Accounting Chapter 4

Current assets are those assets which management intends to convert into cash or consume within:

The longer of the operating cycle or within one year

Which should precede the other on a classified balance sheet?

long-term investments

The ____________ is the length of time it takes a company to turn cash back into cash via investing in inventory and accepting accounts receivable.

operating cycle

A ____________ is the exact opposite of an adjusting entry.

reversing entry

If a company has a current ratio of 2, and then pays half of its current liabilities from current assets, the current ratio would become:

3

The following statements all pertain to the accounting cycle. Which of these statements is wrong?

A post-closing trial balance is prepared prior to closing temporary accounts. (A post-closing trial balance is prepared after all closing entries are complete, not "prior to" closing entries. Formal financial statements are prepared from a worksheet, and adjusting entries are recorded in the journal and posted to the ledger.)

If a company had a current ratio of 0.5, then which of the following statements regarding that company's working capital would be true?

The company's working capital would be negative. (For the current ratio to be 0.5 signifies that the company has twice as many current liabilities as current assets. Therefore, working capital is a negative amount (i.e., current assets minus current liabilities is negative).

Shipman Company had accrued salaries of $300 on December 31. The company recorded reversing entries on the following January 1. On the next payday, January 7, the appropriate entry to record the payment of $1,000 in salaries should include:

a debit to Salaries Expense of $1,000. (When reversing entries are used, the journal entry on the payment date will record the full amount paid as a debit to Salaries Expense. The net impact is that salaries expense will equal the correct $700 amount related to the new year (i.e., $1,000 paid less $300 related to the prior year). This results because the reversing entry would establish a $300 credit to Salaries Expense and the payroll journal entry enters a $1,000 debit to Salaries Expense.)

A post-closing trial balance is prepared:

after closing

Working capital is computed by subtracting ____________ from ____________.

assets - liabilities

The post-closing trial balance would consist of which account types?

balance sheet accounts

Which of the following accounts would not be closed at the end of an accounting period?

capital stock (Capital Stock is a balance sheet account and is not closed. Temporary accounts (like Income Summary, Dividends, and Revenue) are closed "to" retained earnings.)

In preparing a worksheet, a net loss would be computed and entered in the:

credit column of the income statement columns of the worksheet. (A net loss is represented in the worksheet by debits exceeding credits in the subtotal of the income statement columns. To complete (i.e., balance) the income statement columns necessitates a credit to the income statement columns and a debit to the balance sheet columns. Therefore, the amount of a net loss is computed and entered in the credit column of the income statement columns of the worksheet.)

Amounts in the adjusted trial balance columns of the worksheet are extended to the ____________, ____________ or ____________columns of the work sheet.

income statement retained earnings balance sheet

The ____________ account is closed directly to retained earnings.

income summary

The ____________ account is used only in closing, and summarizes the net income or net loss of a business.

income summary

____________ assets usually follow property, plant, and equipment on a classified balance sheet.

intangible

The accountant's worksheet:

lays the groundwork for formal financial statement preparation.

Current assets should be listed on a balance sheet in order of ____________ .

liquidity

The relevant time period related to the definition of current assets is one year or the operating cycle, whichever is:

longer

If the subtotal amounts in the income statement columns of a worksheet reveal debits in excess of credits, then which is indicated?

net loss

Which account types are closed at the end of an accounting period?

nominal accounts

Accounts whose balances are carried forward from period to period are commonly called ____________ accounts.

real, permanent

Revenue, expense, and dividend accounts must be closed or reduced to zero so amounts are not carried over from one period to the next. These accounts are appropriately known as ____________ or ____________accounts.

temporary, nominal

To determine whether the accounts are still in balance after closing entries have been journalized and posted, accountants often prepare a ____________.

trial balance

Whether or not a company utilizes reversing entries, identical financial statements should be achieved. (T/F)

true

Current assets minus current liabilities is defined as:

working capital

The ____________ is a large columnar form that assists in the preparation of an entity's financial statements.

worksheet

On a classified balance sheet, the appropriate ordering of specific classifications is:

Current assets; long-term investments; property, plant, and equipment; intangible assets; other assets

Which of the following statements about reversing entries is true?

Identical account balances are achieved in the subsequent accounting period whether reversing entries are utilized or not. (Reversing entries are an optional tool to assist in the bookkeeping function. No matter whether they are used or not, identical account balances and financial statements should result. Reversing entries are often used for accrued revenues, and other similar items which will involve future cash flows. Reversing entries are prepared at the beginning of a new accounting period, and closing entries are prepared at the end of an accounting period. Closing entries must be prepared whether or not the company elects to use reversing entries.)

After closing all revenue and expense accounts, Norris Company had a debit balance in its Income Summary account of $10,000. The proper entry to record the closing of the Income Summary account would be:

Retained Earnings10,000 Income Summary 10,000 (Closing a debit balance in Income Summary is accomplished by crediting Income Summary. The corresponding debit is applied to retained earnings.)