Chapter 4 Terms

Question 1

Acid-test ratio

Answer 1

A measure of the company’s immediate short-term liquidity.

Question 2

Classified balance sheet

Answer 2

A balance sheet that has several classifications or sections.

Question 3

Closing entries

Answer 3

Entries made at the end of an accounting period to transfer the balances of temporary accounts (revenues, expenses, Income Summary, and drawings) to the permanent owner’s equity account, Owner’s Capital.

Question 4

Closing the books

Answer 4

The process of journalizing and posting closing entries to update the capital account and prepare the temporary accounts for the next period’s postings.

Question 5

Correcting entries

Answer 5

Entries to correct errors that were made when transactions were recorded.

Question 6

Current assets

Answer 6

Cash and other assets that will be converted to cash, sold, or used up within one year from the balance sheet date or in the company’s normal operating cycle

Question 7

Current liabilities

Answer 7

Obligations that are expected to be settled within one year from the balance sheet date or in the company’s normal operating cycle

Question 8

Current ratio

Answer 8

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

Question 9

Goodwill

Answer 9

The amount paid to acquire another company that exceeds the fair value of the company’s net identifiable assets.

Question 10

Income Summary

Answer 10

A temporary account that is used in closing revenue and expense account

Question 11

Intangible assets

Answer 11

Long-lived assets that do not have physical substance and are rights and privileges that result from ownership. They include patents, copyrights, trademarks, trade names, and licenses.

Question 12

Liquidity

Answer 12

The ability of a company to pay obligations as they come due within the next year and to meet unexpected needs for cash

Question 13

Long-term investments

Answer 13

Investments in long-term debts that management intends to hold to earn interest or in the equity of other companies that management plans to hold for many years as a strategic investment.

Question 14

Non-current assets

Answer 14

Assets that are not expected to be converted to cash, sold, or used by the business within one year of the balance sheet date or its operating cycle.

Question 15

Non-current liabilities

Answer 15

Obligations that are expected to be paid after one year or longer.

Question 16

Operating cycle

Answer 16

The time it takes to go from starting with cash to ending with cash in producing revenues

Question 17

Permanent accounts

Answer 17

Balance sheet accounts, whose balances are carried forward to the next accounting period.

Question 18

Post-closing trial balance

Answer 18

A list of debit and credit balances of the permanent (balance sheet) accounts after closing entries have been journalized and posted.

Question 19

Property, plant, and equipment

Answer 19

Long-lived tangible assets that are used in the operations of the business and are not intended for sale. They include land, buildings, equipment, and furniture.

Question 20

Reversing entry

Answer 20

An entry made at the beginning of the next accounting period that is the exact opposite of the adjusting entry made in the previous period.

Question 21

Temporary accounts

Answer 21

Revenue, expense, Income Summary, and drawings accounts, whose balances are transferred to Owner’s Capital at the end of an accounting period.

Question 22

Worksheet

Answer 22

A multiple-column form that may be used in the adjustment process and in preparing financial statements.

Question 23

Working capital

Answer 23

The difference between current assets and current liabilities.