AIS MIDTERMS STUDY MATERIAL 2026 (By: Gladys Requierme)

CHAPTER 7: THE CONVERSION CYCLE

Section 1: The Traditional inventories, long lead times, and less flexibility to
customer demand.
Manufacturing Environment
Controls in the Traditional Environment
The conversion cycle covers activities that turn raw
Traditional manufacturing requires strong internal
materials into finished goods. In a traditional
controls to ensure that materials, labor, and
manufacturing environment, production is
overhead are recorded correctly and that assets are
organized around large batches, long runs, and
safeguarded. Typical controls include:
functional departments (e.g., separate areas for
cutting, assembly, packaging). • Authorization of production orders and
material requisitions.
Batch Processing System
A batch processing system collects similar • Pre-numbered documents (job tickets,
production transactions over a period and material requisitions).
processes them together. For example, a factory
• Segregation of duties between production,
might:
inventory custody, and cost accounting.
• Schedule long production runs of one
• Physical controls over inventory (locked
product type.
stores, count sheets, periodic counts).
• Issue production orders in batches.
• Reconciliations between production
• Record material usage, labor, and overhead reports, inventory records, and cost
for the whole batch. accounts.

Batch systems aim for high machine utilization and

lower unit cost, but they often create high

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 AIS MIDTERMS STUDY MATERIAL 2026 (By: Gladys Requierme)

These controls help prevent theft, waste, and

misstatement of inventory and cost of goods sold.

In lean environments, production is often “pulled”

by customer orders rather than “pushed” by
Section 2: World-Class Companies and forecasts and large batch schedules.
Lean Manufacturing
Section 3: Techniques and Technologies
World-class manufacturing companies focus on that Promote Lean Manufacturing
quality, flexibility, and customer satisfaction, not
just on volume and machine efficiency. Many Physical Reorganization of the Production Facilities
adopt lean manufacturing, which is a philosophy Traditional plants often group machines by function
that aims to eliminate waste and continuously (all cutting machines together, all drills together).
improve processes. Lean manufacturing reorganizes this layout
into cells or work centers that are arranged
Lean manufacturing seeks to:
according to product flow.
• Reduce non-value-added activities (waiting,
• Workers and machines are placed in
excess movement, overproduction).
sequence so products move smoothly from
• Minimize inventory levels and lead times. step to step.

• Improve quality by preventing defects • Setup times and travel distance are
rather than detecting them later. reduced.

• Respond more quickly to changes in • Small batches and one-piece flow become
customer demand. more practical.

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 AIS MIDTERMS STUDY MATERIAL 2026 (By: Gladys Requierme)

Automation of the Manufacturing Process • Identify activities (setups, inspections,

Automation supports lean goals by improving material handling, scheduling).
speed, accuracy, and consistency. Examples include:
• Assign costs to activity cost pools.
• Computer-controlled machines (CNC) and
• Use cost drivers (number of setups, number
robotics to reduce manual handling and
of moves, etc.) to allocate costs to products.
errors.
ABC provides more accurate product costing,
• Real-time data collection on machine
especially when there is product diversity and
status, output, and quality.
complex processes, which supports better pricing
• Automated material handling systems that and product mix decisions in a lean setting.
deliver components just in time.
Value Stream Accounting
Automation does not replace lean principles; rather, Value stream accounting is designed specifically for
it supports them by providing reliable, repeatable lean environments. A value stream is a set of
processes and timely information for improvement. processes that delivers a product or service to the
customer.
Section 4: Accounting in a Lean Instead of tracking costs by department or by many
Manufacturing Environment small cost centers, value stream accounting:

