CHAPTER 8: FINANCIAL REPORTING - This file provides a record of all general

AND MANAGEMENT REPORTING ledger transactions and replaces the

SYSTEM traditional general journal

GENERAL LEDGER SYSTEM Journal Voucher History File

- A hub connected to the other system of - Contains journal vouchers for past
the firm through spokes of information periods
flows - This historical information supports
- Transaction cycle process individual management’s stewardship
events that are recorded in special responsibility to account for resource
journal and subsidiary accounts utilization
- Summaries of these transactions flow - Bot the current and historical journal
into the GLS and become sources of voucher files are important links in the
input for the management reporting firm’s audit trail
system (MRS) and financial reporting
Responsibility Center File
system (FRS)
- The bulk of flows into the GLS comes - Contains the revenues, expenditures,
from the transaction processing and other resource utilization data for
subsystems each responsibility center in the
organization
Journal Voucher
- The MRS draw upon these data for
- The source of input to the general ledger input in the preparation of
- Used to represent summaries of similar responsibility reports for management
transactions or a single unique
Budget Master File
transaction, identifies the financial
amounts affected general ledger (GL) - Contains budgeted amounts for
accounts revenues, expenditures, and other
resources for responsibility centers
GLS Database
- These data, in conjunction with the
- Includes a variety of files, whereas these responsibility center file, are the basis
will vary from firm to firm for responsibility accounting

General Ledger Master File

- Principal file in the GLS database FINANCIAL REPORTING SYSTEM

- This file is based on the organization’s
- Steward information to external parties,
published chart of accounts
who are interested in in the performance
- Each record on the GL master is either a
of the organization as a whole such as
separate GL account (e.g., sales) or the
stockholder, creditors, and government
control account (e.g., AR control) for a
agencies
corresponding subsidiary ledger in the
- They require information that allows
transaction processing system
them to observe trends in performance
General Ledger History File over time and to make comparisons
between different organizations
- Has the same format as the GL Master
- Information provided takes the form of
- Its primary purpose is to provide
standard financial statements, tax
historical financial data for comparative
returns, and documents required by the
financial reports
regulatory agencies such as the SEC
Journal Voucher File
Financial Reposting Procedures
- The total collection of the journal
1. Capture the transaction
vouchers processed in the current
o Within each transaction cycle,
period
transactions are recorded in the
appropriate transaction file
2. Record in special journal statement (temporary) accounts
o Each transaction is entered into and transfer the income or loss to
the journal retained earnings.
o Recall that frequently occurring o Finally, these entries are posted
classes of transactions, such as to the GL
sales, are captured in special 11. Prepare the post-closing trial balance
journals o A trial balance worksheet
o Those that occur infrequently are containing only the balance sheet
recorded in the general journal or accounts may now be prepared to
directly on a journal voucher indicate the balances being
3. Post to subsidiary ledger carried forward to the next
o The details of each transaction accounting period
are posted to the affected
subsidiary accounts
4. Post to general ledger XBRL-REENGINEERING FINANCIAL
o Periodically, journal vouchers, REPORTING
summarizing the entries made to - eXtensible Business Reporting Language
the special journal and subsidiary (XBRL)
ledgers, are prepared and posted - An internet standard specifically
to the GL accounts designed for business reporting and
o The frequency of updates to the information exchange
GL will be determined by the - To facilitate the publication, exchange,
degree of system integration and processing of financial and business
5. Prepare the unadjusted trial balance information
o At the end of the accounting - A derivative of another Internet
period, the ending balance of standard called XML (eXtensible
each account in the GL is placed Markup Language)
in a worksheet and evaluated in
total for debit-credit equality XML
6. Make adjusting entries - eXtensible Markup Language
o Adjusting entries are made to the - A metalanguage for describing markup
worksheet to correct errors and to languages
reflect unrecorded transactions - Extensible – any markup language can be
during the period, such as created using XML
depreciation - This includes the creation of markup
7. Journalize and post adjusting entries languages capable of storing data in
o Journal vouchers for the relational form in which tags (or
adjusting entries are prepared formatting commands) are mapped to
and posted to the appropriate data value
accounts in the GL - It can be used to model the data
8. Prepare the adjusted trial balance structure of an organization’s internal
o From the adjusted balances, a database
trial balance that contains all the
HTML
entries that should be reflected in
the financial statements - HyperText Markup Language
9. Prepare the financial statements - Set of markup symbols or codes inserted
o The balance sheet, income into a file intended for display on the
statements, and statement of cash Internet
flows are prepared using the - The markup tells web browsers how to
adjusted trial balance display a web page’ words and images
10. Journalize and pot the closing entries - It requires tags to be used correctly to
o Journal vouchers are prepared for create the author’s vision
entries that close out the income
Tags
 - The words between what are known as <sup> Defines
<angle-brackets>, which allow graphics, superscripted text
images, and table to appear on the <ins> Defines inserted text
webpage <del> Defines deleted text
- Different tags perform different
functions EXTENSIBLE BUSINESS REPORTING
- The most basic tags apply formatting to LANGUAGE (XBRL)
text
- XML-based language that was designed
XML HTML to provide the financial community with
- Mainly - Focused on a standardized method for preparing,
focuses on presentation
publishing, and automatically
transfer of of data
exchanging financial information,
data - Format driven
including financial statements of
- Content - Case
driven insensitive publicly held companies
- Case sensitive - Does not - Typically used for reporting aggregated
- Provides provide financial data, but can also be applied to
namespaces namespace communication information pertaining
support support to individual transactions
- Strict for - Not strict for
XBRL Taxonomy
closing tags closing tag
- Extensible - Has limited - Specifies the data to be included in an
- Tags are not tags exchange or report
predefined - Has - Classification schemes that are
predefined compliant with XBRL specifications to
tags
accomplish a specific information
exchange or reporting objective such as
HTML LIST TAGS filing with the SEC

