© the mcgraw-hill companies, inc., 2003 mcgraw-hill/irwin slide 3-1 3 reporting and preparing...

© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin

Slide 3-1

3 Reporting and Preparing Financial Statements


Slide 3-2

1 2 3 4 5 6 7 8 9 10 11 12

1 2 3 4

Annual

1 2

Month

Quarter

Semiannual

The Accounting Period

Exh.3.1


Slide 3-3

External Transactions occur between the

organization and an outside party.

Internal Transactions occur within the

organization.

Transactions and Events

Exchanges of economic consideration between two parties.


Slide 3-4

We have delivered theproduct to our customer,

so I think we should recordthe revenue earned.

Recognizing Revenues and Expenses

Revenue Recognition


Slide 3-5

Recognizing Revenues and Expenses

Revenue Recognition Matching

Summaryof Expenses

Rent

Gasoline

Advertising

Salaries

Utilities

and . . . .

$1,000

500

2,000

3,000

450

. . . .

Now that we haverecognized the revenue,let’s see what expenses

we incurred togenerate that revenue.


Slide 3-6

Accounting

Accrual Basis Vs. Cash BasisAccrual Basis

Revenues are recognized when

earned and expenses are recognized when

incurred.

Cash Basis

Revenues are recognized when

cash is received and expenses recorded when cash is paid.

Not GAAPNot GAAPGAAPGAAP


Slide 3-7

Fra m ew ork for Adjustm ents

PrepaidExpenses

Depreciation UnearnedRevenues

AccruedExpenses

AccruedRevenues

Adjustm ents

An adjusting entry is recorded to bring an asset or liability account balance to its proper amount.

Transactions where cash is paid orreceived before a related expense

or revenue is recognized.

Transactions where cash is paid orreceived before a related expense


Adjusting Accounts

Transactions where cash is paid orreceived after a related expense


Transactions where cash is paid orreceived after a related expense


Exh.3.4


Slide 3-8

Here is the checkfor my first

6 months’ rent.Resources paid

for prior to receiving the

actual benefits.

Resources paid for prior to

receiving the actual benefits.

Asset Expense

UnadjustedBalance

CreditAdjustment

DebitAdjustment

Adjusting Prepaid Expenses


Slide 3-9

GENERAL JOURNAL Page 34Date Description PR Debit Credit


Dec. 31 Rent Expense 2,000

Prepaid Rent 2,000

to record monthly rent


On December 1, 2001, Scott Company paid $12,000 to cover rent for December 2001 through May 2002.

Let’s look at the adjusting journal entry needed on December 31, 2001.


Slide 3-10

Prepaid Rent Rent Expense12/1 $12,000 12/31 $2,00012/31 $2,000


After posting, the accounts involved look like this:


Slide 3-11

Straight-LineDepreciationExpense

= Asset Cost - Salvage Value

Useful Life

Adjusting for Depreciation

Depreciation is the process of computing expense from allocating the cost of plant and equipment over its

expected useful lives.


Slide 3-12

?2002

DepreciationExpense

= $62,000 - $2,000

5= $12,000


On January 1, 2002, Monroe, Inc. purchased oil pumping equipment for $62,000 cash. The

equipment has an estimated useful life of 5 years and Monroe expects to sell the equipment at the end of

its life for $2,000 cash.

Let’s compute depreciation expense for the year ended December 31, 2002.


Slide 3-13


Dec. 31




Prepare the Journal EntryPrepare the Journal Entry



Slide 3-14


Dec. 31 Depreciation Exp. 12,000

Accum. Depreciation 12,000

To record annual depreciation





Accumulated depreciation isa contra asset account.

Accumulated depreciation isa contra asset account.


Slide 3-15

Equipment Depreciation Expense

1/1 $62,000 12/31 $12,000

Accumulated Depreciation

12/31 $12,000


After posting, the accounts involved look like this:


Slide 3-16

The equipment account is shown on

the balance sheet like

this.



Slide 3-17

Buy your season tickets forall home basketball games NOW!

““Go Big Blue”Go Big Blue”

Adjusting Unearned Revenue

Cash received in advance of providing

products or services.

Cash received in advance of providing

products or services.

Liability RevenueUnadjusted

BalanceCredit

AdjustmentDebit

Adjustment


Slide 3-18


Oct. 1 Cash 100,000

Unearned Basketball Revenue 100,000

Receipts for 1,000 season tickets


On October 1, 2002, Ox University sold 1,000 season tickets to its 20 home basketball games for $100 each. OxU makes the following entry:

On October 1, 2002, Ox University sold 1,000 season tickets to its 20 home basketball games for $100 each. OxU makes the following entry:


Slide 3-19


Dec. 31


On December 31, OxU has played 10 of its regular home games, winning 2 and losing 8.


Prepare the appropriate Adjusting Entry on December 31



Slide 3-20


Dec. 31 Unearned Basketball Revenue 50,000

Basketball Revenue 50,000

to recognize basketball revenue





Slide 3-21

Unearned BasketballRevenue Basketball Revenue

10/1 $100,000 12/31 $50,00012/31 $50,000

After posting, the accounts involvedwill look like this . . .



