Problems on Financial Reporting and Management Reporting Systems.

Problems

1. GENERAL LEDGER SYSTEM OVERVIEW

Draw a diagram depicting the relationship between the general ledger master file, control accounts, subsidiary files, and financial statements.

2. FINANCIAL REPORTING PROCESS

The following contains the various steps of the financial reporting process. Place these steps in the proper order and indicate whether each step is a function of the TPS, GLS, or FRS.

• Record transaction in special journal

• Make adjusting entries

• Capture the transaction

• Prepare the post-closing trial balance

• Prepare the adjusted trial balance

• Prepare the financial statements

• Journalize and post the adjusting entries

• Post to the subsidiary ledger

• Post to the general ledger

• Journalize and post the closing entries

• Prepare the unadjusted trial balance

3. XBRL

John Ozment, director of special projects and analysis for Ozment’s Corporation, is responsible for preparing corporate financial analyses and monthly statements and reviewing and presenting the financial impacts of proposed strategies to upper management. Data for such financial analyses are obtained from operations and financial databases through direct queries of Ozment’s department staff. Reports and charts for presentations are then prepared by hand and typed. Multiple copies are prepared and distributed to various users. The pressure on Ozment’s group has intensified as demand for more and more current information increases. A solution to this reporting problem must be found.

The systems department wants to develop a proprietary software package to produce the reports automatically. The project would require the company to make a considerable programming investment. Ozment is concerned about the accuracy, completeness, and currency of data in automatically produced reports. He has heard about a reporting system called XBRL and wonders whether a new system based on this technology would not be more effective and reliable.

Required

a. Research the current state of XBRL and determine if this technology is appropriate for internal report- ing projects such as this.

b. Identify the enhancements to current information and reporting that the company could realize by using XBRL.

c. Discuss any data integrity, internal control, and reporting concerns associated with XBRL.

4. INTERNAL CONTROL

Leslie Epstein, an employee of Bormack Manufacturing Company, prepares journal vouchers for general ledger entries. Because of the large number of voided journal vouchers caused by errors, the journal vouchers are not prenumbered by the printer; rather, Leslie numbers them as she prepares each journal voucher. She does, however, keep a log of all journal vouchers written so that she does not assign the same number to two journal vouchers. Biweekly, Leslie posts the journal vouchers to the general ledger and any necessary subsidiary accounts. Bimonthly, she reconciles the subsidiary accounts to their control accounts in the general ledger and makes sure the general ledger accounts balance.

Required

Discuss any potential control weaknesses and problems in this scenario.

5. DATABASE GL SYSTEM

Crystal Corporation processes its journal vouchers using batch procedures similar to the process outlined in Figure 8-4 in the text. To improve customer satisfaction, the sales system is going to be converted to a real- time system. Redraw Figure 8-4 to reflect this change in the financial reporting process.

6. DATABASE GL SYSTEM

The top management team at Olympia, Inc., wishes to have real-time access to the general ledger. Currently the general ledger is updated nightly via a batch processing system, similar to Figure 8-4 in the text. Adjust Figure 8-4 to accommodate this request by top management, assuming that the nightly updates to the general ledger are sufficient.

7. INTERNAL CONTROL

Expand Figure 8-5 in the text to incorporate the journal voucher listing and general ledger change report as con- trol mechanisms. Also discuss the specific controls they impose on the system.

8. ORGANIZATIONAL CHART

Prepare an organizational chart for your university. (Your campus phone directory catalog may be helpful.)

9. DECISION LEVEL

Classify the following decisions as being characteristic of strategic planning, tactical planning, managerial control, or operational control.

• Determining the mix of products to manufacture this year

• Examining whether the number of defective goods manufactured is within a certain range

• Expanding a product line overseas

•Determining the best distribution route

• Examining whether the cost of raw materials is within a certain range

• Examining whether personnel development cost is rising

• Employing more automated manufacturing this year

• Examining whether the amount of scrap material is acceptable

• Building a new plant facility

• Examining whether employees’ attitudes are improv- ing

• Examining whether production levels are within a predicted range

• Making purchasing arrangements with a new supplier

• Increasing production capabilities this year by pur- chasing a more efficient piece of machinery

• Closing a plant

10. REPORT CATEGORIZATION

Classify the following reports as being either scheduled or on-demand reports.

