Chapter 8: Financial Reporting and Management This historical information supports

Reporting Systems management’s stewardship responsibility

to account for resource utilization.
 …for audit trail
IS Functions of GLS  Responsibility center file
 General ledger systems  financial data by responsibility centers for
 a hub connected to the other systems of MRS
the firm through spokes of information  contains the revenues, expenditures, and
flows other resource utilization data for each
 General ledger systems should: responsibility center in the organization.
 collect transaction data promptly and  The MRS draws upon these data for input
accurately. in the preparation of responsibility reports
 classify/code data and accounts. for management.
 Budget master file
 validate collected transactions/ maintain  budget data by responsibility centers for
accounting controls (e.g., equal debits MRS
and credits).
 process transaction data. Journal Voucher Layout for a General Ledger
• post transactions to proper Master File
accounts
• update general ledger  The source of input to the general ledger
accounts and transaction  can be used to represent summaries of
files similar transactions or a single unique
• record adjustments to transaction, identifies the financial amounts
accounts and affected general ledger (GL)
 store transaction data. accounts.
 Routine transactions, adjusting entries, and
 generate timely financial reports.
closing entries are all entered into the GL
via journal vouchers.
Relationship of GLS to Other Information  A responsible manager must approve
Subsystems journal vouchers, they offer a degree of
control against unauthorized GL entries.

Financial Reporting System

 SOPHISTICATED USERS WITH HOMOGENEOUS
INFORMATION NEEDS
o it is assumed that users of financial
reports understand the conventions
and accounting principles that are
GLS Database applied and that the statements have
 General ledger master file information content that is useful.
 principal FRS file based on chart of
accounts.
 This file is based on the organization’s
published chart of accounts.
 Each record in the GL master is either a
separate GL account (for example,
sales) or the control account (such as
AR—control) for a corresponding
subsidiary ledger in the transaction
processing system.
 The FRS = firm’s financial statements. The
MRS = to support internal information
reporting.
 General ledger history file
 the same format as the GL master
 used for comparative financial support
 Journal voucher file
 all journal vouchers of the current period
 provides a record of all general ledger
transactions and replaces the traditional 1. Capture the transaction. Within each transaction
general journal. cycle, transactions are recorded in the appropriate
 Journal voucher history file transaction file.
 journal vouchers of past periods
2. Record in special journal. Each transaction is entered
into the journal. Recall that frequently occurring classes

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of transactions, such as sales, are captured in special  Access controls:
journals. Those that occur infrequently are recorded in  Unauthorized access to G/L can result in
the general journal or directly on a journal voucher.
errors, fraud, and misrepresentations in
3. Post to subsidiary ledger. financial statements.
 Sarbanes-Oxley requires controls that limit
4. Post to general ledger. Periodically, journal vouchers, database access to only authorized
summarizing the entries made to the special journals
and subsidiary ledgers, are prepared and posted to the individuals.
GL accounts. The frequency of updates to the GL will be  Accounting records - trace source documents
determined by the degree of system integration. from inception to financial statements and
vice versa
5. Prepare the unadjusted trial balance.
6. Make adjusting entries.  Independent verification
7. Journalize and post adjusting entries.  G/L dept. reconciles journal vouchers
8. Prepare the adjusted trial balance. and summaries.
9. Prepare the financial statements.  Two important operational reports used:
10. Journalize and post the closing entries.
 journal voucher listing – details of each
11. Prepare the post-closing trial balance.
journal voucher posted to the G/L
 general ledger change report – the
effects of journal voucher postings on
G/L accounts
 GL/FRS Using Database Technology

GL/FRS Using Database Technology

XBRL—Reengineering Financial Reporting
Issue: HTML reports, however, cannot be
conveniently processed through IT automation.
Performing any analysis on the data contained in
the reports requires them to be manually entered
into the user’s information system.

