ACCO20153 - Accounting Information System

by: James Hall

CHAPTER 8
FINANCIAL REPORTING AND MANAGEMENT REPORTING SYSTEMS

Objectives:
● Features, advantages, and disadvantages of various coding schemes.
● Operational features of the GLS, FRS, and MRS.
● Principle operational controls governing the GLS and FRS.
● Factors that influence the design of the MRS.
● Elements of a responsibility accounting system.

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 sequential order
● Used to prenumber source documents
● Track each transaction processed
● Identify any out-of-sequence documents

Disadvantages:
-arbitrary information
-hard to make changes and insertions

Block Codes
● Represent whole classes by assigning each class a specific range within the coding
scheme Used for chart of accounts
-The basis of the general ledger

● Allows for the easy insertion of new codes within a block

-Don't have to reorganize the coding structure

Disadvantage:
-arbitrary information

Group Codes
● Represent complex items or events involving two or more pieces of data using fields with
specific
-meaning for example, a coding scheme for tracking sales might be 04-09-476214-99,

CHAPTER 8 - FINANCIAL REPORTING AND MANAGEMENT REPORTING SYSTEMS

ACCO20153 - Accounting Information System
by: James Hall

Disadvantages:

- arbitrary information
- overused

Alphabetic Codes
● Used for many of the same purposes as numeric codes
● Can be assigned sequentially or used in block and group coding techniques
● May be used to represent large numbers of items
-Can represents up to 26 variations per field

Disadvantage:
-arbitrary information

Mnemonic Codes
● Alphabetic characters used as abbreviations, acronyms, and other types of
combinations
● Do not require users to memorize the meaning since the code itself is informative
~and not arbitrary
-NY = New York

Disadvantages:
-limited usability and availability

IS FUNCTIONS OF GLS
● General ledger systems should:
-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.

CHAPTER 8 - FINANCIAL REPORTING AND MANAGEMENT REPORTING SYSTEMS

ACCO20153 - Accounting Information System
by: James Hall

Relationship of GLS to Other Information Subsystems

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
● Journal Voucher Layout for a General Ledger Master File

CHAPTER 8 - FINANCIAL REPORTING AND MANAGEMENT REPORTING SYSTEMS

ACCO20153 - Accounting Information System
by: James Hall

THE FINANCIAL REPORTING PROCESS

GLS Reports
● General ledger analysis:
-listing of transactions
-allocation of expenses to cost centers

CHAPTER 8 - FINANCIAL REPORTING AND MANAGEMENT REPORTING SYSTEMS

ACCO20153 - Accounting Information System
by: James Hall

-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 Risks in the GL/FRS

● Improperly prepared journal entries
● Unposted journal entries
● Debits not equal to credits
● Subsidiary not equal to G/L control accounts
● Inappropriate access to the G/L
● 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 authorized by a manager at the
source dept
● Segregation of duties – G/L clerks should not:
-have recordkeeping responsibility for special journals or subsidiary ledgers
-prepare journal vouchers
-have custody of physical assets

● Access controls:
-Unauthorized access to G/L can result in errors, fraud, and misrepresentations in
financial statements.
-Sarbanes-Oxley requires controls that limit database access to only authorized
individuals.
● Accounting records - trace source documents from inception to financial statements and
vice versa Independent verification
-G/L dept. reconciles journal vouchers and summaries.

CHAPTER 8 - FINANCIAL REPORTING AND MANAGEMENT REPORTING SYSTEMS

ACCO20153 - Accounting Information System
by: James Hall

-Two important operational reports used:

-journal voucher listing – details of each journal voucher posted to the G/L
-general ledger change report – the effects of journal voucher postings on G/L
accounts

GL/FRS Using Database Technology

● Advantages:
-immediate update and reconciliation
-timely, if not real-time, information
● Removes separation of transaction authorization and processing
-Detailed journal voucher listing and account activity reports are a compensating
control
● Centralized access to accounting records

CHAPTER 8 - FINANCIAL REPORTING AND MANAGEMENT REPORTING SYSTEMS

ACCO20153 - Accounting Information System
by: James Hall

-Passwords and authorization tables as controls

MANAGEMENT REPORTING SYSTEMS

● Produce financial and nonfinancial information needed by management to “plan,
evaluate, control”
● Usually seen as discretionary reporting
● Can argue that Sarbanes-Oxley requires MRS
-MRS provide a formal means for monitoring the internal controls

Factors That Influence MRS Design

● Management principles
● Management function, level, and decision type
● Problem structure
● Types of management reports
● Responsibility accounting
● Behavioral considerations

Management Principles
● Formalization of tasks:
-structures the firm around the tasks performed rather than around individuals’ unique
skills
-allows specification of the information needed to support the tasks
● Responsibility and authority:
-responsibility - obligation to achieve desired results
-authority - power to make decisions within the limits of that responsibility
-delegated by managers to subordinates
-define the vertical reporting channels through which information flows
● 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

CHAPTER 8 - FINANCIAL REPORTING AND MANAGEMENT REPORTING SYSTEMS

ACCO20153 - Accounting Information System
by: James Hall

● Management by exception:
-Managers should limit their attention to potential problem areas.
-Reports should focus on changes in key factors that are symptomatic of potential
problems.

Management Level and Decision Type

● Strategic planning decisions:

-firm’s goals and objectives
-scope of business activities
-organizational structure
-management philosophy

CHAPTER 8 - FINANCIAL REPORTING AND MANAGEMENT REPORTING SYSTEMS

ACCO20153 - Accounting Information System
by: James Hall

-long-term, with broad scope and impact

-non-recurring, with high degree of uncertainty
-need highly summarized information
-require external & internal information sources

● Tactical planning decisions:

-subordinate to strategic decisions
-short term
-specific objectives
-recur often
-fairly certain outcomes
-limited impact on the firm

● Management control decisions:

-using resources as productively as possible in all functional areas
-evaluating the performance of subordinates against standards

● Measuring performance is difficult because sound decisions with long-term benefits may
negatively impact the short- term bottom line.

