Test bank of accounting information systems by hall ch08

Chapter 8—General Ledger, Financial Reporting, and Management Reporting Systems TRUE/FALSE The most common means of making entries in the general ledger is via the journal voucher ANS: T Individuals with access authority to general ledger accounts should not prepare journal vouchers ANS: T The journal voucher is the document that authorizes entries to be made to the general ledger ANS: T Each account in the chart of accounts has a separate record in the general ledger master file ANS: T The responsibility center file is primarily used by the Financial Reporting System ANS: F Management reporting is often called discretionary reporting because it is not mandated as is financial reporting ANS: T Primary recipients of financial statement information are internal management ANS: F The Management Reporting System is a nondiscretionary system ANS: F When evaluating decision alternatives, one option is to take no action ANS: T 10 In most cases intangible decision criteria can be quantified ANS: F 11 One benefit of the Management Reporting System is that it can alert management to delays in project implementation ANS: T 12 Responsibility refers to an individual’s obligation to achieve desired results ANS: T 13 A firm with a wide span of control tends to have relatively more layers of management ANS: F 14 The control function entails evaluating a process against a standard and, if necessary, taking corrective action ANS: T 15 Standards are the basis for evaluating actual performance ANS: T 16 A report is said to have information content if it eliminates uncertainty associated with a problem facing the decision maker ANS: F 17 An inventory out-of-stock report is an example of a programmed, on-demand report ANS: T 18 A principle of responsibility accounting is that managers are responsible for controllable and uncontrollable costs ANS: F 19 The manager of a cost center is responsible for cost control and revenue generation ANS: F 20 Designing an effective management reporting system does not require an understanding of the information managers need to deal with the problems they face ANS: F 21 The formalization of tasks principle suggests that management should structure the firm around the unique skills sets of key individuals ANS: F 22 If a manager delegates responsibility to a subordinate, he or she must also grant the subordinate authority to make decisions ANS: T 23 Operational control involves motivating managers at all levels to use resources, including materials, personnel, and financial assets, as productively as possible ANS: F 24 The block code is the coding scheme most appropriate for a chart of accounts ANS: T MULTIPLE CHOICE The coding scheme most appropriate for a chart of accounts is a sequential code b block code c group code d mnemonic code ANS: B A common use for sequential coding is a creating the chart of accounts b identifying inventory items c identifying documents d identifying fixed assets ANS: C The most important advantage of sequential coding is that a missing or unrecorded documents can be identified b the code itself lacks informational content c items cannot be inserted d deletions affect the sequence ANS: A When a firm wants its coding system to convey meaning without reference to any other document, it would choose a an alphabetic code b a mnemonic code c a group code d a block code ANS: B The most important advantage of an alphabetic code is that a meaning is readily conveyed to users b sorting is simplified c the capacity to represent items is increased d missing documents can be identified ANS: C Entries into the General Ledger System (GLS) can be made using information from a the general journal b a journal voucher which represents a summary of similar transactions c a journal voucher which represents a single, unusual transaction d all of the above ANS: D Which statement is not correct? The general ledger master file a is based on the firm’s chart of account b contains a record for control accounts c is an output of the Financial Reporting System (FRS) d supplies information for management decision making ANS: C What type of data is found in the general ledger master file? a a chronological record of all transactions b the balance of each account in the chart of accounts c budget records for each account in the chart of accounts d subsidiary details supporting a control account ANS: B Which report is not an output of the Financial Reporting System (FRS)? a variance analysis report b statement of cash flows c tax return d comparative balance sheet ANS: A 10 Which steps in the Financial Accounting Process are in the correct sequence? a record the transaction, post to the ledger, prepare the adjusted trial balance, enter adjusting entries, prepare financial statements b record the transaction, prepare the unadjusted trial balance, record adjusting journal entries, record closing entries, prepare financial statements c record the transaction, post to the ledger, record adjusting entries, prepare the unadjusted trial balance, prepare financial statements d record the transaction, post to the ledger, prepare the adjusted trial balance, prepare financial statements, record closing entries ANS: D 11 Which statement is not correct? a the post-closing trial balance reports the ending balance of each account in the general ledger b one purpose of preparing the unadjusted trial balance is to ensure that debits equal credits c financial statements are prepared based on the unadjusted trial balance d the unadjusted trial balance reports control account balances but omits subsidiary ledger detail ANS: C 12 What account appears on the postclosing trial balance? a income summary b machinery c rent expense d interest income ANS: B 13 Financial statements are prepared from the a b c d trial balance adjusted trial balance general ledger general journal ANS: B 14 Risk exposures in the General Ledger and Financial Reporting Systems