© the mcgraw-hill companies, inc., 2005 mcgraw-hill/irwin completing the accounting cycle chapter 4...

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

Completing the Accounting CycleChapter

44


Learning objectiveLearning objective

1. Use of Worksheet

2. Closing Process

3. Accounting Cycle

4. Classification of Financial Statement

5. Decision Analysis: Current ratio

6. Review Exercise • (6 Problems, Please be Prepared)


FastForwardWork Sheet

For Month Ended December 31, 2004

First, enter the

unadjusted amounts to

the worksheet.

First, enter the

unadjusted amounts to

the worksheet.


Next, enter the adjustments.

Next, enter the adjustments.




Prepare adjusted trial

balance.

Prepare adjusted trial

balance.






Sort adjusted trial balance amounts to financial statements.

Sort adjusted trial balance amounts to financial statements.




Total statement columns, compute income or loss, and balance columns.

Total statement columns, compute income or loss, and balance columns.

Total revenue

Total expenses

Profit


Prepare the IncomeStatement.

Prepare the Financial StatementsPrepare the Financial Statements

A work sheet does not

substitute for financial

statements.

A work sheet does not

substitute for financial

statements.


Prepare the Statement of Changes in Owner’s Equity.


FastForwardBalance Sheet

December 31, 2004

AssetsCash 3,950$ Accounts receivable 1,800 Supplies 8,670 Prepaid insurance 2,300 Equipment 26,000$ Less: accum. depr. (375) 25,625 Total assets 42,345$

LiabilitiesAccounts payable 6,200$ Salaries payable 210 Unearned consulting revenues 2,750 Total liabilities 9,160$

Owner's EquityC.Taylor, Capital 33,185 Total liabilities and equity 42,345$

FastForwardBalance Sheet

December 31, 2004

AssetsCash 3,950$ Accounts receivable 1,800 Supplies 8,670 Prepaid insurance 2,300 Equipment 26,000$ Less: accum. depr. (375) 25,625 Total assets 42,345$

LiabilitiesAccounts payable 6,200$ Salaries payable 210 Unearned consulting revenues 2,750 Total liabilities 9,160$

Owner's EquityC.Taylor, Capital 33,185 Total liabilities and equity 42,345$

Prepare the Balance Sheet.


Benefits of a Work SheetBenefits of a Work Sheet

Aids the preparation of

financial statements.

Aids the preparation of

financial statements.

Reduces possibility of

errors.

Reduces possibility of

errors.

Assists in planning and organizing an

audit.

Assists in planning and organizing an

audit.

Helps in preparing

interim financial

statements.

Helps in preparing

interim financial

statements.

Shows the effects of proposed

transactions.

Shows the effects of proposed

transactions.

Not a required report.

Links accounts and their

adjustments.

Links accounts and their

adjustments.


Resets revenue, expense and withdrawal account balances to zero at the end of the period.

Helps summarize a period’s revenues and expenses in the Income Summary account.

Identify accounts for closing.

Record and post closing entries.

Prepare post-closing trial balance.

2. Closing Process2. Closing Process


Temporary and Permanent AccountsTemporary and Permanent Accounts

Temporary accounts accumulate data related to one accounting period.

Permanent accounts report on activities related to one or more future accounting periods.


Temporary Accounts

Revenues

Income Summary

Exp

ense

s

With

draw

als

Permanent Accounts

Assets

Lia

bili

ties

Ow

ner’s

Cap

ital

The closing process applies only to

temporary accounts.

The closing process applies only to

temporary accounts.

Temporary and Permanent AccountsTemporary and Permanent Accounts


Let’s see how the closing process

works!

Recording Closing EntriesRecording Closing Entries

Close Revenue accounts to Income Summary.

Close Expense accounts to Income Summary.

Close Income Summary account to Owner’s Capital.

Close Withdrawals to Owner’s Capital.

Close Revenue accounts to Income Summary.

Close Expense accounts to Income Summary.

Close Income Summary account to Owner’s Capital.

Close Withdrawals to Owner’s Capital.


Using the adjusted trial balance, let’s prepare the

closing entries for

FastForward.


Close Revenue accounts to

Income Summary.


Close Revenue Accounts to Income Summary Close Revenue Accounts to Income Summary

Dec. 31 Consulting revenue 7,850 Rental revenue 300

Income summary 8,150

Dec. 31 Consulting revenue 7,850 Rental revenue 300

Income summary 8,150

Now, let’s look at the ledger accounts after posting this closing entry.


