Completing the Accounting Cycle and Classifying Accounts PDF

1-1 Completing the Accounting Cycle and Classifying Accounts Chapter 4 Electronic Presentations in Microsoft® PowerPoint® to accompany Fundamental Accounting Principles, 17ce Prepared by Regula Lewis © 2022 McGraw Hill Ltd. ...

1-1 Completing the Accounting Cycle and Classifying Accounts Chapter 4 Electronic Presentations in Microsoft® PowerPoint® to accompany Fundamental Accounting Principles, 17ce Prepared by Regula Lewis © 2022 McGraw Hill Ltd.  1-2 The Accounting Cycle Prepare 1 Ch. 4 9 Analyze Ch. 1-2 post-closing transactions trial balance 2 Ch. 2 Journalize Ch. 4 8 Close 3 Ch. 2 Post 7 Prepare Ch. 1-4 statements 4 Prepare unadjusted Ch. 2 trial balance 6 Prepare 5 Ch. 3 adjusted Adjust Ch. 3 trial balance © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill © McGraw Hill Ltd. 4-2 Education.  1-3 Completing The Accounting Cycle Closing Process Temporary and permanent accounts Closing entries Post-closing trial balance Accounting Cycle Definition of accounting cycle Review of accounting cycle Classified Balance Sheet Classification structure Classification categories © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill © McGraw Hill Ltd. 4-3 Education.  1-4 LO1: Closing Process Purpose is to prepare accounts for recording transactions in the next accounting period. Closing entries are a necessary step because we want the revenue, expense, and withdrawals accounts to begin with zero balances to measure the results from the period just ending. Owner’s capital account to reflect: a. Increases from profit (or decreases from losses), and b. Decreases from withdrawals from the period just ending. In the closing process, we must: 1. Identify accounts for closing, 2. Record and post the closing entries, and 3. Prepare the post-closing trial balance. © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill © McGraw Hill Ltd. 4-4 Education.  1-5 Identify Accounts For Closing – Temporary and Permanent Accounts 1 Temporary accounts accumulate data related to one accounting period. They include all income statement accounts, withdrawals accounts, and the Income Summary account. They are temporary because the accounts are opened at the beginning of a period, used to record transactions for that period, and then closed at the end of the period by transferring their balances to the owner’s capital account. They are temporary because the accounts describe transactions or changes that have occurred rather than the financial position that exists at the end of the period. © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill © McGraw Hill Ltd. 4-5 Education.  1-6 Identify Accounts For Closing – Temporary and Permanent Accounts 2 Permanent accounts report on transactions related to one or more future accounting periods. T hey carry their ending balances into the next period and include all balance sheet accounts. Asset, liability, and owner’s capital accounts are not closed as long as a company continues to own the assets, owe the liabilities, and have equity. They are permanent because they reflect the existing financial position. © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill © McGraw Hill Ltd. 4-6 Education.  1-7 Identify Accounts For Closing – Temporary and Permanent Accounts 3 Temporary Accounts Permanent Accounts Revenues Assets Expenses Liabilities Withdrawals Owner’s Capital Income Summary **The income summary account is created and used only for the closing process.** © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill © McGraw Hill Ltd. 4-7 Education.  1-8 IMPORTANT TIP Only temporary accounts are closed, resulting in a reset to zero for the next accounting period. Permanent account balances carry into the next accounting period. © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill © McGraw Hill Ltd. 4-8 Education.  1-9 LO2: Recording And Posting Closing Entries Transfers the end-of-period balances in the revenue, expense, and withdrawals to the permanent owner’s capital account. Income summary is a temporary account that contains a credit for the sum of all revenues and a debit for the sum of all expenses. After closing entries are posted, the revenue, expense, income summary, and withdrawals accounts have zero balances. © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill © McGraw Hill Ltd. 4-9 Education.  