Kế toán, kiểm toán - The accounting information system

PREVIEW OF CHAPTERIntermediate AccountingIFRS 2nd EditionKieso, Weygandt, and Warfield 3Understand basic accounting terminology.Explain double-entry rules.Identify steps in the accounting cycle.Record transactions in journals, post to ledger accounts, and prepare a trial balance.Explain the reasons for preparing adjusting entries.Prepare financial statements from the adjusted trial balance.Prepare closing entries.Prepare financial statements for a merchandising company.After studying this chapter, you should be able to:The Accounting Information System3LEARNING OBJECTIVESCollects and processes transaction data.Disseminates financial information to interested parties.Varies widely from business to business.Nature of businessType of transactionsSize of businessVolume of dataInformational demandsACCOUNTING INFORMATION SYSTEMAccounting Information System (AIS)LO 1Helps management answer such questions as:How much and what kind of debt is outstanding?Were our sales higher this period than last?What assets do we have?What were our cash inflows and outflows?Did we make a profit last period?Are any of our product lines or divisions operating at a loss?Can we safely increase our dividends to shareholders?Is our rate of return on net assets increasing?ACCOUNTING INFORMATION SYSTEMLO 1EventTransactionAccountReal AccountNominal AccountLedgerJournalPostingTrial BalanceAdjusting EntriesFinancial StatementsClosing EntriesACCOUNTING INFORMATION SYSTEMLO 1Basic TerminologyUnderstand basic accounting terminology.Explain double-entry rules.Identify steps in the accounting cycle.Record transactions in journals, post to ledger accounts, and prepare a trial balance.Explain the reasons for preparing adjusting entries.Prepare financial statements from the adjusted trial balance.Prepare closing entries.Prepare financial statements for a merchandising company.After studying this chapter, you should be able to:The Accounting Information System3LEARNING OBJECTIVESAn account shows the effect of transactions on a given asset, liability, equity, revenue, or expense account.Double-entry accounting system (two-sided effect).Recording done by debiting at least one account and crediting another.DEBITS must equal CREDITS.Debits and CreditsACCOUNTING INFORMATION SYSTEMLO 2Debits and CreditsAn arrangement that shows the effect of transactions on an account.Debit = “Left”Credit = “Right”AccountAn Account can be illustrated in a T-Account form.LO 2$10,000Transaction #2$3,0008,000BalanceTransaction #1Transaction #3If the sum of Debit entries are greater than the sum of Credit entries, the account will have a debit balance.Debits and CreditsLO 2 $15,000If the sum of Credit entries are greater than the sum of Debit entries, the account will have a credit balance.$10,000Transaction #2$3,0008,000Transaction #3BalanceTransaction #1Debits and CreditsLO 2 $1,000Normal Balance CreditNormal Balance DebitDebits and Credits SummaryLO 2Statement of Financial Position=+-AssetLiabilityEquityRevenueExpense DebitCreditDebits and Credits SummaryIncome StatementLO 2Relationship among the assets, liabilities and equity of a business: The equation must be in balance after every transaction. For every Debit there must be a Credit.ILLUSTRATION 3-3Expanded Equation andDebit/Credit Rules and EffectsThe Accounting EquationLO 2AssetsLiabilitiesEquity=+Owners invest $40,000 in exchange for ordinary shares.+ 40,000+ 40,000Double-Entry System IllustrationLO 2AssetsLiabilities=+2. Disburse $600 cash for secretarial wages.- 600- 600 (expense)EquityDouble-Entry System IllustrationLO 2AssetsLiabilities=+3. Purchase office equipment priced at $5,200, giving a 10 percent promissory note in exchange.+ 5,200+ 5,200EquityDouble-Entry System IllustrationLO 2Double-Entry System IllustrationAssetsLiabilities=+4. Received $4,000 cash for services performed.+ 4,000+ 4,000 (revenue)EquityLO 2Double-Entry System IllustrationAssetsLiabilities=+5. Pay off a short-term liability of $7,000.- 7,000- 7,000EquityLO 2AssetsLiabilities=+6. Declared a cash dividend of $5,000.+ 5,000- 5,000Double-Entry System IllustrationEquityLO 2Double-Entry System IllustrationAssetsLiabilities=+7. Convert a non-current liability of $80,000 into ordinary shares.