What’s Wrong with Traditional Accounting • Groups costs by value stream (e.g., Product
Information A family, Product B family).
Traditional cost accounting was designed for large-
• Produces simple, timely reports that
batch, labor-intensive factories. In lean
operations teams can understand.
environments, it often:
• Focuses on total value stream profit, lead
• Emphasizes labor variances even when
time, and waste reduction.
direct labor is a small part of cost.
This aligns financial reporting with lean goals by
• Encourages large batches and high
making it clear how improvements in flow and
inventory to “absorb” overhead.
waste reduction affect profitability.
• Produces complex reports that are hard for
operations people to use. Section 5: Information Systems that
Support Lean Manufacturing
As a result, traditional reports can send the wrong
signals—making high inventory look “good” and Materials Requirement Planning (MRP)
small batch, flexible production look “bad” from a MRP systems calculate material requirements
cost standpoint. based on the production plan and bill of materials.
They:
Activity-Based Costing (ABC)
ABC assigns overhead costs to products based on • Determine what materials are needed, in
the activities that generate those costs, rather than what quantities, and when.
just using volume measures like direct labor hours
• Help schedule purchase orders and
or machine hours.
production orders.
Key ideas:
MRP is useful for managing complex products and
dependent demand for components, though

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 AIS MIDTERMS STUDY MATERIAL 2026 (By: Gladys Requierme)

traditional MRP is more “push-based” (driven by Well-designed ERP and related systems provide the
forecasts). information backbone needed to plan, execute, and
continuously improve lean operations.
Manufacturing Resource Planning (MRP II)
MRP II extends MRP beyond materials to include Key Takeaways
other manufacturing resources, such as:
The traditional manufacturing environment relies
• Capacity planning (machines and labor). on batch processing and functional layouts, which
• Scheduling and shop floor control. can create high inventories and long lead times.

• Integration with finance, marketing, and • Internal controls in traditional systems

engineering. focus on authorizing production,
safeguarding inventory, and ensuring
It provides a more complete picture of production accurate cost records.
capabilities and constraints for planning and
control. • Lean manufacturing aims to eliminate
waste, reduce lead times, and improve
Enterprise Resource Planning (ERP) Systems quality using pull systems and continuous
ERP systems integrate all major business improvement.
processes—not only manufacturing, but also:
• Techniques that support lean
• Purchasing and inventory include cellular
• Sales and distribution layouts and automation that enable
smooth flow and real-time information.
• Accounting and finance
• Traditional cost accounting can conflict with
• Human resources lean goals; ABC and value stream
accounting provide more useful cost
In a lean manufacturing context, an ERP:
information for lean operations.
• Shares real-time information across
• MRP, MRP II, and ERP systems form an
departments.
information backbone that helps plan,
• Supports just-in-time deliveries, accurate coordinate, and support both traditional
inventory records, and demand-driven and lean manufacturing, with ERP providing
production. the highest level of enterprise-wide
integration.
• Links production data with financial and
customer data to support better decisions.

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 AIS MIDTERMS STUDY MATERIAL 2026 (By: Gladys Requierme)

CHAPTER 8: FINANCIAL REPORTING AND MANAGEMENT REPORTING SYSTEMS

Section 1: Data Coding Schemes

Financial reporting and management reporting Data coding schemes assign identifiers to accounts,
systems process general ledger data into transactions, and entities, enabling efficient
statements and internal reports essential for storage, retrieval, and reporting in accounting
decision-making and control. This guide explores systems. Without codes, systems become chaotic;
data coding, GLS, FRS controls, MRS design factors, with them, data is organized systematically.
and responsibility accounting, with practical
examples for clarity.

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 AIS MIDTERMS STUDY MATERIAL 2026 (By: Gladys Requierme)

A System without Codes Numeric and Alphabetic Coding Schemes

In a code-free system, records use descriptive Numeric codes (e.g., 1000-1999 for assets) are
narrative fields (e.g., "Office Supplies Expense"), space-efficient and suit sequential processing but
leading to inconsistencies like varied spellings lack mnemonic value—users must memorize or
("rent" vs. "rental expense"). This causes search reference charts.
errors, duplicate entries, lengthy storage, slow
processing, and unreliable reports—imagine sorting Alphabetic codes (e.g., "CASH" for cash account)
paper files alphabetically with no labels. are intuitive and self-documenting but consume
more space and complicate sorting.
A System with Codes Hybrid alphanumeric codes (e.g., "1A10" for current
Coded systems use short identifiers (e.g., "5120" for assets subaccount) combine benefits: numbers for
Office Supplies) linked to master descriptions, structure, letters for meaning.
ensuring uniformity. Benefits include faster
searches, compact storage, error reduction, and
flexible reporting (e.g., grouping all "51xx"
expenses).