Solution: eXtensible Business Reporting Language

(XBRL):
 is the Internet standard specifically designed
for business reporting and information
exchange.
 Objective: to facilitate the publication,
exchange, and processing of financial and
business information.
GLS Reports  XBRL is a derivative of another Internet
 General ledger analysis: standard called XML (eXtensible Markup
 listing of transactions Language).
 allocation of expenses to cost centers
 comparison of account balances from  Advantages:
prior periods  immediate update and reconciliation
 trial balances
 Financial statements:  timely, if not real-time, information
 balance sheet  Removes separation of transaction
 income statement authorization and processing
 statement of cash flows  Detailed journal voucher listing and
 Managerial reports: account activity reports are a
 analysis of sales compensating control
 analysis of cash  Centralized access to accounting records
 analysis of receivables  Passwords and authorization tables as
 Chart of accounts: coded listing of accounts
controls
Potential Risks in the GL/FRS HTML: Hyper Text Markup Language
 Improperly prepared journal entries
 Format used to produce Web pages
 Unposted journal entries
 defines the page layout, fonts, and
 Debits not equal to credits
graphic elements
 Subsidiary not equal to G/L control accounts
 used to lay out information for display in
 Inappropriate access to the G/L
an appealing manner like one sees in
 Poor audit trail
magazines and newspapers
 Lost or damaged data
 using both text and graphics (including
 Account balances that are wrong because of
pictures) appeals to users
unauthorized or incorrect journal vouchers
 Hypertext links to other documents on the Web
 Even more pertinent is HTML’s support for
GL/FRS Control Issues hypertext links in text and graphics that
 Transaction authorization - journal vouchers enable the reader to ‘jump’ to another
must be authorized by a manager at the document located anywhere on the
source dept World Wide Web.
 Segregation of duties – G/L clerks should not:
 have recordkeeping responsibility for XML: eXtensible Markup Language
special journals or subsidiary ledgers  XML is a meta-language for describing markup
 prepare journal vouchers languages.
 have custody of physical assets
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 Extensible means that any markup language whenever the data are placed in XBRL
can be created using XML. format for dissemination to outsiders.
 includes the creation of markup
languages capable of storing data in 4th Step: Generation of XBRL instance documents
relational form, where tags (formatting (the actual financial reports)
commands) are mapped to data values  The XBRL instance document can now be
published and made available to users. The
 can be used to model the data structure
document can be placed on an intranet
of an organization’s internal database server for internal use; it can be placed on
a private extranet for limited dissemination
Comparison of HTML and XML Documents to customers or trading partners; or it can
be placed on the Internet for public
dissemination.
 In its current state, the instance document
is computer-readable for analysis and
processing.
 More human-readable = HTML layout rules
can be provided in a separate style sheet
that Web browsers use to present the XBRL
information in a visually appealing manner.

 Advantages:
In the HTML example, the tags have predefined  Business offer expanded financial
meaning that describes how the attributes will be
presented in a document. The book order in this
information to all interested parties
example can only be viewed visually (similar to a FAX) virtually instantaneously.
and must be manually entered into the bookstore’s  Companies that use XBRL database
order entry system for processing. In the case of the XML technology can further speed the
order, the tags are customized to the user, and the process of reporting.
user’s application can read and interpret the tagged  Consumers import XBRL documents into
data. internal databases and analysis tools to
greatly facilitate their decision-making
XBRL: eXtensible Business Reporting Language processes.
 XBRL is an XML-based language for  Implications for Accounting
standardizing methods for preparing,  Audit implication for XBRL
publishing, and exchanging financial  taxonomy creation: incorrect taxonomy
information, e.g., financial statements. It is used results in invalid mapping that may cause
for reporting aggregated financial data, but
material misrepresentation of financial
can also be applied to communicating
information pertaining to individual data
transactions.  validation of instance documents:
ensure that appropriate taxonomy and
tags have been applied
 audit scope and timeframe: impact on
auditor responsibility as a consequence
of real-time distribution of financial
statements

Management Reporting Systems

 discretionary reporting because it is not
mandated, as is financial reporting
 Produce financial and nonfinancial information
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
1st Step: XBRL taxonomy monitoring the internal controls
 XBRL taxonomies are classification schemes. It
specifies the data to be included in an Factors That Influence MRS Design
exchange or report.  Management principles
 Management function, level, and decision
2nd Step: Cross-Reference each account in the type
reporting organization’s general ledger to an  Problem structure
appropriate XBRL taxonomy element (tag)  Types of management reports
 The mapping process is accomplished
 Responsibility accounting
using a simple tool such as Taxonomy
Mapper  Behavioral considerations

