Chapter 2: The Accounting Information System

Question 1

systems that capture, record, and report a company’s various business activities (companies like Disney use these)

Answer 1

comprehensive accounting systems

Question 2

the procedures that a company uses to transform the results of its business activities into financial statements

Answer 2

accounting cycle

Question 3

What does the accuracy of a company’s financial statements rely on?

Answer 3

The company’s proper usage of the accounting cycle

Question 4

What is the fundamental objective of financial reporting?

Answer 4

to provide info that is useful in making investment and credit decisions

Question 5

designed to support the development of a consistent set of accounting standards and provide a consistent body of thought for financial reporting

Answer 5

the conceptual framework

Question 6

What does GAAP rest on?

Answer 6

the conceptual framework of accounting

Question 7

What are the two qualitative characteristic categories of useful information?

Answer 7

1. Fundamental
2. Enhancing

Question 8

What are the two FUNDAMENTAL qualitative characteristics that useful information should possess?

Answer 8

1. Relevance
2. Faithful Representation

Question 9

helping users predict future events means the useful information has _____ value.

Answer 9

predictive value

Question 10

helping users by providing feedback about prior expectations means the useful information has _____ value.

Answer 10

confirmatory value

Question 11

If the omission or misstatement of information could influence a decision, the information is said to be _______.

Answer 11

material (therefore, materiality is an aspect of relevance)

Question 12

T or F: relevant information must be provided in a timely manner.

Answer 12

True

Question 13

qualitative characteristic of information stipulating it should be complete, neutral, and free from error.

Answer 13

faithful representation

Question 14

For fundamental characteristics, what should you do first: identify the most relevant information or determine if it can be faithfully represented?

Answer 14

Identify the most relevant information

Question 15

What are the four ENHANCING qualitative characteristics?

Answer 15

1. Comparability
2. Verifiability
3. Timeliness
4. Understandability

Question 16

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

Answer 16

consistency (included within comparability)

Question 17

quality of information indicating the information is verifiable when independent parties can reach a consensus on the measurement of the activity

Answer 17

verifiability

Question 18

quality of information where it is available to users before it loses its ability to influence decisions

Answer 18

timeliness

Question 19

quality of information whereby users with a reasonable knowledge of accounting and business can comprehend the meaning of that information

Answer 19

understandability

Question 20

Qualitative characteristics of useful information are bound by one persuasive constraint:

Answer 20

the Cost Constraint

Question 21

qualitative characteristic of useful information that states that the benefit received from accounting information should be greater than the cost of providing that information.

Answer 21

the Cost Constraint

Question 22

a policy that requires any information that would make a difference to financial statement users to be revealed

Answer 22

full disclosure

Question 23

What are the four basic ASSUMPTIONS that underlie accounting?

Answer 23

1. Economic entity assumption
2. Going-concern assumption
3. Time-period assumption
4. Monetary unit assumption

Question 24

one of the four basic assumptions that underlie accounting that assumes each company is accounted for separately from its owners.

Answer 24

economic entity assumption

Question 25

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.

Answer 25

going-concern assumption

Question 26

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)

Answer 26

time-period assumption

Question 27

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.)

Answer 27

monetary unit assumption

Question 28

What are the four basic PRINCIPLES of accounting?

Answer 28

1. Historical cost principle 2. Revenue recognition principle 3. Expense recognition principle 4. Conservatism principle

Question 29

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.

Answer 29

historical cost principle

Question 30

Why has the historical cost principle been criticized?

Answer 30

It doesn't reflect changes in market value.

Question 31

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)

Answer 31

revenue recognition principle

Question 32

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")

Answer 32

expense recognition principle

Question 33

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

Answer 33

conservatism principle

Question 34

What are the seven steps in the accounting cycle?

Answer 34

1. analyze transactions 2. journalize transactions 3. post to the ledger 4. prepare a trial balance 5. adjust the accounts 6. prepare financial statements 7. close the accounts

Question 35

T or F: not every event that affects a company is recorded in the accounting records

Answer 35

true

Question 36

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?

Answer 36

1. Impact a financial statement elements (assets, liability, stockholders' equity, revenue, expense, gain, loss) 2. Faithfully represent the event

Question 37

any event, external or internal, that is recognized in the financial statements

Answer 37

transactions

Question 38

T or F: every transaction has a two part, or double entry effect on the fundamental accounting equation

Answer 38

True (since both sides of the equation must always be equal)

Question 39

The balance sheet and the income statement are related through ______ ________.

Answer 39

retained earnings

Question 40

Net income (increases/decreases) retained earnings.

Answer 40

Increases

Question 41

What is the expanded accounting equation?

