Accounting Chapter 4 Homework This Means That The Financial Information More

CHAPTER 4

COMPLETING THE ACCOUNTING CYCLE

LEARNING OBJECTIVES

1. PREPARE A WORKSHEET.

2. PREPARE CLOSING ENTRIES AND A POST-CLOSING

TRIAL BALANCE.

CHAPTER REVIEW

Preparing a Worksheet

1. (L.O. 1) The steps in preparing a worksheet are:

a. Prepare a trial balance on the worksheet.

b. Enter the adjustments in the adjustments columns.

2. A worksheet is a multiple-column form that may be used in the adjustment process and in pre-

paring financial statements. The basic form of a worksheet consists of the following columns:

Income

Adjusted

Account Titles Trial Balance Adjustments

3. For each account in the worksheet, the amount in the adjusted trial balance columns is equal to

the account balance that will appear in the ledger after the adjusting entries have been journalized

and posted.

5. Using a worksheet accountants can prepare financial statements before adjusting entries are

journalized and posted.

Closing Entries

7. (L.O. 2) Closing entries formally recognize in the ledger the transfer of net income (or loss) and

owner’s drawings to owner’s capital as shown in the owner’s equity statement.

8. Journalizing and posting closing entries is a required step in the accounting cycle.

9. The drawing, revenue, and expense accounts are temporary (nominal) accounts. Asset accounts,

liability accounts, and the owner’s capital account are permanent (real) accounts.

Post-Closing Trial Balance

12. After all closing entries have been journalized and posted, a post-closing trial balance is

prepared. The purpose of this trial balance is to prove the equality of the permanent account

balances that are carried forward into the next accounting period.

Summary of the Accounting Cycle

13. (L.O. 3) The required steps in the accounting cycle are:

a. Analyze business transactions.

b. Journalize the transactions.

Correcting Entries

15. Errors that occur in recording transactions should be corrected as soon as they are discovered by

preparing correcting entries. Correcting entries:

a. are unnecessary if the records are free of errors.

16. To determine the correcting entry, it is useful to compare the incorrect entry with the correct entry,

Classified Balance Sheet

17. (L.O. 4) Financial statements become more useful when the elements are classified into signifi-

cant subgroups. A classified balance sheet generally has the following standard classifications:

Liabilities and

Assets Owner’s Equity

Assets

18. Current assets are assets that a company expects to convert to cash or use up within one year

or its operating cycle, whichever is longer. Current assets are listed in the order of their liquidity.

20. Long-term investments are generally investments in stocks and bonds of other companies that

are normally held for many years.

Liabilities

23. Current liabilities are obligations that the company is to pay within the coming year.

24. Long-term liabilities are obligations that a company expects to pay after one year.

Owner’s Equity

Reversing Entries

*26. (L.O. 5) A reversing entry is made at the beginning of the next accounting period. The purpose

of reversing entries is to simplify the recording of a subsequent transaction related to an adjusting

entry.

LECTURE OUTLINE

A. Using a Worksheet.

1. A worksheet is a multiple-column form used in the adjustment process

and in preparing financial statements.

2. The steps in the preparation of a worksheet:

a. Step 1: Prepare a trial balance on the worksheet.

3. A worksheet facilitates the preparation of financial statements because it

organizes the account balances and the statements can be prepared

before the adjusting entries are journalized and posted.

4. The use of a worksheet is optional and it is essentially a working tool of

the accountant.

B. Preparing Closing Entries.

1. Closing entries formally recognize in the ledger the transfer of net income

(or net loss) and owner’s drawings to owner’s capital. Journalizing and

posting closing entries is a required step in the accounting cycle.

3. There are four closing entries:

a. Debit each revenue account for its balance, and credit Income Sum-

mary for total revenues.

ACCOUNTING ACROSS THE ORGANIZATION

Recent surveys have reported that the average company now takes only six to

seven days to close, rather than 20 days. Knowing exactly where you are finan-

Answer: Investors benefit from a shorter closing process. The shorter the closing,

C. Preparing a Post-Closing Trial Balance.

1. The purpose of the post-closing trial balance is to prove the equality of

the permanent account balances carried forward into the next accounting

period.

D. Summary of the Accounting Cycle.

1. Analyze business transactions.

2. Journalize the transactions.

7. Prepare financial statements.

8. Journalize and post closing entries.

9. Prepare a post-closing trial balance.

E. Correcting Entries.

1. Companies should correct errors, as soon as they discover them, by

journalizing and posting correcting entries.

