3 - Accounting Information System

Question 1

The accounting cycle is a systematized process to create accounting information and consists of a number of distinct steps.

The preparation of financial statements is the ______ step in the accounting cycle, which begins with the _______, _______, and ________ of transactions, followed by the preparation of a trial balance.

Answer 1

The accounting cycle is a systematized process to create accounting information and consists of a number of distinct steps. The preparation of financial statements is the final step in the accounting cycle, which begins with the analyzing, recording, and posting of transactions, followed by the preparation of a trial balance.

Question 2

Assets (from the statement of financial position) and expenses (from the income statement) have normal _______ balances.

Answer 2

Assets (from the statement of financial position) and expenses (from the income statement) have normal debit balances.

Question 3

Liabilities and shareholders’ equity (from the statement of financial position) and revenues (from the income statement) have normal ______ balances.

Answer 3

Liabilities and shareholders’ equity (from the statement of financial position) and revenues (from the income statement) have normal credit balances.

Question 4

“TAMFS”—

Answer 4

“TAMFS”— timely, accurate, monthly financial statements.

Question 5

The system used to ______ and _________ transaction data and _________ financial information to decision makers is known as the accounting information system.

Answer 5

The system used to collect and process transaction data and communicate financial information to decision makers is known as the accounting information system.

Question 6

Accounting cycle—a series of steps used to _______ for, and _______, transactions.

Answer 6

Accounting cycle—a series of steps used to account for, and report, transactions.

Question 7

Accounting transactions occur when an economic event results in a company’s financial position (assets, liabilities, or shareholders’ equity) ________ in a measurable way.

Answer 7

Accounting transactions occur when an economic event results in a company’s financial position (assets, liabilities, or shareholders’ equity) changing in a measurable way.

Question 8

Explain the Expanded Accounting Equation

Answer 8

Refer to Illustration 3.2

Net income = revenues − expenses

Ending retained earnings = Beginning retained earnings + net income − dividends declared

• it must always balance

Question 9

If an individual asset is increased, there must be either a corresponding:

• decrease in another _______, and/or
• increase in a specific _______, and/or
• increase in _______ ______

Answer 9

If an individual asset is increased, there must be either a corresponding:

• decrease in another asset, and/or
• increase in a specific liability, and/or
• increase in shareholders’ equity

Question 10

Unless you are told otherwise, you can assume in your assignments that goods or services purchased on account give rise to _______ _________ (as opposed to another type of payable).

Answer 10

Unless you are told otherwise, you can assume in your assignments that goods or services purchased on account give rise to accounts payable (as opposed to another type of payable).

Ex. Supplies -> Liability (A/P)

Question 11

Unless you are told otherwise, you can assume in your assignments that goods or services provided on account give rise to ________ ________ (as opposed to another type of receivable).

Answer 11

Unless you are told otherwise, you can assume in your assignments that goods or services provided on account give rise to accounts receivable (as opposed to another type of receivable).

Ex. Provision of services on account

Question 12

Explain Unearned Revenue

Answer 12

When cash is received prior to service/product the firm has a liability or obligation to either perform the service or return the cash.

Question 13

Increases in expenses and dividends declared are shown as ______ amounts in the accounting equation because they _______ retained earnings and shareholders’ equity.

Answer 13

Increases in expenses and dividends declared are shown as negative amounts in the accounting equation because they reduce retained earnings and shareholders’ equity.

Question 14

An account consists of three parts:

(1) the _____ of the account
(2) a left or _____ side
(3) a right or _____ side

Answer 14

An account consists of three parts:

1) the title of the account
(2) a left or debit side (Dr.
(3) a right or credit side (Cr.)

Question 15

T account is also known as a general ______ account.

Answer 15

T account is also known as a general ledger account.

Question 16

The entire group of accounts maintained by a company (whether called a T account or a general ledger account) is referred to as the ______.

Answer 16

The entire group of accounts maintained by a company (whether called a T account or a general ledger account) is referred to as the ledger.

Question 17

The normal balance of an account is always the side that is used to _____ the account.

Answer 17

The normal balance of an account is always the side that is used to increase the account.

Question 18

Increases in expense and dividends declared accounts are recorded by ________ and have normal ______ balances.

Answer 18

Increases in expense and dividends declared accounts are recorded by debits and have normal debit balances.

Question 19

Overdraft results in bank _______.

Answer 19

Overdraft results in bank indebtedness.

Question 20

Liabilities are on the right side of the accounting equation so liability accounts normally have _______ (____-side) balances.

