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Financial Accounting > Chapter 2: The Accounting Information System > Flashcards

Chapter 2: The Accounting Information System Flashcards

1
Q

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

A

comprehensive accounting systems

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2
Q

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

A

accounting cycle

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3
Q

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

A

The company’s proper usage of the accounting cycle

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4
Q

What is the fundamental objective of financial reporting?

A

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

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5
Q

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

A

the conceptual framework

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6
Q

What does GAAP rest on?

A

the conceptual framework of accounting

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7
Q

What are the two qualitative characteristic categories of useful information?

A
  1. Fundamental
  2. Enhancing
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8
Q

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

A
  1. Relevance
  2. Faithful Representation
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9
Q

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

A

predictive value

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10
Q

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

A

confirmatory value

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11
Q

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

A

material (therefore, materiality is an aspect of relevance)

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12
Q

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

A

True

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13
Q

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

A

faithful representation

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14
Q

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

A

Identify the most relevant information

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15
Q

What are the four ENHANCING qualitative characteristics?

A
  1. Comparability
  2. Verifiability
  3. Timeliness
  4. Understandability
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16
Q

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

A

consistency (included within comparability)

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17
Q

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

A

verifiability

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18
Q

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

A

timeliness

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19
Q

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

A

understandability

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20
Q

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

A

the Cost Constraint

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21
Q

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

A

the Cost Constraint

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22
Q

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

A

full disclosure

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23
Q

What are the four basic ASSUMPTIONS that underlie accounting?

A
  1. Economic entity assumption
  2. Going-concern assumption
  3. Time-period assumption
  4. Monetary unit assumption
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24
Q

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

A

economic entity assumption

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25
Q

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.

A

going-concern assumption

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26
Q

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)

A

time-period assumption

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27
Q

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.)

A

monetary unit assumption

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28
Q

What are the four basic PRINCIPLES of accounting?

A
  1. Historical cost principle
  2. Revenue recognition principle
  3. Expense recognition principle
  4. Conservatism principle
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29
Q

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.

A

historical cost principle

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30
Q

Why has the historical cost principle been criticized?

A

It doesn’t reflect changes in market value.

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31
Q

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)

A

revenue recognition principle

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32
Q

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”)

A

expense recognition principle

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33
Q

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

A

conservatism principle

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34
Q

What are the seven steps in the accounting cycle?

A
  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
35
Q

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

A

true

36
Q

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?

A
  1. Impact a financial statement elements (assets, liability, stockholders’ equity, revenue, expense, gain, loss)
  2. Faithfully represent the event
37
Q

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

A

transactions

38
Q

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

A

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

39
Q

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

A

retained earnings

40
Q

Net income (increases/decreases) retained earnings.

A

Increases

41
Q

What is the expanded accounting equation?

A

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

42
Q

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

A

transaction analysis

43
Q

What does transaction analysis usually begin with the gathering of?

A

source documents that describe business activities

44
Q

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

A

source documents

45
Q

What are the three steps to a transaction analysis?

A
  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.
46
Q

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 ______ _______.

A

“on account”; account payable

47
Q

Revenues (increase/decrease) retained earnings.

A

increase

48
Q

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 ______ ________.

A

“on account”; account receivable

49
Q

Expenses (increase/decrease) retained earnings.

A

decrease

50
Q

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.

A

decrease

51
Q

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)

A

account

52
Q

the list of accounts used by a company

A

chart of accounts

53
Q

the amount in an account at any time

A

the balance of the account

54
Q

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

A

T-account

55
Q

the left side of a T-account

A

debit

56
Q

the right side of a T-account

A

credit

57
Q

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

A

debiting the account

58
Q

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

A

crediting the account

59
Q

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

A

False

60
Q

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

A
  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.
61
Q

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

A

normal balance

62
Q

Assets, expenses, and dividends have normal _____ balances.

A

Debit

63
Q

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

A

Credit

64
Q

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

A

Debits= increase
Credits= decrease

65
Q

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

A

Credits= increase
Debits= decrease

66
Q

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

A

Credits= increase
Debits= decrease

67
Q

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

A

increase

68
Q

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

A

Credits= increase
Debits= decrease

69
Q

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

A

decrease

70
Q

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

A

Debits= increase
Credits= decrease

71
Q

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

A

decrease; debit

72
Q

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

A

Debits= increase
Credits= decrease

73
Q

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

A

journal

74
Q

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

A

journal entry

75
Q

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

A

the book of original entry

76
Q

A journal entry consists of three parts:

A
  1. The date of the transaction
  2. The accounts and amounts to be increased or decreased
  3. A brief explanation of the transaction
77
Q

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

A

compound journal

78
Q

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

A

general ledger

79
Q

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

A

posting

80
Q

Ledger accounts are often shown using the _________ format.

A

T-account

81
Q

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

A

trial balance

82
Q

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

A

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

83
Q

What is a trial balance used to prove?

A

The equality of debits and credits

84
Q

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

A

True

Financial Accounting (10 decks)

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