Chapter 2: The Accounting Information System Flashcards
systems that capture, record, and report a company’s various business activities (companies like Disney use these)
comprehensive accounting systems
the procedures that a company uses to transform the results of its business activities into financial statements
accounting cycle
What does the accuracy of a company’s financial statements rely on?
The company’s proper usage of the accounting cycle
What is the fundamental objective of financial reporting?
to provide info that is useful in making investment and credit decisions
designed to support the development of a consistent set of accounting standards and provide a consistent body of thought for financial reporting
the conceptual framework
What does GAAP rest on?
the conceptual framework of accounting
What are the two qualitative characteristic categories of useful information?
- Fundamental
- Enhancing
What are the two FUNDAMENTAL qualitative characteristics that useful information should possess?
- Relevance
- Faithful Representation
helping users predict future events means the useful information has _____ value.
predictive value
helping users by providing feedback about prior expectations means the useful information has _____ value.
confirmatory value
If the omission or misstatement of information could influence a decision, the information is said to be _______.
material (therefore, materiality is an aspect of relevance)
T or F: relevant information must be provided in a timely manner.
True
qualitative characteristic of information stipulating it should be complete, neutral, and free from error.
faithful representation
For fundamental characteristics, what should you do first: identify the most relevant information or determine if it can be faithfully represented?
Identify the most relevant information
What are the four ENHANCING qualitative characteristics?
- Comparability
- Verifiability
- Timeliness
- Understandability
the application of the same accounting principles by a single company over time or multiple companies using the same accounting principles in a single time period
consistency (included within comparability)
quality of information indicating the information is verifiable when independent parties can reach a consensus on the measurement of the activity
verifiability
quality of information where it is available to users before it loses its ability to influence decisions
timeliness
quality of information whereby users with a reasonable knowledge of accounting and business can comprehend the meaning of that information
understandability
Qualitative characteristics of useful information are bound by one persuasive constraint:
the Cost Constraint
qualitative characteristic of useful information that states that the benefit received from accounting information should be greater than the cost of providing that information.
the Cost Constraint
a policy that requires any information that would make a difference to financial statement users to be revealed
full disclosure
What are the four basic ASSUMPTIONS that underlie accounting?
- Economic entity assumption
- Going-concern assumption
- Time-period assumption
- Monetary unit assumption
one of the four basic assumptions that underlie accounting that assumes each company is accounted for separately from its owners.
economic entity assumption
one of the four basic assumptions that underlie accounting that states that a company will continue to operate long enough to carry out its existing commitments.
going-concern assumption
one of the four basic assumptions that underlie accounting that allows the life of a company to be divided into artificial time periods so net income can be measured for a specific period of time (ex: monthly, quarterly, annually)
time-period assumption
one of the four basic assumptions that underlie accounting that requires that a company account for and report its financial results in monetary terms (such as a U.S dollar, euro, etc.)
monetary unit assumption
What are the four basic PRINCIPLES of accounting?
- Historical cost principle
- Revenue recognition principle
- Expense recognition principle
- Conservatism principle
a principle that requires the activities of a company to be initially measured at their cost– the exchange price at the time the activity occurs.
historical cost principle
Why has the historical cost principle been criticized?
It doesn’t reflect changes in market value.
a principle that requires revenue to be recognized or recorded in the period in which it is earned and the collection of cash is reasonably assured (generally occurs when services are performed or goods are delivered to customers)
revenue recognition principle
the principle that requires that an expense be recorded and reported in the same period as the revenue it helped generate (often referred to as the “matching principle”)
expense recognition principle
a principle which states that when more than one equally acceptable accounting method exists, the method that results in the lower assets and revenues or higher liabilities and expenses should be selected
conservatism principle
What are the seven steps in the accounting cycle?
- analyze transactions
- journalize transactions
- post to the ledger
- prepare a trial balance
- adjust the accounts
- prepare financial statements
- close the accounts
T or F: not every event that affects a company is recorded in the accounting records
true
In order for an event to be recorded, or recognized, in the accounting system, the items making up the event must do what two things?
- Impact a financial statement elements (assets, liability, stockholders’ equity, revenue, expense, gain, loss)
- Faithfully represent the event
any event, external or internal, that is recognized in the financial statements
transactions
T or F: every transaction has a two part, or double entry effect on the fundamental accounting equation
True (since both sides of the equation must always be equal)
The balance sheet and the income statement are related through ______ ________.
retained earnings
Net income (increases/decreases) retained earnings.
