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General Ledger and Reporting System
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GENERAL LEDGER AND REPORTING SYSTEM
The basic activities in the GLARS are:
Update the general ledger
Post adjusting entries
Prepare financial statements Produce managerial reports
The first three represent the basic steps in theaccounting cycle
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GENERAL LEDGER AND REPORTING SYSTEM
The basic activities in the GLARS are:
Update the general ledger
Post adjusting entries
Prepare financial statements Produce managerial reports
The first three represent the basic steps in theaccounting cycle.
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UPDATE THE GENERAL LEDGER
Updating the general ledger consists of posting journal entriesfrom two sources:
Summary journal entries of routine transactions from theaccounting subsystems
Individual journal entries for non-routine transactions from thetreasurer. Examples:
a) Issuances of or payment of debt and the associatedinterest.
b) Issuances of or repurchases of company stock and payingdividends on that stock.
Journal entries are often documented on a form called a journalvoucher.
After updating the general ledger (GL), journal entries are storedin a journal voucher file.
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GENERAL LEDGER AND REPORTING SYSTEM
The basic activities in the GLARS are:
Update the general ledger
Post adjusting entries
Prepare financial statements Produce managerial reports
The first three represent the basic steps in theaccounting cycle
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POST ADJUSTING ENTRIES
Adjusting entries originate in the controllers office atthe end of each accounting period (month, quarter,year, etc.) and after the initial trial balance has beenprepared.
There are five types of adjusting entries:
Accruals:a) An accrualinvolves an event that has occurred for which
the related cash flow has not yet taken place.
Accrued revenueThe company has delivered aproduct or service to a customer but has not yetbeen paid.
Accrued expenseThe company has used up agood or service but not yet paid for it.
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POST ADJUSTING ENTRIES
There are five types of adjusting entries:
Accruals
Deferrals
A deferralinvolves a situation where the cash flow takes placebefore the related revenue is earned or the expense is incurred.
Deferred revenueThe company received payment for a productor service that was not yet been completely delivered to thecustomer (aka, unearned revenue).
Deferred expenseThe company paid for a good or servicewhich they had not yet completely used up (aka, prepaidexpense).
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POST ADJUSTING ENTRIES
There are five types of adjusting entries:
Accruals
Deferrals
Estimates
Estimatesare used to recognize expenses thatcannot be directly attributed to a related revenueand must be allocated in a more subjective orsystematic manner.
Examples:
Depreciation expense
Bad debt expense.
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POST ADJUSTING ENTRIES
There are five types of adjusting entries:
Accruals
Deferrals
Estimates Re-evaluations
Re-evaluationsresult from:
Reconciling actual and recorded values of assets
a) EXAMPLE: Making a lower-of-cost-or-market adjustmentto inventory
b) Recording an asset impairment
Recording changes in accounting principles.
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GENERAL LEDGER AND REPORTING SYSTEM
The basic activities in the GLARS are:
Update the general ledger
Post adjusting entries
Prepare financial statements Produce managerial reports
The first three represent the basic steps in theaccounting cycle
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PREPARE FINANCIAL STATEMENTS
Activities in the preparation of financial statements areas follows:
Prepare an income statement
The Income Statement is prepared using thebalances in the revenue, expense, gain, and lossaccounts listed on the adjusted trial balance.
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PREPARE FINANCIAL STATEMENTS
Activities in the preparation of financial statements areas follows:
Prepare an income statement
Prepareclosing entries
After preparation of the income statement, the revenue, expense, gain,and loss accounts are closed.
Their balances are transferred to retained earnings, so that this account
will have the correct ending balance.
If a separate account is kept for dividends, that account is also closed toretained earnings.
Most companies perform monthly and annual closes.
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PREPARE FINANCIAL STATEMENTS
Activities in the preparation of financial statements areas follows:
Prepare an income statement
Prepare closing entries
Prepare astatement of stockholders equity
Reconciles the changes in the stockholders equity accounts (paid-incapital and retained earnings) for the year.
