CHAPTER REVIEW

Preparing a Worksheet

1. (L.O. 1) The steps in preparing a worksheet are:
a. Prepare a trial balance on the worksheet.
b. Enter the adjustments in the adjustments columns.
c. Enter adjusted balances in the adjusted trial balance columns.
d. Extend adjusted trial balance amounts to appropriate financial statement columns.
e. Total the statement columns, compute the net income (or loss), and complete the
worksheet.

2. A worksheet is a multiple-column form that may be used in the adjustment process and in
preparing financial statements. The basic form of a worksheet consists of the following
columns:

Balance Sheet
Dr. Cr. Dr. Dr.
Dr. Dr. Cr. Cr. Cr. Cr.
Income
Statement
Adjusted
Trial Balance
Account Titles
Trial Balance Adjustments


3. For each account in the worksheet, the amount in the adjusted trial balance columns is
equal to the account balance that will appear in the ledger after the adjusting entries have
been journalized and posted.

4. After the worksheet has been completed the statement columns contain all data that are
required for the preparation of financial statements. The income statement is prepared
from the income statement columns, and the owners equity statement and balance sheet
are prepared from the balance sheet columns.

5. Using a worksheet accountants can prepare financial statements before adjusting entries
are journalized and posted.

6. A worksheet is not a journal and it cannot be used as a basis for posting to ledger
accounts.

Closing Entries

7. (L.O. 2) Closing entries formally recognize in the ledger the transfer of net income (or
loss) and owners drawings to owners capital as shown in the owners equity statement.

8. Journalizing and posting closing entries is a required step in the accounting cycle.

9. The drawing, revenue, and expense accounts are temporary (nominal) accounts. Asset
accounts, liability accounts, and the owners capital account are permanent (real)
accounts.

10. A temporary account, Income Summary, is used in closing revenue and expense
accounts to minimize the amount of detail in the permanent owners capital account.

11. In closing the books of a proprietorship:
a. Debit each revenue account for its balance, and credit Income Summary for total
revenues.
b. Debit Income Summary for total expenses, and credit each expense account for its
balance.
c. Debit Income Summary, and credit Owners Capital for the amount of net income;
conversely, credit Income Summary and debit Owners Capital if a net loss exists.
d. Debit Owners Capital for the balance in the Owners Drawings account and credit
Owners Drawings for the same amount.

Post-Closing Trial Balance

12. (L.O. 3) After all closing entries have been journalized and posted, a post-closing trial
balance is prepared. The purpose of this trial balance is to prove the equality of the
permanent account balances that are carried forward into the next accounting period.

Steps in the Accounting Cycle

13. (L.O. 4) The required steps in the accounting cycle are:
a. Analyze business transactions.
b. Journalize the transactions.
c. Post to ledger accounts.
d. Prepare a trial balance.
e. Journalize and post adjusting entries: Deferrals/Accruals.
f. Prepare an adjusted trial balance.
g. Prepare financial statements: Income statement, Owners equity statement, Balance
sheet.
h. Journalize and post closing entries.
i. Prepare a post-closing trial balance.

14. A reversing entry is the exact opposite of an adjusting entry. The preparation of reversing
entries is an optional bookkeeping procedure that is not a required step in the accounting
cycle.

Correcting Entries

15. (L.O. 5) Errors that occur in recording transactions should be corrected as soon as they
are discovered by preparing correcting entries. Correcting entries:
a. are unnecessary if the records are free of errors.
b. are journalized and posted whenever an error is discovered.
c. may involve any combination of balance sheet and income statement accounts.

16. To determine the correcting entry, it is useful to compare the incorrect entry with the
correct entry, and then make a correcting entry. Another approach is to reverse the
incorrect entry and then prepare the correct entry.

Classified Balance Sheet

17. (L.O. 6) Financial statements become more useful when the elements are classified into
significant subgroups. A classified balance sheet generally has the following standard
classifications:

Liabilities and
Assets Owners Equity
Current assets Current liabilities
Long-term investments Long-term liabilities
Property, plant, and Owners equity
equipment
Intangible assets

Assets

18. Current assets are assets that a company expects to convert to cash or use up within
one year or its operating cycle, whichever is longer. Current assets are listed in the order
of their liquidity.

19. The operating cycle of a company is the average time that it takes to purchase inventory,
sell it on account, and then collect cash from customers.

20. Long-term investments are generally investments in stocks and bonds of other
companies that are normally held for many years.

21. Property, plant, and equipment are assets with relatively long useful lives that a
company is currently using in operating the business.

22. Intangible assets do not have physical substance yet often are very valuable.

Liabilities

23. Current liabilities are obligations that the company is to pay within the coming year.

24. Long-term liabilities are obligations that a company expects to pay after one year.

Owners Equity

25. The content of the owners equity section varies with the form of business organization. In
a proprietorship, there is one capital account. In a partnership, there are separate capital
accounts for each partner. For a corporation, owners equity is called stockholders equity
and it consists of two accounts: Capital Stock and Retained Earnings.

Form of Balance Sheet

26. A balance sheet is most often presented in report form with the assets shown above the
liabilities and owners equity. It may also be presented in account form with the assets
section placed on the left and the liabilities and owners equity section on the right.

Reversing Entries

*27. (L.O. 7) A reversing entry is made at the beginning of the next accounting period. The
purpose of reversing entries is to simplify the recording of a subsequent transaction
related to an adjusting entry.

*28. Reversing entries are most often used to reverse two types of adjusting entries: accrued
revenues and accrued expenses.