Ch 4 - Completion of the Accounting Cycle Flashcards
What is the Income Summary Account?
Temporary account where all income statement revenue and expense accounts are transferred at the end of an accounting period.
The net amount transferred into the income summary account equals the net profit or net loss that the business incurred during the period.
What would the journal entry to move revenue to the income summary account look like?
Revenue 10,000
Income summary 10,000
Journal entry to close out expense accounts?
Income summary 9000
Expenses 9000
If there was a net profit, how would you close out the income summary account?
Income summary 1000
Retained earnings 1000 (is an increase to RE)
If there was a net loss, how would you close out the income summary account?
Retained earnings 1000 (decreasing it)
Income summary 1000
After the closing entries has been posted, the balance in the Owner’s Capital account should equal:
A) The profit/loss reported on the income statement
B) the opening capital balance reported on the statement of owner’s equity
C) the ending capital balance reported on the statement of owner’s equity and balance sheet
D) the opening capital balance plus any investments made by the owner during the period
C) The ending capital balance reported on the statement of owner’s equity and balance sheet
The proper cycle of the following steps in the accounting cycle is:
Journalize transactions
Post to ledger accounts
Prepare unadjusted trial balance
Journalize and post adjusting entries
When Zander Company purchased supplies worth $500, it incorrectly recorded a credit to Supplies for $5000 and a debit to cash for $5000. Before correcting this error:
A) Cash is overstated, supplies overstated
B) Cash understated, supplies understated
C) Cash understated, supplies overstated
D) Cash overstated, supplies understated
D) Cash overstated, supplies understated
Cash of $100 is received at the time a service is provided. The transaction is journalized and posted as a debit to Accounts Receivable of $100 and a credit to Service Revenue of $100. The correcting entry is:
Cash 100
Accounts receivable 100
When and why do you need to close the books?
At the end of the accounting period, after adjusting entries have been posted and statements prepared.
Have to zero out the revenue, expenses, and drawings accounts for the next period.
What accounts are considered temporary (meaning they close at end of period)
All revenue, expense, and drawings accounts
Which are considered permanent accounts?
Balance sheet accounts - balances are carried forward into the next accounting period.
All asset accounts, liability accounts, owner’s capital account
After accounts have been closed, the balance in the income summary accounts must equal what?
The profit/loss for the period.
What does REID stand for?
R - revenue accounts are closed to the income summary
E - Expense accounts are closed to Income summary
I - Income summary account is closed to Owner’s capital
D - drawings is closed to owners capital
When doing closing entries in the general journal, what must be put in the headings?
Closing Entries - between last adjusting entry and first closing entry.
If there are conta accounts, what must be taken into consideration for a post-closing trial balance?
Total debits will not equal total assets.
Accumulated depreciation is deducted from assets on the balance sheet but added to the credit column in a trial balance.
What is the purpose of a post-closing trial balance?
Shows that the journalized and posting of closing entries has been completed properly. Also shows that the accounting equation is in balance at the end of the accounting period.
Right before transferring the balance to the Owner’s capital account, what should be balance of the income summary equal?
Should equal the profit or loss.
The balance in the capital account should equal the ending balance reported in :
The statement of owner’s equity and balance sheet
What is a reversing entry
Reversing entries at the beginning of the next accounting period. Not a required step
Prior period adjustment
Fixing an error from a previous accounting year.
The Chip ‘N Dough company made the following adjusting journal entry to record $5,200 of depreciation expense on a vehicle at year end
Feb 28 depreciation expense 520
cash 520
Prepare the required correcting entry
Depreciation expense 4680
cash 520
Accumulated depreciation 5200
What is included under Assets in the Classified Balance Sheet?
Liabilities?
Current assets
Short-term investments
Cash
Receivables
Income tax recoverable
prepaid expenses (rent, insurance)
supplies
Long-term investments
Property, plant, and equipment
Intangible assets
Goodwill
Current liabilities
Non-current liabilities
Owner’s (shareholder’s) equity
Balance sheet AKA
Statement of financial position
What are intangible assets
Long-lived assets that do not have physical substance.
Things like patents, copyrights, franchises, trademarks, trade names, and licenses
Goodwill
Results from the acquisition of another company when the price paid for the company is higher than the fair value of the purchased company’s net assets.
Intangible assets, net
What does the term “net” usually indicated
That accumulated amortization has been deducted from the cost of the intangible assets.
What is working capital?
Difference between current assets and current liabilities. Shows a companies ability to pay short-term debts.
Current assets - current liabilities = working capital
Current ratio
Another measure of short-term debt. The current ratio is more dependable indicatior of liquidity than working capital
Current assets/current liabilities = current ratio
217,394 / 175,725 = 1.24:1
Means that comp has 1.24$ of current assets to liabilities
Acid-test ratio
Measures a company’s immediate short-term liquidity.
Cash+ short term investments + receivables /
current liabilities
= acid test ratio
A higher acid test ratio number means better liquidity.
