Académique Documents
Professionnel Documents
Culture Documents
Chapter 03
Preparing Financial Statements
C1
Semiannually
1 2
3 4 5 6 7
3
8 9 10
4
11 12
Quarterly
1 2
Jan
Feb
Mar
Apr
Nov Dec
Monthly
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C1
Not GAAP
Accounting
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C1
Example:
On the cash basis the entire $2,400 would be recognized as insurance expense in 2011. No insurance expense from this policy would be recognized in 2012 or 2013, periods covered by the policy.
$ 2,400
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C2
Insurance Expense 2012 Jan Feb Mar Apr $ $ $ 100 May 100 Sep 100 $ $ $ 100 Jun 100 Oct 100 $ $ $ 100 Jul 100 Nov 100 $ $ $ 100 Aug 100 Dec 100
Insurance Expense 2013 Jan Feb Mar Apr $ $ $ 100 May 100 Sep 100 $ $ $ 100 Jun 100 Oct 100 $ $ $ 100 Jul 100 Nov 100 $ $ $ 100 Aug 100 Dec -
On the accrual basis $100 of insurance expense is recognized in 2011, $1,200 in 2012, and $1,100 in 2013. The expense is matched with the periods benefited by the insurance coverage.
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C2, P1
Adjusting Accounts
An adjusting entry is recorded to bring an asset or liability account balance to its proper amount.
Accrued expenses
Accrued revenues
*including depreciation
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P1
Expense
Debit Adjustment
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P1
Supplies
During 2011, Scott Company purchased $15,500 of supplies. Scott recorded the expenditures as Supplies. On December 31, a count of the supplies indicated $2,655 on hand. What adjustment is required?
Dec. 31 Supplies Expense Supplies
126 Supplies Bought 15,500 Dec. 31 12,845 Bal. 2,655
12,845 12,845
652
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P1
Depreciation
Depreciation is the process of allocating the costs of plant assets over their expected useful lives.
Straight-Line Asset Cost - Salvage Value Depreciation = Useful Life Expense
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P1
Depreciation
On January 1, 2011, Barton, Inc. purchased equipment for $62,000 cash. The equipment has an estimated useful life of 5 years and Barton expects to sell the equipment at the end of its life for $2,000 cash. Lets record depreciation expense for the year ended December 31, 2011.
2011 $62,000 - $2,000 Depreciation = = Expense 5
$12,000
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P1
Depreciation
On January 1, 2011, Barton, Inc. purchased equipment for $62,000 cash. The equipment has an estimated useful life of 5 years and Barton expects to sell the equipment at the end of its life for $2,000 cash. Lets record depreciation expense for the year ended December 31, 2011.
12,000 12,000
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P1
Depreciation
Barton, Inc. Partial Balance Sheet At December 31, 2011 Assets Cash . Equipment Less: accumulated deprec. . . Total Assets
$ 62,000 (12,000)
50,000
Equipment is shown net of accumulated depreciation. This amount is referred to as the assets book value.
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P1
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Go Big Blue
Liability
Debit Adjustment Unadjusted Balance
Revenue
Credit Adjustment
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P1
100,000 100,000
Basketball revenue received in advance
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P1
50,000
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P1
Accrued Expenses
Costs incurred in a period that are both unpaid and unrecorded.
Were about one-half done with this job and want to be paid for our work!
Expense
Debit Adjustment
Liability
Credit Adjustment
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P1
Accrued Expenses
Barton, Inc. pays its employees every Friday. Year-end, 12/31/11, falls on a Thursday. As of 12/31/11, the employees have earned salaries of $47,250 for Monday through Thursday.
Last pay date 12/25/11 Next pay date
12/1/11
12/31/11 Year-end
P1
Accrued Expenses
Barton, Inc. pays its employees every Friday. Year-end, 12/31/11, falls on a Thursday. As of 12/31/11, the employees have earned salaries of $47,250 for Monday through Thursday.
Dec. 31 Salaries Expense Salaries Payable
Salaries Expense Other salaries 657,500 Dec. 31 47,250 Bal. 704,750
47,250 47,250
Salaries Payable Dec. 31 47,250
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P1
Accrued Revenues
Smith & Jones, CPAs, had $31,200 of work completed but not yet billed to clients. Lets make the adjusting entry necessary on December 31, 2011, the end of the firms fiscal year.
Dec. 31 Accounts Receivable Service Revenue
Accounts Receivable Other receivables 1,325,268 Dec. 31 31,200 Bal. 1,356,468
31,200 31,200
Service Revenue Other revenues 6,589,500 Dec. 31 31,200 Bal . 6,620,700
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A1
Summary of Adjustments and Financial Statement Links Before Adjustment Income Balance Sheet Statement Account Account Type Adjusting Entry Prepaid Asset Overstated Expense Dr. Expense Expenses Equity Overstated Understated Cr. Asset Unearned Liability Overstated Revenue Dr. Liability Revenues Equity Understated Understated Cr. Revenue Accrued Liability Understated Expense Dr. Expense Expenses Equity Overstated Understated Cr. Liability Accrued Asset Understated Revenue Dr. Asset Revenues Equity Understated Understated Cr. Revenue
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P2
Cash Accounts receivable Supplies Prepaid insurance Equipment Accum. depr. - Equip. Accounts payable Salaries payable Unearned revenue Common Stock Retained Earnings Dividends Consulting revenue Rental revenue Depr. expense Salaries expense Insurance expense Rent expense Supplies expense Utilities expense Totals
First, the initial unadjusted amounts are added to the work sheet.
