Financial Statements and the Closing Process

When recording closing entries in the general journal, which of the following is written in the Description column?

"closing entries"

Capital at the beginning of the month amounted to $4,000; net income for the month amounted to $1,000; and withdrawals for personal use during the month amounted to $2,000. Capital at the end of the month is

$3,000.

The total revenue for the month of June amounted to $7,500; total expenses amounted to $3,500; and withdrawals amounted to $600. The net income for the month amounted to

$4,000.

The owner's equity in a business amounted to $52,000 at the beginning of the year and $100,000 at the end of the year. The owner had made no additional investments and had withdrawn $19,000 during the year. The net income for the year amounted to

$67,000.

The total assets amount to $26,000 and the total liabilities amount to $18,000. The amount of the owner's equity is

$8,000.

After the closing entries have been posted, which of the following accounts would still have a balance?

Accumulated Depreciation-Equipment

_________________ _____________ will be converted into cash or consumed within either one year or the normal operating cycle of the business, whichever is longer.

Current assets

__________________ ___________________ are due within either one year or the normal operating cycle of the business, whichever is longer, and are to be paid out of current assets.

Current liabilities

(Appendix) The accuracy of the statement of cash flows can be proved by comparing the cash provided by operating activities with the change in the cash balance.

False

(Appendix) The three types of business activities are operating activities, investing activities, and capital activities.

False

A balance sheet that classifies (or groups) items by similarities is called a unified balance sheet.

False

A form of balance sheet that lists the assets at the left and the liabilities and owner's equity at the right is called a report form of balance sheet.

False

A form of balance sheet that shows the liabilities and owner's equity sections below the assets section is called an account form of balance sheet.

False

A mortgage on an office building is an example of a property, plant, and equipment asset.

False

A separate explanation of each closing entry is necessary.

False

Adjusting entries are recorded and posted after closing entries.

False

Adjustments at the end of the period are not formally entered in the journal or posted to the accounts.

False

After posting the closing entries, the balance of the depreciation expense account should agree with the amount shown on the income statement.

False

An income statement is an itemized statement that provides information regarding the status of the assets, liabilities, and owner's equity of a business enterprise as of a specified date.

False

Assets, liabilities, and the owner's capital account are closed at the end of the accounting period.

False

Expenses on the income statement could be listed in alphabetical order by dollar amount.

False

Obligations that need not be paid for a long time, usually more than one year, are classified as current liabilities.

False

Revenue and expense accounts are permanent accounts.

False

The effect of drawing transactions on the capital account is formalized at any time during the accounting period.

False

The end-of-period work sheet is completed after adjusting entries have been recorded and posted.

False

The heading for a balance sheet includes the name of the business, the title of the statement, and a period of time.

False

The income summary account appears on the income statement at the end of the accounting period.

False

The statement of owner's equity is prepared from information from the asset and liability accounts.

False

To close an expense account with a debit balance, debit the account for its balance and credit the income summary account.

False

To close the income summary account with a credit balance, debit the account for its balance and credit the drawing account.

False

The ________________ _________________ account is a temporary account used in the closing process to summarize the effects of all revenue and expense accounts.

Income Summary

The account to which revenue and expenses are closed is called

Income Summary.

The account to which the drawing account is closed is called

Owner's Capital.

________________ accounts accumulate information across accounting periods and are reported on the balance sheet.

Permanent

After the closing entries are journalized and posted, which of the following accounts would NOT have a balance?

Service Revenue

After the accounts are closed and the journal entries have been posted, which of the following accounts would have a balance?

Supplies

_________________ accounts do not accumulate information across accounting periods but are closed.

Temporary

A post-closing trial balance is used to prove the equality of debit and credit balances in the general ledger accounts after the closing entries have been posted.

True

A statement of owner's equity is a statement summarizing all of the changes in owner's equity during a specified period of time.

True

An income statement is an itemized statement for the purpose of providing information regarding the results of operations during a specified period of time.

True

Closing entries are made in the journal and posted to the ledger accounts.

True

Current assets include cash and other assets that will be converted into cash or consumed within one year or the normal operating cycle of the business, whichever is longer.

True

Expenses on the income statement could be listed in the same order as they appear in the chart of accounts.

True

Long-term liabilities are liabilities that are due in a period longer than one year.

