ACG3401 QUIZ 1 STUDY GUIDE

Syllabus Questions
1. When and where are my office hours?
a. Monday and Wednesday (days when we have class) (1:55-2:45)
b. Gerson 331
2. Where should you ask questions about the class?
a. Generally, post questions to e-Learning (Canvas) Discussion forums, especially
questions related to course content, or coverage on exams/ quizzes, rather than
emailing me directly.
3. Who is the TA and what are his/her office hours?
a. Gabriella Munneke
b. Tuesday and Thursday period 7& 8 (1:55-3:50) at Gerson 125
4. Objective of this course?
a. Learn the role of accounting information in a business organization
5. Learning goals of this course?
a. Recognize accountings relationship to each fundamental business discipline
b. Identify the major accounting system inputs and process flows of information within the
accounting system
6. What are the texts required for this course?
a. Accounting Information Systems 9th edition by James A. Hall
b. Systems Understanding Aid (9th edition)
7. What are your grades composed of?
a. 100 points each for Midterm 1, Midterm 2, and Final Exam
b. 25 points for Accounting Fraud Paper
c. 75 points Systems Understanding Aid Project
d. 100 points for quizzes
8. When are there quizzes and how many are counted towards your grade?
a. Weekly quizzes every Wednesday we are in class (except the 1 st week and last 2
weeks)
b. I will count your 10 highest quiz grades for a max. of 100 points
9. When is the Accounting Fraud Paper due?
a. Monday September 12th
10. Exams are on what and in what format?
a. Can be any question format
b. Material can relate to anything presented in class, assigned readings, the System
Understanding Aid project, and homework problems.
c. No more than 60% of the questions on the final will relate to material covered on the 1 st
two exams
d. The 2nd midterm exam will focus on the material covered since the 1 st midterm exam
and thus is only cumulative to the extent that the material builds on prior material

Intro to Class PowerPoint

11. What might change and not change in the syllabus?
a. Policies WONT change, dates might
12. How to succeed in this class?
a. Read chapters prior to class
b. Go to class & office hours
c. Work every assigned problem
d. Keep up & have professional behavior in class
13. How to take good notes?
a. Listen for an organizing pattern
b. Recognize verbal cues
 c. Consider learning style (such as lecture maps)
d. Create consistent shorthand system
14. What are Tiny Habits?
a. The idea that success in life is driven by series of tiny habits
b. Key is to design environment to reduce reliance on motivation and/or willpower
c. Need anchor (previous routine) to attach new habit
d. Keep habit small (& then build up on it)
e. Celebrate success (neurochemistry)
15. What is Accounting?
a. An information system
b. Information about firms activities classified into accounts aggregated across time (over
a period of time) and space (over diff locations)
c. Communicated to set of interested individuals
i. Investors, Debt holders, shareholders
ii. Managers-to know the performance of the business
iii. *Auditors-they are the ones brought in to attest to the financial information
iv. IRS
v. Suppliers- want to know if the firm can pay on time
vi. *Customers-what to know position of a company (it can affect delay of delivery of
products, quality of products)
vii. Competitors- how well I am doing compared to peer firms in my industry
viii. *Employees-want to work for a company doing well
d. ****Financial reporting is not the only purpose & wasnt even the initial purpose
16. What are our objectives?
a. We need to know: what information about business processes is relevant? Where it
comes from, whats the source of this information
b. How does firm capture, process, and assure reliability of information?
i. Reliable: means you can actually put weight on the information you captured and
make decisions
c. How does firm organize and report information?
d. How does management use information?
17. Calendar of our class and what we are going to learn?
a. These 3 parts together: What does it mean as accounting as a profession?
b. Part 1: History, Accounting Cycle
c. Part 2: Business processes part- needs some tools on how to document those
processes, internal control
d. Part 3: how to convert these things that are required into the cash and revenue cycle
18. What are you writing on in your Accounting Fraud Paper?
a. Qwest Communications
19. Why is writing important for accounting?
a. Auditors-a lot of the information they accumulated, they have to write in memos
b. Writing is a key skill needed to be successful
c. Useful in both formal and informal communications
d. CPA firms are not satisfied with many entry-level (complain they have poor writing skills)
