Completing the Accounting Cycle
1. How are revenues and expenses reported on the income statement under the cash basis of accounting? How are they reported on the accrual basis of accounting? What are the key differences between these two methods?
In what situations would you use one of these approaches versus the other?
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2. Which events during an accounting period trigger the recording of normal journal entries? Which event triggers the making of adjusting entries? Please explain why adjusting entries are necessary at the end of an accounting period. What ethical considerations are there when making adjusting entries?
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3. Give an example of an adjusting journal entry for each of the following transactions.
· Equal growth of an expense and a liability.
· Earning of revenue that was previously recorded as unearned revenue.
· Equal growth of an asset and revenue.
· Increase in an expense and decrease in an asset.
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4. The balance in the equipment account is $4,689,000, and the balance in the accumulated depreciation equipment account is $949,000. What is the book value of the equipment and does that amount mean that the equipment has a loss in real value of $949,000? Explain your response.
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5. After the Adjusted Trial Balance columns of a work sheet have been totaled, which account balances are extended to the Income Statement columns, the Statement of Retained Earnings columns, and the Balance Sheet columns?
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6. Current assets and current liabilities for a company are:
· Current assets: 2020—$387,000; 2021—$435,000.
· Current liabilities: 2020—$275,000; 2021—$297,500.
Determine the current ratio for 2020 and 2021. Does the change in the current ratio from 2020 to 2021 indicate a favorable or unfavorable trend? Explain your response.
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7. Rearrange the following steps in the accounting cycle in proper order:
· Financial statements are prepared.
· An adjusted trial balance is prepared.
· Adjustment data are assembled and analyzed.
· Adjusting entries are journalized.
· Closing entries are journalized and posted to the ledger.
· An unadjusted trial balance is prepared.
· Transactions are posted to the ledger.
· Transactions are analyzed and recorded in the general journal.
· An optional end-of-period work sheet is prepared.
· A post-closing trial balance is prepared.
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