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Chapter 4

Completing the Accounting Cycle

QUESTIONS

1.
Closing entries at the end of the current period prepare the revenues (and gains), expenses (and losses), and withdrawals accounts for the next period by giving them zero balances. Closing entries also update the owners capital account for the events of the year just finished. Closing entries do not affect the asset and liability accounts.


2.
(i)Closing entries prepare the temporary accountsrevenue and expense (and gain and loss) accounts and owner withdrawalsfor the next period by giving them zero balances. (ii) Closing entries also update the owners capital account for the events of the period just completed.


3.
The four-step closing entry process is: (i) close the revenue (and gain) accounts, (ii) close the expense (and loss) accounts, (iii) close the Income Summary account, and (iv) close the withdrawals account.


4.
The Income Summary account is used to summarize the periods revenues and expenses. As a result, it temporarily has a balance equal to the net income (or net loss) for the period. (Instructor note: Closing can be accomplished without the Income Summary account by closing revenue and expense accounts directly to the owners capital account.)


5.
Yes, an error would have occurred because a post-closing trial balance should only include permanent accounts, and Depreciation Expense is a temporary account that should have been closed. If an expense appears on the post-closing trial balance, the amounts of net income, total assets, and equity are all in error (overstated).


6.
A work sheet can be used to collect and organize data for preparing (i) adjusting entries, (ii) closing entries, and (iii) financial statements. A work sheet can also be used for what if analysis, for help with audit adjustments, and for preparing interim financial statements.


7.
The adjustments in the Adjustments columns of a work sheet are identified by letter to link the debits with the credits to ensure that the entries are complete and in balance (debits = credits) and for reference purposes (audit trail). The letters can also be used to identify the reasons for the entries and help simplify preparation of the actual adjusting journal entries.




8.
A companys operating cycle is the normal time between paying cash for merchandise inventory or for employee salaries in providing customer services and the receipt of cash from customers in exchange for those products or services.


9.
Assets on a typical classified balance sheet include current assets and noncurrent assetswhere noncurrent assets usually include long-term investments, plant assets, and intangible assets. Liabilities are typically classified as current and noncurrent. Note that the terms short-term and long-term are sometimes used for current and noncurrent.



10.
Unearned revenue is reported as a liabilityusually a current liabili