Ch 4 - Completion of the Accounting Cycle

Question 1

What is the Income Summary Account?

Answer 1

Temporary account where all income statement revenue and expense accounts are transferred at the end of an accounting period.
The net amount transferred into the income summary account equals the net profit or net loss that the business incurred during the period.

Question 2

What would the journal entry to move revenue to the income summary account look like?

Answer 2

Revenue 10,000

Income summary 10,000

Question 3

Journal entry to close out expense accounts?

Answer 3

Income summary 9000

Expenses 9000

Question 4

If there was a net profit, how would you close out the income summary account?

Answer 4

Income summary 1000

Retained earnings 1000 (is an increase to RE)

Question 5

If there was a net loss, how would you close out the income summary account?

Answer 5

Retained earnings 1000 (decreasing it)

Income summary 1000

Question 6

After the closing entries has been posted, the balance in the Owner’s Capital account should equal:

A) The profit/loss reported on the income statement
B) the opening capital balance reported on the statement of owner’s equity
C) the ending capital balance reported on the statement of owner’s equity and balance sheet
D) the opening capital balance plus any investments made by the owner during the period

Answer 6

C) The ending capital balance reported on the statement of owner’s equity and balance sheet

Question 7

The proper cycle of the following steps in the accounting cycle is:

Answer 7

Journalize transactions
Post to ledger accounts
Prepare unadjusted trial balance
Journalize and post adjusting entries

Question 8

When Zander Company purchased supplies worth $500, it incorrectly recorded a credit to Supplies for $5000 and a debit to cash for $5000. Before correcting this error:

A) Cash is overstated, supplies overstated
B) Cash understated, supplies understated
C) Cash understated, supplies overstated
D) Cash overstated, supplies understated

Answer 8

D) Cash overstated, supplies understated

Question 9

Cash of $100 is received at the time a service is provided. The transaction is journalized and posted as a debit to Accounts Receivable of $100 and a credit to Service Revenue of $100. The correcting entry is:

Answer 9

Cash 100

Accounts receivable 100

Question 10

When and why do you need to close the books?

Answer 10

At the end of the accounting period, after adjusting entries have been posted and statements prepared.
Have to zero out the revenue, expenses, and drawings accounts for the next period.

Question 11

What accounts are considered temporary (meaning they close at end of period)

Answer 11

All revenue, expense, and drawings accounts

Question 12

Which are considered permanent accounts?

Answer 12

Balance sheet accounts - balances are carried forward into the next accounting period.
All asset accounts, liability accounts, owner’s capital account

Question 13

After accounts have been closed, the balance in the income summary accounts must equal what?

Answer 13

The profit/loss for the period.

Question 14

What does REID stand for?

Answer 14

R - revenue accounts are closed to the income summary
E - Expense accounts are closed to Income summary
I - Income summary account is closed to Owner’s capital
D - drawings is closed to owners capital

Question 15

When doing closing entries in the general journal, what must be put in the headings?

Answer 15

Closing Entries - between last adjusting entry and first closing entry.

Question 16

If there are conta accounts, what must be taken into consideration for a post-closing trial balance?

Answer 16

Total debits will not equal total assets.

Accumulated depreciation is deducted from assets on the balance sheet but added to the credit column in a trial balance.

Question 17

What is the purpose of a post-closing trial balance?

Answer 17

Shows that the journalized and posting of closing entries has been completed properly. Also shows that the accounting equation is in balance at the end of the accounting period.

Question 18

Right before transferring the balance to the Owner’s capital account, what should be balance of the income summary equal?

Answer 18

Should equal the profit or loss.

Question 19

The balance in the capital account should equal the ending balance reported in :

Answer 19

The statement of owner’s equity and balance sheet

Question 20

What is a reversing entry

Answer 20

Reversing entries at the beginning of the next accounting period. Not a required step

Question 21

Prior period adjustment

Answer 21

Fixing an error from a previous accounting year.

Question 22

The Chip ‘N Dough company made the following adjusting journal entry to record $5,200 of depreciation expense on a vehicle at year end

Feb 28 depreciation expense 520
cash 520

Prepare the required correcting entry

Answer 22

Depreciation expense 4680
cash 520
Accumulated depreciation 5200

Question 23

What is included under Assets in the Classified Balance Sheet?
Liabilities?

Answer 23

Current assets
    Short-term investments
    Cash
    Receivables
    Income tax recoverable
    prepaid expenses (rent, insurance)
    supplies
Long-term investments
Property, plant, and equipment
Intangible assets
Goodwill

Current liabilities
Non-current liabilities
Owner’s (shareholder’s) equity

Question 24

Balance sheet AKA

Answer 24

Statement of financial position

Question 25

What are intangible assets

Answer 25

Long-lived assets that do not have physical substance.

Things like patents, copyrights, franchises, trademarks, trade names, and licenses

Question 26

Goodwill

Answer 26

Results from the acquisition of another company when the price paid for the company is higher than the fair value of the purchased company’s net assets.

Question 27

Intangible assets, net

What does the term “net” usually indicated

Answer 27

That accumulated amortization has been deducted from the cost of the intangible assets.

Question 28

What is working capital?

Answer 28

Difference between current assets and current liabilities. Shows a companies ability to pay short-term debts.

Current assets - current liabilities = working capital

Question 29

Current ratio

Answer 29

Another measure of short-term debt. The current ratio is more dependable indicatior of liquidity than working capital

Current assets/current liabilities = current ratio
217,394 / 175,725 = 1.24:1
Means that comp has 1.24$ of current assets to liabilities

Question 30

Acid-test ratio

Answer 30

Measures a company’s immediate short-term liquidity.

Cash+ short term investments + receivables /
current liabilities
= acid test ratio

A higher acid test ratio number means better liquidity.