- 80,000+ 80,000EquityLO 2Double-Entry System IllustrationAssetsLiabilities=+8. Pay cash of $16,000 for a delivery van.- 16,000+ 16,000Note that the accounting equation equality is maintained after recording each transaction.EquityLO 2Ownership structure dictates the types of accounts that are part of the equity section.Proprietorship or PartnershipCorporationShare capitalShare premiumDividendsRetained EarningsFinancial Statements and Ownership StructureCapital accountDrawing accountLO 2Financial Statements and Ownership StructureInvestments by shareholdersNet income retained in the businessILLUSTRATION 3-4Financial Statements andOwnership StructureLO 2Financial Statements and Ownership StructureILLUSTRATION 3-5Effects of Transactionson Equity AccountsLO 2Understand basic accounting terminology.Explain double-entry rules.Identify steps in the accounting cycle.Record transactions in journals, post to ledger accounts, and prepare a trial balance.Explain the reasons for preparing adjusting entries.Prepare financial statements from the adjusted trial balance.Prepare closing entries.Prepare financial statements for a merchandising company.After studying this chapter, you should be able to:The Accounting Information System3LEARNING OBJECTIVESTransactionsJournalizationStatement preparationClosingPost-closing trail balanceReversing entriesTrial balancePostingAdjusted trial balanceAdjustmentsWork SheetILLUSTRATION 3-6THE ACCOUNTING CYCLELO 3An item should be recognized in the financial statements if it meets the definition of an element, is probable that any future economic benefit associated with the item will flow to or from the entity, and has a cost or value that can be measured reliably.THE ACCOUNTING CYCLEIdentifying and Recording Transactions and Other EventsLO 3Understand basic accounting terminology.Explain double-entry rules.Identify steps in the accounting cycle.Record transactions in journals, post to ledger accounts, and prepare a trial balance.Explain the reasons for preparing adjusting entries.Prepare financial statements from the adjusted trial balance.Prepare closing entries.Prepare financial statements for a merchandising company.After studying this chapter, you should be able to:The Accounting Information System3LEARNING OBJECTIVESGeneral Journal – a chronological list of transactions and other events, expressed in terms of debits and credits to accounts. Journal Entries are recorded in the journal. September 1: Shareholders invested ₺15,000 cash in the corporation in exchange for ordinary shares.ILLUSTRATION 3-7JournalizingLO 4Posting – The process of transferring amounts from the journal to the ledger accounts. ILLUSTRATION 3-8PostingILLUSTRATION 3-7Advance slide in presentation mode to reveal answers.LO 4Posting – Transferring amounts from journal to ledger. ILLUSTRATION 3-8Posting a Journal EntryLO 4An Expanded ExampleThe purpose of transaction analysis is to identify the type of account involved, and to determine whether a debit or a credit is required.Keep in mind that every journal entry affects one or more of the following items: assets, liabilities, equity, revenues, or expense.PostingLO 41. October 1: Shareholders invest ₺100,000 cash in an advertising venture to be known as Pioneer Advertising Agency Inc.Share Capital—Ordinary100,000Cash100,000Oct. 1DebitCreditCash100,000100,000DebitCreditShare Capital—OrdinaryILLUSTRATION 3-9PostingLO 42. October 1: Pioneer purchases office equipment costing ₺50,000 by signing a 3-month, 12%, ₺50,000 note payable.Notes payable50,000Equipment50,000Oct. 1DebitCreditEquipment50,00050,000DebitCreditNotes PayableILLUSTRATION 3-10PostingLO 43. October 2: Pioneer receives a ₺12,000 cash advance from KC, a client, for advertising services that are expected to be completed by December 31.Unearned Service Revenue12,000Cash12,000Oct. 2DebitCreditCash100,00012,000DebitCreditUnearned Service Revenue12,000ILLUSTRATION 3-11PostingLO 44. October 3: Pioneer pays ₺9,000 office rent, in cash, for October.Cash9,000Rent Expense9,000Oct. 3DebitCreditCash100,0009,000DebitCreditRent Expense12,0009,000ILLUSTRATION 3-12PostingLO 45. October 4: Pioneer pays ₺6,000 for a one-year insurance policy that will expire next year on September 30.Cash6,000Prepaid Insurance6,000Oct. 4DebitCreditCash100,0006,000DebitCreditPrepaid Insurance12,0009,0006,000ILLUSTRATION 