Financial Statements and Year-End Accounting for a Merchandising Business

The rough "rule of thumb" for a quick ratio is that the ratio should be about

1 to 1.

Information needed in journalizing the first three closing entries is obtained from which of the following work sheet columns?

Income Statement

A formal statement of the assets, liabilities, and owner's equity of a business at a specified date is known as a(n)

balance sheet.

Net sales minus cost of goods sold equals

gross profit.

A(n) ____________________ is a written agreement specifying that if the borrower does not repay a debt, the lender has the right to take over specific property to satisfy the debt.

mortgage

A mortgage payable is a written agreement specifying that if the borrower does not repay a debt, the lender has the right to take over the property to satisfy the debt.

True

A primary purpose of the work sheet is to serve as an aid in the preparation of the financial statements.

True

A quick ratio of 1.5 to 1 indicates that quick assets are more than adequate to meet current obligations.

True

Assets that are expected to be used for more than one year in the operation of a business are called property, plant, and equipment.

True

Current assets are listed on the balance sheet from the most liquid to least liquid.

True

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

True

Current liabilities are those obligations that are due within one year or the normal operating cycle of the business, whichever is longer, and which will require use of current assets.

True

Entries required at the end of an accounting period to bring certain account balances up-to-date are known as adjusting entries.

True

Gross profit less operating expenses produces the income from operations.

True

Gross sales less sales returns and allowances is called net sales.

True

If inventory is taken only at the end of each accounting period, the average inventory for the period can be calculated by adding the beginning and the ending inventories and dividing their sum by two.

True

Liquidity refers to the speed with which the assets can be converted to cash.

True

Long-term liabilities are obligations that will extend beyond one year or the normal operating cycle, whichever is longer.

True

Net sales less cost of goods sold is called gross profit.

True

Return on owner's equity is the ratio of net income to average owner's equity in the business.

True

Reversing entries make possible the entering of the transactions of the succeeding accounting period in a routine manner.

True

The cost of a building less its accumulated depreciation represents the undepreciated cost.

True

The difference between current assets and current liabilities represents the amount of capital the firm has to work with for current operations.

True

The multiple-step form of income statement shows operating income separate from other revenue and other expenses.

True

The purpose of an income statement is to summarize the results of operations during an accounting period.

True

The purpose of the post-closing trial balance is to prove that the general ledger is in balance at the beginning of the new accounting period.

True

The single-step form of income statement lists all revenue items and their totals first, followed by all expense items and their totals, to produce a difference that is either net income or net loss.

True

The statement of owner's equity summarizes all changes in the owner's equity during the period.

True

Undepreciated cost is the same as the book value of an asset.

True

Working capital is the amount of capital the firm has to work with for current operations.

True

Working capital is the difference between current assets and current liabilities.

True

The number of times the accounts receivable turned over, or were collected, during the accounting period is called the ________________________________________.

accounts receivable turnover

Reversing entries are the opposite of

adjusting entries.

The _____________________________ is(are) the number of days in the year divided by the accounts receivable turnover.

average collection period

Those obligations that are due within one year or the normal operating cycle of the business and will be paid with money provided by the current assets are called

current liabilities.

Current assets divided by current liabilities equals the _____________________.

current ratio

The ability of a business to meet its current obligations may be determined by the

current ratio.

Assets that are expected to be used for more than one year in the operation of a business are classified as _________________________________.

property, plant, and equipment

Assets that are used for several years in the operation of a business are called

property, plant, and equipment.

Cash and all other current assets that can be converted into cash quickly are known as ________________________.

quick assets

The __________________________ is equal to quick assets divided by current liabilities.

quick ratio

The information needed in journalizing the closing entries is obtained from the

work sheet.

The difference between current assets and current liabilities is called ____________________ .

working capital

______________________________________ are the number of days in the year divided by the inventory turnover.

Average days to sell inventory

The current ratio is determined by subtracting current liabilities from current assets.