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PREPARE FINANCIAL STATEMENTS
Activities in the preparation of financial statements areas follows:
Prepare an income statement
Prepare closing entries
Prepare a statement of stockholders equity
Prepare abalance sheet
Presents the balances in thepermanent accounts:
Assets
Liabilities
Owners Equity
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PREPARE FINANCIAL STATEMENTS
Activities in the preparation of financial statements areas follows:
Prepare an income statement
Prepare closing entries
Prepare a statement of stockholders equity
Prepare abalance sheet
Prepare astatement of cash flows
Presents changes in cash for theperiod categorized by:
Operating activities
Investing activities
Financing activities
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GENERAL LEDGER AND REPORTING SYSTEM
The basic activities in the GLARS are:
Update the general ledger
Post adjusting entries
Prepare financial statements Produce managerial reports
The first three represent the basic steps in theaccounting cycle
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PRODUCE MANAGERIAL REPORTS
The final step is preparation of reports for internal purposes, suchas budgets for planning and evaluating performance:
a) Operating budget
b) Capital expenditure budget
c) Cash flow budget
Budgets and performance reports should be developed on thebasis of responsibility accounting, i.e., reporting results on thebasis of the manager responsible:
Breaks down financial results by subunit.
Shows actual costs and variances for current month and year-to-date for items the subunit controls.
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CONTROL: OBJECTIVES, THREATS,AND PROCEDURES
In the general ledger and reporting system (or any cycle), a well-designed AIS should provide adequate controls to ensure that thefollowing objectives are met:
All transactions are properly authorized.
All recorded transactions are valid.
All valid and authorized transactions are recorded.
All transactions are recorded accurately.
Assets are safeguarded from loss or theft.
Business activities are performed efficiently and effectively.
The company is in compliance with all applicable laws andregulations.
All disclosures are full and fair.
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CONTROL: OBJECTIVES, THREATS,AND PROCEDURES
There are several actions a company can take with respect to anycycle to reduce threats of errors or irregularities. These include:
Using simple, easy-to-complete documents with clearinstructions (enhances accuracy and reliability).
Using appropriate application controls, such as validitychecks and field checks (enhances accuracy and reliability).
Providing space on forms to record who completed andwho reviewed the form (encourages proper authorizationsand accountability).
Pre-numbering documents (encourages recording of validand only valid transactions).
Restricting access to blank documents (reduces risk ofunauthorized transaction).
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CHAPTER 14General Ledger and Reporting System
To be continued
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Transaction
data
Multiple departmental
Excel spreadsheets
Senior
Management
Consolidated
spreadsheets for
management
2000 elements = 6500 spreadsheets (this is not a typo)
SQL
SQL
Current Management Reporting
XBRL GL
XBRL GL
XBRL GL
Recent studies show that 88% of spreadsheets contain errors
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Issues with TodaysInformation Model
Information goes in one direction
Information has no shared context
Analysis of the information is conducted via macros that are embeddedwithin the applications and are not reusable by others .
Information labels are inconsistent from one application to another
Information is not independently validated
Information is not connected to other related resources across applications
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XBRL: REVOLUTIONIZING THE REPORTINGPROCESS
Although financial statements appear electronically in a variety offormats, until recently disseminating this information wascumbersome and inefficient.
Recipients (SEC, IRS, etc.) required the information in avariety of formats which was time-consuming.
Also conducive to errors, because re-entry of the informationwas often necessary.
Underlying problem: Lack of standards for identifying the contentof data.
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XBRL: REVOLUTIONIZING THE REPORTINGPROCESS
Solution: Extensible Business Reporting Language (XBRL)
A variant of XML designed specifically to communicate thecontents of financial data.
Creates tags for each data item much like HTML tags.
a) Tag names specify line items in financial statements.b) Other fields in the tag provide information such as the
year, units of measure, etc.
Major software vendors are developing tools to automaticallygenerate XBRL codes so accountants wont need to write code.
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But XBRL Isnt Just About SEC Filing or Technology
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An XBRL Goal
A piece of business information, once entered into anysystem, anywhere, never has to get retyped as it flows alongthe information supply chain.
