CHAPTER THE GENERAL LEDGER, FINANCIAL REPORTING, AND MANAGEMENT REPORTING SYSTEMS This chapter is concerned with the part of the AIS that ties all of the transaction processing systems together and handles financial reporting the general ledger. The first topic discussed is the role of coding schemes. This is probably new to you. Then the general ledger system is presented, followed by the financial reporting system. Historically, the accounting system was the first, and for a very long time the only, information system in most organizations. The last part of this chapter discusses a much broader information system the management reporting system (MRS) which provides both financial and non-financial information to aid managers to plan and control business activity. Of particular note is the fact that an MRS is discretionary at least in the sense of not being mandated by any authoritative body. It would be hard to argue, however, that an organization is free to choose not to collect and report information that helps the organization meet its goals and objectives. The objectives of this chapter are:! to understand the purpose of data coding and to be able to identify the respective features, advantages, and disadvantages of the various numeric and alphabetic coding schemes;! to understand the operational features of the general ledger system, the financial reporting system, and the management reporting system;! to be able to identify the principal operational controls governing the general ledger, financial reporting, and management reporting systems;! to understand the management decision-making process;! to recognize the role of management principles in the design of information systems;! to understand the effect of decision type and management level on information needs;! to know the difference between structures and unstructured decisions;! to know the different report types and the attributes common to all reports;! to understand the elements of a responsibility accounting system; and! to be aware of the behavioral issues in management reporting. Study Prepared by H. M. Savage South-Western Publishing Co., 2004 Page -1
I. Data Coding Schemes The first part of the chapter discusses a topic which has relevance for all of the transaction cycles but has been delayed until now so as not to distract attention from the objectives of the other cycles. In presenting the general ledger system as the hub of the overall information system, the role of coding schemes is easier to present. Fig. -1, on page 409, illustrates the relationship of the GLS to the other elements of the overall information system. A. A System without Codes This section is designed to highlight the extra recordkeeping required and the potential for errors in a system without codes. B. A System with Codes The same system, with a simple coding scheme in place, is illustrated. Note the discussion of the benefits of coding. C. Numeric and Alphabetic Coding Schemes Various types of codes exist. Many of them are familiar to you. None is perfect. What is chosen for a given system must work in its environment. This includes compatibility with procedures and as much information content in the coding scheme as is practical. There are several different types of codes discussed. Be sure that you understand the advantages and disadvantages of:! sequential codes,! block codes,! group codes,! alphabetic codes, and! mnemonic codes. II. The General Ledger System As you study this material on the general ledger, keep in mind what you know already about a manual GL system. Study Prepared by H. M. Savage South-Western Publishing Co., 2004 Page -2
A. The Journal Voucher A journal voucher system has replaced the general journal in many organizations. Fig. -3, on page 415, shows a sample voucher. Note the information it contains. There is more control over a JV system than a traditional general journal. B. The GLS Database When you consider the information that must be collected in a general ledger system, you should not be surprised by the number of files that make up the database:! the general ledger master file,! the general ledger history file,! the journal voucher file,! the journal voucher history file,! the responsibility center file, and! the budget master file. Each of these is well described in the text. Be sure you are clear on the distinction between master and history files. C. GLS Procedures Fig. -5, on page 417, is a flowchart of the GLS update process. It is very simple and should contain no surprises. III. The Financial Reporting System You are well aware that GAAP [generally accepted accounting principles] and legal requirements are the driving force behind our financial reporting system. This is the focus of the current chapter the mandated financial reporting. A. The Financial Accounting Process This section discusses the accounting process in terms of eleven steps. This should confirm what you already know about the accounting process. The text also discusses three phases to describe the frequency at which different events occur. See Fig. -6 on page 419. Study Prepared by H. M. Savage South-Western Publishing Co., 2004 Page -3
IV. Controlling the GL/FRS Although the control concerns in the general ledger/financial reporting system are more limited because they involve only the accounting records, the possible problems are very serious. If errors are permitted in the account balances, thereby leading to incorrect financial statements, great risks exist. A. GL/FRS Control Issues The discussion of control techniques again follows the approach of SAS 7. Although there is no summary table, you should be able to construct your own. V. Computer-Based GL/FRS Two approaches to automating the GL/FRS are presented: batch processing with sequential files and batch with direct access files. Financial reports are normally periodic; therefore, there is little need for real-time systems. A. Legacy GL/FRS Using Batch Processing and Flat Files Fig. -9, on page 424, shows a batch GL/GLS system that uses sequential files. Pay particular attention to the strengths and weaknesses, this can help when you need to contribute to the design of a new system for yourself or a client. B. Reengineered GL/FRS Using Database Technology Fig. -10, on page 426, shows a batch GL/GLS system that uses databases. Again, pay particular attention to the strengths and weaknesses. VI. Factors That Influence the MRS One of the greatest benefits of information technology has been the automating of the routine bookkeeping tasks that in the past overwhelmed accountants and their staff. Now, as information professionals, they have the time and resources to play a much greater role in helping management make good business decisions. This section presents the management reporting system as the significant support system that it is. A. The Decision-Making Process You are probably familiar with the decision-making process from other courses. This section discusses the process as being made up of four steps. Do not take Study Prepared by H. M. Savage South-Western Publishing Co., 2004 Page -4
