FINANCIAL

REPORTING AND
MANAGEMENT
REPORTING
THE JOURNAL VOUCHER
The source of input to the general ledger is the
journal voucher. A journal voucher, which can be
used to represent summaries of similar transactions
or a single unique transaction, identifies the
financial amounts and affected general ledger (GL)
accounts.
Routine transactions, adjusting entries, and closing
entries are all entered into the GL via journal
vouchers. Because a responsible manager must
approve journal vouchers, they offer a degree of
control against unauthorized GL entries.
The general ledger master file is the
principal file in the GLS database. This file is
based on the organization’s published chart
of accounts. Each record in the GL master
is either a separate GL account (for example,
sales) or the control account (such as AR—
control) for a corresponding subsidiary
ledger in the transaction processing system.
Figure 8-3 illustrates the structure of a
typical GL master file. The FRS draws upon
the GL master to produce the firm’s financial
statements. The MRS also uses this file to
support internal information reporting.
The general ledger history
file has the same format as
the GL master. Its primary
purpose is to provide
historical financial data for
comparative financial
reports.
The journal voucher file is
the total collection of the
journal vouchers processed
in the current period. This
file provides a record of all
general ledger transactions
and replaces the traditional
general journal.
The journal voucher history file contains
journal vouchers for past periods. This historical
information supports management’s
stewardship responsibility to account for
resource utilization. Both the current and
historical journal voucher files are important
links in the firm’s audit trail.
The responsibility center file contains the
revenues, expenditures, and other resource
utilization data for each responsibility center in
the organization. The MRS draws upon these
data for input in the preparation of responsibility
reports for management.
Finally, the budget master file contains
budgeted amounts for revenues, expenditures,
and other resources for responsibility centers.
These data, in conjunction with the responsibility
center file, are the basis for responsibility
accounting, which is discussed later in the
THE FINANCIAL
REPORTING
SYSTEM
FINANCIAL REPORTING
PROCEDURES
1. Capture the transaction. Within each transaction cycle,
transactions are recorded in the appropriate transaction file.
2. Record in special journal. Each transaction is entered into the
journal. Recall that frequently occurring classes of transactions,
such as sales, are captured in special journals. Those that occur
infrequently are recorded in the general journal or directly on a
journal voucher.
3. Post to subsidiary ledger. The details of each
transaction are posted to the affected subsidiary
accounts.
4. Post to general ledger. Periodically, journal vouchers,
summarizing the entries made to the special journals and
subsidiary ledgers, are prepared and posted to the GL accounts.
The frequency of updates to the GL will be determined by the
degree of system integration.
 FINANCIAL REPORTING
PROCEDURES
5. Prepare the unadjusted trial balance. At the end of the accounting
period, the ending balance of each account in the GL is placed in a
worksheet and evaluated in total for debit–credit equality.

6. Make adjusting entries. Adjusting entries are made to the worksheet

to correct errors and to reflect unrecorded transactions during the
period, such as depreciation.

7. Journalize and post adjusting entries. Journal vouchers for the

adjusting entries are prepared and posted to the appropriate accounts
in the GL.

