Ch04 Completing the Accounting Cycle PDF

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Chapter 4 Completing the Accounting Cycle OBJECTIVES

Obj 1 Obj 2 Obj 3 Obj 4 Obj 5 Obj 6

Describe the flow of accounting information from the unadjusted trial balance into the adjusted trial balance and financial statements. Prepare financial statements from adjusted account balances. Prepare closing entries. Describe the accounting cycle. Illustrate the accounting cycle for one period. Explain what is meant by the fiscal year and the natural business year.

QUESTION GRID

True / False No Objec. tive 1 04-01 2 04-01 3 04-01 4 04-01 5 04-01 6 04-01 7 04-02 8 04-02 9 04-02 10 04-02 11 04-02 12 04-02 13 04-02 14 04-02 15 04-02 16 04-02 17 04-02 18 04-02 19 04-02 20 04-02 21 04-02 22 04-02 23 04-02 24 04-02

Difficulty Easy Easy Easy Moderate Moderate Moderate Easy Moderate Moderate Moderate Easy Moderate Easy Easy Easy Moderate Easy Easy Easy Easy Moderate Easy Easy Easy

No . 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48

Objective 04-02 04-03 04-03 04-03 04-03 04-03 04-03 04-03 04-03 04-03 04-03 04-03 04-03 04-03 04-03 04-03 04-03 04-03 04-03 04-03 04-03 04-03 04-03 04-03

Difficulty Easy Easy Easy Easy Easy Easy Easy Easy Easy Easy Easy Moderate Easy Easy Easy Easy Easy Easy Easy Easy Easy Easy Easy Moderate

No . 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72

Objective 04-04 04-04 04-04 04-04 04-06 04-06 04-06 04-06 04-APP 04-APP 04-APP 04-APP 04-APP 04-APP 04-APP 04-APP 04-APP 04-APP 04-APP 04-APP 04-APP 04-APP 04-APP 04-APP

Difficulty Easy Easy Moderate Easy Easy Easy Easy Easy Easy Easy Moderate Easy Moderate Easy Easy Moderate Moderate Moderate Moderate Moderate Easy Moderate Easy Easy

167

168  Chapter 4/Completing the Accounting Cycle

Matching No Objec. tive 1 04-05 2 04-05 3 04-05 Multiple Choice No Objective . 1 04-01 2 04-01 3 04-01 4 04-01 5 04-02 6 04-02 7 04-02 8 04-02 9 04-02 10 04-02 11 04-02 12 04-02 13 04-02 14 04-02 15 04-02 16 04-02 17 04-02 18 04-02 19 04-02 20 04-02 21 04-02 22 04-02 23 04-02 24 04-02 25 04-02 26 04-02 27 04-02 28 04-03 cise/Other No Objec. tive 1 04-01

Difficulty Moderate Moderate Moderate

No . 4 5 6

Objective 04-05 04-05 04-05

Difficulty Moderate Moderate Moderate

Difficulty No.

Difficulty No. Objective Difficulty Moderate Difficult Easy Easy Easy Moderate Moderate Easy Moderate Moderate Moderate Moderate Moderate Moderate Moderate Easy Moderate Difficult Moderate Difficult Moderate Moderate Moderate Moderate Moderate Moderate Moderate Moderate

57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83

04-04 04-04 04-06 04-06 04-06 04-APP 04-APP 04-APP 04-APP 04-APP 04-APP 04-APP 04-APP 04-APP 04-APP 04-APP 04-APP 04-APP 04-APP 04-APP 04-APP 04-APP 04-APP 04-APP 04-APP 04-APP 04-APP

Moderate Easy Moderate Moderate Moderate Easy Moderate Easy Easy Moderate Moderate Moderate Moderate Moderate Moderate Easy Moderate Moderate Moderate Moderate Moderate Moderate Moderate Moderate Easy Difficult Difficult

Difficulty Easy

No . 9

Objective 04-04

Difficulty Difficult

Moderate Difficult Difficult Moderate Moderate Moderate Moderate Easy Easy Easy Moderate Easy Moderate Moderate Moderate Moderate Easy Moderate Moderate Moderate Moderate Moderate Moderate Moderate Moderate Moderate Moderate Moderate

29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56

Objective 04-03 04-03 04-03 04-03 04-03 04-03 04-03 04-03 04-03 04-03 04-03 04-03 04-03 04-03 04-03 04-03 04-03 04-03 04-03 04-03 04-03 04-03 04-03 04-03 04-03 04-03 04-04 04-04

