Chapter 4 Vocabulary

Question 1

accounting cycle

Answer 1

The process that begins with analyzing and journalizing transactions and ends with the post-closing trial balance.

Question 2

account form

Answer 2

Another name for the income summary account because it has the effect of clearing the revenue and expense accounts of their balances.

Question 3

closing entries

Answer 3

The entries that transfer the balances of the revenue; expense; and drawing accounts to the owner’s capital account.

Question 4

closing process

Answer 4

The transfer process of converting temporary account balances to zero by transferring the revenue and expense account balances to Income Summary; transferring the income summary account balance to the owner’s capital account; and transferring the owner’s drawing account to the owner’s capital account.

Question 5

closing the books

Answer 5

The process of transferring temporary accounts balances to permanent accounts at the end of the accounting period.

Question 6

current assets

Answer 6

Cash and other assets that are expected to be converted to cash or sold or used up; usually within one year or less; through the normal operations of the business.

Question 7

current liabilities

Answer 7

Liabilities that will be due within a short time (usually one year or less) and that are to be paid out of current assets.

Question 8

current ratio

Answer 8

A financial ratio that is computed by dividing current assets by current liabilities.

Question 9

fiscal year

Answer 9

The annual accounting period adopted by a business.

Question 10

fixed assets

Answer 10

The number of dollars of sales that are generated from each dollar of average fixed assets during the year; computed by dividing the net sales by the average net fixed assets.

Question 11

Income Summary

Answer 11

An account to which the revenue and expense account balances are transferred at the end of a period.

Question 12

liquidity

Answer 12

The ability to convert assets into cash.

Question 13

long-term liabilities

Answer 13

Liabilities that usually will not be due for more than one year.

Question 14

natural business year

Answer 14

A fiscal year that ends when business activities have reached the lowest point in an annual operating cycle.

Question 15

notes receivable

Answer 15

A customer’s written promise to pay an amount and possibly interest at an agreed-upon rate.

Question 16

real accounts

Answer 16

Term for balance sheet accounts because they are relatively permanent and carried forward from year to year.

Question 17

solvency

Answer 17

The ability of a firm to pay its debts as they come due.

Question 18

temporary accounts

Answer 18

Accounts that report amounts for only one period.

Question 19

working capital

Answer 19

The excess of the current assets of a business over its current liabilities.