• Trial Balance – List of account balances to

verify debits = credits.
Section 2: The General Ledger System
• Financial Statements – Balance Sheet,
The General Ledger (GL) System serves as the Income Statement, Statement of Cash
central repository for all financial data in the AIS. It Flows.
receives summarized transaction data from the
Transaction Processing System (TPS) and maintains Manual vs. Computerized GL:
the official accounting records. • Manual: Physical journals/ledgers with
Key Functions: periodic posting.

1. Recordkeeping – Posts journal entries to • Computerized: Automated posting, real-

maintain account balances. time balances, audit trails, and exception
reporting.
2. Classifying – Organizes transactions by
account using the chart of accounts. Section 3: The Financial Reporting
3. Summarizing – Consolidates data for trial System
balances and financial statements. The Financial Reporting System (FRS) takes data
4. Adjusting – Records accruals, deferrals, from the GL to produce external financial
depreciation, and corrections. statements required by GAAP/IFRS, regulators, and
stakeholders.
GL Package Components:
Key Outputs:
• General Journal – Records adjusting and
correcting entries. 1. Balance Sheet – Assets, liabilities, equity at
a point in time.
• General Ledger Accounts – Detailed records
by account. 2. Income Statement – Revenues, expenses,
net income/profit for a period.

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 AIS MIDTERMS STUDY MATERIAL 2026 (By: Gladys Requierme)

3. Statement of Cash Flows – Operating, 5. Audit Trail – Complete documentation of

investing, financing cash activities. adjustments and closing entries.

4. Statement of Changes in Equity – Equity 6. Access Controls – Restricted access to GL

movements during the period. master files and reporting modules.

FRS Process: 7. Backup and Recovery – Regular data

backups to prevent loss of financial records.
1. Extract trial balance from GL.
SOX Compliance (if applicable): FRS controls must
2. Make adjusting entries (depreciation,
support Section 404 requirements for financial
accruals, etc.).
reporting reliability.
3. Prepare workpapers and disclosures.

4. Generate statements and footnotes.

Section 5: The Management Reporting
5. Review and finalize for external distribution.
System
Computerized FRS Features:
The Management Reporting System
• Automated statement generation and (MRS) provides internal reports customized to
formatting. support managerial decision-making. Unlike FRS
(external, standardized), MRS is flexible and tailored
• Consolidation of subsidiaries.
to specific business needs.
• Standard report templates compliant with
Key Characteristics:
accounting standards.
• Timeliness – Reports produced when
• Roll-forward capabilities for comparative
needed (daily, weekly, ad hoc).
reporting.
• Relevance – Focuses on information useful
for decisions.
Section 4: Controlling the FRS • Variety – Exception reports, performance
dashboards, variance analysis.
FRS controls ensure the reliability, accuracy, and
completeness of external financial reports. Key Common MRS Reports:
control categories include:
• Budget vs. actual performance reports.
1. Authorization – Only authorized personnel
• Sales analysis by product/customer/region.
can post adjustments or finalize reports.
• Inventory turnover and aging reports.
2. Segregation of Duties – GL maintenance
separate from statement preparation. • Cost center profitability analysis.
3. Reconciliations – Trial balance, subsidiary • Key performance indicators (KPIs)
ledgers, bank statements reconciled dashboards.
regularly.
MRS Technology: Business Intelligence (BI) tools,
4. Review and Approval – Management sign- OLAP cubes, data warehouses enable interactive,
off on financial statements. drill-down reporting.

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 AIS MIDTERMS STUDY MATERIAL 2026 (By: Gladys Requierme)

Section 6: Factors that Influence the Types of Management Reports

MRS 1. Periodic – Scheduled (weekly sales, monthly
P&L).
Several factors determine what reports managers
receive and how the MRS is designed: 2. On-demand – Generated as needed
(customer profitability).
Management Principles
3. Exception – Deviations from standards
• Exception Principle – Report only significant
(sales below target).
deviations from standards.
4. Push – Automatically delivered to
• Timeliness Principle – Information must be
managers.
available when decisions are made.
5. Pull – Managers request specific
• Relevance Principle – Reports should
information.
address specific management concerns.
Responsibility Accounting

Assigns costs and revenues to managers responsible

Management Function, Level, and Decision Type
for specific organizational units (cost centers, profit
centers, investment centers). Reports compare
actual vs. budgeted performance for each
responsibility center.

