DISCUSSION QUESTIONS

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1. Since general ledger clerks have access to the general ledger, they should not have

access to the journal vouchers in the source departments. If these journal vouchers

are acquired by the general ledger clerks, or anyone else with authorization to enter

the general ledger, these vouchers may be used to make unauthorized entries.

Prenumbering and logging these documents at their source provides a means of

accountability.

2. The data comes from the various transaction processing departments. Specifically,

the cash receipts journal, sales journal, purchases journal, and any another

miscellaneous transactions are the various sources of data which are input into the

system. Once this data is input into the system, the general ledger, as well as

subsidiary ledgers, are updated. After inspection of a trial balance of the general

ledger accounts, any necessary adjustments and error corrections are made. Finally,

the financial statements are prepared and distributed to the appropriate user groups.

3. If journal vouchers are missing, or are fabricated, or are erroneous, and information

is misrepresented in the financial statements, then any decisions made by investors

and governmental agencies is based upon bad data. If an investor provides capital

to a firm based upon its financial statements and these financial statements are

incorrect, if the investor loses money once the corrections are made, the external

user which suffered a loss may claim the firm was either fraudulent or negligent and

sue for the lost amount. Governmental agencies, such as the IRS, may impose

severe penalties for inaccurate reporting of data.

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4. Ultimately, the purpose is to be able to take any account on the financial statement

and trace back to the source documents which comprise the number. However, the

audit trail must also be examined from the other direction to ensure that all

transactions end up being reflected in the financial statements. In other words, if the

financial statement balance for an account is traced back to the originating

documents, then accuracy and verifiability is present, but completeness is not

necessarily present. Tracing a sample of source documents through to their effect

on the financial statements allows the property of completeness to be verified.

5. In batch GL systems, transaction processing applications summarize and capture

transactions in journal vouchers where they are held, reviewed, and later posted to

the GL. In such systems, journal vouchers are the authority and the source of all GL

postings. In contrast, a real-time GL system posts each transaction directly to the

general ledger and concurrently creates a journal voucher. The journal voucher in

this system does not authorize a GL entry in the traditional sense. Rather, it provides

a posting reference and audit trail, which links GL summary account balances to

specific transactions.
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6. If the standards are unrealistic or outdated, then variances will be reported

constantly and probably ignored. For example, if 5 ounces of a raw material is set as

the standard based upon past data, but the most realistic amount to be used for

each unit is actually 5.25 ounces (the unit specifications have changed slightly), then

the exception reports will constantly show a variance since the standard is not

realistic given the design change. The manager will get used to seeing an

unfavorable variance. If a machine begins to have problems and starts to require 5.5

ounces, then the unfavorable variance will increase, but the manager may not see

the difference as readily since he/she is used to seeing an unfavorable variance in

every report.

7. Audit implications include:

Taxonomy Creation. Taxonomy may be generated incorrectly, resulting in an

incorrect mapping between data and taxonomy elements that could result in material

misrepresentation of financial data. Controls must be designed and in place to

ensure the correct generation of XBRL taxonomies.

Validation of Instance Documents. As noted, once the mapping is complete and tags

have been stored in the internal database, XBRL instance documents (reports) can

be generated. Independent verification procedures need to be established to

validate the instance documents to ensure that appropriate taxonomy and tags have

been applied before posting to Web server.

Audit Scope and Timeframe. Currently, auditors are responsible for printed financial

statements and other materials associated with the statements. What will be the

impact on the scope of auditor responsibility as a consequence of real-time

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distribution of financial statements across the Internet? Should auditors also be

responsible for the accuracy of other related data that accompany XBRL financial

statements, such as textual reports?

8. Although both use tags (words that are bracketed by the symbols < and >) and

attributes such as Doe, John, the way in which these tags and attributes are used

differs. In the HTM the tags have predefined meaning that describes how the

attributes will be presented in a document. In the case of the XML the tags are

customized to the user, and the user’s application can read and interpret the tagged

data.
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9. Much of the data used for middle and higher level decision making must come from

data sources outside of the traditional information systems. Examples of such data

would be marketing data collected by the marketing department, new product design

specifications generated by research and development, demographic information

from government sources, competitor information from new sources, exchange rates

from the financial press, union requirements from union representatives, etc.

10. Both types of reports are very important. The scheduled reports are important for

controlling the day-to-day operations. The on-demand reports are very important and

helpful in sudden situations that arise and demand immediate attention. The ability

to retrieve information in a crisis situation is crucial.

