Chapter

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 individuals
obligation to achieve desired results.
Authority is an individuals 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 managers
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
organizations 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 periods 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

FASBs Conceptual Framework
Feedback
Feedback
Value
Value
Representational
Faithfulness

Verifiable
Verifiable

Neutral
Neutral

Relevant
Relevant
Information
Information
Reliable
Reliable
Information
Information

Timely
Timely
Predictive
Predictive
Value
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.