Chapter 8 0 GL FR and MRS

Chapter 8—General Ledger, Ledger, Financial Reporting, and Management Reporting Systems TRUE/FLSE

1. The most common means of making entries in the general ledger is via the journal voucher. voucher. ANS: T 2. Individuals with access access authority authority to general ledger ledger accounts accounts should not reare journal vouchers. vouchers. ANS: T !. The journal voucher is the document that authori"es authori"es entries to #e made made to the general ledger. ledger. ANS: T $. %ach account account in the the chart chart of accounts accounts has a searate searate record record in the the general general ledger ledger master file. file. ANS: T &. The resonsi resonsi#ili #ility ty center center file is rimarily rimarily used #y the the 'inancial 'inancial (eorting (eorting System. System. ANS: ' ). *anagement reorting reorting is often often called discretionary reorting #ecause #ecause it is not mandated as is financial financial reorting. ANS: T +. ,rimary ,rimary reciients reciients of financia financiall statement statement informati information on are internal internal managemen management. t. ANS: ' -. The *anagemen *anagementt (eorting (eorting System System is a nondi nondiscret scretiona ionary ry system. system. ANS: ' . /hen evaluat evaluating ing decision decision altern alternativ atives0 es0 one otion otion is to take take no action. action. ANS: T 1. In most most cases intang intangi#le i#le decisi decision on criteria criteria can #e uantifie uantified. d. ANS: ' 11. 3ne #enefit of the *anagement *anagement (eorting System is that it can alert management to delays in roject imlementation. ANS: T 12. (esonsi# (esonsi#ility ility refers refers to an individual4 individual4ss o#ligation o#ligation to achieve achieve desired results results..

ANS: T 1!. A firm with a wide san of control tends to have relatively more layers of management. ANS: ' 1$. The control function entails evaluating a rocess against a standard and0 if necessary0 taking corrective action. ANS: T 1&. Standards are the #asis for evaluating actual erformance. ANS: T 1). A reort is said to have information content if it eliminates uncertainty associated with a ro#lem facing the decision maker. ANS: ' 1+. An inventory out5of5stock reort is an e6amle of a rogrammed0 on5demand reort. ANS: T 1-. A rincile of resonsi#ility accounting is that managers are resonsi#le for controlla#le and uncontrolla#le costs. ANS: ' 1. The manager of a cost center is resonsi#le for cost control and revenue generation. ANS: ' 2. 7esigning an effective management reorting system does not reuire an understanding of the information managers need to deal with the ro#lems they face. ANS: ' 21. The formali"ation of tasks rincile suggests that management should structure the firm around the uniue skills sets of key individuals. ANS: ' 22. If a manager delegates resonsi#ility to a su#ordinate0 he or she must also grant the su#ordinate authority to make decisions. ANS: T 2!. 3erational control involves motivating managers at all levels to use resources0 including materials0  ersonnel0 and financial assets0 as roductively as ossi#le.

ANS: ' 2$. The #lock code is the coding scheme most aroriate for a chart of accounts. ANS: T MULT!"LE C#$!CE

1. The coding scheme most aroriate for a chart of accounts is a seuential code .  #  #lock code . c grou code . d mnemonic code .

ANS: 8 2. A common use for seuential coding is a creating the chart of accounts .  # identifying inventory items . c identifying documents . d identifying fi6ed assets .

ANS: 9 !. The most imortant advantage of seuential coding is that a missing or unrecorded documents can #e identified .  # the code itself lacks informational content . c items cannot #e inserted . d deletions affect the seuence .

ANS: A $. /hen a firm wants its coding system to convey meaning without reference to any other document0 it would choose a an alha#etic code .

 # . c . d .

a mnemonic code a grou code a #lock code

ANS: 8 &. The most imortant advantage of an alha#etic code is that a meaning is readily conveyed to users .  # sorting is simlified . c the caacity to reresent items is increased . d missing documents can #e identified .