Answer 41

Assets = Liabilities + [(Contributed Capital + Beginning Retained Earnings + Revenues) - Expenses - Dividends Declared]

Question 42

the process of determining the economic effects of a transaction on the elements of the accounting equation

Answer 42

transaction analysis

Question 43

What does transaction analysis usually begin with the gathering of?

Answer 43

source documents that describe business activities

Question 44

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

Answer 44

source documents

Question 45

What are the three steps to a transaction analysis?

Answer 45

1. Write down the accounting equation (basic or expanded) 2. Identify the financial statement elements that are affected by the transaction. 3. Determine whether the elements increased or decreased.

Question 46

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 ______ _______.

Answer 46

"on account"; account payable

Question 47

Revenues (increase/decrease) retained earnings.

Answer 47

increase

Question 48

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 ______ ________.

Answer 48

"on account"; account receivable

Question 49

Expenses (increase/decrease) retained earnings.

Answer 49

decrease

Question 50

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.

Answer 50

decrease

Question 51

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)

Answer 51

account

Question 52

the list of accounts used by a company

Answer 52

chart of accounts

Question 53

the amount in an account at any time

Answer 53

the balance of the account

Question 54

a two column record that consists of an account title and two sides divided by a vertical line

Answer 54

T-account

Question 55

the left side of a T-account

Answer 55

debit

Question 56

the right side of a T-account

Answer 56

credit

Question 57

the act of entering an amount on the left side of an account

Answer 57

debiting the account

Question 58

the act of entering an amount on the right side of an account.

Answer 58

crediting the account

Question 59

T or F: Debit and credit represent increases or decreases.

Answer 59

False

Question 60

What are the three steps in determining increases or decreases to a balance sheet account?

Answer 60

1. Draw a T-Account 2. Determine the normal balance of the account 3. Determine the Increase or decrease to an account based on the normal balance of the account.

Question 61

the type of balance expected of an account based on its effect on the fundamental accounting equation

Answer 61

normal balance

Question 62

Assets, expenses, and dividends have normal _____ balances.

Answer 62

Debit

Question 63

liabilities, stockholders’ equity, and revenues have normal _____ balances.

Answer 63

Credit

Question 64

debits will (increase/decrease) assets and credits will (increase/decrease) assets.

Answer 64

Debits= increase Credits= decrease

Question 65

credits will (increase/decrease) liabilities and stockholders’ equity while debits (increase/decrease) these accounts.

Answer 65

Credits= increase Debits= decrease

Question 66

contributed capital and retained earnings are (increased/decreased) by credits and (increased/decreased) by debits.

Answer 66

Credits= increase Debits= decrease

Question 67

Revenues and gains (increase/decrease) stockholders’ equity through retained earnings.

Answer 67

increase

Question 68

credits will (increase/decrease) revenues and gains, while debits will (increase/decrease) revenues and gains.

Answer 68

Credits= increase Debits= decrease

Question 69

Expenses and losses (increase/decrease) stockholders’ equity through retained earnings.

Answer 69

decrease

Question 70

debits will (increase/decrease) expenses and losses, while credits will (increase/decrease) expenses and losses.

Answer 70

Debits= increase Credits= decrease

Question 71

Because dividends declared (increase/decrease) retained earnings and stockholders’ equity, dividends declared have a normal _____ balance.

Answer 71

decrease; debit

Question 72

debits will (increase/decrease) dividends declared, while credits will (increase/decrease) dividends declared.

Answer 72

Debits= increase Credits= decrease

Question 73

a chronological record showing the debit and credit effects of transactions on a company

Answer 73

journal

Question 74

a record of a transaction that is made in a journal so that the entire effect of the transaction is contained in one place

Answer 74

journal entry

Question 75

Because a transaction first enters the accounting records through journal entries, the journal is often referred to as:

Answer 75

the book of original entry

Question 76

A journal entry consists of three parts:

Answer 76

1. The date of the transaction 2. The accounts and amounts to be increased or decreased 3. A brief explanation of the transaction

Question 77

When more than two accounts are affected by an economic event, a ________ _______ entry is created.

Answer 77

compound journal

Question 78

a collection of all the individual financial statement accounts that a company uses in its financial statements.

Answer 78

general ledger

Question 79

the process of transferring information from journalized transactions to the general ledger.

Answer 79

posting

Question 80

Ledger accounts are often shown using the _________ format.

Answer 80

T-account

Question 81

a list of all active accounts and each account’s debit or credit balance

Answer 81

trial balance

Question 82

What is the order of the accounts listed in a trial balance (hint: same order as they appear in the ledger)

Answer 82

assets, liabilities, stockholder's equity, dividends declared, revenues, and expenses

Question 83

What is a trial balance used to prove?

Answer 83

The equality of debits and credits

Question 84

T or F: A trial balance whose debits equal credits does not mean that all transactions were recorded correctly.

Answer 84

True