• Cash disbursements listing

• Overtime report

• Customer account history

• Inventory stock-out report

• Accounts receivable aging list

• Duplicate paycheck report

• Cash receipts listing

• Machine maintenance report

• Vendor delivery record report

• Journal voucher listing

• Investment center report

• Maintenance cost overrun report

11. CMA ADAPTED— ORGANIZATIONAL STRUCTURE AND SPAN OF CONTROL

Relco Industries recently purchased Arbeck, Inc., a manufacturer of electrical components that the construction industry uses. Roland Ford has been appointed as chief financial officer of Arbeck, and the president of Relco, Martha Sanderson, has asked him to prepare an organizational chart for his department at Arbeck. The chart that Ford has prepared is shown in the figure designated as Problem 11.

Ford believes that the treasurer’s department should include the following employees: assistant treasurer, manager of accounts receivable and four subordinates, manager of investments and three subordinates, and manager of stockholder relations and two subordinates—a total of 13 employees besides the treasurer. The controller’s department should consist of an assist- ant controller, a manager of general accounting and four subordinates, a manager of fixed asset control and three subordinates, and a manager of cost accounting with four subordinates—a total of 15 employees besides the controller.

When Ford presented his plans (Chart A) to Sanderson, she told him that she believed the organizational structure was too tall and showed him, by drawing Chart B, how she had envisioned his department at Arbeck. There would be a reduction in personnel, and 10 employees would report directly to the treasurer, while 13 employees would report directly to the controller.

Ford replied that he believed the span of control was too broad for both the treasurer and the controller and would create problems. Sanderson said that she pre- ferred a flat organizational structure, as she believed that its benefits outweighed the problems that could arise from too great a span of control.

Required

a. For the organizational structure chief financial offi- cer Ford proposed, describe the

1. advantages and disadvantages of that structure.

2. impact of the resulting span of control.

3. effect on employee behavior.

b. For the flat organizational structure Relco president Sanderson proposed, describe the

1. advantages and disadvantages of that structure.

2. impact of the resulting span of control.

3. effect on employee behavior.

c. When determining the appropriate span of control for Arbeck, Inc., discuss the factors that Ford and Sanderson should consider.

12. CMA ADAPTED— ORGANIZATIONAL STRUCTURE AND SPAN OF CONTROL

Barnes Corporation recently purchased Parker Machine Company, a manufacturer of sophisticated parts for the aircraft industry. Donald Jenkins has been appointed vice president of production at Parker, and Beverly Kiner, president at Barnes, has asked Jenkins to prepare an organizational chart for his department at Parker. The chart that Jenkins prepared is presented in Chart A in the figure designated as Problem 12.

When Jenkins presented his chart to Kiner, she told him that she preferred a flat organizational structure and showed him how she envisioned his department at Parker by drawing the chart presented in Chart B. Kiner’s chart reduced a layer of management personnel and increased the number of people reporting directly to the manager of planning and control and the manager of manufacturing.

Jenkins expressed concern about the broad span of control depicted in Kiner’s chart, as he believed this might cause problems for the two managers. Kiner said that she believed that the benefits of a flat organizational structure outweighed the problems that could arise from too great a span of control.

Required

a. For the organizational structure Jenkins proposed, describe the

1. advantages and disadvantages of that structure.

2. impact of the resulting span of control.

3. effect of the organizational structure on employee behavior.

b. For the flat organizational structure Kiner proposed, describe the

1. advantages and disadvantages of that organizational structure.

2. impact of the resulting span of control.

3. effect of the organizational structure on employee behavior.

c. When determining the appropriate span of control for Parker Machine Company, discuss the factors that Jenkins and Kiner should consider.

13. CMA ADAPTED— ORGANIZATIONAL STRUCTURE

While attending night school to earn a degree in computer engineering, Stan Wilson worked for Morlot Container Company (MCC) as an assembly line supervisor. MCC was located near Wilson’s hometown and had been a prominent employer in the area for many years. MCC’s main product was milk cartons that were distributed throughout the Midwest for milk processing plants. The technology at MCC was stable, and the assembly lines were monitored closely. MCC employed a standard cost system because cost control was considered important. The employees who manned the assembly lines were generally unskilled workers who had been with the company for many years; the majority of these workers belonged to the local union.

