Chp 16 General Ledger And Reporting Sys

Topics: XBRL, Balanced scorecard, General ledger Pages: 26 (3219 words) Published: December 2, 2014
CHAPTER 16

GENERAL LEDGER AND REPORTING SYSTEM

SUGGESTED ANSWERS TO DISCUSSION QUESTIONS

16.1Although XBRL facilitates the electronic exchange of financial information, some external users do not think it goes far enough. They would like access to the entire general ledger, not just to XBRL-tagged financial reports that summarize general ledger accounts. Should companies provide external users with such access? Why or why not?

No, companies should not provide access to their general ledger. Providing external users access to a company’s general ledger opens the company up to significant competitive and financial risk.

16.2How can responsibility accounting and flexible budgets improve morale?

Responsibility accounting improves morale by holding managers accountable only for the activities over which they have control. In this way, they are not unfairly “punished” for poor performance that they could not alter.

Flexible budgeting enables more accurate interpretation of deviations from budget. For example, if activity levels are higher than planned, then costs should also increase. Therefore, costs higher than the original budget may not be “bad” if they have risen at a rate less than or equal to the proportionate increase in activity.

16.3Why is the audit trail an important control?

The audit trail is a detective control used to verify the accuracy and completeness of transaction processing. Tracing a set of source documents forward through the journal entries that updated the general ledger verifies that the transactions were actually recorded. Tracing changes in general ledger accounts back to source documents provides a way to verify that the transactions did indeed occur and that they were recorded correctly.

Although an accounting system should employ a variety of processing integrity controls to prevent errors from occurring, preventive controls are never 100% effective. Therefore, they need to be supplemented with detective controls like an audit trail.

16.4The balanced scorecard measures organizational performance along four dimensions. Is it possible that measures on the customer, internal operations, and innovation and learning dimensions could be improving without any positive change in the financial dimension? If so, what are the implications of such a pattern?

It may indeed be possible for measures on three dimensions of the balanced scorecard to improve, but for financial results to deteriorate. This may occur because the 3 other areas are leading indicators of financial performance. If so, the latter should soon begin to improve.

On the other hand, it may be that the measures developed for the other areas are flawed in that they do not address activities that customers value. Consequently, improved performance on those dimensions does not translate into improved profitability. In this case, management needs to redesign the nonfinancial dimensions of the Balanced Scorecard to include items that are causally related to future financial performance.

Yet another possibility is that macroeconomic factors could be depressing earnings.

Clearly, a company cannot continue indefinitely with declining financial performance. Top management needs to investigate the underlying causes of this pattern.

16.5Do you think that mandatory standards should be developed for the design of graphs of financial data that are included in annual reports and other periodic communications to investors? Why or why not?

There is no right answer here but it should generate a good discussion. It may be helpful to start the discussion off by talking about the reporting standards of the SEC and FASB.

It may also be useful to find annual reports or other financial news stories that contain graphs which violate one or more of the rules presented in this chapter, and ask students to discuss the effects, if any, of such violations.

Should students...
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