Chapter 2: Transaction Processing in the AIS

Chapter 2: Transaction Processing in the AIS End-of-chapter Activities –Student

End of Chapter Activities

1. Reading review questions

a. In your own words, explain the similarities and differences between accounting and bookkeeping.

b. What systems do accountants use to create and modify a chart of accounts?

c. What internal controls are common in the accounting cycle? .

d. How is human judgment involved in the accounting cycle?

e. How has information technology been employed in the accounting cycle?

f. List and discuss the six common types of adjusting entries found in most accounting information systems.

g. Explain the purpose and structure of each general purpose financial statement.

h. Respond to the questions for the chapter’s opening vignette.

 What information would you need to capture for a typical debit or credit card transaction?  What does it mean to say that debit transactions require tracking the movement of funds in real time?  Why is capacity planning important for organizations like VISA USA?

2. Making choices and exercising judgment

a. Which of the following would be recordable transactions in an accounting information system? For each item that would not be a recordable transaction, explain why not.

i. Purchasing land with a down payment and a note payable. ii. Verifying an increase in the market value of land. iii. Establishing an exclusive relationship with a raw material supplier. iv. Estimating the amount of warranty expense for the next accounting period. v. Negotiating with an employees union for wage increases.  McGraw-Hill Companies, 2008

Chapter 2 1 Chapter 2: Transaction Processing in the AIS End-of-chapter Activities –Student

b. How will principles-based accounting influence the design of accounting information systems? The steps in the accounting cycle?

c. Use EDGAR to obtain the 2004 financial statements for Home Depot Inc. and Lowes Companies Inc., two large firms in the home improvement industry. Compare their financial statements and comment on which company is stronger.

3. Field exercises:

a. Point your web browser to www.download.com. Investigate One-Step Accounting Standard Edition and Free Accounting—two general ledger packages that can help companies with the steps in the accounting cycle. Identify and describe at least two modules in each system; explain the types of accounting transactions the modules are designed to record.

b. Point your web browser to www.law.harvard.edu/administration/financial/coa. Describe Harvard Law School’s chart of accounts coding system.

c. Contact an accounting professional at a local organization, such as your university, a bank or a retail store. Find out how he / she employ human judgment and information technology in completing the steps of the accounting cycle.

4. Journal entries:

Record each of the following transactions in general journal format. a. Issued 50,000 shares of $1 par capital stock for $35 each. b. Billed customers for services provided, $10,000. c. Purchased supplies on account, $3,000. d. Paid monthly utility bill, $1,500. e. Verified 20% increase in market price of stock. f. Paid wages for the current month, $6,000. g. Purchased equipment with a list price of $50,000 by making a 20% down payment and financing the remainder with a 6-month, 12% note payable. h. Collected cash from customers, $5,000. i. Paid vendors, $1,400. j. Recorded one month’s accrued interest on note payable.

 McGraw-Hill Companies, 2008

5. Adjusting entries: The unadjusted trial balance for GLP Corporation appears below:

GLP Corporation Trial balance September 30, 20x4

Debit Credit Cash $ 6,000 Accounts receivable 2,500 Allowance for bad debts $ 200 Inventory 4,500 Supplies 800 Equipment 15,000 Accumulated depreciation--equipment 10,000 Accounts payable 1,200 Notes payable 6,000 Deferred fees 900 Capital stock 7,000 Additional paid-in capital 8,000 Retained earnings 11,000 Sales 16,000 Cost of goods sold 13,500 Advertising expense 5,000 Wages expense 12,000 Miscellaneous expense 1,000 Totals $ 60,300 $ 60,300

End-of-period analysis revealed the following:

a. The market value of equipment had decreased by 30% of its original cost. Depreciation for the quarter totaled $1,000.

b. The note payable was signed on August 1, 20x4. Its interest rate was 10%, and no interest had been recorded since the signing.

c. Unpaid employee wages at September 30 totaled $1,000.

d. Deferred fees represented a consulting contract signed at the beginning of September. The contract’s duration is 3 months, and the work is spread evenly throughout the contract period.

e. Supplies on hand totaled $150.

f. The market value of capital stock had increased by 15%.  McGraw-Hill Companies, 2008

g. Actual bad debt write-offs during September were $300; 1% of sales will likely become uncollectible in the coming period.

Prepare the required adjusting entries based on the preceding information. Then, prepare an adjusted trial balance.

6. Financial statements:

Use the adjusted trial balance from Problem 5 to prepare an income statement for the quarter ended 9 / 30 / 20x4 and a balance sheet as of 9 / 30 / 20x4 for GLP Corporation.