Answer 20

Liabilities are on the right side of the accounting equation so liability accounts normally have credit (right-side) balances.

Question 21

Increases in common shares, retained earnings, and revenue accounts are recorded by ______ and have normal ______ balances.

Answer 21

Increases in common shares, retained earnings, and revenue accounts are recorded by credits and have normal credit balances.

Question 22

Expenses and dividends declared both decrease _______ earnings.

Answer 22

Expenses and dividends declared both decrease retained earnings (which in turn decrease shareholders’ equity).

Question 23

Increases in expense and dividends declared accounts are recorded by ______ and have normal _____ balances.

Answer 23

Increases in expense and dividends declared accounts are recorded by debits and have normal debit balances.

Question 24

Summary of debit and credit rules for expanded accounting equation

Answer 24

Review Illustration 3.7

Question 25

This equality of debits and credits is the basis for the ______-_____ accounting system, in which the dual (two-sided) effect of each transaction is recorded in appropriate accounts.

Answer 25

This equality of debits and credits is the basis for the double-entry accounting system, in which the dual (two-sided) effect of each transaction is recorded in appropriate accounts.

Question 26

Assets and liabilities are classified into _____ and ______ portions.

Answer 26

Assets and liabilities are classified into current and non-current portions.

Question 27

Revenues, expenses, and dividends declared are eventually transferred to _______ _______ at the end of the period.

Answer 27

Revenues, expenses, and dividends declared are eventually transferred to retained earnings at the end of the period.

Question 28

Journal shows the _____ and _____ effects on specific accounts.

Answer 28

Journal shows the debit and credit effects on specific accounts.

• most basic: General Journal

Question 29

The general journal makes several contributions to the recording process:

1. It discloses the complete effect of a _______ in one place
2. It provides a ________ record of transactions.
3. It helps to prevent and locate _____

Answer 29

The general journal makes several contributions to the recording process:

1. It discloses the complete effect of a transaction in one place, including an explanation and, where applicable, identification of the source document.
2. It provides a chronological record of transactions.
3. It helps to prevent and locate errors, because the debit and credit amounts for each entry can be quickly compared.

Question 30

Entering transaction data in the general journal is known as _________.

Answer 30

Entering transaction data in the general journal is known as journalizing.

Question 31

Regardless of the number of accounts used in the journal entry, the total _____ and ______ amounts must be _____.

Answer 31

Regardless of the number of accounts used in the journal entry, the total debit and credit amounts must be equal.

Question 32

In journal entries, ______ are normally recorded first, followed by _____, which are indented.

Answer 32

In journal entries, debits are normally recorded first, followed by credits, which are indented.

Question 33

9 Steps of Posting Transactions to the general ledger:

Answer 33

9 Steps of Posting Transactions to the general ledger:

1) Analyze
2) Journalize
3) Post to ledger accounts
4) Trial Balance
5) Adjusting Entries
6) Adjusted Trial Balance
7) Financial Statements
8) Closing Entries
9) Post-Closing Trial Balance

Question 34

Most companies list their general ledger accounts in a ______ of ______.

Answer 34

Most companies list their general ledger accounts in a chart of accounts.

Question 35

The chart of accounts is the _______ for the accounting information system.

It lists the ______ and the ________ ________ that identify where the accounts are in the ledger.

Answer 35

The chart of accounts is the framework for the accounting information system.

It lists the accounts and the account numbers that identify where the accounts are in the ledger.

Question 36

The procedure of transferring journal entries from the general _______ to the general ______ ______ is called posting.

Answer 36

The procedure of transferring journal entries from the general journal to the general ledger accounts is called posting.

• posting should be done in chronological order

Question 37

First three steps in the accounting cycle:

Answer 37

First three steps in the accounting cycle—analyze, journalize, and post transactions.

Question 38

Ledger accounts should be arranged in ________ order.

Answer 38

Ledger accounts should be arranged in statement order.

Question 39

A _____ balance proves that total debits equal total credits.

Answer 39

A trial balance proves that total debits equal total credits.

The main purpose of a trial balance is to prove (check) that the debits equal the credits after posting.

Question 40

When auditors become aware of misstatements in financial statements, they consider them to arise from either error or fraud. Unlike an error, fraud is an ______ misstatement that is viewed as being unethical and often illegal.

Answer 40

When auditors become aware of misstatements in financial statements, they consider them to arise from either error or fraud. Unlike an error, fraud is an intentional misstatement that is viewed as being unethical and often illegal.