Chapter 4
COMPLETING THE ACCOUNTING CYCLE
True /False Questions
1. Accounts that appear in the balance sheet are often called temporary (nominal) accounts.
2. Income Summary is a temporary account only used for the closing process.
3. Revenue accounts should begin each accounting period with zero balances.
4. Closing revenue and expense accounts at the end of the accounting period serves to make the
revenue and expense accounts ready for use in the next period.
5. The closing process takes place after financial statements have been prepared.
6. Revenue and expense accounts are permanent (real) accounts and should not be closed at the
end of the accounting period.
7. Closing entries result in net income or net loss being transferred to the owner’s capital account.
8. The closing process is a step in the accounting cycle that prepares accounts for the next
accounting period.
9. Closing entries are required at the end of each accounting period to close all ledger accounts.
10. Closing entries are designed to transfer the end-of-period balances in the revenue accounts, the
expense accounts, and the withdrawals account to owner’s capital.
11. The Income Summary account is a permanent account that will be carried forward period after
period.
12. Closing entries are necessary so that owner’s capital will begin each period with a zero
balance.
13. Permanent accounts carry their balances into the next accounting period. Moreover, asset,
liability and revenue accounts are not closed as long as a company continues in business.
14. The first step in the accounting cycle is to analyze transactions and events to prepare for
journalizing.
15. The accounting cycle refers to the sequence of steps in preparing the work sheet.
16. The first five steps in the accounting cycle include analyzing transactions, journalizing,
posting, preparing an unadjusted trial balance, and recording adjusting entries.
17. The last four steps in the accounting cycle include preparing the adjusted trial balance,
preparing financial statements and recording closing and adjusting entries.
18. A classified balance sheet organizes assets and liabilities into important subgroups that provide
more information to decision makers.
19. An unclassified balance sheet provides more information to users than a classified balance
sheet.
20. Current assets and current liabilities are expected to be used up or come due within one year or
the company’s operating cycle whichever is longer.
21. Intangible assets are long-term resources that benefit business operations that usually lack
physical form and have uncertain benefits.
22. Assets are often classified into current assets, long-term investments, plant assets, and
intangible assets.
23. Current liabilities are cash and other resources that are expected to be sold, collected or used
within one year or the company’s operating cycle whichever is longer.
24. Long-term investments can include land held for future expansion.
25. Plant assets are tangible assets that are usually long-term assets used to produce or sell
products and services.
26. Current liabilities include accounts receivable, unearned revenues, and salaries payable.
27. Cash and office supplies are both classified as current assets.
28. Plant assets are usually listed in order from most liquid to least liquid.
29. The current ratio is used to help assess a company’s ability to pay its debts in the near future.
30. The current ratio is computed by dividing current liabilities by current assets.
31. Harry’s Bikes current assets are $400 million and its current liabilities are $250 million. Its
current ratio is 0.63.
32. A company has current assets of $15,000 and current liabilities of $9,500. Its current ratio is
1.6
33. Harry’s Bikes current ratio is 1.3. The industry average for the current ratio is 1.2. This
indicates that Harry’s Bikes can cover its short term liabilities with its short term assets.
34. A work sheet is a tool to help organize information needed in adjusting the accounts and
preparing the financial statements.
35. Adjustments must be entered in the journal and posted to the ledger after the work sheet is
prepared.
36. The work sheet is a required report.
37. A work sheet is a substitute for the set of financial statements.
38. All necessary numbers to prepare the income statement can be taken from the income
statement columns of the work sheet, including the net income or net loss.
39. On a work sheet, a loss is indicated if the total of the Income Statement Debit column exceeds
the total of the Income Statement Credit column.
40. If all columns balance upon completion of a work sheet, you can be sure that no errors were
made in preparing the work sheet.
41. Closing entries are normally entered in the general journal and then posted to the work sheet.
42. Adjusting entries are normally entered in the general journal before they are posted to the work
sheet.
43. On a work sheet, the adjusted balances of revenues and expenses are sorted to the Income
Statement columns of the work sheet.
44. On the work sheet, net income is entered in the Income Statement Credit column as well as the
Balance Sheet or Statement of Owner’s Equity Debit column.
45. All necessary numbers to prepare the balance sheet can be found in the balance sheet columns
of the work sheet including ending owner’s capital.
46. A worksheet can be helpful in showing the effects of proposed or “what if” transactions, as
well as being useful in helping to prepare end-of-period financial statements.
47. Since it is an important financial statement, the work sheet must be prepared according to
specified accounting procedures.
