Chapter 4: Completion of the Accounting Cycle

Question 1

What is closing the accounts?

Answer 1

Closing the accounts involves bringing the balances in all revenue, expense, and drawings accounts to zero, and updating the balance in the Owner’s Equity account

Question 2

What are temporary accounts?

Answer 2

The accounts that relate to only one accounting period whose balances are transferred to Owner’s Capital at the end of an accounting period

e.g. revenue, expenses, and drawings accounts

Question 3

What are permanent accounts?

Answer 3

The accounts that relate to one or more accounting periods

e.g. balance sheet accounts

Question 4

What are closing entries?

Answer 4

Entries made at the end of an accounting period to transfer the balances of temporary accounts to the owner’s equity account

Question 5

What is a post-closing trial balance?

Answer 5

The post-closing trial balance lists permanent accounts and their balances after closing entries have been journalized and posted

Question 6

What is the purpose of the post-closing trial balance?

Answer 6

The purpose of the post-closing trial balance is to prove the equity of the permanent account balances that are carried forward into the next accounting period

Question 7

What accounts do the post-closing trial balance contain?

Answer 7

Permanent balance sheet accounts only

Question 8

What does the classified balance sheet help users determine?

Answer 8

1) Whether the company has enough assets to pay its debts as they come due

2) The claims of short and long-term creditors on total assets

Question 9

What order does the classified balance sheet lists their assets in ?

Answer 9

Classified balance sheets lists assets in order of their relative liquidity

Question 10

What is liquidity ?

Answer 10

How quickly an item can be converted to cash

Question 11

Why are users of financial statements interested in liquidity?

Answer 11

Users of financial statements are interested in liquidity because business difficulties often arise from a shortage of cash

Question 12

What liabilities create the greatest strain on cash?

Answer 12

Liabilities that must be paid the soonest create the greatest strain on cash

Question 13

In what order does the classified balance sheet lists its liabilities?

Answer 13

The classified balance sheet lists liabilities in order they are due to be paid

Question 14

What are current assets?

Answer 14

Cash and other assets that will be converted to cash, sold, or used up within one year in an accounting period

Question 15

What are long-term assets?

Answer 15

Assets not classified as current. More than a year long.

Question 16

What are intangible assets?

Answer 16

Long-loved assets that do not have physical substance. They derive its value from the rights and privileges it provides the owners

Question 17

What is goodwill?

Answer 17

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

Question 18

What are current liabilities?

Answer 18

Debts to be paid in cash or with goods or services within one year

Question 19

What are long term liabilities?

Answer 19

Liabilities which are not current. More than one year.

Question 20

What is working capital?

Answer 20

The difference between current assets and current liabilities. It shows a company’s ability to pay it short-term debts

Question 21

What is current ratio?

Answer 21

A measure of short-term debt-paying ability that is determined by dividing current asset by current liabilities

Question 22

What is acid-test ratio?

Answer 22

A measure of the company’s immediate short-term liquidity that is determined by adding cash, short-term investments and receivables and dividing it by current liabilities