TAG DESCRIPTION Taxonomy Mapper

<ol> Defines an ordered
Mapper
list
<ul> Defines an - The process of comparing the
unordered list concepts/data of the financial statements
<li> Defines a list item to the elements of the XBRL taxonomy
<dl> Defines a definition
list Steps on how to use Taxonomy Mapper
<dt> Defines an item in a 1. Select XBRL element
definition list 2. Select company General Ledger (GL)
<dd> Defines a description account
of an item in a
3. Press the MAP button
definition list

HTML TEXT FORMATTING TAGS CONTROLLING THE FRS

TAG DESCRIPTION KINDS OF POTENTIAL RISKS

<b> Defines bold text
1. Defective audit trail
<big> Defines big text
2. Unauthorized Access to the General
<em> Defines emphasized
Ledger
text
3. General Ledger Accounts thar are Out
<i> Defines italic text
<small> Defines small text of Balance with Subsidiary Accounts
<strong> Defines strong text 4. Incorrect General Ledger because of
<sub> Defines subscripted Unauthorized or Incorrect Journal
text Vouchers
INTERNAL CONTROL IMPLICATIONS OF o Responsibility – individual’s
XBRL obligation to achieve desired
results
Taxonomy Creation
o Define the vertical reporting
- Taxonomy may be generated channels of the firm through
incorrectly, which results in an incorrect which information flows
mapping between data and taxonomy C. Span of Control
elements that could result in material o Refers to the number of
misrepresentation of financial data subordinates under his or her
- Controls must be designed and put in control
place to ensure correct generation of o Narrow span of control – fewer
XBRL taxonomies subordinates reporting directly to
Taxonomy Mapping Error managers
o Broad span of control – more
- The process of mapping the internal subordinates reporting to each
database accounts to the taxonomy tags manager
needs to be controlled D. Management Exception
- Correctly generated XBRL tags may be o Suggests that mangers should
incorrectly assigned to internal database limit their attention to potential
accounts resulting in material problem areas (that is,
misrepresentations of financial data exceptions) rather than being
Validation of Instance Documents involved with every activity or
decision
- Once the mapping is complete and tags
have been stored in the internal Management Function, Level and Decision
database, XBRL instance documents Type
(reports) can b generated Strategic Planning Decisions
- Independent verification procedures
need to be established to validate the - Setting the goals and objectives of the
instance documents to ensure that firm
approximate taxonomy and tags have - Determining the scope of business
been applied before posting a Web activities
server - Determining or modifying the
organization’s structure
- Setting the management philosophy
THE MANAGEMENT REPORTING - Characteristics
SYSTEM o They have long-term time frames
o They require highly summarized
FACTORS THAT INFLUENCE THE MRS information
Management Principles o They tend to be nonrecurring
o Associated with a high degree of
A. Formalization of Tasks
uncertainty broad in scope and
o Suggests that management
have a profound impact on the
should structure the firm around
firm
the tasks it performs rather than
o Require externa and internal
around individual with unique
sourced of information frames
skills
o Purpose: avoid an organization
structure in which the
organization’s performance,
stability, and continued existence
depend on specific individuals Tactical Planning and Management Control
B. Responsibility and Authority
Middle Management
 - Subordinate to strategic decisions and - One for which we have no precise
are made by middle management solution techniques
- Short-term, more specific, recurring,
TYPES OF MANAGEMENT REPORTS
have more certain outcomes, and have a
lesser impact on the firm than strategic Programmed Reports
decisions
- Provide information to solve problems
Operations Management that users have anticipated
- Scheduled reports – the MRS produces
- Management control involves
scheduled reports according to an
motivating managers in all functional
established time frame
areas to use resources
- On-demand reports – triggered by events,
Operational Control Decisions not by the passage of time