3rd Step: Embed tags Management Principles

 Once the mapping process is complete,  Formalization of tasks:
each database record will contain a  structures the firm around the tasks
stored tag as depicted by the Taxonomy performed rather than around
Element individuals’ unique skills
 Data mapping needs to be done only  allows specification of the information
once, but the embedded tags are used needed to support the tasks
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 purpose of formalization of tasks is to o Long-range planning usually
avoid an organizational structure in encompasses a period of between
which the organization’s performance, 1 and 5 years
stability, and continued existence  Short-term planning involves the
implementation of specific plans that are
depend on specific individuals.
needed to achieve the objectives of the
 The organizational chart shows some long-range plan.
typical job positions in a manufacturing o E.g. planning the marketing and
firm. promotion for a new product,
 Responsibility and authority: preparing a production schedule
 responsibility - obligation to achieve for the month, and providing
desired results department heads with budgetary
 authority - power to make decisions goals for the next 3 months
within the limits of that responsibility  Control Function ensures that the activities
of the firm conform to the plan. This entails
 delegated by managers to subordinates
evaluating the operational process (or
 define the vertical reporting channels individual) against a predetermined
through which information flows standard and, when necessary, taking
 Span of control: corrective action.
 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

A firm with a narrow span of control has fewer

subordinates reporting directly to managers. These
firms tend to have tall, narrow structures with Management Function, Level, and Decision
several layers of management. Firms with broad Type
spans of control (more subordinates reporting to  Strategic planning decisions:
each manager) tend to have wide structures, with  firm’s goals and objectives
fewer levels of management.
 scope of business activities
Organizational behavior research suggests that  organizational structure
wider spans of control are preferable because
they allow more employee autonomy in decision  management philosophy
making. This may translate into better employee  long-term, with broad scope and impact
morale and increased motivation. An important  non-recurring , with high degree of
consideration in setting the span of control is the uncertainty
nature of the task. The more routine and structured  need highly summarized information
the task, the more subordinates one manager can
control.  require external & internal information
sources
 Management by exception:  Tactical planning decisions:
 Managers should limit their attention to  subordinate to strategic decisions
potential problem areas, rather than  short term
being involved with every activity or  specific objectives
decision  recur often
 Reports should focus on changes in key  fairly certain outcomes
factors that are symptomatic of potential  limited impact on the firm
problems.  Management control decisions:
 Unnecessary details that may draw  using resources as productively as
attention away from important facts possible in all functional areas
should be excluded from reports. (E.g.  evaluating the performance of
Inventory Exception Report - used to subordinates against standards
identify items of inventory that turn over  Measuring performance is difficult
more slowly or go out of stock more because sound decisions with long-term
frequently than normal. Management benefits may negatively impact the
attention must be focused on these short- term bottom line.
exceptions. The majority of inventory  Operational control decisions:
 ensures that the firm operates in
items that fluctuate within normal levels accordance with pre-established criteria
should not be included in the report.)  deal with routine tasks
 narrower focus, dependent on details
Management Level and Decision Type  highly structured
 short time frame
 Long-range planning involves a variety of  associated with a fairly high degree of
tasks, including setting the goals and certainty
objectives of the firm, planning the growth  Three basic elements or steps:
and optimum size of the firm, and deciding  set attainable standards (pre-established
on the degree of diversification among the levels of performance that managers
firm’s products believe are attainable. Standards apply
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 to all aspects of operations, such as sales  reduce the level of uncertainty
volume, quality control over production, associated with a problem facing the
costs for inventory items, material usage decision maker
in the production of products, and labor  influence the behavior of the decision
costs in production.)
maker in a positive way
 performance evaluate (The decision
maker compares the performance of the
operation in question against the Types of Management Reports
standard. The difference between the  Programmed Reporting
two is the variance.)  provide information to solve problems
 take corrective action (After comparing that users have anticipated.
the performance to the standard, the
 There are two subclasses of programmed
manager takes action to remedy any
out-of-control condition.) reports: scheduled reports and on-
demand reports.
 The MRS produces scheduled reports
according to an established time frame.
This could be daily, weekly, quarterly,
and so on. Examples of such reports are
a daily listing of sales, a weekly payroll
action report, and annual financial
statements.
 On-demand reports are triggered by
Problem Structure events, not by the passage of time. For
 Reflects and affects how well decision makers example, when inventories fall to their
understand and solve problems pre-established reorder points, the system
 Elements of problem structure: sends an inventory reorder report to the
 Data— the values used to represent purchasing agent.
factors that are relevant to the problem  Ad Hoc Reporting
 Procedures —the sequence of steps or  Managers cannot always anticipate their
decision rules used in solving the problem information needs. This is particularly true
 Objectives —the results the decision for top and middle management. In the
maker desires to attain by solving the dynamic business world, problems arise
problem. that require new information on short
notice, and there may be insufficient
time to write traditional computer
 When all three elements are known with programs to produce the required
certainty, the problem is structured. Payroll information.
calculation is an example of a structured  Data mining is the process of selecting,
problem exploring, and modeling large amounts
of data to uncover relationships and
 Problems are unstructured when any of the global patterns that exist in large
three characteristics identified previously databases but are hidden among the
are not known with certainty. In other vast amount of facts.
words, an unstructured problem is one for  Verification Model uses a drill-down
which we have no precise solution technique to either verify or reject a
techniques. Either the data requirements user’s hypothesis
are uncertain, the procedures are not  Discovery Model uses data mining to
specified, or the solution objectives have discover previously unknown but
not been fully developed. Such a problem important information that is hidden
is normally complex and engages the within the data. This model employs
decision maker in a unique situation. inductive learning to infer information
from detailed data by searching for
recurring patterns, trends, and
generalizations.
 A central feature of a successful data
mining initiative is a Data Warehouse of
archived operational data. A data
warehouse is a relational database
management system that has been
designed specifically to meet the needs
of data mining. The warehouse is a
central location that contains
operational data about current events
Management Reports (within the past 24 hours) as well as
 Report – imply a written message presented on events that have transpired over many
sheets of paper years.
 Report objectives - reports must have value or
information content Report Attributes
 They should…  Relevance – useful to decision making
 Summarization – appropriate level of detail

