Chapter 4
Completing the Accounting Cycle
Review Questions
1.What document are financial statements prepared from?
The financial statements are prepared from the adjusted trial balance or worksheet.
2. What does the income statement report
3.What does the statement of retained earnings show?
4. What does the balance sheet report?
The balance sheet reports assets, liabilities, and stockholders’ equity as of the last day of the period.
5. Why are financial statements prepared in a specific order? What is that order?
The financial statements are prepared in a specific order because net income from the income statement is
6.What is a classified balance sheet?
7. Identify two asset categories on the classified balance sheet, and give examples of each category.
8.Identify two asset categories on the classified balance sheet, and give examples of each category.
Current: Accounts Payable, Salaries Payable, Interest Payable. Long-term: Mortgage Payable, Notes
Payable.
9.What does liquidity mean?
10.How could a worksheet help in preparing financial statements?
The worksheet contains columns for the income statement and the balance sheet and calculates net income.
11.If a business had a net loss for the year, where would the net loss be reported on the worksheet
12. What is the closing process?
Closing the books (often referred to as the closing process) consists of journalizing and posting the closing
entries in order to get the accounts ready for the next period. The closing process zeroes out all revenue
13. What are temporary accounts? Are temporary accounts closed in the closing process?
14. What are permanent accounts? Are permanent accounts closed in the closing process?
15. How is the Income Summary account used? Is it a temporary or permanent account?
16. What are the steps in the closing process?
Step 1: Make the revenue accounts equal zero via the Income Summary account. This closing entry transfers
total revenues to the credit side of the Income Summary account.
Step 2: Make expense accounts equal zero via the Income Summary account. This closing entry transfers
17.If a business had a net loss for the year, what would be the closing entry to close Income Summary and
transfer the net loss to the Retained Earnings account?
18. What types of accounts are listed on the post-closing trial balance?
19. List the steps of the accounting cycle.
The steps of the accounting cycle are:
Step 1. Start with beginning account balances.
20. What is the current ratio, and how is it calculated?
The current ratio measures a company’s ability to pay its current liabilities with its current assets. This ratio
is computed as follows: Current ratio = Total current assets / Total current liabilities.
A.What are reversing entries? Are they required by GAAP?
Reversing entries are special journal entries that ease the burden of accounting for transactions in a later
Short Exercises
S4-1 Preparing an income statement
Learning Objective 1
Dalton Hair Stylists’s adjusted trial balance follows. Prepare Dalton’s income statement for the year ended
December 31, 2018.
SOLUTIONDALTON HAIR STYLISTS
Income Statement
Year Ended December 31, 2018
Revenues:
Service Revenue $ 13,800
Expenses:
Rent Expense $ 3,900
Interest Expense 2,300
Depreciation Expense—Equipment 2,200
Supplies Expense 850
Total Expenses 9,250
Net Income $ 4,550
S4-2 Preparing a statement of retained earnings
Learning Objective 1
Refer to the data in Short Exercise S4-1. Prepare Dalton’s statement of retained earnings for the year ended
December 31, 2018.
SOLUTION
S4-3 Preparing a balance sheet (unclassified, account form)
Learning Objective 1
Refer to the data in Short Exercise S4-1. Prepare Dalton’s unclassified balance sheet at December 31, 2018.
Use the account form.
SOLUTION
S4-4 Preparing a balance sheet (classified, report form)
Learning Objective 1
Refer to the data in Short Exercise S4-1. Prepare Dalton’s classified balance sheet at December
31,2018. Assume the Notes Payable is due on December 1, 2025. Use the report form
SOLUTION
S4-5 Classifying balance sheet accounts
Learning Objective 1
For each account listed, identify the category in which it would appear on a classified balance sheet.
a. Office Supplies
b. Interest Payable
c. Retained Earnings
d. Copyrights
e. Land
f. Accumulated Depreciation—Furniture
g. Land (held for long-term investment purposes)
h. Unearned Revenue
i. Notes Payable (due in six years)
SOLUTION
S4-6 Using the worksheet to prepare financial statements
Learning Objective 2
Answer the following questions:
Requirements
1. What type of normal balance does the Retained Earnings account have—debit or credit?
2. Which type of income statement account has the same type of balance as the Retained Earnings
account?
3. Which type of income statement account has the opposite type of balance as the Retained
Earnings account?
4. What do we call the difference between total debits and total credits on the income statement
section of the worksheet?
SOLUTION
S4-7 Determining net income using a worksheet
Learning Objective 2
A partial worksheet for Ramey Law Firm is presented below. Solve for the missing information.
SOLUTION
S4-8 Determining net loss using a worksheet
Learning Objective 2
A partial worksheet for Aaron Adjusters is presented below. Solve for the missing information.
SOLUTION
S4-9 Identifying temporary and permanent accounts
Learning Objective 3
For each account listed, identify whether the account is a temporary account (T) or a permanent
account (P).
a. Rent Expense
b. Prepaid Rent
c. Equipment
d. Common Stock
e. Salaries Payable
f. Dividends
g. Service Revenue
h. Supplies Expense
i. Office Supplies
SOLUTION
S4-10 Journalizing closing entries
Learning Objective 3
Brett Teddy Enterprises had the following accounts and normal balances listed on its December
31st adjusted trial balance: Service Revenue, $21,900; Salaries Expense, $6,000; Rent Expense,
$4,400; Advertising Expense, $3,100; and Dividends, $6,900.
Journalize the closing entries for Teddy Enterprises.
SOLUTION