Managers vision: drill down from end reporting to underlying
detailAuditors vision: easy access to the original source document,tracking full authorization of entries (accountability)
XBRL US is responsible for maintaining the US GAAP
Taxonomies under contract with the SEC. The taxonomies canbe viewed and downloaded at http://xbrl.us/Pages/US-GAAP.aspx
http://xbrl.us/Pages/US-GAAP.aspxhttp://xbrl.us/Pages/US-GAAP.aspxhttp://xbrl.us/Pages/US-GAAP.aspxhttp://xbrl.us/Pages/US-GAAP.aspxhttp://xbrl.us/Pages/US-GAAP.aspx -
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US GAAP Taxonomy (03-31-2008)
Each XBRL
element containsone or morehuman readablelabels
Each XBRLelement containsa unique XMLname
Structured theway accountantsthink of reportingfacts
The labels foreach XBRLelement can beestablished in oneor more
languages
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An Internet-Based Electronic StandardFormat for Bridging the Globe
MANDATES Include:
a) China, Israel, Japan, Korea, Singapore, United Kingdom,United States
VOLUNTARY
Include:
a) Australia, Netherlands, New Zealand
Erasing lines betweena) Types of reporting
b) Geographic and political borders
What the SEC is doing
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SEC Rule to Mandate XBRLSubmissionFormat
Interactive data would be required with a company'sannual and quarterly reports, transition reports, andSecurities Act registration statements
Interactive data would also be required to be posted on the
companys corporate web site, if it maintains one
What the SEC is doing
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PRINCIPLES OF GRAPH DESIGN
Accountants and IS professionals can helpmanagement deal with information overload bypreparing graphs that highlight and summarizeimportant facts.
Well-designed graphs make it easy to identify andunderstand trends and relationships.
Poorly-designed graphs can impair decision making.
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Insurance Type as % of Total
Business
Life, 62%
Health, 22%
Auto, 16%
Life
Health
Auto
Pie charts show the relative size of sub-components.
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Bar charts are the most common type and are used to displaytrends.
601 603610
605612
540
553
566
589
519
460
480
500
520
540
560
580
600
620
2000 2001 2002 2003 2004
Oklahoma
Texas
Auto Insurance Sales (In Thousands) By State
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PRINCIPLES OF GRAPH DESIGN
Principles that make bar charts easy to read:
Use titles that summarize the basic message.
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PRINCIPLES OF GRAPH DESIGN
Principles that make bar charts easy to read:
Use titles that summarize the basic message.
Include data values with each element
instead of labeling the vertical axis. Thispractice facilitates mental calculations andanalyses.
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Millions of Dollars of Sales by Line of Insurance
Business
681
520
418
0
100200
300400
500600
700
800
Life Health Auto
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PRINCIPLES OF GRAPH DESIGN
Principles that make bar charts easy to read:
Use titles that summarize the basic message.
Include data values with each element instead oflabeling the vertical axisfacilitates mental
calculations and analyses. Use two-dimensional, instead of three-
dimensional, bars. This practice makes iteasier to accurately assess magnitude ofchanges and trends.
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PRINCIPLES OF GRAPH DESIGN
Principles that make bar charts easy to read:
Use titles that summarize the basic message.
Include data values with each element instead of labelingthe vertical axisfacilitates mental calculations and
analyses Use two-dimensional, instead of three-dimensional, bars
makes it easier to accurately assess magnitude of changesand trends.
Use different shades of gray or colors instead of
patterns, dots, or stripes. They are easier todistinguish
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Millions of Dollars of Sales by Line of InsuranceBusiness
681
520
418
0100
200300
400500
600700
800
Life Health Auto
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Millions of Dollars of Sales by Line of InsuranceBusiness
681
520418
0100
200
300400
500
600700
800
Life Health Auto
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PRINCIPLES OF GRAPH DESIGN
Although readability is important, the ultimate value ofgraphs is to support decision making. Two principlesare essential to accurate interpretation:
Begin vertical axis at zero; exception: when there is
a need to monitor minor fluctuations in data
For graphs that depict time-series data, orderthe x-axis chronologically from left to right.
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Life Insurance Sales By Year (In Millions of $)
320
345
406385
410
0100
200
300
400
500
1985 1986 1987 1988 1989
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PRINCIPLES OF GRAPH DESIGN
Many annual reports contain graphs that violate theseprinciples:
Some done automatically by software.
Some done intentionally.
There are no authoritative guidelines in GAAP orauditing standards that prohibit these behaviors, eventhough the results can be deceptive.