34 terms

Chapter 4-Completing The Accounting Cycle

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Terms in this set (...)

Liquidity
Measure of how quickly or readily a firm can convert assets I to cash
Why is liquidity important to the health of a business?
It determines if the business is generating enough cash. If it is highly liquid there are more current assets and less current liabilities
Classified Balance sheet
A classified balance sheet presents information about an entity's assets, liabilities, and shareholders' equity that is aggregated (or "classified") into subcategories of accounts.
Current assets
Any asset that can be sold, used up and converted into cash within one year or the businesses operating cycle
List of current assets
-Cash (most liquid)
-Receivable (have to be collected)
-Inventories (have to be sold)
-Supplies (to be used)
-Prepaid expenses (to be used)
Current ratio
Used to measure the company's liquidity

Total current assets/total current liabilities

Current ratio > 1.50 (acceptable region)

Current ratio < 1.0 (unacceptable)
What are the points of references for the current ratio?
1. Benchmark
2. Industry Average
3. Current period vs. Previous period (within the company)
How do we read the current ratio answer?
For every dollar in current liabilities owed, the company has $_______ in current assets to pay off those liabilities
Post-closing trial balance
the post closing trial balance is a list of accounts or permanent accounts that still have balances after the closing entries have been made.
How is a post closing trial balance different from the unadjusted and adjusted trial balance?
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Four step closing process
R: close all revenue accounts and transfer there balances into income summary

E: close all expense accounts and transfer their balances into income summary

I: close the income summary account and transfer its balances into the retained earnings account

D: close the dividends account and transfer its balance into the retained earnings account
Permanent account (real account)
An ownership driven account

Has assets, liabilities, common stock, retained earnings

Related to a company's position- these accounts will never be eliminated or drawn down to a zero
Temporary (nominal)
Have revenues, expenses, dividends.

These accounts determine a company's success (profit/loss)

Performance driven accounts
Why must we close the accounts?
We prepare closing entries for the temporary accounts such as the revenue and expense accounts (see earlier Q&A). The closing entries are recorded after the financial statements for the accounting year are prepared. The reason for the closing entries is to ensure that each revenue and expense account will begin the next accounting year with a zero balance.
Name the two alternative formats in which a balance sheet may be presented. How do they differ? Which of these formats is more common?
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What is the purpose of an extended worksheet?
Major purpose of the worksheet is to incorporate adjustments to the closed accounts in a structured manner following a certain format. Worksheets are prepared in situations where adjustments are in large number and it helps in reducing accounting and arithmetic errors in finalizing accounts.
Explain the ordering of assets and liabilities
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What is the criteria used by businesses to distinguish current and longterm assets as well as current and long-term liabilities?
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Non current (long term) assets
1. Investments
-stocks > equity >dividends
-bonds > debt > interest
-notes > debt > interest
-land > gains from sales
2. Plant assets
- furniture and fixture
- machinery and equipment
- buildings
- land
3. Intangible assets
-patent
-copyright
-trademark
-tradename
Current Liabilities
1. Accounts payable
2. Salaries/ Wages payable
3. Notes payable
4. Interest payables
5. Unearned revenues ( not paid in cash but with goods and services)
Non current liabilities
1. Notes payable
2. Mortgage payable
3. Bonds payable
4. Pensions
Define non-current asset
Any asset that will not be sold, used up and converted into cash within one year or the businesses operating cycle
Define current liabilities
A liability that would be paid in cash or with goods and services within one year or the operating cycle whichever is longer
Define non current liabilities
A liability that will not be paid in cash or with goods or services within one year or the operating cycle
Operating cycle
The period of time between
1. the purchase of goods and services and cash

2. the use of those goods and services in the production and sales of other goods and services to customers

3. the collection of cash from goods and services sold
Cash paid <-> cash collected
How much time it takes for money paid to come back into the business
There are different operating cycle
True
The time period Concept
To measure the success or failure of a business look at the time
Income and time go hand-in-hand you cannot measure income without time
True
The worksheet
help people be able to make financial statements
Where does net loss/ net profit go on a worksheet
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report form
A form of balance sheet that lists the liabilities and the owner's equity sections below the assets section is called the
accounting cycle
when a company produces their financial statement for a specific period
How to calculate retained earnings
beginning retained earnings+net income-dividends