3-13PostingLO 46. October 5: Pioneer purchases, for ₺25,000 on account, an estimated 3-month supply of advertising materials from Aero Supply.Accounts Payable25,000Supplies25,000Oct. 5DebitCreditSupplies25,00025,000DebitCreditAccounts PayableILLUSTRATION 3-14PostingLO 47. October 9: Pioneer signs a contract with a local newspaper for advertising inserts (flyers) to be distributed starting the last Sunday in November. Pioneer will start work on the content of the flyers in November. Payment of ₺7,000 is due following delivery of the Sunday papers containing the flyers.ILLUSTRATION 3-15PostingA business transaction has not occurred. There is only an agreement between Pioneer Advertising and the newspaper for the services to be provided in November. Therefore, no journal entry is necessary in October.LO 48. October 20: Pioneer’s board of directors declares and pays a ₺5,000 cash dividend to shareholders.Cash5,000Dividends5,000Oct. 20DebitCreditCash100,0005,000DebitCreditDividends12,0009,0006,0005,000ILLUSTRATION 3-16PostingLO 49. October 26: Employees are paid every four weeks. The total payroll is ₺2,000 per day. The pay period ended on Friday, October 26, with salaries of ₺40,000 being paid.Cash40,000Salaries and Wages Expense40,000Oct. 26DebitCreditCash100,00040,000DebitCreditSalaries and Wages Expense12,0009,0006,0005,00040,000ILLUSTRATION 3-17PostingLO 410. October 31: Pioneer receives ₺28,000 in cash and bills Copa Company ₺72,000 for advertising services of ₺100,000 provided in October. Accounts Receivable72,000Cash28,000Oct. 31DebitCreditCash100,00072,000DebitCreditAccounts Receivable12,0009,0006,0005,00040,000Service Revenue100,000100,000DebitCreditService Revenue28,00080,000ILLUSTRATION 3-18PostingA Trial BalanceList of each account and its balance in the order in which they appear in the ledger.Debit balances listed in the left column and credit balance in the right column.Used to prove the mathematical equality of debit and credit balances.Uncovers errors in journalizing and posting.Trial BalanceLO 4ILLUSTRATION 3-19LO 4Understand basic accounting terminology.Explain double-entry rules.Identify steps in the accounting cycle.Record transactions in journals, post to ledger accounts, and prepare a trial balance.Explain the reasons for preparing adjusting entries.Prepare financial statements from the adjusted trial balance.Prepare closing entries.Prepare financial statements for a merchandising company.After studying this chapter, you should be able to:The Accounting Information System3LEARNING OBJECTIVESMakes it possible to:Report on the statement of financial position the appropriate assets, liabilities, and equity at the statement date. Report on the income statement the proper revenues and expenses for the period.Revenues are recorded in the period in which services are performed.Expenses are recognized in the period in which they are incurred.Adjusting EntriesLO 5Adjusting Entries1. Prepaid Expenses. Expenses paid in cash before they are used or consumed.Deferrals3. Accrued Revenues. Revenues for services performed but not yet received in cash or recorded.4. Accrued Expenses. Expenses incurred but not yet paid in cash or recorded.2. Unearned Revenues. Cash received before services are performed.AccrualsIllustration 3-20Types of Adjusting EntriesLO 5Deferrals are expenses or revenues that are recognized at a date later than the point when cash was originally exchanged. Two types of deferralsPrepaid expensesUnearned revenuesIf a company does not make an adjustment for these deferrals, the asset and liability are overstated, and the related expense and revenue are understated.Adjusting Entries for DeferralsLO 5ILLUSTRATION 3-21 Adjusting Entries for DeferralsLO 5Prepaid Expenses. Assets paid for and recorded before a company uses them.Adjusting Entries for Prepaid ExpensesInsuranceSuppliesAdvertisingCash PaymentExpense RecordedBEFORERentBuildings and equipmentPrepayments often occur in regard to:LO 5Supplies. Pioneer purchased advertising supplies costing₺25,000 on October 5. Prepare the journal entry to record the purchase of the supplies.Cash25,000Supplies25,000Oct. 5DebitCreditSupplies25,00025,000DebitCreditCashAdjusting Entries for Prepaid ExpensesLO 5Supplies. An inventory count at the close of business on October 31 reveals that ₺10,000 of supplies are still on hand.Supplies15,000Supplies Expense15,000Oct. 31DebitCreditSupplies25,00015,000DebitCreditSupplies Expense15,000 10,000Adjusting Entries for Prepaid ExpensesLO 5Adjusting Entries for Prepaid ExpensesStatement Presentation:Supplies identifies that portion of the asset’s cost that will provide future economic benefit.ILLUSTRATION 3-35Statement Presentation:Supplies expense shows a balance of ₺15,000, which equals the cost of supplies used in OctoberAdjusting Entries for Prepaid ExpensesILLUSTRATION 3-35LO 5Insurance. On Oct. 4th, Pioneer paid ₺6,000 for a one-year fire insurance policy, beginning October 1. Show the entry to record the purchase of the insurance. Cash6,000Prepaid Insurance6,000Oct. 4DebitCreditPrepaid Insurance6,0006,000DebitCreditCashAdjusting Entries for Prepaid ExpensesLO 5Insurance. An analysis of the policy reveals that ₺500 (₺6,000 ÷ 12) of insurance expires each month. Thus, Pioneer makes the following adjusting entry.Prepaid Insurance500Insurance Expense500Oct. 31DebitCreditPrepaid Insurance6,000500DebitCreditInsurance Expense500 5,500Adjusting Entries for Prepaid ExpensesLO 5Statement Presentation:Prepaid Insurance represents the unexpired cost for the remaining 11 months of coverage.ILLUSTRATION 3-35Adjusting Entries for Prepaid ExpensesStatement Presentation:Insurance expense identifies that portion of the asset’s cost thatexpired in October.Adjusting Entries for Prepaid ExpensesILLUSTRATION 3-35LO 5Depreciation. Pioneer estimates depreciation on its office equipment to be ₺400 per month. Pioneer recognizes depreciation for October by the following adjusting entry.Accumulated Depreciation400Depreciation Expense400Oct. 31DebitCreditDepreciation Expense400400DebitCreditAccumulated DepreciationAdjusting Entries for Prepaid ExpensesLO 5Statement Presentation:Accumulated Depreciation—is a contra asset account.ILLUSTRATION 3-35Adjusting Entries for Prepaid ExpensesStatement Presentation:Depreciation expense identifies that portion of the asset’s cost thatexpired in October.Adjusting Entries for Prepaid ExpensesILLUSTRATION 3-35LO 5Receipt of cash before the services are performed is recorded as a liability called unearned revenues. RentAirline ticketsTuitionCash ReceiptRevenue RecordedBEFOREMagazine subscriptionsCustomer depositsUnearned revenues often occur in regard to:Adjusting Entries for Unearned RevenuesLO 5Unearned Revenue. Pioneer received ₺12,000 on October 2 from KC for advertising services expected to be completed by December 31. Show the journal entry to record the receipt on Oct. 2nd. Unearned Service Revenue12,000Cash12,000Oct. 2DebitCreditCash12,00012,000DebitCreditUnearned Service RevenueAdjusting Entries for Unearned RevenuesDebitCreditService Revenue100,00012,000DebitCreditUnearned Service Revenue4,000 8,000Unearned Revenues. An evaluation of the service Pioneer performed for Knox during October, the company determines that it should recognize 4,000 of revenue in October.Service Revenue4,000Unearned Service Revenue4,000Oct. 314,000Adjusting Entries for Unearned RevenuesLO 5Statement Presentation:Unearned service revenue represents the remaining advertising services expected to be performed in the future.ILLUSTRATION 3-35Adjusting Entries for Unearned RevenuesStatement Presentation:Service revenue shows total revenue recognized in October.Adjusting Entries for Unearned RevenuesILLUSTRATION 3-35LO 5Accruals are made to record revenues for services performed and expenses incurred in the current accounting period.Without an accrual adjustment, the revenue account (and the related asset account) or theexpense account (and the related liability account) are understated.Adjusting Entries for AccrualsLO 5ILLUSTRATION 3-27 Adjusting Entries for AccrualsLO 5Revenues recorded for services performed for which cash has yet to be received at statement date are accrued revenues.Adjusting Entries for Accrued RevenuesRentInterestServices performedBEFOREAccrued revenues often occur in regard to:Cash ReceiptRevenue RecordedAdjusting entry results in:LO 5Accrued Revenues. In October Pioneer performed services worth ₺2,000 that were not billed to clients on or before October 31. Pioneer makes the following adjusting entry.Service Revenue2,000Accounts Receivable2,000Oct. 31DebitCreditAccounts