Transaction Cycles

Chapter 13: General Ledger &

Financial Reporting Cycle
Based on Chapter 13 of your prescribed textbook:
Accounting Information Systems: Understanding
Business Processes (4th Edition) by Brett CONSIDINE,
Alison PARKES, Karin OLESEN, Yvette BLOUNT & Derek
SPEER. Published by John Wiley & Sons Australia, Ltd
 What you will cover in this weeks lecture

 The objectives and strategic implications of the GL & financial reporting cycle

 Technologies that underpin the GL & financial reporting cycle activities

 GL & financial reporting cycle business decisions

 The primary activities in the GL & financial reporting cycle

 Risks and ways of mitigating risks in this cycle

 Importance of establishing KPIs

 GL & Financial Reporting Cycle Overview and Key
Objectives
• General ledger & financial reporting cycles are critical cycles in any organisations
regardless of their size. In this cycle, data and reports from all the previous
operational cycles are summarised, adjustments made, budgets entered and
compared, decisions made, etc.,

• The reports generated in this cycle (i.e. management reports, operational

reports & general purpose financial statements such as the Income Statement,
Balance Sheet, Statement of Cash flows, etc) are used by:
1. Managers to determine their financial performance and standing including
making strategic decisions in regards to the organisation
2. Creditors to find out about the organisations financial performance and
financial standings
3. Investors when making investment decisions
4. Public and private companies to attract new investors and raise funds for
future expansions
5. External regulators to assess compliance with relevant corporate regulation

• The objective of this cycle is to synthesise and report data that accurately
represents business transactions and activities including comparing performance
to budget estimates.
Source Documents –Documents flowing through the
GL
 Strategic Implications of the GL & Financial
Reporting Cycle
• It is important that reports generated within this cycle meet the following two
criteria:

1. The first has to do with the validity, timeliness, accuracy and completeness
of reports generated in this cycle.

2. The second has to do with the design of reports. Too much data can lead to
the inability of the reader to comprehend reports. In addition, poorly arranged or
badly formatted data in reports can mislead or confuse people

• Remember that:
1. Any reports that are difficult to understand or are invalid, not timely,
inaccurate or incomplete will compromise decision making performance.
Poor decision making can lead to eventual business failure. In contrast, high
quality decision making require good data and comprehensible reports.

2. Equally important is to understand that external reports are distributed to

corporate regulators, analysts and investors amongst others. Errors in
financial reports can lead to problems such as incorrect market pricing of
company shares, inequitable increases in the cost of capital, inability to
access capital markets and potential for prosecution if corporate laws are
broken.
 Technologies Underpinning the Production Cycle
ERP (Enterprise Resource Planning) Systems
• ERP systems assist with integrating the GL and financial reporting cycles
with the other operational cycles discussed earlier (i.e. expenditure cycle,
revenue cycle, production cycle, payroll cycle, etc.). Examples for MLE
(medium and large enterprises) include SAP, Oracle, PeopleSoft and MYOB
eXO and for SME, they include MYOB, Xero, QuickBooks, Attaché, etc.,

Online Banking
• Allows organisations to manage and view their bank accounts online and
conduct payments, transfers, reconciliations, etc. which improves the timeliness
and accuracy of bank reconciliations and reports.

XBRL (eXtensible Business Reporting Language

• Discussed earlier but it is a data standard that is used when generating
financial reports.
 Data in the GL & Financial Reporting Cycle

• The GL & financial reporting cycle uses and extract transactional data from
the following subsidiary ledgers:

1. Accounts receivable (e.g. customer invoices, customer payments, credit

notes, refunds, customer EPD, etc)

2. Accounts payable (e.g. supplier invoices or bills, supplier payments, credit

notes, refunds, supplier EPD)

3. Payroll data (e.g. Salary and wage transactions, etc)

4. Production cycle data (e.g. production costs incurred, inventory level, etc)

• These transactional data are summarised in the GL via the COA or Accounts List
for that organisation.
 Data in the GL & Financial Reporting Cycle

The COA in AIS are generally represented by numbers which generally indicate
transaction type (e.g. revenue, expense, liability, COGS, etc.), nature of the transaction
(e.g. Office supplies, postage, wages & salaries, etc.) and in some systems additional
numbers to represent more details like branch, department, etc.
Number Reference
For example in large ERP systems, 4 Expendiure
12 Office supplies
you can have the following 12 digit COA number 356 Paper
O2 NSW branch
of 412356021328, which represents: 12 Sydney
28 Finance Department

or for SME like MYOB, you can have the

4 digit COA number as shown.

