General Ledger, Financial Reporting and Management Reporting Systems Chapter 8 General Ledger, Financial Reporting and Management Reporting Systems 1

IS Functions of the General Ledger System All general ledgers should (must): 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

General Ledger System (GLS) Financial Reporting System Management Billings Sales Inventory Control General Ledger System (GLS) Cash Receipts Payroll Cost Accounting Cash Disbursements Accounts Payable 3

The Financial Accounting Process Trial balance Post entries to the ledger Journal entries in the journal Source documents NOTICE THE IP-OP MODEL WITH FEEDBACK Financial statements Adjusting and closing

GLS Reports General Ledger Analysis Financial Statements 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

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

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 18

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 19

GL/FRS Control Issues Independent verification journal vouchers and summaries are reconciled by the general ledger department. Two important operational reports used: journal voucher listing general ledger change report 20

GLS: Tape Batch Processing Sorted Journal Vouchers Journal Voucher Batch General Ledger Master Edit input and update master file Key in journal voucher data Unsorted Journal Vouchers New General Ledger Master Old General Ledger Master Sorted Journal Vouchers Error and Exception Report Sort vouchers in chart of account order

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 21

GL/FRS Using Database Technology

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. 7

Management Principles Responsibility and authority: Responsibility is an individual’s obligation to achieve desired results. Authority is an individual’s power to make decisions within the limits of that responsibility. Managers delegate responsibility and authority downward to subordinates. 8

Management Principles Span of control: the number of subordinates directly under the manager’s control detailed reports for managers with narrow spans of control summarized information for managers with broad spans of control Narrow Span of Control Wide Span of Control 9

Problem Structure The problem structure reflects how well the decision maker understands the problem. Elements of problem structure: data procedures objectives 18

Problem Structure Non-Traditional IS Traditional IS Information System Management Level Problem Structure Unstructured Strategic Management Non-Traditional IS Tactical Management Partially Structured Operations Management Traditional IS Operations Structured 19

Representational Faithfulness Attributes of Useful Information According to FASB’s Conceptual Framework Predictive Value Feedback Value Timely Representational Faithfulness Relevant Information Reliable Information Verifiable 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 22

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 25

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. 26

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 28