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Accounting Information Systems:
Basic Concepts and Current Issues
2nd edition
Robert L. Hurt
McGraw-Hill/Irwin
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 1
Role and Purpose of Accounting
Information Systems
Outline
• Objectives
• Definition of accounting information
systems
• FASB Conceptual Framework
• Typical AIS structure
• Information competence
• Textbook structure
1-3
Objectives
When you finish this chapter, you should be able to:
– Define “accounting information systems”
– Discuss why AIS is an important area of study for future
accountants
– Compare and contrast AIS with other areas of study in
accounting
– Explain the structure of most accounting information systems
– Locate and evaluate information sources on accounting
information systems
– Describe the structure and content of the remainder of this text
1-4
Definition of AIS
• Interrelated activities, documents and
technologies
• Collect data and process it
• Report information
• Diverse group of internal and external
decision makers
1-5
FASB Conceptual Framework
• Developed in 1977
• Well-designed AIS can respond to many
elements
• Components
– Objectives of financial reporting
– Elements of financial statements and
qualitative characteristics
– Assumptions, principles and constraints
1-6
FASB Conceptual Framework
FASB Conceptual Framework
• Objectives of financial
reporting
– Framework lists
multiple objectives
– For AIS study, the
most important may be
the most basic: to
provide information for
decision making
• Elements of financial
statements
– Balance sheet:
assets, liabilities,
equity
– Income statement:
revenues, expenses,
gains, losses
– Other: comprehensive
income
1-8
FASB Conceptual Framework
• Qualitative characteristics
– Primary
• Relevance: information makes a difference in
decisions
• Reliability: information can be relied upon for
decisions
– Secondary
• Comparability: between organizations
• Consistency: across time
1-9
FASB Conceptual Framework
• Assumptions
– Economic entity: a business is separate from
its owners
– Going concern: a business will survive long
enough to meet its current obligations
– Periodicity: the life of a business is divided
into time periods for financial reporting
– Monetary unit: the value of a dollar is stable
1-10
FASB Conceptual Framework
• Principles
– Historical cost: in
general, items in the
AIS are recorded at
their historical cost
– Realization: revenue
can be recorded in the
AIS when the earnings
process is essentially
complete
– Matching: expenses
should appear on the
income statement with
the revenue they
helped generate
– Full disclosure: give
decision makers all the
information they need
1-11
FASB Conceptual Framework
• Constraints
– Cost effectiveness:
the benefit of having
information must
exceed the cost of
obtaining it
– Materiality: dollar
amounts must be large
enough to make a
difference in decisions
– Conservatism: when
choosing between
accounting practices,
make the choice that
presents the “worst
case” scenario
– Industry practices:
follow the conventions
of the industry in
financial reporting
1-12
Typical AIS structure
• Inputs
Such as source documents
• Processes
Journals, ledgers, information
technology
• Outputs
General purpose financial
statements and other
reports
• Storage
Paper-based or electronic
• Internal controls
Designed to
– Safeguard assets
– Promote operating
efficiency
– Encourage adherence to
management rules
– Ensure reliable financial
reports
1-13
Information competence
• Problems in accounting information
systems often have more than one
“correct” answer
• In other words, they are non-deterministic
• But, some answers are clearly incorrect
• Research is often required to address
problems in AIS
• Therefore, accountants must be able to
evaluate information
1-14
Information competence
• Definition
Information competence is the ability to find,
evaluate, use, and communicate information
in all of its various formats (Curzon, 1995)
1-15
Information competence
• Types of information
– Sponsored / commercial
Someone has paid a fee or given other
consideration
– Popular / practitioner
Has been reviewed. May be descriptive in nature.
– Scholarly
Has been reviewed. Typically intended for
academic audiences.
1-16
Information competence
• Criteria for evaluating information (UMUC)
– Authority
– Accuracy
– Objectivity
– Currency
– Coverage
1-17
Information competence
• Authority
– Who created the
information?
– For what purpose?
• Objectivity
– Does the information
contain advertising?
– Is it available freely?
• Accuracy
– Where did the information
come from?
– Any obvious factual errors?
• Currency
– When was the information
created / written?
– When was it last updated?
• Coverage
– Is the information
continually “under
construction?”
– Does it provide sufficient
depth?
