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Chapter 5

Accounting and Finance

Information Systems

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Chapter 5 Learning Objectives

• State and describe Accounting and Finance functional area activities

• Identify and describe problems that arise in Accounting and Finance as a result of unintegrated information systems

• Describe how ERP systems can solve Accounting and Finance data problems that arise in an unintegrated system

• Explain accounting and management-reporting benefits of an ERP system

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Introductions

• Accounting system data is used:– By decision-makers throughout a company to

plan and manage day-to-day activities– By managers to make long-range operating

forecasts– By accountants to generate a company’s

financial statements and other reports

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Basic Financial Statement

• Balance Sheet: shows company’s financial health at a point in time

• Income Statement: shows a company’s sales, cost of sales and profit or loss for a period.

• “Closing the books” means checking to see that financial statements are accurate and up to date. Usually done quarterly or monthly.

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Using ERP for Accounting and Finance

• Unintegrated systems usually require research effort by accountants to assemble required data

• ERP systems capture accounting data in real time as business transactions occur– Transfer of finished goods from assembly line

to warehouse results in changes to Accounting records as well as Materials Management records.

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SAP R/3 Modules and Accounting

• Sales and Distribution (SD)• Production Planning (PP)• Materials Management (MM)• Financial Accounting (FI)• Controlling (CO)• Human Resources (HR)• Asset Management (AM)

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Credit Management

• Companies routinely sell to customers on credit

• Sellers must manage credit to avoid default by customers

• Sellers manage customer credit using credit limits

• Accurate and timely data required to manage credit

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Product Profitability Analysis

• Accurate data required to properly determine the profitability of a company’s products

• Inaccurate data can result from:– Inconsistent record keeping– Inaccurate inventory-costing systems– Problems consolidating data from subsidiaries

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Inconsistent Record Keeping

• Companies may have divisions that keep records in different systems or with different structures

• Summarizing the data to provide management summaries may require additional processing by middleware systems (e.g. spreadsheets)

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Inventory Costing

• A manufactured items costs consist of three elements:– Cost of raw materials– Cost of direct labor– Cost of overhead (utilities, general factory

labor, supplies, manager’s salaries, storage and insurance costs)

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Inventory Costing

• Direct costs (material and direct labor) can be associated with products or batches of materials relatively easily

• Indirect costs (overhead) are difficult to assign to particular products or batches, but are a significant portion of a product’s cost

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Distribution of Indirect Costs

• Indirect costs are frequently allocated based on machine hours or labor hours used to make a product

• Standard costs are used to adjust accounting records for changes due to production and sale of products

• Cost variances must be recorded to reconcile actual and standard costs

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ERP and Inventory Cost Accounting

• Adjusting accounting records for cost variances can be difficult with unintegrated information systems

• ERP systems are configured with methods for computing variances so that the process is automated

• Real time data in ERP systems means that accurate cost data will be available

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Activity-Based Costing (ABC) and ERP

• In ABC, “activities” associated with overhead-cost generation are used to allocate costs more precisely

• Defining “activities” to relate overhead costs to products can be difficult

• ABC requires more record keeping, which can be simplified using an ERP system

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Problems in Closing Books

• Currency Translation – Daily fluctuation of exchange rates more easily handled by ERP systems

• Intercompany Transactions – Companies cannot make profits by selling products to themselves, so profits can’t be recorded from intercompany sales

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Management Reporting with ERP

• Document Flow allows for better management of the numerous transactions that are related to a customer order

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Sales Order Document Flow in SAP R/3

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Management Reporting and Analysis

• Storing accounting records in a database allows for easier analysis

• Data warehousing provides separate, summarized data for reporting to avoid disruption of transaction processing

• SAP R/3 provides specialized information systems for analysis (LIS, SIS)

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Chapter Summary

• Accounting systems are required to record transactions for preparing financial statements and providing information for managerial analysis and planning

• Unintegrated information systems have difficulty providing up-to-date and accurate accounting information

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Chapter Summary continued

• 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

• Integrated IS systems with a common database can provide more accurate record keeping, providing better cost data for managerial decision making

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Chapter Summary continued

• The use of an integrated IS and common database to record data has important management reporting benefits, allowing built-in drill-down and query tools