- Narrower and more focused than Ad Hoc Reporting

tactical decisions because they are
- Refers to reports that are put together
concerned with routine tasks of
creatively by users in real-time, rather
operations
than pre-designed according to a
- Ensures that the firm operates in
template
accordance with pre-established criteria
- Mangers with limited computer
- More focused than tactical
background can quickly produce ad hoc
- More structure than management
reports from a terminal or PC, without
- More dependent on details than
the assistance of data processing
planning
professionals
Three Basic Elements - Data Mining – process of selecting,
exploring, and modeling large amounts
1. Standards
of data to uncover relationships and
o Pre-established levels of
global pattern that exist in large
performance that managers
databases but are hidden among the
believe are attainable
vast amount of facts
2. Performance Evaluation
o Two general approaches to data
o The decision maker compares the
mining
performance of the operation in
 Verification Model – uses a
question against the standard
drill-down technique to
3. Taking Corrective Action
either verify or reject a
o After comparing the performance
user’s hypothesis
to the standard, the manager
 Discovery Model – uses
takes action to remedy any out-
data mining to discover
of-control condition
previously unknown but
PROBLEM STUCTURE important information that
is hidden within the data;
Structured Problem
employs inductive
Three elements: learning to infer
1. Data – the values used to represent information from detailed
factors that are relevant to the problem data by searching for
2. Procedures – the sequence of steps or recurring pattern, trends,
decision rules used in solving the and generalizations
problem - Report attributes:
3. Objectives – the results the decision o Relevance
maker desires to attain by solving the o Summarization
problem o Exception orientation
o Accuracy
Unstructured Problem o Completeness
o Timeliness
 o Conciseness

RESPONSIBILITY ACCOUNTING

- Every economic event that affects the

organization is the responsibility of and
can be traced to an individual manager

Two Phase of Responsibility Accounting

1. Creating a set of financial performance

goals (budgets) pertinent to the
manager’s responsibilities
2. Reporting and measuring actual
performance as compared to these goals

Responsibility Centers

A. Cost Centers
o Organizational unit with
responsibility for cost
management within the
budgetary limits
B. Profit Centers
o A profit center manager has
responsibility for both cost
control and revenue generation
C. Investment Centers
o The manager of an investment
center has the general authority
to make decisions that
profoundly affect the
organization

BEHAVIORAL CONSIDERATIONS

Goal Congruence

- Management principles of authority,

responsibility, and the formalization of
tasks and if these are applied properly
within an organization, it can promote
the concept of goal congruence

Information Overload

- Occurs when a manager receives more

information than he or she can
assimilate
- Happens when designers of the
reporting system do not properly
consider the manager’s organizational
level and span of control