8. Prepare the adjusted trial balance. From the adjusted balances, a

trial balance is prepared that contains all the entries that should be
reflected in the financial statements.
 FINANCIAL REPORTING
PROCEDURES
9. Prepare the financial statements. The balance sheet, income
statement, and statement of cash flows are prepared using the
adjusted trial balance.
10. Journalize and post the closing entries. Journal vouchers
are prepared for entries that close out the income statement
(temporary) accounts and transfer the income or loss to
retained earnings. Finally, these entries are posted to the GL.
11. Prepare the post-closing trial balance. A trial balance
worksheet containing only the balance sheet accounts may
now be prepared to indicate the balances being carried
forward to the next accounting period.
XBRL—REENGINEERING
FINANCIAL REPORTING
- the Internet standard specifically designed for
business reporting and information exchange.
The objective of XBRL is to facilitate the
publication, exchange, and processing of
financial and business information.
XBRL is based on XML coding and is a
standardized way of transmitting financial
records around the world.
XML
XML is a metalanguage for describing markup
languages. The term extensible means that any
markup language can be created using XML.
This includes the creation of markup languages
capable of storing data in relational form in
which tags (or formatting commands) are
mapped to data values. Thus, XML can be used
to model the data structure of an organization’s
internal database.
Imagine that you are looking at a company's financial statements online on the
company's website. Traditionally, these statements would simply be in plain text. If
you wanted to put these numbers into a spreadsheet file to run analysis on the
statements, you would have to either manually type or copy and paste each
account and corresponding number into the spreadsheet.
However, if the data on the site was available in eXtensible Business Reporting
Language (XBRL), you could simply convert this data from the website into a
spreadsheet program (usually instantaneously) that is XBRL compatible.
Due to the standardized nature of the identification tags and the language itself,
financial data from one country, which has set accounting standards such as U.S. 
GAAP, can be easily compiled into the accepted accounting standards of another
country even if they are drastically different. The reporting of financial data in XBRL
is not required by all companies, but because it has become prevalent, it has been
suggested that it won't be long before all companies will have to report their
financial data in this language. iXBRL, where i stands for inline is an update that
allows for XBRL metadata to be embedded in an HTML document.
CONTROLLING THE FRS
Sarbanes-Oxley legislation requires that management design
and implement controls over the financial reporting process.
This includes the transaction processing systems that feed
data into the FRS. The potential risks to the FRS include:
1. A defective audit trail.
2. Unauthorized access to the general ledger.
3. GL accounts that are out of balance with subsidiary
accounts.
4. Incorrect GL account balances because of unauthorized or
incorrect journal vouchers.
SAS 78/COSO CONTROL
ISSUES
Transaction Authorization
The journal voucher is the document that
authorizes an entry to the general ledger. Journal
vouchers have numerous sources, such as the
cash receipts processing, sales order processing,
and the financial reporting group. It is vital to the
integrity of the accounting records that the
journal vouchers be properly authorized by a
responsible manager at the source department.
 SAS 78/COSO CONTROL
ISSUES
Segregation of Duties
In previous chapters, we have seen how the general ledger provides
verification control for the accounting process. To do so, the task of
updating the general ledger must be separate from all accounting
and asset custody responsibility within the organization.
Therefore, individuals with access authority to GL accounts should
not:
1. Have record-keeping responsibility for special journals or
subsidiary ledgers.
2. Prepare journal vouchers.
3. Have custody of physical assets.
SAS 78/COSO CONTROL
ISSUES
Access Controls
Unauthorized access to the GL accounts can
result in errors, fraud, and misrepresentations
in financial statements. SOX legislation
explicitly addresses this area of risk by
requiring organizations to implement controls
that limit database access to authorized
individuals only.
SAS 78/COSO CONTROL
ISSUES
Accounting Records
The audit trail is a record of the path that a
transaction takes through the input,
processing, and output phases of
transaction processing.
This involves a network of documents,
journals, and ledgers designed to ensure
that a transaction can be accurately traced
through the system from initiation to final
disposition.
SAS 78/COSO CONTROL
ISSUES
Accounting Records
An audit trail facilitates error prevention and correction when the
data files are conveniently and logically organized. Also, the general
ledger and other files that constitute the audit trail should be
detailed and rich enough to:
(1) provide the ability to answer inquiries, for example, from
customers or vendors;
(2) be able to reconstruct files if they are completely or partially
destroyed;
(3) provide historical data required by auditors;