include all of the following except a loss of the audit trail b unauthorized access to the general ledger c loss of physical assets d general ledger account out of balance with the subsidiary account ANS: C 15 Which situation indicates an internal control risk in the General Ledger/Financial Reporting Systems (GL/FRS)? a the employee who maintains the cash journal computes depreciation expense b the cash receipts journal voucher is approved by the Treasurer c the cash receipts journal vouchers are prenumbered and stored in a locked safe d the employee who maintains the cash receipts journal records transactions in the accounts receivable subsidiary ledger ANS: D 16 With a limited work force and a desire to maintain strong internal control, which combination of duties performed by a single individual presents the least risk exposure? a maintaining the inventory ledger and recording the inventory journal voucher in the general ledger b recording the inventory journal voucher in the general ledger and maintaining custody of inventory c maintaining the cash disbursements journal and recording direct labor costs applied to specific jobs d preparing the accounts payable journal voucher and recording it in the general ledger ANS: C 17 The audit trail fulfills all of the following purposes except a provides the ability to answer inquiries b ensures the accuracy of the application software c fulfills governmental regulations d offers a means for preventing, detecting, and correcting errors ANS: B 18 Which best describes a batch process General Ledger System (GLS) a paper documents are eliminated b the general ledger master file is updated each night c there is a time lag between transaction processing and posting to the general ledger d no direct access or querying of the General Ledger is possible ANS: C 19 An advantage of a batch General Ledger System (GLS) is that a separation between authorization and transaction processing is strictly enforced b the general ledger master file is recreated with each update c updates and reconciliation of transactions occur as a step within the transaction cycle d errors and out-of-balance conditions are identified at the end of the month ANS: C 20 A characteristic of the Management Reporting System (MRS) is a the MRS operates in conformity with generally accepted accounting principles b it is a legal requirement that the MRS be installed and functioning properly c the MRS is developed by implementing SEC requirements d the MRS focuses on internal decision-making information ANS: D 21 Which statement is not true? a authority refers to an individual’s obligation to achieve desired results b if an employee is given the responsibility for a task, that employee should be given authority to make decisions within the limits of that task c the level of detail provided to an employee is a function of the employee’s position with the firm d all of the above are true ANS: A 22 Which statement is not true? The manager’s span of control a is narrow for routine and repetitive tasks b is related to the number of layers of management c affects the amount of detail provided to a manager d can affect employee morale and motivation ANS: A 23 Short-range planning involves a setting goals and objectives of the firm b planning the production schedule for the next quarter c planning the growth of the firm d deciding on the degree of diversification among the firm’s products ANS: B 24 Long-range planning involves a planning the marketing and promotion for a product b presenting department heads with budgetary goals for the next year c preparing a work force utilization budget for the next quarter d deciding the optimum size of the firm ANS: D 25 The level of management that makes tactical planning decisions is a top management b middle management c operations management d front-line management ANS: B 26 The decision to enter a new market is an example of a strategic planning b tactical planning c management control d operational control ANS: A 27 All of the following are elements of operational control decisions except a determining the scope of the activity b setting operating standards c evaluating performance d taking corrective action when necessary ANS: A 28 In contrast to tactical planning decisions, management control decisions, and operational control decisions, strategic planning decisions usually a are more focused b have a shorter time frame c are unstructured d have a high degree of certainty ANS: C 29 Which of the following management principles affects the management reporting system? a formalization of tasks b authorization c span of control d all of the above ANS: D 30 All of the following are elements of problem structure except a certainty b data c procedures d objectives ANS: A 31 All of the following are examples of programmed reports except a cash flow reports for Division B b year-to-date local income tax payments made by all employees living in City X and working in City Y c inventory exception reports for Division G d equipment utilization reports for Plant M ANS: B 32 A fundamental principle of responsibility accounting is that a managers are accountable only for items they control b a manager’s span of control should not exceed eight people c structured reports should be prepared weekly d the information flow is in one direction, top-down ANS: A 33 Which statement is not true? Responsibility accounting a involves both a top-down and bottom-up flow of information b acknowledges that some economic events cannot be traced to any manager c creates a budget d compares actual performance with budget ANS: B 34 What mechanism is used to convey to managers the standards by which their performance will be measured? a the responsibility report b the scheduled report c the budget d all of the above ANS: C 35 All of the following concepts encourage goal congruence except a detailed information reporting at all management levels b authority and responsibility c formalization of tasks