1-10 IMPORTANT TIP If companies such as Apple, Inc. did not make closing entries, prior-year revenue from iPhone sales would be included with current-year revenue. Recording closing entries helps to reset revenue and expense accounts to zero on the income statement and the owner’s withdrawal account to capital. © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill © McGraw Hill Ltd. 4-10 Education.  1-11 Four Step Closing Process (REID) 1. Close Revenue accounts to Income Summary account. 2. Close Expense accounts to Income Summary account. 3. Close Income Summary account to Owner’s Capital account. 4. Close Drawings (Withdrawals) account to the Capital account. * There should only be 4 closing entries at most * © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill © McGraw Hill Ltd. 4-11 Education.  1-12 Closing Process for a Proprietorship © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No EXHIBIT 4.2 reproduction or further distribution permitted without the prior written consent of McGraw-Hill © McGraw Hill Ltd. 4-12 Education.  1-13 Entry 1: Close Temporary Accounts with Credit Balances to Income Summary EXHIBIT 4.5 © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill © McGraw Hill Ltd. 4-13 Education.  1-14 Entry 2: Close Temporary Accounts with Debit Balances to Income Summary EXHIBIT 4.5 © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill © McGraw Hill Ltd. 4-14 Education.  1-15 Entry 3: Close Income Summary to Owner’s Capital EXHIBIT 4.5 © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill © McGraw Hill Ltd. 4-15 Education.  1-16 Entry 4: Close Withdrawals Account to Owner’s Capital EXHIBIT 4.5 © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill © McGraw Hill Ltd. 4-16 Education.  1-17 Account Balances after Closing After closing: 1. All temporary accounts (revenue, expense, and withdrawal accounts will have zero balances. 2. The capital account will be updated to reflect profit (or loss) and withdrawals from the period just ending. 3. All other accounts will be unchanged. © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill © McGraw Hill Ltd. 4-17 Education.  1-21 CHECKPOINT 1. What are the four major closing entries? 2. Why are revenue and expense accounts called temporary? Are there other temporary accounts? © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill © McGraw Hill Ltd. 4-21 Education.  1-22 LO3: Preparing A Post-Closing Trial Balance 1 A list of permanent accounts and their balances from the ledger after all closing entries are journalized and posted. A list of balances for accounts not closed. The post-closing trial balance in Exhibit 4.7 was created by listing the account balances found in Exhibit 4.6. Like the trial balance, the post- closing trial balance does not prove that all transactions are recorded or that the ledger is correct. © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill © McGraw Hill Ltd. 4-22 Education.  1-23 Preparing A Post-Closing Trial Balance 2 Organico, Post-Closing Trial Balance, March 31, 2023 Debit Credit Cash $8,070 Accounts receivable 1,800 Supplies 2,550 Prepaid Insurance 2,300 Equipment 6,000 Accumulated depreciation, equipment $200 Accounts payable 200 Interest payable 35 Salaries payable 140 Unearned food services revenue 2,750 Notes payable 6,000 Hailey Walker, capital 11,395 Totals $20,720 $20,720 © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No Education. EXHIBIT 4.7 reproduction or further distribution permitted without the prior written consent of McGraw-Hill © McGraw Hill Ltd. 4-23  1-26 CHECKPOINT 3. What accounts are listed on the post-closing trial balance? © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill © McGraw Hill Ltd. 4-26 Education.  1-27 LO4: Completing the Accounting Cycle 1 1. Analyze transactions. Analyze transactions in preparation for journalizing. 2. Journalize. Record debits and credits with explanations in a journal. 3. Post. Transfer debits and credits from journal entries to the ledger accounts. 4. Unadjusted trial balance*. Summarize ledger accounts and amounts. 5. Adjust*. Record adjustments to bring account balances up to date; journalize and post adjusting entries to the accounts. 6. Adjusted trial balance. Summarize adjusted ledger accounts and amounts. © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill © McGraw Hill Ltd. 4-27 Education.  1-28 Completing the Accounting Cycle 2 7. Prepare statements. Use adjusted trial balance to prepare: income statement, statement of changes in equity, balance sheet, and statement of cash flows (details of preparing the statement of cash flows are in Chapter 16). 8. Close. Journalize and post entries to close temporary accounts (revenue, expense, and withdrawals) and update the owner’s capital account. 