11. Scheduled reports are prepared according to an established time frame. The reports

contain information in a pre-formatted manner. The multiple users become

accustomed to the reports and are able to focus on the information which is

necessary to make a specific type of decision. These reports are designed this way

for processing and printing efficiency. If the reports contain too much information,

however, the trade-off is inefficient processing by the user due to information

overload.

12. An example where timeliness is more important in accounting information systems

occurs for year-end accruals. An exact number regarding the cost of utilities may not

be available for three or four weeks, yet the accrued liability account must reflect this

liability on the year-end financial statements. Thus, an estimate is more important to

have during the financial statement preparation period than having no amount while

waiting for the exact number.

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13. Downward flows represent goals for managers such as budget goals. The goals are

used to direct and motivate managers. Upward flows report performance

measurements, and these are used to evaluate management performance. The

upward and downward goals are related. The performance measurements (upward

flows) are compared to the goals (downward flows).

14. The verification model uses a drill-down technique to either verify or reject a user’s

hypothesis. The discovery model uses data mining to discover previously unknown

but important information that is hidden within the data. This type of system employs

inductive learning to infer information from detailed data by searching for recurring

patterns, trends, and generalizations. This approach is fundamentally different from

the verification model in that the data are searched with no specific hypothesis

driving the process.

15. 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 (within the past 24

hours) as well as archived operational data relating to events that have transpired

over many years. Data are coded and stored in the warehouse in detail and at

various degrees of aggregation to facilitate identification of recurring patterns and

trends. A transaction processing database contains current data and that facilitates

the processing of economic events. It is not designed to support historical analysis of

past events.
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16. The production department is held accountable for controllable costs which relate to

the production demand. Profit centers are not appropriate since they include non-

controllable items and measure the performance by the profit center’s contribution

(including revenue) after non-controllable costs. The production department has no

control over the activities of the sales and marketing department, thus, a cost center

is more appropriate since it holds the production department responsible for

measures they can control.

17. A performance measure based solely upon quantity of production output can

adversely affect the quality of the product. The foreman may push for production of

more units, while disregarding the quality. Further, in an attempt to produce more

units, the foreman may push workers to work in an inefficient manner with respect to

raw materials usage. The workers may become sloppy and use more raw materials.

Further, the workers may get frustrated with being pushed to produce more than is

realistic.

18. Managers may choose not to replace equipment when it needs to be replaced, in

order to reduce the asset base, thus decreasing the denominator in the ROI figure.

Not replacing old equipment may cause a firm to produce less efficiently, and

actually in the long-run drive up raw materials scrap cost and labor costs due to

reworks. These manipulations are not good for the firm in the long-run because the

firm may find that it is operating a manufacturing process with tattered and obsolete

equipment. Unfortunately, by the time the information becomes available, the

manager may either be promoted or have obtained a higher position in another

company based on his seemingly great ROIs from the past.

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19. Too much information can cause the user to spend unproductive and unnecessary

time weeding through reports to get to the relevant components. Also, information

overload can result and may cause the user to bypass or misinterpret the relevant

information when it is hidden in a deluge of other data.

MULTIPLE CHOICE

1. B

2. D

3. C

4. C

5. C

6. A

7. B

8. D

9. A

10. E

11. B

12. A

13. B

14. A

15. B
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PROBLEMS

1.

2.

2 Record transaction in special journal TPS

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6 Make adjusting entries FRS

1 Capture the transaction TPS

11 Prepare the post-closing trial balance FRS

8 Prepare the adjusted trial balance FRS

9 Prepare the financial statements FRS

7 Journal and post adjusting entries GLS

3 Post to the subsidiary ledger TPS

4 Post to the general ledger GLS

10 Journalize and post the closing entries GLS

5 Prepare the unadjusted trial balance FRS

3. a. Yes it is appropriate. XBRL is typically used for reporting aggregated financial

data but can also be applied to communicating information pertaining to individual

transactions and internal business units. To make the data useful to others they

need to be organized, labeled, and reported in a manner that is generally accepted.

This involves mapping the organization’s internal data to XBRL taxonomy elements

to produce an XBRL instance document. Companies that use native-XBRL database

technology internally as their primary information storage platform can speed the

process of reporting. Users can import XBRL documents into internal databases and

analysis tools to greatly facilitate decision making.

b. 1. Can provide the financial community with a standardized method for

preparing, publishing, and automatically exchanging financial information,

including financial statements of publicly held companies.