Difficulty Easy

No . 5

Objective 04-02

No . 7 8

Objective 04-05 04-05

Difficulty Moderate Moderate

Exer-

Chapter 4/Completing the Accounting Cycle  169

2 04-02 3 04-02 4 04-02 Problem No Objec. tive 1 04-02 2 04-02 3 04-02 4 5 6 7 8

04-02 04-02 04-02 04-02 04-02

Easy Moderate Easy

6 7 8

Difficulty Easy Easy Moderate

No . 9 10 11

Easy Moderate Easy Difficult Difficult

12 13 14 15 16

04-03 04-03 04-03 Objective 04-02 04-02 04-02|0403 04-03 04-03 04-03 04-03 04-03

Easy Moderate Moderate

10 11

04-APP 04-APP

Moderate Difficult

Difficulty Difficult Difficult Difficult

No . 17 18 19

Objective 04-03 04-03 04-03

Difficulty Difficult Moderate Difficult

Moderate Difficult Moderate Moderate Moderate

20 21 22 23 24

04-03 04-03 04-05 04-APP 04-APP

Difficult Difficult Difficult Difficult Difficult

Chapter 4—Completing the Accounting Cycle TRUE/FALSE 1. After analyzing transactions, the next step would be to post the transactions in the ledger. ANS: F DIF: Easy OBJ: 04-01 NAT: AACSB Analytic | AICPA FN-Measurement 2. The most important output of the accounting cycle is the financial statements. ANS: T DIF: Easy OBJ: 04-01 NAT: AACSB Analytic | AICPA FN-Measurement 3. The work sheet is not considered a part of the formal accounting records. ANS: T DIF: Easy OBJ: 04-01 NAT: AACSB Analytic | AICPA FN-Measurement 4. Cross-referencing is useful in assuring that the debits and credits are in balance. ANS: F DIF: Moderate OBJ: 04-01 NAT: AACSB Analytic | AICPA FN-Measurement 5.

When accounts do not appear on the unadjusted trial balance but are needed to post adjustments, they are simply added to the account title column. ANS: T DIF: Moderate OBJ: 04-01 NAT: AACSB Analytic | AICPA FN-Measurement 6.

Once the adjusted trial balance is in balance, the flow of accounts will now go into the financial statements. ANS: T DIF: Moderate OBJ: 04-01 NAT: AACSB Analytic | AICPA FN-Measurement

170  Chapter 4/Completing the Accounting Cycle

7. There is really no benefit in preparing financial statements in any particular order. ANS: F DIF: Easy OBJ: 04-02 NAT: AACSB Analytic | AICPA FN-Measurement 8.

Round tripping is a fraudulent scheme where business A artificially inflates revenue by lending money to customer B who uses that money to buy products from A. ANS: T DIF: Moderate OBJ: 04-02 NAT: AACSB Analytic | AICPA FN-Measurement 9.

On the income statement, miscellaneous expenses are usually presented as the last item without regard to the dollar amount. ANS: T DIF: Moderate OBJ: 04-02 NAT: AACSB Analytic | AICPA FN-Measurement

10. The usual presentation of the statement of retained earnings is (1) Beginning retained earnings, (2) Net income or loss, (3) Dividends, (4) Investment by Stockholder, (5) Ending retained earnings. ANS: F DIF: Moderate OBJ: 04-02 NAT: AACSB Analytic | AICPA FN-Measurement 11. The difference between a classified balance sheet and one that is not classified is that the classified one has subheadings. ANS: T DIF: Easy OBJ: 04-02 NAT: AACSB Analytic | AICPA FN-Measurement 12. Cash and other assets that may reasonably be expected to be realized in cash, sold, or consumed through the normal operations of a business, usually longer than one year, are called current assets. ANS: F DIF: Moderate OBJ: 04-02 NAT: AACSB Analytic | AICPA FN-Measurement 13. Prepaid Insurance is an example of a current asset. ANS: T DIF: Easy OBJ: 04-02 NAT: AACSB Analytic | AICPA FN-Measurement 14. Land is an example of a plant asset. ANS: T DIF: Easy OBJ: 04-02 NAT: AACSB Analytic | AICPA FN-Measurement 15. Liabilities that will be due within one year or less and that are to be paid out of current assets are called current liabilities. ANS: T DIF: Easy OBJ: 04-02 NAT: AACSB Analytic | AICPA FN-Measurement

