Chapter 4

Question 1

accounting cycle

Answer 1

The procedures needed to process transactions through an accounting system; including journalization, posting, adjusting and preparing financial statements.

Question 2

capital stock

Answer 2

A non-specific reference to the ownership interests of shareholders in a corporation.

Question 3

closing process

Answer 3

The process by which temporary accounts are “zeroed” out and the effects transferred to retained earnings.

Question 4

current assets

Answer 4

Assets that will be converted into cash or consumed within one year or the operating cycle, whichever is longer.

Question 5

current liabilities

Answer 5

Obligations that will be liquidated within one year or the operating cycle, whichever is longer.

Question 6

current ratio

Answer 6

A measure of liquidity, calculated by dividing current assets by current liabilities.

Question 7

full disclosure principle

Answer 7

All relevant facts that would influence investors’ and creditors’ judgments about the company are disclosed in the financial statements or related notes.

Question 8

income summary

Answer 8

A non-financial statement account used only to facilitate the closing process by summarizing and zeroing-out the revenue and expense accounts.

Question 9

intangible asset

Answer 9

Lack physical existence, and include items like purchased patents and copyrights.

Question 10

liquidity

Answer 10

The ability of a firm to meet its near-term obligations as they come due.

Question 11

long-term investments

Answer 11

Investments made for long-term holding purposes; including land for speculation, securities of other companies, etc.

Question 12

long-term liabilities

Answer 12

Any obligation that is not current, and include bank loans, mortgage notes, and the like.

Question 13

nominal accounts

Answer 13

Accounts that will be reset to a zero balance with each new accounting period; revenue, expense, and dividend accounts (also called “temporary” accounts.

Question 14

operating cycle

Answer 14

The period of time it takes to convert cash back into cash (i.e., purchase inventory, sell the inventory on account, and collect the receivable)

Question 15

other assets

Answer 15

The category of a classified balance sheet for reporting assets that are not logically attached to one of the other specific sections.

Question 16

post-closing trail balance

Answer 16

Reveals the balance of accounts after the closing process, and consists of balance sheet accounts only.

Question 17

property, plant, & equipment

Answer 17

Assets with long lives that will be used in an entity’s production processes; land, building, and equipments.

Question 18

quick ratio

Answer 18

An extreme measure of liquidity, calculated by dividing quick assets (cash, short-term investments, and accounts receivable) by current liabilities.

Question 19

real accounts

Answer 19

Asset, liability, and equity accounts; balances are carried forward from the end of one period into the beginning of the next period.

Question 20

reversing entry

Answer 20

Optional accounting procedure which may prove useful in simplifying record keeping; a journal entry to “undo” an adjusting entry.

Question 21

temporary accounts

Answer 21

Accounts that will be reset to a zero balance with each new accounting period; revenue, expense, and dividend accounts (also called “nomial” accounts)

Question 22

working capital

Answer 22

The difference between current assets and current liabilities.