Chapter 4 by Me
The following selected account balances appear on the December 31, 2008 balance sheet of Ming Co. Land (location of the corporation's office building) $150,000 Land (held for future use) 225,000 Corporate Office Building 900,000 Inventory 300,000 Equipment 675,000 Office Furniture 150,000 Accumulated Depreciation 450,000
$1,425,000
At January 1, 2008, Nova reported owner's equity of $50,000. Owner drawings for the year totalled $10,000. At December 31, 2008, the company will report owner's equity of a. $13,500. b. $36,500. c. $40,000. d. $43,500.
$36,500.
The steps in completing a worksheet are
(1) Prepare a trial balance on the worksheet. (2) Enter the adjustments in the adjustments column. (3) Enter adjusted balances in the adjusted trial balance column. (4) Total the statement columns, compute the net income (or net loss), and complete the worksheet. (5) Total the statement columns, compute the net income (or net loss), and complete the worksheet.
Common types of current assets are
(1) cash, (2) investments (such as short-term U.S. government securities), (3) receivables (notes receivable, accounts receivable, and interest receivable), (4) inventories, and (5) prepaid expenses (supplies and insurance)
Examples of intangible assets are
(1) goodwill, (2) patents, (3) copyrights, and (4) trademarks
These groupings help financial statement readers determine such things as
(1) whether the company has enough assets to pay its debts as they come due, and (2) the claims of short- and long-term creditors on the company's total assets
Companies record closing entries in the general journal. The steps are:
1. Debit each revenue account for its balance, and credit Income Summary for total revenues. 2. Debit Income Summary for total expenses, and credit each expense account for its balance. 3. Debit Income Summary and credit Owner's Capital for the amount of net income. If there is a net loss, Debit Owner's Capital and credit Income Summary 4. Debit Owner's Capital for the balance in the Owner's Drawings account, and credit Owner's Drawings for the same amount.
the completed worksheet is not a substitute for formal financial statements.
A worksheet is essentially a working tool of the accountant.
post-closing trial balance
After a company journalizes and posts all closing entries, it prepares another trial balance
PERMANENT ACCOUNTS (LIST)
All asset accounts All liability accounts Owner's capital accounts
TEMPORARY ACCOUNTS (LIST)
All revenue accounts All expense accounts Owner's drawings account
Income Summary
Companies close the revenue and expense accounts to another temporary account
Assets (List)
Current assets Long-term investments Property, plant, and equipment Intangible assets
Liabilities and Stockholders' Equity (List)
Current liabilities Long-term liabilities Owner's (Stockholders') equity
Step 3: Preparing a Worksheet
Enter adjusted balances in the adjusted trial balance column
Step 2: Preparing a Worksheet
Enter the adjustments in the adjustments column
Step 4: Preparing a Worksheet
Extend adjusted trial balance amounts to appropriate financial statements
A worksheet is a mandatory form that must be prepared along with an income statement and balance sheet
False
Permanent accounts are not closed from period to period
Instead, the balances are carried forward.
All of the following are owner's equity accounts except
Investment in Stock
intangible assets.
Many companies have assets that do not have physical substance and yet often are very valuable
Step 1: Preparing a Worksheet
Prepare a trial balance on the worksheet
the company has not journalized or posted adjusting entries
Therefore, ledger balances for some accounts are the same as the financial statement amounts.
Which statement about long-term investments is not true?
They can never include cash accounts
Step 5: Preparing a Worksheet
Total the statement columns, compute the net income (or net loss), and complete the worksheet
If a worksheet is used, financial statements can be prepared before adjusting entries are journalized
True
If total credits in the income statement columns of a worksheet exceed total debits, the enterprise has net income
True
It is not a permanent accounting record
Worksheet
The final step in the accounting cycle is to prepare
a post-closing trial balance
Closing entries also produce
a zero balance in each temporary account; Permanent accounts are not closed
A lawyer collected $830 of legal fees in advance. He erroneously debited Cash for $380 and credited Accounts Receivable for $380. The correcting entry is
a. Cash..................................................................................... 380 Accounts Receivable............................................................ 450 Unearned Revenue .................................................. 830 b. Cash..................................................................................... 830 Service Revenue ...................................................... 830 c. Cash..................................................................................... 450 Accounts Receivable............................................................ 380 Unearned Revenue .................................................. 830 d. Cash..................................................................................... 450 Accounts Receivable................................................ 450
Current Liabilities Examples
accounts payable, salaries and wages payable, notes payable, interest payable, and income taxes payable
After the adjusting entries are journalized and posted to the accounts in the general ledger, the balance of each account should agree with the balance shown on the
adjusted trial balance
A post-closing trial balance is a list of all permanent accounts and their balances
after closing entries are journalized and posted.
Companies do not journalize the adjustments until
after they complete the worksheet and prepare the financial statements.
