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sm_04 21e - CHAPTER 4 COMPLETING THE ACCOUNTING CYCLE CLASS...

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CHAPTER 4 COMPLETING THE ACCOUNTING CYCLE CLASS DISCUSSION QUESTIONS 1. a. The financial statements are the most important output of the accounting cy- cle. b. Yes, all companies have an accounting cycle that begins with analyzing and journalizing transactions and ends with a post-closing trial balance. However, companies may differ in how they im- plement the steps in the accounting cy- cle. For example, while most companies use computerized accounting systems, some companies may use manual sys- tems. 2. No. The work sheet is a device used by the accountant to facilitate the preparation of statements and the recording of adjusting and closing entries. 3. Net loss. The expenses exceed the rev- enues. 4. Net income. The revenues exceed the ex- penses by $68,500. 5. a. Current assets are composed of cash and other assets that may reasonably be expected to be realized in cash or sold or consumed in the near future through the normal operations of the business. b. Property, plant, and equipment is com- posed of assets used in the business that are of a permanent or relatively fixed nature. 6. Current liabilities are liabilities that will be due within a short time (usually one year or less) and that are to be paid out of current assets. Liabilities that will not be due for a comparatively long time (usually more than one year) are called long-term liabilities. 7. Revenue, expense, and drawing accounts are generally referred to as temporary ac- counts. 8. Closing entries are necessary at the end of an accounting period (1) to transfer the bal- ances in temporary accounts to permanent accounts and (2) to prepare the temporary accounts for use in accumulating data for the following accounting period. 9. Adjusting entries bring the accounts up to date, while closing entries reduce the rev- enue, expense, and drawing accounts to zero balances for use in accumulating data for the following accounting period. 10. (1) The first entry closes all income state- ment accounts with credit balances by transferring the total to the credit side of Income Summary. (2) The second entry closes all income statement accounts with debit balances by transferring the total to the debit side of Income Summary. (3) The third entry closes Income Summary by transferring its balance, the net in- come or net loss for the year, to the owner’s capital account. (4) The fourth entry closes the drawing ac- count by transferring its balance to the owner’s capital account. 11. The purpose of the post-closing trial balance is to make sure that the ledger is in balance at the beginning of the next period. 12. The natural business year is the fiscal year that ends when business activities have reached the lowest point in the annual oper- ating cycle. 13. January is more likely to have a lower level of business activity than is December for a department store. Therefore, the additional work to adjust and close the accounts and prepare the financial statements can more easily be performed at the end of January than at the end of December.
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