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Chapter 5: Accounting in ERP Systems

TRUE/FALSE 1. An income statement shows a company's profit or loss in a period of time.

ANS: T

PTS: 1

REF: 119

2. When a company has an ERP system, it no longer needs a general ledger.

ANS: F In the SAP ERP system, input to the general ledger occurs simultaneously with the business transaction in the specific module. Many SAP ERP modules cause transaction data to be entered into the general ledger.

PTS: 1

REF: 122

3. When a company has an ERP system, the general ledger is maintained by the ERP system.

ANS: T

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REF: 122

4. The SAP ERP system has a module called Accounting and Finance.

ANS: F Financial Accounting (FI) PTS: 1

REF: 122

5. In SAP ERP access to general ledger accounts is spread over many modules.

ANS: T

PTS: 1

REF: 122

6. In a manufactured item, the cost of heating the plant would be considered part of the item's raw materials.

ANS: F Manufacturing overhead costs include factory utilities, general factory labor (such as custodians or security guards), factory manager’s salaries, storage, insurance, and other manufacturing-related costs.

PTS: 1

REF: 128

7. The cost of heating the plant would be considered part of manufacturing overhead.

ANS: T

PTS: 1

REF: 128

8. Using standard costs to accumulate manufacturing costs means that the company does not have to keep track of actual manufacturing costs.

ANS: F If actual costs in the month equaled standard costs, no balance sheet or income statement adjustments would be needed. Actual costs never exactly equal expected costs, however, so adjustments are almost always needed. The differences between actual costs and standard costs are called cost variances.

PTS: 1

REF: 129

9. Activity-based costing treats overhead costs as more direct than traditional cost-accounting methods have treated them.

ANS: T

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REF: 132

10. In activity-based costing, overhead costs are assigned to products based on the manufacturing activities that gave rise to the costs.

ANS: T

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REF: 132

11. ERP systems help in resolving conflicts in goals, standardizing basic processes, and controlling product costs.

ANS: T

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REF: 133

12. Having ERP will require a company to restrict the number of cost allocation bases.

ANS: F

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REF: 133

13. In an ERP system, data does not flow from one module to another.

ANS: T Data do not flow from one ERP module to another because they are all in one place -- the database.

PTS: 1

REF: 136

14. The term drill down refers to the ability to view the details behind a summary of information.

ANS: T

PTS: 1

REF: 138

15. With an ERP system, the job of tracking all the data required for a financial report can be a monumental undertaking.

ANS: F Without an ERP system, the job of tracking all the data required for a financial report is a monumental undertaking.

PTS: 1

REF: 136

16. A Business Warehouse system is a completely separate information system that extracts data from the ERP system.

ANS: T

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REF: 139

17. The U.S. Congress passed the Sarbanes-Oxley Act of 2002 in response to the fraud and abuse in the Enron collapse.

ANS: T

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REF: 141

18. The Sarbanes-Oxley Act requires that financial statements filed with the SEC include a statement signed by the chief executive officer and chief financial officer, certifying that the financial statement complies with the SEC rules.

ANS: F

PTS: 1

REF: 141

19. It is very easy to delete items in the ERP system.

ANS: F One of the first things a new SAP ERP user typically notices is that the software offers very few ways to delete items.

PTS: 1

REF: 143

20. SAP ERP has sophisticated user administration tools that allow different levels of authorization management, to ensure that employees can perform only the transactions required for their jobs.

ANS: T

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REF: 145

21. Tolerance groups make sure employees do not exceed their authority in financial transactions.

ANS: T

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REF: 146

Figure 2 22. Figure 2 is an example of Fitter Snacker’s Balance Sheet.

ANS: T

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REF: 118

23. Figure 2 is an example of Fitter Snacker’s Income Statement.

ANS: F

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REF: 118

Figure 1 24. Figure 1 is an example of Fitter Snacker’s Balance Sheet.

ANS: F

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REF: 119

25. Figure 1 is an example of Fitter Snacker’s Income Statement.

ANS: T

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REF: 119

26. Another name for an income statement is a profit and loss statement.

ANS: T

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REF: 119

27. In an ERP system, the balance sheet and P&L statements are database reports.

ANS: T

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REF: 120

28. Managerial accounting deals with determining the costs and profitability of the company’s activities.

ANS: T

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REF: 121

29. In the SAP ERP system, inputs to the general ledger occur simultaneously with input of business transactions to the various modules.