Chapter 4/Completing the Accounting Cycle  171

16. The amount of the net income for a period appears on both the income statement and the balance sheet for that period. ANS: F DIF: Moderate OBJ: 04-02 NAT: AACSB Analytic | AICPA FN-Measurement 17. Accrued taxes payable are generally reported on the balance sheet as a current liability. ANS: T DIF: Easy OBJ: 04-02 NAT: AACSB Analytic | AICPA FN-Measurement 18. At the end of the fiscal period, prepaid expenses are reported on the Income Statement as expenses. ANS: F DIF: Easy OBJ: 04-02 NAT: AACSB Analytic | AICPA FN-Measurement 19. Office Equipment is an example of a current asset account. ANS: F DIF: Easy OBJ: 04-02 NAT: AACSB Analytic | AICPA FN-Measurement 20. Capital Stock and Dividends are reported in the stockholders’ equity section of the balance sheet. ANS: F DIF: Easy OBJ: 04-02 NAT: AACSB Analytic | AICPA FN-Measurement 21. Deferred expenses that benefit a relatively short period of time are listed on the balance sheet as current assets. ANS: T DIF: Moderate OBJ: 04-02 NAT: AACSB Analytic | AICPA FN-Measurement 22. Unearned revenues that will be earned in a relatively short period of time are listed on the balance sheet as current assets. ANS: F DIF: Easy OBJ: 04-02 NAT: AACSB Analytic | AICPA FN-Measurement 23. Accrued expenses are ordinarily listed on the balance sheet as current assets. ANS: F DIF: Easy OBJ: 04-02 NAT: AACSB Analytic | AICPA FN-Measurement 24. Accrued revenues are ordinarily listed on the balance sheet as current liabilities. ANS: F DIF: Easy OBJ: 04-02 NAT: AACSB Analytic | AICPA FN-Measurement 25. The income statement is prepared from the adjusted trial balance or the income statement columns on the work sheet. ANS: T DIF: Easy OBJ: 04-02 NAT: AACSB Analytic | AICPA FN-Measurement

172  Chapter 4/Completing the Accounting Cycle

26. Examples of temporary accounts are supplies and prepaid expenses which are in the ledger for just a short time before they expire. ANS: F DIF: Easy OBJ: 04-03 NAT: AACSB Analytic | AICPA FN-Measurement 27. Accumulated Depreciation is a permanent account. ANS: T DIF: Easy OBJ: 04-03 NAT: AACSB Analytic | AICPA FN-Measurement 28. The dividend account is a temporary account. ANS: T DIF: Easy OBJ: 04-03 NAT: AACSB Analytic | AICPA FN-Measurement 29. The balance sheet accounts are referred to as real or permanent accounts. ANS: T DIF: Easy OBJ: 04-03 NAT: AACSB Analytic | AICPA FN-Measurement 30. Journalizing and posting the adjustments and closing entries updates the ledger for the new accounting period. ANS: T DIF: Easy OBJ: 04-03 NAT: AACSB Analytic | AICPA FN-Measurement 31. The income summary account is closed to the retained earnings account. ANS: T DIF: Easy OBJ: 04-03 NAT: AACSB Analytic | AICPA FN-Measurement 32. The accumulated depreciation account is closed to the income summary account. ANS: F DIF: Easy OBJ: 04-03 NAT: AACSB Analytic | AICPA FN-Measurement 33. The dividends account is closed to the income summary account. ANS: F DIF: Easy OBJ: 04-03 NAT: AACSB Analytic | AICPA FN-Measurement 34. The trial balance prepared after all the closing entries have been posted is called a preclosing trial balance. ANS: F DIF: Easy OBJ: 04-03 NAT: AACSB Analytic | AICPA FN-Measurement 35. Entries required to close the balances of the temporary accounts at the end of the period are called final entries. ANS: F DIF: Easy OBJ: 04-03 NAT: AACSB Analytic | AICPA FN-Measurement