Close Revenue Accounts to Income Summary Close Revenue Accounts to Income Summary

Consulting Revenue7,850 7,850

-

Rental Revenue300 300

-

Income Summary7,850

300


Close Expense accounts to

Income Summary.



Close Expense Accounts to Income Summary Close Expense Accounts to Income Summary

Dec. 31 Income summary 4,365Depreciation expense-Equipment 375Salaries expense 1,610Insurance expense 100Rent expense 1,000Supplies expense 1,050Utilities expense 230


Income Summary4,365 7,850

300 3,785

Utilities Expense230 230

-

Rent Expense1,000 1,000

-

Net Income

Close Expense Accounts to Income Summary Close Expense Accounts to Income Summary Close Expense Accounts to Income Summary

Supplies Expense1,050 1,050

-

Depreciation Expense- Eq.

375 375 -

Salaries Expense1,610 1,610

-

Insurance Expense100 100

-


Close Income Summary to

Owner’s Capital.



Close Income Summary to Owner’s Capital Close Income Summary to Owner’s Capital

Dec. 31 Income summary 3,785C. Taylor, Capital 3,785


C. Taylor, Capital30,000 3,785

33,785

Close Income Summary to Owner’s Capital Close Income Summary to Owner’s Capital Close Income Summary to Owner’s Capital

Income Summary4,365 7,850 3,785 300

-


Close Withdrawals to

Owner’s Capital.



Close Withdrawals to Owner’s Capital Close Withdrawals to Owner’s Capital

Dec. 31 C. Taylor, Capital 600C. Taylor, Withdrawals 600


C. Taylor, Capital600 30,000

3,785

33,185

C. Taylor, Withdrawals

600 600

-

Close Withdrawals to Owner’s Capital Close Withdrawals to Owner’s Capital


Let’s look at FastForward’s

post-closing trial balance.

Post-Closing Trial BalancePost-Closing Trial Balance

List of permanent accounts and their balances after posting closing entries.

Total debits and credits must be equal.

List of permanent accounts and their balances after posting closing entries.

Total debits and credits must be equal.


Post-Closing Trial BalancePost-Closing Trial Balance


3. Accounting cycle3. Accounting cycle

1. Analyze transactions

2. Journalize

3. Post

4. Prepare unadjusted Trial balance

5. Adjust 6. Prepare adjusted Trial balance

7. Prepare statements

8. Close

9. Prepare Post-closing Trial balance


Let’s discuss the

components of a classified

balance sheet.


Categories of a Classified Balance SheetAssets Liabilities and Equity

Current Assets Current LiabilitiesNoncurrent Assets Noncurrent Liabilities

Long-Term Investments EquityPlant AssetsIntangible Assets

Current items are those expected to come due (both collected and owed) within the longer of one year or

the company’s normal operating cycle.

4. Classified Balance Sheet4. Classified Balance Sheet


Classified Balance SheetClassified Balance Sheet

Operating cycle is the time span from when cash is used to acquire goods and services until cash is received from the sale of those goods and services.

Operating cycle of supermarket (a few weeks) vs. operating cycle of a construction company (several years).


Snowboarding ComponentsBalance Sheet

January 31, 2005

Current assets Cash 6,500$ Short-term investments 2,100 Accounts receivable 4,400 Merchandise inventory 27,500 Prepaid expenses 2,400 Total current assets 42,900$ Long-term investments Notes receivable 1,500 Investments in stocks and bonds 18,000 Land held for future expansion 48,000 Total investments 67,500 Plant assets Store equipment 33,200$ Less accumulated depreciation 8,000 25,200 Buildings 170,000 Less accumulated depreciation 45,000 125,000 Land 73,200 Total plant assets 223,400 Intangible assets 10,000 Total assets 343,800$

ASSETS

Current assets are expected to be sold, collected, or used within one year or the company’s operating

cycle.



January 31, 2005


ASSETS

Long-term investments are expected to be held for the longer of one year or the operating cycle.



January 31, 2005


ASSETS

Plant assets are tangible long-lived assets used to produce or sell

products and services.



January 31, 2005


ASSETS

Intangible assets are long-term resources used to produce or sell

products and services and that lack physical form.


Current liabilities are obligations due within the longer of one year or the

company’s operating cycle.


January 31, 2005

Current liabilities Accounts payable 15,300$ Wages payable 3,200 Notes payable 3,000 Current portion of long-term liabilities 7,500 Total current liabilities 29,000$ Long-term liabilities: Notes payable (net of current portion) 150,000 Total liabilities 179,000$

T. Hawk, Capital 164,800 Total liabilities and equity 343,800$

LIABILITIES

EQUITY


Long-term liabilities are obligations not due within the longer of one year

or the company’s operating cycle.