9. Post-closing trial balance**. Test clerical accuracy of adjusting and closing steps. *Steps 4, 5, and 6 can be done on a work sheet. **Reversing entries are optional and, if prepared, are done between Steps 9 and 1. © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill © McGraw Hill Ltd. 4-28 Education.  1-29 CHECKPOINT 4. What steps in the accounting cycle are optional? © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill © McGraw Hill Ltd. 4-29 Education.  1-30 LO5: Classified Balance Sheet Items are broadly grouped into assets, liabilities, and equity. Information to differentiate liabilities that are due in the near future from those not due within the next fiscal year. Information helps financial statement users assess a company’s ability to meet liabilities when they come due. © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill © McGraw Hill Ltd. 4-30 Education.  1-31 Classification Scheme Assets Liabilities and Equity Current Assets Current Liabilities Non-Current Investments* Non-Current Liabilities Property, Plant and Equipment* Equity Intangible Assets* *Non-current assets EXHIBIT 4.9 © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill © McGraw Hill Ltd. 4-31 Education.  1-32 Operating Cycles for a Service Company and a Merchandising Company EXHIBIT 4.10 © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill © McGraw Hill Ltd. 4-32 Education.  1-33 A Classified Balance Sheet Example The balance sheet for Elite Boardshop in Exhibit 4.11 shows the most commonly used groupings. Assets are classified into: (1) current assets, (2) equity investments, (3) property, plant, and equipment, and (4) intangible assets. Its liabilities are classified as either current or non-current. Not all companies use the same categories of assets and liabilities on their balance sheets. © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill © McGraw Hill Ltd. 4-33 Education.  1-34 Current Assets 1 Include all assets such as cash and other resources that are expected to be sold, collected, or used within the longer of one year of the company’s balance sheet date or the company’s operating cycle. Examples are cash, short-term investments, accounts receivable, notes receivable, goods for sale to customers (called merchandise inventory or inventory), and prepaid expenses. Notes receivable expected to be collected after a year or operating cycle would be classified under non-current assets. © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill © McGraw Hill Ltd. 4-34 Education.  1-35 Current Assets 2 Example: Current Assets – Apple Inc. as at September 26, 2020 Apple Inc. Consolidated Balance Sheets Current assets (in millions of US dollars) Cash and equivalents $38,016 Short-term marketable securities 52,927 Accounts receivable, net 16,120 Inventories 4,061 Vendor non-trade receivables 21,325 Other current assets 11,264 Total current assets $143,713 © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No EXHIBIT 4.12 reproduction or further distribution permitted without the prior written consent of McGraw-Hill © McGraw Hill Ltd. 4-35 Education.  1-36 Non-Current Investments Include all investments management intends to hold to maturity. The distinction between current and non-current classification is determined largely by management’s strategic intent to keep the instrument to maturity. Examples of non-current investments in debt instruments include bonds, loans outstanding, and non-current notes receivable. Non-current equity investments generally relate to significant equity ownership in another company usually held for strategic purposes. Non-current investments also can include land that is not being used in operations. © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill © McGraw Hill Ltd. 4-36 Education.  1-37 Property, Plant and Equipment (PPE) Are tangible assets of which the company has legal ownership as a result of a past business transaction and can use for more than one accounting period to produce or sell products and services. Examples include machinery, vehicles, computer hardware, buildings, and land. All PPE items are expected to be used in the business to carry out its operations and are not intended to be sold. © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill © McGraw Hill Ltd. 4-37 Education.  