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2. XBRL documents can be placed on an intranet server for

internal use.

3. They can be placed on an extranet for dissemination to

customers or trading partners.

4. If Leslie is preparing the journal vouchers and/or posting to the subsidiary ledgers,

she should not be entering the information into the general ledger. Performing these

two functions is not in conformance with segregation of functions. A separate

general ledger clerk should post the entries to the general ledger and reconcile the

control accounts in the general ledger to the corresponding subsidiary ledger.

Having source documents, such as journal vouchers, without preassigned numbers

is very risky. If a separate general ledger clerk did exist as mentioned above, this

person could visit Leslie’s office and inconspicuously take a couple of journal

vouchers without anyone knowing (since the forms are not numbered). The general

ledger clerk could then enter unauthorized entries into the general ledger. Further,

the possibility that Leslie makes an error in recording journal voucher numbers

incorrectly is highly possible.

5. See drawing on the following page. The only change made is that the

daily sales transactions are used to immediately update the sales file.

The daily applications create cumulative totals of each day’s

transactions on disk. The totals are merged with the other applications’

totals prior to updating the general ledger and other database files.
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6.
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7. The journal voucher listing and general ledger change reports allow the transactions

to be analyzed for accuracy and completeness. Any errors noted can be changed

and input into the system prior to preparing the financial statements. For Figure 8-

10, the update general ledger procedure would include a listing of the journal

voucher listing and general ledger change report. Again, any noted errors can be

corrected prior to the generation of financial statements.

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8.
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9. Determining the mix of products to manufacture this year—tactical

Examining whether the number of defective goods manufactured is within a certain

range—operational

Expanding a product line overseas—strategic

Determining the best distribution route—tactical

Examining whether the cost of raw materials is within a certain range—managerial

Examining whether personnel development cost is rising—managerial

Employing more automated manufacturing this year—Managerial

Examining whether the amount of scrap material is acceptable—operational

Building a new plant facility—strategic

Examining whether employees’ attitudes are improving—managerial

Examining whether production levels are with a predicted range—managerial and

operational

Acquiring a supplier—tactical

Increasing production capabilities this year by purchasing a more efficient piece of

machinery—tactical

Closing down a plant—strategic

10. Cash Disbursements Listing—scheduled

Overtime Report—scheduled if routine, on-demand if non-routine

Customer Account History—on-demand

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Inventory Stock-out Report—on-demand

Accounts Receivable Aging List—on-demand

Duplicate Paycheck Report—scheduled

Cash Receipts Listing—scheduled

Machine Maintenance Report—scheduled

Vendor Delivery Record Report—on-demand

Journal Voucher Listing—scheduled

Investment Center Report—scheduled

Maintenance Cost Overruns Report—on-demand

11. a. 1. For the original organizational structure proposed by Roland Ford, the

advantages include:

 a hierarchy and unity of command.

 a limited span of control providing greater centralized decision making.

 more available opportunities for promotions to supervision or

management.

The disadvantages include:

 lack of flexibility and employee creativity.

 lack of global knowledge of the organizational objectives.

 increased labor costs.

2. Management will tightly control a few employees and closely supervise

the employees’ work tasks, thereby increasing timeliness.

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3. The employee will tend to be more structured, evasive of risk, and

know what is expected from his/her performance.

b. 1. For the flat organizational structure proposed by Martha

Sanderson, the advantages include:

 fewer levels of management providing for quicker decision making.

 decreased labor costs.

The disadvantages include:

 misunderstood, unclear performance objectives and an increased

risk of inaccuracy in performing tasks due to reduced supervision.

 fewer available management opportunities, possibly leading to

employee turnover.

 too much of managers’ time being spent on supervision.

2. This flexible organizational structure will demand greater employee

participation causing increased creativity.

3. The employee will be motivated by the increase in responsibility in

organizational objectives. However, (s)he may lack access to supervisory

time and/or sufficient training.

c. The factors that Roland Ford and Martha Sanderson should consider

when determining the appropriate span of control include the:

 competence and qualifications of the employees.

 corporate culture and preferred style of management of the

organization.

 nonsupervisory, task performance demands on the manager as

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well as the tasks to be supervised.

 the risk level and frequency of new problems.

12. a. 1. Advantages of the original organizational structure proposed by Donald

Jenkins include:

 centralized decision making.

 close supervision of subordinates.

 increased opportunities for promotion.