ANS: T

PTS: 1

REF: 122

Figure 3 30. Figure 3 is an example of document flow.

ANS: T

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31. Figure 3 is an example of production planning.

ANS: F

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32. The key feature of any ERP system is the ability to drill down from a report to the source documents (transactions) that created it.

ANS: T

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REF: 147

MULTIPLE CHOICE 1. The process of transferring balances for temporary or nominal accounts, such as revenue, expense, gain, and loss, to the retained earnings account is called ____. a. cost accounting d. closing the books b. account closure e. statement wrap-up c. periodic closure ANS: D Closing the books means that balances for temporary or nominal accounts (such as revenue, expense, gain, and loss) are transferred to the retained earnings account. An integrated information system simplifies the process of closing the books and preparing financial statements. Using an integrated information system and a common database to record accounting data has important inventory cost-accounting benefits. More precise record keeping is possible, which can lead to more accurate product cost calculations. These, in turn, can help managers determine which products are profitable and which are not.

PTS: 1

REF: 119

2. When finished goods are transferred from the assembly line to the warehouse, an employee in the warehouse records the transaction using a terminal or a barcode scanner. Which SAP ERP module records this change? a. Materials Management

c. Sales and Distribution

b. Asset Management ANS: A

PTS: 1

d. Controlling REF: 122

3. Which general ledger document tracks the amount of money that a customer owes for the goods received by the customer? a. Balance sheet c. Accounts payable b. Accounts receivable d. Income statement ANS: B

PTS: 1

REF: 122

4. Which financial statement shows account balances such as, cash held, amounts owed to the company by customers, the cost of raw materials and finished goods inventory? a. Income statement c. Tolerance group b. Balance sheet d. Year end report ANS: B

PTS: 1

REF: 118

5. Assume that a buyer calls a seller to order $3,000 worth of goods and her credit limit is $10,000. If the sellers accounts receivable for the customer is already $8,500, how much of the new order will be accepted? a. The entire amount c. No amount b. $1,500 only d. $10,000 only ANS: B

PTS: 1

REF: 123

6. What are the manufacturing costs that include factory utilities, general factory labor such as custodians or security guards, factory managers’ salaries, storage, insurance, and other manufacturing-related costs? a. Direct costs c. Overhead costs b. Plant costs d. Manmade costs ANS: C

PTS: 1

REF: 128

7. In ____, activities associated with overhead cost generation are identified and then records are kept on the costs and on the activities. a. activity-based costing c. run of the mill costing b. backoffice costing d. plant operation costing ANS: A

PTS: 1

REF: 132

8. Each transaction in SAP ERP gets its own unique number, which acts as an index to the appropriate database table entries. This is known as ____. a. document reference c. auditing codes b. document flow d. unique codes ANS: B

PTS: 1

REF: 137

Figure 2 9. Figure 2 is Fitter Snacker’s ____. a. Balance Sheet b. Income Statement ANS: A

c. Credit Report d. Document Flow PTS: 1

REF: 118

Figure 1 10. Figure 1 is Fitter Snacker’s ____. a. Balance Sheet

c. Credit Report

b. Income Statement ANS: B

d. Document Flow PTS: 1

REF: 119

11. Another name for an income statement is a ____ statement. a. credit c. sales b. profit and loss d. revenue ANS: B

PTS: 1

REF: 119

12. In an ERP system, the balance sheet and P&L statements are ____. a. generated yearly c. database reports b. not available d. modules ANS: C

PTS: 1

REF: 120

13. What is the advantage to credit management in SAP ERP? a. Marketing and Sales get weekly reports. c. Payments are posted daily. b. The data is in real-time. d. There is no advantage.

