REPORTING AS AN OUTPUT OF THE GENERAL LEDGER PROCESSES (STUDY OBJECTIVE 7)

The information in the general ledger accounts provides important feedback for both internal and external parties. External parties such as investors and creditors use summarized accounting data in the general purpose financial statements to evaluate business performance. Internal managers need financial and nonfinancial feedback for proper planning and control of operations. Internal managers need much more frequent and detailed reports than external users. The sections that follow describe the external and internal reporting concepts.

EXTERNAL REPORTING

The four general purpose financial statements—balance sheet, income statement, statement of cash flows, and statement of retained earnings—are created from general ledger account balances. These financial statements are generated at the end of the accounting cycle. The dollar amounts reported are all derived from general ledger account balances. Usually, accounts are combined and summarized when reported in general purpose financial statements. External users do not need detailed balance information on every existing account in the general ledger. For example, a large company may have several general ledger accounts for various types of cash and cash equivalents. These individual cash accounts are combined, or “rolled up,” into one dollar amount reported as Cash on the balance sheet. This same summary process occurs for all of the line items on the general purpose financial statements. Sales revenue as reported on the income statement may be a combination of many revenue accounts in the general ledger. There may be a revenue account for each product or product line so that managers can track sales of individual products. However, external users would be overwhelmed by the detail in several revenue accounts. Therefore, the revenue accounts are rolled up into one or a few lines on the income statement.³

The IT accounting systems are programmed to combine, or roll up, accounts when the system processes the financial statements. The financial statements are designed and programmed into the IT system when the system is implemented. When these financial statement reports are needed at the end of the period, they may be printed by the IT system. Prior to the printing and distribution of these reports, the CFO and the accounting staff oversee the closing process to ensure that the dollar amounts are correct and complete, usually by printing various reports in the IT system and reconciling them to ensure their accuracy.

INTERNAL REPORTING

The internal reports to be provided to managers vary greatly depending on several factors. Internal reports are usually not general-purpose financial statements, but reports that are tailored to the specific needs of each management level and function. The many factors that affect the type of report provided to internal users can be summarized so that they fall into three categories: the type of organization, the underlying function managed, and the time horizon.

Type of Organization

Although this may seem obvious, the type of organization affects the type of reports that are needed to manage the organization. For example, manufacturing firms need different reports than retail firms or service firms. Manufacturing firms must have internal reports to help manage the flow of raw materials, work in process, and manufacturing labor. Retail firms do not have these processes. However, both retail and manufacturing firms manage inventories, while service firms do not. Therefore, service firm internal reports are more likely to focus on sales and the status of projects. Certainly, all three types of firms use revenue and profitability related reports. Some organizations, such as governmental or charitable foundations, are not profit-oriented, so their internal reports tend to focus on cash flows, funding sources, and expenditures.

Function Managed

The type of business function that a manager oversees also affects the type of reports needed. An operations manager needs reports about operations, such as reports about machine hours, down time of machines, units produced, defective units, and material usage. These types of operational reports may not be prepared from data in the general ledger. However, as transactions are recorded in the accounting processes, financial as well as nonfinancial data are accumulated. Therefore, the accounting system often records both financial and operational data that can be used in reports.

Managers who direct financial aspects of a business need financial data in reports. For example, an accounts receivable manager needs reports that show aged accounts receivable. Higher-level managers examine financial reports regularly to properly manage sales, expenditures, cash flows, inventories, and many other financial aspects. These financial reports are prepared directly from ledgers, journals, and other accounting records.

Time Horizon

The relevant time horizon impacts the type of reports needed by management. In day-to-day business activities, managers are more likely to use details such as unit measures, physical counts, and other non financial data. However, as the time horizon expands, the types of reports that are useful are likely to involve financial measures. For example, on a day-to-day basis a purchasing manager is likely to focus on physical counts such as quantities ordered; yet, as the time horizon lengthens to a month, financial data such as purchase price variances become more useful. Therefore, for time horizons of one month or longer, reports generated by information in the general ledger are likely to be very important.