Chapter 4/Completing the Accounting Cycle  173

36. In a corporation, a closing entry for the dividends account may not be necessary. ANS: F DIF: Moderate OBJ: 04-03 NAT: AACSB Analytic | AICPA FN-Measurement 37. Journalizing and posting closing entries must be completed before financial statements can be prepared. ANS: F DIF: Easy OBJ: 04-03 NAT: AACSB Analytic | AICPA FN-Measurement 38. During the closing process, some balance sheet accounts are closed and end the period with a zero balance. ANS: F DIF: Easy OBJ: 04-03 NAT: AACSB Analytic | AICPA FN-Measurement 39. Closing entries are entered directly on to the work sheet. ANS: F DIF: Easy OBJ: 04-03 NAT: AACSB Analytic | AICPA FN-Measurement 40. The post-closing trial balance will generally have fewer accounts than the trial balance. ANS: T DIF: Easy OBJ: 04-03 NAT: AACSB Analytic | AICPA FN-Measurement 41. A post-closing trial balance contains only asset and liability accounts. ANS: F DIF: Easy OBJ: 04-03 NAT: AACSB Analytic | AICPA FN-Measurement 42. A post-closing trial balance should be prepared before the financial statements are prepared. ANS: F DIF: Easy OBJ: 04-03 NAT: AACSB Analytic | AICPA FN-Measurement 43. Assets, liabilities, and stockholders’ equity are real accounts and do not get closed at the end of the period. ANS: T DIF: Easy OBJ: 04-03 NAT: AACSB Analytic | AICPA FN-Measurement 44. The income summary account is also known as the clearing account. ANS: T DIF: Easy OBJ: 04-03 NAT: AACSB Analytic | AICPA FN-Measurement 45. All income statement accounts will be closed at the end of the period. ANS: T DIF: Easy OBJ: 04-03 NAT: AACSB Analytic | AICPA FN-Measurement

174  Chapter 4/Completing the Accounting Cycle

46. Balance Sheet are not considered real accounts. ANS: F DIF: Easy OBJ: 04-03 NAT: AACSB Analytic | AICPA FN-Measurement 47. It is not necessary to post the closing entries to the general ledger. ANS: F DIF: Easy OBJ: 04-03 NAT: AACSB Analytic | AICPA FN-Measurement 48. Once an account has been closed for the period, inserting a line in the balance columns zero’s out the account making it ready for the following period. ANS: T DIF: Moderate OBJ: 04-03 NAT: AACSB Analytic | AICPA FN-Measurement 49. The last step of the accounting cycle is to prepare a post-closing trial balance. ANS: T DIF: Easy OBJ: 04-04 NAT: AACSB Analytic | AICPA FN-Measurement 50. The accounting cycle begins with preparing an unadjusted trial balance. ANS: F DIF: Easy OBJ: 04-04 NAT: AACSB Analytic | AICPA FN-Measurement 51. Financial statements should be prepared before the closing entries are journalized and posted. ANS: T DIF: Moderate OBJ: 04-04 NAT: AACSB Analytic | AICPA FN-Measurement 52. The unadjusted, adjusted, and final trial balances are prepared during the accounting cycle of a period. ANS: F DIF: Easy OBJ: 04-04 NAT: AACSB Analytic | AICPA FN-Measurement 53. Any twelve-month accounting period adopted by a company is known as its fiscal year. ANS: T DIF: Easy OBJ: 04-06 NAT: AACSB Analytic | AICPA BB-Industry 54. A fiscal year that ends when business activities have reached their lowest point is called the natural business year. ANS: T DIF: Easy OBJ: 04-06 NAT: AACSB Analytic | AICPA BB-Industry 55. All companies must use a calendar year as their fiscal year. ANS: F DIF: Easy OBJ: 04-06 NAT: AACSB Analytic | AICPA BB-Industry

Chapter 4/Completing the Accounting Cycle  175

56. The majority of businesses end their fiscal year on December 31. ANS: T DIF: Easy OBJ: 04-06 NAT: AACSB Analytic | AICPA BB-Industry 57. The work sheet is not considered a part of the formal accounting records. ANS: T DIF: Easy OBJ: 04-App NAT: AACSB Analytic | AICPA FN-Measurement 58. The work sheet is a working paper that accountants can use to summarize adjusting entries and the account balances for the financial statements. ANS: T DIF: Easy OBJ: 04-App NAT: AACSB Analytic | AICPA FN-Measurement 59. In a computerized accounting system, a work sheet may not be necessary because the software program automatically posts entries to the accounts and prepares financial statements. ANS: T DIF: Moderate OBJ: 04-App NAT: AACSB Analytic | AICPA FN-Measurement 60. The trial balance may be listed on the work sheet instead of being prepared separately. ANS: T DIF: Easy OBJ: 04-App NAT: AACSB Analytic | AICPA FN-Measurement 61. The totals of the Adjusted Trial Balance columns on a work sheet will always be the sum of the Trial Balance column totals and the Adjustments column totals. ANS: F DIF: Moderate OBJ: 04-App NAT: AACSB Analytic | AICPA FN-Measurement 62. A work sheet heading is dated for a period of time. ANS: T DIF: Easy OBJ: 04-App NAT: AACSB Analytic | AICPA FN-Measurement 63. On the work sheet, the retained earnings and dividend account balances are extended to the Balance Sheet columns. ANS: T DIF: Easy OBJ: 04-App NAT: AACSB Analytic | AICPA FN-Measurement 64. After the account balances have been extended from the Adjusted Trial Balance columns on the work sheet, the difference between the initial totals of the Balance Sheet debit and credit columns is Net Income or Net Loss. ANS: T DIF: Moderate OBJ: 04-App NAT: AACSB Analytic | AICPA FN-Measurement

