Chp 4 Flashcards
Definition of liquidity
Ability to pay obligations expected to be due within the next year.
- Favorable when current assets exceed current liabilities at the BS date.
- When reverse is true, short term creditors may not be paid; could lead to bankruptsy.
The standard asset classifications on a classified balance sheet
- current assets
- long-term assets
- property, plant, and equipment
- intangible assets
The standard liabilities and SE classifications on classified balance sheet
- current liabilities
- long-term liabilities
- stockholders equity
Definition of current assets
Co. expects to convert to cash or use up within one year, or its operating cycle, whichever is longer (usually one year from balance sheet date).
Definition of operating cycle
The average time it takes to purchase inventory, sell it on account, and then collect cash from customers.
Typical order of current liabilities on a classified balance sheet.
- notes payable (or accts payable)
- accounts payable (or notes payable)
- (rest in order of magnitude)
Which are the temporary accounts
revenue, expense, and dividends
The four entries needed to close the books.
- Dr each revenue account for the balance, and credit Income Summary.
- Dr Income Summary and credit the expense accounts for the balance.
- For net income, Dr Income Summary, and Cr Retained Earnings (moves it all over to RE)
- For dividends, Dr Retained Earnings, and Cr Dividends (doesn’t use Income Summary account)
All the steps in the full accounting cycle
- Analyze business transactions.
- Journalize the transactions.
- Post to ledger accounts
- Make a trial balance
- Journalize and post adjusting entries: deferrals and accruals.
- Prepare adjusted trial balance
- Prepare financial statements: income statement, retained earnings statements, balance sheet
- Journalize and post closing entries
- Prepare a post-closing trial balance
The steps in preparing a worksheet
- Prepare trial balance on the worksheet.
- Enter the adjustments in the adjustments columns.
- Enter adjusted balances in the adjusted trial balance columns.
- Extend adjusted trial balance amounts to the appropriate financial statement columns
- Total the statement columns, compute net income (or net loss), and complete the worksheet.
What are closing entries?
Entries made at the end of an accounting period to transfer the balances of temporary accounts to a permanent stockholders’ equity account called Retained Earnings.
What is the Income Summary account
A temporary account used in closing revenue and expense accounts.
The two most common types of long-term investments
- investments in stocks and bonds of other companies that companies normally hold for many years
- long-term assets, such as land and building, not currently being used in operations.
What are permanent (real) accounts?
Accounts that relate to one or more accounting periods. Consist of all balance sheet accounts. Balances are carried forward to the next accounting period.
What are temporary (nominal) accounts?
Accounts that relate only to a given accounting period. Consist of all income statements accounts and the dividends account. All temporary accounts are closed at the end of the accounting period.
