Chapter 04

Chapter 004 Completing the Accounting Cycle Summary of Questions by Difficulty Level (DL) and Learning Objective (LO) True/False Item

DL

LO

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DL

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1.

Easy

C1

22.

Easy

C3

43.

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P1

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23.

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44.

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Easy

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24.

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45.

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27.

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C3

48.

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P1

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28.

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49.

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29.

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C3

50.

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9.

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30.

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51.

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10 .

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31.

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52.

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11 .

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53.

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12 .

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33.

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54.

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13 .

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14 .

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35.

Easy

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56.

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15 .

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36.

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57.

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16 .

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37.

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58.

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C2

38.

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59.

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18 .

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39.

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60.

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19 .

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40.

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61.

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41.

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62.

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21 .

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42.

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63.

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4-1

Chapter 004 Completing the Accounting Cycle Multiple Choice Item

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64.

Easy

C1

81.

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9 8.

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65.

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82.

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99.

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66.

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C1

83.

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100.

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67.

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C1

84.

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101.

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68.

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85.

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102.

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69.

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C1

86.

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103.

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70.

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87.

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104.

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71.

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88.

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105.

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72.

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89.

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106.

Hard

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73.

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90.

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P1

107.

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P3

74.

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C2

91 .

Med

P1

1 08.

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P3

75.

Easy

C3

9 2.

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P1

1 0 9.

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P3

76.

Easy

C3

9 3.

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P1

1 1 0.

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77.

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C3

94 .

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1 11 .

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P4

78.

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C3

95.

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112.

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79.

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96.

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113.

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80.

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9 7.

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115.

Me Med

C1,C2

11 6 .

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C1-C3

1 17 .

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Short Essay Item

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11 9.

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12 4 .

Hard

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128 .

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12 1.

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12 5 .

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4-2

Chapter 004 Completing the Accounting Cycle Multiple Choice Item

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LO

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64.

Easy

C1

81.

Hard

A1

9 8.

Med

P2

65.

Easy

C1

82.

Easy

P1

99.

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66.

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C1

83.

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P1

100.

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67.

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C1

84.

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101.

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68.

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85.

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102.

Hard

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69.

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86.

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103.

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70.

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87.

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104.

Hard

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71.

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C1

88.

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105.

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72.

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89.

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106.

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73.

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90.

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P1

107.

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74.

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C2

91 .

Med

P1

1 08.

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P3

75.

Easy

C3

9 2.

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P1

1 0 9.

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P3

76.

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9 3.

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1 1 0.

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77.

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C3

94 .

Hard

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1 11 .

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P4

78.

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C3

95.

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P2

112.

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79.

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96.

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113.

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80.

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9 7.

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1 1 4.

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Matching Item

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LO

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LO

Item

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LO

115.

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C1,C2

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11 8.

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1 26.

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11 9.

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128 .

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4-2

Chapter 004 Completing the Accounting Cycle Problems Item

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129 .

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1 36 .

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1 43.

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130 .

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1 37 .

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1 44.

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131 .

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1 38 .

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1 45.

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132 .

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13 9.

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146 .

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133 .

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C3,A1

140 .

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134 .

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135 .

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14 2.

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Completion Problems Item

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1 48 .

Easy

C1

152 .

Easy

C2

1 56 .

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P1

1 49 .

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1 53 .

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157 .

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1 50 .

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1 51 .

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155 .

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1 59 .

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Ha Hard

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Hard

P4

Problems

4-3

Chapter 004 Completing the Accounting Cycle

True / False Questions

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

AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Easy Learning Objective: C1

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


3. Revenue accounts should begin each accounting period with zero balances. TRUE


4. 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. TRUE


4-4


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


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

AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: C1

7. Closing entries result in revenues and expenses being reflected in the owner's capital account. TRUE


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


4-5


9. The closing process is a two-step process. First revenue, expense, and withdrawals are set to a zero balance. Second, the process summarizes a period's assets and expenses. FALSE


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


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


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


4-6


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


14. 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. FALSE

AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Hard Learning Objective: C1

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


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


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


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

AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Hard Learning Objective: C2

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

AACSB: Communications AICPA BB: Industry AICPA FN: Reporting Difficulty: Easy Learning Objective: C3

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


4-8


21. 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. TRUE


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


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

AACSB: Communications AICPA BB: Industry AICPA FN: Reporting Difficulty: Medium Learning Objective: C3

24. 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. FALSE


4-9


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


26. Plant assets and intangible assets are usually long-term assets used to produce or sell products and services. TRUE


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


28. Cash and office supplies are both classified as current assets. TRUE


4-10


29. Plant assets are also called fixed assets or property, plant, and equipment. TRUE


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

AACSB: Analytic AICPA BB: Industry AICPA FN: Risk Analysis Difficulty: Easy Learning Objective: A1

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

AACSB: Analytic AICPA BB: Industry AICPA FN: Risk Analysis Difficulty: Easy Learning Objective: A1

32. Harley-Davidson's current assets are $400 million and its current liabilities are $250 million. Its current ratio is 0.63. FALSE $400/$250 = 1.6

