609 Assignment 6 Discussion 6

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Concepts in Enterprise Resource Planning
Fourth Edition

Chapter Five

Accounting in ERP Systems

Concepts in Enterprise Resource Planning, Fourth Edition

Objectives

After completing this chapter, you will be able to:

Describe the differences between financial and managerial accounting
Identify and describe problems associated with accounting and financial reporting in unintegrated information systems
Describe how ERP systems can help solve accounting and financial reporting problems in an unintegrated system

Concepts in Enterprise Resource Planning, Fourth Edition

Objectives (cont’d.)

Describe how the Enron scandal and the Sarbanes-Oxley Act have affected accounting information systems
Explain accounting and management-reporting benefits that accrue from having an ERP system
Explain the importance of Extensible Business Reporting Language (XBRL) in financial reporting

Concepts in Enterprise Resource Planning, Fourth Edition

Introduction

In this chapter, you will learn about the activities in the Accounting functional area
Accounting is tightly integrated with all other functional areas
Accounting activities are necessary for decision making

Concepts in Enterprise Resource Planning, Fourth Edition

Accounting Activities

Areas of accounting:
Financial accounting
Managerial accounting
Financial accounting
Documenting all transactions of a company that have an impact on the financial state of the firm
Using documented transactions to create reports for external parties and agencies
Reports, or financial statements, must follow prescribed rules and guidelines of various agencies

Concepts in Enterprise Resource Planning, Fourth Edition

Accounting Activities (cont’d.)

Common financial statements: balance sheets and income statements
Balance sheet
Statement that shows account balances such as:
Cash held
Amounts owed to company by customers
Cost of raw materials and finished-goods inventory
Long-term assets such as buildings
Amounts owed to vendors, banks, and other creditors
Amounts owners have invested in company

Concepts in Enterprise Resource Planning, Fourth Edition

Figure 5-1 Fitter Snacker sample balance sheet

Concepts in Enterprise Resource Planning, Fourth Edition

Accounting Activities (cont’d.)

Income statement
Profit and loss (P&L) statement
Shows company’s sales, cost of sales, and profit or loss for a period of time (typically a quarter or year)
Integrated information system simplifies the process of closing the books and preparing financial statements
Managerial accounting: determining costs and profitability of company’s activities

Concepts in Enterprise Resource Planning, Fourth Edition

Figure 5-2 Fitter Snacker sample income statement

Concepts in Enterprise Resource Planning, Fourth Edition

Accounting Activities (cont’d.)

Quarterly financial statement
Close books
Closing entries to nominal accounts
Nominal accounts – zero balance to start next cycle
Ensure accounts accurate and up-to-date
“Adjusting” entries
Integrated information system advantage
Simplifies process of closing books and preparing financial statements

Concepts in Enterprise Resource Planning, Fourth Edition

Figure 5-3 Balance sheet and income statement for Fitter Snacker in SAP ERP system

Concepts in Enterprise Resource Planning, Fourth Edition

Accounting Activities (cont’d.)

Managerial accounting
Determine costs and profitability of company’s activities
Provide managers with detailed information
Informed decisions
Create budgets
Determine profitability
Information that managers use to control day-to-day activities, develop long-term plans

Concepts in Enterprise Resource Planning, Fourth Edition

Using ERP for Accounting Information

Problems associated with unintegrated systems
Data sharing usually did not occur in real time
Accounting’s data were often out of date
Accounting personnel had to do significant research
ERP system, with its centralized database, avoids these problems
In traditional accounting, company’s accounts are kept in a record called a general ledger

Concepts in Enterprise Resource Planning, Fourth Edition

Using ERP for Accounting Information (cont’d.)

