Week 10:

Accounting process

MIS2101: Management Information Systems

Based on material developed by C.J. Marselis

Introduction

Accounting tightly integrated with other functional areas PurchasingMarketing and SalesSupply Chain Management

Accounting activities are necessary for decision making

Types of Accounting

What is the purpose of “Financial Accounting”?

What is the purpose of “Managerial Accounting”?

4

Sales Process

Where does Accounting have an interest?

Is this financial accounting or managerial accounting?

Can you identify 5 examples?

USDA Nutrition Label

How you know what’s inside before you buy

For investors, how do you know “what’s inside” before you buy?

Financial Accounting StatementsIncome Statement

Shows sales, cost of sales and overall profit for a period of time

(quarter, year)

Balance SheetShows account balances

Picture of the overall financial health of a company

Accounting Information Before integrated systems

Data gathered by each functional area Accounting department didn’t have real-time access Accountants and clerks had to “research” their own company

to get information

With ERP Materials management records a goods receipts as an

increase in inventory Accounting records a goods receipts as an increase in the

value of inventory The same transaction provides information for both

The General Ledger (GL) in an Integrated System

What is the “General Ledger”? When is the general ledger updated with a non-integrated

system? How about with an integrated system?

SAP Module Feeds to GLSales and Distribution (SD) - Sales to Customer Accounts Receivable (AR) Entries

Materials Management (MM) - Purchase Orders made in

Accounts Payable (AP) Entries

Payroll Processing (HR) Expense EntriesFinancial Accounting (FI) - Manages the AR and AP items created in SD and MM

GL accounts closed in FI at end of a fiscal period

Credit Management

Companies extend credit to customers to make purchases

Credit is limitedWith each purchase, available credit is reducedWith each payment or return, available credit is

increased What do you do if a new sale will put a customer

over their limit?

10

Sales Process

Credit report sent weekly

How many other purchases this week?

Have we received any payments this week?

Have they made any returns this week?

How would this look with an integrated system?

Accounting Data and Profitability Analysis

Inaccurate or incomplete data leads to flawed analysis & bad decision making

What are some of the causes of data problems?

Inconsistent Record Keeping

Direct Division & Distributor Division keep their own records and keep different information Direct Division records sales region Distributor Division records sales state Can make some reporting extremely challenging

Sales by state within region Production records are paper, not electronic How many places can errors be introduced? How would this look with an ERP?

Inaccurate Inventory Costing Systems

Inventory is expensive!

What are some of your major costs?

Question

How difficult is it to answer this question with an integrated system?

Inventory Costing Systems How much does it cost me to make an individual

product and where do I get all of this information?

Which products are profitable and which are not? Without knowing your costs, are you sure?

What happens to costs when production is interrupted?

Do they really have a clue? What if they had an ERP?

Question

What do we mean when we say a company has do “close its books”?

How often does a company do this?

How complicated is this?

Even More Complicated for Companies with Subsidiaries

What do I need to do to produce financial reports when I have a company with subsidiaries?

What if I have different subsidiaries in different countries?

What if one subsidiary sells products to another subsidiary?

Case Study: Microsoft

Microsoft consolidates financial information from 130 subsidiaries

Pre-SAP: each subsidiary had separate accounting Each used different systems, with different field sizes, types of

characters, account structures Transmitted the files to another system where manipulation of the

data was required Consolidation took over a week

With SAP: Microsoft can look directly at financial activity at any subsidiary around the world

Case Study – Cisco and One-Day Close

Closing books zeroing out temporary accounts

Takes days/weeks/months to get all the financial figures in balance before company can close the financial period

“Virtual closings” during the month can show how well the company is doing

Cisco’s closing went from 2 weeks to 1 day by switching from “un-integrated” systems to Oracle ERP

Enron Collapse

Enron Collapse Energy company revolutionizing the oil and gas business On Oct. 16, 2001, Enron’s creative financial arrangements began

to unravel On Dec. 2, 2001, Enron made the largest bankruptcy filing in

history Key cause: Enron’s partnerships shifted billions of debt off Enron’s

books so Enron could borrow money more cheaply Arthur Andersen:

Respected accounting firm with firm with 28,000 employees - issued annual reports attesting to the validity of Enron’s financial statements

Arthur Andersen indicted for, among other things, destruction of Enron documents

Results of Enron Collapse Enron’s 20,000 creditors will receive

approximately 20% of the $63 billion they are owed

Shareholders will receive nothing Many employees invested large sums of money in

Enron stock via 401K savings plans Arthur Andersen dismantled 31 individuals either have been tried or will be

tried on criminal charges The Sarbanes-Oxley Act was passed

Sarbanes-Oxley Act of 2002 Requires public company’s annual report

contain management’s internal control report Must include documentation of controls An integrated information system provides

tools to implement internal controlsControls cannot necessarily prevent effort to

circumvent standard processes Companies with ERP systems will have an

easier time complying with Sarbanes-Oxley

Archiving And Fraud Detection

Why it’s hard to delete information in SAP?

What could an unscrupulous employee do if this were not true?

What is “Archiving” in SAP?

Data on a company’s materials cannot be deleted directly, but must be archived for deletion

Integrated System and Fraud Detection

Changes to data are tracked

SAP R/3 maintains detailed records on all changes made to material master data

Integrated System and Fraud Detection

What is “User Authorization” all about?

How many employees does it take to do something like create and approve the payment of a large invoice?

Integrated System and Fraud Detection

What are “Tolerance Groups”?

Integrated System and Fraud Detection

Financial Transparency

ERP systems have “drill down” functionality from report to source documents (transactions) that created them

Makes it easier for auditors to verify integrity of reports

Double-clicking on the 8,810.00 debit will provide details on the transactions that make up the item

Line items linked…

Figure 5.12 Documents that make up G/L Account Balance for Raw Material Consumption

Selecting the 10.00 item and clicking on the details icon will provide more information on the item

…to the documents that created them

Figure 5.13 Details on $10.00 line item in G/L account for raw material consumption

Summary Companies use accounting systems to record

transactions and generate financial statements Should have ability to summarize data to assist

managers in their daily and strategic work With “un-integrated” systems, accounting data might

not be current Integrated IS with common database to record

accounting data facilitates inventory benefits Compliance with Sarbanes-Oxley Act facilitated with

integrated systems