Questions and Answers
What is a work sheet?
A document that is used internally by companies to help with adjusting and closing accounts and with preparing financial statements.
What is the first step in the work sheet process?
Enter unadjusted trial balance
What is the purpose of closing process?
Occurs at the end of an accounting period after financial statements are completed.
What are temporary accounts?
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What are permanent accounts?
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What does the post-closing trial balance represent?
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The accounting cycle steps are: Analyze transactions, Journalize, Post, Prepare unadjusted trial balance, Adjust and post, Prepare __________.
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Which items are included in the column headings of a work sheet? (Select all that apply)
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The closing process takes place at the end of an accounting period.
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Which of the following statements is (are) correct about completing a work sheet? (Select all that apply)
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Identify the steps for preparing a work sheet.
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What defines current assets?
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What is the current ratio?
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What is an unclassified balance sheet?
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What defines long-term liabilities? (Select all that apply)
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How does the accounting cycle conclude?
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Study Notes
Work Sheet and Its Steps
- A work sheet is an internal document used for adjusting accounts and preparing financial statements.
- Steps for completing a work sheet include entering the unadjusted trial balance, adjustments, and preparing the adjusted trial balance.
Closing Process and Account Types
- The closing process occurs at the end of an accounting period after financial statements are finalized.
- Temporary accounts relate to a specific accounting period and are reset to zero during closing. Permanent accounts report on activities for future periods.
Financial Statements Organization
- An unclassified balance sheet broadly groups accounts into assets, liabilities, and equity.
- A classified balance sheet organizes assets and liabilities into subgroups for clarity.
Operating Cycle and Asset Classifications
- Operating cycle refers to the time from cash expenditure to cash receipt from sales.
- Current assets are expected to be consumed or sold within one year or one operating cycle; include cash, accounts receivable, and prepaid expenses.
- Long-term investments are held for over a year and include notes receivable and stock investments.
Liabilities Classification
- Current liabilities are obligations due within a year; examples include accounts payable and taxes payable.
- Long-term liabilities extend beyond one year; examples include notes payable and mortgages.
Current Ratio
- The current ratio assesses a company's ability to pay short-term obligations: Current Ratio = Current Assets / Current Liabilities.
- A ratio below 1.0 signals potential financial issues; a ratio above indicates stronger debt coverage.
Financial Statement Preparation Steps
- Key steps in the accounting cycle include transaction journalizing, posting, preparing trial balances, adjusting entries, and creating financial statements.
- A post-closing trial balance lists all permanent account balances, verifying debits equal credits.
Plant Assets and Investments
- Plant assets are tangible and used in production or services, having a lifespan of over one year.
- Long-term investments and plant assets differ, with the former including stocks and bonds held for extended durations.
Income Summary Account
- The Income Summary is a temporary account used to aggregate revenues and expenses during the closing process. It balances net income or loss.
Understanding the Closing Entries
- Closing entries transfer balances from temporary accounts like revenues and expenses to the permanent capital account.
- The owner’s withdrawals account is also closed out at the period's end.
Summary of Financial Statements
- Income Statement reports revenues and expenses over a specific period.
- Balance Sheet reflects assets, liabilities, and equity at a specific point in time.
- Statement of Cash Flows details cash inflows and outflows during a period.
Current vs. Long-Term Asset Classification
- Current assets are those expected to be realized within one year; long-term investments exceed one year during holding.
- Key identification for current liabilities includes accounts payable, unearned rent, and taxes payable, showcasing obligations expected to be settled within the year.
Key Findings
- Companies with a current ratio greater than the industry average demonstrate better short-term financial stability.
- Successful management of temporary accounts through the closing process ensures accurate reporting in subsequent accounting periods.
These points summarize crucial concepts in accounting related to work sheets, financial statements, classifications of accounts, and the closing process, providing a comprehensive overview for study and review.
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Description
Test your knowledge of key concepts from Chapter 4 of Accounting with these flashcards. This set covers important terms and steps involved in using a worksheet for financial statements. Perfect for students looking to reinforce their understanding of accounting procedures.