CHAPTER 16

AIS AND BUSINESS REPORTING

PROCESS
Learning Objectives:
• The student will able to understand the following concept:

• Features, advantages, and disadvantages of various

coding schemes
• Operational features of the GLS, FRS, and MRS Principle
operational controls governing the GLS and FRS
• Factors that influence the design of the MRS
• Elements of a responsibility accounting system
APPLICATION OF ACCOUNTING CYCLE IN AIS
Uses of Coding in AIS
• Concisely 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 Codes
• Represent items in sequential order
• Used to pre-number source documents
• Track each transaction processed
• Identify any out-of-sequence documents

• Disadvantages:
• arbitrary information
• hard to make changes and insertions
Block Codes
• Represent 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 Codes
• Represent 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 Codes
• Used for many of the same purposes as numeric codes
Can be assigned sequentially or used in block and
group coding techniques
• May be used to represent large numbers of items
• Can represents up to 26 variations per field

• Disadvantage:
• arbitrary information
Mnemonic Codes
• Alphabetic 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 GLS
• General ledger systems should:
• collect transaction data promptly and accurately
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
•  update general ledger accounts and transaction files
•  record adjustments to accounts
• store transaction data
• generate timely financial reports Input Process Output
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 principles
• Management function, level, and decision type
• Problem structure
• Types of management reports
• Responsibility accounting
• Behavioral considerations
Responsibility Accounting
• 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
Setting Financial Goals
• 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 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.
• Short-term v. long-term measures
Behavioral Considerations: Information Overload

• 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
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 reserve levels, customer satisfaction
• Behavioral Considerations: Performance Measures
• End of Presentation