(4) fulfill government regulations; and
(5) provide a means for preventing, detecting, and correcting errors.
SAS 78/COSO CONTROL
ISSUES
Independent Verification
In previous chapters we have portrayed the general
ledger function as an independent verification step
within the accounting information system.
The FRS produces two operational reports—journal
voucher listing and the GL change report—that provide
proof of the accuracy of this process. The journal voucher
listing provides relevant details about each journal
voucher posted to the GL. The general ledger change
report presents the effects of journal voucher postings to
the GL accounts.
INTERNAL CONTROL
IMPLICATIONS OF XBRL
TAXONOMY CREATION. Taxonomy may be
generated incorrectly, which results in an
incorrect mapping between data and
taxonomy elements that could result in
material misrepresentation of financial data.
Controls must be designed and put in place to
ensure the correct generation of XBRL
taxonomies.
INTERNAL CONTROL IMPLICATIONS
OF XBRL
TAXONOMY MAPPING ERROR. The process of
mapping the internal database accounts to
the taxonomy tags needs to be controlled.
Correctly generated XBRL tags may be
incorrectly assigned to internal database
accounts resulting in material
misrepresentation of financial data.
INTERNAL CONTROL
IMPLICATIONS OF XBRL
VALIDATION OF INSTANCE DOCUMENTS. As
noted, once the mapping is complete and tags
have been stored in the internal database,
XBRL instance documents (reports) can be
generated. Independent verification
procedures need to be established to validate
the instance documents to ensure that
appropriate taxonomy and tags have been
applied before posting to a Web server.
 THE
MANAGEMENT
REPORTING
FACTORS THAT INFLUENCE
THE MRS
MANAGEMENT PRINCIPLES
• formalization of tasks
• responsibility and authority
• span of control
• management by exception.
FORMALIZATION OF TASKS
The formalization of tasks principle suggests that
management should structure the firm around the tasks it
performs rather than around individuals with unique skills.
Under this principle, organizational areas are subdivided
into tasks that represent full-time job positions. Each
position must have clearly defined limits of responsibility.
The purpose of formalization of tasks is to avoid an
organizational structure in which the organization’s
performance, stability, and continued existence depend on
specific individuals. The organizational chart in Figure 8-14
shows some typical job positions in a manufacturing firm.
IMPLICATIONS FOR THE
MRS
Formalizing the tasks of the firm allows formal specification
of the information needed to support the tasks. Thus, when
a personnel change occurs, the information the new
employee will need is essentially the same as for his or her
predecessor.
The information system must focus on the task, not the
individual performing the task. Otherwise, information
requirements would need to be reassessed with the
appointment of each new individual to the position. Also,
internal control is strengthened by restricting information
based on need as defined by the task, rather than the whim
or desire of the user.
RESPONSIBILITY AND
AUTHORITY
The principle of responsibility refers to an individual’s
obligation to achieve desired results. Responsibility is
closely related to the principle of authority.
If a manager delegates responsibility to a subordinate,
he or she must also grant the subordinate the authority
to make decisions within the limits of that responsibility.
In a business organization, managers delegate
responsibility and authority downward through the
organizational hierarchy from superior to subordinates.
IMPLICATIONS FOR THE MRS
The principles of responsibility and authority
define the vertical reporting channels of the
firm through which information flows. The
manager’s location in the reporting channel
influences the scope and detail of the
information reported.
Managers at higher levels usually require
more summarized information. Managers at
lower levels receive information that is more
detailed. In designing a reporting structure,
SPAN OF CONTROL
A manager’s span of control refers to the number of
subordinates directly under his or her control. The size
of the span has an impact on the organization’s physical
structure.
A firm with a narrow span of control has fewer
subordinates reporting directly to managers. These firms
tend to have tall, narrow structures with several layers
of management.
Firms with broad spans of control (more subordinates
reporting to each manager) tend to have wide
structures, with fewer levels of management.
MANAGEMENT BY
EXCEPTION
The principle of management by exception
suggests that managers should limit their
attention to potential problem areas (that is,
exceptions) rather than being involved with
every activity or decision. Managers thus
maintain control without being overwhelmed
by the details.
IMPLICATIONS FOR THE MRS
Managers need information that identifies operations or
resources at risk of going out of control. Reports should
support management by exception by focusing on changes
in key factors that are symptomatic of potential problems.
Unnecessary details that may draw attention away from
important facts should be excluded from reports.
For example, an inventory exception report may be used to
identify items of inventory that turn over more slowly or go