d responsibility accounting ANS: A 36 Which of the following statements is NOT true? a Sorting records that are coded alphabetically tends to be more difficult for users than sorting numeric sequences b Mnemonic coding requires the user to memorize codes c Sequential codes carry no information content beyond their order in the sequence d Mnemonic codes are limited in their ability to represent items within a class ANS: B 37 Which file has as its primary purpose to present comparative financial reports on a historic basis? a journal voucher history file b budget master file c responsibility file d general ledger history file ANS: D 38 All of the following are characteristics of the strategic planning process except the a emphasis on both the short and long run b review of the attributes and behavior of the organization’s competition c analysis of external economic factors d analysis of consumer demand ANS: A 39 Which of the following performance measures can not result in dysfunctional behavior? a price variance b quotas c ROI d net income e all of the above can result in dysfunctional behavior ANS: E 40 Which of the following best describes a profit center: a authority to make decisions affecting the major determinants of profit, including the power to choose its markets and sources of supply b authority to make decisions affecting the major determinants of profit, including the power to choose its markets and sources of supply, and significant control over the amount of invested capital c authority to make decisions over the most significant costs of operations, including the power to choose the sources of supply d authority to provide specialized support to other units within the organization e responsibility for combining the raw materials, direct labor, and other factors of production into a final product ANS: A SHORT ANSWER List, in order, the steps in the Financial Accounting Process 10 11 ANS: Capture the transaction on source documents Record in special journals Post to subsidiary ledger Post to general ledger (using journal vouchers) Prepare the unadjusted trial balance Make adjusting entries Journalize and post adjusting entries Prepare adjusted trial balance Prepare financial statements 10 Journalize and post closing entries 11 Prepare the post-closing trial balance 2 List two duties that the general ledger clerk should not perform ANS: make entries in special journals or subsidiary ledgers; prepare journal vouchers; maintain custody of physical assets Explain the purpose and contents of the general ledger master file ANS: The general ledger master file is the main file on the general ledger database It is based on the firm’s chart of accounts Each record is either a general ledger account (e.g., sales) or a control account (e.g., the accounts payable control) for one of the subsidiary ledgers The general ledger master file contains the following for each account: the account number, description, account class (e.g., asset), the normal balance (debit or credit), beginning balance, total debits for period, total credits for period, and current balance Explain two types of coding schemes and give examples of their use ANS: Sequential codes represent items in some sequential order Prenumbered checks are one example Block codes use sequential numbering in specific parts of the total code–all current assets begin with ‘1,’ fixed asset ‘2,’ etc Traditional charts of accounts use block codes and start assets with 1, liabilities with 2, etc Alphabetic codes are similar to numeric codes with increased options A two character code AA has potential for 676 items (26  26) whereas a two digit code can accommodate only 100 (10  10) Mnemonic codes use letters with meaning The postal state abbreviations are mnemonic Why many firms no longer use a general journal? What has taken its place? ANS: Many firms have replaced a traditional general journal with a journal voucher system Each entry is documented on a prenumbered journal voucher which contains additional information, such as authorization, which enhances control A voucher may contain information on a number of related transactions What are the major exposures in the general ledger/financial reporting system? ANS: The primary exposures are: a defective or lost audit trail, unauthorized access, GL accounts out of balance with subsidiary ledger accounts, and incorrect account balances due to unauthorized or incorrect entries Why is the audit trail necessary? ANS: The audit trail is needed for several reasons: to provide the ability to answer inquiries from customers and suppliers, to reconstruct files if lost, to provide historical data to auditors, to satisfy government regulations, and for error control 8 The _ principle suggests that management should structure the firm around the work it performs rather than around individuals with unique skills ANS: formalization of tasks Employees who are responsible for a task must have the to make decisions within the limits of the responsibility delegated ANS: authority 10 refers to the number of subordinates directly under a manager’s control ANS: Span of control 11 The difference between the actual performance and the standard is called the ANS: variance 12 How does the Management by Exception principle affect the Management Reporting System? ANS: Reports should focus on differences between actual and expected numbers in key factors that are symptomatic of potential problems Reports that provide unnecessary details about routine, in control items should be avoided 13 For reports to be useful they must have information content Describe a reporting objective which gives reports information content ANS: Reports must reduce the level of uncertainty associated with a problem facing the decision maker, and must influence the behavior of the decision maker in a positive way 14 What is information overload? How does it affect decision-making? ANS: Information overload refers to a situation in which a manager