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.