1-18
Textbook structure
• Part One:
Introduction and
Basic Concepts
– Nature and purpose of
AIS
– Transaction
processing
– Professionalism and
ethics
– Internal control
• Part Two:
Documentation
Techniques
– Flowcharting
– Data flow
diagramming and
database design
– REAL modeling
1-19
Elements in the Study of AIS
20
Sarbanes-Oxley Act of 2002
Section 404 –
• Management must identify, document, and
evaluate significant internal controls
• Auditors must report on management’s
assertions regarding internal controls
Section 409 –
• Requires disclosure to the public on a
“rapid and current” basis of material changes in
an organization’s financial condition.
Implications for both public and private accountants
21
Accounting Systems and
Subsystems
• A system is a set of interdependent
elements that together accomplish specific
objectives.
• A subsystem is the interrelated parts that
have come together, or integrated, as a
single system, which we have named
System 1.0.
22
Information System Model
• An information system (IS) (or management
information system [MIS]) is a manmade
system that generally consists of an integrated
set of computer-based and manual components
established to collect, store, and manage data
and to provide output information to users.
• The Figure on the next slide depicts the
functional components of an information system.
23
Information System Model
24
Purpose of AIS
• Collect, process and report information
related to the financial aspects of business
events
• Often integrated and indistinguishable
from overall information system
• Like the IS, the AIS may be divided into
components based on the operational
functions supported.
25
Information Qualities
26
INFORMATION QUALITIES
• STATEMENT OF FINANCIAL
ACCOUNTING CONCEPTS NO. 2:
“QUALITATIVE CHARACTERISTICS OF
ACCOUNTING INFORMATION”
• http://www.fasb.org/pdf/con2.pdf
27
Information Qualities
Control Matrix
28
Management Decision Making
1. Intelligence: Searching the environment
for conditions calling for a decision.
2. Design: Inventing, developing, and
analyzing possible courses of action.
3. Choice: Selecting a course of action.
29
Management Decision Making
30
Strategic
Management
Tactical
Management
Operations
Management
Operations and
Transaction Processing
Horizontal information flows
31
Management Problem Structure
and Information Requirements
• Horizontal flows relate to specific business
events, such as one shipment, or to individual
inventory items.
– the information moves through operational units such
as sales, the warehouse, and accounting.
• Vertical Flows relate to the flow of information to
and from strategic management through tactical
management, operations management, and
operations and transaction processing
32
Management Problem Structure
and Information Requirements
Higher up the pyramid, the less structured the decision
• Less defined
• External orientation
• More summarized information
• Future oriented
• Less frequent
• Less accurate
Lower down the pyramid, the more structured the decision
• More defined
• Internal orientation
• More detailed information
• Historical
• More frequent
• More accurate
33
Accountant’s Role
• Designer—application of accounting
principles, auditing, information systems,
and systems development
• User—participate in design
• Auditor—provide audit and assurance
services
34
A weekend edition of the
NY Times contains more
information than the
average person was likely
to come across in a
lifetime in seventeenthcentury England.
• More new information has
been produced in the last 30
years than in the previous
5,000.
• About 1,000 books are
published internationally
every day, and the total of all
printed knowledge doubles
every eight years.
• The world produces between
1 and 2 exabytes of unique
information per year, which
is roughly 250 megabytes for
every man, woman, and child
on earth.
Data Powers of Ten
Byte - 8 bits
Kilobyte – 1,000 bytes or 103 bytes
Megabyte – 1,000,000 bytes or 106 bytes
Gigabyte – 1,000,000,000 bytes
Terabyte – 1,000,000,000,000 bytes
Petabyte – 1,000,000,000,000,000 bytes
Exabyte – 1,000,000,000,000,000,000 bytes
Data Powers of Ten
Zettabyte –
1,000,000,000,000,000,000,000 bytes
Yottabyte –
1,000,000,000,000,000,000,000,000 bytes
Textbook structure
• Part Three:
Systems Analysis
and Information
Technology
– Information technology
basics
– Information systems
models
– XBRL
– E-business and ERP
systems
• Part Four: Business
Processes
– Sales / collection
– Acquisition / payment
– Other business
processes
– Business process
management
1-41
Textbook structure
• Part Five: Other Topics
in AIS
– Computer crime and IT
security
– Decision-making models
and knowledge
management
– Professional certifications
and career planning
– Auditing and evaluating the
AIS
1-42