48. An expense account is normally closed by debiting Income Summary and crediting the
expense account.
49. The withdrawals account is normally closed by debiting it.
50. After posting the entries to close all revenue accounts and all expense accounts, the Income
Summary account of Waif Services has a $4,000 debit balance. This result implies that Waif
Services earned a net income of $4,000.
51. After posting the entries to close all revenue and expense accounts, Hatfield Company’s
Income Summary account has a credit balance of $6,000, and its Hatfield, Withdrawals account
has a debit balance of $2,500. These balances indicate that net income for the current accounting
period amounted to $3,500.
52. When expenses exceed revenues, there is a net loss and the Income Summary account would
have a credit balance.
53. The Income Summary account is used to close the permanent accounts at the end of an
accounting period.
54. The steps in the closing process are (1) close credit balances in revenue accounts to Income
Summary; (2) close credit balances in expense accounts to Income Summary; (3) close Income
Summary to Owner’s Capital; (4) close Withdrawals to Owner’s Capital.
55. The third closing entry is to close Owner’s Capital to the Owner’s Withdrawals account.
56. A post-closing trial balance is a list of permanent accounts and their balances from the ledger
after all closing entries are journalized and posted.
57. The aim of a post-closing trial balance is to verify that (1) total debits equal total credits for
temporary accounts, and (2) all temporary accounts have zero balances.
58. A company’s post-closing trial balance has total debits of $40,350 and total credits of $40,650.
Accordingly, the company should review for errors in the closing process.
59. Reversing entries are optional.
60. Reversing entries are recorded in response to accrued assets and accrued liabilities that were
created by adjusting entries at the end of the prior accounting period.
61. Another name for temporary accounts is:
A. Real accounts.
B. Contra accounts.
C. Accrued accounts.
D. Balance column accounts.
E. Nominal accounts.
62. When closing entries are made:
A. All ledger accounts are closed to start the new accounting period.
B. All temporary accounts are closed but not the permanent accounts.
C. All real accounts are closed but not the nominal accounts.
D. All permanent accounts are closed but not the nominal accounts.
E. All balance sheet accounts are closed.
63. Revenues, expenses, and withdrawals accounts, which are closed at the end of each accounting
period are:
A. Real accounts.
B. Temporary accounts.
C. Closing accounts.
D. Permanent accounts.
E. Balance sheet accounts.
64. Which of the following statements is incorrect?
A. Permanent accounts is another name for nominal accounts.
B. Temporary accounts carry a zero balance at the beginning of each accounting period.
C. The Income Summary account is a temporary account.
D. Real accounts remain open as long as the asset, liability, or equity items recorded in the
accounts continue in existence.
E. The closing process applies only to temporary accounts.
65. Assets, liabilities, and equity accounts are not closed; these accounts are called:
A. Nominal accounts.
B. Temporary accounts.
C. Permanent accounts.
D. Contra accounts.
E. Accrued accounts.
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66. Closing the temporary accounts at the end of each accounting period does all of the following
except:
A. Serves to transfer the effects of these accounts to the owner’s capital account on the balance
sheet.
B. Prepares the withdrawals account for use in the next period.
C. Gives the revenue and expense accounts zero balances.
D. Has no effect on the owner’s capital account.
E. Causes owner’s capital to reflect increases from revenues and decreases from expenses and
withdrawals.
67. Journal entries recorded at the end of each accounting period to prepare the revenue, expense,
and withdrawals accounts for the upcoming period and to update the owner’s capital account for
the events of the period just finished are referred to as:
A. Adjusting entries.
B. Closing entries.
C. Final entries.
D. Work sheet entries.
E. Updating entries.
68. The closing process is necessary in order to:
A. calculate net income or net loss for an accounting period.
B. ensure that all permanent accounts are closed to zero at the end of each accounting period.
C. ensure that the company complies with state laws.
D. ensure that net income or net loss and owner withdrawals for the period are closed into the
owner’s capital account.
E. ensure that management is aware of how well the company is operating.
69. Closing entries are required:
A. if management has decided to cease operating the business.
B. only if the company adheres to the accrual method of accounting.
C. if a company’s bookkeeper forgets to prepare reversing entries.
D. if the temporary accounts are to reflect correct amounts for each accounting period.
E. in order to satisfy the Internal Revenue Service.
70. The recurring steps performed each reporting period, starting with analyzing and recording
transactions in the journal and continuing through the post-closing trial balance, is referred to as
the:
A. Accounting period.
B. Operating cycle.
C. Accounting cycle.
D. Closing cycle.
E. Natural business year.