ANS: B

PTS: 1

REF: 133

14. If the cost of manufacturing NRG-A bars is $0.72 per bar, how much does FS need to charge to make a profit of $0.25? a. $1.00 c. $0.97 b. $0.99 d. $1.25 ANS: C

PTS: 1

REF: 130

15. What is the sum of direct materials, production overhead, and direct labor? a. COGM - cost of goods manufactured c. COGP - cost of goods produced b. COGS - cost of goods sold d. COGS - cost of goods shipped ANS: A

PTS: 1

REF: 131

Figure 3 16. Figure 3 is an example of ____. a. Production Planning b. MRP

c. Document Flow d. Configuration Settings

ANS: C

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REF: 137

17. The key pieces of information for cost analysis is the direct material costs and the ____. a. direct labor cost c. driver cost b. overhead cost d. selling cost ANS: A

PTS: 1

REF: 131

18. If Fitter Snacker’s cost of making a case of bars is $209.82. There are 24 bars to a box and 12 boxes to a case. How much money does it cost Fitter Snacker to make each individual bar? a. $17.49 c. $8.74 b. $1.00 d. $0.73 ANS: D

PTS: 1

REF: 130

COMPLETION

Figure 2 1. Figure 2 is Fitter Snacker’s ____________________.

ANS: Balance Sheet PTS: 1

REF: 118

Figure 1 2. Figure 1 is Fitter Snacker’s ____________________.

ANS: Income Statement PTS: 1

REF: 119

3. Any business events that occur between companies and their subsidiaries are known as ____________________.

ANS: intercompany transactions PTS: 1

REF: 135

4. With a properly configured and managed ERP system, there are direct links between the company’s ____________________ and individual transactions that make up the statements, so that fraud and abuse can be detected more easily.

ANS: financial statements PTS: 1

REF: 149

SHORT ANSWER 1. What are the three cost elements for a manufactured item?

ANS: A manufactured item has three cost elements: (1) the cost of raw materials, (2) the cost of labor employed directly in the production of the item, and (3) all other costs, which are typically called overhead.

PTS: 1

REF: 128

2. Assume a company has many foreign-based subsidiaries. In what ways can ERP improve preparation of consolidated financial statements?

ANS: Accounts stated in another country’s currency are converted to U.S. dollars (in the case of a U.S. parent company), and transactions between a company and its subsidiaries are eliminated from the accounts.

PTS: 1

REF: 134

3. In a company that has an ERP system the accountants talk in terms of "data flows" between modules.

Why are the accountants not accurate, and what is a better term for them to use?

ANS: Data do not flow from one ERP module to another because they are all in one place -- the database.

Each area views the same records. It might be better to speak of “data access” than of “data flows” when talking about how these areas use the common database.

PTS: 1

REF: 136

4. How does ERP facilitate "drilling down" to see the details of transaction data?

ANS: (1) Transaction details are associated with their document number. Click the number, see the details.

(2) Numbers are linked in an audit trail, so that details can be shown in sequence or other relationship.

(3) Further, document flow data is available from any SAP ERP screen.

PTS: 1

REF: 138

5. Assume Fitter Snacker's existing information systems are in place. FS has a customer called First State TastyBars. Here is the background data on FS and First State TastyBars: Today's date Current list price, NRG-A bars Accounts receivable balance at start of business day, First State TastyBars, as shown on the list available in Marketing Credit Limit, First State TastyBars

4/20/2001 1.00/bar $15,000 $17,000

An order came in from First State TastyBars: Product Amount Price Ship to Date desired Next invoice number Customer Purchase Order Number

NRG-A 10 cases (288 bars/case) List First State TastyBars headquarters 4/25/2001 A1200 FST 1003

There are some documents in FS's system as follows: Purchase order FST 988 for 3 cases (864 bars) of NRG-A. This order is in the FS sales order-entry program, but Accounting has not been told about it yet.

A check from FST for $5184 was received in yesterday's mail and entered into Accounting's

PeachTree program. The check applies to some March 2001 orders. The list of accounts receivable balances that Marketing uses does not reflect this payment. a. Given the state of FS's systems, will credit be granted or denied on the current order (purchase order FST 1003)? b. What is the actual First State TastyBars accounts receivable balance (without considering the current order)? c. If the FS systems processed transaction data in a more timely way would credit be granted or denied? Why? ANS: (a) No. $15000 + $2880 = $17880, which exceeds the $17000 limit. (b) $15000 + $864 unrecorded sale - $5184 cash not shown in AR listing = $10680 actual AR exposure. (c) $10680 actual AR + $2880 current order = $13560, which is less than the $17000 limit. Credit should be granted.

