Accounting Cycle & Financial Ratio Analysis

This accounting assignment focuses on two key areas: understanding the accounting cycle and analyzing financial performance. It requires students to arrange the steps of the accounting cycle in proper order, demonstrating their knowledge of the process. The second part delves into financial ratio analysis, specifically the current ratio. Students must calculate the current ratio for a given company, interpret its meaning, and assess whether a change in the ratio indicates a favorable or unfavorable trend.

Running Head: Fundamentals of Accounting
Fundamentals of Accounting

Fundamentals of Accounting 2
Table of Contents
Question 1.............................................................................................................................................3
Proficient:..........................................................................................................................................3
Distinguished:....................................................................................................................................3
Question 2.............................................................................................................................................3
Proficient:..........................................................................................................................................3
Distinguished:....................................................................................................................................4
Question 3:............................................................................................................................................4
Proficient...........................................................................................................................................4
Distinguished:....................................................................................................................................5
Question 4.............................................................................................................................................5
Proficient:..........................................................................................................................................5
Distinguished:....................................................................................................................................6
Question 5:............................................................................................................................................7
Proficient:..........................................................................................................................................7
Distinguished:....................................................................................................................................7
References:............................................................................................................................................8

Fundamentals of Accounting 3
Question 1
Proficient: You have taken over a set of accounting books for a small business as a part-time
job. At the end of the first accounting period, you have partially completed the work sheet by
entering the proper ledger accounts and balances in the Trial Balance columns. You turn to
the manager and ask, "Where is the list of additional information I can use in entering the
adjusting entries?" The manager indicates there is no such list. In all the text problems you
have done, you have always been given this information. How would you obtain the
information for this real-life situation?
The very first thing that the manger needs to do is to review all the adjusting entries that were
made at the end of previous period of accounting. This is because most of the accounting
entries are repeated in each and every accounting period. The next thing to do is to review the
tittles of accounts recorded in the trial balance. For example, of we see the trial balance and
review the account titled Furniture, then we do ensure that the entry has made for the
depreciation or not. We review the various sources of document that cover the various assets,
liabilities, expenses and revenues and analyse as any of them is not recorded. The manager
must identify all the services that were received and performed in the previous months that
may be having any outstanding credits and debits.
Distinguished: What are the consequences of not making all of the required adjustments at
the end of the accounting period?
The consequences if we do not make all the required adjustments at the end of accounting
period will either understate or overstate the net income, expenses, owner’s equity, assets and
liabilities. The presentation of financial statements needs to be accurate as the shareholders
and other stakeholders use this financial information to make various decisions regarding
their investment.
Question 2
Proficient: After the Adjusted Trial Balance columns of a work sheet have been totalled,
which account balances are extended to the Income Statement columns, the Statement of
Retained Earnings columns, and the Balance Sheet columns?

Fundamentals of Accounting 4
Accounts Balance Sheet Income
Statement
Statement of
Retained Earnings
Cash √ - -
Accounts Receivable √
Accounts Payable √
Inventories √
Prepaid Salary √
Outstanding Rent √
Sales √
Purchase √
Salaries √
Rent √
Advertisement Expenses √
Printing and Stationery √
Depreciation √
Net Income √
Net Loss √
Distinguished: Describe how is the statement of retained earnings prepared.
The statement of retained earnings is prepared by taking the opening balance of retained
earning that is from the previous year’s balance sheet the amount of retained earnings is taken
then the net profit or loss of the current year is added or deducted from it and the amount of
dividend paid is deducted lastly we get the amount of retained earnings that is to be shown in
the balance sheet of the company (Hillier, Clacher, Ross, Westerfield & Jordan, 2014).
Question 3:
Proficient: Describe, in order, the four basic steps in the closing process performed at the
end of each accounting period. Explain why the closing process is so important.
The four basic steps performed at the end of each accounting period are:
 Closing of the Revenue Account: We need to transfer the credit balances in the
revenue account to a clearing account know as income summary.