this material for granted. Read carefully all that is involved in each of the four steps: 1. identification of the problem this is often more difficult than expected; 2. evaluation of the alternative solutions; 3. implementation of the best solution; and 4. a post-implementation review. The example developed in the text is very good. Follow the reasoning. Of particular value in future chapters will be an understanding of a postimplementation review. B. Management Principles Depending on your experience with management courses, this section may be a review or it may be eye-opening. Of particular value are the little sections implications for the MRS.! The importance of the formalization of tasks cannot be ignored. Control and evaluation are difficult if tasks have not been well defined.! The link between responsibility and authority should be clear, but is not always so.! Span of control has a great deal of affect on a manager s need for information and the types of information that the manager needs. Be aware of the factors involved. See Fig. -12, on page 433.! Management by exception focuses a managers attention on areas requiring attention. C. Management Function, Level, and Decision Type Chapter 1 introduced the idea that a manager s need for information quantity, frequency, level of aggregation is affected by the manager s position in the organization and the type of decisions he or she makes. This part of the chapter discusses four categories of planning and control decisions:! strategic planning decisions made by toplevel managers; Study Prepared by H. M. Savage South-Western Publishing Co., 2004 Page -5
! tactical planning decisions made by middle managers to implement strategic plans;! management control decisions that raise some concerns about distinguishing between the manager and the unit he or she manages; and! operational control decisions which aim to assure that the organization operates in accord with preestablished criteria. Table - 2, on page 436, contrasts decision characteristics and decision types. D. Problem Structure It should not be surprising that there are different types of problems. The text discusses three elements or aspects of problems that determine whether a problem can be regarded as structured or unstructured. These elements are:! the data related to the situation;! the procedures or decision rules used in solving the problem; and! the objectives that the decision maker has for solving the problem. i. When all elements are known with certainty, the problem is structured. The example is quite clear. When all elements are known, the solution to the problem is clear and can be programmed within traditional data processing systems. ii. Unstructured problems involve uncertainty on one or more of those elements. When this is the case, the solution is not obvious. Judgement is important. E. Types of Management Reports This section discusses the characteristics of management reports information communicated to managers regardless of the form it takes. The objectives of reports are discussed first followed by a description of programmed (scheduled and ondemand) reports and ad hoc reports. One of the greatest benefits of new database management systems is the ease with which managers can obtain answers to ad hoc questions themselves, without the Study Prepared by H. M. Savage South-Western Publishing Co., 2004 Page -6
assistance of an information professional the ability to get the information now. The discussion of report attributes expands on ideas introduced in chapter 1. Recall the reference to Statement of Financial Accounting Concepts Number 2. F. Responsibility Accounting Responsibility accounting is based on the concept that managers are accountable only for items that they can control. This section may revisit material from your cost accounting or managerial accounting course. It emphasizes the importance of setting financial goals (that nasty word budget, again) and measuring and reporting performance. Part of the responsibility question leads to the identification of three types of responsibility centers: cost center, profit centers, and investment centers. Even if you have met these concepts before, be sure you understand them. They have definite implications for information systems. G. Behavioral Considerations This chapter has discussed the management reporting system and how it can help managers and organizations make better decisions. But, decisions are made by people and people are not as rational as programmed information systems. This last section raises several questions of a behavioral nature. Goal congruence refers to the need to match the goals of individuals (and the related measures of performance) to overall organizational goals. As information systems have become more complex and sophisticated, the possibility arises that too much information is generated and provided to decision makers a situation called information overload. [This may occur in some of your accounting courses!!!] In addition, if inappropriate performance measures are selected, inappropriate decisions are made. Read all of this material carefully. Review Questions for Chapter : 1-43 Discussion Questions for Chapter : 1-, 10, 12, 13, 15-17, 21-24 Study Prepared by H. M. Savage South-Western Publishing Co., 2004 Page -7