AACSB: Analytic AICPA BB: Industry AICPA FN: Risk Analysis Difficulty: Medium Learning Objective: A1

4-11


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

AACSB: Analytic AICPA BB: Industry AICPA FN: Risk Analysis Difficulty: Medium Learning Objective: A1

34. Harley-Davidson's current ratio is 1.3. The industry average for the current ratio is 1.2. This indicates that Harley-Davidson can cover its short term liabilities with its short term assets. TRUE

AACSB: Analytic AICPA BB: Industry AICPA FN: Risk Analysis Difficulty: Hard Learning Objective: A1

35. A work sheet is a tool to help bring together information needed in adjusting the accounts and preparing the financial statements. TRUE

AACSB: Technology AICPA BB: Industry AICPA FN: Leveraging Technology Difficulty: Easy Learning Objective: P1

4-12


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


37. The work sheet is a book of original entry used to record transactions and events as they occur. FALSE


38. The work sheet is a required financial statement. FALSE


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


4-13


40. 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. TRUE

AACSB: Technology AICPA BB: Industry AICPA FN: Leveraging Technology Difficulty: Medium Learning Objective: P1

41. 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. TRUE


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


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

AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: P1

4-14


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


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


46. 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. FALSE


47. 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. FALSE


4-15


48. 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. TRUE


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

AACSB: Communications AICPA BB: Industry AICPA FN: Reporting Difficulty: Medium Learning Objective: P1

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

AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Easy Learning Objective: P2

51. The withdrawals account is normally closed by debiting it. FALSE


4-16


52. 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. FALSE


53. 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. FALSE


54. The Income Summary account is closed to the owner's capital account. TRUE


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


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


57. 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. FALSE

AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Hard Learning Objective: P2

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


59. 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. TRUE


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60. 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. FALSE


61. A company's post-closing trial balance has a debit total of $40,350 and a credit total of $40,650. Accordingly, the company should review for errors in the closing process. TRUE


62. Reversing entries are optional. TRUE


63. Reversing entries adjust the accrued assets and accrued liabilities that were created by adjusting entries at the end of the prior accounting period. TRUE


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Multiple Choice Questions

64. Another name for temporary accounts is: A. Real accounts. B. Contra accounts. C. Accrued accounts. D. Balance column accounts. E. Nominal accounts.


65. 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.


66. 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.


4-20


67. 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.


68. 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.


69. Closing the temporary accounts at the end of each accounting period: 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. Causes owner's capital to reflect increases from revenues and decreases from expenses and withdrawals. E. All of these.


4-21


70. 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.


71. 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.


72. 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.


4-22


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.


74. 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.


75. 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.


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76. 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.


77. 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.


78. A classified balance sheet differs from an unclassified balance sheet in that A. a 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.


4-24


79. 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.


80. 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.

AACSB: Communications AICPA BB: Industry AICPA FN: Risk Analysis Difficulty: Medium Learning Objective: A1

81. The current ratio: A. Is calculated by dividing current assets by current liabilities. B. Helps to assess a company's ability to pay its debts in the near future. C. Can reveal problems in a company if it is less than 1. D. Can affect a creditor's decision about whether to lend money to a company. E. All of these.

AACSB: Communications AICPA BB: Industry AICPA FN: Risk Analysis Difficulty: Hard Learning Objective: A1

4-25


82. The Unadjusted Trial Balance columns of a company's work sheet show the balance in the Office Supplies account as $750. The Adjustments columns show that $425 of these supplies were used during the period. The amount shown as Office Supplies in the Balance Sheet columns of the work sheet is: A. $325 debit. B. $325 credit. C. $425 debit. D. $750 debit. E. $750 credit.


83. A 10-column spreadsheet used to draft a company's unadjusted trial balance, adjusting entries, adjusted trial balance, and financial statements, and wh ich is an optional tool in the accounting process is a(n) : A. Adjusted trial balance. B. Work sheet. C. Post-closing trial balance. D. Unadjusted trial balance. E. General ledger.


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84. Accumulated Depreciation, Accounts Receivable, and Service Fees Earned would be sorted to which respective columns in completing a work sheet? A. Balance Sheet or Statement of Owner's Equity-Credit; Balance Sheet or Statement of Owner's Equity Debit; and Income Statement-Credit. B. Balance Sheet or Statement of Owner's Equity-Debit; Balance Sheet or Statement of Owner's Equity-Credit; and Income Statement-Credit. C. Income Statement-Debit; Balance Sheet or Statement of Owner's Equity-Debit; and Income Statement-Credit. D. Income Statement-Debit; Income Statement-Debit; and Balance Sheet or Statement of Owner's Equity-Credit. E. Balance Sheet or Statement of Owner's Equity-Credit; Income Statement-Debit; and Income Statement-Credit.


85. Which of the following statements is incorrect? A. Working papers are useful aids in the accounting process. B. On the work sheet, the effects of the accounting adjustments are shown on the account balances. C. After the work sheet is completed, it can be used to help prepare the financial statements. D. On the work sheet, the adjusted amounts are sorted into columns according to whether the accounts are used in preparing the unadjusted trial balance or the adjusted trial balance. E. A worksheet is not a substitute for financial statements.