1-38 Intangible Assets Resources that lack physical form and have benefits that flow to the company for more than one accounting period, result from a past transaction for which the company has the legal right, and are expected to provide future benefits. These intangibles add value to the company and are used to produce or sell products and services. Examples include patents, trademarks, copyrights, and franchise rights. Their value comes from the privileges or rights granted to or held by the owner. © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill © McGraw Hill Ltd. 4-38 Education.  1-39 Current Liabilities Obligations due to be paid or settled within the longer of one year of the company’s balance sheet date or its normal operating cycle. They are usually settled by paying out current assets. Include accounts payable, notes payable, wages payable, taxes payable, interest payable, and unearned revenues. Any portion of a non-current liability due to be paid within the longer of one year or the operating cycle is classified as a current liability. © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill © McGraw Hill Ltd. 4-39 Education.  1-40 Non-Current Liabilities Obligations due beyond the longer of one year or the company’s normal operating cycle. Include notes payable, mortgages payable, bonds payable, and lease obligations. If a portion of a non-current liability is due to be paid within the year immediately following the balance sheet date, it must be separated and shown as a current liability on the balance sheet. © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill © McGraw Hill Ltd. 4-40 Education.  1-41 Equity The owner’s claim on the assets of a company. In a sole proprietorship, it is reported in the equity section with an owner’s capital account. The equity sections of a partnership and corporation are discussed in detail in later chapters. © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill © McGraw Hill Ltd. 4-41 Education. © 2019 McGraw-Hill Education 5-42 The classified balance sheet is labelled “Balance Sheet”; it is NOT labelled “Classified Balance Sheet,” a common error made by students.  1-44 CHECKPOINT 5. Identify which of the following assets are classified as (1) current assets, (2) property, plant and equipment, or (3) intangible assets: a) Land used in operations b) Office supplies c) Receivables from customers due in ten months d) Insurance protection for the next nine months e) Trucks used to provide services to customers f) Trademarks used in advertising the company’s services 6. Name two examples of assets classified as non-current investments on the balance sheet. 7. Explain an operating cycle for a service company and identify its importance to the classified balance sheet. © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill © McGraw Hill Ltd. 4-44 Education.  1-45 LO6: FINANCIAL STATEMENT ANALYSIS Current Ratio 1 Used to evaluate a company’s ability to pay its short-term obligations. The ability to pay day-to-day obligations (current liabilities) with existing liquid assets is commonly referred to as liquidity. Liquid assets are those that can easily be converted to cash or used to pay for services or obligations. Cash is the most liquid asset. Useful for decision making and a widely used tool in making decisions like whether or not to lend money to a company or allow a customer to buy on credit. 𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐀𝐬𝐬𝐞𝐭𝐬 Current Ratio = 𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐋𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐢𝐞𝐬 © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. EXHIBIT 4.13 © McGraw Hill Ltd. 4-45  1-46 Current Ratio 2 For the most recent three years, Costco’s current ratio has been slightly above or slightly below 1.0. This means Costco could face challenges in covering current liabilities. Although Costco has a better ratio than Walmart in each of the last three years, management must continue to monitor current assets and liabilities. Company $ millions Current Year 1 Year Ago 2 Years Ago Costco Current assets $23,485 $20,289 $17,317 Current liabilities $23,237 $19,926 $17,495 Current ratio 1.01 1.02 0.99 Walmart Current ratio 0.80 1.02 0.86 EXHIBIT 4.14 © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill © McGraw Hill Ltd. 4-46 Education.  1-48 Quick Ratio A simple modification from the current ratio, and a more robust measure of liquidity. Includes under-the-numerator-only assets that are easily converted into cash, including cash and marketable securities, short-term investments, and receivables. Measures the dollar value of liquid assets available to settle current liabilities. Excludes items such as inventory and prepaid assets. A quick ratio of greater than one is important. 