Disadvantages of the original organizational structure include:

 lack of flexibility/creativity.

 more difficult vertical communication.

 increased costs for additional management personnel.

2. The resulting span of control will:

 allow for tighter control over employees.

 afford timelier task completion and problem resolution as the

supervisors are closer to everyday operations.

3. As a result of the organizational structure proposed by Donald Jenkins,

the employees are likely to have a clear understanding of what is expected

of them. However, because of the tighter span of control the employees

may avoid making decisions and taking risks.

b. 1. The advantages of the flat organizational structure proposed by

Beverly Kiner include:

 quicker decision making.

 lower costs resulting from fewer management personnel.

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The disadvantages of the flat organizational structure include:

 increased risk of inaccuracy in performing tasks due to reduced

supervision.

 fewer available promotional opportunities which may lead to

increased employee turnover.

2. The span of control will:

 afford employees greater autonomy.

 result in increased creativity.

3. As a result of the organizational structure proposed by Beverly Kiner,

employees are likely to be motivated by greater participation as their input

has greater value. However, employees may not be adequately trained for

additional responsibilities.

c. The factors that Donald Jenkins and Beverly Kiner should consider when

determining the appropriate span of control include the:

 competence and qualifications of the employees.

 corporate culture and preferred style of management of the

organization.

13. a.

Mechanistic MCC

1. Emphasis on rules and procedures. Narrow job definitions. Centralized

decision making.

2. Based on position and power. Adhere to chain of command.

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3. Objective measures (i.e., standard cost). Focused on results.

4. Level and importance of position. Performance against standards.

Organic Alden

1. Few formal rules or guidelines. Greater individual autonomy.

Decentralized decision making.

2. Based on skill and expertise. Adaptable to situations.

3. Subjective measures. Focus on expertise/activities.

4. Experience in area of expertise. Recognition by profession.

b. 1. The benefits Morlot Container Corporation might derive from an

organic structure include:

 reduced boredom on the job through enlarged and enriched

position definitions.

 a more creative work environment that would encourage employee

suggestions and innovations.

2. The problems that Alden Computers might encounter from using an

organic structure include:

 employee uncertainty or confusion arising from undefined lines of

authority and/or informal job descriptions.

 inconsistent decision making because of decentralized decision

making.

3. The benefits that could accrue to Alden Computers from the

introduction of a mechanistic structure include:

 reduced job stress because of better defined lines of authority and

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more formal job descriptions.

 improved goal congruence due to more structured planning

procedures.

14. a. General criteria that should be used in selecting performance measures to

evaluate operating managers include the following. The measures should:

 be controllable by the manager and reflect the actions and decisions

made by the manager in the current period.

 be mutually agreed upon, clearly understood, and accepted by all the

parties involved.

 address the efficiency and effectiveness of operations.

b. A major expansion of Star Paper’s plant was completed in April 1990. This

expansion included additions to the production-line machinery and the

replacement of obsolete and fully depreciated equipment. As a result, the value

of the division’s asset base increased considerably. While productivity

undoubtedly increased during the first year in the expanded plant, the increase

was not immediate nor sufficient to offset the increase in the asset base as there

is likely to be a “catch-up” period.

c. Apparent weaknesses in the performance evaluation process at Royal

Industries include the following:

 There was no mutual agreement on the use of return on assets (ROA)

as the only measurement of performance.

 The feedback from Fortner was insufficient. Fortner indicated that she

would get back to Harris about his questions concerning ROA but she
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did not do so.

 There is only one single measure of performance, which may give a

distorted picture of actual performance as is the case with Star Paper.

In addition, a single measure could encourage division management to

make poor decisions, i.e., delaying the purchase of equipment so that

ROA will remain high.

d. Multiple performance evaluation criteria would be appropriate for the evaluation

for the Star Paper Division. The criteria suggested by George Harris would take

into account more of the results of the key decisions being made by the manger,

are not conflicting, and emphasize the balance of profits with the control of

current assets. These three measures are controllable by the manager and, in

conjunction with ROA, would be more representative of the success of the

business.

15. a. 1. Responsibility accounting is a system of accounting that recognizes

various responsibility or decision centers throughout an organization, and

reflects the plans and actions of each of these centers by assigning

particular revenues and costs to the one having the pertinent responsibility

for making decisions about these revenues and costs.

