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ll_a11_cial ReP0rtillng and
Management Reportillng Systems
 LEARNlNG oBJEc��vEs
 After studying this chapter yon should��
·    understand the purpose of date coding and be able to idantify the respactive features��
    advantages��and disadvantages of fhe various numerlc and alphabetic∞ding schemas��
·  Undersfand the operationaI features of the GLS��F(xi��n)RS��and MRS��
·  Be able fo idantify the PhncipIe operationeI contrals governing the GLs and FRs��
·  Unders}and the Fadors}haf in�muence fhe design of the MRS��
·  Understand the eIements of a resPonsibility accounting sysfem��
The chapter begins w��th a review of data COd��ng fec hn��ques used in transaoion Processһ
  ��ing sysfems and for genera¨edger design��1f expIores severel coding schames and fheir
  respectiye advanfages and disadvantages��I��Jext��the chapter examines fhe obiecfivas��oper—
  afional feefUres��and control issues of two reIafed Sysfems��fhe genera��edger sysfem{GLS)
  and fhe f_nanc��a(ch��n)l repOFl��ing sysfem(FRs)��Finally the menagement reporring sysfem(MRs)is
  examined��The MRS is distinguishable from fhe FRS in one key respect��financ��a(ch��n)l raporting is
  mandatory  and manegament reporting is djseretiOnary Menogament repOFTing informe’
  fion is needed for pIanning and confro¨ing business eclivities��organization management
  implaments MRS appcations at their discl'etion��besed on internaI user needs��

252    Chapter 8    FinaRCial Reportlng and Mahagement Reporting Systems
 DArA CODlNG SCHEMES
 In previous chapters wc saw how primary and secondary keys link together transaction
 and master rccords fbr file updating��This is one app“cation of dara coding��We delVe
 more deeply into this sabject here to examine various types of data coding schemes and
 how they arc used in data processing systems��To emphasize the importance of dara codes
 we first consider a hypothetical system that does not use them��
A SYSTEM V��ITHouT CoDEs
 Firms process large volames of transactions that are similar in their basic attributes��For
 instance��a firm'S accounts receivable file may contain accounts for scveral difierent cus—
tomers with the same name and similar addrcsses��To prOCeSS transactions accurately
 against the correct accounts��the firm must be able to distinguish one“John Smith”from
 another��This task bccomcs particularly dif_ficult as the autober of similar attributes and
 items in the class increase��
    CORSider the most elemental itern a machine shop wholesaler firm might carty in its
 inventory--a machine nut��AssHme that the total inventory of nuts has only three distin-
guishing attributes��size��material��and thread type��As a resuIt��this entire class of inven—
tory must be distinguished on the basis of thcse three features as follows��
1��  The size attribute ranges from1/4inch to 1 3/4 inches in diameter in increments of1/64 of
    an inch��giVing 96 sizes of nuts��
2��  For each size subcIass��four materials are available��brass��copper mild steel��and case-
    harderied steel��
3��  Each of thcst size and material subclasses come in thtee different threads��fine��stan-
    dard��a(ch��n)nd coarsc��
By these assumptions��this class of inventory conId contain 1��152 separatc itcms(96×4×3)��
The identification of a single item in this class thus requires a description featurig these
 distinguishing attributes��To illustrate��consider the following joamal entry to record the
 rcceipt of$1��000 worth of half��inch��case-hardened steel nuts with standard thrcads sup-
p“ed by Industrial Parts Mannfacrater of Cleveland��Ohio��
    DR    CR
    Inventorymnut��1��2 inch��case—hardcued
    $teel��startdard thrcad    1��000
    A��P--Industrial Parts Maaafacratef
    Cleveland��0hio    1��000
  This uncoded entry takes a great deal of recording space��is time consuming to rccord��and
  is obvioasly proue to many types of errors��The ncgatiVe efieets of this approach may be
  seca in many parts of the organization��
  1��  Safes staff .To properly identify the items sold requires the transcriptlon of large
    amounts of detail onto source documents��Apart from the time and effort involVed��
    this tends to encourage clerical crrors and incorrect shipmerits��
  2��  Warebouse personnel  Locating and picking goods for shipmerit are impeded and
    shipping crrors will“kely result��
  3��  Accounting personnel POStings to ledger accounts wiU require searching throngh the
    sabsidiary files using lengthy descriptioas as the ke y��This win be painfuIly slow��and
    postings to the wrong accounts will be common��

Part 2 Transaction Cycles and Business Processes
A SYSTEM��vITH CoDES
 These problems are solved��or at least greatly reduced��by using COdes to represent each item in
the inventory and suppIief accounts��Let��s assume the inventory itern in our previous example
 had been assigned the numeric COde 896��and the supper in the AP account is given the COde
 number 321��The coded version of the previous journal entry can now be greatly simplified��
    ACCOUNT    DR    CR
    896    1��000
    321    1��000
 This is not to SUggest that detailed information about the inventory and the supp“er is of
 no interest to the organization��obviously it is!These facts will be kept in ref=erence files
 and used for SUCh purposes as the preparation of parts“StS��catalogs��bills of material��and
 mai“ng information��The incIusion of SUCh details��howeveL WOUld clutter the task of
transaction processing and could prove dysfunctional as this simple example illustrates��
Other uses of data COding in AIS are to��
1��  Concisely represent large amounts of complex information that would otherwise be
  unmanageable��
2��Provide a means of accountability over the completeness of the transactions
  processed��
3��Identify anique transactions and accounts within a file��
4��  Support the audit function by proyiding an efiectiVe audit trail��
The foIlOWing diSCUSSion examines some of the more commonly used COding techniques
 and explores their respective advantages and disadvantages��
NuME��C AND ALPHA8ETIC CoDING ScHEMES
 Seauential CodeS
 As the name impes sequential COdes represent items in some sequential order(ascending OF
 descending)��A common application of numeric sequential COdes is the prenumbering of
 source documents��At printing��hardCOpy documents are each giyen a anique sequential COde
 Bumber��This nUlTIber becomes the transaction Humber that alloWS the system to track each
 transaction processed and to identify any lost or out-of-sequence documents��Digital dOCU—
ments are similarly assigned a sequential namber by the computer when they are created��
Aduages��Sequential COding supports the reconciation of a batch 0f transactions��SUCh
 as sales orders��at the end of processing��If the transaction processing system detects any gaps
 in the sequence 0f transaction nurnbers��it alerts management to the pOSSibity of a missing
 or misplaced transaction��By tracing the transaction namber back through the stages in the
 process��management can eventually determine the cause and effect of the error��WithOUt
 sequentiaIlv Bumbered documents��problems of this sort are diffiCUlt to detect and resolve��
Sequential COdes carry no information content beyond their order in the
 sequence��For instance��a sequential COde assigned to a raw material inventory item teIls
 us nothing about the attributes of the item(type��size��material��warehouse location��and
 so on)��Also��sequential COding schemes are diffiCUlt to change��Inserting a new item at
 some midpoint req uires renumbering the sabsequent items in the class accordingl y��In
 applications where record types must be grOUped together logically and where additions
 and deletions occur regularly��this COding scheme is inappropriate��