True

Long-term liabilities may also be called long-term debt.

True

Owner withdrawals have nothing to do with measuring the profitability of a business.

True

Property, plant, and equipment are assets that are expected to serve the business for many years.

True

Revenues and expenses are temporary accounts and are closed at the end of the accounting period.

True

The Account Title and Balance Sheet columns of the work sheet provide all of the information necessary to prepare the statement of owner's equity.

True

The income statement includes all changes in owner's equity except those resulting from investments or withdrawals of assets by the owner.

True

The income summary account is an account used only during the closing process.

True

The purpose and use of the income summary account is to summarize the difference between revenues and expenses.

True

The steps involved in handling all of the transactions and events completed during an accounting period, beginning with placing data in a book of original entry and ending with a post-closing trial balance, are referred to collectively as the accounting cycle.

True

To close a revenue account with a credit balance, debit the account for its balance and credit the income summary account.

True

To close the drawing account with a debit balance, credit the account for its balance and debit the owner's capital account.

True

A(n) ______________ ______________ balance sheet shows the assets on the left and the liabilities and the owner's equity sections on the right.

account form

The steps involved in accounting for all the business activities during an accounting period are known as the ________________ _____________ .

accounting cycle

The amount reported in the Balance Sheet columns of the work sheet for the owner's capital represents the

beginning balance plus additional investments.

A balance sheet that groups similar items is called a(n)

classified balance sheet.

The Income Summary account is used to

close revenue accounts and expense accounts and update the owner's capital account.

The ______________ process gives zero balances to the temporary accounts so that they can accumulate information for the next accounting period.

closing

Cash and other assets that will be converted into cash within one year or the normal operating cycle of the business, whichever is longer, are called

current assets.

The journal entry to close expense accounts includes

debiting Income Summary and crediting the expense accounts.

The journal entry to close the income summary account (showing a profit) includes

debiting Income Summary and crediting the owner's capital account.

The journal entry to close the income summary account (showing a net loss) includes

debiting the owner's capital account and crediting Income Summary.

The journal entry to close the drawing account includes

debiting the owner's capital account and crediting the drawing account.

The journal entry to close revenue accounts includes

debiting the revenue accounts and crediting Income Summary.

(Appendix) A company receives cash from a bank loan. This activity is classified as

financing.

The order in which financial statements should be prepared is

income statement, statement of owner's equity, balance sheet.

The balance in an expense account is closed to a(n)

income summary account.

Owner's equity can be increased through

investments by the owner.

Long-term liabilities or ___________-_____________ ______________ are obligations that are not expected to be paid within a year and do not require the use of current assets.

long-term debt

Obligations that are not expected to be paid within a year and do not require the use of current assets are known as ____________-________________ _________________ .

long-term liabilities .

The period of time required to purchase supplies and services and convert them back into cash is the _____________ ______________ .

operating cycle

(Appendix) Business transactions can be classified as

operating, investing, and financing.

(Appendix) A utility bill for $315 was paid. This activity is classified as

operating.

The accounts shown in the post-closing trial balance are the ________________ accounts.

permanent

The ____________-_____________ _____________ __________________ is prepared after posting the closing entries to prove the equality of the debit and credit balances in the general ledger accounts.

post-closing trial balance

To prove the equality of the debit and credit balances in the general ledger accounts after the closing entries have been journalized and posted, prepare the

post-closing trial balance.

Which step is taken at the end of the accounting period?

prepare a post-closing trial balance

Which of the following steps of the accounting cycle are in the correct order?

prepare a trial balance, make adjustments, prepare financial statements

The ____________ ___________ balance sheet shows the liabilities and owner's equity sections below the asset section.

report form

A form of balance sheet that lists the liabilities and the owner's equity sections below the assets section is called the

report form.

What is the correct sequence for closing the temporary accounts?

revenue accounts, expense accounts, Income Summary, drawing account

The body of the income statement consists of an itemized list of

revenues and expenses.

Changes in owner's equity that result from investments or withdrawals of assets by the owner are included in the

statement of owner's equity.

The steps involved in handling all of the transactions and events completed during an accounting period, beginning with placing data in a book of original entry and ending with a post-closing trial balance, are referred to collectively as

the accounting cycle.

What is the purpose of the post-closing trial balance?

to prove the equality of the debit and credit balances in the general ledger accounts