4-27


86. A company shows a $600 balance in Prepaid Insurance in the Unadjusted Trial Balance columns of the work sheet. The Adjustments columns show expired insurance of $200. This adjusting entry results in: A. $200 decrease in net income. B. $200 increase in net income. C. $200 difference between the debit and credit columns of the Unadjusted Trial Balance. D. $200 of prepaid insurance. E. An error in the financial statements.


87. Statements that show the effects of proposed transactions as if the transactions had already occurred are called: A. Pro forma statements. B. Professional statements. C. Simplified statements. D. Temporary statements. E. Interim statements.


4-28


88. If in preparing a work sheet an adjusted trial balance amount is mistakenly sorted to the wrong work sheet column. The Balance Sheet columns will balance on completing the work sheet but with the wrong net income, if the amount sorted in error is: A. An expense amount placed in the Balance Sheet Credit column. B. A revenue amount placed in the Balance Sheet Debit column. C. A liability amount placed in the Income Statement Credit column. D. An asset amount placed in the Balance Sheet Credit column. E. A liability amount placed in the Balance Sheet Debit column.


89. If the Balance Sheet and Statement of Owner's Equity columns of a work sheet fail to balance when the amount of the net income is added to the Balance Sheet and Statement of Owner's Equity Credit column, the cause could be: A. An expense amount entered in the Balance Sheet and Statement of Owner's Equity Debit column. B. A revenue amount entered in the Balance Sheet and Statement of Owner's Equity Credit column. C. An asset amount entered in the Income Statement and Statement of Owner's Equity Debit column. D. A liability amount entered in the Income Statement and Statement of Owner's Equity Credit column. E. An expense amount entered in the Balance Sheet and Statement of Owner's Equity Credit column.

AACSB: Analytic AICPA BB: Industry AICPA FN: Leveraging Technology Difficulty: Medium Learning Objective: P1

4-29

Chapter 004 Completing the Accounting Cycle 90. The following items appeared on a company's December 31 work sheet for the current period. Based on the following information, what is net income for the current period?

A. $1,400. B. $1,855. C. $1,905. D. $2,060. E. $4,670.

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91. Which of the following errors would cause the Balance Sheet and Statement of Owner's Equity columns of a work sheet to be out of balance? A. Entering an asset amount in the Income Statement Debit column. B. Entering a liability amount in the Income Statement Credit column. C. Entering an expense amount in the Balance Sheet and Statement of Owner's Equity Debit column. D. Entering a revenue amount in the Balance Sheet and Statement of Owner's Equity Debit column. E. Entering a liability amount in the Balance Sheet and Statement of Owner's Equity Credit column.


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92. The Unadjusted Trial Balance columns of a work sheet total $84,000. The Adjustments columns contain entries for the following: 1. Office supplies used during the period, $1,200. 2. Expiration of prepaid rent, $700. 3. Accrued salaries expense, $500. 4. Depreciation expense, $800. 5. Accrued service fees receivable, $400. The Adjusted Trial Balance columns total is: A. $80,400. B. $84,000. C. $85,700. D. $85,900. E. $87,600.


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93. The balances in the unadjusted columns of a work sheet will agree with: A. the balances reflected in the company's financial statements. B. the balances reflected in the company's unadjusted trial balance. C. whatever balances management has decided to report. D. the balances in the company's post-closing trial balance. E. the balances management budgeted for the accounting period.


94. In the process of completing a work sheet, you determine that the Income Statement debit column totals $83,000, while the Income Statement credit column totals $65,000. To enter net income (or net loss) for the period into the work sheet would require an entry to A. the Adjustments debit column and the Adjustments credit column. B. the Unadjusted Trial Balance debit column and the Adjustments credit column. C. it is not practical to enter Net Income (or Net Loss) on the work sheet. D. the Balance Sheet & Statement of Owner's Equity debit column and the Income Statement credit column. E. the Income Statement debit column and the Balance Sheet & Statement of Owner's Equity credit column.

AACSB: Analytic AICPA BB: Industry AICPA FN: Leveraging Technology Difficulty: Hard Learning Objective: P1

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95. The special account used only in the closing process to temporarily hold the amounts of revenues and expenses before the net difference is added to (or subtracted from) the owner's capital account is the: A. Income Summary account. B. Closing account. C. Balance column account. D. Contra account. E. Nominal account.


96. J. Awn, the proprietor of Awn Services, withdrew $8,700 from the business during the current year. The entry to close the withdrawals account at the end of the year, is: A. B.

C. D. E.

AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: P2

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97. A company had revenues of $75,000 and expenses of $62,000 for the accounting period. Which of the following entries could not be a closing entry? A. B.

C. D. E. All of these are possible closing entries.

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Difficulty: Medium Learning Objective: P2

98. The following information is available for the Travis Travel Ag ency. After these closing entries what will be the balance in the Jay Travis, Capital account?