Wilson was glad he was nearly finished with school

because he found the work at MCC to be repetitive and boring, even as a supervisor. The supervisors were monitored almost as closely as the line workers, and standard policies and procedures existed that applied to most situations. Most of MCC’s management had been with the company for several years and believed in clear lines of authority and well-defined responsibilities. Whereas he knew he had performed well against the company’s standards, Wilson also knew that there probably would be little opportunity for advancement or significant compensation increases.

After receiving his degree, Wilson went to work in the research and development department of Alden Computers, a 5-year-old company specializing in educational computer systems for elementary schools. The company was customer-oriented and willing to tailor its computer systems to the needs of the end users. The customization of its systems, combined with continual changes in technology, resulted in a job-shop orientation in the company’s production facility. The employees who assembled Alden’s systems were skilled technicians who worked closely with the engineering staff.

Wilson was gratified by the respect and authority his newly acquired knowledge and skills afforded him at Alden. If changes were required in his area of expertise, Wilson often made recommendations about how the work should proceed and was involved in decisions on new product development. The company’s management team frequently ‘‘rolled up its sleeves’’ and worked alongside the technicians when production problems arose; the lines of authority were sometimes difficult to distinguish, and decisions were often made by the expert on the spot. Wilson believed that his skills were appreciated at Alden, and he would be fairly compensated for his professional expertise.

Required

a. Morlot Container Company and Alden Computers represent two different types of organizational structures. In terms of each of the following points, explain how MCC differs from Alden Computers.

1. General organizational structure and climate

2. Bases of authority

3. Evaluation criteria

4. Bases of compensation

b. Both structures have potential benefits or can create problems. Discuss the features of the structure used by

1. Alden Computers that might benefit MCC.

2. Alden that might create problems for Alden.

3. MCC that might benefit Alden Computers.

14. CMA ADAPTED—PERFORMANCE MEASURES

The Star Paper Division of Royal Industries is located near Los Angeles. A major expansion of the division’s only plant was completed in April 2007. The expansion consisted of an addition to the existing building, additions to the production-line machinery, and the replacement of obsolete and fully depreciated equipment that was no longer efficient or cost effective.

On May 1, 2007, George Harris became manager of Star. Harris had a meeting with Marie Fortner, vice president of operations for Royal, who explained to Harris that the company measured the performance of divisions and division managers on the basis of return on gross assets (ROA). When Harris asked if other measures were used in conjunction with ROA, Fortner replied, ‘‘Royal’s top management prefers to use a single performance measure. Star should do well this year now that it has expanded and replaced all of that old equipment. You should have no problem exceeding the division’s historical rate. I’ll check with you at the end of each quarter to see how you are doing.’’

Fortner called Harris after the first quarter results were completed because Star’s ROA was considerably below the historical rate for the division. Harris told Fortner that he did not believe that ROA was a valid performance measure for Star. Fortner indicated that she would discuss this with others at headquarters and get back to Harris. However, there was no further discussion of the use of ROA, only reports on divisional performance at the end of the second and third quarters. Now that the fiscal year has ended, Harris has received the memorandum in the figure designated Problem 14.

Harris is looking forward to meeting with Fortner as he plans to pursue the discussion about the appropriate- ness of ROA as a performance measure for Star. While the ROA for Star is below historical levels, the division’s profits for the year are higher than at any previous time. Harris is going to recommend that ROA be replaced with multiple criteria for evaluating performance— namely, dollar profit, receivable turnover, and inventory turnover.

Required

a. Identify general criteria that should be used in selecting performance measures to evaluate operating managers.

b. Describe the probable cause of the decline in the Star Paper Division’s return on gross assets during the fiscal year ended April 30, 2007.

c. On the basis of the relationship between Fortner and Harris, as well as the memorandum from Fortner, discuss apparent weaknesses in the performance evaluation process at Royal Industries.

d. Discuss whether the multiple performance evaluation criteria that Harris suggested would be appropriate for the evaluation of the Star Paper Division.

15. CMA ADAPTED—RESPONSIBILITY ACCOUNTING

Family Resorts, Inc., is a holding company for several vacation hotels in the northeastern and mid-Atlantic states. The firm originally purchased several old inns, restored the buildings, and upgraded the recreational facilities. Vacationing families have been well pleased with the inns because many services are provided that accommodate children and afford parents time for them- selves. Since the completion of the restoration 10 years ago, the company has been profitable.

