predates the computer as a business information tool. Traditionally,
accountants have been responsible for key aspects of the information system, including assessing the information needs of users, defining the content and format of output reports, specifying
sources of data, selecting the appropriate accounting rules, and determining the controls necessary to preserve the integrity and efficiency of the information system. These traditional systems
were physical, observable, and unambiguous. The procedures for processing information were manual, and the medium for transmitting and storing data was paper. With the arrival of the
computer, computer programs replaced manual procedures, and paper records were stored digitally. The role accountants would play in this new era became the subject of much controversy.
Lacking computer skills, accountants were generally uncertain about their status and unwilling to explore this emerging technology. Many accountants relinquished their traditional
responsibilities to the new generation of computer professionals who were emerging in their organizations. Computer programmers, often with no accounting or business training, assumed full
responsibility for the design of accounting information systems. As a result, many systems violated accounting principles and lacked necessary controls. Large system failures and computer
frauds marked this period in accounting history. By the mid-1970s, in response to these problems, the accounting profession began to reassess the accountant’s professional and legal
responsibilities for computer-based systems. Today, we recognize that the responsibility for systems design is divided between accountants and IT professionals as follows: the accounting
function is responsible for the conceptual system, and the IT function is responsible for the physical system. To illustrate the distinction between conceptual and physical systems, consider the
following example: The credit department of a retail business requires information about delinquent accounts from the AR department. This information supports decisions made by the credit
manager regarding the creditworthiness of customers. The design of the conceptual system involves specifying the criteria for identifying delinquent customers and the information that needs
to be reported. The accountant determines the nature of the information required, its sources, its destination, and the accounting rules that need to be applied. The physical system is the
medium and method for capturing and presenting the information. The computer professionals determine the most economical and effective technology for accomplishing the task. Hence,
systems design should be a collaborative effort. Because of the uniqueness of each system and the susceptibility of systems to serious error and even fraud, the accountant’s involvement in
systems design should be pervasive. Accountants as System Auditors Auditing is a form of independent attestation performed by an expert the auditor who expresses an opinion about the
fairness of a company’s financial statements. Public confidence in the reliability of internally produced financial statements rests directly on their being validated by an independent expert
auditor. This service is often referred to as the attest function. Both internal and external auditors conduct audits. External auditing is often called independent auditing because certified public
accounting (CPA) firms that are independent of the client organization’s management perform them. External auditors represent the interests of third-party stakeholders in the organization,
such as stockholders, creditors, and government agencies