A. $ 65,000. B. $ 80,000. C. $130,000. D. $145,000. E. $280,000. $80,000 + $125,000 - $60,000 - $15,000 = $130,000


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99. The J. Godfrey, Capital account has a credit balance of $17,000 before closing entries are made. If total revenues for the period are $55,200, total expenses are $39,800, and withdrawals are $9,000, what is the ending balance in the J. Godfrey, Capital account after all closing entries are made? A. $ 8,000. B. $15,400. C. $23,400. D. $17,000. E. $32,400. $17,000 + $55,200 - $39,800 - $9,000 = $23,400


100. The Income Summary account is used: A. To adjust and update asset and liability accounts. B. To close the revenue and expense accounts. C. To determine the appropriate withdrawal amount. D. To replace the income statement under certain circumstances. E. To replace the capital account in some businesses.


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101. Dina Kader withdrew a total of $35,000 from her business during the current year. The entry needed to close the withdrawals account is: A. Debit Income Summary and credit Cash for $35,000. B. Debit Dina Kader, Withdrawals and credit Cash for $35,000. C. Debit Income Summary and credit Dina Kader, Withdrawals for $35,000. D. Debit Dina Kader, Capital and credit Dina Kader, Withdrawals for $35,000. E. Debit Dina Kader, Withdrawals and credit Dina Kader, Capital for $ 35,000.


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102. A company's ledger accounts and their end-of-period balances before closing entries are posted are shown below. What amount will be posted to Tricia DeBarre, Capital in the process of closing the Income Summary account? (Assume all accounts have normal balances.)

A. $16,780 debit. B. $ 7,180 credit. C. $16,780 credit. D. $18,280 credit. E. $23,780 credit.

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Difficulty: Hard Learning Objective: P2

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103. It is obvious that an error occurred in the preparation and/or posting of closing entries if: A. all revenue and expense accounts have zero balances. B. the owner's capital account is debited for the amount of the net loss for the period. C. the income summary account is debited for the amount of net income for the period. D. all balance sheet accounts have zero balances. E. only permanent accounts appear on the post-closing trial balance.


104. At the beginning of 2009, a company's balance sheet reported the following balances: Total Assets = $125,000; Total Liabilities = $75,000; and Owner's Capital = $50,000. During 2009, the company reported revenues of $46,000 and expenses of $30,000. In addition, owner's withdrawals for the year totaled $20,000. Assuming no other changes to owner's capital, the balance in the owner's capital account at the end of 2009 would be: A. $66,000. B. $86,000. C. $(4,000). D. $46,000. E. cannot be determined from the information provided. Owner's Capital = $50,000 at beginning of 2009. Add revenues of $46,000 during 2009, subtract expenses of $30,000 during 2009 and subtract owner withdrawals of $20,000 during 2009. The ending balance in the owner's capital account at the end of 2009 would be $46,000.

AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Difficulty: Hard Learning Objective: P2

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105. At the beginning of 2009, Beta Company's balance sheet reported Total Assets of $195,000 and Total Liabilities of $75,000. During 2009, the company reported total revenues of $226,000 and expenses of $175,000. Also, owner withdrawals during 2009 totaled $48,000. Assuming no other changes to owner's capital, the balance in the owner's capital account at the end of 2009 would be: A. $174,000. B. $78,000. C. cannot be determined from the information provided. D. $120,000. E. $123,000. Owner's Capital at the beginning of 2009 is $120,000 (Total Assets of $195,000 - Total Liabilities of $75,000). Add revenues of $226,000 during 2009, subtract expenses of $175,000 and subtract owner withdrawals of $48,000 and ending owner's capital at the end of 2009 would be $123,000.


106. After preparing and posting the closing entries to close revenues (and gains) and expenses (and losses) into the income summary, the income summary account has a debit balance of $33,000. The entry to close the income summary account will include: A. a debit of $33,000 to owner withdrawals. B. a credit of $33,000 to owner withdrawals. C. a debit of $33,000 to income summary. D. a debit of $33,000 to owner capital. E. a credit of $33,000 to owner capital.


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107. A trial balance prepared after the closing entries have been journalized and posted is the: A. Unadjusted trial balance. B. Post-closing trial balance. C. General ledger. D. Adjusted trial balance. E. Work sheet.


108. An error is indicated if the following account has a balance appearing on the post-closing trial balance: A. Office Equipment. B. Accumulated Depreciation-Office Equipment. C. Depreciation Expense-Office Equipment. D. Ted Nash, Capital. E. Salaries Payable.


109. A post-closing trial balance reports: A. All ledger accounts with balances, none of which can be temporary accounts. B. All ledger accounts with balances, none of which can be permanent accounts. C. All ledger accounts with balances, which include some temporary and some permanent accounts. D. Only revenue and expense accounts. E. Only asset accounts.


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110. Which of the following statements is true? A. Owner's capital must be closed each accounting period. B. A post-closing trial balance should include only permanent accounts. C. Information on the work sheet can be used in place of preparing financial statements. D. By using a work sheet to prepare adjusting entries you need not post these entries to the ledger accounts. E. Closing entries are only necessary if errors have been made.


