College Accounting- Contemporary Approach (Chapter#13- Financial Statements & Closing Procedures)

Reversing Entries

Entries made to reverse the effect of certain adjustments helping to prevents errors in recording payments or cash receipts in the new accounting period.

Accounts Receivable Turnover

Measures the reasonableness of accounts receivable outstanding and can be used to estimate the average collection period of accounts receivable.

How do you calculate Accounts Receivable Turnover?

Net credit sales divided by average accounts receivable.

Classified Financial Statements

A statement where revenues, expenses, assets, and liabilities are divided into groups of similar accounts and a subtotal is given for each group, making the statement more useful for the reader.

Multi-step Income Statement

A type of statement on which several subtotals are computed before the net income is calculated.

Single-step Income Statement

A type of statement where only one computation is needed to determine the net income, calculated by subtracting the total expense from the total revenue.

Which adjusting entries should be reversed?

Adjustments that include entries in asset and liability accounts that have not been used during the period.

Classified Income Statement

Also known as a Multiple-step Income Statement, because several subtotals are computed before net income is calculated.

Merchandise Inventory

An account that appears on both the income statement and balance sheet. The beginning and ending balances appear on the income statement. The ending balance also appears on the balance sheet in the assets section.

Liquidity

An item that can be converted into cash.

Why do adjusting entries need detailed explanations in the general journal?

Anyone who needs to examine the entries at a later date will need to understand how and why the adjustments were made.

How do you calculate Average Inventory?

Beginning inventory plus ending inventory divided by 2.

Gross Profit Percentage

Calculated by dividing gross profit by net sales, revealing the gross profit of each dollar.

What are the 4 steps in the closing process?

Close revenue accounts and cost of goods sold accounts with credit balances to Income Summary. Close expense accounts and cost of goods sold with debit balances to Income Summary. Close Income Summary, which now reflects the net income or loss for the period to owners capital. Close the Drawing account to owners capital.

Current Assets

Consists of items that will normally be converted into cash within 1 year and items that will be used up within 1 year. These are usually listed in order or liquidity.

Plant and Equipment

Consists of property that will be used in the business for longer than 1 year.

How do you calculate Inventory Turnover?

Costs of goods sold divided by average inventory.

How do you calculate current ratio?

Current Assets divided by Current Liabilities.

Inventory Turnover

Shows the number of times inventory is replaced during an accounting period.

What is the calculation to define Net Income?

Subtract total expense from total revenue.

Long-term Liability

The debits of the business that are due more than 1 year in the future. Even though payment might not be due for several years, management must make sure that periodic interest is paid promptly.

Current Liability

The debits that must be paid within 1 year. These are usually listed in order of priority.

Gross Profit

The difference between net sales and cost of goods sold.

Working Capital

The difference between total current assets and total current liabilities. It measures the firms ability to pay it's current obligations.

Prepare a Postclosing Trial Balance

The eighth step in the review of the accounting cycle. This confirms that the general ledger is still in balance and that the temporary account have zero balances.

Operating Expense

The expenses that arise from normal business activities.

Prepare Financial Statements

The fifth step in the review of the accounting cycle.

Analyze Transactions

The first step in the review of the accounting cycle. Transaction data comes into an accounting system from a variety of source documents such as sales slips, purchase invoices, credit memorandums, check stubs, and so on. Each document is reviewed to determine the accounts and amounts affected.

Prepare a Worksheet

The fourth step in the review of the accounting cycle. This is prepared at the end of each period. The trial balance section of the sheet is used to prove the equality of the debits and credits in the general ledger. Adjustments are entered in the adjustment section so that the financial statements will be prepared using the accrual basis of accounting. The adjusted trial balance section is used to prove the equality of the debits and credits of the updated account balances. The income statement and balance sheet sections are used to arrange data in an orderly manner.

Interpret the Financial Information

The ninth step in the review of the accounting cycle. The review of the financial statements and reports used to evaluate results of the operation and it's financial position of the business.

Current Ratio

The relationship between current assets and current liabilities that provides a measure of the firms ability to pay current debits.

Journalize the Data about Transactions

The second step in the review of the accounting cycle. Each transaction is recorded in either a special journal or the general journal.

Journalizing and Post Closing Entries

The seventh step in the review of the accounting cycle. This entry reduces the temporary account balance to zero.

Journalize and Post Closing Entries

The sixth step in the review of the accounting cycle. This creates a permanent record of the changes shown on the worksheet.

Post the Data about Transaction

The third step in the review of the accounting cycle. Each transaction is transferred from the journal to the ledger accounts. Merchandising businesses typically maintain several subsidiary ledgers in addition to the general ledger.

What do the four steps in the closing process accomplish?

They provide a systematic and uniform method for closing all accounts that affect profit or loss for the period and transferring that profit or loss, adjusted for owners withdrawals to the owners capital account.