receives more information than can be assimilated A natural response to this is to ignore information or select only some In addition, intuition can displace logic 15 Explain the phrase “span of control.” What are the implications for the management reporting system of this principle? ANS: A manager’s span of control is the number of subordinates he/she supervises directly The broader a manager’s span of control, the more autonomy his/her subordinates enjoy–the less involved the manager is in their specific tasks This impacts the MRS in terms of the level of detail a manager requires If the span is wide, less detail; if narrow, more 16 Explain the three types of responsibility centers ANS: Cost centers are organizational units with responsibility for cost management Profit centers have responsibility for both cost management and revenue generation Investment centers have responsibility for cost management, revenue generation, and also the investment and use of assets 17 Describe at least three characteristics of strategic planning decisions and their information requirements ANS: have long time frames–create a need for information that supports forecasting, require summarized information–not encumbered by detail, tend to be nonrecurring–thus having little historical data in support involve a lot of uncertainty–i.e., are unstructured decisions are broad in scope–thus requiring broad based information often require significant external information–generated beyond the information system itself 18 What three elements must be present for a problem to be “structured?” ANS: data, procedures, objectives 19 How does management by exception help to alleviate information overload by a manager? ANS: The principle of management by exception is that managers should limit their attention to potential problem areas rather than being involved with every activity or decision Thus, only situations which are not proceeding as scheduled are highlighted by the reports and analyzed by the manager Thus, the manager does not have to weed through multiple reports to find the situations which need attention 20 What is a data warehouse? ANS: A data warehouse is a relational database management system that has been designed specifically to meet the needs of data mining The warehouse is a central location that contains operational data about current events (within the past 24 hours) as well as events that have transpired over many years ESSAY List and explain the six basic files in the general ledger database ANS: The general ledger master file is the main file on the general ledger database It is based on the firm’s chart of accounts Each record is either a separate general ledger account (e.g., sales) or a control account (e.g., the accounts payable control) for one of the subsidiary ledgers The general ledger history file contains the same information for prior periods The journal voucher file contains all of the journal vouchers processed in the current period The journal voucher history file contains journal vouchers for past periods The responsibility center file contains the revenues, expenses, and other data for individual responsibility centers The budget master file contains budgeted amounts for responsibility centers Describe the three elements of problem structure Contrast a structured problem to an unstructured problem Describe which levels of management typically deal with structured problems and with unstructured problems ANS: Problem structure has three elements: (1) Data–the values used to represent factors that are relevant to the problem; (2) Procedures–the sequence of steps or decision rules used in solving the problem; and (3) Objectives–the results the decision maker desires to attain by solving the problem When all three elements of problem structure are known with certainty, the problem is structured In unstructured problems the data requirements are uncertain, and/or the procedures are not specified, and/or the solution objectives have not been fully developed In general, structured problems are handled at the operations level and partially structured problems are handled by operations, tactical, and strategic management Usually, strategic management handles unstructured problems Many financial reports produced by organizations are nondiscretionary–publicly traded firms have no choice but to prepare income statements, tax returns, etc Applications that are part of the management reporting system are discretionary–they are optional How does this characteristic affect the system? ANS: Unlike nondiscretionary reports whose content, timing, even format are prescribed by regulatory or authoritative bodies, discretionary reports are whatever management feels is needed–in content, timing, format, and use The MRS can be an important part of the firm’s internal control system By summarizing activities, highlighting trends, and identifying exceptions from normal performance, reports can greatly enhance management’s understanding of operations These can be whatever management feels is necessary to make good decisions The expansion of the MRS must be guided by common sense If too many reports are generated, information overload results If the cost of the system exceeds the perceived benefits, the organization loses There are two basic types of management reports–programmed and ad hoc Describe each and give examples ANS: Programmed reports provide information to solve anticipated problems and make normal decisions They include scheduled reports such as daily sales reports and on-demand reports generated by need such as inventory below reorder point (the report is generated when the inventory level fall to reorder–the report is demanded by the system based on the previously set inventory level) Ad hoc reports are the result of immediate need for information and may take the form of database queries on sales of a particular item mentioned in a news report Describe at least three attributes of an effective report ANS: Effective reports tend to share several attributes: relevance–relevant data supports the manager’s decision needs, summarization–data should be at the appropriate level of summarization for the manager receiving it, exception orientation–this highlights what is not going as planned, accuracy–is the freedom from material errors, completeness–with no key pieces of information missing, timeliness–information that is reasonable complete and accurate in a reasonable time frame is more valuable than perfect information too late, conciseness–conciseness is a counter measure to information overload What is the implication for the Management Reporting System of an organization that implements the formalization of tasks principle? ANS: Information requirements are defined by a position, not by the person filling that position When there is a personnel change, there should be no major changes in the information needed by the new employee; it will be essentially the same as that needed by the former employee Internal control is strengthened because information is provided based on the requirements of the position (a need to know basis) What are the reasons the companies use coding schemes in their accounting information systems? ANS: Companies use coding schemes in their AISs because codes concisely represent large amounts of complex information that would otherwise be unmanageable They also provide a means of accountability over the completeness of the transactions processed and identify unique transactions and accounts within a file In addition, coding supports the audit function by providing an effective audit trail Compare and contrast the relative advantages and disadvantages of sequential, block, group, alphabetic and mnemonic codes ANS: Sequential codes are appropriate for items in either an ascending or descending sequence, such as the numbering of checks or source documents An advantage is that during batch processing, any gaps detected in the sequence is a signal that a transaction may be missing A disadvantage is that the codes carry little, if any, information other than the sequence order Another disadvantage is that sequential codes are difficult to manage when items need to be added; the sequence needs either to be reordered or the items must be added to the end of the list Block codes provide some remedies to sequential codes by restricting each class to a prespecified range The first digit typically represents a class, whereas the following digits are sequential items which may be spaced in intervals in case of future additions An example of block coding is a chart of accounts A disadvantage of block coding is that the information content does not provide much meaning, i.e an account number only means something if the chart of accounts is known Group codes may be used to represent complex items or events involving two or more pieces of related data The code is comprised of fields which possess specific meaning The advantages of group codes over sequential and block codes are 1) they facilitate the representation of large amounts of diverse data, 2) they allow complex data structures to be represented in a hierarchical form that is logical and thus more easily remembered by humans, and 3) they permit detailed analysis and reporting both within an item class and across different classes of items A disadvantage is that the codes may be overused to link classes which not need to be linked, and thus creating a more complex coding system that is necessary Alphabetic codes may be used sequentially or in block or group codes An advantage is that a system which uses alphabetic codes can represent far more situations than a system with numeric codes given a specific field size Some disadvantages are that sequentially assigned codes mostly have little meaning Also, humans typically find alphabetic codes more difficult to sort than numeric data Lastly, mnemonic codes are alphabetic characters in the form of acronyms, abbreviations or other combinations that convey meaning The meaning aspect is its advantage A disadvantage of mnemonic codes is that they are limited in their ability to represents items within a class i.e names of all of American Express's customers Contrast the four decision types, strategic planning, tactical planning, management control and operational control, by the four decision characteristics, time frame, scope, level of details, recurrence, and certainty ANS: Strategic planning decisions are 1) typically long-term in nature, 2) have a high impact on the firm, 3) require highly summarized information, 4) typically non-recurring problems/opportunities, and 5) uncertain in nature Tactical planning decisions are 1) typically medium-term in nature, 2) have a limited impact on the firm, 3) require detailed information, 4) typically are periodically recurring problems/opportunities, and 5) highly certain in nature Management control decisions are 1) typically medium-term in nature, 2) have a narrower impact on the firm, 3) require moderately summarized information, 4) typically are periodically recurring problems/opportunities, and 5) uncertain in nature Operational control decisions are 1) typically short-term in nature, 2) have the narrowest impact on the firm, 3) require highly detailed information, 4) typically are periodically recurring problems/opportunities, and 5) highly certain in nature  ... Financial Reporting Systems include all of the following except a loss of the audit trail b unauthorized access to the general ledger c loss of physical assets d general ledger account out of balance... high degree of certainty ANS: C 29 Which of the following management principles affects the management reporting system? a formalization of tasks b authorization c span of control d all of the above... all of the above can result in dysfunctional behavior ANS: E 40 Which of the following best describes a profit center: a authority to make decisions affecting the major determinants of profit,