2. The benefits that accrue to a company using responsibility accounting

include the following:

 The development of responsibility budgets and plans encourages

managers to plan ahead and promotes goal congruence.

 Because of participation in the planning process, the company

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guidelines established are more readily accepted as achievable.

 The responsibility accounting plans provide managers with clear

guidelines for day-to-day decisions and free management from

daily operations.

 Responsibility accounting affords management performance

evaluation criteria.

3. The advantages of responsibility accounting to the managers of a firm

include the following:

 Under the guidelines of responsibility accounting, managers are

responsible only for those items over which they have control.

 Because responsibility accounting facilitates the delegation of

decision making, managers are afforded greater freedom of action

without daily supervision.

 Managers know what is expected of them and on what basis their

performance will be evaluated.

 The ability to participate in decision making and exercise control

helps managers develop leadership skills.

b. 1. The features of the budget presentation that would make it

attractive to the managers include the following:

 The managers are only responsible for costs that are directly under

their control; arbitrary allocations have been avoided.

 The budget presentation shows the managers exactly how their

segment fits into the entire company and how their units contribute
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to the overall well being of the firm.

 The presentation clearly depicts those areas each manager is

responsible for and establishes the criteria on which his/her

performance will be evaluated.

2. Recommendations to improve the budget process might include the

following:

 The budget could be presented using the contribution approach

and segregating variable and fixed costs.

 There could be a comparison to prior year actuals so that

managers know if their contributions have increased or decreased.

 The expense items could be presented as a percentage of sales.

16. a. 1. The characteristics that should be present in a standard cost system in

order to encourage positive employee motivation include:

 participation in setting standards from all levels of the organization

including purchasing, engineering, manufacturing, and accounting.

 the integration of organizational communication by translating the

organizational goals and objectives into monetary terms for the

employees.

 support of the standard cost system by management.

 incorporation of standards that are perceived as achievable and

accurate and apply to controllable costs.

2. A standard cost system should be implemented to positively motivate

employees by:
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 communicating the corporate objectives of a standard cost system.

 soliciting from employees standards for which they will be held

accountable.

 tying the individual’s performance in the standard cost system to

the individual’s performance review and reward system.

b. 1. “Management by exception” is the situation where management’s

attention is focused only on those items that deviate significantly from the

standard. The assumption is that, foregoing a thorough, detailed analysis

of all items, the manager has more time to concentrate on other

managerial activities.

2. The behavioral implications of “management by exception” include both

positive and negative implications.

On the positive side, this technique increases management efficiency

by concentrating only on material variances, allowing time for the

manager to concentrate on other activities.

On the negative side, managers tend only to focus on the negative

variances rather than positive ones limiting their employee interactions

to negative reinforcement or punishment. This technique may not

indicate detrimental trends at an early stage and fragmentation of

efforts can occur from dealing only with the specific problems rather

than global issues.

c. Employee behavior could be adversely affected when “actual to budget”

comparisons are used as the basis for performance evaluation. Employees may
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subvert the system and submit budgets that are low so they can meet or exceed

the budget favorably, thereby averting negative reinforcement for varying

unfavorably to budget. There can be a minimal level of motivation since

exceptional performance is not rewarded. Employees may strive for mediocrity

and not work up to their full potential.

17. a. 1. Departmental income statements are considered a form of

communication because they:

 are written documents that provide information.

 measure performance against previously established objectives.

 provide feedback to involved employees.

2. The format of the departmental income statements is effective because

it provides:

 a comparison of actual performance to budgeted amounts.

 detailed information by line item.

 total manageable contribution for each department.

In order to improve the effectiveness of the departmental income

statements, the format could be changed to include:

 year-to-date budgeted amounts and actual performance.

 volume indicators that provided the basis for the budget such as

projected membership.

 additional statistical data such as number of employees in the

department, the number of current memberships, etc.

b. Positive as well as negative variances can be unfavorable as the absence of

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expenditures may indicate that important activities have not been accomplished.

For example, the statement shows a 46.6% positive variance for promotion and

advertising expense. This reduced level of expenditures could be directly linked

to declining membership and lower subscription revenues. The variance may

also be caused by good planning and efficiencies within the department, but this

is not clear until the variance has been analyzed.

c. In order to encourage Daniel Riley to have all significant variances reviewed,

Marie Paige and Jon Franklin could prepare an analysis of all variances,

showing by example how extensive analysis of all variances is beneficial, and

submit these analyses with a cover memo directly to Riley.