Accounting Chapter 4 Flashcards

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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?

Accounts related to one accounting period. Signup and view all the answers

What are permanent accounts?

Accounts that report on activities related to one or more future accounting periods. Signup and view all the answers

What does the post-closing trial balance represent?

A list of permanent accounts and their balances after all closing entries. Signup and view all the answers

The accounting cycle steps are: Analyze transactions, Journalize, Post, Prepare unadjusted trial balance, Adjust and post, Prepare __________.

adjusted trial balance Signup and view all the answers

Which items are included in the column headings of a work sheet? (Select all that apply)

Adjustment columns Signup and view all the answers

The closing process takes place at the end of an accounting period.

True Signup and view all the answers

Which of the following statements is (are) correct about completing a work sheet? (Select all that apply)

Adding net income to the Credit column of the Balance Sheet & Owner's Equity columns implies that it is to be added to Owner, Capital. Signup and view all the answers

Identify the steps for preparing a work sheet.

<ol> <li>Enter unadjusted trial balance 2. Enter adjustments 3. Prepare adjusted trial balance 4. Sort adjusted trial balance amounts to financial statements 5. Total financial statement columns, compute income or loss.</li> </ol> Signup and view all the answers

What defines current assets?

Cash and other resources that are expected to be sold, collected, or used within one year or the company's operating cycle. Signup and view all the answers

What is the current ratio?

Current ratio = current assets / current liabilities Signup and view all the answers

What is an unclassified balance sheet?

A balance sheet that broadly groups accounts into assets, liabilities, and equity. Signup and view all the answers

What defines long-term liabilities? (Select all that apply)

Liabilities that are often secured by collateral. Signup and view all the answers

How does the accounting cycle conclude?

By preparing the post-closing trial balance. Signup and view all the answers

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.