Intermediate_Accounting_Chapter03 - 1460T_c03.qxd 11/18/05...

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61 Learning Objectives After studying this chapter, you should be able to: 1 Understand basic accounting terminology. 2 Explain double-entry rules. 3 Identify steps in the accounting cycle. 4 Record transactions in journals, post to ledger accounts, and prepare a trial balance. 5 Explain the reasons for preparing adjusting entries. 6 Prepare financial statements from the adjusted trial balance. 7 Prepare closing entries. 8 Explain how to adjust inventory accounts at year-end. Maintaining a set of accounting records is not optional.The Internal Revenue Service (IRS) requires that businesses prepare and retain a set of records and documents that can be audited. The Foreign Corrupt Practices Act (federal legislation) requires public companies to “. . . make and keep books, records, and accounts, which, in reasonable detail, accu- rately and fairly reflect the transactions and dispositions of the assets .... ” But beyond these two reasons, a company that fails to keep an accurate record of its business trans- actions may lose revenue and is more likely to operate inefficiently. Consider, for example, the Long Island Railroad (LIRR) , once one of the nation’s busiest commuter lines. The LIRR lost money because of poor recordkeeping. It forgot to bill some customers, mistakenly paid some payables twice, and neglected to record redemptions of bonds. FFP Marketing , which operates convenience stores in 11 states, provides another example. The SEC forced it to restate earnings when an audit uncovered faulty bookkeeping for its credit card accounts and fuel payables. Inefficient accounting also cost the City of Cleveland , Ohio. An audit discovered over 313 examples of dysfunctional accounting, costing taxpayers over $1.3 million. Its poor ac- counting system resulted in the Cleveland treasurer’s ignorance of available cash, which led to missed investment opportunities. Further, delayed recording of pension payments created the false impression of $13 million in the city coffers. Even the use of computers is no assurance of accuracy and efficiency. “The conversion to a new system called MasterNet fouled up data processing records to the extent that Bank of America was frequently unable to produce or deliver customer statements on a timely basis,” said an executive at one of the country’s largest banks. Although these situations may occur only rarely in large organizations, they illustrate the point: Companies must properly maintain accounts and detailed records or face unnec- essary costs. The SEC suspended trading in FFP Marketing’s stock until it corrected the errors and re-issued financial statements. The City of Cleveland’s municipal bond rating took a hit because of its poor accounting practices. THE ACCOUNTING INFORMATION SYSTEM CHAPTER THREE Needed: A Reliable Information System
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THE ACCOUNTING INFORMATION SYSTEM • Identifying and recording • Journalizing • Posting • Trial balance • Adjusting entries • Adjusted trial balance • Preparing financial statements • Closing • Post-closing trial
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This note was uploaded on 04/04/2012 for the course ACC 422 taught by Professor Susan during the Spring '08 term at University of Phoenix.

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Intermediate_Accounting_Chapter03 - 1460T_c03.qxd 11/18/05...

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