In the SAP ERP system, input to general ledger occurs simultaneously with business transactions
Many SAP ERP modules cause transaction data to be entered into general ledger, including:
Sales and Distribution (SD)
Materials Management (MM)
Financial Accounting (FI)
Controlling (CO)
Human Resources (HR)
Asset Management (AM)

Concepts in Enterprise Resource Planning, Fourth Edition

Operational Decision-Making Problem: Credit Management

Unintegrated information system
Out-of-date or inaccurate accounting data can cause problems when a company is making operational decisions
Industrial credit management
Fitter Snacker’s credit management procedures
Credit management in SAP ERP

Concepts in Enterprise Resource Planning, Fourth Edition

Industrial Credit Management

Credit management requires a good balance between:
Granting sufficient credit to support sales and
Making sure that the company does not lose too much money
Setting a limit on how much money a customer can owe at any one time
Monitoring that limit as orders come in and payments are received

Concepts in Enterprise Resource Planning, Fourth Edition

Industrial Credit Management (cont’d.)

Sales representative needs to be able to review an up-to-date accounts receivable balance when an order comes in
Problems arise if Marketing and Accounting have unintegrated information systems
Less than full cooperation on updates
Problems should not arise with an integrated information system
Accounts receivable is immediately updated

Concepts in Enterprise Resource Planning, Fourth Edition

Fitter Snacker’s Credit Management Procedures

FS sales clerk refers to a weekly printout of a customer’s current balance and credit limit to see if credit should be granted
Sales data are transferred to Accounting by disk three times a week
Accounting clerk can use sales input to prepare a customer invoice
Accounting must make any adjustments for partial shipments before preparing the invoice
Accounting clerks process customer payments

Concepts in Enterprise Resource Planning, Fourth Edition

Credit Management in SAP ERP

SAP ERP would allow FS to set a credit limit for each customer
Company can configure any number of credit-check options in SAP ERP system
Advantages of using SAP ERP to manage credit
Process is automated
Data are available in real time

Concepts in Enterprise Resource Planning, Fourth Edition

Figure 5-5 Credit management configuration

Concepts in Enterprise Resource Planning, Fourth Edition

Product Profitability Analysis

Business managers use accounting data to perform profitability analyses of a company and its products
When data are inaccurate or incomplete, the analyses are flawed
Main reasons for inaccurate or incomplete data
Inconsistent recordkeeping
Inaccurate inventory costing systems
Problems consolidating data from subsidiaries

Concepts in Enterprise Resource Planning, Fourth Edition

Figure 5-6 Credit management for Health Express

Concepts in Enterprise Resource Planning, Fourth Edition

Figure 5-7 Blocked sales order

Concepts in Enterprise Resource Planning, Fourth Edition

Inconsistent Recordkeeping

Each of FS’s marketing divisions maintains its own records and keeps track of sales data differently
Paper records might be inaccurate or missing, making validity of the final report questionable
Without integrated information systems, accounting and reporting to management requires:
Working around limitations of information systems to produce useful output
ERP system minimizes or eliminates these problems

Concepts in Enterprise Resource Planning, Fourth Edition

Inaccurate Inventory Costing Systems

Correctly calculating inventory costs
One of the most important and challenging accounting tasks in any manufacturing company
Inventory cost accounting background
Manufactured item’s cost has three elements:
Cost of raw materials
Cost of labor employed directly in production of item
Overhead: all other costs

Concepts in Enterprise Resource Planning, Fourth Edition

Inaccurate Inventory Costing Systems (cont’d.)

Inventory cost accounting background (cont’d.)
Direct costs: materials and labor
Can be estimated fairly accurately
Indirect costs: overhead items
Difficult to associate with specific product(s)
Standard costs for a product are established by:
Studying historical direct and indirect cost patterns
Taking into account the effects of current manufacturing changes
Cost variances: differences between actual costs and standard costs

Concepts in Enterprise Resource Planning, Fourth Edition

Inaccurate Inventory Costing Systems (cont’d.)

ERP and inventory cost accounting
Many companies with unintegrated accounting systems analyze their cost variances infrequently
Often, they do not know how much it actually costs to produce a unit of a product
If FS had an ERP system, employees throughout the company would have recorded costs in a company-wide database as they occurred
ERP system configurations allow analysts to track costs using many bases

Concepts in Enterprise Resource Planning, Fourth Edition

Inaccurate Inventory Costing Systems (cont’d.)

