1. General Ledger, Financial Reporting, and Management Reporting Systems
Chapter 8
General Ledger, Financial Reporting, and Management Reporting Systems 1

2. 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 31

3. 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 4

4. 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
Disadvantages
carry no information content beyond their order in the sequence
inserting a new item at some midpoint requires complete renumbering 5

5. Block Codes Disadvantages: Arbitrary information
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
Disadvantage
the information content is not readily apparent. 6

6. 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 Dept. Number Item Number Salesperson
Advantages
facilitates the representation of large amounts of diverse data
allows complex data structures to be represented in a hierarchical form that is logical and more easily remembered by humans
permits detailed analysis and reporting both within an item class and across different classes of items
Disadvantage
tend to be overused which can lead to unnecessarily complex group codes that cannot be easily interpreted
A coding scheme used to track sales.
Disadvantages:
Overused 7

7. 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
Disadvantages
difficulty of rationalizing the meaning of codes sequentially assigned
sorting records that are coded alphabetically tend to be more difficult for users 9

8. 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
Disadvantage
they are limited in their ability to represent items within a class 10

9. IS Functions of the General Ledger System
All general ledgers should (must):
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
Input
Process
Output

10. General Ledger System (GLS) Financial Reporting System Management
Billings
Sales
Inventory
Control
General
Ledger
System
(GLS)
Cash
Receipts
Payroll
Cost
Accounting
Cash
Disbursements
Accounts
Payable 3

11. GLS Database general ledger master file general ledger history 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 12

12. The Financial Accounting Process
Trial balance
Post entries to the ledger
Journal entries in the journal
Source documents
NOTICE THE IP-OP MODEL WITH FEEDBACK
Financial statements
Adjusting and closing

13. GLS Reports General Ledger Analysis Financial Statements
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

14. 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

15. 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 18

16. 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 19

17. 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 20

18. GLS: Tape Batch Processing
Sorted
Journal
Vouchers
Journal
Voucher
Batch
General
Ledger
Master
Edit input
and update
master file
Key in journal
voucher data
Unsorted
Journal
Vouchers
New
General
Ledger
Master
Old
General
Ledger
Master
Sorted
Journal
Vouchers
Error and
Exception
Report
Sort vouchers
in chart of
account order

19. 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 21

20. 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 22

21. 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 2

22. 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 3

23. 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 4

24. 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. 7

25. Management Principles
Responsibility and Authority:
Responsibility is an individual’s obligation to achieve desired results, while authority is an individual’s power to make decisions within the limits of that responsibility.
Managers delegate responsibility and authority downward to subordinates. 8

26. Management Principles
Span of Control:
the number of subordinates directly under the manager’s 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 9

27. 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. 10

28. Management Function, Level, and Decision Type
Top
Management
Middle
Operations Management
Operations
Strategic Planning
Tactical Planning
Management Control
Operational Control 11

29. 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 and internal information sources 12

30. 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 14

31. 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. 15

32. 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 16

33. Problem Structure
The problem structure reflects how well the decision maker understands the problem.
Elements of problem structure:
data
procedures
objectives 18

34. Problem Structure Non-Traditional IS Traditional IS
Information System Use
Management Level
Problem Structure
Unstructured
Strategic
Management
Non-Traditional IS
Partially
Structured
Tactical
Management
Operations Management
Traditional IS
Operations
Structured 19

35. 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 20

36. Representational Faithfulness
Attributes of Useful Information According to FASB’s Conceptual Framework
Predictive Value
Feedback Value
Timely
Representational Faithfulness
Relevant Information
Reliable Information
Verifiable
Neutral

37. 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. 22

38. 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 23

39. 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. 24

40. 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. 25

41. 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. 26

42. 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 28