2. Liabilities – Are borrowed funds (accounts payable, accrued liabilities, and obligations to lenders or bond investors). 3. Equity – Capital that has been invested by the shareholders, either directly via the purchase of stock (net of any repurchases of stock from its shareholders by the company) or indirectly in the form of retained earnings that have been reinvested into the business and not paid out as dividends.Topic: Need for accounting adjustmentsLO: 23. Explain what accounting adjustments are and why firms use them.Answer: Companies make adjustments to more accurately report their financial performance and condition.For example, employees might not have been paid for wages earned at the end of an accounting period. Failure to recognize this labor cost would understate the company’s total liabilities because wages payable would be too low), and would overstate net income for the period because wages expense would be too low). Thus, neither the balance sheet nor the income statement would be accurate.Cambridge Business Publishers, ©20103-46Financial Accounting for MBAs, 4th Edition
Topic: Trial balanceLO: 34. Why do firms prepare a trial balance before making accounting adjustments for the period?Answer: A trial balance is a listing of all accounts and their balances at a point in time. To prepare a trial balance the company lists the accounts along with their balances. The trial balance lists debits and credits separately. The purpose of a trial balance is to prove the mathematical equality of debits and credits, provide a useful tool to uncover any accounting errors, and help prepare the financial statements.Topic: Statement of cash flowsLO: 45. Name and describe the two methods for preparing the operating section of the cash flow statement.Answer: there are two methods to display net cash flows from operating activities: the direct method and the indirect method. Under the indirect method, the basic approach is to adjust net income to arrive at net cash flows from operating activities. This indirect method involves listing changes in working capital accounts (by comparing the opening and ending balances). The direct method lists all cash revenues and expenses directly. Changes in balance sheet accounts are not involved in this method. Both methods report the same net operating cash flow, the only difference is in presentation.Topic: Closing temporary accountsLO: 56. Describe the closing process and explain why firms engage in this process.Answer: The closing process refers to the ‘zeroing out’ of revenue, expense, and dividend accounts (the temporary accounts) by transferring their ending balances to retained earnings. The closing process is typically carried out via a series of journal entries that successively zero out each revenue and expense account, transferring those balances to retained earnings. The result is that all income statement accounts begin the next period with zero balances. The balance sheet accounts do not need to be similarly adjusted because their balances carry over from period to period.