Product costing example
Suppose Fitter Snacker wishes to update standard costs for NRG-A bars
Product cost analysis for NRG-A bar
Product cost analysis in SAP ERP
Product cost variant: method for developing a product cost in an ERP system

Concepts in Enterprise Resource Planning, Fourth Edition

Figure 5-8 Product cost analysis for NRG-A bar

Concepts in Enterprise Resource Planning, Fourth Edition

Figure 5-9 Product cost analysis result in SAP ERP

Concepts in Enterprise Resource Planning, Fourth Edition

Inaccurate Inventory Costing Systems (cont’d.)

Activity-based costing and ERP
Activity-based costing (ABC)
Accountants identify activities associated with overhead cost generation and then keep records on costs and on activities
ABC requires more bookkeeping than traditional costing methods

Concepts in Enterprise Resource Planning, Fourth Edition

Companies with Subsidiaries

Account balances for each entity must be compiled and forwarded to the home office
Consolidated statement for the company as a whole must be created
Currency translation
Problems when currency translation is needed for a subsidiary’s accounts
Intercompany transactions
Transactions that occur between companies and their subsidiaries

Concepts in Enterprise Resource Planning, Fourth Edition

Management Reporting with ERP Systems

Generating the right reports for the right situation is often challenging
Without an ERP system, the job of tracking all the numbers that need to go into a report is a monumental undertaking
With ERP system, vast amount of information is available for reporting purposes

Concepts in Enterprise Resource Planning, Fourth Edition

Document Flow for Customer Service

With an ERP system, all transactions in all areas of a company get posted in a centralized database
Each transaction posted in SAP ERP gets its own unique document number
Allows quick access to the data
In SAP ERP, document numbers for related transactions are associated in the database
Provides an electronic audit trail

Concepts in Enterprise Resource Planning, Fourth Edition

Document Flow for Customer Service (cont’d.)

Figure 5-10 Document flow of a transaction in SAP ERP

Concepts in Enterprise Resource Planning, Fourth Edition

Built-In Management-Reporting and Analysis Tools

Accounting records maintained in the common database
Advantage of using a database is the ability to query the records to:
Produce standard reports
Answer ad hoc questions
SAP provides a data warehouse within each major module
Data warehouse: repository for data from various sources

Concepts in Enterprise Resource Planning, Fourth Edition

The Enron Collapse

October 16, 2001: Enron was one of the world’s largest electricity and natural gas traders
Reported a $618 million third-quarter loss and disclosed a $1.2 billion reduction in shareholder equity
U.S. Securities and Exchange Commission (SEC) inquiry into possible conflict of interest related to company’s dealings with partnerships run by CFO Fastow

Concepts in Enterprise Resource Planning, Fourth Edition

The Enron Collapse (cont’d.)

Volume of financial contracts was far greater than volume of contracts to actually deliver commodities
Some partnerships were faked to mask billions of dollars in debt
Enron’s financial statements had been audited by Arthur Andersen, a highly regarded accounting firm
Andersen employees on the Enron engagement team were instructed to destroy documentation relating to Enron

Concepts in Enterprise Resource Planning, Fourth Edition

Outcome of the Enron Scandal

Shareholders lost an estimated $40 billion dollars
Thousands of workers lost their jobs
31 individuals were either charged or pled guilty to criminal charges
Jurors convicted accounting firm Arthur Andersen for obstructing justice by destroying Enron documents
U.S. Congress passed Sarbanes-Oxley Act of 2002
Act was designed to prevent the kind of fraud and abuse that led to the Enron downfall

Concepts in Enterprise Resource Planning, Fourth Edition

Key Features of the Sarbanes-Oxley Act

Designed to encourage top management accountability in firms that are publicly traded in the United States
Title IX
Financial statements filed with the Securities and Exchange Commission must include a statement signed by the chief executive officer and chief financial officer, certifying that the financial statement complies with SEC rules

Concepts in Enterprise Resource Planning, Fourth Edition

Key Features of the Sarbanes-Oxley Act (cont’d.)

