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2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 1 of 101

C HAPTER 14

General Ledger andReporting System

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INTRODUCTION

Questions to be addressed in this chapterinclude: What information processing operations are

required to update the general ledger andproduce reports for internal and externalusers?

How do IT developments impact the general

ledger and reporting system? What are the major threats in the general

ledger and reporting system and the controlsthat can mitigate those threats?

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INTRODUCTION

What is a balanced scorecard and how is itused?

What are data warehouses, and how do they

support business intelligence? How can the design of financial graphs affect

business decisions?

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INTRODUCTION

The general ledger and reporting system(GLARS) includes the processes in placeto update general ledger accounts andprepare reports that summarize results ofthe organizations activities.

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INTRODUCTION

One of the primary functions of GLARS is tocollect and organize data from: Each of the accounting cycle subsystems, which

provide summary entries related to the routineactivities in those cycles. The treasurer, who provides entries with respect to

non-routine activities such as transactions with

creditors and investors. The budget department, which provides budgetnumbers.

The controller, who provides adjusting entries.

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INTRODUCTION

The information must be organized tomeet the needs of internal and externalusers.

The system must be designed to produceregular periodic reports and to supportreal-time inquiries.

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GENERAL LEDGER AND REPORTINGSYSTEM

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 inthe accounting cycle.

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UPDATE THE GENERAL LEDGER

Updating the general ledger consists ofposting journal entries from two sources: Summary journal entries of routine

transactions from the accounting subsystems. Individual journal entries for non-routine

transactions from the treasurer. Examples:

Issuances or payment of debt and the associatedinterest. Issuances or repurchases of company stock and

paying dividends on that stock.

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UPDATE THE GENERAL LEDGER

Journal entries are often documented on aform called a jo u rn al v o u c h er .

After updating the general ledger (GL), journal entries are stored in a journalvoucher file.

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POST ADJUSTING ENTRIES

Adjusting entries originate in thecontrollers office at the end of eachaccounting period (month, quarter, year,

etc.) and after the initial trial balance hasbeen prepared. The t r ia l balan ce lists the balances for all

of the GL accounts. If properly recorded, the total of all debit

balances equal the total of all creditbalances.

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There are five types of adjusting entries: Accruals

An accrual involves an event that hasoccurred for which the related cash flowhas not yet taken place. Accrued revenue The company has

delivered a product or service to a customer

but has not yet been paid. Accrued expense The company has used upa good or service but not yet paid for it.

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There are five types of adjusting entries: Accruals Deferrals

A deferral involves a situation where the cash flowtakes place before the related revenue is earned or theexpense is incurred. Deferred revenue The company received payment for a

product or service that was not yet been completely deliveredto the customer (aka, unearned revenue).

Deferred expense The company paid for a good or servicewhich they had not yet completely used up (aka, prepaidexpense).

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There are five types of adjusting entries: Accruals Deferrals Estimates

Estimates are used to recognize expensesthat cannot be directly attributed to a relatedrevenue and must be allocated in a more

subjective or systematic manner. Examples:

Depreciation expense. Bad debt expense.

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There are five types of adjusting entries: Accruals Deferrals Estimates Re-evaluations

Re-evaluations result from: Reconciling actual and recorded values of assets.

Example: Making a lower-of-cost-or-market adjustment toinventory.

Recording an asset impairment.

Recording changes in accounting principles.

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There are five types of adjusting entries: Accruals Deferrals Estimates Re-evaluations Error corrections

Error corrections involve correctionof errors previously made in thegeneral ledger.

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Journal vouchers for adjusting entriesshould be stored in the journal voucherfile.

Once adjusting entries have beenrecorded, an adjusted trial balance isprepared from the new balances in thegeneral ledger.

The adjusted trial balance serves as theinput for the next step preparation of thefinancial statements.

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PREPARE FINANCIAL STATEMENTS

Activities in the preparation of financialstatements are as follows: Prepare an incom e s tatem ent

The income statement is prepared using thebalances in the revenue, expense, gain, andloss accounts listed on the adjusted trialbalance.