Family Resorts has just concluded its annual meeting of regional and district managers. This meeting is held each November to review the results of the previous season and to help the managers prepare for the upcoming year. Before the meeting, the managers submitted proposed budgets for their districts or regions as appropriate. These budgets are reviewed and consolidated into an annual operating budget for the entire company. The 2008 budget has been presented at the meeting, and the managers accepted it.

To evaluate the performance of its managers, Family Resorts uses responsibility accounting. Therefore, the preparation of the budget is given close attention at headquarters. If major changes need to be made to the budgets that the managers submitted, all affected parties are consulted before the changes are incorporated. The two figures designated Problem 15 present two reports from the budget booklet that all managers received at the meeting.

Required

a. Responsibility accounting has been used effectively by many companies, both large and small.

1. Define responsibility accounting.

2. Discuss the benefits that accrue to a company using responsibility accounting.

3. Describe the advantages of responsibility accounting for the managers of a firm.

b. The regional and district managers accepted Family Resort’s budget. Based on the facts presented, evaluate the budget process Family Resorts employs by addressing the following:

1.What features of the budget presentation shown are likely to make the budget attractive to managers?

2. What recommendations, if any, could be made to the budget preparers to improve the budget process? Explain your answer.

16. MANAGEMENT BY EXCEPTION

A variety of quantitative measures are used to evaluate employee performance, including standard costs, financial ratios, human resource forecasts, and operating budgets.

Required

a. Discuss the following aspects of a standard cost system.

1. Discuss the characteristics that should be present to encourage positive employee motivation.

2. Discuss how the system should be implemented to positively motivate employees.

b. The use of variance analysis often results in management by exception.

1. Explain the meaning of management by exception.

2. Discuss the behavioral implications of management by exception.

c. Explain how employee behavior could be adversely affected when actual-to-budget comparisons are used as the basis for performance evaluation.

17. CMA ADAPTED—VARIANCE ANALYSIS

Engineers Education Association (EEA) is a volunteer membership organization providing educational and professional services to its members. The professional staff is organized into four divisions with a total of 14 operating departments.

EEA adopted an annual budget program many years ago as a means for planning and controlling activities. Each department of EEA prepares an annual budget in consultation with its respective volunteer committee(s). After a series of reviews by both the professional staff and the volunteer structure, the budget is adopted. The professional staff is expected to comply with the budget in conducting its activities and operations.

The EEA’s accounting department generates monthly income statements that present actual performance as compared to budget for each EEA department. The November 2010 statement for the publications department is shown in the first figure designated Problem 17. Accompanying the report this month was a memorandum from EEA’s president, Daniel Riley, which is shown in the second figure designated as Problem 17.

Marie Paige, publications manager, was having lunch with Jon Franklin, continuing education manager, when the following conversation about Riley’s memorandum took place.

Paige: The volunteers must be giving Riley some static—the memo doesn’t sound like him. Franklin: I think you’re right. One of EEA’s problems is that membership is down.

Paige: I heard that both growth and retention are bad. This is confirmed by my results. A set percentage of the membership dues of each member is assigned to us each month for the magazine subscription. This amount is down 12 percent. I have no control over this number because only members get the magazine.

Franklin: I wonder if the results are really as bad as they look. For instance, accounting has divided all of the annual budget figures by 12 to derive the monthly figures. This is okay for some things but not for most. What about you? Paige: I agree. I don’t know why they do that when we spend so much time up front developing the annual budget. I know what Riley is attempting, but I don’t think he is going to get the results he wants. I know he wants to eliminate the negative variances, but some positive variances are really not favorable! We should be analyzing all significant variances—positive and negative.

Franklin: What are you going to do—analyze just the negatives? Should we do anything before we prepare our reports?

Required

a. The monthly income statements that EEA’s accounting department prepares for each department of EEA are a form of communication.

1. Explain why the departmental income statements are considered a form of communication.

2. In terms of the format of the income statement presented for the publications department, evaluate EEA’s departmental income statement as a communication device.

b. Paige stated that all significant variances should be analyzed because some positive variances are not favorable. Discuss why EEA’s departments should

be analyzing all significant variances, both positive (favorable) and negative (unfavorable). As support for your answer, identify a positive variance from the publications department’s income statement that may not be favorable to EEA’s operations and explain why.

c. Recommend a course of action that Paige or Franklin could take to encourage Riley to have all significant variances reviewed.