Comprehensive Guide to Chapters 7-9: AIS, Internal Control, and Receivables

What is the primary purpose of an Accounting Information System (AIS)?

To collect and process data from transactions and events, organize them in useful reports, and communicate results to decision makers.

What does the Control Principle in AIS prescribe?

It prescribes that AIS have internal controls—methods and procedures allowing managers to control and monitor activities.

What is the Relevance Principle in AIS?

It prescribes that AIS report useful, understandable, timely, and pertinent information for effective decision making.

What does the Compatibility Principle in AIS entail?

It prescribes that AIS conform with a company's activities, personnel, and structure, adapting to the company's unique characteristics.

What is the Flexibility Principle in AIS?

It prescribes that AIS be able to adapt to changes in the company, business environment, and needs of decision makers.

What does the Cost-Benefit Principle require in AIS?

It requires that the benefits from an activity in AIS outweigh the costs of that activity.

What are the five basic components of an Accounting Information System?

Source Documents, Input Devices, Information Processors, Information Storage, and Output Devices.

What are Source Documents in an AIS?

Documents (paper and electronic) that provide the basic information processed by an accounting system.

What is the role of Input Devices in an AIS?

They capture information from source documents and enable its transfer to the information system's processing component.

What do Information Processors do in an AIS?

They interpret, transform, and summarize information for use in analysis and reporting.

What is the purpose of Information Storage in an AIS?

It keeps data in a form accessible to information processors.

What are Output Devices in an AIS?

Means to take information out of an accounting system and make it available to users.

What is a Special Journal in accounting?

A journal used to record and post transactions of similar type, reducing recording and posting labor.

What is a Subsidiary Ledger?

A list of individual accounts with a common characteristic, containing detailed information on specific general ledger accounts.

What is the purpose of a Sales Journal?

Used to record sales of inventory on credit, typically containing columns for sales and tracking perpetual inventory cost.

What does the Cash Receipts Journal record?

All receipts of cash, with special columns for Accounts Receivable, Sales, and tracking perpetual inventory cost.

What is the function of a Purchases Journal?

It records all purchases on credit, with special columns for Inventory and Accounts Payable.

What is a Cash Disbursements Journal?

It records all payments of cash, including a Check Register and special columns for Accounts Payable and Inventory.

What types of transactions are recorded in the General Journal?

Transactions that do not fit in any of the special journals, such as adjusting, closing, and correcting entries.

What technology supports Accounting Information Systems?

Technology ranging from simple calculators to advanced computerized systems.

What is the primary purpose of technology in accounting?

To provide accuracy, speed, efficiency, and convenience in performing accounting tasks.

What are multipurpose off-the-shelf software programs designed for?

To be user-friendly and menu-driven, such as Peachtree and QuickBooks.

What is the benefit of integrated accounting systems?

Actions in one part of the system automatically affect related parts.

What is online processing in accounting?

Data is entered and processed as soon as source documents are available, updating databases immediately.

What is batch processing in accounting?

Accumulating source documents for a period and processing them all at once.

What is a Local Area Network (LAN) in accounting?

A network that links computers with hard-wire hookups.

What is Enterprise Resource Planning (ERP) software?

Programs that manage a company's vital operations, with major suppliers like SAP and Oracle.

What is cloud computing?

Delivery of computing as a service rather than a product, using applications via the web.

What is the purpose of an internal control system?

To protect assets, ensure reliable accounting, promote efficient operations, and urge adherence to company policies.

What does Section 404 of the Sarbanes-Oxley Act (SOX) require?

Managers and auditors of public companies to document and certify the system of internal controls.

Name one principle of internal control.

Establish responsibilities.

How does technology impact internal control?

It reduces processing errors and allows more extensive testing of records.

What is liquidity in accounting?

A company's ability to pay for its near-term obligations.

What constitutes cash in accounting?

Currency, coins, deposits in bank and checking accounts, and acceptable items for deposit.

What are cash equivalents?

Short-term, highly liquid investment assets that are readily convertible to a known cash amount.

What is one goal of cash management?

To plan cash receipts to meet cash payments when due.

What is a key procedure for controlling cash receipts?

Apply internal control principles.

What is a voucher system of control?

A system that establishes procedures for verifying, approving, and recording obligations for cash disbursement.

What should be done to safeguard cash disbursements?

Require all expenditures to be made by checks, except small payments from petty cash.

What is the cost-benefit principle in internal control?

The costs of internal controls must not exceed their benefits.

What is the human element limitation in internal control?

Errors or fraud can occur due to negligence, fatigue, or opportunity.

What is the purpose of separating cash handling from recordkeeping?

To prevent theft and ensure accurate financial reporting.

What does the segment return on assets ratio measure?

The success of a business segment, calculated as segment operating income divided by segment average assets.

What is the role of the Committee of Sponsoring Organizations (COSO)?

To provide a framework for improving the quality of financial reporting through internal control principles.

What is the significance of cash shortages and overages?

They are recorded in an income statement account called Cash Over and Short.

What is the importance of regular and independent reviews in internal control?

To ensure the effectiveness and reliability of the internal control system.

When should the Petty Cash account be used?

Only when the fund is established or its size is increased or decreased.

What is the role of a petty cashier?

To account for the amounts expended and to keep receipts.

