Deck 4: Completing the Accounting Cycle

Question 1

The last four steps in the accounting cycle include preparing the adjusted trial balance, preparing financial statements and recording closing and adjusting entries.

Answer 1

False

Question 2

Revenue accounts should begin each accounting period with zero balances.

Answer 2

True

Question 3

Reversing entries are linked to ____________________ and _____________ that were created by adjusting entries at the end of the prior accounting period.
________________________________________

Answer 3

Chapter 04 Completing the Accounting Cycle Answer Key
True / False Questions

Question 4

The first five steps in the accounting cycle include analyzing transactions, journalizing, posting, preparing an unadjusted trial balance, and recording adjusting entries.

Question 5

The following adjusted trial balance is for Clara Co. at year-end December 31. The credit balance in Clara, Capital at the beginning of the year, January 1, was $320,000. The owner, Sara Clara, invested an additional $100,000 during the current year. The land held for future expansion was also purchased during the current year.

Question 6

Closing revenue and expense accounts at the end of the accounting period serves to make the revenue and expense accounts ready for use in the next period.

Question 7

Closing entries are designed to transfer the end-of-period balances in the revenue accounts, the expense accounts, and the withdrawals account to owner's capital.

Question 8

The closing process is a step in the accounting cycle that prepares accounts for the next accounting period.

Question 9

Permanent accounts carry their balances into the next accounting period. Moreover, asset, liability and revenue accounts are not closed as long as a company continues in business.

Question 10

The Income Summary account is a permanent account that will be carried forward period after period.

Question 11

Income Summary is a temporary account only used for the closing process.

Question 12

The Adjusted Trial Balance of Bade Cleaning Service is entered on the partial work sheet below. Complete the work sheet by extending the account balances into the appropriate financial statement columns and by entering the amount of net income for the reporting period:

Question 13

The accounting cycle refers to the sequence of steps in preparing the work sheet.

Question 14

Revenue and expense accounts are permanent (real) accounts and should not be closed at the end of the accounting period.

Question 15

Closing entries result in net income or net loss being transferred to the owner's capital account.

Question 16

The first step in the accounting cycle is to analyze transactions and events to prepare for journalizing.

Question 17

Accounts that appear in the balance sheet are often called temporary (nominal) accounts.

Question 18

Closing entries are necessary so that owner's capital will begin each period with a zero balance.

Question 19

Closing entries are required at the end of each accounting period to close all ledger accounts.

Question 20

The closing process takes place after financial statements have been prepared.

Question 21

Current liabilities are cash and other resources that are expected to be sold, collected or used within one year or the company's operating cycle whichever is longer.

Question 22

Harry's Bikes' current assets are $400 million and its current liabilities are $250 million. Its current ratio is 0.63.
$400/$250 = 1.6

Question 23

Plant assets are tangible assets that are usually long-term assets used to produce or sell products and services.

Question 24

Current liabilities include accounts receivable, unearned revenues, and salaries payable.

Question 25

Adjustments must be entered in the journal and posted to the ledger after the work sheet is prepared.

Question 26

A company has current assets of $15,000 and current liabilities of $9,500. Its current ratio is 1.6.
$15,000/$9,500 = 1.6

Question 27

A work sheet is a tool to help organize information needed in adjusting the accounts and preparing the financial statements.

Question 28

Current assets and current liabilities are expected to be used up or come due within one year or the company's operating cycle whichever is longer.

Question 29

Harry's Bikes' current ratio is 1.3. The industry average for the current ratio is 1.2. This indicates that Harry's Bikes can cover its short term liabilities with its short term assets.

Question 30

Intangible assets are long-term resources that benefit business operations that usually lack physical form and have uncertain benefits.

Question 31

The work sheet is a required report.

Question 32

The current ratio is used to help assess a company's ability to pay its debts in the near future.

Question 33

The current ratio is computed by dividing current liabilities by current assets.

Question 34

Cash and office supplies are both classified as current assets.

Question 35

A work sheet is a substitute for the set of financial statements.

Question 36

Assets are often classified into current assets, long-term investments, plant assets, and intangible assets.

Question 37

A classified balance sheet organizes assets and liabilities into important subgroups that provide more information to decision makers.

