Question

The accounting systems of most business organizations:

Multiple Choice

• Are designed by the CPA firm that performs the annual financial audit.

• Are tailored to meet the organization's needs for accounting information and the resources available for operating the system.

• Are similar in design to the journals, ledgers, and worksheets illustrated in this text.

• Utilize data bases, rather than ledger accounts.

2/

Which of the following is not a basic function of an accounting system?

Multiple Choice

• To ensure that a business organization will be managed profitably.

• To interpret and record the effects of business transactions.

• To classify the effects of similar transactions in a manner that permits determination of various totals and subtotals useful to management.

• To summarize and communicate information to decision makers.

3/

Information is cost effective when:

Multiple Choice

• The information is based upon historical costs, rather than upon estimated market values.

• The value of the information exceeds the cost of producing it.

• The information is generated by a computer based accounting system.

• The information aids management in controlling costs.

Answer 1

1. The accounting systems of most business organisations

Solution: Are tailored to meet the organization's needs for accounting information and the resources available for operating the system.

The CPA firm that does the annual financial audit does not design these systems nor is it necessary that they be similar to the formats provided in the text. The last option 'Utilize data bases, rather than ledger accounts' may not be entirely true since in ERP systems the data is stored in databases and retrieved and formatted to look like ledgers while in other accounting packages ledgers may be used.

2. Which of the following is not a basic function of an accounting system?

Solution: To ensure that a business organization will be managed profitably.

The accounting system cannot by itself ensure that the business will be managed profitably. This is a function of the executives that run the business. The accounting system is at most a tool for monitoring the financial position of the business and its operating results. To that effect, it performs all the functions of a record keeping system viz.

• To interpret and record the effects of business transactions.

• To classify the effects of similar transactions in a manner that permits determination of various totals and subtotals useful to management.

• To summarize and communicate information to decision makers.

3. Information is cost effective when:

Solution: The value of the information exceeds the cost of producing it.

The other options do not fit in or are not related to cost effectiveness of information. Whether costs are historical or estimated is immaterial to the cost effectiveness of the system. The information generated by a computer based accounting system may not necessarily be a cost effective method. If the information aids management in controlling costs, it does not become cost effective.