Ch 4 Financial Accounting
journalize transactions
2nd step
prepare a trial balance
6th step
Define current assets. What basis is used for arranging individual items within the current assets section?
Current assets are assets that a company expects to convert to cash or use up in one year. Some companies use a period longer than one year to classify assets and liabilities as current because they have an operating cycle longer than one year. Companies usually list current assets in the order in which they expect to convert them into cash.
post to ledger accounts
Step 3
post-closing trial balance
a list of permanent accounts and their balances after a company has journalized and posted closing entries
property, plant, and equipment
assets with relatively long useful lives and currently being used in operations
operating cycle
the average time that it takes to purchase inventory, sell it on account, and then collect cash from customers
prepare financial statements; income statement, retained earnings statement, balance sheet
step 7
journalize and post closing entries
step 8
prepare a post-closing trial balance
step 9
liquidity
the ability of a company to pay obligations expected to be due within the next year
stockholders equity
the ownership claim of shareholders on total assets. its to a corporation what owner's equity is to a proprietorship
identify the accounts debited and credited in each of the four closing entries, assuking the company has net income for the year.
(1) (Dr) Individual revenue accounts and (Cr) Income Summary. (2) (Dr) Income Summary and (Cr) Individual expense accounts. (3) (Dr) Income Summary and (Cr) Retained Earnings (for net income). (4) (Dr) Retained Earnings and (Cr) Dividends.
What is the term used to describe the owners equity section of a corporation? (b) identify the two owners' equity accounts in a corporation and indicate the purpose of each
(a) The owner's equity section for a corporation is called stockholders' equity. (b) The two accounts and the purpose of each are: (1) Common stock is used to record investments of assets in the business by the owners (stockholders). (2) Retained earnings is used to record net income retained in the business.
What standard classifications are used in preparing a classified balance sheet?
Assets Liabilities and Stockholders' Equity Current Assets Current Liabilities Long-term Investments Long-term Liabilities Property, Plant, and Equipment Stockholders' Equity Intangible Assets
T or F - Journalize the transaction is the first step in the accounting cycle
False "Analyze business transactions" is the first step in the accounting cycle.
Closing entries must be prepared before financial statements can be prepared
False. Closing entries are prepared after financial statements are prepared.
T or F - Reversing entries are a required step in the accounting cycle
False. Reversing entries are an optional step in the accounting cycle.
All steps of the accounting cycle occur daily during the accounting period
False. Steps 1-3 may occur daily in the accounting cycle. Steps 4-7 are performed on a periodic basis. Steps 8 and 9 are usually prepared only at the end of a company's annual accounting period.
The steps of "post to the ledger accounts" occurs before the step of "journalize the tranzations
False. The step of "journalize the transactions" occurs before the step of "post to the ledger accounts."
Why is it necessary to prepare formal financial statements if all of the data are in teh statement columns of the worksheet?
Formal financial statements are needed because the columnar data are not properly arranged and classified for statement purposes. For example, the dividends account is listed with assets.
long-term investments
Generally, (1) investments in stocks and bonds of other corporations that companies hold for more than one year; (2) long-term assets, such as land and buildings, not currently being used in the company's operations
Describe the nature of the income summary account and identify the types of summary data that may be posted to this account
Income Summary is a temporary account that is used in the closing process. The account is debited for expenses and credited for revenues. The difference, either net income or net loss, is then closed to the retained earnings account.
Distinguish between long-term investments and property, plant, and equipment
Long-term investments are generally investments in stocks and bonds of other companies that are normally held for many years. Property, plant, and equipment are assets with relatively long useful lives that a company is currently using in operating the business.
analyze business transactions
Step 1
Journalize and post adjusting entries; deferrals/accruals
Step 5
prepare an adjusted trial balance
Step 6
If a company's revenues are $125,000 and its expenses are $113,000, in which financial statement colums of the worksheet will the net income of 12,000 appear? When expenses exceed revenues, in which columns will the difference appear?
The net income of $12,000 will appear in the income statement debit column and the balance sheet credit column. A net loss will appear in the income statement credit column and the balance sheet debit column.
What is meant by the term operating cycle?
The operating cycle of a company is the average time that it takes to purchase inventory, sell it on account, and then collect cash from customers.
If a worksheet is prepared, some steps of the accounting cycle are incorporated into the worksheet
True
T or F - Correcting entries do not have to be part of the accounting cycle
True
The accounting cycle begins with the analysis of business transactions and ends with the preparation of a post-closing trial balance
True
worksheet
a multiple column form that may be used in making adjusting entries and in preparing financial statements
income summary
a temporary account used in closing revenue and expense accounts
temporary (nominal) accounts
accounts that relate only to a given accounting period. consist of all income statement accounts and the dividends account. All temporary accounts are closed at the end of the accounting period
permanent (real) accounts
accounts that relate to one or more future accounting periods. consist of all balance sheet accounts. Balances are carried forward to the next accounting period
reversing entry
an entry, made and the beginning of the next accounting period, that is the exact opposite of the adjusting entry made in the previous period.
current assets
assets that a company expects to convert to cash or use up within one year
classified balance sheet
balance sheet that contains standard classifications or sections
closing entries
entries made at the end of an accounting period to transfer the balances of temporary accounts to a permanent stockholders' equity account, retained earnings
correcting entries
entries to correct errors made in recording transactions
intangible assets
noncurrent assets that do not have physical substance
long-term liabilities
obligations that a company expects to pay after one year
current liabilities
obligations that a company expects to pay within the coming year or its operating cycle, whichever is longer