Receivable72,000DebitCreditService Revenue100,0004,0002,000106,0002,00074,000Adjusting Entries for Accrued RevenuesILLUSTRATION 3-35ILLUSTRATION 3-35Statement PresentationAdjusting Entries for Accrued RevenuesLO 5Expenses incurred but not yet paid in cash or recorded.RentInterestBEFOREAccrued expenses often occur in regard to:Cash PaymentExpense RecordedTaxesSalariesAdjusting entry results in:Adjusting Entries for Accrued ExpensesLO 5Accrued Interest. Pioneer signed a three-month, 12%, note payable in the amount of ₺50,000 on October 1. The note requires interest at an annual rate of 12 percent. Three factors determine the amount of the interest accumulation: 123ILLUSTRATION 3-29Formula for ComputingInterestAdjusting Entries for Accrued ExpensesLO 5Interest Payable500Interest Expense500Oct. 31DebitCreditInterest Expense500500DebitCreditInterest PayableAccrued Interest. Pioneer signed a three-month, 12%, note payable in the amount of ₺50,000 on October 1. Prepare the adjusting entry on Oct. 31 to record the accrual of interest.Adjusting Entries for Accrued ExpensesLO 5ILLUSTRATION 3-35ILLUSTRATION 3-35Statement PresentationAdjusting Entries for Accrued ExpensesLO 5Accrued Salaries. At October 31, the salaries and wages for these days represent an accrued expense and a related liability to Pioneer. The employees receive total salaries of ₺10,000 for a five-day work week, or ₺2,000 per day.Adjusting Entries for Accrued ExpensesLO 5LO 5Salaries and Wages Payable6,000Salaries and Wages Expense6,000Oct. 31DebitCreditSalaries and Wages Expense40,0006,000DebitCreditSalaries and Wages PayableAccrued Salaries. Employees receive total salaries of ₺10,000 for a five-day work week, or ₺2,000 per day. Prepare the adjusting entry on Oct. 31 to record accrual for salaries.6,00046,000Adjusting Entries for Accrued ExpensesILLUSTRATION 3-35ILLUSTRATION 3-35Statement PresentationAdjusting Entries for Accrued ExpensesLO 5Salaries and Wages Expense34,000Salaries and Wages Payable6,000Nov. 2334,0006,000Accrued Salaries. On November 23, Pioneer will again pay total salaries of ₺40,000. Prepare the entry to record the payment of salaries on November 23.Cash40,0006,000Adjusting Entries for Accrued ExpensesDebitCreditSalaries and Wages Expense34,0006,000DebitCreditSalaries and Wages PayableLO 5Bad Debts. Assume Pioneer reasonably estimates a bad debt expense for the month of ₺1,600. It makes the adjusting entry for bad debts as follows.Adjusting Entries for Accrued ExpensesAllowance for Doubtful AccountsBad Debt ExpenseOct. 311,6001,600ILLUSTRATION 3-32Adjustment for Bad DebtExpenseLO 5ILLUSTRATION 3-35ILLUSTRATION 3-35Statement PresentationAdjusting Entries for Accrued ExpensesLO 5Shows the balance of all accounts, after adjusting entries, at the end of the accounting period. Proves the equality of the total debit and credit balancesILLUSTRATION 3-33Adjusted Trial BalanceUnderstand basic accounting terminology.Explain double-entry rules.Identify steps in the accounting cycle.Record transactions in journals, post to ledger accounts, and prepare a trial balance.Explain the reasons for preparing adjusting entries.Prepare financial statements from the adjusted trial balance.Prepare closing entries.Prepare financial statements for a merchandising company.After studying this chapter, you should be able to:The Accounting Information System3LEARNING OBJECTIVESFinancial Statements are prepared directly from the Adjusted Trial Balance. Statement of Financial PositionIncome StatementRetained Earnings StatementPreparing Financial StatementsLO 6ILLUSTRATION 3-34 Preparation of the Income Statement and Retained Earnings Statement from the Adjusted Trial BalanceILLUSTRATION 3-35 Preparation of the Statement of Financial Position from the Adjusted Trial BalanceLO 6To achieve the vision of “24/7 accounting,” a company must be able to update revenue, income, and statement of financial position numbers every day within the quarter (and potentially publish them on the Internet). Such real-time reporting responds to the demand for more timely financial information made available to all investors—not just to analysts with access to company management. Two obstacles typically stand in the way of 24/7 accounting: having the necessary accounting systems to close the books on a daily basis, and