AIS ASSIGNMENT 1

Q1. The annual report is considered by some to be the single most important printed document that
companies produce. In recent years, annual reports have become large documents. They now include
such sections as letters to the stockholders, descriptions of the business, operating highlights, financial
review, management discussion and analysis, a discussion of company internal controls, segment
reporting, inflation data, and the basic financial statements. The expansion has been due in part to a
general increase in the degree of sophistication and complexity in accounting standards and disclosure
requirements for financial reporting.
The expansion also is reflective of the change in the composition and level of sophistication of users.
Current users include not only stockholders but also financial and securities analysts, potential
investors, lending institutions, stockbrokers, customers, employees, and whether the reporting
company likes it or not--competitors. Thus, a report that was originally designed as a device for
communicating basic financial information now attempts to meet the diverse needs of an ever-
expanding audience.
Users hold conflicting views on the value of annual reports. Some argue that they fail to provide
enough information, whereas others believe that disclosures in annual reports have expanded to the
point where they create information overload. Others argue that the future of most companies
depends on acceptance by the investing public and by its customers; therefore, companies should take
this opportunity to communicate well-defined corporate strategies.
Required
a. Identify and discuss the basic factors of communication that must be considered in the presentation
of the annual report.
b. Discuss the communication problems a corporation faces in preparing the annual report that result
from the diversity of the users being addressed.
c. Select two types of information found in an annual report, other than the financial statements and
accompanying footnotes, and describe how they are helpful to the users of annual reports.
d. Discuss at least two advantages and two disadvantages of stating well-defined corporate strategies
in the annual report.
e. Evaluate the effectiveness of annual reports in fulfilling the information needs of the following
current and potential users: shareholders, creditors, employees, customers, and financial analysts.
f. Annual reports are public and accessible to anyone, including competitors. Discuss how this affects
decisions about what information should be provided in annual reports.
Q2. Ollie Mace is the controller of SDC, an automotive parts manufacturing firm. Its four major
operating divisions are heat treating, extruding, small parts stamping, and machining. Last year’s sales
from each division ranged from $150,000 to $3,000,000. Each division is physically and managerially
independent, except for the constant surveillance of Sam Dilley, the firm’s founder.
The AIS for each division evolved according to the needs and abilities of its accounting staff. Mace is
the first controller to have responsibility for overall financial management. Dilley wants Mace to
improve the AIS before he retires in a few years so that it will be easier to monitor division
performance. Mace decides to redesign the financial reporting system to include the following features:
• It should give managers uniform, timely, and accurate reports of business activity. Monthly
reports should be uniform across divisions and be completed by the fifth day of the following
month to provide enough time to take corrective actions to affect the next month’s
performance. Company-wide financial reports should be available at the same time.
• Reports should provide a basis for measuring the return on investment for each division. Thus,
in addition to revenue and expense accounts, reports should show assets assigned to each
division.
• The system should generate meaningful budget data for planning and decision-making
purposes. Budgets should reflect managerial responsibility and show costs for major product
groups.
Mace believes that a new chart of accounts is required to accomplish these goals. He wants to divide
asset accounts into six major categories, such as current assets and plant and equipment. He does not
foresee a need for more than 10 control accounts within each of these categories. From his
observations to date, 100 subsidiary accounts are more than adequate for each control account.
No division has more than five major product groups. Mace foresees a maximum of six cost centers
within any product group, including both the operating and non-operating groups. He views general
divisional costs as a non-revenue-producing product group. Mace estimates that 44 expense accounts
plus 12 specific variance accounts would be adequate.
Required
Design a chart of accounts for SDC. Explain how you structured the chart of accounts to meet the
company’s needs and operating characteristics. Keep total account code length to a minimum, while
still satisfying all of Mace’s desires.