Behavioral Considerations

Reports influence behavior—managers respond to

what is measured:

• Goal Congruence – Individual goals align

with organizational objectives.

• Controllability – Managers evaluated only

on factors they control.

• Actionability – Reports provide clear

guidance for corrective action.
Problem Structure

• Structured – Repetitive, routine (e.g.,

payroll processing). Key Takeaways
• Semi-structured – Some judgment required Data coding schemes (sequence, block, group,
(e.g., pricing decisions). mnemonic) standardize data classification and
enable efficient AIS processing.
• Unstructured – Unique, complex (e.g., new
market entry). • General Ledger System is the central hub
that consolidates TPS data and feeds both
FRS and MRS.

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 AIS MIDTERMS STUDY MATERIAL 2026 (By: Gladys Requierme)

• Financial Reporting System (FRS) produces • MRS design depends on management level
standardized external statements (Balance (strategic/tactical/operational), problem
Sheet, Income Statement, Cash Flows). structure, responsibility accounting, and
behavioral impacts.
• Management Reporting System
(MRS) delivers timely, relevant internal • Modern reporting leverages BI tools, ERP
reports tailored to decision needs. integration, and real-time dashboards for
better decision support.
• FRS controls ensure external reporting
reliability through authorization,
segregation, reconciliations, and audit trails.

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AIS MIDTERMS STUDY MATERIAL 2026 (By: Gladys Requierme)

CHAPTER 9: DATABASE MANAGEMENT SYSTEMS

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 AIS MIDTERMS STUDY MATERIAL 2026 (By: Gladys Requierme)

Section 1: Overview of Flat-File vs. System (DBMS). This provides data independence—
changes to structure don't affect programs.
Database Approach
How Databases Solve Flat-File Problems:
Data Storage Issues in Flat-Files: Flat-file systems
store data in separate, independent files (e.g., one • Eliminates redundancy through integrated
for customers, one for invoices). This leads to data storage.
redundancy—same customer details repeated
• Single update propagates everywhere.
across multiple files, wasting space and risking
inconsistencies. • Ensures real-time currency.
Data Updating Challenges: To update a customer's • Supports task-data independence.
address, you must change it in every file containing
that data. Missing one file creates errors, making Controlling Access: DBMS enforces security via user
maintenance error-prone and time-consuming. privileges, authentication, and encryption,
preventing unauthorized views or changes—critical
Currency of Information: Files are often outdated for SOX compliance in accounting.
because not all users/systems access the latest
version simultaneously. For example, sales data The DBMS Role: Software that manages data
might not reflect in inventory files promptly. creation, storage, retrieval, and security (e.g.,
Oracle, MySQL).
Task-Data Dependency: Programs are tightly linked
to specific file structures. If a file layout changes Three Conceptual Models (Three-Schema
(e.g., adding a field), every related program must be Architecture):
rewritten, limiting flexibility. • External: User-specific views (e.g.,
The Database Approach: Centralizes data into a accountant sees only financial summaries).
single shared pool accessible by multiple • Conceptual: Logical structure (entities,
users/applications via a Database Management relationships).

• Internal: Physical storage (files, indexes)

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 AIS MIDTERMS STUDY MATERIAL 2026 (By: Gladys Requierme)

Database Administrator (DBA): Key role overseeing

the database.
Section 2: Elements of the Database
• Responsibilities: Design, performance
Environment tuning, backups, security, capacity planning.
Users: Range from end-users (accountants querying • Organizational Interactions: Works with
reports) to programmers building apps. They users (requirements), IT (implementation),
interact via DBMS tools without needing storage management (audits), and auditors (access
details. logs).
Database Management System Components: The Data Dictionary: Centralized metadata
• Data Definition Language (DDL): Defines repository tracking table names, attributes,
structure (e.g., CREATE TABLE Customers relationships, access rights, and usage stats. Acts
(ID INT, Name VARCHAR)). like a "phone book" for the database; essential for
accountants tracing data lineage.
• Data Manipulation Language (DML):
Handles operations (INSERT, UPDATE, The Physical Database: Actual storage on disk—
DELETE). files, indexes, buffers. DBA optimizes for speed (e.g.,
indexing frequently queried fields like AccountID).
• Query Language: SQL for ad-hoc queries
(e.g., SELECT * FROM Invoices WHERE
Amount > 1000).

