Download Chapter 8

Chapter 8
General Ledger,
Financial Reporting
and
Management
Reporting
Systems
Objectives for Chapter 8
•
•
•
•
Features, advantages, and disadvantages of coding schemes
Operational features of the GLS, FRS, and MRS
Operational controls governing the GLS, FRS, and MRS
Management decision-making process
• Role of management principles in information systems design
• Effect of decision type and management level on information
needs
• Difference between structured and unstructured decisions
• Different report types and the attributes common to all reports
• Elements of a responsibility accounting system
• Behavioral issues in management reporting
Common Uses of Coding in
AIS
• Concisely represent large amounts of complex
information that would otherwise be
unmanageable
• Provide a means of accountability over the
completeness of the transactions processed
• Identify unique transactions and accounts
within a file
• Support the audit function by providing an
effective audit trail
Sequential Codes
• Represent items in some sequential order
• Commonly used to prenumber source
documents
• Allows the system to track each transaction
processed and to identify any out-of-sequence
documents
• Disadvantages:
– arbitrary information
– hard to make changes and insertions
Block Codes
• Represents whole classes of items by restricting
each class to a specific range within the coding
scheme
• Used for chart of accounts which is the basis for
the general ledger
• Allows for the insertion of new codes within a
block without having to reorganize the entire
coding structure
• Disadvantages:
– arbitrary information
Group Codes
• Used to represent complex items or
events involving two or more pieces of
related data using zones or fields that
possess specific meaning
Store Number
04
Dept. Number
09
Item Number
476214
A coding scheme used to track sales.
• Disadvantages:
– overused
Salesperson
99
Alphabetic Codes
• May be used for many of the same purposes as
numeric codes and may be assigned
sequentially or used in block and group coding
techniques
• May be used to represent large numbers of
items; the number of possible represents per
space is 26
• Disadvantages:
– arbitrary information
Mnemonic Codes
• Alphabetic characters in the form of
acronyms and other combinations that
convey meaning
• Do not require the user to memorize the
meaning; the code itself conveys a high
degree of information
– NY = New York
• Disadvantages:
– limited usability and availability
IS Functions of the General
Ledger System
• All general ledgers should (must):
Input
Process
Output
– collect transaction data promptly and accurately
– classify/code data and accounts
– validate collected transactions/ maintain
accounting controls (e.g., equal debits and credits)
– process transaction data
• post transactions to proper accounts
• update general ledger accounts and transaction files
• record adjustments to accounts
– store transaction data
– generate timely financial reports
Financial
Reporting
System
Management
Reporting
System
Billings
Inventory
Control
Sales
Cash
Receipts
General
Ledger
System
(GLS)
Payroll
Cash
Disbursements
Cost
Accounting
Accounts
Payable
GLS Database
• General ledger master file
– principal FRS file based on chart of accounts
• General ledger history file
– used for comparative financial support
• Journal voucher file
– all journal vouchers of the current period
• Journal voucher history file
– journal vouchers of past periods for audit trail
• Responsibility center file
– financial data by responsibility centers for MRS
• Budget master file
– budget data by responsibility centers for MRS
The Financial Accounting Process
Source
documents
Journal
entries in the
journal
Post entries to
the ledger
Adjusting and
closing
Trial balance
Financial
statements
GLS Reports
• General Ledger Analysis
–
–
–
–
listing of transactions
allocation of expenses to cost centers
comparison of account balances from prior periods
trial balances
• Financial Statements
– balance sheet
– income statement
– statement of cash flows
• Managerial Reports
– analysis of sales
– analysis of cash
– analysis of receivables
• Chart of Accounts: coded listing of accounts
Potential Exposures in the
GL/FRS  Risks
•
•
•
•
•
•
•
•
Improperly prepared journal entries
Unposted journal entries
Debits not equal to credits
Subsidiary not equal to general ledger control
accounts
Inappropriate access to the general ledger
Poor audit trail
Lost or damaged data
Account balances that are wrong because of
unauthorized or incorrect journal vouchers
GL/FRS Control Issues
• Transaction authorization - journal
vouchers must be properly authorized
by a responsible manager at the source
department
• Segregation of duties - general ledger
clerks should not:
– have recordkeeping responsibility for
special journals or subsidiary ledgers
– prepare journal vouchers
– have custody of physical assets
GL/FRS Control Issues
• Access controls:
– direct - journal vouchers should only be
posted by authorized individuals
– indirect - source documents should be
prenumbered and a log kept
• Accounting records - should be able to
trace a source document from its
inception to its impact of the financial
statements and vice-versa
GL/FRS Control Issues
• Independent verification
– journal vouchers and summaries are
reconciled by the general ledger
department.
• Two important operational reports used:
– journal voucher listing
– general ledger change report
GLS: Tape Batch Processing
Sorted
Journal
Vouchers
Journal
Voucher
Batch
General
Ledger
Master
Key in journal
voucher data
Edit input
and update
master file
Unsorted
Journal
Vouchers
Sort vouchers
in chart of
account order
Old
General
Ledger
Master
New
General
Ledger
Master
Sorted
Journal
Vouchers
Error and
Exception
Report
Automated GL/FRS using Batch
Processing and Sequential Files
• Advantages
– control - journal vouchers can be approved,
validated, and balanced prior to processing
– reporting - provides summary feedback on
transaction activity
• Disadvantages
– inefficiency - production of manual documents
which must be entered into the system and filed
– infrequent reconciliation
GL/FRS Using
Database Technology
Reengineered GL/FRS Using
Direct Access Files
• Advantages
– immediate update and reconciliation
– timely information
• Removal of separation between transaction
authorization and processing
– detailed journal voucher listing and account activity
reports are a compensating control
• Accounting Records and Access Controls
– need computer control techniques such as
passwords and authorization tables
The Management Reporting
System…
• produces the financial and nonfinancial
information needed by management to
plan and control its business
• applications are discretionary
• provides a formal means for monitoring
the function of internal controls and this
control implication is specifically
recognized in SAS 78
Factors That Influence
Management Information
• The decision making process
• Management principles
• Management function, level, and
decision type
• Problem structure
• Types of management reports
• Responsibility accounting
• Behavioral considerations
Decision-Making Process
• Identify the problem - look for symptoms and
underlying problem
• Evaluate alternative solutions - consider all
alternatives and identify decision criteria
• Implement the best solution - requires detailed
planning with deadlines and checkpoints
• Post-implementation review - provides insight
into the thoroughness of problem identification
Management Principles
• Formalization of tasks:
– Management structures the firm
around the tasks it performs rather
than around individuals with unique
skills.