January 31, 2005



LIABILITIES

EQUITY


Equity is the owner’s claim on the assets.


January 31, 2005



LIABILITIES

EQUITY


5. Decision Analysis - Current Ratio5. Decision Analysis - Current Ratio

Helps assess the company’s ability to pay its debts in the near futureLiquidity measure


Review ExerciseChapter

1-31-3


Exercise 1: Business Entity (Chap 1) Exercise 1: Business Entity (Chap 1)Sole proprietorship, Partnership, or Corporation?

Ownership of Spirit Company is divided into 1,000 shares of stock.

Delta is owned by Sarah Gomez, who is personally liable for the debts of the business.

Jo Chen and Al Fitch own Financial Services, a financial services provider. Neither

Chen nor Fitch has personal responsibility for the debts of Financial Services.

Sung Kwon and Frank Heflin own Get-It-There, a courier service. Both are personally

liable for the debts of the business.

XLT Services does not have separate legal existence apart from the one person who

owns it.

BioProducts does not pay income taxes and has one owner.

Tampa Biz pays its own income taxes and has two owners.


Exercise 1: Business Entity (Chap 1)Exercise 1: Business Entity (Chap 1)Sole proprietorship, Partnership, or Corporation?

Ownership of Spirit Company is divided into 1,000 shares of stock.

Delta is owned by Sarah Gomez, who is personally liable for the debts of the business.

Jo Chen and Al Fitch own Financial Services, a financial services provider. Neither

Chen nor Fitch has personal responsibility for the debts of Financial Services.

Sung Kwon and Frank Heflin own Get-It-There, a courier service. Both are personally

liable for the debts of the business.

XLT Services does not have separate legal existence apart from the one person who

owns it.

BioProducts does not pay income taxes and has one owner.

Tampa Biz pays its own income taxes and has two owners.

Characteristics Proprietorship Partnership CorporationBusiness entity yes yes yesLegal entity no no yesLimited liability no no yesUnlimited life no no yesBusiness taxed no no yesOne owner allowed yes no yes

Characteristics Proprietorship Partnership CorporationBusiness entity yes yes yesLegal entity no no yesLimited liability no no yesUnlimited life no no yesBusiness taxed no no yesOne owner allowed yes no yes


Exercise 2: Accounting Equation & F/S (Chap 2) Exercise 2: Accounting Equation & F/S (Chap 2)

What is the number for ‘?’

December 31. 2004: A B C D EAssets $45,000 $35,000 $29,000 $80,000 $123,000 Liabilities 23,500 22,500 14,000 38,000 ?

December 31 , 2005:Assets 48,000 41,000 ? 125,000 112,500Liabilities ? 27,500 19,000 64,000 75,000

During year 2005:Owner investments 5,000 1,500 7,750 ? 4,500Net income 7,500 ? 9,000 12,000 18,000Owner cash withdrawals 2,500 3,000 3,875 0 9,000


Exercise 3: Account Type (Chap 2)Exercise 3: Account Type (Chap 2)(1) What is the type of account as an asset, liability, equity, revenue, or expense?

(2) should we debit (Dr.) or credit (Cr.) the account when account increase?

(3) Which side is the normal balance of the account?

Type Account increase Normal balance

Unearned Revenue

Accounts Payable

Postage Expense

Prepaid Insurance

Wages Expense

Land

Owner Capital

Accounts Receivable

Owner Withdrawals

Cash

Equipment

Fees Earned


LandLand

EquipmentEquipment

BuildingsBuildings

CashCash

Notes Receivabl

e

Notes Receivabl

e

SuppliesSupplies

Prepaid AccountsPrepaid

Accounts

Accounts ReceivableAccounts

Receivable

AssetAccounts

AssetAccounts

Review Accounts:Asset AccountsReview Accounts:Asset Accounts


Asset accountAsset account

Cash: reflects a company’s cash balance. Account receivable: held by a seller and refer

to promises of payment from customers to sellers. (credit sales or sales on account)

Note receivable: a written promise of another entity to pay a definite sum of money on a specified future date to the holder of the note.

Prepaid account: represent prepayments of future expenses. (ex. prepaid insurance)


Asset accountAsset account

Supplies: belong to asset until they are used. When they are used, their costs are transferred from the asset accounts to expense accounts.

Equipment: When it is used and gets worn down its cost is gradually reported as an expense (called depreciation).