How is reimbursement to the petty cash fund recorded?

Debit the expenses paid with petty cash and credit Cash for the amount reimbursed.

What should be recorded regarding petty cash?

Any petty cash shortages or overages.

What is the purpose of bank accounts?

To permit depositing money for safeguarding and to help control withdrawals.

What does EFT stand for?

Electronic Funds Transfer.

What is a bank statement?

It shows activities of a bank account and is used to prove the accuracy of the depositor's cash records.

What is a bank reconciliation?

A report that explains the difference between the balance of a checking account according to the depositor's records and the balance reported on the bank statement.

Name a factor that causes the bank statement balance to differ from the depositor's book balance.

Outstanding checks.

What are deposits in transit?

Deposits that have been made but not yet recorded by the bank.

What is the first step in preparing a bank reconciliation?

Identify the bank balance of the cash account (balance per bank).

What should be done with unrecorded deposits during bank reconciliation?

Add them to the bank balance.

What is the adjusted bank balance?

The corrected or reconciled balance after adjustments are made.

What is the purpose of adjusting entries from a bank reconciliation?

To reflect reconciling additions and subtractions to the book balance.

What is the definition of accounts receivable?

Amounts due from customers for credit sales.

How are sales on credit recorded?

Increase (debit) Accounts Receivable for the full amount of the sale and increase (credit) Sales.

What is a control account in the context of accounts receivable?

The General Ledger which keeps a single total Accounts Receivable account.

What is the purpose of a subsidiary ledger?

To maintain a separate account receivable for each customer.

What are installment sales?

Amounts owed by customers from credit sales where payment is required in periodic amounts over an extended time period.

What is the direct write-off method?

Records the loss from an uncollectible account receivable when it is determined to be uncollectible.

What is the allowance method?

Matches the estimated loss from uncollectibles against the sales they helped produce.

What does the materiality constraint state?

An amount can be ignored if its effect on the financial statements is unimportant to users' decisions.

What is the effect of bad debts on financial statements?

They can violate the matching principle if recorded after the credit sale.

What is the purpose of a Schedule of Accounts Receivable?

To show that the sum of the individual accounts in the subsidiary ledger equals the balance of the Accounts Receivable account in the general ledger.

What is the significance of credit card sales for businesses?

They eliminate the need to evaluate each customer's credit standing and can increase sales.

What happens if a written-off account is later collected?

It results in a reversal of the write-off and a normal collection of account entry.

What is the purpose of estimating bad debts expense at the end of an accounting period?

To match expenses with revenues in the period of the corresponding sale.

What is recorded in the adjusting entry for bad debt expense?

Debit Bad Debt Expense and credit Allowance for Doubtful Accounts.

How do you write off an uncollectible account?

Debit Allowance for Doubtful Accounts and credit Accounts Receivable.

Does writing off an uncollectible account change the estimated cash to be collected?

No, it does not change the realizable value of accounts receivable.

What happens if a written-off account is later recovered?

A reversal of the write-off is recorded, followed by a normal collection entry.

What is the Percent of Sales Method for estimating bad debts expense?

Bad debts expense is computed as a percentage of sales for the period.

What is the Percent of Accounts Receivable Method?

It estimates the desired credit balance in Allowance for Doubtful Accounts based on a percentage of outstanding receivables.

What is a promissory note?

A written promise to pay a specified amount of money either on demand or on a definite future date.

What is included in the maturity value of a note?

The principal plus interest.

How is annual interest on a note calculated?

Using the formula: Annual Interest = Principal x Rate x Time.

What is the entry for recording an honored note?

Debit Cash for maturity value, credit Note Receivable for face value, and credit Interest Revenue for interest.

What happens when a note is dishonored?

Debit Accounts Receivable for maturity value, credit Note Receivable for face amount, and credit Interest Revenue for interest.

How is accrued interest recorded at the end of the period?

Debit Interest Receivable and credit Interest Revenue for accrued interest earned.

What is the process of selling receivables?

A buyer called a factor collects the receivables and charges a factoring fee.

What is pledging receivables?

Borrowing money by using receivables as security while retaining ownership.

What is the significance of the accounts receivable turnover ratio?

It measures the quality and liquidity of accounts receivable, indicating how often receivables are collected.

How is the accounts receivable turnover calculated?

By dividing net sales by average accounts receivable.

What is the purpose of a bank reconciliation?

To ensure that the company's cash records match the bank's records.

What is the entry for a deposit in transit?

It is added to the bank statement balance during reconciliation.

What is an NSF check?

A check that cannot be processed due to insufficient funds in the account.

What is the journal entry for a payment on a long-term note payable?

Recorded in the Cash disbursements journal.

What does the allowance method require for receivables?

Receivables must be reported net of estimated uncollectibles.

What is the matching principle in accounting?

It requires that expenses be recorded in the same period as the revenues they help to generate.

What is the role of interest in a promissory note?

It is the charge for using money until the due date.

What is the impact of a debit memorandum for check printing charges?

It reduces the company's cash balance and must be recorded in the books.

What is the difference between notes receivable and notes payable?

Notes receivable are amounts owed to the payee, while notes payable are amounts owed by the maker.

What is the effect of outstanding checks on bank reconciliation?

They are deducted from the bank statement balance.