Title II
Auditor independence
Limits non-audit services that an auditor can provide
Title IV
More stringent requirements for financial reporting

Concepts in Enterprise Resource Planning, Fourth Edition

Implications of the Sarbanes-Oxley Act for ERP Systems

To meet the internal control report requirement, a company must:
Document the controls that are in place
Verify that the controls are not subject to error or manipulation
Companies with ERP systems in place will have an easier time complying with the Sarbanes-Oxley Act than will companies without ERP

Concepts in Enterprise Resource Planning, Fourth Edition

Archiving

SAP ERP software offers very few ways to delete items
Data are removed from SAP ERP system only after they have been recorded to media (tape backup, DVD-R) for permanent storage
Archive: permanent storage
SAP ERP systems keep track of when data are created or changed
Change Record

Concepts in Enterprise Resource Planning, Fourth Edition

Figure 5-11 Transaction options for material master data

Concepts in Enterprise Resource Planning, Fourth Edition

Archiving (cont’d.)

Figure 5-12 Change Record for material master

Concepts in Enterprise Resource Planning, Fourth Edition

User Authorizations

SAP ERP has sophisticated user administration tools that allow different levels of authorization management
Ensure that employees can perform only the transactions required for their jobs
Profile Generator
Provides a simple method for selecting functions that a user should be allowed to perform

Concepts in Enterprise Resource Planning, Fourth Edition

Figure 5-13 Display Roles screen in SAP

Concepts in Enterprise Resource Planning, Fourth Edition

Tolerance Groups

Setting limits on the size of transaction an employee can process
In an SAP ERP system, this is done using tolerance groups
Tolerance groups
Preset limits on an employee’s ability to post transactions
Set limits on the dollar value for a single item in a document as well as the total value of document

Concepts in Enterprise Resource Planning, Fourth Edition

Figure 5-14 Default tolerance group

Concepts in Enterprise Resource Planning, Fourth Edition

Financial Transparency

ERP systems provide the ability to drill down from a report to the source documents (transactions) that created it
Makes it easier for auditors to confirm the integrity of reports
With a properly configured and managed ERP system, there are direct links between the company’s financial statements and individual transactions that make up the statements
Fraud and abuse can be detected more easily

Concepts in Enterprise Resource Planning, Fourth Edition

Figure 5-15 G/L (general ledger) account balance for raw material consumption

Concepts in Enterprise Resource Planning, Fourth Edition

Financial Transparency (cont’d.)

Figure 5-16 Documents that make up G/L account balance for raw material consumption

Concepts in Enterprise Resource Planning, Fourth Edition

Financial Transparency (cont’d.)

Figure 5-17 Details on $10.00 line item in G/L account for raw material consumption

Concepts in Enterprise Resource Planning, Fourth Edition

Trends in Financial Reporting (XBRL)

Extensible Business Reporting Language (XBRL)
Standards based language
Extensible Markup Language (XML) coded data directly from web page into database
Reports processed faster and validated easier
ERP systems accept data in XML and XBRL

Concepts in Enterprise Resource Planning, Fourth Edition

Summary

Companies need accounting systems to record transactions and generate financial statements
Unintegrated information systems
Accounting data might not be current
Can cause problems for sales representatives trying to make operational decisions
Data can be inaccurate
Can affect decision making and therefore profitability

Concepts in Enterprise Resource Planning, Fourth Edition

Summary (cont’d.)

Closing the books at the end of an accounting period can be difficult with an unintegrated IS, but is relatively easy with an integrated IS
Closing the books means zeroing out temporary accounts
Using an integrated IS and a common database to record accounting data has important inventory cost-accounting benefits
Can lead to more accurate product cost calculations
Can help managers determine which products are profitable and which are not

Concepts in Enterprise Resource Planning, Fourth Edition

Summary (cont’d.)

Use of an integrated system and a common database to record accounting data has important management-reporting benefits
Built-in drill-down and query tools available
Sarbanes-Oxley Act, 2002 U.S. federal regulation
Written and passed in the wake of Enron collapse
Promoted management accountability by requiring extra financial approval and reporting
ERP systems can help companies meet the requirements of this legislation

Concepts in Enterprise Resource Planning, Fourth Edition

Summary (cont’d.)

Trends in financial reporting
XBRL
XML
ERP systems accept data in XML and XBRL into database

Concepts in Enterprise Resource Planning, Fourth Edition