3. To determine the correcting entry, it is useful to compare the incorrect

entry with the correct entry in order to identify the accounts and amounts

that should—or should not—be corrected.

ACCOUNTING ACROSS THE ORGANIZATION

Yale Express, a short-haul trucking firm, turned over much of its cargo to local

truckers to complete deliveries and waited 20 days to receive the local truckers’

bills. However, Republic Carloading, a nationwide, long-distance freight

forwarder whom Yale merged with, frequently did not receive bills from truckers

until months after the year-end.

What might Yale Express have done to produce more accurate financial state–

ments without waiting months for Republic’s outstanding transportation bills?

Answer: Yale’s vice president could have engaged his accountants and auditors

F. The Classified Balance Sheet.

1. Current assets are assets that a company expects to convert to cash or

use up within one year or its operating cycle, whichever is longer. On the

balance sheet, companies usually list current assets in the order in which

they expect to convert them into cash (order of liquidity).

4. Intangible assets are assets that do not have physical substance yet often

are very valuable.

*G. Reversing Entries.

1. Companies make reversing entries at the beginning of the next account-

ing period. Each reversing entry is the exact opposite of the adjusting

entry made in the previous period.

IFRS

A Look at IFRS

The classified balance sheet, although generally required internationally, contains certain

variations in format when reporting under IFRS.

KEY POINTS

The procedures of the closing process are applicable to all companies, whether they are using

IFRS or GAAP. Following are the key similarities and differences between GAAP and IFRS

related to the closing process and the financial statements.

• IFRS generally requires a classified statement of financial position similar to the

classified balance sheet under GAAP.

• The format of statement of financial position information is often presented differently

under IFRS. Although no specific format is required, many companies that follow IFRS

present statement of financial position information in this order:

• Non-current assets

• Current assets

• Equity

LOOKING TO THE FUTURE

The IASB and the FASB are working on a project to converge their standards related to

financial statement presentation. A key feature of the proposed framework is that each of the

statements will be organized in the same format, to separate an entity’s financing activities

from its operating and investing activities and, further, to separate financing activities into

transactions with owners and creditors. Thus, the same classifications used in the statement

20 MINUTE QUIZ

Circle the correct answer.

True/False

1. An important purpose of closing entries is to set permanent account balances to zero in

order to begin the next period.

True False

2. The preparation of reversing entries is a required step in the accounting cycle.

True False

3. A worksheet can be used as a basis for posting the adjustments to the ledger.

True False

4. The content of the owner’s equity section of a proprietorship is the same as the content

of the owners’ equity section of a corporation.

True False

5. Adjustments are journalized and posted only at the end of an accounting period, whereas

correcting entries are journalized and posted whenever an error is discovered.

True False

6. Current assets are resources that can be converted into cash, but are not expected to be

converted within one year.

True False

7. Long-term liabilities such as lease liabilities, mortgages payable, and bonds payable are

expected to be paid from existing current assets.

True False

8. The balance of Accumulated Depreciation will appear in the credit side of the worksheet’s

Balance Sheet column.

True False

9. The relationship between current assets and current liabilities is important in evaluating

a company’s liquidity.

True False

10. Intangible assets are not listed on the balance sheet because they do not have physical

substance.

True False

Multiple Choice

1. The worksheet is a type of

a. financial statement.

b. permanent accounting record.

c. working paper.

d. journal.

2. In preparing closing entries, which of the following columns of the worksheet are the

most helpful?

a. The Adjustments column

b. The Adjusted Trial Balance columns

c. The Income Statement columns

d. The Balance Sheet columns

3. The proper sequence for the accounting cycle is

a. analyze, journalize, post, adjust, prepare statements, close.

b. post, journalize, analyze, prepare statements, close, adjust.

c. prepare statements, journalize, post, adjust, close, analyze.

d. journalize, post, close, prepare statements, adjust, analyze.

4. After all the closing entries have been posted, the balance of the income summary will be

a. a debit if a net income has occurred.

b. a debit if a net loss has occurred.

c. a credit if a net loss has occurred.

d. zero.

5. The post-closing trial balance will

a. be prepared before closing entries are posted to the ledger.

b. contain both income statement and balance sheet accounts.

c. contain only balance sheet accounts.

d. contain only income statement accounts.

ANSWERS TO QUIZ

True/False

1. False 6. False

2. False 7. False

Multiple Choice

1. c.