Accounting Information Systems, 6th edition

James A. Hall

COPYRIGHT © 2009 South-Western, a division of Cengage Learning. Cengage Learning and South-Western

are trademarks used herein under license

Objectives for Chapter 8Features, advantages, and disadvantages

of various coding schemesOperational features of the GLS, FRS, and

MRSPrinciple operational controls governing

the GLS and FRSFactors that influence the design of the

MRSElements of a responsibility accounting

system

Uses of Coding in AISConcisely represent large amounts of

complex information that would otherwise be unmanageable

Provide a means of accountability over the completeness of the transactions processed

Identify unique transactions and accounts within a file

Support the audit function by providing an effective audit trail

Sequential CodesRepresent items in sequential orderUsed to prenumber source documentsTrack each transaction processed Identify any out-of-sequence documentsDisadvantages:

arbitrary informationhard to make changes and insertions

Block CodesRepresent whole classes by assigning

each class a specific range within the coding scheme

Used for chart of accounts The basis of the general ledger

Allows for the easy insertion of new codes within a block Don’t have to reorganize the coding structure

Disadvantage:arbitrary information

Group CodesRepresent complex items or events involving

two or more pieces of data using fields with specific meaning

For example, a coding scheme for tracking sales might be 04-09-476214-99, meaning:

Store Number Dept. Number Item Number Salesperson

04 09 476214 99

• Disadvantages:– arbitrary information– overused

Alphabetic CodesUsed for many of the same purposes as

numeric codes Can be assigned sequentially or used in

block and group coding techniquesMay be used to represent large numbers

of itemsCan represents up to 26 variations per

fieldDisadvantage:

arbitrary information

Mnemonic CodesAlphabetic characters used as

abbreviations, acronyms, and other types of combinations

Do not require users to memorize the meaning since the code itself is informative – and not arbitrary NY = New York

Disadvantages:limited usability and availability

IS Functions of GLSGeneral ledger systems should:

collect transaction data promptly and accuratelyclassify/code data and accountsvalidate 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 datagenerate timely financial reports

Input

Process

Output

GeneralLedgerSystem(GLS)

FinancialReportingSystem

ManagementReportingSystem

InventoryControl

Payroll

CashDisbursements

AccountsPayable

CostAccounting

CashReceipts

Sales

Billings

GLS DatabaseGeneral ledger master file

principal FRS file based on chart of accountsGeneral ledger history file

used for comparative financial supportJournal voucher file

all journal vouchers of the current periodJournal voucher history file

journal vouchers of past periods for audit trailResponsibility center file

financial data by responsibility centers for MRSBudget master file

budget data by responsibility centers for MRS

Source documents

Journal entries in the

journal

Post entries to the ledger

Trial balance

Financial statements

Adjusting and closing

Financial Reporting Process Flowchart

GLS ReportsGeneral ledger analysis:

listing of transactionsallocation of expenses to cost centerscomparison of account balances from prior periodstrial balances

Financial statements:balance sheet income statementstatement of cash flows

Managerial reports:analysis of salesanalysis of cashanalysis of receivables

Chart of accounts: coded listing of accounts

Potential Risks in the GL/FRSImproperly prepared journal entriesUnposted journal entriesDebits not equal to creditsSubsidiary not equal to G/L control

accountsInappropriate access to the G/L Poor audit trailLost or damaged dataAccount balances that are wrong because of

unauthorized or incorrect journal vouchers

GL/FRS Control IssuesTransaction authorization - journal

vouchers must be authorized by a manager at the source dept

Segregation of duties – G/L clerks should not:have recordkeeping responsibility for

special journals or subsidiary ledgersprepare journal vouchershave custody of physical assets

Access controls:Unauthorized access to G/L can result in

errors, fraud, and misrepresentations in financial statements.

Sarbanes-Oxley requires controls that limit database access to only authorized individuals.