PTS: 1

REF: 123

6. Describe the general ledger with regard to SAP ERP. ANS: In the SAP ERP system, input to the general ledger occurs simultaneously with the business transaction in the specific module.

PTS: 1

REF: 122

7. What are the two main accounting challenges when closing the books for companies with overseas subsidiaries?

ANS: Accounts stated in a foreign currency must be converted to the parent company’s currency.

Transactions between companies and their subsidiaries must be eliminated from the accounts.

PTS: 1

REF: 134

Figure 3 8. What is the significance of the accompanying figure in SAP from an accounting standpoint?

ANS: When an ERP system is used, all transactions in all areas of a company, get posted in a central database. Each transaction that gets posted gets its own unique number, called a document number.

This number allows quick access to the data. If you need to look up a transaction online, you do so by referencing the document number, which acts as an index to the appropriate database table entries.

PTS: 1

REF: 137

9. Why is developing product costs in a large company such a time-consuming task? Why is an integrated system an advantage?

ANS: There may be thousands of complicated products, and the task of gathering the required information and insuring its accuracy can be a major challenge. An integrated system is an advantage because timely, accurate information is available in the system.

PTS: 1

REF: 131

10. List ways in which an ERP system can prevent or minimize fraud in a company.

ANS: Archiving User authorizations Tolerance Groups Financial Transparency PTS: 1

REF: 143-149

ESSAY 1. Explain how activity based costing would be implemented using an ERP system. In doing that, explain the advantage of using ERP with activity based costing.

ANS: A trend in inventory cost accounting is toward activity-based costing (ABC). In ABC, “activities” associated with overhead cost generation are identified and then records are kept on the costs and on the activities. The activities are viewed as causes (“drivers”) of the overhead costs. This view treats overhead costs as more direct than traditional cost-accounting methods have treated them.

ABC tries to avoid rough allocation procedures in an attempt to assign costs more precisely to individual products. A company using ABC to provide more accurate cost allocations would be able to determine which products have the highest profit margin, information that is crucial in making strategic decisions on product lines. ABC is often used when competition is stiff, overhead costs are high, and products are diverse.

Consider this example from FS’s operations. Suppose that storage of raw materials is considered an “activity.” Assume that storage activities differ between NRG-A and NRG-B bars because the ingredients are different, and that some of these storage activities are more labor-intensive than others. In an ERP system, FS would keep track of the various activities (how often they occur) and the cost of each. Later, when determining the profitability of each kind of bar, storage costs would be added in, based on their cause. This costing is more precise than computing an average storage cost based on total storage costs and machine hours, and then allocating that amount to each kind of bar.

Conceivably, if the activities differ enough from one bar to the next, one could be significantly more or less profitable than the other. This fact would be revealed by the ABC approach, but not by traditional cost-accounting approaches. Letting managers see that difference is the value of an information system that supports ABC. Not all overhead costs can be linked to products by their activities. However, many can, depending on the company and the manufacturing situation. For many companies, the cost and effort required to implement ABC is justified by the value of the improved information yielded.

ABC requires more bookkeeping than traditional costing methods because a company must do ABC in addition to traditional costing, and because ABC requires keeping track of instances of activities, not just the costs. Companies often use ABC for strategic purposes, and at the same use traditional costing for generally accepted accounting principles such as bookkeeping and taxes. Having an integrated information system allows a company to do both kinds of accounting much more easily.

A recent study of companies with and without ERP revealed that: (1) ERP companies had nearly twice as many cost-allocation bases to use in management decision-making, and (2) the ERP companies’ managers rated their cost-accounting system much higher.1 Companies with ERP systems value their cost accounting systems more than if they didn’t have ERP, and these companies also have more faith in their numbers from the ERP system.

PTS: 1

REF: 132-133

2. Explain how SAP ERP built-in management reporting and analysis tools are an advantage to an organization.

ANS: Accounting records are maintained in the common database. The advantage of using a database is the ability to query the records to produce standard reports as well as answer ad hoc questions. An ad hoc question is one that is spontaneous. For example, a Fitter Snacker manager might run into an analyst's office and ask for an immediate sales report for the third quarter, snack bar division, by product. Traditional accounting packages are not optimized to set up and execute queries against accounting records, but database packages are. Therefore, when the records are kept in a database, the user gets a double benefit. The records can be kept in an accounting package and the records can be queried because of the built-in database language.