Fundamentals of Accounting 5
 Closing of Expense Account: The debit balance of the expense account is to be
transferred to income summary account.
 Closing of Income Summary Account: The balance of income summary account is
to be transferred to Retained Earnings Account.
 Closing of Dividend Account: The debit balance of the dividend account is to be
transferred to Retained Earnings Account.
The closing process is very important because it helps the companies to get the information
that they need for the accurate reporting of taxes, earnings and to make sound decisions
relating to financial performance of the company. The closing process helps to make the
revenue and expense account balances zero to start afresh for the next accounting year
(Horngren, Sundem, Stratton, Burgstahler & Schatzberg, 2002).
Distinguished: After the closing process has been completed, what account types remain
open?
After the completion of closing process the owner’s equity, assets and liabilities account will
remain open as they are permanent accounts and their closing balance swill become the
opening balance for the next accounting year.
Question 4
Proficient: Describe how a classified balance sheet is different from a basic unclassified
balance sheet. List the major categories of accounts that would appear under assets, liabilities,
and stockholder's equity on a classified balance sheet.
The classified balance sheet is the normal differentiation of accounts between current and
non- current. The unclassified balance sheet is termed as the balance sheet that groups the
accounts into assets, owner’s equity and liabilities, this type of balance sheet is prepared by
banks and the financial institutions as it is very difficult for them to classify the customer’s
deposits into current and non-current (Weygandt, Kimmel & Kieso, 2015).
The major categories of accounts that are listed under assets, liabilities and owners’ equity on
a classified balance sheet are:
Assets:
Current Assets:

Fundamentals of Accounting 6
Non- Current Assets:
Fixed Assets
-Tangible
-Intangible
Investments
Other assets
Liabilities:
Long Term Liabilities
Current Liabilities
Owner’s Equity
Share Capital
Retained Earnings
Distinguished: Rearrange the following steps in the accounting cycle in proper order:
Financial statements are prepared.
 Transactions are analysed and recorded in the general journal.
 Transactions are posted to the ledger.
 An unadjusted trial balance is prepared.
 An optional end-of-period work sheet is prepared.
 Adjustment data are assembled and analysed.
 Adjusting entries are journalized.
 An adjusted trial balance is prepared.
 Financial statements are prepared.
 Closing entries are journalized and posted to the ledger.
 A post-closing trial balance is prepared.

Fundamentals of Accounting 7
Question 5:
Proficient: Describe how the current ratio is used to analyse financial results? What are the
components of the ratio and how is the ratio calculated? What does the ratio indicate
regarding a company's financial position?
Current Ratio is described as the proportion of Current assets to Current liabilities of a
company. The Liquidity ratio and Working capital ratio are the other names of Current ratio.
Current ratio shows the company’s reflection of ability to repay its short term liabilities and
loans. We can calculate current ratio by dividing its current assets to its current liabilities.
The current ratio is used to analyse the working capital management and liquidity position of
the company. Current ratio is also used by analysts to compare the company’s performance
with the companies of same line. The ideal current ratio is 1:1 (Hilton & Platt, 2013).
Distinguished: Current assets and current liabilities for the Fortson Company are:
Current assets: 2013—$262,500; 2014—$310,500.
Current liabilities: 2013—$150,000; 2014—$172,500.
Determine the current ratio for 2013 and 2014. Does the change in the current ratio from
2013 to 2014 indicate a favourable or unfavourable trend?
Calculation of Current Ratio
Year Assets Liabilities Ratio
2013 $262500 $150000 1.75
2014 $310000 $172500 1.80
The current ratio of 2013 is 1.75 and the current ratio of 2014 is 1.80 this shows that the
assets are growing. Hence, it is a favourable change.

Fundamentals of Accounting 8
References:
Hillier, D., Clacher, I., Ross, S., Westerfield, R., & Jordan, B. (2014). Fundamentals of
corporate finance. McGraw Hill.
Hilton, R. W., & Platt, D. E. (2013). Managerial accounting: creating value in a dynamic
business environment. McGraw-Hill Education.
Horngren, C. T., Sundem, G. L., Stratton, W. O., Burgstahler, D., & Schatzberg, J. (2002).
Introduction to Management Accounting: Chapters 1-17. Prentice Hall.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Financial & managerial accounting.
John Wiley & Sons.