ANS: 9 ). %ntries into the eneral ;edger System <;S= can #e made using information from a the general journal .  # a journal voucher which reresents a summary of similar transactions . c a journal voucher which reresents a single0 unusual transaction . d all of the a#ove .

ANS: 7 +. /hich statement is not correct> The general ledger master file a is #ased on the firm4s chart of account .  # contains a record for control accounts . c is an outut of the 'inancial (eorting System <'(S= . d sulies information for management decision making .

ANS: 9 -. /hat tye of data is found in the general ledger master file> a a chronological record of all transactions .

 # the #alance of each account in the chart of accounts . c  #udget records for each account in the chart of accounts . d su#sidiary details suorting a control account .

ANS: 8 . /hich reort is not an outut of the 'inancial (eorting System <'(S=> a variance analysis reort .  # statement of cash flows . c ta6 return . d comarative #alance sheet .

ANS: A 1. /hich stes in the 'inancial Accounting ,rocess are in the correct seuence> a record the transaction0 ost to the ledger0 reare the adjusted trial #alance0 enter . adjusting entries0 reare financial statements  # record the transaction0 reare the unadjusted trial #alance0 record adjusting journal . entries0 record closing entries0 reare financial statements c record the transaction0 ost to the ledger0 record adjusting entries0 reare the unadjusted . trial #alance0 reare financial statements d record the transaction0 ost to the ledger0 reare the adjusted trial #alance0 reare . financial statements0 record closing entries

ANS: 7 11. /hich statement is not correct> a the ost5closing trial #alance reorts the ending #alance of each account in the general . ledger   # one urose of rearing the unadjusted trial #alance is to ensure that de#its eual credits . c financial statements are reared #ased on the unadjusted trial #alance . d the unadjusted trial #alance reorts control account #alances #ut omits su#sidiary ledger . detail

ANS: 9 12. /hat account aears on the ostclosing trial #alance> a income summary .

 # . c . d .

machinery rent e6ense interest income

ANS: 8 1!. 'inancial statements are reared from the a trial #alance .  # adjusted trial #alance . c general ledger  . d general journal .

ANS: 8 1$. (isk e6osures in the eneral ;edger and 'inancial (eorting Systems include all of the following e6cet a loss of the audit trail .  # unauthori"ed access to the general ledger  . c loss of hysical assets . d general ledger account out of #alance with the su#sidiary account .

ANS: 9 1&. /hich situation indicates an internal control risk in the eneral ;edger?'inancial (eorting Systems <;?'(S=> a the emloyee who maintains the cash journal comutes dereciation e6ense .  # the cash receits journal voucher is aroved #y the Treasurer  . c the cash receits journal vouchers are renum#ered and stored in a locked safe . d the emloyee who maintains the cash receits journal records transactions in the . accounts receiva#le su#sidiary ledger 

ANS: 7

1). /ith a limited work force and a desire to maintain strong internal control0 which com#ination of duties  erformed #y a single individual resents the least risk e6osure> a maintaining the inventory ledger and recording the inventory journal voucher in the . general ledger   # recording the inventory journal voucher in the general ledger and maintaining custody of . inventory c maintaining the cash dis#ursements journal and recording direct la#or costs alied to . secific jo#s d  rearing the accounts aya#le journal voucher and recording it in the general ledger  .

ANS: 9 1+. The audit trail fulfills all of the following uroses e6cet a  rovides the a#ility to answer inuiries .  # ensures the accuracy of the alication software . c fulfills governmental regulations . d offers a means for reventing0 detecting0 and correcting errors .

ANS: 8 1-. /hich #est descri#es a #atch rocess eneral ;edger System <;S= a  aer documents are eliminated .  # the general ledger master file is udated each night . c there is a time lag #etween transaction rocessing and osting to the general ledger  . d no direct access or uerying of the eneral ;edger is ossi#le .