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 AIS MIDTERMS STUDY MATERIAL 2026 (By: Gladys Requierme)

Section 3: The Relational Database • Linking Normalized Tables: Use FKs.

Model • Accountants' Role: Ensure normalization
prevents errors in financials (e.g., accurate
Relational Concepts:
trial balances); audit for denormalization
• Entity: Real-world object (e.g., Customer). trade-offs in reporting speed.

• Occurrence: Specific instance (e.g., row for Section 4: Designing Relational

"ABC Corp"). Databases
• Attributes: Properties (e.g., Name, Balance
Step-by-step process for accountants designing AIS
columns).
databases:
• Associations/Cardinality: Relationships like
1. Identify Entities: List from user needs (e.g.,
one-to-many (one customer, many invoices:
Customers, Vendors, Transactions).
1:M).
2. Construct Data Model: ER Diagram showing
• Physical Tables: Rows (records), columns
entities, associations, cardinality (e.g.,
(fields).
Employee 1:M Tasks).
• Linkages: Primary Key (PK: unique, e.g.,
3. Add Primary Keys/Attributes: Assign PKs
CustomerID) and Foreign Key (FK:
(e.g., auto-increment ID), list fields (e.g.,
references PK, e.g., [Link]).
Date, Amount).
• User Views: Virtual tables tailored to users
4. Normalize and Add Foreign Keys: Apply
(e.g., manager sees aggregated sales).
1NF-3NF, link with FKs.
Anomalies, Dependencies, and Normalization:
5. Construct Physical Database: CREATE
• Anomalies: TABLE statements, indexes, constraints
(e.g., CHECK Balance >=0).
• Insertion: Can't add new customer
without invoice. 6. Prepare User Views: Subsets/joins (e.g.,
VIEW SalesSummary AS SELECT...).
• Deletion: Deleting invoice loses
customer data. 7. Global View Integration: Merge multiple
user views into enterprise-wide schema,
• Update: Change address in one resolving conflicts (e.g., standardize
place but not others. "Customer" definitions).
• Normalization:

Section 5: Databases in a Distributed

Environment
Centralized Databases: All data at one location.

• Data Currency in DDP: Distributed Data

Processing (multi-site apps) causes delays—
remote sites get stale data.

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 AIS MIDTERMS STUDY MATERIAL 2026 (By: Gladys Requierme)

• Database Lockout: Exclusive locks block • Concurrency Control: Two-phase locking,

other users during transactions. timestamps to prevent conflicts (e.g., lost
updates).
Distributed Databases: Data spread across
sites/networks. Accountant Implications: Distributed setups
improve branch responsiveness but require
• Partitioned: Fragments split horizontally
reconciliation for consolidated reports. Watch for
(e.g., regional sales) or vertically (selected
replica consistency in audits; tools like Oracle
columns) for local access/parallelism.
Distributed Queries help.
• Replicated: Full/partial copies at sites for
fault tolerance/fast queries.

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 AIS MIDTERMS STUDY MATERIAL 2026 (By: Gladys Requierme)

Chapter 10: The REA Approach to Database Modeling

The REA model revolutionizes accounting database Elements of an REA Model:

design by focusing on business events, resources,
• Resources (R): Assets controlled by the
and agents, providing a semantic framework for
entity (e.g., Inventory, Cash). These are
enterprise-wide data modeling. It ensures robust
what the firm "duals" or exchanges.
financial reporting, audit trails, and decision support
in AIS, contrasting traditional ER models by • Events (E): Business activities that affect
emphasizing economic exchanges. resources (e.g., Sale, Receipt of Payment,
Purchase). Classified as economic "give"
Section 1: The REA Approach (outflows) or "get" (inflows).
Overview of REA: REA stands for Resources, Events, • Agents (A): People or organizations
Agents—a high-level framework for modeling participating (e.g., Customer, Salesperson,
business processes. Developed by McCarthy in the Vendor). Represent duality (internal vs.
1980s, it captures the essence of economic external).
activities (e.g., sales, purchases) rather than just
data structures, making it ideal for accountants REA diagrams use ovals (resources/events),
designing transaction databases. rectangles (agents), and diamonds (relationships),
with minimum/maximum cardinality (e.g., 0:1 for
optional participation). This structure prevents

