Chapter 3 (2/2) Flashcards
Unadjusted Trial Balance
list of accts and balances before adjustments are recorded
Adjusted Trial Balance
list of accts and balances after adjustments are recorded
Steps to Prepare Financial Statements
- Prepare Income Statement
- Prepare Statement of Retained Earnings
- Prepare Balance Sheet
- Prepare Statement of Cash Flows
Closing Process
occurs at the end of an acct period after financial statements are completed
Closing Process layout
- Identify accts for closing
- Record/post closing entries
- prepare a post-closing trial balance
Purposes of Closing Process
- to reset rev, exp, and div, acct balances to 0 at the end of each period
- helps summarize a period’s rev and exp
Temporary Accounts
relate to one accting period.
includes following accts:
- income statement (rev & exp)
- dividends
- income summary
T/F: Closing process only applies to temporary accounts
True
Permanent Accounts
report on activities related to 1+ future accting periods
includes following accts:
- assets
- liabilities
- equity (common stock & ret. earnings)
Closing Entries
transfer the end-of-period balances in rev, exp, and div accts to the permanent Ret Earnings acct
Reasons for Closing Entries
- rev, exp, div accts must begin each period w/ balance of zero
- retained earnings must reflect prior periods’ rev, exp, div
CLOSING ENTRIES LAYOUT: REV
Revenue (debit) Income Summary (credit)
result: rev closed
CLOSING ENTRIES LAYOUT: EXP
inc summary (debit) expenses (credit)
result: exp closed
CLOSING ENTRIES LAYOUT: INC SUMMARY
inc summary (debit) ret. earnings (credit)
result: inc summary closed
CLOSING ENTRIES LAYOUT: DIVIDENDS
ret. earnings (debit)
dividends (credit)
result: dividends closed
Income statements report…
…rev and exp for a specific accounting period
At the end of closing process…
- asset and liability accts will carry forward to next period
- equity accts will be zeroed out before going to next period
Post-Closing Trial Balance
a list of permanent accts and their balances after all closing entries; only balance sheet (permanent) accts are on this
Accounting Cycle definition
steps in preparing financial statements; called a cycle bc steps are repeated each reporting period
Accounting Cycle steps
- analyze transactions
- journalize
- post
- prep unadjusted trial balance
- adjust and post accts
- prep adjusted trial balance
- prep fin statements
- close accts
- prep post-closing trial balance
- reverse and post (optional)
Unclassified Balance Sheet
broadly groups accts into assets, liabilities, equity
Classified Balance Sheet
organizes assets and liabilities into subgroups
Operating Cycle
time span from when CASH IS USED to acquire goods/services, until CASH IS RECEIVED from the sale of goods/servies
Current Assets
cash/other resources that are expected to be sold, collected, or used within a year or the company’s operating cycle (whichever is longer)
Long-Term Investments
includes notes receivable and investments (stocks/bonds) when they’re expected to be held for more than the longer of: one year or the operating cycle
Intangible Assets
long-term assets that benefit business operations but lack physical form
ex: patents, trademarks, copyrights
Current Liabilities
liabilities due to be paid/settled within a year or the operating cycle, whichever is longer; typically settled by paying out cash
ex: accts payable, notes payable, wages payable, taxes payable, interest payable, unearned rev
Long-Term Liabilities
liabilities not due within one year or the operating cycle, whichever is longer
ex: notes payable, mortgages payable, bonds payable, lease obligations
Profit Margin (return on sales) def
ratio of net income to net sales
Profit Margin equ
(Net Income) / (Net Sales)