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Activities in the preparation of financialstatements are as follows: Prepare an income statement Prepare c los ing ent r ies

After preparation of the income statement, the revenue,expense, gain, and loss accounts are closed.

Their balances are transferred to retained earnings, so that thisaccount will have the correct ending balance.

If a separate account is kept for dividends, that account is alsoclosed to retained earnings.

Most companies perform monthly and annual closes.

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Activities in the preparation of financialstatements are as follows: Prepare an income statement Prepare closing entries Prepare a statement of stockholders

equi ty Reconciles the changes in the stockholders equity accounts

(paid-in capital and retained earnings) for the year.

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Activities in the preparation of financialstatements are as follows: Prepare an income statement Prepare closing entries Prepare a statement of stockholders equity Prepare a balance sh eet

Presents the balances in thepermanent accounts: Assets Liabilities

Owners Equity

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Activities in the preparation of financialstatements are as follows: Prepare an income statement Prepare closing entries Prepare a statement of stockholders equity Prepare a balance sheet Prepare a s t a tem ent o f cash f low s

Presents changes in cash for

the period categorized by: Operating activities Investing activities Financing activities

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PRODUCE MANAGERIAL REPORTS

The final step is prepare of reports forinternal purposes, including: Reports to verify the accuracy of the

posting process. Examples:

Lists of journal vouchers by numerical sequence,account number, or date.

Lists of general ledger account balances.

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The final step is prepare of reports forinternal purposes, including: Reports to verify the accuracy of the posting

process. Budgets for planning and evaluating

performance.

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performance:

Operating budget Depicts planned revenues and expenses for

each unit.

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performance:

Operating budget Capital expenditure budget

Shows planned cash inflows and outflowsfor each project.

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performance:

Operating budget Capital expenditure budget Cash flow budget

Shows anticipated cash inflows and outflows

for use in determining borrowing needs.

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performance:

Operating budget Capital expenditure budget Cash flow budget

Whats the difference between the operatingbudget and the cash flow budget?

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PREPARE MANAGERIAL REPORTS

Budgets and performance reports should bedeveloped on the basis of respons ib i l i tyaccoun t ing , i.e., reporting results on the basis

of the manager responsible: Breaks down financial results by sub-unit. Shows actual costs and variances for current month

and year-to-date for items the subunit controls.

The cost of a sub-unit is displayed as a single lineitem on the report for the next level up.

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Contents of the budgetary performancereports should be tailored to the nature ofthe unit being evaluated.- Cost centers

Examples: Production, service, andadministrative departments.

Present actual vs. budgeted costs, focusingonly on controllable costs.

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Contents of the budgetary performancereports should be tailored to the nature ofthe unit being evaluated.- Cost centers- Revenue centers

Example: Sales department.

Present actual vs. forecasted sales byproduct, geographical category, etc.

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Contents of the budgetary performancereports should be tailored to the nature ofthe unit being evaluated.- Cost centers- Revenue centers- Profit centers

Examples: IT and utilities that charge otherunits for their services.

Compare actual vs. budgeted revenues,expenses, and profits.

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Contents of the budgetary performancereports should be tailored to the nature ofthe unit being evaluated.- Cost centers- Revenue centers- Profit centers

- Investment centers Examples: Plants, divisions, and other

autonomous operating units. Provide calculations of return on investment.

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The method used to calculate the budgetstandard is crucial: Can use a fixed target and compare actual

results to the fixed budget. Problem: Does not adjust for unforeseen

changes in operating environment and may

penalize manager for factors beyond hiscontrol.

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Example: A unit forecasts sales of 1,000 units of its

product.

Actual sales are 1,200 units. Because sales rose, the cost of goods sold

also rose. The outcome is good for the profitability of the

company, but the production manager may bepenalized because production costs werehigher than the fixed target.

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Solution: Develop a flexible budget.

Break each item into fixed and variable

components. Adjust the variable components for variations in

sales or production. See example on next slide.