7. Coding systems:

Which type of coding system is indicated in each of the following independent situations? Be prepared to explain your reasoning.

a. Airport codes (LAX, OGG) b. Automatically assigned transaction numbers in a cash register c. Consecutively numbered purchase orders (101, 102, 103 and so on) d. Dewey Decimal System (used to classify library books) e. Invoice numbers f. National Association of Home Builders chart of accounts (look this one up on the Internet) g. Standard chart of accounts included with Quickbooks h. Telephone numbers. i. Universal Product Codes (UPCs) j. ZIP codes (91768, 63135)

8. Crossword puzzle:

Created with EclipseCrossword — www.eclipsecrossword.com

Across

2. Often confused with accounting 5. Transaction type that describes adjusting entries 6. Increases to equity accounts 7. Specific account that is never involved in an adjusting entry 9. One of the three elements of AAA's definition of accounting 10. One of the three main elements of AAA's definition of accounting Down

1. One of the three elements of AAA's definition of accounting 3. Transaction type that involves exchanges with suppliers 4. Conceptual basis for depreciation 8. Increases to an asset

9. Terminology:

Please match each item on the right with the most appropriate item on the left.

1. Accrued revenue b. Book of original entry

2. Credit c. Cash is received before service is provided 3. Debit d. Decreases to revenue 4. Deferred revenue e. Increases to liabilities f. Purchase orders, invoices, and receipts 5. Human judgment g. Service is provided before cash is 6. Information received technology h. Simplifies the bookkeeping process 7. Journal i. Transferring information from the journal to the ledger 8. Posting j. Used to recognize recordable transactions 9. Source document k. Verifies the equality of debits and credits 10. Trial balance in the ledger a.

10. Multiple choice questions:

1. Which of the following steps in the accounting cycle is most likely to involve human judgment? a. Closing the temporary accounts b. Preparing an adjusted trial balance c. Evaluating source documents for recordable transactions d. Preparing financial statements

2. Which of the following statements about human judgment and information technology is most true? a. Human judgment has been replaced by information technology b. Information technology has been replaced by human judgment c. Bookkeeping does not involve human judgment d. Bookkeeping involves information technology

3. In general, an “accrual” refers to a situation where: a. The matching concept is violated. b. Cash flow occurs before service. c. Cash flow occurs after service.  McGraw-Hill Companies, 2008

d. A corporation has unbilled client fees.

4. Which of the following is the best example of deferred revenue? a. A newspaper company collects subscription fees before delivering papers. b. A student pays her college tuition after the term has begun. c. A company signs a note payable due in six months. d. A corporation purchases supplies on account.

5. A trial balance: a. Demonstrates the lack of fraud in the AIS if its debits equal its credits. b. Can be prepared only at the end of the accounting period. c. Is another name for the balance sheet. d. Proves the equality of debits and credits in the ledger, but does not guarantee an error-free AIS.

6. Which of the following is not a type of coding common in organizations? a. Random b. Sequential c. Hierarchical d. Block

7. Internal control can be strengthened in the accounting cycle by: a. Eliminating human judgment b. Making information easily accessible c. Enforcing transaction limits d. All of the above

8. A journal entry increases an asset. Which of the following could also be part of the entry? a. Decrease in revenue b. Increase in expense c. Increase in liability d. Any of the above

9. A project manager codes a transaction as 12-06-48, where 12 stands for a particular project, 06 denotes the department where the transaction occurred and 48 indicates the transaction number. Considered as a whole, this coding system is best described as: a. Block b. Hierarchical c. Mnemonic d. Sequential

10. Which of the following steps in the accounting cycle is least likely to involve human judgment?

i. Posting ii. Coding transactions according to the chart of accounts iii. Approving transactions before they are recorded a. I only b. I and II c. I and III d. I, II and III

11. Statement evaluation:

Determine whether each of the following statements is (a) always true, (b) sometimes true or (c) never true. For those that are sometimes true, explain when.

1. Bookkeeping and accounting are two ways of referring to the same thing. 2. If a transaction increases a liability, it will also increase an expense. 3. The accounting cycle involves human judgment. 4. A company’s chart of accounts should use block coding. 5. Information technology has eliminated the need for human judgment in the accounting cycle. 6. An “accrual” refers to a situation where a company provides service before receiving cash. 7. An adjusting entry for depreciation recognizes an asset’s loss in market value over time. 8. Adjusting entries involve one balance sheet account and one income statement account, but never cash. 9. In automated accounting information systems, block coding facilitates closing entries. 10. The complete accounting cycle incorporates three different forms of a trial balance.

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