176  Chapter 4/Completing the Accounting Cycle

65. After Net Income or Loss is entered on the work sheet, the debit column total must equal the credit column total for the Balance Sheet pair of columns. ANS: T DIF: Moderate OBJ: 04-App NAT: AACSB Analytic | AICPA FN-Measurement 66. A net loss is shown on the work sheet in the credit columns of both the Income Statement columns and the Balance Sheet columns. ANS: F DIF: Moderate OBJ: 04-App NAT: AACSB Analytic | AICPA FN-Measurement 67. Net income is shown on the work sheet in the Income Statement debit column and the Balance Sheet credit column. ANS: T DIF: Moderate OBJ: 04-App NAT: AACSB Analytic | AICPA FN-Measurement 68. If the totals of the Income Statement debit and credit columns of a work sheet are $22,750 and $25,000, respectively, after all account balances have been extended, the amount of the net loss is $2,250. ANS: F DIF: Moderate OBJ: 04-App NAT: AACSB Analytic | AICPA FN-Measurement 69. The worksheet and the financial statements both require dollar signs. ANS: F DIF: Easy OBJ: 04-App NAT: AACSB Analytic | AICPA FN-Measurement 70. The balance in the retained accounts account on the worksheet will equal the amount presented in the balance sheet. ANS: F DIF: Moderate OBJ: 04-App NAT: AACSB Analytic | AICPA FN-Measurement 71. Since the adjustments are entered on the work sheet, it is not necessary to record them in the journal or post them to the ledger. ANS: F DIF: Easy OBJ: 04-App NAT: AACSB Analytic | AICPA FN-Measurement 72. The chart of accounts, the journal, and the ledger are essential parts of the accounting system. ANS: T DIF: Easy OBJ: 04-App NAT: AACSB Analytic | AICPA FN-Measurement

Chapter 4/Completing the Accounting Cycle  177

MATCHING Identify the following transactions as either: a. Journal entries b. Adjusting journal entries c. Closing journal entries 1.

Cash

500 Fees Earned 500 2. Income Summary 465 Retained earnings 465 3. Utilities Expense 123 Cash 123 4. Wages Expense 790 Wages Payable 790 5. Unearned revenue 498 Fees Earned 498 6. Income Summary 677 Rent Expense 240 Supplies Expense 220 Utilities Expense 130 Miscellaneous Exp 87 7. Dividends 175 Cash 175 8. Accounts Receivable 400 Fees earned 400 (Customer billed for services performed) 1. ANS: A DIF: Moderate OBJ: 04-05 NAT: AACSB Analytic | AICPA FN-Measurement 2. ANS: C DIF: Moderate OBJ: 04-05 NAT: AACSB Analytic | AICPA FN-Measurement 3. ANS: A DIF: Moderate OBJ: 04-05 NAT: AACSB Analytic | AICPA FN-Measurement 4. ANS: B DIF: Moderate OBJ: 04-05 NAT: AACSB Analytic | AICPA FN-Measurement 5. ANS: B DIF: Moderate OBJ: 04-05 NAT: AACSB Analytic | AICPA FN-Measurement 6. ANS: C DIF: Moderate OBJ: 04-05 NAT: AACSB Analytic | AICPA FN-Measurement 7. ANS: A DIF: Moderate OBJ: 04-05 NAT: AACSB Analytic | AICPA FN-Measurement 8. ANS: A DIF: Moderate OBJ: 04-05 NAT: AACSB Analytic | AICPA FN-Measurement

178  Chapter 4/Completing the Accounting Cycle

MULTIPLE CHOICE 1.

In the accounting cycle, the last step is a. preparing the financial statements b. journalizing and posting the adjusting entries c. preparing a post-closing trial balance d. journalizing and posting the closing entries ANS: C DIF: Moderate OBJ: 04-01 NAT: AACSB Analytic | AICPA FN-Measurement 2.

During the end-of-period processing which of the following best describes the logical order of this process a. Preparation of adjustments, adjusted trial balance, financial statements b. Preparation of Income Stat...