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BEC IV > 8-1. Accounting System Cycles > Flashcards

8-1. Accounting System Cycles Flashcards

1
Q

What is the accounting cycle?

A

*Systematic process of recording and processing financial transactions and events.
*A way of categorizing similar business and accounting activities.
Accounting system accumulates and reports info on financial position of an entity.

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2
Q

What are 2 ways the term “accounting cycle” used for?

A
  • To categorize business and accounting activities

* A set of accounting procedures to accumulate and report financial info

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3
Q

Accounting cycle: what are general 9 steps of accounting procedures?

A
  1. Analyze transactions and business documents
  2. Journalize transactions
  3. Post journal entries to accounts
  4. Determine account balances and prepare a trial balance
  5. Journalize and post adjusting entries
  6. Prepare FS and reports
  7. Journalize and post-closing entries
  8. Balance the accounts and prepare a post-closing trial balance
    9 Repeat
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4
Q

Accounting cycle: what are 3 steps of data processing?

A
  • Data capture (input)
  • Data storage and data processing
  • Information output and reporting
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5
Q

Accounting cycle: what are steps for data capture?

A
  1. Analyze transactions and business documents
  2. Journalize transactions
  3. Journalize and post adjusting entries
  4. Journalize and post-closing entries
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6
Q

Accounting cycle: what are steps for data storage/processing?

A
  1. Post journal entries to accounts
  2. Determine account balances and prepare a trial balance
  3. Journalize and post adjusting entries
  4. Journalize and post-closing entries
  5. Balance the accounts and prepare a post-closing trial balance
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7
Q

Accounting cycle: what are steps for information output and reporting?

A
  1. Prepare FS and reports
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8
Q

Accounting cycle: what is it as categories of activity?

A

Business activities as paid, give-get exchanges.

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9
Q

Accounting cycle as categories of activity: what are 5 major transaction cycles of grouping of basic exchange?

A
  • Revenue cycle: interactions with customers (give goods; get cash)
  • Expenditure cycle: interactions with suppliers (give cash; get goods)
  • Production cycle: give labor and raw materials; get finished good product
  • Human resources/payroll cycle: hire, utilize, and develop labor; give cash and benefits
  • General ledger, reporting, financial cycle: give cash; get cash; report financial outcomes
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10
Q

Accounting cycle: Revenue cycle: what are 3 actions that interact with other cycles?

A
  • Get finished goods from production
  • Provides data to general ledger and reporting
  • Provides funds to the financing
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11
Q

Accounting cycle: Expenditure cycle: what are 3 actions that interact with other cycles?

A
  • Gets $ from financing
  • Provides data to the general ledger and reporting
  • Provide raw materials to production
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12
Q

Accounting cycle: Production cycle: what are 5 actions that interact with other cycles?

A
  • Gets labor from HR/payroll
  • Gets $ from finance
  • Gets raw materials from expenditure
  • Provides data to general ledger and reporting
  • Provides finished goods to revenue
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13
Q

Accounting cycle: HR/payroll cycle: what are 3 actions that interact with other cycles?

A

Records activity related to employees and payroll.

  • Gets funds from financing
  • Provides data to general ledger and reporting systems,
  • Provides labor to production
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14
Q

Accounting cycle: Financing cycle: what are 3 actions that interact with other cycles?

A
  • Gets funds from revenue
  • Provides funds to expenditures and HR/payroll
  • Provides data to general ledger and reporting
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15
Q

Accounting cycle: General ledger and reporting cycle: what are 2 actions that interact with other cycles?

A
  • Gets data from all cycle

* Provides info for internal and external users

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16
Q

Accounting cycle: is implementation of each transaction cycle same across organizations?

A

No, significantly different.

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17
Q

Accounting cycle: do all organizations need all cycles?

A

No. E.g. retail stores don’t need production cycle module.

Some organizations need extra modules.

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18
Q

Accounting cycle: Common risks across cycles?

A
  • Loss, alteration, or unauthorized disclosure of data.

* Accounting system is not functioning as required by law, regulation, or organizational policy

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19
Q

Accounting cycle: what are controls goals across cycles?

A

Completeness;

  • transactions are properly authorized
  • recorded transactions are valid
  • valid and authorized transactions are recorded
  • transactions are recorded accurately

Safeguarding: assets are safeguarded from loss or theft

Efficiency: business activities are performed efficiently and effectively.

Compliance: the organization complies with all applicable laws and regulations.

Reporting: all financial disclosures are full and fair.

Data integrity: accurate data is available when needed.

20
Q

Revenue cycle: what is the central item?

A

Money.

  • Sell items or receive pledges for donations
  • Collect pmts on receivables or pledges
21
Q

Revenue cycle: what are core activities?

A
  • Sales
  • Accounts receivables
  • Cash
22
Q

Revenue cycle: what are sales activities?

A
  • receive customer orders
  • approve customer credit/sales authorization
  • physical (or virtual) custody of products or services: fill the order and prepare for shipping (if a physical merchandise, ship or deliver the product.
23
Q

Revenue cycle: what are A/R activities?

A
  • Bill (if needed)

* Manage receivables (e.g. returns and allowances, determine collectability of accounts)

24
Q

Revenue cycle: what are cash activities?

A
  • Collection and receipt of pmts

* Reconciliation

25
Q

Revenue cycle: risks?

A
  • Validity or revenue - revenue recognition
  • Collectability of receivables
  • Customer returns and allowances
26
Q

Revenue cycle: Validity of revenue: when can revenue be recognized for FS?

A

Realized (or realizable) and earned.