Question 38

Plant assets are usually listed in order from most liquid to least liquid.

Question 39

Long-term investments can include land held for future expansion.

Question 40

An unclassified balance sheet provides more information to users than a classified balance sheet.

Question 41

When expenses exceed revenues, there is a net loss and the Income Summary account would have a credit balance.

Question 42

Adjusting entries are normally entered in the general journal before they are posted to the work sheet.

Question 43

An expense account is normally closed by debiting Income Summary and crediting the expense account.

Question 44

The Income Summary account is used to close the permanent accounts at the end of an accounting period.

Question 45

The aim of a post-closing trial balance is to verify that (1) total debits equal total credits for temporary accounts, and (2) all temporary accounts have zero balances.

Question 46

All necessary numbers to prepare the balance sheet can be found in the balance sheet columns of the work sheet including ending owner's capital.

Question 47

Since it is an important financial statement, the trial balance must be prepared according to specified accounting procedures.

Question 48

The withdrawals account is normally closed by debiting it.

Question 49

A worksheet can be helpful in showing the effects of proposed or "what if" transactions, as well as being useful in helping to prepare end-of-period financial statements.

Question 50

After posting the entries to close all revenue and expense accounts, Hatfield Company's Income Summary account has a credit balance of $6,000, and its Hatfield, Withdrawals account has a debit balance of $2,500. These balances indicate that net income for the current accounting period amounted to $3,500.

Question 51

The steps in the closing process are (1) close credit balances in revenue accounts to Income Summary; (2) close credit balances in expense accounts to Income Summary; (3) close Income Summary to Owner's Capital; (4) close Withdrawals to Owner's Capital.

Question 52

On a work sheet, the adjusted balances of revenues and expenses are sorted to the Income Statement columns of the work sheet.

Question 53

All necessary numbers to prepare the income statement can be taken from the income statement columns of the work sheet, including the net income or net loss.

Question 54

Closing entries are normally entered in the general journal and then posted to the work sheet.

Question 55

The third closing entry is to close Owner's Capital to the Owner's Withdrawals account.

Question 56

On a work sheet, a loss is indicated if the total of the Income Statement Debit column exceeds the total of the Income Statement Credit column.

Question 57

A post-closing trial balance is a list of permanent accounts and their balances from the ledger after all closing entries are journalized and posted.

Question 58

After posting the entries to close all revenue accounts and all expense accounts, the Income Summary account of Waif Services has a $4,000 debit balance. This result implies that Waif Services earned a net income of $4,000.

Question 59

If all columns balance upon completion of a work sheet, you can be sure that no errors were made in preparing the work sheet.

Question 60

On the work sheet, net income is entered in the Income Statement Credit column as well as the Balance Sheet or Statement of Owner's Equity Debit column.

Question 61

A classified balance sheet differs from an unclassified balance sheet in that

A) an unclassified balance sheet is never used by large companies.
B) a classified balance sheet normally includes only three subgroups.
C) a classified balance sheet presents information in a manner that makes it easier to calculate a company's current ratio.
D) a classified balance sheet will include more accounts than an unclassified balance sheet for the same company on the same date.
E) a classified balance sheet cannot be provided to outside parties.

Question 62

When closing entries are made:

A) All ledger accounts are closed to start the new accounting period.
B) All temporary accounts are closed but not the permanent accounts.
C) All real accounts are closed but not the nominal accounts.
D) All permanent accounts are closed but not the nominal accounts.
E) All balance sheet accounts are closed.

Question 63

Revenues, expenses, and withdrawals accounts, which are closed at the end of each accounting period are:

A) Real accounts.
B) Temporary accounts.
C) Closing accounts.
D) Permanent accounts.
E) Balance sheet accounts.

Question 64

The closing process is necessary in order to:

A) calculate net income or net loss for an accounting period.
B) ensure that all permanent accounts are closed to zero at the end of each accounting period.
C) ensure that the company complies with state laws.
D) ensure that net income or net loss and owner withdrawals for the period are closed into the owner's capital account.
E) ensure that management is aware of how well the company is operating.

