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chapter 4
The Reporting Cycle
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check list and key terms
Following is a "checklist" of selected key concepts that are likely to be included on an exam. Review and check-off each noted item to be certain that important concepts have not been overlooked in your study.
Prepare a worksheet.
Know the appropriate worksheet columns into which amounts from the adjusted trial balance are to be extended.
How are profits and losses determined and presented in the worksheet?
Why might one prepare a work sheet, and what is the advantage of computerization?
When and why are the books "closed?"
Define temporary (nominal) and real accounts.
Be able to prepare closing entries related to revenues, expenses, the Income Summary, and the dividend account.
What benefit is a post-closing trial balance, and what type of accounts would be found there?
Flowchart the accounting cycle.
When and why might reversing entries be used?
Are reversing entries mandatory?
Demonstrate, by example, the use of reversing entries, versus no reversing entries.
Name limitations of the balance sheet.
What is included in the appropriate heading for a balance sheet?
In order, list the classifications for assets on a classified balance sheet.
In order of presentation, name five typical current assets.
Cite examples of long-term investments.
Be able to prepare the property, plant, and equipment section of a balance sheet (notice the presentation of accumulated depreciation).
What types of items would be found in the intangible assets and other assets sections of the balance sheet?
What two key categories distinguish liabilities on the balance sheet?
Name three entity forms and note their significance to the equity section on the balance sheet.
Illustrate a simplified equity section for a corporation, and be able to describe the nature of capital stock, retained earnings, and dividends.
What types of items are discussed in the notes to the financial statements?
What is meant by the term "full disclosure?"
What is meant by the term "liquidity?"
What is working capital?
How is the current ratio calculated?
How is the quick ratio calculated?
KEY TERMS AND DEFINITIONS (with links to discussion in text)
| accounting cycle | The procedures needed to process transactions through an accounting system; including journalization, posting, adjusting, and preparing financial statements |
| capital stock | A non-specific reference to the ownership interests of shareholders in a corporation |
| closing process | The process by which temporary accounts are "zeroed" out and the effects transferred to retained earnings |
| current assets | Assets that will be converted into cash or consumed within one year or the operating cycle, whichever is longer |
| current liabilities | Obligations that will be liquidated within one year or the operating cycle, whichever is longer |
| current ratio | A measure of liquidity, calculated by dividing current assets by current liabilities |
| full disclosure principle | All relevant facts that would influence investors' and creditors' judgments about the company are disclosed in the financial statements or related notes |
| income summary | A non-financial statement account used only to facilitate the closing process by summarizing and zeroing-out the revenue and expense accounts |
| intangible asset | Lack physical existence, and include items like purchased patents and copyrights |
| liquidity | The ability of a firm to meet its near-term obligations as they come due |
| long-term investments | Investments made for long-term holding purposes; including land for speculation, securities of other companies, etc. |
| long-term liabilities | Any obligation that is not current, and include bank loans, mortgage notes, and the like |
| nominal accounts | Accounts that will be reset to a zero balance with each new accounting period; revenue, expense, and dividend accounts (also called "temporary" accounts) |
| operating cycle | The period of time it takes to convert cash back into cash (i.e., purchase inventory, sell the inventory on account, and collect the receivable) |
| other assets | The category of a classified balance sheet for reporting assets that are not logically attached to one of the other specific sections |
| post-closing trial balance | Reveals the balance of accounts after the closing process, and consists of balance sheet accounts only |
| property, plant, & equipment | Assets with long lives that will be used in an entity's production processes; land, buildings, and equipment |
| quick ratio | An extreme measure of liquidity, calculated by dividing quick assets (cash, short-term investments, and accounts receivable) by current liabilities |
| real accounts | Asset, liability, and equity accounts; balances are carried forward from the end of one period into the beginning of the next period |
| reversing entry | Optional accounting procedure which may prove useful in simplifying record keeping; a journal entry to "undo" an adjusting entry |
| temporary accounts | Accounts that will be reset to a zero balance with each new accounting period; revenue, expense, and dividend accounts (also called "nominal" accounts) |
| working capital | The difference between current assets and current liabilities |