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ACCT110 Ch 3 & 4 CAP

CAP for Ch 3 & 4

QuestionAnswer
Explain the two reasons why temporary accounts are closed at the end of the period. First, the closing process updates the capital account to include the effects of all transactions and events recorded for the period. Second, it prepares revenue, expense, and withdrawal accounts for the next reporting period by giving them zero balances.
Identify steps in the accounting cycle. 1. Analyze transactions 2. Journalize 3. Post 4. Prepare unadjusted trial balance 5. Adjust 6. Prepare an adjusted trial balance 7. Prepare statements 8. Close 9. Prepare a post-closing trial balance. 10. Reverse (optional)
Explain a classified balance sheet. Classified balance sheets report assets and liabilities in two categories: Current and noncurrent. Owner's equity for proprietorships/partnerships report the capital account balance. A corporation separates equity into common stock and retained earnings.
Provide examples of current assets. Cash, short-term investments, accounts receivable, interest receivable, rent receivable, notes receivable, inventory, office supplies, prepaid insurance, prepaid interest, prepaid rent.
Provide examples of noncurrent assets. Automobiles, trucks, boats, professional library, law library, furniture, office equipment, store equipment, machinery, building, land, land improvements - and the accumulated depreciation accounts tied to same.
Provide examples of current liabilities. Accounts payable, insurance payable, interest payable, rent payable, salaries payable, wages payable, accrued payroll payable, unearned revenues, short-term notes payable.
Provide examples of noncurrent liabilities. Long-term notes payable and other long-term liabilities.
Compute current ratio and describe what it reveals about a company's financial condition. Current ratio is defined as current assets divided by current liabilities. We use it to evaluate a company's ability to pays its current liabilities out of current assets.
Explain a worksheet's usefulness. A worksheet can be a useful tool in preparing and analyzing financial statements. It is helpful at the end of a period in preparing adjusting entries, an adjusted trial balance and financial statements.
Describe the four steps closing entries. - Close credit balances in revenue and gain accts to Income Summary. - Close debit balances in expense and loss to Income Summary. - Close the Income Summary account to the owner’s capital account. - Close withdrawals account to owner's capital accoun
Explain a post-closing trial balance. List of permanent accounts and their balances taken from the ledger, prepared after closing entries are journalized and posted; and verifies that total debits equal total credits for permanent accounts and all temporary accounts have zero ending balances.
Explain the purpose of reversing entries. Option step in closing process applied to accrued expenses and revenue geared toward simplifying subsequent journal entries. Financial statements are unaffected by the choice to use or not use reversing entries.
Explain the importance of periodic reporting and the time period principle. The value of info is often linked to its timeliness. To provide timely info, accounting systems prepare periodic reports at regular intervals, under the assumption that presumes an organization's activities can be divided in to specific time periods.
Explain accrual accounting and how it improves financial statements. Accrual accounting recognizes revenue when earned and expenses when incurred - not necessarily when cash inflows/outflows occur. This info is valuable in assessing a company's financial position and performance.
Identify the types of adjustments and their purpose. Prepaid expenses, unearned revenues, accrued expenses/revenues are grouped according to timing of cash receipts/payments relative to when recognized as revenues/expenses. Necessary so revenues, expenses, assets & liabilities are correctly reported.
Explain how accounting adjustments link to financial statements. Adjustments bring asset/liability balances to correct amount and also update related expense/revenue accounts. Every adjusting entry affects one or more income statement accounts and one or more balance sheet accounts - but NEVER cash.
Compute profit margin and describe its use in analyzing company performance. Profit margin is defined as reporting period's net income divided by its net sales; and reflects on a company's earning activities by showing how much income is in each dollar of sales.
Explain an adjusted trial balance. An adjusted trial balance is a list of accounts and balances prepared after recording and posting adjusted entries. Financial statements are often prepared from the adjusted trial balance.
Explain preparation of financial statements from an adjusted trial balance. Revenue & expense balances are reported on income statement. Asset, liability & equity balances are reported on the balance sheet. Prepared in this order: income statement, statement of owner's equity, balance sheet & statement of cash flows.
Explain adjusting entries for prepaid expenses. They're items paid for in advance of receiving their benefits and are classified as assets. Adjusting entries involve increasing (Dr.) expenses and decreasing (Cr.) assets.
Explain adjusting entries unearned or prepaid revenues. Refers to cash rec'd in advance of providing products/services and are classified as liabilities. Adjusting entries involve increasing (Cr.) revenues and decreasing (Dr.) unearned revenues.
Explain adjusting entries for accrued expenses. They're costs incurred in a period that are both unpaid & unrecorded. Adjusting entries involve increasing (Dr.) expenses and increasing (Cr.) liabilities.
Explain adjusting entries for accrued revenues. Refer to revenues earned in a period that are both unrecorded and not yet rec'd. Adjusting entries involve increasing (Dr.) assets and increasing (Cr.) revenues.
Explain alternatives in accounting for prepaid expenses. Prepaid expenses may originally be recorded with debits to expense accounts instead of assets. If so, then adjusting entries must transfer the cost of the unused portions from expense accounts to prepaid expense (asset) accounts.
Explain alternatives in accounting for prepaid revenues. Prepaid revenues may originally be recorded with credits to revenue accounts instead of liabilities. If so, then adjusting entries must transfer the unearned portions from revenue accounts to unearned revenue (liability) accounts.
Do financial statements differ from alternative accounting for prepaids? No. Financial statements are identical under either procedure, but the adjusting entries are different
Created by: slk