111. Reversing entries: A. Are optional. B. Are mandatory. C. Correct errors in journal entries. D. Are required by GAAP. E. Are prepared on the worksheet.


112. Reversing entries: A. Are optional. B. Are linked to accrued assets and liabilities that were created by adjusting entries at the end of the previous accounting period. C. Are used to simplify a company's recordkeeping. D. Are dated the first day of the new accounting period. E. All of these.


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113. Reversing entries: A. are necessary when journal entries have been incorrectly recorded. B. are a required step in the accounting cycle. C. will often result in abnormal account balances in some accounts. D. are required only if the company uses accounting software to record journal entries. E. must be made before preparing the post-closing trial balance.


114. The purpose of reversing entries is to: A. simplify the recording of certain journal entries in the future. B. correct an error made in a previous journal entry. C. ensure that closing entries have been properly posted to the ledger accounts. D. make certain that only permanent accounts are carried forward into the next accounting period. E. complete a required step in the accounting cycle.


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Matching Questions

115. Match the following terms with the appropriate definition. Accounts that reflect on activities related to one or 1. Temporary more future periods; they include all balance sheet accounts accounts. 7 Recurring steps performed each accounting period, starting with analyzing and recording of transactions in the 2. Pro forma journal and continuing through the post-closing trial statements balance (or reversing entries). 5 Accounts that are used to record transactions and events for one accounting period only; they include 3. Closing entries revenues, expenses, and withdrawals. 1 Analyses and other informal reports prepared by accountants when organizing the information presented in 4. Work sheet reports and financial statements. 10 A temporary account used only in the closing process 5. Accounting and to where the balances of revenue and expense cycle accounts are transferred. 9 A spreadsheet used to draft an unadjusted trial balance, 6. Post-closing trial adjusting entries, adjusted trial balance, and financial balance statements. 4 Entries recorded at the end of each accounting period to transfer end-of-period balances in revenue, expense, 7. Permanent and withdrawals accounts to the permanent owner's capital accounts account. 3 A list of permanent accounts and their balances from 8. Operating cycle the ledger after all closing entries are journalized and of a business posted. 6 The time span from when cash is used to acquire goods 9. Income and services until cash is received from the sale of those summary goods and services. 8 10. Working Statements that show the effects of proposed papers transactions as if the transactions had already occurred. 2 AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: C1-C2 Learning Objective: P1-P3

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116. Match the following terms with the appropriate definition.

1. Current ratio 2. Owner's capital 3. Classified balance sheet

4. Closing entries

5. Plant assets

6. Unclassified balance sheet 7. Current liabilities

8. Current assets 9. Intangible assets 10. Long-term investments

Tangible long-lived assets used to produce or sell products or services. 5 The owner's claim on the assets of a company. 2 A balance sheet that organizes the assets and liabilities into important subgroups. 3 Long-term assets used to produce or sell products or services; these assets usually lack physical form and their benefits are uncertain. 9 A ratio that is used to help evaluate a company's ability to pay its short-term obligations, calculated by dividing current assets by current liabilities. 1 Entries recorded at the end of each accounting period to transfer end-of-period balances in revenue, expense, and withdrawals accounts to the permanent owner's capital account. 4 Debts that are due to be paid or settled within one year or the operating cycle of a business whichever is longer. 7 Assets such as notes receivable or investments in stocks which are held for the longer of one year or the operating cycle of the company. 10 Cash or other assets that are expected to be sold, collected, or used within one year or the company's operating cycle whichever is longer. 8 A balance sheet that broadly groups assets, liabilities and equity items. 6

AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: A1 Learning Objective: C1-C3

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117. Classified balance sheets commonly include the following categories. a. Current assets b. Long-term investments c. Plant assets d. Intangible assets e. Current liabilities f. Long-term liabilities g. Equity. Indicate the typical classification of each item listed below by placing the letter of the correct balance sheet category a through g in the blank space next to the item. 1. Buildings used in business operations 2. Office Supplies 3. Cash 4. Accounts payable. 5. Land held for future plant expansion 6. Patents. 7. Prepaid insurance 8. Long-term note payable 9. Current portion of long-term debt 10. Wages payable. 11. Margarita Acosta, Capital 12. Accounts Receivable

c a b f a g e e d e a a


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1 2 5 8 12 11 4 9 6 10 7 3


Short Answer Questions

118. Explain why temporary accounts are closed each period. Temporary accounts are closed at the end of each accounting period for two main reasons. First, it prepares revenue, expense and withdrawal accounts for the next reporting period by bringing the balances in those accounts to zero. Second, the closing process is used to update the owner's capital account to include the increases from revenues and decreases from expenses and withdrawals.


119. Explain the difference between temporary and permanent accounts. Temporary, or nominal, accounts accumulate data related to one accounting period. They include all income statement accounts, withdrawals, and Income Summary. Temporary accounts are closed at the end of each accounting period. Permanent, or real, accounts, on the other hand, report on activities related to one or more future accounting periods. They carry their balances to the next period. All balance sheet accounts are permanent accounts.


