Chapter 8

Chapter 8
Financial Reporting and

Management Reporting
Systems
IS Functions of GLS
 General ledger systems should:
 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
Process ▪ post transactions to proper accounts
▪ update general ledger accounts and transaction files
▪ record adjustments to accounts
 store transaction data
 generate timely financial reports
Output
Financial
Reporting
System
Geneal Ledger System is also called the Non-
Cycle. Billings Management
This is how it is called by some auditing
Reporting
firms, e.g., SGV. It is the system that receives
System
the summarized output coming from the
different accounting information systems as
Sales Inventory
seen in the diagram. However, there can be Control
inputs to the system that are not coming from
General
other systems. TheseLedgerinputs usually come in
the form of Journal
System Vouchers. Only
Cash Payroll
transactions
Receipts
that are not
(GLS) processed in other
systems are directly inputted to the GLS, e.g.,
reclassification entries, adjusting entries,
closingCost
entries, debit to equity conversion,
Cash etc.
The Financial and Management Disbursements
Accounting Reporting
systems get their data from the GLS.
Accounts
Payable
Journal Voucher
 Source of input to the GL

 Represents summaries of similar transactions
or single unique transactions
 Identifies the financial amounts and affected
GL accounts
GLS Database
 General ledger master file
 principal FRS file based on chart of accounts
 General ledger history file (usually, however, previous years’ balances are
captured in the fields in the GL master file and therefore separate GL history files may
not be needed to be kept online)
 used for comparative financial support
 Journal voucher file (this is a temporary file)
 all journal vouchers of the current period
 Journal voucher history file (this is usually an archived file and need not
be maintained online if computer disk storage is an issue)
 journal vouchers of past periods for audit trail
 Responsibility center file (this is a reference file)
 responsibility centers for MRS
 Budget master file (this is a reference file which is temporary as well since
it is kept online for a year only usually)
 budget data by responsibility centers for MRS
The Financial Accounting Process
Source Journal Trial balance

entries in the Post entries to
documents
journal the ledger
Financial
Adjusting and
statements
closing
Financial Reporting Process Flowchart
XBRL: Reengineering Financial Reporting
 Many companies post financial statements on their

websites using HTML (Hyper Text Markup Language).
 Cannot be conveniently processed through IT automation.
Data entered using HTML are all
 Performing analysis on data requires them to be manually
considered as text characters.
entered into the user’s information system.
 The solution to theTherefore, numbers entered cannot be
problems is XBRL (extensible
calculated on.
Business Reporting Language).
For XBRL, data entered are recognized
 Internet standard designed fornumbers,
as texts, business reporting and
date, or special
information exchange.characters. Numbers can therefore be
 Objective is to facilitate the publication,
calculated exchange,
on by the user. and
processing of financial and business information.
 Derivative of XML (extensible Markup Language).
10
XML
 XML is a meta-language for describing markup
languages.
 Extensible means that any markup language can
be created using XML.
 Includes the creation of markup languages capable of
storing data in relational form, where tags (formatting
commands) are mapped to data values.
 Can be used to model the data structure of an
organization’s internal database.
11
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duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-
protected website for classroom use. 12
XBRL
 XML-based language for standardizing methods for
preparing, publishing, and exchanging financial
information.
 First step is to select an XBRL taxonomy.
 Classification schemes that specify the data to be included in an exchange or
report.

