gl and reporting

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Human Resources Cycle

ACC 444Enterprise Process Analysis

1

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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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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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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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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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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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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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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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 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 a statement of stockholders equity

Prepare abalance sheet

Presents the balances in thepermanent accounts:

Assets

Liabilities

Owners Equity


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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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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 that make bar charts easy to read:

Use titles that summarize the basic message.


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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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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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ACC 444 E i P A l i


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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

ACC 444 E t i P A l i


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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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ACC 444 Enterprise Process Analysis


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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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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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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.

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