Accrued LiabilitiesAccrued

LiabilitiesUnearned RevenuesUnearned Revenues

Notes PayableNotes

PayableAccounts Payable

Accounts Payable

LiabilityAccountsLiability

Accounts

Liability AccountsLiability Accounts


Liability accountsLiability accounts

Accounts payable: oral or implied promises to pay later, commonly arise from purchases of merchandise.

Note payable: a formal promise, usually denoted by the signing of a promissory note, to pay a future amount.

Accrued liabilities: They are amounts owed that are not yet paid (ex. Wages payable, taxes payable).


Liability accountsLiability accounts

Unearned revenue: a liability that is settled in the future when a company delivers its products or services. When customers pay in advance for products or services (before revenue is earned), the revenue recognition principle requires that the seller consider this payment as unearned revenue (ex. Unearned ticket revenue).


EquityAccounts

EquityAccounts

RevenuesRevenues

Owner’s Capital

Owner’s Capital

Owner’s Withdrawals


ExpensesExpenses

Equity AccountsEquity Accounts


LiabilitiesLiabilities EquityEquityAssetsAssets = +

Equity AccountsEquity Accounts

Owner’s Capital

Owner’s Capital


Owner’s Withdrawals RevenuesRevenues ExpensesExpenses

+ +– –


Equity accountsEquity accounts

Revenues: gross increase in equity from a company’s earnings activities.

Expenses: the cost of assets or services used to earn revenue. Expenses decrease owner’s equity.

Owner investments: the amounts an owner puts into the company.

Owner withdrawals: the amounts take away from the company for personal use.


Exercise 4: T-Account, Debit & Credit (Chap 2)Exercise 4: T-Account, Debit & Credit (Chap 2)

Use the information in each of the following separate cases to calculate the unknown amount:

• During October, Shandra Company had $97,500 of cash receipts and $101,250 of cash disbursements. The October 31 Cash balance was $16,800. What is the cash balance on September 30.

• On September 30, Li Ming Co. had a $97,500 balance in Accounts Receivable. During October, the company collected $88,950 from its credit customers. The October 31 balance in Accounts Receivable was $100,500. Determine the amount of sales on account that occurred in October.

• Nasser Co. had $147,000 of accounts payable on September 30 and $136,500 on October 31. Total purchases on account during October were $270,000. how much cash was paid on accounts payable during October.


Exercise 5: Journal Entry, Posting, & Trial Balance (Chap 2)Exercise 5: Journal Entry, Posting, & Trial Balance (Chap 2)

Roberto Ricci opens a computer consulting business called Viva Consultants and completes the following transactions in its first month of operations:

Apr. 1: Ricci invests $100,000 cash along with office equipment valued at $24,000 in the business.

Apr. 2: Prepaid $7,200 cash for twelve months' rent for office space.

Apr. 3: Made credit purchases for $12,000 in office equipment and $2,400 in office supplies. Payment is due within 10 days.

Apr. 6: Completed services for a client and immediately received $2,000 cash.

Apr. 9: Completed an $8,000 project for a client, who must pay within 30 days.

Apr. 13: Paid $14,400 cash to settle the account payable created on April 3.

Apr. 19: Paid $6,000 cash for the premium on a 12-month insurance policy.

Apr. 22: Received $6,400 cash as partial payment for the work completed on April 9.

Apr. 25: Completed work for another client for $2,640 on credit.

Apr. 28: Ricci withdrew $6,200 cash for personal use.

Apr. 29: Purchased $800 of additional office supplies on credit.

Apr. 30: Paid $700 cash for this month's utility bill.


Exercise 6: Adjusting Journal Entry (Chap 3)Exercise 6: Adjusting Journal Entry (Chap 3)

Prepare Adjusting Journal Entry for year ended on 12/31/2005

1) Depreciation on equipment for 2005 is $16,000

2) Prepaid Insurance had $7,000 at 12/31/2005 before adjustment. An analysis show only $1,040 unexpired

3) Office supply had $300 debit balance on 12/31/204, during 2005, $2,680 supplies was purchased. On 12/31/2005, physical count show $345 supplies remain.

4) Half of work related to$10,000 cash received in advance was performed in 2005.

5) Prepaid insurance had debit balance of $5,600 before adjustment. An analysis show that $4,600 coverage had expired.

6) Wage expense of $4,000 have been incurred but are not paid yet as on 12/31/2005


End of Chapter 4End of Chapter 4

© the mcgraw-hill companies, inc., 2005 mcgraw-hill/irwin completing the accounting cycle chapter 4...

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