ANS: 9 1. An advantage of a #atch eneral ;edger System <;S= is that a searation #etween authori"ation and transaction rocessing is strictly enforced .  # the general ledger master file is recreated with each udate . c udates and reconciliation of transactions occur as a ste within the transaction cycle . d errors and out5of5#alance conditions are identified at the end of the month .

ANS: 9

2. A characteristic of the *anagement (eorting System <*(S= is a the *(S oerates in conformity with generally acceted accounting rinciles .  # it is a legal reuirement that the *(S #e installed and functioning roerly . c the *(S is develoed #y imlementing S%9 reuirements . d the *(S focuses on internal decision5making information .

ANS: 7 21. /hich statement is not true> a authority refers to an individual4s o#ligation to achieve desired results .  # if an emloyee is given the resonsi#ility for a task0 that emloyee should #e given . authority to make decisions within the limits of that task  c the level of detail rovided to an e mloyee is a function of the emloyee4s osition with . the firm d all of the a#ove are true .

ANS: A 22. /hich statement is not true> The manager4s san of control a is narrow for routine and reetitive tasks .  # is related to the num#er of layers of management . c affects the amount of detail rovided to a manager  . d can affect emloyee morale and motivation .

ANS: A 2!. Short5range lanning involves a setting goals and o#jectives of the firm .  #  lanning the roduction schedule for the ne6t uarter  . c  lanning the growth of the firm . d deciding on the degree of diversification among the firm4s roducts .

ANS: 8

2$. ;ong5range lanning involves a  lanning the marketing and romotion for a roduct .  #  resenting deartment heads with #udgetary goals for the ne6t year  . c  rearing a work force utili"ation #udget for the ne6t uarter  . d deciding the otimum si"e of the firm .

ANS: 7 2&. The level of management that makes tactical lanning decisions is a to management .  # middle management . c oerations management . d front5line management .

ANS: 8 2). The decision to enter a new market is an e6amle of  a strategic lanning .  # tactical lanning . c management control . d oerational control .

ANS: A 2+. All of the following are elements of oerational control decisions e6cet a determining the scoe of the activity .  # setting oerating standards . c evaluating erformance . d taking corrective action when necessary .

ANS: A

2-. In contrast to tactical lanning decisions0 management control decisions0 and oerational control decisions0 strategic lanning decisions usually a are more focused .  # have a shorter time frame . c are unstructured . d have a high degree of certainty .

ANS: 9 2. /hich of the following management rinciles affects the management reorting system> a formali"ation of tasks .  # authori"ation . c san of control . d all of the a#ove .

ANS: 7 !. All of the following are elements of ro#lem structure e6cet a certainty .  # data . c  rocedures . d o#jectives .

ANS: A !1. All of the following are e6amles of rogrammed reorts e6cet a cash flow reorts for 7ivision 8 .  # year5to5date local income ta6 ayments made #y all emloyees living in 9ity @ and . working in 9ity  c inventory e6cetion reorts for 7ivision  . d euiment utili"ation reorts for ,lant * .

ANS: 8 !2. A fundamental rincile of resonsi#ility accounting is that a managers are accounta#le only for items they control .  # a manager4s san of control should not e6ceed eight eole . c structured reorts should #e reared weekly . d the information flow is in one direction0 to5down .

ANS: A !!. /hich statement is not true> (esonsi#ility accounting a involves #oth a to5down and #ottom5u flow of information .  # acknowledges that some economic events cannot #e traced to any manager  . c creates a #udget . d comares actual erformance with #udget .

ANS: 8 !$. /hat mechanism is used to convey to managers the standards #y which their erformance will #e measured> a the resonsi#ility reort .  # the scheduled reort . c the #udget . d all of the a#ove .

ANS: 9 !&. All of the following concets encourage goal congruence e6cet a detailed information reorting at all management levels .  # authority and resonsi#ility . c formali"ation of tasks . d resonsi#ility accounting .