– It allows specification of the
information needed to support the
tasks.
Management Principles
• Responsibility and authority:
– Responsibility is an individual’s
obligation to achieve desired results.
– Authority is an individual’s power to
make decisions within the limits of that
responsibility.
– Managers delegate responsibility and
authority downward to subordinates.
Management Principles
• Span of control:
– the number of subordinates directly under the manager’s
control
– detailed reports for managers with narrow spans of control
– summarized information for managers with broad spans of
control
Narrow Span of Control
Wide Span of Control
Management Principles
• Management by exception:
– Managers should limit their
attention to potential problem
areas.
– Reports should focus on
changes in key factors that
are asymptomatic of potential
problems.
Management Function, Level,
and Decision Type
Management Function, Level, and
Decision Type
• Strategic planning decisions:
– global goals and objectives
– the scope of business activities
– organization’s structure
– management philosophy
– long-term, broad scope and impact
– highly summarized, high degree of uncertainty
– non-recurring
– require external & internal information sources
Management Function, Level, and
Decision Type
• Tactical planning decisions:
– subordinate to strategic decisions
• They…
– are shorter term
– are more specific
– recur more often
– have more certain outcomes
– have a lesser impact on the firm
…than strategic decisions
Management Function, Level, and
Decision Type
• Management control decisions involve
managers in all functional areas using
resources as productively as possible.
• The manager compares the performance of
subordinates against standards, and either
rewards them or takes corrective action.
• Measuring the performance of managers’
actions is difficult because sound decisions
with long-term benefits may negatively impact
the current period’s bottom line.
Management Function, Level, and
Decision Type
• Operational control decisions ensure that the
firm operates within pre-established criteria.
• They are…
– narrower
– more focused
– more structured
– more dependent
– have a shorter time frame
…than strategic and tactical decisions
because they deal with routine tasks
Classification of Decision Types
by Decision Characteristics
Problem Structure
• The problem structure reflects how well
the decision maker understands the
problem.
• Elements of problem structure:
– data
– procedures
– objectives
Problem Structure
Non-Traditional IS
Traditional IS
Information System
Management Level
Problem Structure
Unstructured
Strategic
Management
Tactical
Management
Partially
Structured
Operations Management
Operations
Structured
Management Reports
• Report objectives - reports must have
value or information content
• They should…
– reduce the level of uncertainty associated
with a problem facing the decision maker
– influence the behavior of the decision maker
in a positive way
Attributes of Useful Information According to
FASB’s Conceptual Framework
Feedback
Value
Representational
Faithfulness
Verifiable
Neutral
Relevant
Information
Reliable
Information
Timely
Predictive
Value
Types of Management Reports
• Programmed reports:
– Scheduled reports are produced at
prespecified intervals, such as weekly.
– On-demand reports are triggered by
events, such as inventory levels dropping
to a certain level.
• Ad hoc reports - reports designed and
created on an “as needed” basis as
situations arise that require new
information needs
Responsibility Accounting
• Implies that every economic event that
affects the organization is the
responsibility of and can be traced to an
individual manager
• Incorporates the fundamental principle
that responsibility-area managers are
accountable for items that they control
Setting Financial Goals:
Budgeting
• Budgeting is a process that helps
management achieve its financial
objectives by establishing measurable
goals for each organizational segment.
• Budget information flows downward and
becomes increasingly detailed at each
lower level.
• The performance information flows
upward as responsibility reports.
Responsibility Centers
• Cost center - an organizational unit with
responsibility for cost management within
budgetary limits
• Profit center - an organizational unit with
responsibility for both cost control and revenue
generation
• Investment center - an organizational unit with
the general authority to make a wide range of
decisions affecting costs, revenue, and
investments in assets
Goal Congruence
• A carefully structured management
reporting system and compensation
schemes help to appropriately assign
authority and responsibility.
• If compensation measures are not
carefully designed, managers may be
tempted to engage in actions not optimal
for the organization in the long-run.
Information Overload…
• occurs when a manager receives more
information than he or she can assimilate
• can cause managers to disregard their
formal information and rely on informal-probably inferior--cues to
help them make
decisions
Performance Measures
• Appropriate performance measures
– stimulate behavior consistent with the objectives of the
firm
– consider all relevant aspects, not just one
• Inappropriate performance measures—
examples of adverse effects
– The use of price variance to evaluate a purchasing
agent can affect the quality of the items purchased.
– The use of quotas (such as units produced) to evaluate
a supervisor can affect quality control, material usage
efficiency, labor relations, and plant maintenance.
– The use of profit measures such as ROI, net income,
and contribution margin can affect plant investment,
employee training, inventory reserve levels, customer
satisfaction, and labor relations.