EXAM 2 Review.docx - EXAM 2 Study Guide(Chapters 4-6...

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EXAM 2 Study Guide (Chapters 4-6) Chapter 4: Completing the Accounting Cycle Preparation of the Financial Statements goes in the following order: Income Statement – Statement of Owner’s Equity – Balance Sheet – Cash Flows Income Statement = Revenues and Expenses, displays net income/loss Statement of Owner’s Equity = Capital, Withdrawals, Distributions Balance Sheet = Assets, Liabilities Classified Balance Sheet: Assets are shown in order of liquidity (how quickly asset converted to cash). Current assets are converted to cash, sold, or used up during the next 12 months or within the business’ operating cycle if the cycle is longer than one year. Long-term assets are NOT converted to cash, sold, or used up during the next 12 months or within the business’ operating cycle if the cycle is longer than one year. Examples of current assets : Cash, AR, Merchandise Inventory, prepaid assets, office supplies Examples of long-term assets : Building, Machinery, Furniture, Land “Plant Assets” Current liabilities are liabilities that must be paid with cash or with goods and services within one year or within the entity’s operating cycle if the operating cycle > 1 year Examples of current liabilities: AP, accruals, current portion of long-term debt Long-term liabilities : A liability that does NOT need to be paid within one year or within the entity’s operating cycle if the operating cycle > 1 year Examples of long-term liabilities: Mortgage, note payable, bond payable Balance sheets can be reported in account (left/right) or report format (down) Closing Process Closing Process – A step that occurs at the end of the period. Journalized and posts the closing entries to

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