Module 3:Module 3:

Accounting Accounting Adjustments and Adjustments and

Constructing Constructing Financial Financial

StatementsStatements

The Accounting The Accounting CycleCycle

T-Accounts and Journal T-Accounts and Journal EntriesEntries

Capital InvestmentCapital Investment

Asset (Inventory) Asset (Inventory) TransactionTransaction

Cash DividendsCash Dividends

•All transactions between the company and its shareholders are considered financing transactions. This includes payment of dividends, the issuance of stock, and any subsequent stock repurchase.

•Financing transactions affect only the balance sheet; they do not affect the income statement.

Adjusting AccountsAdjusting Accounts

Types of AdjustmentsTypes of Adjustments

Cash received or paid before recognition of revenue or expense: Prepaid expensesPrepaid expenses Unearned revenuesUnearned revenues

Cash received or paid after recognition of revenue or expense Accrued expensesAccrued expenses Accrued revenuesAccrued revenues

Prepaid Expenses Prepaid Expenses (Assets)(Assets)

Assume that Apple pays $200 to purchase time on MTV for future i ads. Apple’s cash account decreases by $200, and an asset called prepaid advertising increases

by the same amount. When the ad is aired, the prepaid asset is “used up” and is removed from the balance sheet

and recognizing the cost as an expense.

Unearned Revenues Unearned Revenues (Liabilities)(Liabilities)

Assume that Apple receives $400 cash from a customer as advance payment on a multi-unit iPod sale to be delivered next month.

Recognition of Unearned Recognition of Unearned Revenue Revenue

as Earned Revenueas Earned Revenue Assume that Apple delivers the iPods

a month later (but still within the fiscal quarter).

Accrued Expenses Accrued Expenses (Liabilities)(Liabilities)

Assume that Apple’s sales staff earns $100 of sales commissions this period that will not be paid until next period.

When paid, the liability is reduced as is cash.

Accrued Revenues Accrued Revenues (Assets)(Assets)

Assume that Apple delivers iPods to a customer in Germany who will pay next quarter. The sales price for those units is $500 and the cost is $400.

Trial BalanceTrial Balance

The trial balancetrial balance is a listing of all accounts and their balances at a point in time.

Its purpose is to prove the mathematical equality of debits and credits, provide a useful tool to uncover any accounting errors, and help prepare the financial statements.

Adjusted Trial Balance Adjusted Trial Balance For AppleFor Apple

Preparation of the Preparation of the Financial StatementsFinancial Statements

Income StatementIncome Statement

Preparation of the Preparation of the Financial StatementsFinancial Statements

Retained Earnings ComputationRetained Earnings Computation

Preparation of the Preparation of the Financial StatementsFinancial Statements

Balance SheetBalance Sheet

Preparation of the Preparation of the Financial StatementsFinancial Statements

Statement of Stockholders’ EquityStatement of Stockholders’ Equity

Statement of Cash Flows – Statement of Cash Flows – Indirect MethodIndirect Method

Operating cash flowsOperating cash flows

Changes to Working Capital Changes to Working Capital AccountsAccounts

Formal Presentation of Formal Presentation of Apple’s SCFApple’s SCF

Closing ProcessClosing Process

The closing processclosing process refers to the ‘zeroing out’ of revenue and expense accounts (the temporary accounts) by transferring their ending balances to retained earnings.

Balance sheet accounts carry over from period to period and are called permanent accounts.)

The result is that all income statement accounts begin the next period with zero balances.

Closing Process Journal Closing Process Journal EntriesEntries