Question 65

Closing the temporary accounts at the end of each accounting period does all of the following except:

A) Serves to transfer the effects of these accounts to the owner's capital account on the balance sheet.
B) Prepares the withdrawals account for use in the next period.
C) Gives the revenue and expense accounts zero balances.
D) Has no effect on the owner's capital account.
E) Causes owner's capital to reflect increases from revenues and decreases from expenses and withdrawals.

Question 66

Which of the following statements is incorrect?

A) Permanent accounts is another name for nominal accounts.
B) Temporary accounts carry a zero balance at the beginning of each accounting period.
C) The Income Summary account is a temporary account.
D) Real accounts remain open as long as the asset, liability, or equity items recorded in the accounts continue in existence.
E) The closing process applies only to temporary accounts.

Question 67

The current ratio:

A) Is used to measure a company's profitability.
B) Is used to measure the relation between assets and long-term debt.
C) Measures the effect of operating income on profit.
D) Is used to help evaluate a company's ability to pay its debts in the near future.
E) Is calculated by dividing current assets by equity.

Question 68

Closing entries are required:

A) if management has decided to cease operating the business.
B) only if the company adheres to the accrual method of accounting.
C) if a company's bookkeeper forgets to prepare reversing entries.
D) if the temporary accounts are to reflect correct amounts for each accounting period.
E) in order to satisfy the Internal Revenue Service.

Question 69

Two common subgroups for liabilities on a classified balance sheet are:

A) current liabilities and intangible liabilities.
B) present liabilities and operating liabilities.
C) general liabilities and specific liabilities.
D) intangible liabilities and long-term liabilities.
E) current liabilities and long-term liabilities.

Question 70

The usual order for the asset section of a classified balance sheet is:

A) Current assets, prepaid expenses, long-term investments, intangible assets.
B) Long-term investments, current assets, plant assets, intangible assets.
C) Current assets, long-term investments, plant assets, intangible assets.
D) Intangible assets, current assets, long-term investments, plant assets.
E) Plant assets, intangible assets, long-term investments, current assets.

Question 71

Journal entries recorded at the end of each accounting period to prepare the revenue, expense, and withdrawals accounts for the upcoming period and to update the owner's capital account for the events of the period just finished are referred to as:

A) Adjusting entries.
B) Closing entries.
C) Final entries.
D) Work sheet entries.
E) Updating entries.

Question 72

A company's post-closing trial balance has total debits of $40,350 and total credits of $40,650. Accordingly, the company should review for errors in the closing process.

Question 73

The recurring steps performed each reporting period, starting with analyzing and recording transactions in the journal and continuing through the post-closing trial balance, is referred to as the:

A) Accounting period.
B) Operating cycle.
C) Accounting cycle.
D) Closing cycle.
E) Natural business year.

Question 74

Reversing entries are recorded in response to accrued assets and accrued liabilities that were created by adjusting entries at the end of the prior accounting period.

Question 75

The assets section of a classified balance sheet usually includes:

A) Current assets, long-term investments, plant assets, and intangible assets.
B) Current assets, long-term assets, revenues, and intangible assets.
C) Current assets, long-term investments, plant assets, and equity.
D) Current liabilities, long-term investments, plant assets, and intangible assets.
E) Current assets, liabilities, plant assets, and intangible assets.

Question 76

Another name for temporary accounts is:

A) Real accounts.
B) Contra accounts.
C) Accrued accounts.
D) Balance column accounts.
E) Nominal accounts.

Question 77

Reversing entries are optional.

Question 78

Assets, liabilities, and equity accounts are not closed; these accounts are called:

A) Nominal accounts.
B) Temporary accounts.
C) Permanent accounts.
D) Contra accounts.
E) Accrued accounts.

Question 79

Which of the following is the usual final step in the accounting cycle?

A) Journalizing transactions.
B) Preparing an adjusted trial balance.
C) Preparing a post-closing trial balance.
D) Preparing the financial statements.
E) Preparing a work sheet.

Question 80

A classified balance sheet:

A) Measures a company's ability to pay its bills on time.
B) Organizes assets and liabilities into important subgroups.
C) Presents revenues, expenses, and net income.
D) Reports operating, investing, and financing activities.
E) Reports the effect of profit and withdrawals on owner's capital.