5 Financial Statements and the Closing Process Free Online FlashCards

What is the starting point for preparing financial statements?

Financial statements are prepared from the adjusted trial balance at the end of an accounting period.

What does the income statement report?

It reports revenues and expenses over a period of time.

What does the statement of changes in equity explain?

It explains how owners’ equity changed during the period. For a corporation, it may show changes in common stock and retained earnings.

What does the balance sheet show, and when?

It reports assets, liabilities, and equity at a specific date; it is a snapshot, not a summary of activity over the whole period.

Which accounts are temporary, and which are permanent?

Revenue, expense, and dividends accounts are temporary. Asset, liability, and equity accounts are permanent and carry forward.

In what order are the three main financial statements prepared?

Prepare the income statement first, then determine ending equity, and use ending equity on the balance sheet.

How is net income calculated?

Net income equals total revenues minus total expenses: $\text{Net income} = \text{Total revenues} - \text{Total expenses}$.

Which items are not classified as revenues or expenses?

Do not report assets, liabilities, owner contributions, or dividends as revenues or expenses.

How are owner contributions classified?

Owner contributions increase contributed capital, not revenue.

How is ending retained earnings calculated?

Ending retained earnings equal beginning retained earnings plus net income minus dividends: $\text{Ending retained earnings} = \text{Beginning retained earnings} + \text{Net income} - \text{Dividends}$.

What is the fundamental accounting equation?

The fundamental relationship is $\text{Assets} = \text{Liabilities} + \text{Equity}$.

What is the purpose and timing of closing entries?

Closing entries reset temporary accounts for the next period and transfer the period’s net result and distributions to equity. They are recorded after the statements are prepared.