Increases
What is the expanded accounting equation?
Assets = Liabilities + [(Contributed Capital + Beginning Retained Earnings + Revenues) - Expenses - Dividends Declared]
the process of determining the economic effects of a transaction on the elements of the accounting equation
transaction analysis
What does transaction analysis usually begin with the gathering of?
source documents that describe business activities
can be internally or externally prepared and include items such as purchase orders, cash register tapes, and invoices that describe the transaction and monetary amounts involved
source documents
What are the three steps to a transaction analysis?
- Write down the accounting equation (basic or expanded)
- Identify the financial statement elements that are affected by the transaction.
- Determine whether the elements increased or decreased.
A transaction where goods are purchased on credit is often referred to as a purchase “_____ ______” and the liability that is created is referred to as an ______ _______.
“on account”; account payable
Revenues (increase/decrease) retained earnings.
increase
When a company performs services for which they will be paid at a later date, this is often referred to as a sale “_____ _____”. This right to collect amounts due from customers creates an asset called an ______ ________.
“on account”; account receivable
Expenses (increase/decrease) retained earnings.
decrease
Similar to salary expense, utility expense is recorded as a (increase/decrease) in retained earnings in the same period that it helped to generate revenue.
decrease
a record of increases and decreases in each of the basic elements of the financial statements (each of the company’s asset, liability, stockholder’s equity, revenue, expense, gain, and loss items)
account
the list of accounts used by a company
chart of accounts
the amount in an account at any time
the balance of the account
a two column record that consists of an account title and two sides divided by a vertical line
T-account
the left side of a T-account
debit
the right side of a T-account
credit
the act of entering an amount on the left side of an account
debiting the account
the act of entering an amount on the right side of an account.
crediting the account
T or F: Debit and credit represent increases or decreases.
False
What are the three steps in determining increases or decreases to a balance sheet account?
- Draw a T-Account
- Determine the normal balance of the account
- Determine the Increase or decrease to an account based on the normal balance of the account.
the type of balance expected of an account based on its effect on the fundamental accounting equation
normal balance
Assets, expenses, and dividends have normal _____ balances.
Debit
liabilities, stockholders’ equity, and revenues have normal _____ balances.
Credit
debits will (increase/decrease) assets and credits will (increase/decrease) assets.
Debits= increase
Credits= decrease
credits will (increase/decrease) liabilities and stockholders’ equity while debits (increase/decrease) these accounts.
Credits= increase
Debits= decrease
contributed capital and retained earnings are (increased/decreased) by credits and (increased/decreased) by debits.
Credits= increase
Debits= decrease
Revenues and gains (increase/decrease) stockholders’ equity through retained earnings.
increase
credits will (increase/decrease) revenues and gains, while debits will (increase/decrease) revenues and gains.
Credits= increase
Debits= decrease
Expenses and losses (increase/decrease) stockholders’ equity through retained earnings.
decrease
debits will (increase/decrease) expenses and losses, while credits will (increase/decrease) expenses and losses.
Debits= increase
Credits= decrease
Because dividends declared (increase/decrease) retained earnings and stockholders’ equity, dividends declared have a normal _____ balance.
decrease; debit
debits will (increase/decrease) dividends declared, while credits will (increase/decrease) dividends declared.
Debits= increase
Credits= decrease
a chronological record showing the debit and credit effects of transactions on a company
journal
a record of a transaction that is made in a journal so that the entire effect of the transaction is contained in one place
journal entry
Because a transaction first enters the accounting records through journal entries, the journal is often referred to as:
the book of original entry
A journal entry consists of three parts:
- The date of the transaction
- The accounts and amounts to be increased or decreased
- A brief explanation of the transaction
When more than two accounts are affected by an economic event, a ________ _______ entry is created.
compound journal
a collection of all the individual financial statement accounts that a company uses in its financial statements.
general ledger
the process of transferring information from journalized transactions to the general ledger.
posting
Ledger accounts are often shown using the _________ format.
T-account
a list of all active accounts and each account’s debit or credit balance
trial balance
What is the order of the accounts listed in a trial balance (hint: same order as they appear in the ledger)
assets, liabilities, stockholder’s equity, dividends declared, revenues, and expenses
What is a trial balance used to prove?
The equality of debits and credits
T or F: A trial balance whose debits equal credits does not mean that all transactions were recorded correctly.
True