reliability concerns associated with unaudited real-time data. Only a few companies have the necessary accounting capabilities.WHAT’S YOUR PRINCIPLE24/7 ACCOUNTINGLO 6Understand basic accounting terminology.Explain double-entry rules.Identify steps in the accounting cycle.Record transactions in journals, post to ledger accounts, and prepare a trial balance.Explain the reasons for preparing adjusting entries.Prepare financial statements from the adjusted trial balance.Prepare closing entries.Prepare financial statements for a merchandising company.After studying this chapter, you should be able to:The Accounting Information System3LEARNING OBJECTIVESClosing EntriesReduce the balance of nominal (temporary) accounts to zero in preparation for the next period’s transactions.Transfer all revenue and expense account balances (income statement accounts) to Retained Earnings.Statement of financial position (asset, liability, and equity) accounts are not closed.Dividends are closed directly to Retained Earnings.Income Summary account may be used however it has no effect on the financial statements.Basic ProcessLO 7Closing EntriesRetained Earnings 5,000 Dividends 5,000Service Revenue 106,000 Salaries & Wages Expense 46,000 Supplies Expense 15,000 Rent Expense 9,000 Insurance Expense 500 Interest Expense 500 Depreciation Expense 400 Bad Debt Expense 1,600 Retained Earnings 33,000ILLUSTRATION 3-33Closing Journal Entries:LO 7LO 7Illustration 3-38ILLUSTRATION 3-38Accounting Cycle SummarizedEnter the transactions of the period in appropriate journals.Post from the journals to the ledger (or ledgers).Prepare an unadjusted trial balance (trial balance).Prepare adjusting journal entries and post to the ledger(s).Prepare a trial balance after adjusting (adjusted trial balance).Prepare the financial statements from the adjusted trial balance.Prepare closing journal entries and post to the ledger(s).Prepare a trial balance after closing (post-closing trial balance).Prepare reversing entries (optional) and post to the ledger(s).Reversing entries are covered in Appendix 3B. LO 7The economic volatility of the past few years has left companies hungering for more timely and uniform financial information to help them react quickly to fast-changing conditions. As one expert noted, companies were extremely focused on trying to reduce costs as well as better plan for the future, but a lot of them discovered that they didn’t have the information they needed and they didn’t have the ability to get that information. The unsteady recession environment also made it risky for companies to interrupt their operations to get new systems up to speed. So what to do? Try to piecemeal upgrades each year or start a major overhaul of their internal systems? One company, for example, has standardized as many of its systems as possible and has been steadily upgrading them over the past decade. Acquisitions can also wreak havoc on reporting systems. This company is choosy about when to standardize for companies it acquires, but it sometimes has to implement new systems after international deals. In other situations, a major overhaul is needed. For example, it is common for companies with a steady stream of acquisitions to have 50 to 70 general ledger systems. In those cases, a company cannot react well unless its systems are made compatible. So is it the big bang (major overhaul) or the piecemeal approach? It seems to depend. One thing is certain—good accounting systems are a necessity. Without one, the risk of failure is high.WHAT’S YOUR PRINCIPLEHEY, IT’S COMPLICATEDSource: Emily Chasan, ”The Financial-Data Dilemma,” Wall Street Journal (July 24, 2012), p. B4.LO 7Understand basic accounting terminology.Explain double-entry rules.Identify steps in the accounting cycle.Record transactions in journals, post to ledger accounts, and prepare a trial balance.Explain the reasons for preparing adjusting entries.Prepare financial statements from the adjusted trial balance.Prepare closing entries.Prepare financial statements for a merchandising company.After studying this chapter, you should be able to:The Accounting Information System3LEARNING OBJECTIVESILLUSTRATION 3-39Merchandising CompanyILLUSTRATION 3-40Financial Statements of a Merchandising CompanyLO 8ILLUSTRATION 3-41Financial Statements of a