Financial Statements

Question 1

Define income statement

Answer 1

reports the details of revenue and expenses to arrive at net profit or loss

Question 2

Define balance sheet

Answer 2

Summarizes assets, liabilities and owner’s equity at a specific moment in time

Question 3

Define capital statement

Answer 3

Reports the owner’s interest in business during the period covered

Question 4

Define sources and uses statement

Answer 4

What our actual sources and uses of cash are for a specific period of time

Question 5

Define Trial Balance

Answer 5

Proof of the equality of debit and credit balances

Question 6

How do you construct a trial balance

Answer 6

Constructing a two colume schedule listing the names and balances of the accounts in the order in which they appear in the ledger

Question 7

The agreement of the debit and credit totals of the trial balance gives assurance that?

Answer 7

Equal debits and credits have been recorded for all transactions
Each account has been correctly computed
Addition of the account balances has been correctly preformed

Question 8

Typical errors of trial balances?

Answer 8

Entering of debits as credit or vice versa
Arithmetical mistakes in balancing accounts
Clerical errors in copying account balances into the trial balance
Addition errors

Question 9

Which accounts typically have a debit balance?

Answer 9

Assets
Prepaid expenses
Expenses

Question 10

Which accounts typically have a credit balance?

Answer 10

Accounts payable, credit, revenue

Question 11

What is the purpose of adjusting entries?

Answer 11

Record revenue and expenses that are not properly measured in the course of recording daily business transactions

Question 12

When are adjusting entries needed?

Answer 12

When a transactions goes for more than one fiscal year

Question 13

Four categories of adjusting entries?

Answer 13

Entries to… apportion recorded cost
apportion unearned revenue
record unrecorded expenses
record unrecorded revenue

Question 14

Pay for one year of fire insurance

Answer 14

Prepaid Insurance
Debit | Credit
600

Cash
Debit | Credit
600

Insurance Expense
Debit | Credit
50

Prepaid Insurance
Debit | Credit
50

Question 15

Define Nominal Accounts

Answer 15

Income Statement Accounts
Accumulate data for a set period of time then the balance is removed and reset to zero
- Revenue, expense and owner’s withdrawals

Question 16

Where do they go after the year?

Answer 16

The money is transferred to Owner’s Capital

Question 17

Define closing entries

Answer 17

The journal entries that transfer the balances of nominal accounts to owner’s capital

Question 18

Purpose of closing entries?

Answer 18

Close the nominal account to zero balance so they are ready for the new year
Transfer the net income or loss for the current period and owner’s withdrawals to the Owner’s capital accounts

Question 19

Sales is what kind of balance and how do you offset it?

Answer 19

Credit balance so offset it by taking a debit and then credit it to the income summary sheet

Question 20

Once you move everything to income summary what should the account =

Answer 20

Net income after taxes

Question 21

So how do you get net income via this process?

Answer 21

Sales and beginning inventory are offset by a credit and then debited to the income summary (but with BI you only have EI left so you credit EI to the income summary)
All expenses are debits so you take a credit to reset them to zero (add them all together)
That total is now debited to the income summary to offset the credits you took
Next you bring subtract the credit from the debit to get the net income (debit if profit, credit if loss)

Question 22

To finished up and get rid of the income summary account what do you do with the net income debit?

Answer 22

You then Credit that to the income summary to get zero
Debit it to the Capital account and either add to the capital in the account or take away if it started as a net income credit

Question 23

How do you close the Owner’s withdrawal account?

Answer 23

It shows as a debit (loss of money) to the account so you credit it
Then you debit it to the Capital account (removing that “money” from the account)