Fin. | Chapter 4 - 4 COMPLETING THE ACCOUNTING CYCLE ANSWERS TO QUESTIONS 1 The work sheet is prepared after all transactions have been journalized and

Fin. | Chapter 4 - 4 COMPLETING THE ACCOUNTING CYCLE...

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86 Financial Accounting: A Business Perspective 10e 4 COMPLETING THE ACCOUNTING CYCLE ANSWERS TO QUESTIONS 1. The work sheet is prepared after all transactions have been journalized and posted and a trial balance has been prepared. The work sheet is prepared before adjusting and closing entries are journalized and posted and financial statements are prepared. 2. Management is usually anxious to see the financial statements. After the financial statements have been delivered to management, the adjusting and closing entries can be prepared and posted and the post-closing trial balance can be prepared. 3. The work sheet is an informal accounting document that is used for summarization purposes. It provides columns for the trial balance and serves as a means for displaying the adjusting and closing entries, net income for the period, and the proper balances for all accounts. If mistakes are made, many of them will be discovered before being recorded in the formal accounting records. The financial statements (as well as the adjusting and closing journal entries) can be prepared by looking at the completed work sheet. 4. This is often a very difficult task for the accountant. Probably the first thing you should do is look at the adjusting entries made at the end of the previous accounting period. Very often the same types of adjustments are necessary period after period. An examination of the account titles appearing in the unadjusted trial balance also aids in discovering necessary adjustments. For instance, account titles such as Supplies on Hand, Prepaid Insurance, Accumulated Depreciation - Buildings, Accumulated Depreciation - Equipment, and Unearned Revenue should lead you to believe that the balances appearing in those accounts may require adjustment. Various business papers should be examined in an attempt to discover other assets, liabilities, expenses, and revenues that have not been recorded. Specific questions directed to various company personnel may reveal other necessary adjustments. To the extent that necessary adjustments go undiscovered, the financial statements will be in error. Decisions made on the basis of these statements may also be in error. 5. The amounts in the Adjusted Trial Balance columns are derived by combining the amounts in the Trial Balance columns with the amounts in the Adjustments columns on a line-by-line basis. A debit balance in the Trial Balance columns is increased by debits and decreased by credits in the Adjustments columns. A credit balance in the Trial Balance columns is increased by credits and decreased by debits in the Adjustments columns. 6. The current income is $24,200 as computed below: Reported net income on work sheet ......................... $40,000 Add: Subscriptions revenue ........................................... 1,200 $41,200 Deduct: Depreciation expense on equipment ..................... $ 4,000 Depreciation expense on building .......................... 10,000 Salaries expense ................................................... 3,000 17,000 Correct net income ................................................... $24,200
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Solutions Manual, Chapter 4 87 7. The revenue and expense account balances are extended to the Income Statement
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