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SAMPLE FLEXIBLE BUDGET

Sales Revenue ($5 ea.) 500,000$ 600,000$ 600,000$

Production Costs Fixed (200,000) (200,000) (205,000) (5,000)$

Variable ($1.20 ea.) (120,000) (144,000) (141,600) 2,400$

Selling & Admin.Fixed (70,000) (70,000) (62,000) 8,000$Variable ($.50 ea.) (50,000) (60,000) (54,000) 6,000$

Income 60,000$ 126,000$ 137,400$

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XBRL: REVOLUTIONIZING THEREPORTING PROCESS

Although financial statements appearelectronically in a variety of formats, untilrecently disseminating this information was

cumbersome and inefficient. Recipients (SEC, IRS, etc.) required the informationin a variety of formats which was time-consuming.

Also conducive to errors, because re-entry of the

information was often necessary. Underlying problem: Lack of standards for

identifying the content of data.

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Solution: Extensible Business ReportingLanguage (XBRL) A variant of XML designed specifically to communicate

the contents of financial data. Creates tags for each data item much like HTML tags. Tag names specify line items in financial statements. Other fields in the tag provide information such as the year,

units of measure, etc.

Major software vendors are developing tools toautomatically generate XBRL codes soaccountants wont need to write code.

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XBRL provides two major benefits: Organizations can publish their financial

statements on time in a format that anyone

can use. Recipients will no longer need to manually re-

enter data they acquired electronically so thatdecision support tools can analyze them.

Means search for data on the Internet will be moreefficient and accurate.

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Benefits of XBRL apply to exchangingfinancial information both externally andinternally.

XBRL provides a great example of howaccountants can actively participate in ITdevelopment, since the accounting

profession spearheaded its development.

The power of XBRL lies in the informationprovided by its tags. XBRL taxonomies definewhat those tags represent. There are two basictypes of taxonomies. 1) Financial reportingtaxonomies, which have been developed fordifferent industries and countries, definesummary measures like accounts payable,inventory, and accounts receivable that appear infinancial statements and reports. 2) XBRL-GL

taxonomy (the GL stands for "global ledger")defines the underlying data elements in an theAIS, thereby tagging each individual piece ofbusiness data prior to its aggregation in reports.

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CONTROL: OBJECTIVES, THREATS,AND PROCEDURES

In the general ledger and reporting system (or anycycle), a well-designed AIS should provide adequatecontrols to ensure that the following 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 and

regulations. All disclosures are full and fair.

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There are several actions a company can takewith respect to any cycle to reduce threats oferrors or irregularities. These include: Using simple, easy-to-complete documents with

clear instructions (enhances accuracy andreliability).

Using appropriate application controls, such asvalidity checks and field checks (enhances

accuracy and reliability). Providing space on forms to record who completed

and who reviewed the form (encourages properauthorizations and accountability).

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Pre-numbering documents (encouragesrecording of valid and only validtransactions).

Restricting access to blank documents(reduces risk of unauthorized transaction).

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In the following sections, well discuss thethreats that may arise in the generalledger and reporting system, as well asthe controls that can prevent those threats.

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THREATS IN THE GENERALLEDGER AND REPORTING SYSTEM

The primary threats in the general ledgerand reporting system are: THREAT 1: Errors in updating the general

ledger and generating reports THREAT 2: Financial statement fraud THREAT 3: Loss, alteration, or unauthorized

disclosure of financial data THREAT 4: Poor performance You can click on any of the threats above to get

more information on: The types of problems posed by each threat. The controls that can mitigate the threats.

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SUPPORTING MANAGEMENTSINFORMATION NEEDS

Three tools or abilities can be particularlyuseful to management in decision making: The balanced scorecard Data warehouses Proper design of graphs of financial data

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THE BALANCED SCORECARD

A balanc ed sc orecard is a report thatprovides a multi-dimensional perspectiveon organizational performance.

Contains measures relating to fourperspectives of the organization: Financial

Customer Internal operations Innovation and learning

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The balanced scorecard shows: The organizations goals for each of the four

dimensions Specific measures of performance in attaining those

goals. It provides a more comprehensive overview of

organizational performance than financialmeasures alone.

