Content check — Financial Accounting, Chapter 5: Completing the Accounting Cycle

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Chapter 5: Completing the Accounting Cycle

16 problems · 0 figures

Multiple Choice 5.1 §5.1 source ↗

Which of the following accounts is considered a temporary or nominal account?

a.
Fees Earned Revenue
b.
Prepaid Advertising
c.
Unearned Service Revenue
d.
Prepaid Insurance

Answer

A. Fees Earned Revenue

Multiple Choice 5.3 §5.1 source ↗

If a journal entry includes a debit or credit to the Cash account, it is most likely which of the following?

a.
a closing entry
b.
an adjusting entry
c.
an ordinary transaction entry
d.
outside of the accounting cycle

Answer

C. an ordinary transaction entry

Multiple Choice 5.5 §5.1 source ↗

Which of these accounts would be present in the closing entries?

a.
Dividends
b.
Accounts Receivable
c.
Unearned Service Revenue
d.
Sales Tax Payable

Answer

A. Dividends

Multiple Choice 5.7 §5.1 source ↗

Which of these accounts is never closed?

a.
Dividends
b.
Retained Earnings
c.
Service Fee Revenue
d.
Income Summary

Answer

B. Retained Earnings

Multiple Choice 5.9 §5.1 source ↗

Which account would be credited when closing the account for fees earned for the year?

a.
Accounts Receivable
b.
Fees Earned Revenue
c.
Unearned Fee Revenue
d.
Income Summary

Answer

D. Income Summary

Multiple Choice 5.11 §5.2 source ↗

Which of these accounts is included in the post-closing trial balance?

a.
Sales Revenue
b.
Salaries Expense
c.
Retained Earnings
d.
Dividends

Answer

C. Retained Earnings

Multiple Choice 5.13 §5.2 source ↗

On which of the following would the year-end Retained Earnings balance be stated correctly?

a.
Unadjusted Trial Balance
b.
Adjusted Trial Balance
c.
Post-Closing Trial Balance
d.
The Worksheet

Answer

C. Post-Closing Trial Balance

Multiple Choice 5.15 §5.3 source ↗

If current assets are $112,000 and current liabilities are $56,000, what is the current ratio?

a.
200 percent
b.
50 percent
c.
2.0
d.
$50,000

Answer

C. 2.0

Question 5.1 §5.1 source ↗

Explain what is meant by the term real accounts (also known as permanent accounts).

Answer

Real/permanent accounts are those that carry over from one period to the next, with a continuing balance in the account. Examples are asset accounts, liability accounts, and equity accounts. In contrast, revenue accounts, expense accounts, and dividend accounts are not real/permanent accounts.

Question 5.3 §5.1 source ↗

What is the purpose of the closing entries?

Answer

Closing entries are used to transfer the contents of the temporary accounts into the permanent account, Retained Earnings, which resets the temporary balances to zero, enabling tracking of revenues, expenses, and dividends in the next period.

Question 5.5 §5.1 source ↗

Which of these account types (Assets, Liabilities, Equity, Revenue, Expense, Dividend) are credited in the closing entries? Why?

Answer

Expense accounts and dividend accounts are credited during closing. This is because closing requires that the account balances be cleared, to prepare for the next accounting period.

Question 5.7 §5.1 source ↗

The account called Income Summary is often used in the closing entries. Explain this account’s purpose and how it is used.

Answer

Income Summary is a super-temporary account that is only used for closing. The revenue accounts are closed by a debit to each account and a corresponding credit to Income Summary. Then the expense accounts are closed by a credit to each account and a corresponding debit to Income Summary. Finally, the balance in Income Summary is cleared by an entry that transfers its balance to Retained Earnings. Thus, it is used in three journal entries, as part of the closing process, and has no other purpose in the accounting records.

Question 5.9 §5.1 source ↗

After the first two closing entries are made, Income Summary has a credit balance of $125,500. What does this indicate about the company’s net income or loss?

Answer

The fact that Income Summary has a credit balance (of any size) after the first two closing entries are made indicates that the company made a net profit for the period. In this case, a credit of $125,500 reflects the fact that the company earned net income of $125,500 for the period.

Question 5.11 §5.2 source ↗

What account types are included in a post-closing trial balance?

Answer

The post-closing trial balance will include only the permanent/real accounts, which are assets, liabilities, and equity. All of the other accounts (temporary/nominal accounts: revenue, expense, dividend) would have been cleared to zero by the closing entries.

Question 5.13 §5.3 source ↗

Describe the calculation required to compute working capital. Explain the significance.

Answer

Working capital is calculated by subtracting current liabilities from current assets. The result indicates how well the company can pay bills as they come due, which is sometimes referred to as the company’s liquidity position.

Question 5.15 §5.4 source ↗

Describe the progression of the three trial balances that a company would have during the period, and explain the difference between the three.

Answer

(1) First is the Unadjusted Trial Balance, which summarizes the account balances of all accounts in the ledger, before period-end adjustments. (2) Next, the Adjusted Trial Balance summarizes the account balances of all accounts in the ledger, after adjusting entries have been posted. (3) Finally, the Post-Closing Trial Balance summarizes the account balances of all accounts in the ledger, after closing entries have been posted.

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Problems and answers are adapted from Principles of Accounting, Volume 1: Financial Accounting by Mitchell Franklin, Patty Graybeal and Dixon Cooper, OpenStax, and are used under the CC BY-NC-SA 4.0 licence. Access for free at https://openstax.org/books/principles-financial-accounting/pages/1-why-it-matters. Illustrations: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license. This adaptation is released under the same licence, is non-commercial, and is neither affiliated with nor endorsed by OpenStax or Rice University.