Ch 4 Financial Accounting

journalize transactions

2nd step

prepare a trial balance

6th step

Define current assets. What basis is used for arranging individual items within the current assets section?

Current assets are assets that a company expects to convert to cash or use up in one year. Some companies use a period longer than one year to classify assets and liabilities as current because they have an operating cycle longer than one year. Companies usually list current assets in the order in which they expect to convert them into cash.

post to ledger accounts

Step 3

post-closing trial balance

a list of permanent accounts and their balances after a company has journalized and posted closing entries

property, plant, and equipment

assets with relatively long useful lives and currently being used in operations

operating cycle

the average time that it takes to purchase inventory, sell it on account, and then collect cash from customers

prepare financial statements; income statement, retained earnings statement, balance sheet

step 7

journalize and post closing entries

step 8

prepare a post-closing trial balance

step 9

liquidity

the ability of a company to pay obligations expected to be due within the next year

stockholders equity

the ownership claim of shareholders on total assets. its to a corporation what owner's equity is to a proprietorship

identify the accounts debited and credited in each of the four closing entries, assuking the company has net income for the year.

(1) (Dr) Individual revenue accounts and (Cr) Income Summary. (2) (Dr) Income Summary and (Cr) Individual expense accounts. (3) (Dr) Income Summary and (Cr) Retained Earnings (for net income). (4) (Dr) Retained Earnings and (Cr) Dividends.

What is the term used to describe the owners equity section of a corporation? (b) identify the two owners' equity accounts in a corporation and indicate the purpose of each

(a) The owner's equity section for a corporation is called stockholders' equity. (b) The two accounts and the purpose of each are: (1) Common stock is used to record investments of assets in the business by the owners (stockholders). (2) Retained earnings is used to record net income retained in the business.

What standard classifications are used in preparing a classified balance sheet?

Assets Liabilities and Stockholders' Equity Current Assets Current Liabilities Long-term Investments Long-term Liabilities Property, Plant, and Equipment Stockholders' Equity Intangible Assets

T or F - Journalize the transaction is the first step in the accounting cycle

False "Analyze business transactions" is the first step in the accounting cycle.

Closing entries must be prepared before financial statements can be prepared

False. Closing entries are prepared after financial statements are prepared.

T or F - Reversing entries are a required step in the accounting cycle

False. Reversing entries are an optional step in the accounting cycle.

All steps of the accounting cycle occur daily during the accounting period

False. Steps 1-3 may occur daily in the accounting cycle. Steps 4-7 are performed on a periodic basis. Steps 8 and 9 are usually prepared only at the end of a company's annual accounting period.

The steps of "post to the ledger accounts" occurs before the step of "journalize the tranzations

False. The step of "journalize the transactions" occurs before the step of "post to the ledger accounts."

Why is it necessary to prepare formal financial statements if all of the data are in teh statement columns of the worksheet?

Formal financial statements are needed because the columnar data are not properly arranged and classified for statement purposes. For example, the dividends account is listed with assets.

long-term investments

Generally, (1) investments in stocks and bonds of other corporations that companies hold for more than one year; (2) long-term assets, such as land and buildings, not currently being used in the company's operations

Describe the nature of the income summary account and identify the types of summary data that may be posted to this account

Income Summary is a temporary account that is used in the closing process. The account is debited for expenses and credited for revenues. The difference, either net income or net loss, is then closed to the retained earnings account.

Distinguish between long-term investments and property, plant, and equipment

Long-term investments are generally investments in stocks and bonds of other companies that are normally held for many years. Property, plant, and equipment are assets with relatively long useful lives that a company is currently using in operating the business.

analyze business transactions

Step 1

Journalize and post adjusting entries; deferrals/accruals

Step 5

prepare an adjusted trial balance

Step 6

If a company's revenues are $125,000 and its expenses are $113,000, in which financial statement colums of the worksheet will the net income of 12,000 appear? When expenses exceed revenues, in which columns will the difference appear?

The net income of $12,000 will appear in the income statement debit column and the balance sheet credit column. A net loss will appear in the income statement credit column and the balance sheet debit column.

What is meant by the term operating cycle?

The operating cycle of a company is the average time that it takes to purchase inventory, sell it on account, and then collect cash from customers.

If a worksheet is prepared, some steps of the accounting cycle are incorporated into the worksheet

True

T or F - Correcting entries do not have to be part of the accounting cycle

True

The accounting cycle begins with the analysis of business transactions and ends with the preparation of a post-closing trial balance

True

worksheet

a multiple column form that may be used in making adjusting entries and in preparing financial statements

income summary

a temporary account used in closing revenue and expense accounts

temporary (nominal) accounts

accounts that relate only to a given accounting period. consist of all income statement accounts and the dividends account. All temporary accounts are closed at the end of the accounting period

permanent (real) accounts

accounts that relate to one or more future accounting periods. consist of all balance sheet accounts. Balances are carried forward to the next accounting period

reversing entry

an entry, made and the beginning of the next accounting period, that is the exact opposite of the adjusting entry made in the previous period.

current assets

assets that a company expects to convert to cash or use up within one year

classified balance sheet

balance sheet that contains standard classifications or sections

closing entries

entries made at the end of an accounting period to transfer the balances of temporary accounts to a permanent stockholders' equity account, retained earnings

correcting entries

entries to correct errors made in recording transactions

intangible assets

noncurrent assets that do not have physical substance

long-term liabilities

obligations that a company expects to pay after one year

current liabilities

obligations that a company expects to pay within the coming year or its operating cycle, whichever is longer