introduction chapters
chapter 4
The Reporting Cycle
goals discussion
goals
achievement
fill
in the blanks multiple
choice
problems
check list and key terms
Select the appropriate response.
1. The accountant's worksheet:
a. lays
the groundwork for formal financial statement preparation.
b.
is a fundamental financial statement.
c. provides details necessary for full disclosure and the preparation of
footnotes.
d. is prepared at the end of each operating cycle.
2. In preparing a work sheet, a net loss would be computed and entered in the:
a. debit
column of the income statement columns of the worksheet.
b. credit column of the income statement
columns of the worksheet.
c. in the debit column of the adjusted
trial balance.
d.
in the credit column of the balance sheet columns of the worksheet.
3. Which of the following accounts would not be closed at the end of an accounting period?
a.
Income Summary
b. Dividends
c. Revenue
d. Capital Stock
4. After closing all revenue and expense accounts, Norris Company had a debit balance in its Income Summary account of $10,000. The proper entry to record the closing of the Income Summary account would be:
a.
Revenue
10,000
Income
Summary
10,000
b. Retained Earnings
10,000
Income
Summary
10,000
c.
Income
Summary
10,000
Retained Earnings
10,000
d.
Income
Summary
10,000
Expenses
10,000
5. The following statements all pertain to the accounting cycle. Which of these statements is wrong?
a. A
post-closing trial balance is prepared prior to closing temporary accounts.
b. Formal financial statements may be
produced from the worksheet.
c. Adjusting entries are recorded in the journal and posted to the ledger.
d. The post-closing trial balance is prepared by examining ledger balances
subsequent to the closing of accounts.
6. Which of the following statements about reversing entries is true?
a.
Identical account balances are achieved in the subsequent accounting period
whether reversing entries are utilized or not.
b. Reversing entries may not be used
with accrued revenues.
c. Reversals are generally applied to those adjusting items that do not involve
future cash flow.
d. Reversing entries would not be prepared if a company also utilized closing
entries.
7. Shipman Company had accrued salaries of $300 on December 31. The company recorded reversing entries on the following January 1. On the next payday, January 7, the appropriate entry to record the payment of $1,000 in salaries should include:
a. a debit
to Salaries Expense of $1,000.
b. a debit to Salaries Expense of $700.
c. a debit to Salaries Expense of $1,300.
d. a debit to Salaries Payable for $300.
8. Current assets are those assets which management intends to convert into cash or consume within:
a. The
operating cycle
b. One year
c. The longer of (a) or (b)
d. The shorter of (a) or (b)
9. On a classified balance sheet, the appropriate ordering of specific classifications is:
a. Current
assets; long-term investments; property, plant, and equipment; intangible
assets; other assets.
b. Current assets; property, plant, and
equipment; long-term investments; intangible assets; other assets.
c. Current assets; intangible assets; property, plant, and equipment; long-term
investments; other assets.
d. Current assets; other assets; long-term investments; intangible assets;
property, plant, and equipment.
10. If a company had a current ratio of 0.5, then which of the following statements regarding that company's working capital would be true?
a. The
company's working capital would be positive.
b. The company's working capital would be zero.
c. The company's working capital would be
negative.
d. The company's working capital would
be 2:1.
1. a. Formal financial statements can be prepared from the worksheet, therefore the worksheet lays the groundwork for their preparation. The worksheet is not a financial statement and does not include details about needed footnotes. The worksheet would be prepared at the end of an "accounting cycle" -- not an "operating cycle."
2. b. A net loss is represented in the worksheet by debits exceeding credits in the subtotal of the income statement columns. To complete (i.e., balance) the income statement columns necessitates a credit to the income statement columns and a debit to the balance sheet columns. Therefore, the amount of a net loss is computed and entered in the credit column of the income statement columns of the worksheet.
3. d. Capital Stock is a balance sheet account and is not closed. Temporary accounts (like Income Summary, Dividends, and Revenue) are closed "to" retained earnings.
4. b. Closing a debit balance in Income Summary is accomplished by crediting Income Summary. The corresponding debit is applied to retained earnings.
5. a. A post-closing trial balance is prepared after all closing entries are complete, not "prior to" closing entries. Formal financial statements are prepared from a worksheet, and adjusting entries are recorded in the journal and posted to the ledger.
6. a. Reversing entries are an optional tool to assist in the bookkeeping function. No matter whether they are used or not, identical account balances and financial statements should result. Reversing entries are often used for accrued revenues, and other similar items which will involve future cash flows. Reversing entries are prepared at the beginning of a new accounting period, and closing entries are prepared at the end of an accounting period. Closing entries must be prepared whether or not the company elects to use reversing entries.
7. a. When reversing entries are used, the journal entry on the payment date will record the full amount paid as a debit to Salaries Expense. The net impact is that salaries expense will equal the correct $700 amount related to the new year (i.e., $1,000 paid less $300 related to the prior year). This results because the reversing entry would establish a $300 credit to Salaries Expense and the payroll journal entry enters a $1,000 debit to Salaries Expense.
8. c. Current assets are those which management intends to convert into cash or consume within one year or the operating cycle, whichever is longer.
9. a. The correct ordering of major categories on a classified balance sheet is current assets; long-term investments; property, plant, and equipment; intangible assets; and other assets.
10. c. For the current ratio to be 0.5 signifies that the company has twice as many current liabilities as current assets. Therefore, working capital is a negative amount (i.e., current assets minus current liabilities is negative).