Steps are further discussed in
Next step is to cross-reference each GL account to an
appropriate XBRL taxonomythe next(tag).
element slides
 Mapping organization’s internal data to XBRL taxonomy elements.
 Tags are used whenever data is disseminated to outsiders.
 Computer programs that recognize and interpret tags
general XBRL instance documents (financial reports) that
can be published and made available to users. 13
This is your General Ledger data
for example
Choose a taxonomy mapper.
However, if you are
submitting your financial
statements data to a
government agency, e.g.,
This is the mapping process: your individual SEC, they already have a
GL accounts from your chart of accounts are prescribed taxonomy mapper
classified according to the taxonomy mapper
seen above
This is the resulting worksheet
after mapping has been done.
This is the programming source code
for generating the instance
documents. For GL mapping, the
instance documents are the financial
statements
Current State of XBRL Reporting
 Likely to be the primary vehicle for delivering business
reports to investors and regulators in the near future.
 Developments in XBRL Reporting:
 Required for US banking quarterly “Call Reports”.
 SEC ruling requires large publicly held companies to adopt
SBRL by December 2015 to meet financial reporting
requirements.
 Comparable developments to encourage or require SBRL in
Tokyo, Canada, China, Spain, the Netherlands and the UK.
 Use of XBRL facilitates fulfillment of legal requirements
specified in SOX.
 (This is now being implemented in the Philippines by the SEC)
19
GLS Reports (examples only)
 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 Risks in the GL/FRS
 Improperly prepared journal entries (human error)
 Unposted journal entries (human error)
 Debits not equal to credits (can be prevented by validation
controls in the JV input process in computerized systems)
 Subsidiary not equal to G/L control account (this
happens in nonintegrated accounting systems. In ERPs, like SAP, this does
not happen anymore since the subsidiary and GL totals are always
matched automatically. In my experience in the nineties, I have a staff
whose job is devoted to reconciling SL and GL totals since the systems
were not integrated)
 Inappropriate access to the G/L (e.g., weak passwords)
 Poor audit trail (lacks accounting records)
 Lost or damaged data (can be due to calamities such as fire,
floods)
GL/FRS Control Issues
 Transaction authorization - journal vouchers must
be authorized by a manager at the source dept (there
must be signatures on the JVs as evidence of the control)
 Segregation of duties – G/L clerks should not:
 have recordkeeping responsibility for special journals or
subsidiary ledgers
 prepare journal vouchers (this is not correct since the GL clerks
must be the ones who will create JVs for transactions that cannot be
processed in the other accounting systems. Previously mentioned
examples are reclassification entries, adjusting and closing entries, etc.)
 have 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
Why audit trail needs to be detailed?
 Provide the ability to answer inquiries

 Able to reconstruct files if they are
completely or partially destroyed
 Provide historical data required by auditors
 Fulfill government regulations
 Provide a means for preventing, detecting
and correcting errors
 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
This report shows all the journal vouchers in
numerical order entering the GL. This allows the
verification of the completeness of JVs
This report shows how opening balances are
affected by the current JVs to arrive at the ending
balances.
Internal Control Implications of XBRL
 Taxonomy creation: Incorrect generation results in
incorrect mapping between data and elements that
could result in material misrepresentation of
financial data.
 Taxonomy mapping errors: Correctly generated
XBRL tags may be incorrectly assigned to internal
database accounts, results in material
misrepresentations of financial data.
 Validation of instance documents: Independent
verification procedures need to be established to
ensure that appropriate taxonomy and tags have
been applied before posting to a web server. 31
GL/FRS Using Database Technology
 Advantages:
 immediate update and reconciliation
 timely, if not real-time, information
 Removes separation of transaction
authorization and processing
 Detailed journal voucher listing and account activity
reports are a compensating control
 Centralized access to accounting records
 Passwords and authorization tables as controls
Management Reporting Systems
 Produce financial and

Financial nonfinancial
statements are generated by
information needed
financialby management
reporting systems whileto
management
“plan, evaluate, control”reports are generated by
management reporting systems (MRS). MRS
 Usually seen as discretionary reporting
are based on management accounting
 Can argue that Sarbanes-Oxley
principles. 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
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
 (it is important that a company must have a formal and detailed
organization chart so that responsibilities and authorities are
pinpointed)
This is an example of the organization chart and
may not exactly be ideal. A chart may have to
be customized©based on the nature of the
2015 Cengage Learning. All rights reserved. May not be copied, scanned, or
business of a duplicated,
companyin or organization.
whole or in part, except for use as permitted in a license
 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 Which is better
between the
two?
 Span of control:
 the number of subordinates directly under the manager’s
This is the
control Western This is the
 detailed reports for managers
concept of with narrow spans of control
Japanese
 summarized information
control for managers
concept of with broad spans of
control control
This is better since any communication

travels a short distance and actions are
immediately taken. For example, if a
worker has a suggestion for
improvement, the top executive will
know of if immediately and can
approve it for implementation soonest
as well.
Narrow Span of Control Wide Span of Control
 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.
 (this is an old concept that is not practiced in progressive
companies. Continuous improvement is implemented by
management wherein they continuously evaluate processes for
improvement even if no errors or problems occur.)
Management Function, Level, and
Decision Type
Top
management
Middle
Management
Operations
Management
Operations
Decision Type
 Strategic planning decisions:

