Chapter 8

General Ledger,
Financial Reporting
and
Management Reporting
Systems
 IS Functions of the General
Ledger System
• All general ledgers should (must):
– collect transaction data promptly and accurately
Input – classify/code data and accounts
– validate collected transactions/ maintain accounting
controls (e.g., equal debits and credits)
– process transaction data
• post transactions to proper accounts
Process • update general ledger accounts and transaction files
• record adjustments to accounts
– store transaction data
– generate timely financial reports
Output
 Financial
Reporting
System
Management
Billings
Reporting
System

Sales Inventory
Control
General
Ledger
System
Cash Payroll
Receipts (GLS)

Cost Cash
Accounting Disbursements

Accounts
Payable
 The Financial Accounting Process

Source Journal Trial balance

entries in the Post entries to
documents
journal the ledger

Financial
Adjusting and
statements
closing
 GLS Reports
• General Ledger Analysis
– listing of transactions
– allocation of expenses to cost centers
– comparison of account balances from prior periods
– trial balances
• Financial Statements
– balance sheet
– income statement
– statement of cash flows
• Managerial Reports
– analysis of sales
– analysis of cash
– analysis of receivables
• Chart of Accounts: coded listing of accounts
 Potential Exposures in the
GL/FRS  Risks
• Improperly prepared journal entries
• Unposted journal entries
• Debits not equal to credits
• Subsidiary not equal to general ledger control
accounts
• Inappropriate access to the general ledger
• Poor audit trail
• Lost or damaged data
• Account balances that are wrong because of
unauthorized or incorrect journal vouchers
 GL/FRS Control Issues
• Transaction authorization - journal
vouchers must be properly authorized
by a responsible manager at the source
department
• Segregation of duties - general ledger
clerks should not:
– have recordkeeping responsibility for
special journals or subsidiary ledgers
– prepare journal vouchers
– have custody of physical assets
 GL/FRS Control Issues
• Access controls:
– direct - journal vouchers should only be
posted by authorized individuals
– indirect - source documents should be
prenumbered and a log kept
• Accounting records - should be able to
trace a source document from its
inception to its impact of the financial
statements and vice-versa
 GL/FRS Control Issues
• Independent verification
– journal vouchers and summaries are
reconciled by the general ledger
department.
• Two important operational reports used:
– journal voucher listing
– general ledger change report
 GLS: Tape Batch Processing
Sorted
Journal
Journal
Voucher
Vouchers
Batch

General
Ledger Edit input
Key in journal and update
Master
voucher data master file

Unsorted
Journal
Vouchers
New Sorted
Old General Error and
Sort vouchers General Journal Exception
Ledger Vouchers
in chart of Ledger Master Report
account order Master
 Automated GL/FRS using Batch
Processing and Sequential Files

• Advantages
– control - journal vouchers can be approved,
validated, and balanced prior to processing
– reporting - provides summary feedback on
transaction activity
• Disadvantages
– inefficiency - production of manual documents
which must be entered into the system and filed
– infrequent reconciliation
 GL/FRS Using
Database Technology
 Management Principles
• Formalization of tasks:
– Management structures the firm around
the tasks it performs rather than around
individuals with unique skills.
– It allows specification of the information
needed to support the tasks.
 Management Principles
• Responsibility and authority:
– Responsibility is an individual’s
obligation to achieve desired results.
– Authority is an individual’s power to
make decisions within the limits of that
responsibility.
– Managers delegate responsibility and
authority downward to subordinates.
 Management Principles
• Span of control:
– 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

Narrow Span of Control Wide Span of Control

 Problem Structure
• The problem structure reflects how well
the decision maker understands the
problem.
• Elements of problem structure:
– data
– procedures
– objectives
 Problem Structure
Information System Management Level Problem Structure
Non-Traditional IS

Unstructured

Strategic
Management

Tactical Partially
Management Structured
Traditional IS

Operations Management

Operations
Structured
Attributes of Useful Information According to
FASB’s Conceptual Framework
Feedback
Feedback
Value
Value

Representational Relevant
Relevant Timely
Faithfulness Timely
Information
Information
Predictive
Predictive
Reliable Value
Value
Verifiable
Reliable
Verifiable
Information
Information

Neutral
Neutral
Types of Management Reports
• Programmed reports:
– Scheduled reports are produced at
prespecified intervals, such as weekly.
– On-demand reports are triggered by
events, such as inventory levels dropping
to a certain level.
• Ad hoc reports - reports designed and
created on an “as needed” basis as
situations arise that require new
information needs
 Responsibility Centers
• Cost center - an organizational unit with
responsibility for cost management within
budgetary limits
• Profit center - an organizational unit with
responsibility for both cost control and revenue
generation
• Investment center - an organizational unit with
the general authority to make a wide range of
decisions affecting costs, revenue, and
investments in assets
 Goal Congruence
• A carefully structured management
reporting system and compensation
schemes help to appropriately assign
authority and responsibility.
• If compensation measures are not
carefully designed, managers may be
tempted to engage in actions not optimal
for the organization in the long-run.
 Information Overload…
• occurs when a manager receives more
information than he or she can
assimilate
• can cause managers to disregard their
formal information and rely on informal--
probably inferior--cues to
help them make
decisions