5
 Exception orientation – identifies risks of going  Short-term v. long-term measures
out of control and should ignore activities that
are under control. Behavioral Considerations: Information
 Accuracy – free of material errors Overload
 Completeness – essential information  Occurs when managers receive more
 Timeliness – in time for decisions information than they can assimilate.
 Conciseness – understandable format  Can cause managers to disregard formal
information and rely on informal—probably
Attributes of Useful Information According to inferior—cues when making decisions.
FASB’s Conceptual Framework
Behavioral Considerations: Performance
Measures
 Appropriate performance measures
 Stimulate behavior consistent with firm
objectives.
 Managers consider all relevant aspects,
not just one.
 Example of inappropriate measures:
 price variance – can affect the quality of
the items purchased
 quotas – can affect quality control,
material usage efficiency, labor relations,
plant maintenance
 profit measures – can affect plant
investment, employee training, inventory
Responsibility Accounting reserve levels, customer satisfaction
 Implies that every economic event that affects
the organization is the responsibility of and can
be traced to an individual manager
 Incorporates the fundamental principle that
responsibility-area managers are accountable
for items that they control
 These top-down and bottom-up information
flows represent the two phases of responsibility
accounting: (1) creating a set of financial
performance goals (budgets) pertinent to the
manager’s responsibilities, and (2) reporting
and measuring actual performance as
compared to these goals.

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.

Measuring and Reporting Performance

 Performance measurement and reporting
take place at each operational segment in
the firm. This information flows upward as
responsibility reports to senior levels of
management.

Responsibility Centers
 Cost center – responsible for keeping costs
within budgetary limits
 Profit center – responsible for both cost control
and revenue generation
 Investment center – has general authority to
make a wide range of decisions affecting
costs, revenue, and investments in assets

Behavioral Considerations: Goal Congruence

 MRS and compensation schemes help to
appropriately assign authority and
responsibility.
 If compensation measures are not carefully
designed, managers may engage in actions
not optimal for the organization.
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