Merchandising CompanyACCOUNTING INFORMATION SYSTEMSAs indicated in this chapter, companies must have an effective accounting system. In the wake of accounting scandals at U.S. companies like Sunbeam, Rite-Aid, Xerox, and WorldCom, U.S. lawmakers demanded higher assurance on the quality of accounting reports. Since the passage of the Sarbanes-Oxley Act of 2002 (SOX), companies that trade on U.S. exchanges are required to place renewed focus on their accounting systems to ensure accurate reporting.GLOBAL ACCOUNTING INSIGHTSRelevant FactsFollowing are the key similarities and differences between U.S. GAAP and IFRS related to accounting information systems. SimilaritiesInternational companies use the same set of procedures and records to keep track of transaction data. Thus, the material in Chapter 3 dealing with the account, general rules of debit and credit, and steps in the recording process—the journal, ledger, and chart of accounts—is the same under both U.S. GAAP and IFRS.Transaction analysis is the same under U.S. GAAP and IFRS but, as you will see in later chapters, different standards sometimes impact how transactions are recorded.GLOBAL ACCOUNTING INSIGHTSRelevant FactsSimilaritiesBoth the FASB and IASB go beyond the basic definitions provided in this textbook for the key elements of financial statements, that is, assets, liabilities, equity, revenues, and expenses. A trial balance under U.S. GAAP follows the same format as shown in the textbook. As shown in the textbook, currency signs are typically used only in the trial balance and the financial statements. The same practice is followed under U.S. GAAP.GLOBAL ACCOUNTING INSIGHTSRelevant FactsDifferencesRules for accounting for specific events sometimes differ across countries. For example, European companies rely less on historical cost and more on fair value than U.S. companies. Despite the differences, the double- entry accounting system is the basis of accounting systems worldwide. Internal controls are a system of checks and balances designed to prevent and detect fraud and errors. While most public U.S. companies have these systems in place, many non-U.S. companies have never completely documented them nor had an independent auditor attest to their effectiveness. Both of these actions are required under SOX. Enhanced internal control standards apply only to large public companies listed on U.S. exchanges.GLOBAL ACCOUNTING INSIGHTSAbout The NumbersDebate about requiring foreign companies to comply with SOX centers on whether the higher costs of a good information system are making the U.S. securities markets less competitive. Presented are statistics for initial public offerings (IPOs) in the years since the passage of SOX.GLOBAL ACCOUNTING INSIGHTSAbout The NumbersNote the U.S. share of IPOs has steadily declined, and some critics of the SOX provisions attribute the decline to the increased cost of complying with the internal control rules, others are not so sure. These commentators argue that growth in non-U.S. GLOBAL ACCOUNTING INSIGHTSmarkets is a natural consequence of general globalization of capital flows.On the HorizonHigh-quality international accounting requires both high-quality accounting standards and high-quality auditing. Similar to the convergence of U.S. GAAP and IFRS, there is a movement to improve international auditing standards. The International Auditing and Assurance Standards Board (IAASB) functions as an independent standard-setting body. It works to establish high-quality auditing and assurance and quality-control standards throughout the world. Whether the IAASB adopts internal control provisions similar to those in SOX remains to be seen. You can follow developments in the international audit arena at http:// www.ifac.org/iaasb/.GLOBAL ACCOUNTING INSIGHTSMost companies use accrual-basis accounting. Theyrecognize revenue when the performance obligation is satisfied and expenses in the period incurred, without regard to the time of receipt or payment of cash.Under the strict cash-basis, companiesrecord revenue only when they receive cash, and record expenses only when they disperse cash.Cash basis financial statements are not in conformity with IFRS.LO 9 Differentiate the cash basis of accounting from the accrual basis of accounting.APPENDIX 3ACASH-BASIS