Chapter 4
> Things You Should Know
1. How do we prepare financial statements?
Financial statements are prepared from the adjusted trial balance in the following order:
Income statement—reports revenues and expenses and calculates net income or net loss during the period
Statement of retained earnings—shows how retained earnings changed during the period due to net income or net loss and dividends
Balance sheet—reports assets, liabilities, and stockholders’ equity as of the last day of the period
A classified balance sheet classifies each asset and each liability into specific categories.
2. How could a worksheet help in preparing financial statements?
The columns of a worksheet can be extended to help in preparing the financial statements.
The income statement section will include only revenue and expense accounts.
The balance sheet section will include asset and liability accounts and all equity accounts except revenues and expenses
3. What is the closing process, and how do we close the accounts?
The closing process consists of zeroing out all temporary accounts (revenues, expenses, Income Summary, and Dividends) in order to get the accounts ready for the next period.
The closing process also updates the Retained Earnings account balance for net income or net loss during the period and any dividends paid to the stockholders.
There are four steps in the closing process:
1. Make the revenue accounts equal zero via the Income Summary account.
2. Make the expense accounts equal zero via the Income Summary account.
3. Make the Income Summary account equal zero via the Retained Earnings account.
4. Make the Dividends account equal zero via the Retained Earnings account.
4. How do we prepare a post-closing trial balance? ■ ■ A post-closing trial balance is prepared after the closing entries are recorded and posted to the ledger. It contains only assets, liabilities, Common Stock, and Retained Earnings accounts (permanent accounts).
5. What is the accounting cycle?
The accounting cycle is the process by which companies produce their financial statements for a specific period.
1. Start with the beginning account balances.
2. Analyze and journalize transactions as they occur.
3. Post journal entries to the accounts.
4. Compute the unadjusted balance in each account and prepare the unadjusted trial balance.
5. Enter the unadjusted trial balance on the worksheet and complete the worksheet (optional).
6. Journalize and post adjusting entries.
7. Prepare the adjusted trial balance.
8. Prepare the financial statements.
9. Journalize and post the closing entries.
10. Prepare the post-closing trial balance.
6. How do we use the current ratio to evaluate business performance?
The current ratio measures a company’s ability to pay its current liabilities with its current assets.
Current ratio = Total current assets/ Total current liabilities.
7. What are reversing entries?
Reversing entries are special journal entries that ease the burden of accounting for transactions in a later period.
Reversing entries are the exact opposite of certain adjusting entries and are used only for accrual adjusting entries.
Chapter 4
> Things You Should Know
1. How do we prepare financial statements?
Financial statements are prepared from the adjusted trial balance in the following order:
Income statement—reports revenues and expenses and calculates net income or net loss during the period
Statement of retained earnings—shows how retained earnings changed during the period due to net income or net loss and dividends
Balance sheet—reports assets, liabilities, and stockholders’ equity as of the last day of the period
A classified balance sheet classifies each asset and each liability into specific categories.
2. How could a worksheet help in preparing financial statements?
The columns of a worksheet can be extended to help in preparing the financial statements.
The income statement section will include only revenue and expense accounts.
The balance sheet section will include asset and liability accounts and all equity accounts except revenues and expenses
3. What is the closing process, and how do we close the accounts?
The closing process consists of zeroing out all temporary accounts (revenues, expenses, Income Summary, and Dividends) in order to get the accounts ready for the next period.
The closing process also updates the Retained Earnings account balance for net income or net loss during the period and any dividends paid to the stockholders.
There are four steps in the closing process:
1. Make the revenue accounts equal zero via the Income Summary account.
2. Make the expense accounts equal zero via the Income Summary account.
3. Make the Income Summary account equal zero via the Retained Earnings account.
4. Make the Dividends account equal zero via the Retained Earnings account.
4. How do we prepare a post-closing trial balance? ■ ■ A post-closing trial balance is prepared after the closing entries are recorded and posted to the ledger. It contains only assets, liabilities, Common Stock, and Retained Earnings accounts (permanent accounts).
5. What is the accounting cycle?
The accounting cycle is the process by which companies produce their financial statements for a specific period.
1. Start with the beginning account balances.
2. Analyze and journalize transactions as they occur.
3. Post journal entries to the accounts.
4. Compute the unadjusted balance in each account and prepare the unadjusted trial balance.
5. Enter the unadjusted trial balance on the worksheet and complete the worksheet (optional).
6. Journalize and post adjusting entries.
7. Prepare the adjusted trial balance.
8. Prepare the financial statements.
9. Journalize and post the closing entries.
10. Prepare the post-closing trial balance.
6. How do we use the current ratio to evaluate business performance?
The current ratio measures a company’s ability to pay its current liabilities with its current assets.
Current ratio = Total current assets/ Total current liabilities.
7. What are reversing entries?
Reversing entries are special journal entries that ease the burden of accounting for transactions in a later period.
Reversing entries are the exact opposite of certain adjusting entries and are used only for accrual adjusting entries.
