Financial Accounting Ch. 4 Notes

what is included in a balance sheet?

Includes asset, liability, and equity accounts except revenues and expenses

Revenues and expenses may be transferred to the ________ account before their final transfer into the Retained Earnings account.

Income Summary

Which of the following accounts will be included in a post-closing trial balance?

Interest Payable, Unearned Revenue

Which of the following is a measure of how quickly an item can be converted to cash?

Liquidity

Balance Sheet

Reports assets, liabilities, and stockholders' equity as of the last day of the period.

Income Statement

Reports revenues and expenses and calculates net income or net loss for the period

To which of the following accounts should the balance in the Income Summary account be closed?

Retained Earnings

Statement of Retained Earnings

Shows how retained earnings changed during the period due to net income (or net loss) and dividends.

Permanent accounts

accounts used to accumulate information from one fiscal period to the next -NOT closed at the end of the period EX: Assets, Liability, Common Stock, and Retained Earnings

The financial statements are prepared from the ________.

adjusted trial balance

Closing entries are journalized and posted ________.

after preparing the financial statements

Patents, copyrights, and trademarks are examples of ________.

intangible assets

In an accounting cycle, which of the following steps takes place only at the end of the accounting period?

journalize adjusting entries

The time span during which cash is paid for goods and services, which are then sold to customers from whom the business collects cash, is called the ________.

operating cycle

An account that is not closed at the end of the period is called a(n) ________.

permanent account

Temporary accounts

relate to a particular accounting period and are CLOSED at the end of that period -Revenues, Expenses, Income Summary, and Dividends accounts.

Stockholders' Equity

represents the stockholders' claims to the assets of the business -Reflects the stockholders' contributions through common stock -Represents the amount of assets left over after the corporation has paid its liabilities

what is included in an income statement?

revenue and expense accounts

Which of the following are temporary accounts that are closed at the end of the year?

revenues, expenses, and dividends

Reversing entries

special journal entries that ease the burden of accounting for transactions in a later period. •The opposite of adjusting entries •Not required by G A A P Used for convenience and to save time

A reversing entry switches...

switches the debit and the credit of a previous entry •It is the exact opposite of a prior adjusting entry. •The reversing entry is dated the first day of the new period.

operating cycle

the time span when: 1. Cash is used to acquire goods and services. 2. These goods and services are sold to customers. 3. The business collects cash from customers

closing process

zeroes out all revenue and expense accounts in order to measure each period's net income separately from all other periods.

post-closing trial balance

•A list of the accounts and their balances at the end of the period, after journalizing and posting the closing entries •Includes only permanent accounts

accounting cycle

•It is the steps that are followed throughout the time period. •It starts with the beginning asset, liability, and stockholders' equity account balances left over from the preceding period.

Current liabilities

•must be paid either with cash or with goods and services within one year or within the entity's operating cycle. -Examples: §Accounts Payable §Salaries Payable §Unearned Revenue

Under which of the following categories would Accounts Payable appear?

current liabilities

Flow of Financial Statements

1. Income Statement 2. Statement of Retained Earnings 3. Balance Sheet 4. Statement of Cash Flows

Classified Balance Sheet

A balance sheet that places each asset and each liability into a specific category -assets are shown in order of liquidity -liabilities are classified as current (due within 1 yr.) or long term (more than 1 yr.)

Which of the following would be considered the weakest current ratio? A) 0.55 B) 0.90 C) 1.25 D) 2.30

A) 0.55

Salaries Payable, Accounts Payable, and Unearned Revenue are examples of ________.

current liabilities

Which of the following accounts' balance is carried forward to the next accounting period?

Accumulated Depreciation

Regarding a classified balance sheet, which of the following statements is correct?

Assets are listed in the order of their liquidity.

current assets

Assets that companies expect to convert to cash or use up within one year or the operating cycle, whichever is longer.

The formula for computing the current ratio is ________.

Current ratio = Total Current assets / Total Current liabilities

Closing entries

Entries at the end of an accounting period to transfer the balances of temporary accounts to a permanent stockholders' equity account, Retained Earnings.

The current ratio measures ________.

a company's ability to pay current liabilities from current assets

Income Summary

a temporary account that summarizes the net income (or net loss) for the period

The process by which companies produce their financial statements for a specific period is called the ________.

accounting cycle

long term assets

assets that are expected to be used in business operations for longer than one year (ex: long-term investments, property, plant, and equipment, and intangible assets)

The financial statement that reports assets, liabilities, and stockholders' equity as of the last day of the period is called the _______________.

balance sheet

remember!!!

close revenues, close expenses, close income summary, close dividends

The entries that transfer the revenue, expense, and dividends balances to the Retained Earnings account to prepare the company's books for the next period are called ________ entries.

closing

Martinville, Inc. earned revenues of $18,000 and incurred expenses of $4,000. The company declared and paid cash dividends of $3,500. What is the balance in the Income Summary account prior to closing net income or loss to the Retained Earnings account?

credit balance of $14,000 (Revenue: $18,000 Expenses - 4,000 Net Income= $14,000)

Assets that are expected to be converted to cash, sold, or used up during the next 12 months, or within the business's normal operating cycle if the cycle is longer than a year, are called ________ assets.

current

Brownstone, Inc. has a current ratio of 6.00. This indicates that the company has $6 in ________.

current assets for every $1 of current liabilities

long-term liabilities

liabilities that do not need to be paid within one year or within the operating cycle.

All assets that will not be converted to cash or used up within the business's operating cycle or one year, whichever is greater, are called ________.

long-term assets

intangible assets

long-term assets (e.g., patents, trademarks, copyrights) that have no real physical form but do have value

Notes Payable due within two years are classified as ________.

long-term liabilities

the current ratio

measures a company's ability to pay its current liabilities with its current assets. (current ratio= total current assets/total current liabilities) high current ratio means high ability to pay debts

Liquidity

measures how quickly and easily an account can be converted to cash.