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120. List the steps in the accounting cycle. The accounting cycle consists of ten steps: (1) analyze transactions, (2) journalize entries, (3) post entries to the ledgers, (4) prepare an unadjusted trial balance, (5) prepare adjusting entries, (6) prepare an adjusted trial balance, (7) prepare financial statements, (8) close the temporary accounts, (9) prepare a post-closing trial balance, and (10) prepare reversing entries (optional).


121. How is a classified balance sheet different from an unclassified balance sheet? List the order of the usual classifications on a classified balance sheet. An unclassified balance sheet broadly groups assets, liabilities, and equity. A classified balance sheet organizes assets, liabilities, and equity into important subgroups that provide more useful information to decisions makers. Classified balance sheets usually report four groups of assets: current assets, long-term investments, plant assets, and intangible assets. Liabilities are usually divided into current and long-term. For sole proprietorships and partnerships equity is reported under capital accounts. For corporations, the equity section is divided into capital stock and retained earnings.


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122. How is the current ratio calculated? How is it used to evaluate a company? The current ratio is current assets divided by current liabilities. It is used to he lp evaluate a company's ability to pay its short term obligations. It can be used by suppliers and creditors to help them decide whether to allow a company to buy on credit, and whether to loan them money.

AACSB: Communications AICPA BB: Industry AICPA FN: Risk Analysis Difficulty: Medium Learning Objective: A1

123. Describe a work sheet and explain why it is useful. A work sheet is a useful tool for organizing the preparation and analysis of financial statements. It contains five pairs of debit and credit columns for the trial balance, adjusting entries, adjusted trial balance, income statement accounts, and balance sheet (and owner's equity) accounts.


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124. List and explain the steps in preparing a 10-column worksheet. 1. Enter the unadjusted trial balance. List all account titles that will be expected to appear on the financial statements and enter their balances from the ledger. 2. Enter adjustments. 3. Prepare the adjusted trial balance by combining the unadjusted trial balance columns with the adjustments. 4. Sort the adjusted trial balance columns into the Income Statement columns and Balance Sheet and Statement of Owner's Equity columns. 5. Total the Income Statement columns co lumns and Balance Sheet and Statement of Owner's Equity columns. The difference between the Income Statement columns is the net income or net n et loss. The difference between the Balance Sheet and Statement of Owner's Equity columns will also be the amount of the net income or net loss. Add the net income to the Income Statement debit column and total the columns. Add the net income to the Balance Sheet and Statement of Owner's Equity credit column and total the columns.

AACSB: Technology AICPA BB: Industry AICPA FN: Leveraging Technology Technology Difficulty: Hard Learning Objective: P1

125. What is the purpose of closing entries? Describe the closing process. The purpose of closing entries is to transfer the end of period balances in the temporary accounts to the equity account(s). accoun t(s). The closing process has four steps: (1) Close credit balances in revenue accounts to income summary, (2) close debit balances in expense accounts to income summary, (3) close withdrawals to the owner's capital account, (4) close income summary to the owner's capital account.

AACSB: Communications Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: P2

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126. Journalizing and posting closing entries is a required step in the accounting cycle. Explain why it is necessary to close the books at the end of an accounting period. Closing entries are necessary to close the income statement accounts (the temporary or nominal accounts) at the end of the year in order to start the next year with the proper balances in those accounts. The closing entries are what separate one accounting period from another.


127. What is the purpose of a post-closing trial balance? A post-closing trial balance is a list of permanent accounts an d their balances after all the closing entries are journalized and posted. It is used to verify the equality of debits and credits of the permanent account balances. It also verifies that the temporary accounts have zero balances.


128. Explain the purpose of reversing entries. Reversing entries are an optional step in the accounting cycle. They apply to accrued assets and accrued liabilities. The purpose of the reversing entries is to simplify a company's recordkeeping.

AACSB: Communications Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Hard Learning Objective: P4

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Problems

129. In the table below, indicate with an "X" in the proper column whether the account is a (nominal) temporary account or a (real) permanent account. acco unt.

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Chapter 004 Completing the Accounting Cycle 130. Listed below are a number of accounts. Use the table below to classify each account. Indicate whether it is a temporary or permanent account, whether it is included in the Income Statement or Balance sheet, and if it is closed at the end of the accounting period, and, if so, how it is closed. The first one is done as an example.

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AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: C1

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131. The following are the steps in the accounting cycle. List them in the order in which they are completed: Prepare adjusted trial balance Post transactions Prepare an unadjusted trial balance Journalize transactions Prepare the financial statements Close the temporary accounts Adjust the ledger accounts Prepare a post-closing trial balance Analyze transactions 1) Analyze transactions 2) Journalize transactions 3) Post transactions 4) Prepare an unadjusted trial balance 5) Adjust the ledger accounts 6) Prepare adjusted trial balance 7) Prepare the financial statements 8) Close the temporary accounts 9) Prepare a post-closing trial balance

AACSB: Communications Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: C2

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Chapter 004 Completing the Accounting Cycle 132. Based on the adjusted trial balance shown below, prepare a classified balance sheet for Focus Package Delivery.

* $2,000 of the long-term note payable is due during the next year.