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 AIS MIDTERMS STUDY MATERIAL 2026 (By: Gladys Requierme)

anomalies by linking events bidirectionally (e.g., Follow these sequential steps for processes like
Sale → Inventory Decrease + Cash Increase). Revenue Cycle:

Key Benefit for Accountants: REA supports 1. Identify Event Entities: Pinpoint
revenue, expenditure, conversion, and human measurable economic events (e.g., Sale,
resource cycles, ensuring balanced duality (every Cash Receipt). Start with inflows/outflows;
"give" has a "get"). link sequentially (Sale → Receipt).

Section 2: Developing a REA Model 2. Identify Resource Entities: Determine what

is gained/lost (e.g., Cash for Sale; Inventory
Differences between ER and REA Diagrams: for Purchase). Resources persist across
events.
Aspect ER Diagram REA Diagram
3. Identify Agent Entities: List participants
(e.g., Customer for Sale; Employee as
Economic internal salesperson). Distinguish internal
General data resources, (firm-controlled) vs. external.
entities/relationsh events,
4. Determine Associations and Cardinalities:
Focus ips agents
Draw links:

• Events to Resources: 0:1 or 1:M

Strict R, E, A
(e.g., Sale decreases Inventory: 0:1
Entities Any (e.g., tables) typology
min/max for optional stockouts).

• Events to Agents: Typically 1:1 or

Minimum/m 0:1 (one customer per sale).
ax
(participatio • Between Events: Participation (e.g.,
Cardinality Often 1:M n rules) Sale participates in Receipt).

Example: Revenue Cycle—Sale (E) links to Inventory

Event- (R, decrease), Cash (R, via Receipt), Customer (A),
driven, Salesperson (A). Cardinality: Sale-Salesperson (1:1),
Accounti duality Customer-Sale (1:M).
ng Fit Generic enforced
Section 3: View Integration: Creating an
Enterprise-Wide REA Model
AIS with
audit/revenu Integrate individual views (e.g., sales clerk's +
Use Case Operational DB e cycles accountant's) into a cohesive core model.

Step 1: Consolidate Individual Models:

ER is broader; REA is semantically rich for business
semantics. • Merge overlapping entities (e.g., shared
"Cash" resource).
View Modeling: Creating an Individual REA
Model (Per Business Cycle/User View): • Resolve conflicts via aggregation (combine
similar events).

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 AIS MIDTERMS STUDY MATERIAL 2026 (By: Gladys Requierme)

• Identify enterprise linkages (e.g., Sale • Indexes on PK/FK for query speed.
Inventory links to Production Inventory).
REA and Value Chain Analysis: Maps to Porter's
Step 2: Define Primary Keys, Foreign Keys, and chain—REA events trace inbound logistics
Attributes: (Purchase) → Operations (Conversion) → Outbound
(Sale), aiding strategic analysis like cost-to-serve.
• Assign surrogate PKs (e.g., EventID).
REA Compromises in Practice:
• FKs for relationships (e.g., [Link]).
• Performance Trade-offs: Full normalization
• Attributes: Event timestamps, amounts;
slows queries; denormalize for OLAP.
Resource quantities; Agent contacts.
• Legacy Integration: Adapt REA to existing
• Normalize to 3NF, preserving REA
ER schemas.
semantics.
• ERP Systems: SAP/Oracle use REA-like
Step 3: Construct Physical Database and Produce
structures (e.g., event hubs).
User Views:
• Accountant Role: Validate duality in audits;
• Build tables from REA (e.g., SalesEvent table
use for risk assessment (missing events
with FKs to Inventory, Customer).
signal fraud).
• Create views/joins for reports (e.g., Aging
Receivables: JOIN Sale + Receipt).

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