 firm’s goals and objectives
 scope of business activities
 organizational structure
 management philosophy
 long-term, with broad scope and impact
 non-recurring , with high degree of uncertainty
 need highly summarized information
 require external & internal information sources
Decision Type
 Tactical planning decisions:

 subordinate to strategic decisions
 short term
 specific objectives
 recur often
 fairly certain outcomes
 limited impact on the firm
Decision Type
 Management control decisions:

 using resources as productively as possible in all
functional areas
 evaluating the performance of subordinates
against standards
 Measuring performance is difficult because
sound decisions with long-term benefits may
negatively impact the short- term bottom line.
Decision Type
 Operational control decisions:

 deal with routine tasks
 narrower focus, dependent on details
 highly structured
 short time frame
 Three basic elements or steps:
 set attainable standards
 evaluate performance
 take corrective action
Classification of Decision Types by
Decision Characteristics
Problem Structure
 Reflects and affects how well decision
makers understand and solve problems
 Elements of problem structure:
 data
 procedures
 objectives
Problem Structure
The higher the position, the more unstructured are the problems being faced, i.e.,
elements of the problems become more uncertain and may require looking for data
outside the organization. Information systems supporting higher management are
more specialized and sophisticated.
Information System Management Level Problem Structure
Non-Traditional IS
Unstructured
NonTraditional IS
Strategic
Management
Tactical Partially
IS IS
Management Structured
Traditional
Traditional
Operations Management
Operations
Structured
Management Reports
 Report 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
 (as future accountants, your reports should be able to help management
arrive at sound decisions. The reports contain only relevant data and
presented in a way that is most understandable by the recipient)
Report Attributes
 There would be
Relevance – useful to decision making times that these
 Summarization – appropriate level of detailtwo attributes
 Exception orientation – identify risks conflict. You can be
complete but not
 Accuracy – free of material errors submit a report on
time or you can be
 Completeness – essential information on time but not
 Timeliness – in time for decisions have all the
information. As an
 Conciseness – understandable format accountant, you
have to decide
which has more
weight.
Types of Management Reports
 Programmed 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
Data Mining
 Process of selecting, exploring, and modeling

large amounts of data to uncover
relationships and global patterns that exist in
large databases but are hidden among the
vast amount of facts.
 This is being studied in Business Analytics which would be of an advantage
if accountants likewise have knowledge of this discipline. For example, if
you have a Students information database, you can perhaps be able to
relate academic programs to gender, family income or even physical
attributes of students. From the analysis, you can market programs to
students who have the identified attributes.
Approaches to Data Mining
 Verification Model
 Uses drill-down technique to either verify or reject
a user’s hypothesis.
 Discovery Model
 Discover previously unknown but important
information that is hidden within the data.
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
 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 (however, people at the lowest levels should have a participation in
formulating budgets to give them a feeling of ownership)
 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 (especially if
managers feel that they are not well compensated. Also, if compensation
schemes are not properly designed, e.g., they are performance based,
managers may fraudulently find ways to make their performance up to
par).
 Short-term v. long-term measures
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 (this is
normal human behavior, i.e., if were are confronted with too much
information, we sometimes just rely on other people or sources to identify
which of the information we have on hand are relevant)
Inappropriate Performance Measures
 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 (if
management is too concerned with getting the lowest prices for materials, quality may
be compromised)
 quotas – can affect quality control, material usage efficiency,
labor relations, plant maintenance (employees may be too focused on
achieving the quota at the expense of other items such as quality)
 profit measures – can affect plant investment, employee training,
inventory reserve levels, customer satisfaction (to achieve profit,
management may be too conscious of cost outlays or expenses which may
actually be beneficial to the company)

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Financial Reporting and

 Source of input to the GL

Source Journal Trial balance

 Many companies post financial statements on their

 Provide the ability to answer inquiries

 Produce financial and

 Responsibility and authority:

This is better since any communication

 Strategic planning decisions:

 Tactical planning decisions:

 Management control decisions:

 Operational control decisions:

 Process of selecting, exploring, and modeling

 Implies that every economic event that

 Budgeting helps management achieve financial

 Cost center – responsible for keeping costs

 MRS and compensation schemes help to

 Occurs when managers receive more

 Appropriate performance measures

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