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.