27
Q

Revenue cycle: Validity of revenue: fraud risks?

A
  • booking fake revenue or booking revenue prematurely.

* creation of fictions customer who “buy” things (hence the goods are taken) but don’t pay for them.

28
Q

Revenue cycle: is estimating the collectability of receivables objective or subjective? Consequence of it?

A

Subjective - where subjectivity exists, management may err in its self-interest.

29
Q

Revenue cycle: fraud related to A/R?

A

“Sales” to fictitious customers where receivables are written off.

30
Q

Revenue cycle: how is customer returns and allowances determined and consequence?

A

They, particularly for new products or technologies, are determined by subjective estimates - managers may error in their self-interest.

31
Q

Revenue cycle: who are relevant stakeholders?

A

Customers:
*whose role is to buy products or services - establish that customers exist and receive credit appropriately. *Outbound logistics providers - ship goods to customers.

32
Q

Revenue cycle: what is lading?

A

Also called bill of lading = archaic noun - the action or process of loading a ship or other vessel with cargo.
Specify terms of shipment. Legal document between the shipper and the carrier detailing the type, qty, and destination of carried goods. Also a receipt for shipment when the goods are delivered.

33
Q

Revenue cycle: what are 9 important file, form, or document?

A
  • Customer or sales order
  • Credit check files
  • Aged trial balance
  • Picking list (physical goods)
  • Packing list (physical goods)
  • Bill of lading (physical goods)
  • Customer invoice
  • Remittance advice
  • Customer stmts (monthly)
34
Q

Revenue cycle: Customer or sales order: Purpose? Comments and controls?

A

P: Document order, including items, prices, and stock numbers.
C: Point of sale documentation.

35
Q

Revenue cycle: Credit check files: Purpose? Comments and controls?

A

P: Document granting or denial of credit.
C: Review for compliance, accuracy and completeness.

36
Q

Revenue cycle: Aged trial balance: Purpose? Comments and controls?

A

P: Document receivables and give evidence of collectability.
C: Verify if receivables are collectable and timely.

37
Q

Revenue cycle: Picking list (physical goods): Purpose? Comments and controls?

A

P: Items to be pulled from warehouse.
C: Increasingly automated and use bar code or RFID tagging.

38
Q

Revenue cycle: Packing list (physical goods): Purpose? Comments and controls?

A

P: Contents to be shipped.
C: Increasingly automated and use bar code or RFID tagging.

39
Q

Revenue cycle: Bill of lading (physical goods): Purpose? Comments and controls?

A

P: Specify terms of shipment
C: Helps determine data goods were sold (cutoff). Can match goods to bill of lading to confirm receipt

40
Q

Revenue cycle: Customer invoice: Purpose? Comments and controls?

A

P: Client’s bill
C: Useful in documenting existence of customer and receivable

41
Q

Revenue cycle: Remittance : Purpose? Comments and controls?

A

P: Help match pmts to invoices
C: Sent by customer to selling company to indicate pmt

42
Q

Revenue cycle: Customer stmts: Purpose? Comments and controls?

A

P: Document orders and pmts
C: Determine billings and collections (accuracy and existence)

43
Q

Revenue cycle: Accounting and business risks?

A
  • Sales issues
  • Receivables and account collections issues
  • Shipping issues
  • Cash and cash receipt issues
44
Q

Revenue cycle: Accounting and business risks: Describe sales issues and responses.

A
  • Customer abandons order before completion
  • Incomplete or inaccurate customer orders: Re: automate data entry, data input controls, authorization (password or biometric control), input controls.
  • Fake sales or sales inconsistent with policy: Re: controls include appropriate authorization and evidence, confirmation and review of customer files
45
Q

Revenue cycle: Accounting and business risks: Describe receivables and account collection issues and responses.

A

Grant credit to undeserving customers (e.g. poor credit). Re:

  • hire vendors to determine credit status
  • segregation of duties (credit granting process is independent of sales)
  • cash only businesses reduce sales by reducing uncollectible receivables

Failure to bill customers.
Re:
*Segregation of duties in shipping and billing functions
*Sequentially pre-numbered sales orders, enables identification of missing sales orders when matching to billings
*Matching picking tickets, packing slips, and sales invoices

Receivables inappropriately written off.
Re:
*segregation of duties: someone independent of sales and cash receipts authorized to write off accounts
*access to terminal/system to write off accounts restricted by password, device or biometrics

Pricing based on price list master file.
Re:
*confirm accuracy of price lists (can be complicated)
*check qty on packing slip against qty on sale order
*bar code and RFID scanners to eliminate data entry and other errors

46
Q

Revenue cycle: Accounting and business risks: Describe shipping issues and responses.

A

Shipping errors - send wrong items.
Re:
*online shipping systems that check qty shipped; bar code scanners and radio-frequency identification (RFID) tags to record picking and shipping
*additional controls: e.g. field check and completeness tests

47
Q

Revenue cycle: Accounting and business risks: Describe cash and cash receipt issues and responses.

A

Controls:

  • Segregation of duties: e.g. 2 people opening emails/mails together, remittance data sent to accounts receivable clerk, while cash and check are sent to the cashier
  • Prompt documentation and restrictive endorsements of remittances
  • Reconcile total credits to accounts receivable and total debits to cash
  • sending remittance list to independent party (internal auditor) to compare with validated deposit slips and bank stmts
  • monthly stmts to customers
  • cash registers that automatically record cash received
  • daily deposit of all remittances in the bank
  • independent bank reconciliations

BEC IV (12 decks)

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