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Chapter 1: 486833-AB-1SE (page 31)

In Vogue, a T-shirt business, is growing fast and needs a better accounting information system. Consider the features of an effective system. Which features are most important? Why? Which feature must you consider if your financial resources are limited?

Short Answer

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Features of an effective accounting information system are 鈥� control, compatibility, flexibility, relevance, and cost/benefit relationship. The cost/benefit relationship is the most important feature.

Step by step solution

01

Accounting Information System

An accounting information system is a system of collecting, recording, storing, and processing accounting data in such a way that a report can be produced for investors, creditors, managers, and other parties to make decisions.

02

Features of an effective accounting information system

An effective accounting information system has the following features 鈥�

a) Control 鈥� Control is one of the important features of an effective accounting information system. An effective control ensures transparency and safeguarding of the business assets from the likelihood of fraud and errors.

b) Compatibility 鈥� Compatibility brings smoothness for the employees and organizational structure. The accounting information system should be in line with the size of the business. For a small business, an entry-level package can be effective but for a big organization, customized accounting software must be implemented for making an effective system.

c) Flexibility 鈥� Flexibility is necessary to accommodate changes in the business over time. An effective accounting information system should be complicated and flexible as per the requirement.

d) Relevance 鈥� An effective accounting information system should be such that it provides useful information and reduces uncertainty for better decision-making.

e) Cost/benefit relationship 鈥� Above all an effective accounting information system should be such that it must be relatively economical for the business.

03

Most important feature  

The most important feature of an accounting information system is the cost/benefit relationship. All other features can be expensive to implement. An effective accounting information system should be such that provides the most benefits for the least cost.

In the given case, if the financial resources are limited, then the cost/benefit relationship would be the most important feature of an effective accounting information system.

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Most popular questions from this chapter

During 2018, Flowing Rivers Spa reported revenue of \(30,000. Total expenses for the year were \)15,000. Flowing Rivers Spa ended the year with total assets of \(43,000, and it owed debts totaling \)14,000. At year-end 2017, the business reported total assets of \(28,000 and total liabilities of \)14,000. Requirements 1. Compute Flowing Rivers Spa鈥檚 net income for 2018. 2. Did Flowing Rivers Spa鈥檚 stockholders鈥� equity increase or decrease during 2018? By how much?

Amos Sharp recently opened his own accounting firm on October 1, which he operates as a corporation. The name of the new entity is Amos Sharp, CPA. Sharp experienced the following events during the organizing phase of the new business and its first month of operations in 2018. Oct. 5 Sharp deposited \(45,000 in a new business bank account titled Amos Sharp, CPA. The business issued common stock to Sharp. 6 Paid \)300 cash for letterhead stationery for new office. 7 Purchased office furniture for the office on account, \(6,500. 10 Consulted with tax client and received \)3,300 for services rendered. 11 Paid utilities, \(340. 12 Finished tax hearings on behalf of a client and submitted a bill for accounting services, \)16,000. 18 Paid office rent, \(1,800. 25 Received amount due from client that was billed on October 12. 27 Paid full amount of Accounts Payable created on October 7. 31 Cash dividends of \)3,800 were paid to stockholders. Requirements 1. Analyze the effects of the events on the accounting equation of Amos Sharp, CPA. Use a format similar to Exhibit 1-6. 2. Prepare the following financial statements: a. Income statement. b. Statement of retained earnings. c. Balance sheet.

Indicate the effects of the following business transactions on the accounting equation of Vivian鈥檚 Online Video store. Transaction (a) is answered as a guide. a. Received cash of \(10,000 from issuance of common stock. Answer: Increase asset (Cash); Increase equity (Common Stock) b. Earned video rental revenue on account, \)2,800. c. Purchased office furniture on account, \(300. d. Received cash on account, \)400. e. Paid cash on account, \(100. f. Rented videos and received cash of \)200. g. Paid monthly office rent of \(1,000. h. Paid \)100 cash to purchase office supplies

Allen Shonton recently opened his own accounting firm on April 1, which he operates as a corporation. The name of the new entity is Allen Shonton, CPA. Shonton experienced the following events during the organizing phase of the new business and its first month of operations in 2018: Apr. 5 Shonton deposited \(75,000 in a new business bank account titled Allen Shonton, CPA. The business issued common stock to Shonton. 6 Paid \)300 cash for letterhead stationery for new office. 7 Purchased office furniture for the office on account, \(9,500. 10 Consulted with tax client and received \)4,000 for services rendered. 11 Paid utilities, \(190. 12 Finished tax hearings on behalf of a client and submitted a bill for accounting services, \)20,000. 18 Paid office rent, \(750. 25 Received amount due from client that was billed on April 12. 27 Paid full amount of accounts payable created on April 7. 30 Cash dividends of \)3,500 were paid to stockholders. Requirements: Prepare the following financial statements: b. Statement of retained earnings.

Let鈥檚 examine a case using Greg鈥檚 Tunes and Sal鈥檚 Silly Songs. It is now the end of the first year of operations, and the stockholders want to know how well each business came out at the end of the year. Neither business kept complete accounting records, and no dividends were paid. The businesses throw together the data shown on the next page at year-end: \( 23,000 8,000 35,000 22,000 \) 10,000 6,000 44,000 9,000 Total Assets Common Stock Total Revenues Total Expenses Greg鈥檚 Tunes: Sal鈥檚 Silly Songs: Total Liabilities Common Stock Total Expenses Net Income To gain information for evaluating the businesses, the stockholders ask you several questions. For each answer, you must show your work to convince the stockholders that you know what you are talking about.

Requirements 2. Which business owes more to creditors?

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