After Preparing the Financial Statements for the Current Year, the Accountant

question 67

Multiple Choice

After preparing the financial statements for the current year, the accountant for Exquisite Gems closed the Dividends account at year-end by debiting Income Summary and crediting the Dividends account. What is the effect of this entry on current-year net income and the balance in the Retained Earnings account at year-end?

• A) Net income is overstated and the balance in the Retained Earnings account is correct.
• B) Net income is correct and the balance in the Retained Earnings account is overstated.
• C) Net income is understated and the balance in the Retained Earnings account is understated.
• D) Net income is understated and the balance in the Retained Earnings account is overstated.

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Definitions:

Moving Average

A calculation to analyze data points by creating averages of different subsets of the complete data set.

Cyclical Movement

Fluctuations in business activity experienced over time, usually tied to economic cycles.

Random Variation

The unpredictable changes in data that do not follow a recognizable pattern, often due to random effects or causes.

Moving Averages

A method used in time series analysis to smooth out short-term fluctuations and highlight long-term trends by averaging data points over specific periods.