The company closes
all temporary accounts at the end of the period
A current asset is
an asset that a company expects to convert to cash or use up within one year
A worksheet it not a journal
and it cannot be used as a basis for posting to ledger accounts
Current assets
are assets that a company expects to covert to cash or use up within one year or its operating cycle, whichever is longer
Property, plant, and equipment
are assets with relatively long useful lives that are currently used in operating the business. This category includes land, buildings, equipment, delivery vehicles, and furniture
Long-term investments
are generally (1) investments in stocks and bonds of other companies that are normally held for many years, (2) long-term assets such as land or buildings that a company is not currently using in its operating activities, and (3) long-term notes receivable.
Current liabilities
are obligations that the company is to pay within the next year or operating cycle, whichever is longer.
Long-term liabilities (long-term debt)
are the obligations that a company expects to pay after one year
The assets that the company depreciates are reported on the balance sheet
at cost less accumulated depreciation
The amount shown for owner's capital on the worksheet is the account balance
before considering drawings and net income (or loss).
long-term liabilities Examples
bonds payable, mortgages payable, long-term notes payable, lease liabilities, and pension liabilities
Companies should correct errors, as soon as they discover them
by journalizing and posting correcting entries
The current assets should be listed on Cerner's balance sheet in the following order
cash, accounts receivable, prepaid insurance, supplies
At the end of the accounting period, the company makes the accounts ready for the next period
closing the books
On the balance sheet
companies usually list these items in the order in which they expect to convert them into cash
The balance sheet presents a snapshot of a
company's financial position at a point in time
Users of financial statements look closely at the relationship between
current assets and current liabilities
Liabilities are generally classified on a balance sheet as
current liabilities and long-term liabilities.
On September 23, Pitts Company received a $350 check from Mike Moluf for services to be performed in the future. The bookkeeper for Pitts Company incorrectly debited Cash for $350 and credited Accounts Receivable for $350. The amounts have been posted to the ledger. To correct this entry, the bookkeeper should
debit Accounts Receivable $350 and credit Unearned Service Revenue $350.
Speedy Bike Company received a $940 check from a customer for the balance due. The transaction was erroneously recorded as a debit to Cash $490 and a credit to Service Revenue $490. The correcting entry is
debit Cash, $450 and Service Revenue, $490; credit Accounts Receivable, $940
Preparing a worksheet involves
five steps
The information for preparing a trial balance on a worksheet is obtained from
general ledger accounts.
Temporary accounts
include all income statement accounts and the owner's drawings account
Worksheet
is a multiple-column form used in the adjustment process and in preparing the financial statements
Depreciation
is the allocation of the cost of an asset to a number of years; Companies do this by systematically assigning a portion of an asset's cost as an expense each year (rather than expensing the full purchase price in the year of the purchase)
The operating cycle of a company
is the average time required to go from cash to cash in producing revenue—to purchase inventory, sell it on account, and then collect cash from customers.
The balance in Income Summary
is the net income or loss for the accounting period
After a company has completed a worksheet
it has at hand all the data required for a preparation of financial statements
liquidity
its ability to pay obligations expected to be due within the next year
The adjustments entered in the adjustments columns of a worksheet are
not journalized until after the financial statements are prepared.
Companies generally journalize and post closing entries
only at the end of the annual accounting period
A post-closing trial balance will show
only permanent account balances.
In order to close the owner's drawing account, the
owner's capital account should be debited
A worksheet is a multiple column form that facilitates the
preparation of financial statements
Temporary accounts
relate only to a given accounting period
permanent accounts
relate to one or more future accounting periods
Journalizing and posting closing entries is a
required step in the accounting cycle
The accumulated depreciation account
shows the total amount of depreciation that the company has experienced thus far in the asset's life
Corporations combine Common Stock and Retained Earnings accounts and report them on the balance sheet
stockholders' equity
If the total debit column exceeds the total credit column of the income statement columns on a worksheet, then the company has
suffered a net loss for the period.
All of the following are property, plant, and equipment except
supplies
Closing entries are necessary for
temporary accounts only
The purpose of this trial balance is to prove the equality of the total debt and total credit balances of the permanent account balances
that the company carries forward into the next accounting period
A double rule applied to accounts in the ledger during the closing process implies that
the account is an income statement account
Adjusting entries are prepared from
the adjustments columns of the worksheet
the credit amount balances
the balance sheet columns
The balance sheet and owner's equity statement are prepared from
the balance sheet columns.
In the liabilities and stockholders' equity section of the balance sheet
the first grouping is current liabilities
The debit amount balances
the income statement columns
The income statement is prepared from
the income statement columns
Since all temporary accounts will have zero balances
the post-closing trial balance will contain only permanent—balance sheet---accounts.
Closing entries formally recognize in the ledger
the transfer of net income (or net loss) and owner's drawings to owner's capital
The adjusting entries are prepared from the adjustments columns of
the worksheet
A classified balance sheet groups together similar assets and similar liabilities
using a number of standard classifications and sections
Closing Entries & Post Closing Trial Balance
usually take place ONLY at the end of a company's annual accounting period
Correcting entries are made
whenever an error is discovered.
Companies make correcting entries
whenever they discover an error
Income Summary is then closed
which transfers the net income or net loss from this account to Owner's Capital.