Chapter 4 Completing the Accounting Cycle Flashcards
how do we prepare financial statements?
financial statements are prepared from the adjusted trial balance in the following order:
income statement
statement of retained earnings
balance sheet
what is a classified balance sheet?
classifies each asset and each liability into a specific categories
how could a worksheet help in preparing financial statements?
the columns of a worksheet can be extended to help in preparing the financial statements; the income statement section will include only revenue and expense accounts; the balance sheet section will include asset and liability accounts and all equity accounts except revenues and expenses
what is the closing process, and how do we close the accounts?
the closing process consist of zeroing out all temporary accounts (revenues, expenses, income summary, and dividends) in order to get the accounts ready for the next period
the closing process also updates the retained earnings account balance for net income or net loss during the period and any dividends made to the stockholders
what are the four steps in the closing process?
- make the revenue accounts equal zero via the income summary account
- make the expense accounts equal zero via the income summary account
- make the income summary account equal zero via the retained earnings account
- make the dividends account equal zero via the retained earnings account
how do we prepare a post-closing trial balance?
a post-closing trial balance is prepared after the closing entries are recorded and posted to the ledger; it contains only assets, liabilities, common stock, and retained earnings accounts (permanent accounts)
what is the accounting cycle?
the accounting cycle is the process by which companies produce their financial statements for a specific period
list the steps in the accounting cycle?
- start with beginning account balances
- analyze and journalize transaction as they occur
- post journal entries to the accounts
- compute the unadjusted balance in each account and prepare the unadjusted trial balance
- enter the unadjusted trial balance on the worksheet and complete the worksheet (optional)
- journalize and post adj entries
- prepare the adj trial balance
- prepare the financial statements
- journalize and post the closing entries
10 prepare the post-closing trial balance
how do we use the current ratio to evaluate business performance?
the current ratio measures a company’s ability to pay its current liabilities with its current assets (current ratio = total current assets / total current liabilities)
what are reversing entries?
reversing entries are special journal entries that ease the burden of accounting fro transactions in a later period
reversing entries are the exact opposites of certain adj entries and are used only for accrual adj entries
what is long-term investment?
a long-term asset category that includes investmetns in bonds or stocks in which the company intends to hold the investment for longer than one year
what is a long-term liability?
a liability that does no need to be paid within one year or within the entity’s operating cycle, whichever is longer
what is an operating cycle?
the time span during which cash is paid for goods and services which are then sold to customers from whom the business collects cash.
what is a permanent account?
an account that is not closed at the end of the period - the asset, liability, common stock, and retained earnings account
what is a plant asset?
long-lived, tangible asset, such as land, buildings, and equipment, used in the operation of a business
