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Chapter 8Financial Reporting and

Management Reporting

Systems

Accounting Information Systems,5thedition

James A. Hall

COPYRIGHT 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo,and South-Western are trademarks used herein under license

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Objectives for Chapter 8

Features, advantages, and disadvantages ofvarious coding schemes

Operational features of the GLS, FRS, andMRS

Principle operational controls governing theGLS and FRS

Factors that influence the design of the MRS Elements of a responsibility accounting system

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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

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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

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Block Codes Represent whole classes by assigning eachclass 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

Dont have to reorganize the coding structure

Disadvantage:


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Group Codes Represent complex items or events involving

two or more pieces of data using fields withspecific meaning

For example, a coding scheme for trackingsales might be 04-09-476214-99, meaning:

Store Number Dept. Number Item Number Salesperson

04 09 476214 99

Disadvantages: arbitrary information

overused

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Alphabetic Codes

Used for many of the same purposes as

numeric codes

Can be assigned sequentially or used in blockand group coding techniques

May be used to represent large numbers of

items

Can represents up to 26 variations per field

Disadvantage:


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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

informativeand not arbitrary

NY = New York

Disadvantages:

limited usability and availability

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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

Input

Process

Output

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General

LedgerSystem

(GLS)

Financial

Reporting

System

Management

Reporting

System

Inventory

Control

Payroll

Cash

Disbursements

Accounts

Payable

CostAccounting

Cash

Receipts

Sales

Billings

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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

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The Financial Accounting Process

Source

documents

Journal

entries in the

journal

Post entries to

the ledger

Trial balance

Financial

statementsAdjusting and

closing

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Financial Reporting Process Flowchart

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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

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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 wrongbecause of

unauthorized or incorrect journal vouchers

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GL/FRS Control Issues

Transaction authorization - journal

vouchers must be authorized by a

manager at the source dept

Segregation of dutiesG/L clerks

should not:

have recordkeeping responsibility for

special journals or subsidiary ledgers

prepare journal vouchers

have custody of physical assets

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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


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Independent verification

G/L dept. reconciles journal vouchers and

summaries.

Two important operational reports used:

journal voucher listingdetails of each

journal voucher posted to the G/L general ledger change reportthe effects

of journal voucher postings on G/L accounts


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GL/FRS Using Database Technology

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Advantages:

immediate update and reconciliation

timely, if not real-time, information Removes separation of transaction

authorization and processing

Detailed journal voucher listing and accountactivity reports are a compensating control

Centralized access to accounting records

Passwords and authorization tables as controls

GL/FRS Using Database Technology

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Management Reporting Systems

Produce financial and nonfinancialinformation 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

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Factors That Influence MRS

Design

Management principles

Management function, level, and decisiontype

Problem structure

Types of management reports Responsibility accounting

Behavioral considerations

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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

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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


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Span of control: the number of subordinates directly under the managers

control

detailed reports for managers with narrow spans of control

summarized information for managers with broad spans ofcontrol

Narrow Span of Control Wide Span of Control


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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.


M F i L l

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Management Function, Level,

and Decision Type

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Strategic planning decisions:

firms goals and objectives

scope of business activities

organizational structure

management philosophy

long-term, with broad scope and impact non-recurring , with high degree of uncertainty

need highly summarized information

require external & internal information sources


and Decision Type

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Tactical planning decisions:

subordinate to strategic decisions short term

specific objectives

recur often fairly certain outcomes

limited impact on the firm


and Decision Type

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Management control decisions:

using resources as productively as possible in all

functional areas

evaluating the performance of subordinates

against standards

Measuring performance is difficult becausesound decisions with long-term benefits may

negatively impact the short- term bottom line.


and Decision Type

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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


and Decision Type

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Classification of Decision Types

by Decision Characteristics

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Problem Structure Reflects and affects how well decision

makers understand and solve

problems

Elements of problem structure:

data procedures

objectives

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Problem Structure

Strategic

Management

Tactical

Management

Operations Management

Operations

Information System Management Level Problem Structure

Unstructured

Structured

Partially

Structured

Traditiona

lIS

Non-Traditi

onalIS

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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 makerin a positive way

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Report Attributes

Relevanceuseful to decision making

Summarizationappropriate level of detail

Exception orientationidentify risks

Accuracyfree of material errors

Completenessessential information

Timelinessin time for decisions

Concisenessunderstandable format

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Attributes of Useful Information According to

FASBs Conceptual Framework

Relevant

Information

Predictive

Value

FeedbackValue

Timely

Neutral

VerifiableReliable

Information

Representational

Faithfulness

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Types of Management Reports

Programmed reports:

scheduled reportsproduced at specified

intervals, e.g., weekly on-demand reportstriggered by events,

e.g., inventory levels drop to a certain level

Ad hoc reports: designed and created as needed

situations arise that require new information

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Responsibility Accounting

Implies that every economic event that

affects the organization is the

responsibility of and can be traced to anindividual manager

Incorporates the fundamental principle that

responsibility-area managers areaccountable for items that they control

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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.

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Responsibility Centers

Cost centerresponsible for keeping

costs within budgetary limits

Profit centerresponsible for both costcontrol and revenue generation

Investment centerhas general authority

to make a wide range of decisionsaffecting costs, revenue, and investments

in assets

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Behavioral Considerations:

Goal Congruence

MRS and compensation schemes help to

appropriately assign authority andresponsibility.

If compensation measures are not

carefully designed, managers may engage

in actions not optimal for the organization.

Short-term v. long-term measures

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Occurs when managers receive more

information than they can assimilate Can cause managers to disregard formal

information and rely on informalprobably

inferiorcues when making decisions


Information Overload

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Appropriate performance measures Stimulate behavior consistent with firm objectives

Managers consider all relevant aspects, not just one Example of inappropriate measures:

price variancecan affect the quality of the itemspurchased

quotascan affect quality control, material usageefficiency, labor relations, plant maintenance

profit measurescan affect plant investment, employeetraining, inventory reserve levels, customer satisfaction


Performance Measures

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