20. What is good writing?
a. Content e. Clarity
b. Critical thinking f. Coherence
c. Audience-focused g. Revision
d. Conciseness
 h. Fundamental Demand of Accounting Information PowerPoint
21. Explain the in-class experiment
a. We set up an asset market with sellers and buyers
b. Sellers choose the asset to produce (either high or normal quality)
c. Value is a function of quality but not 100% predictor
i. Super (400 points) or Regular (100 points)
ii. Expected values of 340 & 160 respectively
d. There was a Double Auction to discover prices
i. Double Auction means that both sides can put in offers (buyers and sellers)
e. Each team tracks costs, revenues (value), and profits
22. General Impressions of the Market?
a. Sellers Impressions to sell due to the salvage value (salvage value is less than the cost,
so you had a loss if you didnt sell)
b. Sellers Impressions to sell due to opportunity cost: based on the market value there, if
you didnt sell, there would be an opportunity cost (cost compared to the market price;
the cost not engaged in the market period)
23. What strategy did you use?
a. Sellers: start selling high quality and see from there if we made profit; sell early dont
wait;
b. Buyers: buy later (lower prices later on); price ceilings, waiting for competition from
selling side to lower price
24. What information did you use to make your decisions?
a. Prices, Profit margin, expected values (to not bid higher than that)
25. What was your impression of the market trading?
a. Buyers compete among themselves for prices
b. Competition brings out other peoples willingness to pay, which can be diff than yours
c. Efficient Markets decide prices quicklyspeed to price (deciding prices quickly because
of time limit to sell or buy)
26. What is the role of the Market Maker?
a. Market makers stay on the side that had more demand (buyers) until they even it out
b. If there was more demand on one side compared to the other, the market maker would
stay with that side for a while to try to balance it out.
c. If there was lots of demand on the buyer side, that means the price is still lower than
what we can get to.
27. What is bid-ask spread?
a. How apart or what is the difference between the highest price that a buyer is willing to
pay and the lowest price that a seller is willing to accept to sell.
b. Market makers try to close those gaps
28. Difference between market A and market B?
a. Market A: auditing mechanism
i. Buyers: knew what they were getting
b. Market B: no credible mechanism to communicate quality
i. Buyers didnt know if it was high or normal; sellers couldnt signal if it was high or
normal
ii. Information Asymmetry: sellers knew something buyers didnt; buyers dont have
quality information
iii. Because of this: buyers will price protect (eventually)
c. d. MARKET A (AUDIT) e. MARKET B
(NON-AUDIT)
f. Mechanis g. Auditing mechanism h. No
m to auditing/credible
communic mechanism
 ate
quality?
i. Avg j. Big differences between k. Started same: big
Market high & normal quality diff between high
Prices products because and normal price
expected values are l. Ended: same
very different price for both
(buyers started to
price protect and
treated high q as
low)
m. Asset Sold n. Started out even, then o. Opposite-mostly
by Quality realized profit margin for normal
high Q was higher than p. Groups started
normal; groups started switching to
switching to selling high selling normal
quality quality
q. Avg Profit r. Sellers had higher t. Same
profits than buyers
s. 1st period only-buyers
had a loss
u. Wealth v. High Q more profit than w. Still lots of wealth
Created normal Q (economy created
much better off in the x.
high quality market)
y.
29. In Market B: Why dont firms sell the more valuable asset?
a. Price they were getting was a lot lower than the expected values
30. In Market B: Why dont buyers want to pay more?
a. They didnt know what quality product they were getting
b. Started to just assume that sellers were just selling normal
c. Didnt want to pay more for it cause they were sure of quality
31. In Market B: Why cant sellers signal quality credibly?
a. No way to verify if they started to signal by bidding high or low; cheaptalk
32. In Market B: Why might emerge if we allowed communication?
a. Communication within groupscollusion
b. But competition will work against collusion (cant keep collusion unless you have some
enforcement mechanism)
33. What is the Market for Lemons? Explain
a. George Akerlof came up with this idea; context he used was buying a used car
b. Imagine in a market where there is a distribution of quality from low to high.
c. Restrictions in this market: no signals about quality (Like market B)
d. What is going to happen in a market like this?
i. Buyer: Rational person will look at a given car and assume to basically pay the
avg price. WTP (willingness to pay) is average
ii. Seller: hard time selling high quality cars; WTA goes down and gets out of the
market
iii. New average keeps moving left and left
iv. Towards the end, all we have is either no market or the very worst quality cars.
