Fundamental Accounting Principles CH4

Question 1

Work Sheet

Answer 1

a document that is used internally by companies to help with adjusting and closing accounts and with preparing financial statements.
*prepared at the end of a period

Question 2

Preparing a Worksheet

Answer 2

1. enter unadjusted trial balance
2. enter adjustments
3. prepare adjusted trial balance
4. sort adjusted trial balance accounts to Financial Statements
5. Total statement columns, compute income or loss, and balance columns
   * the difference between the debit and credit column totals of the income statement columns is net income or net loss.

Question 3

Pro forma Financial Statements

Answer 3

The extended amounts in the worksheet financial statement columns show the effects of the proposed transactions and this yields the pro forma financial statements because they show the statements as if the proposed transactions have occurred.

Question 4

Closing process

Answer 4

occurs at the end of an accounting period after financial statements are completed.

1. identify accounts for closing
2. record and post the closing entries
3. prepare a post-closing trial balance.

Question 5

Temporary Account Types

Answer 5

relate to one accounting period and include al income statement accounts *closing process only applies to temporary accounts. (close at the end of a period)
Revenues
Expenses
Owner, withdrawals
Income summary

Question 6

Permanent Income Account Types

Answer 6

report activities related to one or more future accounting periods. (do not close at the end of a period)
Assets
Liabilities
Owner, capital

Question 7

Closing Enteries

Answer 7

transfer the end of a period balances in revenue, expense, and withdrawals accounts to the permanent capital account
necessary because:
- revenue, expense, and withdrawals accounts must begin each period with zero balances.
- owner’s capital must reflect prior periods’ revenues, expenses, and withdrawals.

Question 8

Four Step Closing Process

Answer 8

1. Close income statement credit balances
2. Close income statement debit balances
3. Close Income summary account
4. Close withdrawal accounts
   * to close revenue and expense accounts, we transfer their balances to Income summary.
   * the income summary balance, which equals net income or net loss is transferred to the capital account
   * the withdrawals account balance is transferred to the capital account.

Question 9

Post Closing Trial Balance

Answer 9

a list of permanent accounts and their balances after all closing entries.

Question 10

Account Cycle Steps

Answer 10

1. Analyze Transactions
2. Journalize
3. Post
4. Prepare unadjusted trial balance
5. adjust and post accounts
6. Prepare adjusted trial balance
7. Prepare financial Statements
8. Close accounts
9. prepare post closing trial balance
10. reverse and post (optional)

Question 11

Operating Cycle

Answer 11

the time span from when cash is used to acquire goods and services until the cash is received from the sale of goods and services
*easy to assume an operating cycle of 1 year unless stated otherwise

Question 12

Current assets

Answer 12

cash and other resources that are expected to be sold, collected, or used within one year of the company’s operating, whichever is longer.

Question 13

Long-term Investments

Answer 13

include notes receivable and investments in stocks and bonds when they are expected to be held for more than the longer of one year or the operating cycle.
Land held for future expansion is a long term investment because it is snot used in operations.

Question 14

Plant Assets

Answer 14

tangible assets that are both long lived and used to produce or sell products or services.

Question 15

Intangible assets

Answer 15

long term assets that benefit business operations but lack physical form

Question 16

Current Liabilities

Answer 16

liabilities due to be paid or settled within one year or the operating cycle, whichever is longer

Question 17

Long term Liabilities

Answer 17

not due within one year or the operating cycle, whichever is longer.

Question 18

Current Ratio

Answer 18

one measure of a company’s ability to pay its short term obligations
Current ratio = Current Assets/Current Liabilities
current ratio over 1.0 means that current obligations can be covered with current assets.

Question 19

Reversing Enteries

Answer 19

Optional, they are recorded in response to accrued assets and accrued liabilities that were created by adjusting entries at the end of a reporting period.