ACCOUNTING VERSUS ACCRUAL-BASIS ACCOUNTINGIllustration: Quality Contractor signs an agreement to construct a garage for ₺22,000. In January, Quality begins construction, incurs costs of ₺18,000 on credit, and by the end of January delivers a finished garage to the buyer. In February, Quality collects ₺22,000 cash from the customer. In March, Quality pays the ₺18,000 due the creditors. ILLUSTRATION 3A-1Advance slide in presentation mode to reveal answers.APPENDIX 3ACASH-BASIS ACCOUNTING VERSUS ACCRUAL-BASIS ACCOUNTINGLO 9Illustration: Quality Contractor signs an agreement to construct a garage for ₺22,000. In January, Quality begins construction, incurs costs of ₺18,000 on credit, and by the end of January delivers a finished garage to the buyer. In February, Quality collects ₺22,000 cash from the customer. In March, Quality pays the ₺18,000 due the creditors.Advance slide in presentation mode to reveal answers.APPENDIX 3ACASH-BASIS ACCOUNTING VERSUS ACCRUAL-BASIS ACCOUNTINGILLUSTRATION 3A-2LO 9CONVERSION FROM CASH TO ACCRUAL BASISIllustration: Dr. Diane Windsor, like many small business owners, keeps her accounting records on a cash basis. In the year 2015, Dr. Windsor received ₺300,000 from her patients and paid ₺170,000 for operating expenses, resulting in an excess of cash receipts over disbursements of ₺130,000 (₺300,000 - ₺170,000). At January 1 and December 31, 2015, she has accounts receivable, unearned service revenue, accrued liabilities, and prepaid expenses as shown below.ILLUSTRATION 3A-5APPENDIX 3ACASH-BASIS ACCOUNTING VERSUS ACCRUAL-BASIS ACCOUNTINGLO 9ILLUSTRATION 3A-8Advance slide in presentation mode to reveal answers.APPENDIX 3ASERVICE REVENUE COMPUTATIONLO 9To convert the amount of cash received from patients to service revenue on an accrual basis, we must consider changes in accounts receivable and unearned service revenue during the year.ILLUSTRATION 3A-5ILLUSTRATION 3A-11Advance slide in presentation mode to reveal answers.APPENDIX 3AOPERATING EXPENSE COMPUTATIONLO 9To convert cash paid for operating expenses during the year to operating expenses on an accrual basis, we must consider changes in prepaid expenses and accrued liabilities.ILLUSTRATION 3A-5LO 9APPENDIX 3ACONVERSION FROM CASH BASIS TO ACCRUAL BASISILLUSTRATION 3A-12THEORETICAL WEAKNESSES OF THE CASH BASISToday’s economy is considerably more lubricated by credit than by cash. The accrual basis, not the cash basis, recognizes all aspects of the credit phenomenon. Investors, creditors, and other decision makers seek timely information about a company’s future cash flows. APPENDIX 3ACASH-BASIS ACCOUNTING VERSUS ACCRUAL-BASIS ACCOUNTINGLO 9LO 10 Identifying adjusting entries that may be reversed.ILLUSTRATION 3B-1APPENDIX 3BUSING REVERSING ENTRIESILLUSTRATION OF REVERSING ENTRIES-ACCRUALSAPPENDIX 3BUSING REVERSING ENTRIESILLUSTRATION OF REVERSING ENTRIES-DEFERRALSILLUSTRATION 3B-2LO 10All accruals should be reversed.All deferrals for which a company debited or credited the original cash transaction to an expense or revenue account should be reversed.Adjusting entries for depreciation and bad debts are not reversed.Reversing entries do not have to be used. APPENDIX 3BUSING REVERSING ENTRIESSUMMARY OF REVERSING ENTRIESLO 10LO 11 Prepare a 10-column worksheet.A company prepares a worksheet either on columnar paper or within a computer spreadsheet. A company uses the worksheet to adjust account balances and to prepare financial statements.APPENDIX 3CUSING A WORKSHEET: THE ACCOUNTING CYCLE REVISITEDTrial Balance ColumnsAdjustment ColumnsAPPENDIX 3CUSING A WORKSHEET: THE ACCOUNTING CYCLE REVISITEDWORKSHEET COLUMNSLO 11APPENDIX 3CUSING A WORKSHEET: THE ACCOUNTING CYCLE REVISITEDILLUSTRATION 3C-1 (Partial)Use of a WorksheetLO 11ILLUSTRATION 3C-1Use of a WorksheetAPPENDIX 3CUSING A WORKSHEET: THE ACCOUNTING CYCLE REVISITEDThe Worksheet: provides information needed for preparation of the financial statements.Sorts data into appropriate columns, which facilitates the preparation of the statements.APPENDIX 3CUSING A WORKSHEET: THE ACCOUNTING CYCLE REVISITEDPREPARING FINANCIAL STATEMENTS FROM A WORKSHEETLO 11ILLUSTRATION 3-39ILLUSTRATION 3-40LO 11ILLUSTRATION 3-41LO 11Copyright © 2014 John Wiley & Sons, Inc. All rights reserved. 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