Week 10:
Accounting process
MIS2101: Management Information
Systems
Based on material developed by C.J. Marselis
Introduction

Accounting tightly integrated with other
functional areas
Purchasing
 Marketing and Sales
 Supply Chain Management

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Accounting activities are necessary for
decision making
Types of Accounting

What is the purpose of “Financial Accounting”?
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What is the purpose of “Managerial Accounting”?
Sales Process
Where does Accounting have an interest?
Is this financial accounting or managerial accounting?
Can you identify 5 examples?
4
USDA Nutrition Label
How you know what’s inside
before you buy
For investors, how do you
know “what’s inside” before
you buy?
Financial Accounting Statements
Balance Sheet
Shows account balances
Picture of the overall financial
health of a company
Income Statement
Shows sales, cost of sales and
overall profit for a period of time
(quarter, year)
Accounting Information

Before integrated systems

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Data gathered by each functional area
Accounting department didn’t have real-time access
Accountants and clerks had to “research” their own company
to get information
With ERP

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Materials management records a goods receipts as an
increase in inventory
Accounting records a goods receipts as an increase in the
value of inventory
The same transaction provides information for both
The General Ledger (GL) in
an Integrated System


What is the “General Ledger”?
When is the general ledger updated with a non-integrated
system? How about with an integrated system?
SAP Module
Feeds to GL
Sales and Distribution (SD) - Sales to Customer
Accounts Receivable (AR) Entries
Materials Management (MM) - Purchase Orders Accounts Payable (AP) Entries
made in
Payroll Processing (HR)
Expense Entries
Financial Accounting (FI) - Manages the AR and GL accounts closed in FI at end of
AP items created in SD and MM
a fiscal period
Credit Management
Companies extend credit to customers to make
purchases
 Credit is limited

With each purchase, available credit is reduced
 With each payment or return, available credit is
increased


What do you do if a new sale will put a customer
over their limit?
How many other
purchases this week?
Have we received any
payments this week?
Sales Process
Have they made any
returns this week?
Credit
report system?
How would this look with
an integrated
sent weekly
10
Accounting Data and
Profitability Analysis

Inaccurate or incomplete data leads to flawed
analysis & bad decision making

What are some of the causes of data problems?
Inconsistent Record Keeping

Direct Division & Distributor Division keep their
own records and keep different information

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Direct Division records sales region
Distributor Division records sales state
Can make some reporting extremely challenging
 Sales by state within region
Production records are paper, not electronic
How many places can errors be introduced?
How would this look with an ERP?
Inaccurate Inventory Costing
Systems

Inventory is expensive!

What are some of your major costs?
Question
How difficult is it to answer this question with an integrated system?
Inventory Costing Systems

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How much does it cost me to make an individual
product and where do I get all of this
information?
Which products are profitable and which are
not? Without knowing your costs, are you sure?
What happens to costs when production is
interrupted?
Do they really have a clue? What if they had an
ERP?
Question

What do we mean when we say a
company has do “close its books”?

How often does a company do this?

How complicated is this?
Even More Complicated for
Companies with Subsidiaries

What do I need to do to produce financial
reports when I have a company with
subsidiaries?

What if I have different subsidiaries in different
countries?

What if one subsidiary sells products to
another subsidiary?
Case Study:
Microsoft

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Microsoft consolidates financial
information from 130 subsidiaries
Pre-SAP: each subsidiary had separate accounting

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Each used different systems, with different field sizes, types of
characters, account structures
Transmitted the files to another system where manipulation of the
data was required
Consolidation took over a week
With SAP: Microsoft can look directly at financial activity at
any subsidiary around the world
Case Study – Cisco and
One-Day Close

Closing books

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zeroing out temporary accounts
Takes days/weeks/months to get all the financial figures
in balance before company can close the financial
period
“Virtual closings” during the month can show how well
the company is doing
Cisco’s closing went from 2 weeks to 1 day by switching
from “un-integrated” systems to Oracle ERP
Enron Collapse
Enron Collapse
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Energy company revolutionizing the oil and gas business
On Oct. 16, 2001, Enron’s creative financial arrangements began
to unravel
On Dec. 2, 2001, Enron made the largest bankruptcy filing in
history
Key cause: Enron’s partnerships shifted billions of debt off Enron’s
books so Enron could borrow money more cheaply
Arthur Andersen:
 Respected accounting firm with firm with 28,000 employees issued annual reports attesting to the validity of Enron’s
financial statements
 Arthur Andersen indicted for, among other things, destruction of
Enron documents
Results of Enron Collapse

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Enron’s 20,000 creditors will receive
approximately 20% of the $63 billion they are
owed
Shareholders will receive nothing

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Many employees invested large sums of money in
Enron stock via 401K savings plans
Arthur Andersen dismantled
31 individuals either have been tried or will be
tried on criminal charges
The Sarbanes-Oxley Act was passed
Sarbanes-Oxley Act of 2002
Requires public company’s annual report
contain management’s internal control report
 Must include documentation of controls
 An integrated information system provides
tools to implement internal controls

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Controls cannot necessarily prevent effort to
circumvent standard processes
Companies with ERP systems will have an
easier time complying with Sarbanes-Oxley
Archiving And Fraud
Detection

Why it’s hard to delete information
in SAP?

What could an unscrupulous
employee do if this were not true?

What is “Archiving” in SAP?
Data on a
company’s
materials
cannot be
deleted
directly, but
must be
archived for
deletion
Integrated System and Fraud
Detection

Changes
to data are
tracked
SAP R/3 maintains
detailed records on
all changes made to
material master data
Integrated System and Fraud
Detection

What is “User Authorization”
all about?

How many employees does it
take to do something like
create and approve the
payment of a large invoice?
Integrated System and Fraud
Detection

What are “Tolerance
Groups”?
Integrated System and Fraud
Detection

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Financial
Transparency
ERP systems have “drill
down” functionality from
report to source
documents
(transactions) that
created them
Makes it easier for
auditors to verify
integrity of reports
Double-clicking on the
8,810.00 debit will
provide details on the
transactions that make
up the item
Line items linked…
Selecting the 10.00 item
and clicking on the
details icon will provide
more information on the
item
Figure 5.12 Documents that make up G/L Account
Balance for Raw Material Consumption
…to the documents that
created them
Figure 5.13 Details on $10.00 line item in
G/L account for raw material consumption
Summary
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Companies use accounting systems to record
transactions and generate financial statements
Should have ability to summarize data to assist
managers in their daily and strategic work
With “un-integrated” systems, accounting data might
not be current
Integrated IS with common database to record
accounting data facilitates inventory benefits
Compliance with Sarbanes-Oxley Act facilitated with
integrated systems