The important point being is

that the COA
establishes the basis
for report generation.
 Business Decisions in the GL & Financial Reporting
Cycle
Process business decisions are made from several different perspectives during the GL
and financial reporting cycle and are related to the following:

• Budgetary considerations such as budget level, budget breakdown and budget

targets. See real life example in MYOB on how to enter budgets.
• Creation of general journal adjustments which would include considerations for
accounting standards, accounting polices and procedure and timing differences for a
given accounting period.
• Need to incorporate data from external sources such bank statements that are not
already captured during the operational cycle, etc.

In addition to these budgetary and journal decisions, decision makers also rely on the
following reports (if applicable) to assist them in making intelligent business decisions
such as.
• Profitability analysis
• Individual or divisional performance
• Profitability potential
• Cost management analysis
 GL & Financial Reporting Cycle Documentation-
Context Diagram Overview
A context diagram does not show any interaction with any entities.
 GL & Financial Reporting Cycle Documentation-
Reporting Diagram Overview
This reporting diagram overview showing the inter-relationship with the other cycles
discussed earlier.
GL & Financial Reporting Cycle Documentation-
Logical Data Flows
Level 0 logical DFD (page
595 in your textbook) with
the bubble reflecting
what is involved in the
GL & financial reporting
cycle, the rectangle
reflecting the other
cycles and the data flow
depicting the
chronological sequence
of the business
processes, documents
produced, etc.

Also refer to table

describing logical data
flows in the production
cycle as shown in page
591-594.
 GL & Financial Reporting Cycle Process Activities

The following diagram summarises the 4 main process activities as outlined in the
level 0 logical data flow diagram shown in the previous slide (see bubble in logical data
flow diagram). You should also refer to Table 13.1 on page 591-594 for more detailed
description of what is involved in the logical data flows..

• Prepare budgets (i.e. Process 1.0 from Level 0 logical

1. data flow diagram)

• Update the GL (i.e. Process 2.0 from Level 0 logical data

2. flow diagram)

• Record GL adjustments(i.e. Process 3.0 from Level 0

3. logical data flow diagram)

4. • Produce reports (i.e. Process 4.0 from Level 0 logical

data flow diagram)
 Prepare Budgets
Go to Figure 13.2 on page 598 in your textbook, which shows the key activities,
personnel, risks and common controls for

 Determine budget values

 Record Budget details

 Update the GL (Process 2.0)
Key activities, personnel, risks and common controls
Go to Figure 13.3 on page 602 from your textbook. This figure (shown below for
this slide) is important as it outlines the key activities, personnel involved, risks
and common controls for * Extract and validate data and *Post transactions.
 Record GL Adjustments (Process 3.0)
Key activities, personnel, risks and common controls
Go to Figure 13.4 on page 605 from your textbook which outlines the key
activities, personnel, risks and common controls for * Prepare adjustment
journals and *Post transaction journals as shown below.
 Produce Reports (Process 4.0)
Key activities, personnel, risks and common controls
Go to your textbook on page 611 and have a look at Figure 13.5 (not shown this time).

This figure is important as it shows the key activities, personnel, risks and common
controls for

 Produce management reports

 Produce financial reports.

 Measuring GL & Financial Reporting Cycle
Performance
As with all processes, you must be able to measure how well the process outcomes
achieve the overall objectives of the GL & Financial Reporting cycle.

So go to page 615 and have a look at Figure 13.7 which shows the KPI that are
commonly used in this cycle (i.e. GL & Financial Reporting Cycle).
 Overview of Chapter 13

 The objectives and strategic implications of the GL & financial reporting cycle
were established

 Technologies that underpin the GL & financial reporting cycle activities were
identified

 GL & financial reporting cycle business decisions were outlined

 The primary activities in the GL & financial reporting cycle were identified and
discussed

 Risks and ways of mitigating these risks were considered

 The importance of establishing KPIs was emphasised

 Students Class & Tutorial Activities

Please refer to this weeks tutorial activity worksheet for discussion questions and
activities relating to what you will do in this week’s tutorial class.