Properly designed, it measures key aspects ofthe organizations strategy and reflects importantcausal links.

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With respect to the goals: Many organizations mistakenly use industry

benchmarks in designing their balanced

scorecards. This approach limits the companys

performance to that of its competitors andfails to consider the organizations uniquestrengths and weaknesses.

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Example: Dumbledore InsuranceCompanys top management agreed onthree key financial goals: Increased revenue streams through the sale

of new products. Increased profitability as reflected in return on

equity. Maintaining adequate cash flows to meet

obligations.

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They then created the following hypotheses (orcausal links) as to how these goals could beachieved: If we increase employee training ( innovation and

learning dimension ), that should improve our servicequality ( internal operations dimension ). If we increase our service quality ( internal

operations dimension ), that should improve ourcustomer satisfaction ( customer dimension ) andcause us to pick up a greater market share.

Improved customer satisfaction and market share(customer dimension ) should therefore result inimproved profitability ( financial dimension ).

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Given these hypotheses, Dumbledoredesigns and implements the scorecardshown on the following slide.

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Analyzing trends in the actual measuresallows Dumbledores management to testthe validity of their hypotheses:

If improvements in one perspective dontgenerate expected improvements in otherareas, top management should reevaluateand revise their hypotheses.

The ability to test and refine their strategy isone of the major benefits of the balancedscorecard.

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In developing a balanced scorecard: Top management should specify the goals to

be pursued in each dimension.

Accountants and IS professionals: Help them choose appropriate measures for

tracking attainment of these goals. Provide input on the feasibility of collecting data to

implement the various measures.

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USING DATA WAREHOUSES FORBUSINESS INTELLIGENCE

Management must constantly monitor andreevaluate the organizations financial andoperating performance in light of strategic goalsand must be able to alter plans quickly when theenvironment changes.

They may adopt ERP systems and integrated AIS systems to facilitate these activities.

However, these systems are designed primarilyto support transaction processing needs, andtypically contain data only for the current fiscalyear and maybe an extra month.

S G O S S O

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But strategic decision making requires access tolarge amounts of historical data. To fill this need, organizations are building separate

databases called data w areho us es . These are typically huge databases that contain both

detailed and summarized data for a number of years. They are separate from the AIS.

Organizations may also build separate, smallerwarehouses, called data marts , for individualfunctions such as finance or human resources.

USING DATA WAREHOUSES FOR

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Data warehouses and data marts are updatedperiodically to reflect the results of transactions thathave occurred since the last update.

They are structured differently than transactionprocessing databases:

Transaction processing databases are designed tominimize redundancy and maximize efficiency ofupdates.

Data warehouses are purposely designed to beredundant in order to maximize query efficiency.

They are usually dimensional in nature. Most use a star schema.

Dimension Table

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Fact Table

Location IDItem NumberBuyer NumberSupplier NumberTime PeriodDollar PurchasesUnit Purchases

Dimension Table

Location IDLocation NameBudgetStorage CapacityStateRegionCountry

Address

Item NumberItem NameDescription

CategorySubcategory

Dimension Table

Buyer NumberBuyer NameDepartmentDivisionCityStateRegionCountry

Dimension Table

Time PeriodDateMonthYearQuarterFiscal YearDay

Dimension Table

Supplier NumberSupplier NameIndustry CategorySubcategoryStateRegionCountry

Address

At the center of the star is asingle fact table that representsthe most important variable ofinterest.

Dimension Table

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Fact Table

Location IDItem NumberBuyer NumberSupplier NumberTime PeriodDollar purchasesUnit purchases

Dimension Table


Address

Item NumberItem NameDescriptionCategorySubcategory

Dimension Table


Dimension Table


Dimension Table


Address

The fact table contains multipleviews or measures of a variable anda number of foreign keys that link itto the factors that influence it.

Dimension Table

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Fact Table


Dimension Table


Address


Dimension Table


Dimension Table


Dimension Table


Address

This fact table contains info onpurchases of raw materials in unitsand dollars.