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Chapter 004 Completing the Accounting Cycle 133. The calendar year-end adjusted trial balance for Acosta Co. follows:

Required: (a) Prepare a classified year-end balance sheet. (Note: A $7,000 installment on the long-term note payable is due within one year.) (b) Calculate the current ratio. Comment on the ability of Acosta Co. to meets its short-term debts.

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Chapter 004 Completing the Accounting Cycle (a)

*NI = $370,800 - $90,000 - $5,200 - $5,000 - $800 - $7,000 = $262,800 Ending Capital = $1,010,000 + $262,800 - $200,500 = $1,072,300 (b)

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Acosta Co. has a current ratio of 4.5 to 1, which means it should have no difficulty paying its short-term debts. Cash alone is more than adequate to meet short-term debts.

AACSB: Analytic, Reflective Thinking AICPA BB: Industry, Resource Management, Critical Thinking AICPA FN: Reporting, Risk Analysis Difficulty: Hard Learning Objective: A1 Learning Objective: C3

134. Calculate the current ratio in each of the following separate cases.

Case 1. 2.5 Case 2. 1.9 Case 3. 0.85 Case 4. 1.04 Case 5. 0.90

AACSB: Analytic AICPA BB: Resource Management AICPA FN: Risk Analysis Difficulty: Medium Learning Objective: A1

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Chapter 004 Completing the Accounting Cycle 135. Use the following partial work sheet from Matthews Lanes to prepare its income statement, statement of owner's equity and a balance sheet (Assume the owner did not make any investments in the business this year.)

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AACSB: Communications AICPA BB: Industry AICPA FN: Reporting Difficulty: Medium Learning Objective: P1

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Chapter 004 Completing the Accounting Cycle 136. The unadjusted trial balance of E. Pace, Consultant is entered on the partial work sheet below. Complete the work sheet using the following information: (a) Salaries earned by employees that are unpaid and unrecorded, $500. (b) An inventory of supplies showed $800 of unused supplies still on hand. (c) Depreciation on equipment, $1,300.

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AACSB: Technology, Analytic AICPA BB: Industry AICPA FN: Leveraging Technology Difficulty: Hard Learning Objective: P1

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Chapter 004 Completing the Accounting Cycle 137. A partially completed work sheet is shown below. The unadjusted trial balance columns are complete. Complete the adjustments, adjusted trial balance, income statement, and balance sheet and statement of owner's equity columns.

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Chapter 004 Completing the Accounting Cycle 138. Shown below are selected data taken from the unadjusted and adjusted trial balances for the Simonson Company for the current year ended December 31. Determine the items A through H below.

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139. The summary amounts below appear in the Income Statement and Balance Sheet columns of a company's December 31 work sheet. Prepare the necessary closing entries.

AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Difficulty: Easy Learning Objective: P2

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Chapter 004 Completing the Accounting Cycle 140. The adjusted trial balance of Sara's Web Services follows:

(a) Prepare the closing entries for Sara's Web Services. (b) What is the balance of Sara's capital account after the closing entries are posted?

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141. Following are selected accounts and their balances for a company after the adjustments as of May 31, the end of its fiscal year. (All accounts have normal balances.)

Prepare all the necessary closing entries for this company.


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142. The adjusted trial balance of the Thomas Company follows:

Prepare the closing entries for Thomas Company.


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143. The items that follow appeared in the Income Statement columns of the work sheet prepared for Armstrong Delivery Service at current year-end. In addition, L. Armstrong, Capital had a credit balance of $117,000 and L. Armstrong, Withdrawals had a debit balance of $30,000 at year end. Prepare closing journal entries for this company.


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Chapter 004 Completing the Accounting Cycle 144. Presented below are the year-end balances at December 31 of Laura's Laundry Service. (All accounts have normal balances.)

(a) Prepare the necessary closing entries at December 31. (b) Prepare a post-closing trial balance at December 31.

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(b)

AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Difficulty: Hard Learning Objective: P2 Learning Objective: P3

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Chapter 004 Completing the Accounting Cycle 145. Shown below is Adventure Travel's adjusted trial balance as of the end of its annual accounting period:

(a) Prepare the necessary closing entries. (b) Prepare a post-closing trial balance.

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(b)

AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Difficulty: Hard Learning Objective: P2 Learning Objective: P3

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146. Employees of Artworld Co. have earned but have not been paid $3,500 in salaries for the last week of the current calendar year. (a) Prepare the necessary adjusting journal entry(ies) for Artworld at December 31 of the current year. (b) Assuming that Artworld makes reversing entries, prepare the necessary reversing entry. Include the appropriate date for the reversing entry(ies).

AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making, Measurment Difficulty: Easy Learning Objective: P4

147. The following information has been gathered for Stylish Co. to assist in preparing its year-end adjusting entries at December 31: (a) The company has earned $2,500 of rental revenue that has not yet been received or recorded. (b) Stylish has recorded $3,200 of unearned service fees. At year-end, $1,500 of this amount has been earned. (c) Depreciation on equipment for the year is $7,800. (d) Employees have earned but have not yet been paid $2,750 in salaries. Identify which of the above accounting adjustment would be reversed assuming Stylish Co. uses reversing entries. (a) Reversed. (b) Not reversed. (c) Not reversed. (d) Reversed.