ANS: A !). /hich of the following statements is N3T true> a Sorting records that are coded alha#etically tends to #e more difficult for users than . sorting numeric seuences.  # *nemonic coding reuires the user to memori"e codes. . c Seuential codes carry no information content #eyond their order in the seuence. . d *nemonic codes are limited in their a#ility to reresent items within a class. .

ANS: 8 !+. /hich file has as its rimary urose to resent comarative financial reorts on a historic #asis> a  journal voucher history file .  #  #udget master file . c resonsi#ility file . d general ledger history file .

ANS: 7 !-. All of the following are characteristics of the strategic lanning rocess e6cet the a emhasis on #oth the short and long run. .  # review of the attri#utes and #ehavior of the organi"ation4s cometition. . c analysis of e6ternal economic factors. . d analysis of consumer demand. .

ANS: A !. /hich of the following erformance measures can not result in dysfunctional #ehavior> a  rice variance .  # uotas . c (3I . d net income . e all of the a#ove can result in dysfunctional #ehavior  .

ANS: % $. /hich of the following #est descri#es a rofit center: a authority to make decisions affecting the major determinants of rofit0 including the .  ower to choose its markets and sources of suly.  # authority to make decisions affecting the major determinants of rofit0 including the .  ower to choose its markets and sources of suly0 and significant control over the amount of invested caital. c authority to make decisions over the most significant costs of oerations0 including the .  ower to choose the sources of suly. d authority to rovide seciali"ed suort to other units within the organi"ation. . e resonsi#ility for com#ining the raw materials0 direct la#or0 and other factors of .  roduction into a final roduct.

ANS: A S#$RT %S&ER 

1. ;ist0 in order0 the stes in the 'inancial Accounting ,rocess. 1. 2. !. $. &. ). +. -. . 1 . 11 .

ANS: 1. 9ature the transaction on source documents. 2. (ecord in secial journals. !. ,ost to su#sidiary ledger. $. ,ost to general ledger
1. Bournali"e and ost closing entries. 11. ,reare the ost5closing trial #alance. 2. ;ist two duties that the general ledger clerk should not erform. ANS: make entries in secial journals or su#sidiary ledgersC  reare journal vouchersC maintain custody of hysical assets !. %6lain the urose and contents of the general ledger master file. ANS: The general ledger master file is the main file on the general ledger data#ase. It is #ased on the firm4s chart of accounts. %ach record is either a general ledger account /hat has taken its lace> ANS: *any firms have relaced a traditional general journal with a journal voucher system. %ach entry is documented on a renum#ered journal voucher which contains additional information0 such as authori"ation0 which enhances control. A voucher may contain information on a num#er of related transactions. ). /hat are the major e6osures in the general ledger?financial reorting system> ANS: The rimary e6osures are: a defective or lost audit trail0 unauthori"ed access0 ; accounts out of  #alance with su#sidiary ledger accounts0 and incorrect account #alances due to unauthori"ed or incorrect entries. +. /hy is the audit trail necessary> ANS:

The audit trail is needed for several reasons: to rovide the a#ility to answer inuiries from customers and suliers0 to reconstruct files if lost0 to rovide historical data to auditors0 to satisfy government regulations0 and for error control. -. The FFFFFFFFFFFFFFFFFFFFFFFFFFFFFFF rincile suggests that management should structure the firm around the work it erforms r ather than around individuals with uniue skills. ANS: formali"ation of tasks . %mloyees who are resonsi#le for a task must have the FFFFFFFFFFFFFFFFFFFFFFFFFF to make decisions within the limits of the resonsi#ility delegated. ANS: authority 1. FFFFFFFFFFFFFFFFFFFFFFFFFF refers to the num#er of su#ordinates directly under a manager4s control. ANS: San of control 11. The difference #etween the actual erformance and the standard is called the  FFFFFFFFFFFFFFFFFFFFFFFFFF. ANS: variance 12. Gow does the *anagement #y %6cetion rincile affect the *anagement (eorting System> ANS: (eorts should focus on differences #etween actual and e6ected num#ers in key factors that are symtomatic of otential ro#lems. (eorts that rovide unnecessary details a#out routine0 in control items should #e avoided. 1!. 'or reorts to #e useful they must have information content. 7escri#e a reorting o#jective which gives reorts information content. ANS: (eorts must reduce the level of uncertainty associated with a ro#lem facing the decision maker0 and must influence the #ehavior of the decision maker in a ositive way. 1$. /hat is information overload> Gow does it affect decision5making> ANS: Information overload refers to a situation in which a manager receives more information than can #e assimilated. A natural resonse to this is to ignore information or select only some. In addition0 intuition can dislace logic. 1&. %6lain the hrase Hsan of control. /hat are the imlications for the management reorting system of this rincile>

ANS: A manager4s san of control is the num#er of su#ordinates he?she suervises directly. The #roader a manager4s san of control0 the more autonomy his?her su#ordinates enjoyDthe less involved the manager is in their secific tasks. This imacts the *(S in terms of the level of detail a manager reuires. If the san is wide0 less detailC if narrow0 more. 1). %6lain the three tyes of resonsi#ility centers. ANS: 9ost centers are organi"ational units with resonsi#ility for cost management. ,rofit centers have resonsi#ility for #oth cost management and revenue generation. Investment centers have resonsi#ility for cost management0 revenue generation0 and also the investment and use of assets. 1+. 7escri#e at least three characteristics of strategic lanning decisions and their information reuirements. ANS: have long time framesDcreate a need for information that suorts forecasting0 reuire summari"ed informationDnot encum#ered #y detail0 tend to #e nonrecurringDthus having little historical data in suort involve a lot of uncertaintyDi.e.0 are unstructured decisions are #road in scoeDthus reuiring #road #ased information often reuire significant e6ternal informationDgenerated #eyond the information system itself. 1-. /hat three elements must #e resent for a ro#lem to #e Hstructured> ANS: data0 rocedures0 o#jectives 1. Gow does management #y e6cetion hel to alleviate information overload #y a manager> ANS: The rincile of management #y e6cetion is that managers should limit their attention to otential  ro#lem areas rather than #eing involved with every activity or decision. Thus0 only situations which are not roceeding as scheduled are highlighted #y the reorts and analy"ed # y the manager. Thus0 the manager does not have to weed through multile reorts to find the situations which need attention. 2. /hat is a data warehouse> ANS: A data warehouse is a relational data#ase management system that has #een designed secifically to meet the needs of data mining. The warehouse is a central location that contains oerational data a#out current events
1. ;ist and e6lain the si6 #asic files in the general ledger data#ase. ANS:

The general ledger master file is the main file on the general ledger data#ase. It is #ased on the firm4s chart of accounts. %ach record is either a searate general ledger account ANS: Jnlike nondiscretionary reorts whose content0 timing0 even format are rescri#ed #y regulatory or authoritative #odies0 discretionary reorts are whatever management feels is neededDin content0 timing0 format0 and use. The *(S can #e an imortant art of the firm4s internal control system. 8y summari"ing activities0 highlighting trends0 and identifying e6cetions from normal erformance0 reorts can greatly enhance management4s understanding of oerations. These can #e whatever management feels is necessary to make good decisions. The e6ansion of the *(S must #e guided #y common sense. If too many reorts are generated0 information overload results. If the cost of the system e6ceeds the erceived #enefits0 the organi"ation loses. $. There are two #asic tyes of management reortsDrogrammed and ad hoc. 7escri#e each and give e6amles. ANS:

,rogrammed reorts rovide information to solve anticiated ro#lems and make normal decisions. They include scheduled reorts such as daily sales reorts and on5demand reorts generated #y need such as inventory #elow reorder oint ANS: Information reuirements are defined #y a osition0 not #y the erson filling that osition. /hen there is a ersonnel change0 there should #e no major changes in the information needed #y the new emloyeeC it will #e essentially the same as that needed #y the former emloyee. Internal control is strengthened #ecause information is rovided #ased on the reuirements of the osition ANS: 9omanies use coding schemes in their AISs #ecause codes concisely reresent large amounts of comle6 information that would otherwise #e unmanagea#le. They also rovide a means of accounta#ility over the comleteness of the transactions rocessed and identify uniue transactions and accounts within a file. In addition0 coding suorts the audit function #y roviding an effective audit trail. -. 9omare and contrast the relative advantages and disadvantages of seuential0 #lock0 grou0 alha#etic and mnemonic codes. ANS: Se()ential codes are aroriate for items in either an ascending or descending seuence0 such as the num#ering of checks or source documents. An advantage is that during #atch rocessing0 any gas detected in the seuence is a signal that a transaction may #e missing. A disadvantage is that the codes carry little0 if any0 information other than the seuence order. Another disadvantage is that seuential codes are difficult to manage when items need to #e addedC the seuence needs either to #e reordered or the items must #e added to the end of the list.

*loc+ codes rovide some remedies to seuential codes #y restricting each class to a resecified range. The first digit tyically reresents a class0 whereas the following digits are seuential items which may #e saced in intervals in case of future additions. An e6amle of #lock coding is a chart of accounts. A disadvantage of #lock coding is that the information content does not rovide much meaning0 i.e. an account num#er only means something if the chart of accounts is known. Gro)p codes may #e used to reresent comle6 items or events involving two or more ieces of related data. The code is comrised of fields which ossess secific meaning. The advantages of grou codes over seuential and #lock codes are 1= they facilitate the reresentation of large amounts of diverse data0 2= they allow comle6 data structures to #e reresented in a hierarchical form that is logical and thus more easily remem#ered #y humans0 and != they ermit detailed analysis and reorting #oth within an item class and across different classes of items. A disadvantage is that the codes may #e overused to link classes which do not need to #e linked0 and thus creating a more comle6 coding system that is necessary. lphaetic codes may #e used seuentially or in #lock or grou codes. An advantage is that a system which uses alha#etic codes can reresent far more situations than a system with numeric codes given a secific field si"e. Some disadvantages are that seuentially assigned codes mostly have little meaning. Also0 humans tyically find alha#etic codes more difficult to sort than numeric data.

;astly0 mnemonic codes are alha#etic characters in the form of acronyms0 a##reviations or other com#inations that convey meaning. The meaning asect is its advantage. A disadvantage of mnemonic codes is that they are limited in their a#ility to reresents items within a class i.e. names of all of American %6ressKs customers. . 9ontrast the four decision tyes0 strategic lanning0 tactical lanning0 management control and oerational control0 #y the four decision characteristics0 time frame0 scoe0 level of details0 recurrence0 and certainty. ANS: Strategic lanning decisions are 1= tyically long5term in nature0 2= have a high imact on the firm0 != reuire highly summari"ed information0 $= t yically non5recurring ro#lems?oortunities0 and &= uncertain in nature. Tactical lanning decisions are 1= tyically medium5term in nature0 2= have a limited imact on the firm0 != reuire detailed information0 $= tyically are eriodically recurring  ro#lems?oortunities0 and &= highly certain in nature. *anagement control decisions are 1= tyically medium5term in nature0 2= have a narrower imact on the firm0 != reuire moderately summari"ed information0 $= tyically are eriodically recurring ro#lems?oortunities0 and &= uncertain in nature. 3erational control decisions are 1= tyically short5term in nature0 2= have the narrowest imact on the firm0 != reuire highly detailed information0 $= tyically are eriodically recurring  ro#lems?oortunities0 and &= highly certain in nature.