False

The ending balance for merchandise inventory is reported on the balance sheet as a noncurrent asset.

False

The number of times the accounts receivable turned over or were collected during the accounting period is called net credit sales for the period.

False

The purpose of a balance sheet is to summarize the results of operations during an accounting period.

False

The quick ratio is determined by subtracting current liabilities from quick assets.

False

______________ refers to the speed with which an asset can be converted to cash.

Liquidity

______________________ are obligations that will extend beyond one year or the normal operating cycle, whichever is longer.

Long-term liabilities

After the temporary owner's equity and drawing accounts are transferred to the permanent owner's equity account, which of the following accounts will have a balance?

Owner's Capital

Quick assets include cash and other noncurrent assets that can be converted into cash quickly.

False

The ability of a business to meet its current obligations may be evaluated with the return on owner's equity ratio.

False

____________________ are those obligations that are due within one year or the normal operating cycle of the business, whichever is longer, and will require the use of current assets.

Current liabilities

A formal statement of the changes in owner's equity during an accounting period is called a statement of financial position.

False

All adjusting entries should be reversed.

False

Assets that are used in the operation of a business are called temporary investments.

False

Current liabilities include those obligations that will extend beyond one year or the normal operating cycle, whichever is longer.

False

Inventory turnover is determined by dividing cost of goods sold for the period by the ending inventory.

False

The third step in the closing process is to transfer the balance in which of the following accounts to the permanent owner's equity account?

Income Summary

Which of the following accounts is used only at the close of the accounting period to adjust the merchandise inventory account and summarize the temporary owner's equity accounts?

Income Summary

_____________________________ compares the relationship between certain amounts in the income statement and balance sheet.

Interstatement analysis

The cost of plant and equipment less accumulated depreciation equals the ____________________________________.

book value undepreciated cost

The entries that transfer the balances of the temporary owner's equity accounts to the permanent owner's equity account are called

closing entries.

Accumulated depreciation amounts are shown as deductions from the

cost of building and equipment accounts.

Cash and all other assets expected to be converted into cash or consumed within one year or the normal operating cycle of the business, whichever is longer, are called _______________________.

current assets

Cash and all other assets that may be reasonably expected to be converted to cash or consumed within one year or the normal operating cycle of the business are classified as

current assets.

Closing entries are made in the

general journal.

Reversing entries are made in the

general journal.

Net sales minus cost of goods sold equals __________________________ .

gross profit

Operating expenses are subtracted from gross profit to compute ________________________________.

income from operations

In a multiple-step income statement, operating expenses are subtracted from gross profit to compute

income from operations.

A formal statement of the results of the operation of a business during an accounting period is called a(n)

income statement.

The resulting balance in the _________________________ account is transferred to the owner's capital account.

income summary

The number of times the merchandise inventory turned over, or was sold, during the accounting period is called the __________________________.

inventory turnover

The __________________________________ shows a step-by-step calculation of net sales, cost of goods sold, gross profit, operating expenses, income from operations, other revenues and expenses, and net income.

multiple-step income statement

Gross sales less sales returns and allowances and sales discounts equals __________________ .

net sales

The _________________________ is the length of time generally required for a business to buy inventory, sell it, and collect the cash.

operating cycle

The balance in the owner's drawing account is transferred to the _______________________ account.

owner's capital

A(n) ______________________________ is taken after the temporary owner's equity accounts have been closed.

post-closing trial balance

Which of the following serves as an end-of-period accuracy check?

post-closing trial balance

A trial balance of the general ledger accounts taken after the temporary owner's equity accounts have been closed is usually referred to as a

post-closing trial balance.

Net income divided by average owner's equity equals ________________________.

return on owner's equity

A(n) _________________________ is the reverse or opposite of the adjusting entry.

reversing entry

The ________________________ lists all revenue items and their total first, followed by all expense items and their total.

single-step income statement

The heading on a financial statement includes which of the following information, in the order shown?

the name of the business, the name of the statement, and the period of time the statement covers