MARKET OF LEMONS (lemon= car that has the lowest quality)
v. End: market disappears entirely or whatever is left is the lowest quality
 vi. Summary: buyers dont know quality; all they want to pay is the average.
Because of that, sellers that are selling higher gets out of the market; Average
goes down, and then higher quality sellers keep getting out of the market until
there is no market yet or only the lowest quality is available.
vii. EXACTLY LIKE MARKET B: drove out high quality sellers and to only sell
normal quality
e. GOAL: SHOWS HOW DAMAGING INFORMATION ASYMMETRY IS TO THE MARKET
(IT MAKES THE MARKET GO AWAY)
34. How do we make sure normal qualities are sold? What are some ways we overcome it?
a. Reputation of dealer/maker/manufacturer
b. Get verified by a mechanic
c. VIN #, car facts
d. Look at how much miles are in the car
35. Comparison: What does auditing do? (MARKET A)
a. Provides a credible signal (buyers knew that they were getting H or N quality)
b. Provides information to improve the estimation of value (diff price between normal
quality and high quality) just the information of quality, changed the price so much
c. Improves market efficiency (less uncertaintygot to prices quicker)
36. Audit vs. Non-Audit
a. b. Audit c. Non-Audit
d. Avg e. High vs Normal: Big f. Started in between
Pric difference in prices audited high and
e normal, and then
changed. Treated them
as audited normal(price
protect)
g. % h. Mostly high quality i. Almost NONE
High
quali
ty
prod
uced
j. Avg k. Buyers made more l. Less profit than audit
Buy profits group
er
Profi
t
m. Avg n. Seller made more profits o. Less profit than audit
Selle group
r
Profi
t
p. Total q. BETTER !!! r.
Profi
t
s. Weal t. Lot more wealth created u.
th
creat
ed in
each
tran
 sacti
on
v. Weal w. BETTER!! x.
th
effici
ency
37. What are the key takeaways? (Market)
a. Markets without credible signals generate less wealth than those with credible signals
(such as audit signals)
b. Economies w/ auditors functioning well have a lot more wealth than those economies
that dont
c. Credible signals in real-world
i. Financial statements (only credible if they are audited-they attest to the quality of
the financial statements)
ii. Disclosure (subject to litigation): fancy word for communicating; credible only if
it is subject to litigation (no way to hold them responsible without litigation)
1. Litigation provides an enforcement mechanism for managers to disclose
truthfully
d. ***Notice this is an unregulated setting*** you dont need it to be regulated; just need
auditors
38. What are they key takeaways (Accounting)
a. There are 3 main roles for accounting information
b. (1) Exchange Guidance Role: accounting information guides production decisions &
determining what to sell based on historical profit
i. Reading: If you go back in the beginning of firms, merchants trying to make
money and based on their experience and record keeping, they made decisions
about what to sell, how much to sell it for he calls it exchange guidance
ii. Guiding this exchange transaction
iii. In market a: the amount of profit margin that you received or saw yourself in the
high quality market compared to the normal helped you make a choice about
which asset to produce
iv. In market b: they also saw that the profit margin for selling high quality was really
low
c. (2) Valuation role: accounting information guides price formation; helping to set prices
i. consider willingness to pay as buyers based on profit history
ii. Market a: more willing to pay high quality based on profit history
iii. Market b: saw they were getting burnt out buying high quality, so now are less
willing to pay more and pay just enough for normal quality
d. ***Credibility of accounting information (auditing) impacts both of those goals
i. Willingness to pay of buyers (if I know its high quality, Im willing to pay more)
ii. Production decisions of producers (I can credibly sell it as high quality, Im going
to produce more of it)
e. (3) Contracting Role
i. (1) Debt contracts
1. Accounting information helps determine if we should even give a loan to a
company, how many liabilities a company already has, D/E ratio, ability to
pay debts, calculate the interest rate to charge.
ii. (2) Management compensation contracts: managers getting compensated based
on accounting performance (bonuses based on income, etc.)
f. ULTIMATELY: ACCOUNTING INFORMATION MAKES ALLOCATION OF CAPITAL
MORE EFFICIENT AT THE ECONOMY LVL
i. (Akerlof) Double Entry Accountingenabled capitalism; biggest accumulator of
wealth