Question 1

A reversing entry

Accepted Answer

A reversing entry is the exact opposite of an adjusting entry made in a previous period. It is used to simplify the process of recording transactions that span across multiple periods by automatically reversing the original entry in the next period. It is typically used for accruals or deferrals that are no longer applicable in the next period.

Question 2

If a company utilizes reversing entries, they will

Accepted Answer

Reversing entries are typically made at the beginning of the next accounting period to reverse the effects of adjusting entries made in the previous period. This allows for a clean start to the new period and makes it easier to distinguish current period transactions from those of the previous period.

Question 3

Keswick Industries has the following current assets and current liabilities on the company's balance sheet: Cash $17,000; Accounts Receivable $8,200; Inventory $54,000; Prepaid Rent $3,000; Accounts Payable $23,000; Long-Term Notes Payable $20,000; and Unearned Revenue $5,500. The company's acid-test ratio would be

Accepted Answer

The acid-test or quick ratio is a measure of a company's ability to meet its short-term obligations using only its most liquid assets. It's calculated as follows:

Acid-test ratio = (Cash + Accounts Receivable + Marketable Securities) / Current Liabilities

In this case, Keswick Industries' most liquid assets are the cash and accounts receivable, which total $17,000 + $8,200 = $25,200. The current liabilities are the accounts payable and unearned revenue, which total $23,000 + $5,500 = $28,500.

Acid-test ratio = $25,200 / $28,500 ≈ 0.88:1

Therefore, the best choice is C) 0.88:1.

Question 4

Although it may look unusual, when preparing a reversing entry you may create

Accepted Answer

Reversing entries are made at the beginning of the new accounting period to reverse certain adjusting entries made at the end of the previous period. A common use of reversing entries is to reverse accrued expenses. When an expense is accrued, it is recognized before it is paid, creating a liability. At the beginning of the new period, a reversing entry is made to negate this accrual. This can result in a temporary credit balance in the expense account if the actual expense payment is recorded later in the period. This process simplifies the accounting process by ensuring that the expense is not double-counted and is recognized in the correct period.

Question 5

Which of the following would NOT affect the acid-test ratio?

Accepted Answer

The acid-test ratio is calculated by taking the sum of a company's quick assets (cash, marketable securities, and accounts receivable) and dividing by its current liabilities. Increasing supplies would not affect the acid-test ratio because supplies are not considered quick assets.

Question 6

Reversing entries are used to reverse two type of adjusting entries:

Accepted Answer

Reversing entries are typically used to reverse the adjusting entries for accrued revenues and accrued expenses. This simplifies the accounting process in the next period by negating the impact of the initial accruals, making it easier to record actual revenues or expenses when they occur.

Question 7

When preparing a worksheet, the profit (or loss) for the period

Accepted Answer

The profit (or loss) for the period is found by calculating the difference between the income statement column totals of the work sheet. This is because the income statement column shows the revenues earned and expenses incurred during the period, which ultimately determines the profit or loss.

Question 8

Which of the following will be affected by a reclassification of assets from current to non-current?

Accepted Answer

Reclassifying assets from current to non-current does not change the total amount of assets but affects the current ratio by changing the proportion of current assets to current liabilities, potentially lowering the ratio if current assets decrease.

Question 9

The unadjusted trial balance columns of the work sheet show the balance in the Prepaid Insurance account at $2,250. The adjustments columns show that $625 of this insurance was used during the period. Assuming there is no other charges to insurance expense during the year, what amount would be shown as Insurance Expense in the income statement columns?

Accepted Answer

The adjustment of $625 shows that the prepaid portion of insurance has been used up during the period and should be moved from the asset account to an expense account. Therefore, $625 should be debited to Insurance Expense in the income statement columns of the worksheet.

Question 10

When constructing a work sheet, accounts are often needed that are NOT listed in the trial balance already entered on the work sheet from the ledger. Where should these additional accounts be shown on the work sheet?

Accepted Answer

The additional accounts should be inserted on the lines immediately below the trial balance totals. This is because the trial balance totals represent the subtotal of all accounts, and any additional accounts should be included in that subtotal. Inserting them alphabetically or by dollar value would disrupt the overall continuity and accuracy of the work sheet. Not including them until the next accounting period would also result in inaccurate financial statements.

Question 11

Which of the following will be affected by a reclassification of liabilities from current to non-current?

Accepted Answer

Reclassifying liabilities from current to non-current affects working capital because working capital is calculated as current assets minus current liabilities. Changing the classification of liabilities alters the current liabilities amount, thereby impacting the working capital calculation. Total assets and total liabilities remain unchanged because the reclassification does not affect the overall amount, just the classification within liabilities. Inventory turnover is unrelated to the classification of liabilities, as it involves inventory and cost of goods sold figures.

Question 12

The current ratio

Accepted Answer

The current ratio is a measure of a company's liquidity, indicating its ability to pay off its short-term liabilities using its current assets. It measures the company's ability to meet its current obligations, which are those due within one year. A current ratio of 1:1 or higher is considered a good indicator of a company's financial health as it suggests that it can meet its current liabilities.

Question 13

The current ratio should be interpreted by considering all but

Accepted Answer

The current ratio, which measures a company's ability to pay short-term obligations, should be interpreted by considering factors such as general economic and industry conditions, special financial information, and comparisons with other firms in the same or related industry. Other firms in unrelated industries may have different financial norms and conditions, making such comparisons less relevant.

Question 14

Reversing entries are useful

Accepted Answer

Reversing entries are typically used in the accounting cycle to simplify the recording of subsequent transactions. They are made at the beginning of the new period to nullify the effect of adjusting entries that were made in the previous period. This allows for a smoother transition and ensures that the correct balances are carried forward. Therefore, reversing entries are useful whenever adjusting entries are prepared.

Question 15

When using a work sheet, adjusting entries are journalized

Accepted Answer

The answer of When using a work sheet, adjusting entries...

Question 16

The account, Supplies, will appear in the debit columns of the work sheet for all columns EXCEPT the

Accepted Answer

The answer of The account, Supplies, will appear in the...

Question 17

Assuming that there is a loss for the period, which column will the loss balance be entered in?

Accepted Answer

The loss balance will be entered in the income statement credit column because losses decrease net income and are therefore recorded as credits on the income statement.

Question 18

After the adjusting entries are journalized and posted to the accounts in the general ledger, the balance of each account should agree with the balance shown on the

Accepted Answer

The adjusted trial balance is prepared after the adjusting entries have been journalized and posted to the general ledger accounts. It shows the updated balances of all accounts, including those that were affected by adjusting entries. Therefore, the balance of each account should agree with the balance shown on the adjusted trial balance. The post-closing trial balance is prepared after the closing entries have been made, and the general journal and adjustment columns of the work sheet are not used to determine the balance of individual accounts in the general ledger.

Question 19

The work sheet does NOT show

Accepted Answer

The worksheet does not show the ending balance in the Owner's Capital account because it is used to prepare financial statements and does not reflect post-closing balances.

Question 20

If the total debits exceed total credits in the balance sheet columns of the work sheet, owner's equity

Accepted Answer

The answer of If the total debits exceed total credits...

Quiz 4: Completion of the Accounting Cycle