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Fill in the Blank Questions

148. The closing process resets ________, __________, and ________ account balances to zero at the end of each accounting period. Revenue, expense, withdrawals


149. The ___________________ account is used only in the closing process. Income Summary


150. Revenues, expenses, withdrawals, and Income Summary are called _________________ accounts because they are closed at the end of each accounting period. Temporary (or nominal)


151. Balance sheet accounts are called ____________________ accounts because they carry their balances to the next accounting period, and are not closed as long as the company continues to own the asset, owe the liability and have equity. Permanent (or real)


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152. The ______________ refers to the steps in preparing financial statements for users. Accounting cycle


153. Intangible assets are long-term resources used to produce or sell products and services; they generally lack ______________ and their benefits are highly ____________. Physical form; uncertain


154. The current portion of long-term debt is classified with the _________________________. Current Liabilities


155. A current ratio of 2.1 suggests that a company has ____________ current assets to cover current liabilities. Sufficient

AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: A1

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156. A ____________________ helps in preparing financial statements, is useful in preparing interim statements, and is helpful in showing the effects of proposed transactions. Work sheet


157. A company's post-closing trial balance has a debit total of $475,000 and a credit total of $457,000. This indicates that __________________________. An error was made in the closing process.


158. Reversing entries are linked to ____________________ and _____________ that were created by adjusting entries at the end of the prior accounting period. Accrued assets, accrued liabilities


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Problems

159. The unadjusted trial balance of Quick Delivery is entered on the partial work sheet below. Complete the work sheet using the following information: (a) Salaries earned by employees that are unpaid and unrecorded, $5,000. (b) An inventory of supplies showed $1,000 of unused supplies still on hand. (c) Depreciation on delivery vans, $24,000. (d) Services paid in advance by customers of $10,000 have now been provided to customers.

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Chapter 004 Completing the Accounting Cycle 160. The following year-end adjusted trial balance is for Tom Janes Co. at the end of December 31. The credit balance in Tom Janes, Capital at the beginning of the year, January 1, was $320,000. The owner, Tom Janes, invested an additional $300,000 during the current year. The land held for future expansion was also purchased during the current year.

Required: Prepare a classified year-end balance sheet. (Note: A $22,000 installment on the long-term note payable is due within one year.)

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Net income $470,800 - $180,000 - $12,000 - $25,000 - $2,000 - $10,000 = $241,800 Ending Capital = $620,000 + $241,800 - $60,000 = $801,800

AACSB: Analytic AICPA BB: Industry, Resource Management AICPA FN: Reporting Difficulty: Hard Learning Objective: C3

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161. Using the information presented in problem 160: (a) Calculate the current ratio. Comment on the ability of Tom Janes Co. to meets its shortterm debts. (b) Calculate the debt ratio and comment on the financial position and risk analysis of Tom Janes Co. (c) Using the account balances to analyze the financial position of Tom Janes Co., why would the owner need to invest an additional $300,000 in the business when the business is already profitable and the owner had an existing capital balance of $320,000? (a) Current ratio = current assets/current liabilites 116,000/56,200 = 2.1 to 1 Tom Janes Co.'s current ratio is good and indicates that the company has more than enough in current assets to meet its short-term debts. (b) Debt ratio = Total Liabilities/Total Assets 258,200/1,060,000 = .24 to 1 The debit ratio is low and indicates that the company does not have a high degree of risk associated with the company's use of liabilities to finance the company. The company has a low degree of financial leverage, the assets of the company have been purchased through equity financing rather than debt financing. The company should have no problem meeting required future payments of liabilities. (c) To keep the debt ratio low, the owner may have decided to use his own capital to finance the purchase of assets. Also, the majority of capital contributed prior to the current year had been used to purchase other plant and long-term assets. To finance the purchase of the land held for future expansion, the bank may have required the owner to increase equity before granting the long-term note payable. If the long-term note had previously existed, then the owner invested the cash to purchase the land held for future expansion.

AACSB: Analytic, Reflective Thinking AICPA BB: Resource Management, Critical Thinking AICPA FN: Risk Analysis Difficulty: Hard Learning Objective: A1 Learning Objective: C3

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162. Excalibur frequently has accrued expenses at the end of its fiscal year that should be recorded for proper financial statement presentation. Excalibur pays on a weekly basis and has $50,000 of accrued salaries incurred but not paid for June 30, its fiscal year-end. This consists of one day's accrued salaries for the week. Excalibur will pay its employees $250,000 on July 4; the one day of accrued salaries and the remaining four days for July salaries. Record the following entries: (a) Accrual of the salaries on June 30. (b) Payment of the salaries on July 4, assuming that Excalibur does not prepare reversing entries. (c) Assuming that Excalibur prepares reversing entries, reverse the adjusting entry made on June 30. (d) Assuming that Excalibur prepares reversing entries, payment of the salaries on July 4.

AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making, Measurement Difficulty: Hard Learning Objective: P4

4-90

Chapter 04

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