Thus, if a user wants to identify customer 1002’s 10 largest orders in the past year, a query could be executed to show the answer. In principle, this query could directly access the transaction records to get the answer. In practice, this would mean that analysts running queries would be accessing the records at the same time as current transactions are being recorded. This competition can slow down processing in even a large database, such as those used by ERP packages.

SAP’s solution to this problem is to provide a data warehouse within each major module.

Analysts query the warehouse rather than the transaction database. For example, SAP ERP provides the Sales Information System (SIS) tool for analysts querying the sales records and the Logistics Information System (LIS) tool for analysts querying the logistics (shipping) records. Both the SIS and the LIS come embedded with SAP ERP. Also, as mentioned in Chapter 2, SAP also sells its Business Warehouse (BW) product, a completely separate information system that extracts data from the SAP ERP system. With BW, users have great flexibility in defining data reports and analyses in a system that does not compete for system resources with transaction processes.

PTS: 1

REF: 137-138

3. What are the key features of the Sarbanes-Oxley Act? ANS: Key Features of the Sarbanes-Oxley Act The Sarbanes-Oxley Act is designed to encourage top management accountability.

Frequently, top executives involved in corporate scandals claim that they were unaware of abuses occurring at their company. Title IX of the Sarbanes-Oxley act adds the requirement that financial statements filed with the Securities and Exchange Commission must include a statement signed by the Chief Executive Officer and Chief Financial Officer that the financial statement complies with the Securities and Exchange rules. Specifically, the statements certify that “the information contained in the periodic report fairly presents, in all material respects, the financial condition and results of operations of the issuer.” The penalty for “willfully certifying any statement...knowing that the periodic report accompanying the statement does not comport with all the requirements set forth in this section shall be fined not more than $5,000,000, or imprisoned not more than 20 years, or both.”

Title II of the act addresses auditor independence. Among other things, this section of the act limits the non-audit services that an auditor can provide. Among the non-audit services prohibited by the act are: Bookkeeping or other services related to the accounting records or financial statements Financial information systems design and implementation services Legal services Expert services unrelated to the audit Management functions Human resources functions Any other service that the Public Company Accounting Oversight Board (PCAOB) determines to be impermissible. The PCAOB was created in Title I of the act with broad powers to regulate audits and auditors of public companies.

Title IV of the act is Enhanced Financial Disclosures, which specifies more stringent requirements for financial reporting. Section 404 of Title IV requires that a public company’s annual report contains management’s internal control report. This control report outlines management’s responsibility for establishing and maintaining adequate internal control over financial reporting and assesses the effectiveness of its internal control over financial reporting. Section 409 of Title IV addresses the timeliness of reports, and may require companies to file an SEC report within two days of a significant trigger event, for example, completion of an acquisition or default by a major customer.

PTS: 1

REF: 141-142

4. What are the implications of the Sarbanes-Oxley Act for ERP systems?

ANS: Certainly the Sarbanes-Oxley Act has significant implications for a firm’s information systems. To meet the internal control report requirement, a company must first document the controls that are in place and then verify that they are not subject to error or manipulation.

Even the passage of the Sarbanes-Oxley Act and the availability of state-of-the-art ERP technology cannot prevent insidious and systematic fraud similar to the Enron scandal. An ERP system relies on a central database with accurate information. It would be more difficult to hide fraudulent dealings with an ERP system, and perhaps Enron's problems would have been more obvious to stakeholders of the company. But it is unlikely that an ERP system can prevent all fraud. An integrated information system such as an ERP provides the tools to implement internal controls as long as the system is configured and managed correctly.

On the positive side, companies with ERP systems in place will have an easier time complying with the Sarbanes-Oxley Act than will companies without an ERP. The next section explores ways in which SAP ERP and other ERP systems can prevent corporate fraud and abuse. Systems from vendors other than SAP have functionality similar to that of SAP ERP. PTS: 1

REF: 142