Accounting records - trace source documents from inception to financial statements and vice versa

GL/FRS Control Issues

Independent verification G/L dept. reconciles journal vouchers and

summaries. Two important operational reports used:

journal voucher listing – details of each journal voucher posted to the G/L

general ledger change report – the effects of journal voucher postings on G/L accounts

GL/FRS Control Issues

GL/FRS Using Database Technology

Advantages:immediate update and reconciliationtimely, if not real-time, information

Removes separation of transaction authorization and processingDetailed journal voucher listing and account

activity reports are a compensating control

Centralized access to accounting recordsPasswords and authorization tables as controls

GL/FRS Using Database Technology

Management Reporting Systems 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

monitoring the internal controls

Factors That Influence MRS Design Management principlesManagement function, level, and

decision typeProblem structureTypes of management reportsResponsibility accountingBehavioral considerations

Management Principles

Formalization of tasks:structures the firm around the tasks performed rather than around individuals’ unique skills

allows specification of the information needed to support the tasks

Responsibility and authority:responsibility - obligation to achieve desired results

authority - power to make decisions within the limits of that responsibility

delegated by managers to subordinates

define the vertical reporting channels through which information flows

Management Principles

Span of control:the number of subordinates directly under the manager’s

controldetailed 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

Management Principles

Management by exception:Managers should limit their attention to potential problem areas.

Reports should focus on changes in key factors that are asymptomatic of potential problems.

Management Principles

Management Function, Level, and Decision Type

Strategic planning decisions:firm’s goals and objectivesscope of business activitiesorganizational structuremanagement philosophylong-term, with broad scope and impactnon-recurring , with high degree of uncertaintyneed highly summarized informationrequire external & internal information sources

Management Function, Level, and Decision Type

Tactical planning decisions: subordinate to strategic decisions

short term specific objectivesrecur oftenfairly certain outcomeslimited impact on the firm

Management Function, Level, and Decision Type

Management control decisions:using resources as productively as possible in all

functional areas evaluating the performance of subordinates

against standardsMeasuring performance is difficult because

sound decisions with long-term benefits may negatively impact the short- term bottom line.

Management Function, Level, and Decision Type

Operational control decisions:deal with routine tasksnarrower focus, dependent on details highly structuredshort time frame

Three basic elements or steps:set attainable standards evaluate performancetake corrective action

Management Function, Level, and Decision Type

Classification of Decision Types by Decision Characteristics

Problem StructureReflects and affects how well decision makers understand and solve problems

Elements of problem structure:dataproceduresobjectives

Problem Structure

StrategicManagement

TacticalManagement

Operations Management

Operations

Information System Management Level Problem Structure

Unstructured

Structured

PartiallyStructured

Tra

ditio

nal I

S

Non

-Tra

ditio

nal I

S

Management ReportsReport objectives - reports must

have value or information content They should…

reduce the level of uncertainty associated with a problem facing the decision maker

influence the behavior of the decision maker in a positive way

Report AttributesRelevance – useful to decision makingSummarization – appropriate level of

detailException orientation – identify risksAccuracy – free of material errorsCompleteness – essential informationTimeliness – in time for decisionsConciseness – understandable format

Attributes of Useful Information According to FASB’s Conceptual Framework

Relevant Information

Relevant Information

Predictive Value

Predictive Value

Feedback Value

Feedback Value

TimelyTimely

NeutralNeutral

VerifiableVerifiable Reliable Information

Reliable Information

Representational Faithfulness

Types of Management ReportsProgrammed reports:

scheduled reports – produced at specified intervals, e.g., weekly

on-demand reports – triggered by events, e.g., inventory levels drop to a certain level

Ad hoc reports:designed and created “as needed” situations arise that require new

information

Responsibility AccountingImplies 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

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.

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 CongruenceMRS 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.Short-term v. long-term measures

Occurs when managers receive more information than they can assimilate

Can cause managers to disregard formal information and rely on informal—probably inferior—cues when making decisions

Behavioral Considerations: Information Overload

Appropriate performance measuresStimulate behavior consistent with firm objectivesManagers consider all relevant aspects, not just

oneExample 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 reserve levels, customer satisfaction

Behavioral Considerations: Performance Measures