Which cycle do companies use to evaluate and improve financial performance, particularly when preparing adjusting journal entries for prepaid expenses?

• A. Sales cycle
• B. Production cycle
• C. Accounting cycle
• D. Operating cycle

Answer: (C)

Verified step by step guidance

1. Understand the concept of the accounting cycle: The accounting cycle is a systematic process used by companies to record, analyze, and report financial transactions. It includes steps such as journalizing transactions, posting to the ledger, preparing trial balances, and making adjusting entries.
2. Recognize the role of adjusting journal entries: Adjusting journal entries are made at the end of an accounting period to ensure that revenues and expenses are recognized in the correct period, following the accrual basis of accounting.
3. Identify prepaid expenses: Prepaid expenses are payments made in advance for goods or services to be received in the future. Examples include prepaid rent, insurance, or subscriptions. These are initially recorded as assets and adjusted over time.
4. Learn how adjusting entries for prepaid expenses work: To adjust prepaid expenses, companies reduce the prepaid asset account and record the expense in the appropriate expense account. This ensures accurate financial reporting.
5. Connect the accounting cycle to financial performance evaluation: The accounting cycle helps companies evaluate and improve financial performance by ensuring accurate and timely financial reporting, which is critical for decision-making and compliance.