Dimension Table

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Fact Table


Dimension Table


Address


Dimension Table


Dimension Table


Dimension Table


Address

Relevant dimensions includelocation of storage, item,purchasing agent, department,supplier, and time period (in red) .

Dimension Table

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Fact Table


Dimension Table


Address


Dimension Table


Dimension Table


Dimension Table


Address

Data warehouses consist of manystars one for each important setof data.


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Business intelligence is the process ofaccessing data in a warehouse and usingit for strategic decision making. Two basic

techniques: Online analytical processing (OLAP)

The user employs queries to investigatehypothesized relationships in the data.

Can drill down to deeper levels with eachquery.


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Business intelligence is the process ofaccessing data in a warehouse and usingit for strategic decision making. Two basic

techniques: Online analytical processing (OLAP) Data mining

Uses sophisticated statistical analysis and artificialintelligence techniques such as neural networks to discoverunhypothesized relationships in the data.Lets just dig and see what we find!


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Proper controls are needed for datawarehouses: Data validation controls are essential to ensuring data

accuracy. The process of verifying the accuracy of the data, aka

sc rubb ing , is often one of the most time-consuming andexpensive steps.

Information should be protected from competitors or

from destruction by using: Access controls Encryption Backup provisions

SUPPORTING MANAGEMENTS

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Three tools or abilities can be particularlyuseful to management in decision making: The balanced scorecard

Data warehouses Proper design of graphs of financial data

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PRINCIPLES OF GRAPH DESIGN

Accountants and IS professionals can helpmanagement deal with informationoverload by preparing graphs that highlight

and summarize important facts. Well-designed graphs make it easy to

identify and understand trends and

relationships. Poorly-designed graphs can impair

decision making.

Insurance Type as % of Total

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Insurance Type as % of TotalBusiness

Life, 62%Health, 22%

Auto, 16%

LifeHealthAuto

Pie charts show the relative size of sub-components.

Auto Insurance Sales (In Thousands) By State

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Bar charts are the most common type and are usedto display trends.

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Principles that make bar charts easy toread: Use titles that summarize the basic

message.

Millions of Dollars of Sales by Line of Insurance

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Business

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Life Health Auto

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Principles that make bar charts easy toread: Use titles that summarize the basic message.

Include data values with each elementinstead of labeling the vertical axis. Thispractice facilitates mental calculations andanalyses.


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Business

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Life Health Auto

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Principles that make bar charts easy toread: Use titles that summarize the basic message.

Include data values with each element insteadof labeling the vertical axis facilitates mentalcalculations 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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LifeHealth

Auto

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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 facilitates mentalcalculations and analyses

Use two-dimensional, instead of three-dimensional,bars makes it easier to accurately assessmagnitude of changes and trends.

Use different shades of gray or colors insteadof patterns, dots, or stripes. They are easier todistinguish

Millions of Dollars of Sales by Line of InsuranceB i

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Business

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Life Health Auto

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Although readability is important, theultimate value of graphs is to supportdecision making. Two principles are

essential to accurate interpretation: Begin vertical axis at zero.

Millions of Dollars of Sales by Line of InsuranceB i

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Business

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Life Health Auto

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Although readability is important, theultimate value of graphs is to supportdecision making. Two principles are

essential to accurate interpretation: Begin vertical axis at zero. For graphs that depict time-series data,

order the x-axis chronologically from leftto right.

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Many annual reports contain graphs thatviolate these principles: Some done automatically by software.

Some done intentionally. There are no authoritative guidelines in

GAAP or auditing standards that prohibit

these behaviors, even though the resultscan be deceptive.

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SUMMARY

Youve learned about the information processingoperations that are required to update thegeneral ledger and produce reports for internaland external users.

Youve learned how IT developments impact thegeneral ledger and reporting system.

Youve learned about the major threats in thegeneral ledger and reporting system and thecontrols that can mitigate those threats.

SUMMARY

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SUMMARY

Youve learned how data warehouses anddata marts support business intelligence.

Youve learned how the design of financialgraphs can affect business decisions.

Documents

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