out of stock more frequently than normal. Management
attention must be focused on these exceptions. The
majority of inventory items that fluctuate within normal
levels should not be included in the report.
MANAGEMENT FUNCTION, LEVEL,
AND DECISION TYPE
PLANNING
- Long-range planning involves a variety of
tasks, including setting the goals and objectives
of the firm, planning the growth and optimum
size of the firm, and deciding on the degree of
diversification among the firm’s products.
- Short-term planning involves the
implementation of specific plans that are needed
to achieve the objectives of the long-range plan.
MANAGEMENT FUNCTION, LEVEL,
AND DECISION TYPE
CONTROL
- The control function ensures that the activities of
the firm conform to the plan. This entails evaluating
the operational process (or individual) against a
predetermined standard and, when necessary,
taking corrective action.
- Effective control takes place in the present time
frame and is triggered by feedback information that
advises the manager about the status of the
operation being controlled.
CATEGORIES OF PLANNING AND
CONTROL FUNCTION
I. strategic planning
II. tactical planning
III. managerial control
IV. operational control
STRATEGIC PLANNING DECISIONS
The top-level managers make strategic planning decisions,
including:
 Setting the goals and objectives of the firm.
 Determining the scope of business activities, such as
desired market share, markets the firm wishes to enter or
abandon, the addition of new product lines and the
termination of old ones, and merger and acquisition
decisions.
 Determining or modifying the organization’s structure.
 Setting the management philosophy.
STRATEGIC PLANNING DECISIONS
Strategic planning decisions have the following characteristics:
 They have long-term time frames. Because they deal with the
future, managers making strategic decisions require
information that supports forecasting.
 They require highly summarized information. Strategic
decisions focus on general trends rather than detail-specific
activities.
 They tend to be nonrecurring. Strategic decisions are usually
one-time events. As a result, there is little historical
information available to support the specific decision.
STRATEGIC PLANNING DECISIONS
 Strategic decisions are associated with a high
degree of uncertainty. The decision maker must
rely on insight and intuition. Judgment is often
central to the success of the decision.
 They are broad in scope and have a profound
impact on the firm. Once made, strategic decisions
permanently affect the organization at all levels.
 Strategic decisions require external as well as
internal sources of information.
TACTICAL PLANNING DECISIONS
Tactical planning decisions are subordinate to strategic
decisions and are made by middle management
These decisions are shorter term, more specific, recurring,
have more certain outcomes, and have a lesser impact on the
firm than strategic decisions.
For example, assume that the president of a manufacturing
firm makes the strategic decision to increase sales and
production by 100,000 units over the prior year’s level. One
tactical decision that must result from this is setting the
monthly production schedule to accomplish the strategic goal.
MANAGEMENT CONTROL
DECISIONS
Management control involves motivating managers
in all functional areas to use resources, including
materials, personnel, and financial assets, as
productively as possible. The supervising manager
compares the performance of his or her
subordinate manager to pre-established standards.
If the subordinate does not meet the standard, the
supervisor takes corrective action. When the
subordinate meets or exceeds expectations, he or
she may be rewarded.
OPERATIONAL CONTROL
DECISIONS
Operational control ensures that the firm operates in
accordance with pre-established criteria. The operations
managers exercise operational control.
- Operational control decisions are narrower and more
focused than tactical decisions because they are
concerned with the routine tasks of operations.
- Operational control decisions are more structured than
management control decisions, more dependent on
details than planning decisions, and have a shorter time
frame than tactical or strategic decisions.
OPERATIONAL CONTROL
DECISIONS
Operational control decisions have three basic
elements:
 setting standards
 evaluating performance
 taking corrective action.
STANDARDS
Standards are pre-established levels of
performance that managers believe are
attainable.
Standards apply to all aspects of operations, such
as sales volume, quality control over production,
costs for inventory items, material usage in the
production of products, and labor costs in
production. Once established, these standards
become the basis for evaluating performance.
PERFORMANCE EVALUATION
The decision maker compares the performance of
the operation in question against the standard.
The difference between the two is the variance.
For example, a price variance for an item of
inventory is the difference between the expected
price—the standard—and the price actually paid.
If the actual price is greater than the standard, the
variance is said to be unfavorable. If the actual
price is less than the standard, the variance is
favorable.
TAKING CORRECTIVE ACTION
After comparing the performance to the
standard, the manager takes action to remedy
any out-of-control condition.