Chapter 8

General Ledger, Financial Reporting, and Management Reporting Systems

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Objectives for Chapter 8

Features, advantages, and disadvantages of coding schemes The operational features of the GLS, FRS, and MRS The operational controls governing the GLS, FRS, and MRS The management decision-making process The role of management principles in information systems design The effect of decision type and management level on information needs The difference between structured and unstructured decisions The different report types and the attributes common to all reports The 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
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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

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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
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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 Salesperson 99

A coding scheme used to track sales.

Disadvantages: Overused
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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
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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
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IS Functions of the General Ledger System

All general ledgers should (must):
Input

Process

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

Output

Store transaction data Generate timely financial reports

Financial Reporting System Billings Management Reporting System

Sales

Inventory Control

Cash Receipts

General Ledger System (GLS)

Payroll

Cost Accounting Accounts Payable

Cash Disbursements

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
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The Financial Accounting Process

Source documents

Journal entries in the journal

Post entries to the ledger

Trial balance

Adjusting and closing

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

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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
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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
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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
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GL/FRS Control Issues

Independent Verification - Journal vouchers and summaries are reconciled by the general ledger department. Two important operational reports are used:
journal voucher listing general ledger change report

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GLS: Tape Batch Processing

Journal Voucher Batch General Ledger Master Sorted Journal Vouchers

Key in journal voucher data Unsorted Journal

Edit input and update master file

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
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Reengineered GL/FRS Using Direct Access Files

Advantages
Immediate update and reconciliation Time 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
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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
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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

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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
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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.
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Management Principles
Responsibility and Authority:
Responsibility is an individuals obligation to achieve desired results, while authority is an individuals power to make decisions within the limits of that responsibility. Managers delegate responsibility and authority downward to subordinates.
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Management Principles
Span of Control:
the number of subordinates directly under the managers control Managers with narrow spans of control require detailed reports. Managers with broad spans of control require summarized information.

Narrow Span of Control

Wide Span of Control

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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.

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Management Function, Level, and Decision Type

Strategic Planning
Top Management

Middle Management

Tactical Planning Management Control

Operational Control

Operations Management
Operations

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Management Function, Level, and Decision Type

Strategic Planning Decisions:
global goals and objectives the scope of business activities organizations structure management philosophy long-term, broad scope and impact highly summarized, high degree of uncertainty non-recurring require external and internal information sources
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Management Function, Level, and Decision Type

Tactical Planning Decisions:
subordinate to strategic decisions

They:
are shorter term are more specific are recurring have more certain outcomes have a lesser impact on the firm than strategic decisions
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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 31 the current periods bottom line.

Management Function, Level, and Decision Type

Operational Control Decisions ensure that the firm operates with pre-established criteria. They are:
narrower more focused more structured more dependent have a shorter time frame than strategic and tactical decisions because they are concerned with routine tasks 32

Problem Structure
The problem structure reflects how well the decision maker understands the problem. Elements of problem structure:
data procedures objectives

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Problem Structure
Information System Use Management Level Problem Structure
Unstructured

Non-Traditional IS

Strategic Management Tactical Management Operations Management Operations

Partially Structured

Traditional IS

Structured
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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

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Attributes of Useful Information According to FASBs Conceptual Framework

Feedback Value Representational Faithfulness

Relevant Information Reliable Information

Timely

Predictive Value

Verifiable

Neutral

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.
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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

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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.
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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.
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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.
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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

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