Chapter 4 - Fin. Acct.

Completing the Accounting Cycle

What accounts are included on the income statement?

Revenue and expense accounts

What accounts are included on the statement of stockholders’ equity?

Common Stock, Retained Earnings, and Dividends

What accounts are included on the balance sheet?

Assets, liabilities, Common Stock, and Retained Earnings.

In what order are the financial statements prepared?

• Income Statement

• Statement of Stockholders’ Equity

• Balance Sheet

What is Notes Receivable?

A written promise that someone will pay the business money plus interest

Is Notes Receivable an asset or liability?

Asset → someone owes money to the business.

What are the five sections of a classified balance sheet?

• Current assets

• Property, plant, and equipment

• Current liabilities

• Long-term liabilities

• Stockholders’ equity

What are permanent (real) accounts?

Accounts whose balances carry over to the next accounting period.

Which accounts are permanent accounts?

Assets, liabilities, and stockholders’ equity accounts.

What are temporary (nominal) accounts?

Accounts used for one accounting period and then reset to zero

Which accounts are temporary accounts?

Revenues, expenses, and dividends

What are closing entries?

Journal entries that reset temporary accounts to zero at the end of the accounting period.

Why are temporary accounts closed?

So revenues, expenses, and dividends start at zero for the next period

Where are revenue and expense balances transferred during closing?

Retained Earnings

Where is the Dividends balance transferred during closing?

Retained Earnings.

What is a post-closing trial balance?

A trial balance prepared after closing entries are posted

What is the purpose of the post-closing trial balance?

To make sure the ledger is balanced and ready for the next period

What is the accounting cycle?

The process from analyzing transactions → preparing the post-closing trial balance.

What are the 10 steps of the accounting cycle?

• Analyze & journalize transactions → Record what happened

• Post to ledger → Move entries to accounts

• Unadjusted trial balance → Check debit = credit

• Analyze adjustments → Find what needs updating

• Optional spreadsheet → Organize end-of-period info

• Journalize & post adjustments → Update the accounts

• Adjusted trial balance → Check updated balances

• Financial statements → Report the results

• Journalize & post closing entries → Reset temporary accounts

• Post-closing trial balance → Final balance check

Why does GAAP require accrual-basis accounting?

It better reports company performance by matching revenues with related expenses.

What is liquidity?

A business's ability to convert assets into cash

What is solvency?

A business's ability to pay its debts

How is working capital calculated?

Current Assets − Current Liabilities

What does positive working capital generally mean?

Current assets exceed current liabilities,

Meaning → business can cover its current liabilities.

How is the current ratio calculated?

Current Assets ÷ Current Liabilities

Why is the current ratio useful?

It makes it easier to compare companies or industry averages than working capital does.