45,300
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P2
Cash Accounts receivable Supplies Prepaid insurance Equipment Accum. depr. - Equip. Accounts payable Salaries payable Unearned revenue Common Stock Retained Earnings Dividends Consulting revenue Rental revenue Depr. expense Salaries expense Insurance expense Rent expense Supplies expense Utilities expense Totals
6,200 3,000 d 30,000 0 600 5,800 300 1,400 1,000 230 $45,300 c e a b $45,300
250 1,800
$3,785
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P2
Cash Accounts receivable Supplies Prepaid insurance Equipment Accum. depr. - Equip. Accounts payable Salaries payable Unearned revenue Common Stock Retained Earnings Dividends Consulting revenue Rental revenue Depr. expense Salaries expense Insurance expense Rent expense Supplies expense Utilities expense Totals
$47,685
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P3
FastForward Income Statement For the Month Ended December 31, Revenues: Consulting revenue $ Rental revenue Operating expenses: Depr. expense - Equip. $ 375 Salaries expense 1,610 Insurance expense 100 Rent expense 1,000 Supplies expense 1,050 Utilities expense 230 Total expenses Net income $
4,365 3,785
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P3
FastForward Income Statement For the Month Ended December 31, 2011 Revenues: Consulting revenue $ 7,850 Rental revenue 300 Total Revenues 8,150 Operating expenses: Depr. expense - Equip. $ 375 Salaries expense 1,610 Insurance expense 100 Rent expense 1,000 Supplies expense 1,050 Utilities expense 230 Total expenses 4,365 Net income $ 3,785
FastForward Statement of Retained Earnings For the Month Ended December 31, 2011 Retained earnings, 12/1/11 Add: Net income Less: Dividends Retained earnings 12/31/11 $ -03,785 600 $ 3,185
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P3
Adjusted Trial Balance Dr. Cr. Cash $ 3,950 Accounts receivable 1,800 Supplies 8,670 Prepaid insurance 2,300 Equipment 26,000 Accum. depr. - Equip. $ 375 Accounts payable 6,200 Salaries payable 210 Unearned revenue 2,750 Chuck Taylor, Capital 30,000 FastForward 600 Chuck Taylor, Withd'l. Statement Consulting revenue of Retained Earnings 7,850 Rental revenue 300 For the Month Ended December 31, 2011 Depr. expense 375 Salaries expense 1,610 Retained expense earnings, 12/1/11 100 $ -0Insurance Add: Net income 3,785 Rent expense 1,000 Supplies expense 1,050 Less: Dividends 600 Utilities expense 230 Retained earnings 12/31/11 $$ 3,185 Totals $ 47,685 47,685
Assets
Cash Accounts receivable Supplies Prepaid insurance Equipment Less: accum. depr. Total assets $ 3,950 1,800 8,670 2,300 25,625 42,345
Liabilities
Accounts payable Salaries payable Unearned revenue Total liabilities
Equity
Common stock Retained earnings Total liabilities and equity $
C3
Temporary (nominal) accounts accumulate data related to one accounting period. They include all income statement accounts, the dividends account, and the Income Summary account. These accounts are closed at the end of the period to get ready for the next accounting period.
Permanent (real) accounts report activities related to one or more future accounting periods. They carry ending balances to the next accounting period and are not closed.
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P4
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P4
Consulting Revenues
$ 25,000
Income Summary
Retained Earnings
$ 7,000
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P4
Consulting Revenues
$ 25,000 $ 25,000
Income Summary
$ 25,000
Close revenues with a debit to the revenue account and a credit to Income Summary.
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P4
Consulting Revenues
$ 25,000 $ 25,000
Income Summary
$ 18,100 $ 25,000
Close expense accounts with a credit to expenses and a debit to Income Summary.
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P4
Consulting Revenues
$ 25,000 $ 25,000
Income Summary
$ 18,100 $ 25,000
$ 6,900
P4
Income Summary
$ 18,100 $ 6,900 $ 25,000 $ 6,900
Retained Earnings
$ 7,000 $ 6,900
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P4
Retained Earnings
$ 2,000
$ 7,000 6,900
$ 2,000
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P4
Retained Earnings
$ 2,000 $ 7,000 6,900 $ 11,900
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P5
Trial Balance prepared after the closing entries have been posted. The purpose is to insure that all nominal or temporary accounts have been closed. The only accounts on this trial balance should be assets, liabilities, and equity accounts.
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C3
9. Prepare post-closing trial balance 8. Close 7. Prepare statements 6. Prepare adjusted trial balance
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5. Adjust
C4
Current items are those expected to come due (either collected or owed) within one year or the companys operating cycle, whichever is longer.
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C4
Intangible Assets
Long-term resources that benefit business operations. They usually lack physical form and have uncertain benefits. Examples include patents, trademarks, copyrights, franchises, and goodwill.
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C4
Liabilities
Current Liabilities
Obligations due to be paid or settled within one year or the operating cycle, whichever is longer.
Long-Term Liabilities
Obligations not due within one year or the operating cycle, whichever is longer.
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C4
26,000 (375) $
25,625 42,345
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A2
Profit Margin
The profit margin ratio measures the companys net income to net sales.
Profit = margin Net income Net sales
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A3
Current Ratio
This ratio is an important measure of a companys ability to pay its short-term obligations.
Current Current assets = ratio Current liabilities
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End of Chapter 03
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