● Operational control decisions:

-deal with routine tasks
-narrower focus, dependent on details
-highly structured
-short time frame

● Three basic elements or steps:

-set attainable standards
-evaluate performance
-take corrective action

● Classification of Decision Types by Decision Characteristics

Problem Structure
● Reflects and affects how well decision makers understand and solve problems.

CHAPTER 8 - FINANCIAL REPORTING AND MANAGEMENT REPORTING SYSTEMS

ACCO20153 - Accounting Information System
by: James Hall

● Elements of problem structure:

-data
-procedures
-objectives

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

Report Attributes
● Relevance – useful to decision making
● Summarization – appropriate level of detail
● Exception orientation – identify risks
● Accuracy – free of material errors
● Completeness – essential information
● Timeliness – in time for decisions
● Conciseness – understandable format

Types of Management Reports

● Programmed reports:
-scheduled reports – produced at specified intervals, e.g., weekly
-on-demand reports – triggered by events, e.g., inventory levels drop to a certain level

CHAPTER 8 - FINANCIAL REPORTING AND MANAGEMENT REPORTING SYSTEMS

ACCO20153 - Accounting Information System
by: James Hall

● Ad hoc reports:
-designed and created “as needed”
-situations arise that require new information
 
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 helps management achieve financial objectives by setting 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 – responsible for keeping costs within budgetary limits
● Profit center – responsible for both cost control and revenue generation
● Investment center – has general authority to make a wide range of decisions affecting
costs, revenue, and investments in assets

Behavioral considerations
-Behavioral Considerations: Goal Congruence

● MRS and compensation schemes help to appropriately assign authority and

responsibility.

● If compensation measures are not carefully designed, managers may engage in actions
not optimal for the organization.
-Short-term v. long-term measures

-Behavioral Considerations: Information Overload

● Occurs when managers receive more information than they can assimilate.

● Can cause managers to disregard formal information and rely on informal probably
inferior cues when making decisions.

CHAPTER 8 - FINANCIAL REPORTING AND MANAGEMENT REPORTING SYSTEMS

ACCO20153 - Accounting Information System
by: James Hall

● Behavioral Considerations: Performance Measures

● Appropriate performance measures
-Stimulate behavior consistent with firm objectives.
-Managers consider all relevant aspects, not just one.

● Example of inappropriate measures:

-price variance – can affect the quality of the items purchased
-quotas – can affect quality control, material usage efficiency, labor relations, plant
maintenance.
-profit measures – can affect plant investment, employee training, inventory reserve
levels, and customer satisfaction.

Review Questions:
1. What information is contained in a journal voucher?
2. How are journal vouchers used as a control mechanism?
3. What information is contained in the general ledger master file?
4. What is the purpose of the general ledger history file?
5. What is the purpose of a responsibility center file?
6. List the primary users of the FRS, and discuss their information needs.
7. Name in order the eleven steps of the financial reporting process?
8. What assumption is made regarding the external users of financial statements?
9. When are adjusting entries made to the worksheet, and what is their purpose? When are the
corresponding voucher entries made?
10. What tasks should the general ledger clerk not be allowed to do?
11. What are two operational reports produced by the FRS that provide proof to the accuracy of
the process?
12. Explain which of the four potential exposures in the FRS may be controlled better by a close
examination of the journal voucher listing.
13. What does XML stand for?
14. What does XBRL stand for?
15. What is an XBRL taxonomy?
16. What is an XBRL instance document?
17. What is an XBRL tag?
18. Explain how the formalization of tasks promotes internal control.

CHAPTER 8 - FINANCIAL REPORTING AND MANAGEMENT REPORTING SYSTEMS

ACCO20153 - Accounting Information System
by: James Hall

19. Explain why it is important that both responsibility and authority are appropriately assigned
to employees.
20. Distinguish between narrow and wide span of control. Give an example of tasks appropriate
to each type.
21. How does management by exception help to alleviate information overload by a manager?
22. Identify instances for which feedback becomes useless in helping to control activities.
23. Contrast the four decision types—strategic planning, tactical planning, management control,
and operational control—by the five decision characteristics—time frame, scope, level of details,
recurrence, and certainty.
24. What are the three elements that distinguish structured and unstructured problems? Give an
example of each type of problem. Which type of problem is more suitable for a transaction
processing system?
25. What management levels are more likely to deal with unstructured problems? With
structured problems? Why?
26. What are two objectives that enable reports to be considered useful?
27. List and define the seven report attributes.
28. What is responsibility accounting?
29. What are the two phases of responsibility accounting?
30. What are the three most common forms of responsibility centers?
31. What is goal congruence?
32. What is data mining?
33. What is a data warehouse?
34. What is information overload?
35. Explain some reporting techniques that may cause dysfunctional behavior by a manager.
36. Explain how ad hoc reports have allowed managers to make more timely and better-quality
decisions. Give an example.
37. Explain how exception reporting would be invaluable to the manager of a credit department.
38. What types of variances are found on cost center reports? Explain what each variance is
measuring and why this information is important.
39. Distinguish between a profit center and an investment center. Draw a diagram illustrating the
relationship between cost, profit, and investment centers.

CHAPTER 8 - FINANCIAL REPORTING AND MANAGEMENT REPORTING SYSTEMS