𝐂𝐚𝐬𝐡%𝐄𝐪𝐮𝐢𝐯𝐚𝐥𝐞𝐧𝐭𝐬%𝐌𝐚𝐫𝐤𝐞𝐭𝐚𝐛𝐥𝐞 𝐒𝐞𝐜𝐮𝐫𝐢𝐭𝐢𝐞𝐬%𝐀𝐜𝐜𝐨𝐮𝐧𝐭𝐬 𝐑𝐞𝐜𝐞𝐢𝐯𝐚𝐛𝐥𝐞 Quick Ratio = 𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐋𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐢𝐞𝐬 EXHIBIT 4.15 © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill © McGraw Hill Ltd. 4-48 Education.  1-50 Debt to Equity Ratio 1 Another calculation that is important for understanding financial statements as it indicates the risk position of a company. It is important to determine what is normal for the industry. A lower number is more favourable; the higher the number, the higher the risk associated with the potential for bankruptcy. 𝐓𝐨𝐭𝐚𝐥 𝐃𝐞𝐛𝐭 Debt to Equity Ratio= 𝐓𝐨𝐭𝐚𝐥 𝐄𝐪𝐮𝐢𝐭𝐲 EXHIBIT 4.16 © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill © McGraw Hill Ltd. 4-50 Education.  1-51 Debt to Equity Ratio 2 We investigate the financial statements of Recipe Unlimited Corporation to calculate and compare its debt to equity ratios at December 29, 2019, and December 30, 2018 (rounded to two decimal places): 2019 2018 𝟏,𝟗𝟏𝟗,𝟎𝟖𝟎 𝟏,𝟏𝟎𝟓,𝟐𝟕𝟏 = = 0.85 = = 0.69 𝟐,𝟐𝟔𝟒,𝟎𝟔𝟔 𝟏,𝟓𝟗𝟏,𝟎𝟖𝟑 © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill © McGraw Hill Ltd. 4-51 Education.  1-53 CHECKPOINT 8. If a company misclassifies a portion of liabilities as non-current when they are current, how does this affect its current ratio? © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill © McGraw Hill Ltd. 4-53 Education.  1-54 Summary 1 1. Describe the closing process and explain why temporary accounts are closed each period. The closing process is the final step of the accounting cycle; it closes temporary accounts at the end of each accounting period: (1) to update the owner’s capital account for revenue, expense, and withdrawals transactions recorded for the period; and (2) to prepare revenue, expense, and withdrawals accounts for the next reporting period by giving them zero balances. © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill © McGraw Hill Ltd. 4-54 Education.  1-55 Summary 2 2. Prepare closing entries. Closing entries involve four steps: (1) close credit balances in revenue accounts to Income Summary, (2) close debit balances in expense accounts to Income Summary, (3) close Income Summary to Owner’s Capital, and (4) close the Withdrawals account to Owner’s Capital. © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill © McGraw Hill Ltd. 4-55 Education.  1-56 Summary 3 3. Explain and prepare a post-closing trial balance. A post-closing trial balance is a list of permanent accounts and their balances after all closing entries are journalized and posted. Permanent accounts are asset, liability, and equity accounts. The purpose of a post-closing trial balance is to verify that (1) total debits equal total credits for permanent accounts and (2) all temporary accounts have zero balances. © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill © McGraw Hill Ltd. 4-56 Education.  1-57 Summary 4 4. Complete the steps in the accounting cycle. The accounting cycle consists of nine steps: (1) analyze transactions, (2) journalize, (3) post, (4) prepare unadjusted trial balance, (5) adjust, (6) prepare adjusted trial balance, (7) prepare statements, (8) close, and (9) prepare post-closing trial balance. If a work sheet is prepared, it covers Steps 4 to 6. Reversing entries are an optional step that is done between Steps 9 and 1. © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill © McGraw Hill Ltd. 4-57 Education.  1-58 Summary 5 5. Explain and prepare a classified balance sheet. Classified balance sheets usually report four groups of assets: current assets; non-current investments; property, plant, and equipment; and intangible assets. Also, they include at least two groups of liabilities: current and non-current. The equity section on the balance sheet for a proprietorship reports the capital account balance. © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill © McGraw Hill Ltd. 4-58 Education.  1-59 Summary 6 6. Calculate the current ratio and debt to equity ratios and describe what they reveal about a company’s financial condition. A company’s current ratio is defined as current assets divided by current liabilities. We use it to evaluate a company’s ability to pay its current liabilities out of current assets. A company’s debt to equity ratio is calculated as total debt divided by total equity and is used to determine whether the company is at higher risk of bankruptcy. © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill © McGraw Hill Ltd. 4-59 Education.  1-60 End of Chapter © 2022 McGraw Hill Ltd.