Chapter 8

General Ledger,
Financial
Reporting, and
Management
Reporting
Systems
1
 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

2
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
3
 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

4
 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
5
 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
04 09 476214 99

A coding scheme used to track sales.

Disadvantages:
Overused
6
 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

7
 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):

Collect transaction data promptly and accurately
Input
Classify/code data and accounts
Validate collected transactions/ Maintain
accounting controls (e.g., equal debits and credits)
Process transaction data
Process
Post transactions to proper accounts
Update general ledger accounts and transaction files
Record adjustments to accounts
Store transaction data
Output Generate timely financial reports
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 Financial
Reporting
System
Management
Billings
Reporting
System

Sales Inventory
Control
General
Ledger
System
Cash Payroll
Receipts (GLS)

Cost Cash
Accounting Disbursements

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 11
 The Financial Accounting Process

Source Journal Trial balance

entries in the Post entries to
documents
journal the ledger

Financial
Adjusting and
statements
closing
 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 13
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
Sorted
Journal
Journal
Voucher
Vouchers
Batch

General Edit input

Ledger and update
Key in journal
Master master file
voucher data

Unsorted
Journal
Vouchers
New Sorted
Old General Error and
Sort vouchers Journal Exception
General Ledger
in chart of Vouchers Report
Ledger Master
account order
Master
 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 20
 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 22
 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 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.
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 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 26

 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
Tactical Planning
Middle
Management Control
Management

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
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
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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
the current period’s bottom line. 31
 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
Non-Traditional IS

Unstructured

Strategic
Management
Partially
Tactical Structured
Management
Traditional IS

Operations Management

Operations
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 FASB’s Conceptual
Framework
Feedback
Value

Representational Relevant Timely

Faithfulness
Information
Predictive
Reliable Value
Verifiable
Information

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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