Slide 3-22

We’re about one-halfdone with this job and

want to be paid!Costs incurred in a period that areboth unpaid and

unrecorded.

Costs incurred in a period that areboth unpaid and

unrecorded.

Adjusting for Accrued Expenses

Expense LiabilityCredit

AdjustmentDebit

Adjustment


Slide 3-23

12/1/02 12/31/02Year end

Last paydate

12/26/02

Next paydate

1/2/03

Record adjustingjournal entry.

Record adjustingjournal entry.


Denton, Inc. pays its employees every Friday. Year-end, 12/31/02, falls on a Wednesday. As of 12/31/02, the employees have earned salaries of $47,250 for Monday

through Wednesday of the week ended 1/02/03.




Slide 3-24










Slide 3-25


Dec. 31 Salaries Expense 47,250

Salaries Payable 47,250

to record salary accrual







Slide 3-26

Salaries Expense Salaries Payable12/31 $47,250

After posting, the accounts involvedwill look like this . . .

12/31 $47,250



Slide 3-27

Yes, you can pay mefor your tax return

when I finish the work.

Adjusting for Accrued RevenuesRevenues earned in a period that

are both unrecorded and not yet received.

Asset Revenue

CreditAdjustment

DebitAdjustment


Slide 3-28




Adjusting for Accrued Revenues

Smith & Jones, CPAs, had $31,200 of work completed but not yet billed to clients. Let’s make

the adjusting entry necessary on December 31, 2002, the end of the company’s fiscal year.




Slide 3-29


Dec. 31 Accounts Receivable 31,200

Service Revenues 31,200

Revenues earned but not received







Slide 3-30

Accounts Receivable Service Revenue

12/31 $31,20012/31 $31,200



Slide 3-31

Type

Balance Sheet

Account

Income Statement Account Adjusting Entry

Prepaid Asset Expense Dr. ExpenseExpenses Overstated Understated Cr. AssetUnearned Liability Revenue Dr. LiabilityRevenues Overstated Understated Cr. RevenueAccrued Liability Expense Dr. ExpenseExpenses Understated Understated Cr. LiabilityAccrued Asset Revenue Dr. AssetRevenues Understated Understated Cr. Revenue

Before AdjustmentSummary of Adjustments and Financial Statement Links

Four major types of transactions requiring adjustment.

Adjustments and Financial Statements

Exh.3.18


Slide 3-32

FastForwardTrial Balance

December 31, 2001

Exh.3.19

First, the initial

unadjusted amounts are added to the worksheet.

First, the initial

unadjusted amounts are added to the worksheet.


Slide 3-33

Next, FastForward’s adjustments are added.

Next, FastForward’s adjustments are added.


December 31, 2001

Exh.3.19


Slide 3-34


December 31, 2001Finally, the totals are determined.

Finally, the totals are determined.

Exh.3.19


Slide 3-35

Preparing Financial Statements

Let’s use FastForward’s adjusted trial balance to prepare the company’s financial statements.


Slide 3-36

Step One:Prepare the IncomeStatement.

Exh.3.20


Slide 3-37

Step Two:Prepare the Statement of Retained Earnings.

Note: The Net Income from the Income Statement carries to the Statement of Retained Earnings.

Exh.3.20


Slide 3-38

Step Three:Prepare the BalanceSheet.

FastForwardBalance Sheet

December 31, 2001

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 revenue 2,750 Total liabilities 9,160$

Owner's EquityCommon Stock 30,000 Retained Earnings 3,185 Total liabilities and equity 42,345$

Exh.3.20


Slide 3-39

Resets revenue, expense and dividend 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.

Closing Process


Slide 3-40

Temporary Accounts

Revenues

Income Summary

Exp

ense

s

Divid

end

s

Permanent Accounts

Assets

Lia

bili

ties

Retain

ed

Earn

ing

s

The closing process applies only to

temporary accounts.

The closing process applies only to

temporary accounts.

Temporary and Permanent Accounts


Slide 3-41

Let’s see how the closing process

works!

Recording and Posting Closing Entries Close Revenue

accounts to Income Summary.

Close Expense accounts to Income Summary.

Close Income Summary account to Retained Earnings.


Slide 3-42

Balances before closing.

Income Summary

Revenue Accounts25,000

25,000

Expense Accounts10,000

10,000

Closing Process for a Corporation

Retained Earnings25,000

25,000


Slide 3-43

Income Summary25,000

25,000

Close Revenue accounts to Income

Summary.

Revenue Accounts25,000 25,000

-

Expense Accounts10,000

10,000



25,000


Slide 3-44

Income Summary10,000 25,000

15,000


-

Close Expense accounts to Income

Summary.

Expense Accounts10,000 10,000

-


The balance in Income Summary equals net

income.

The balance in Income Summary equals net

income.


25,000


Slide 3-45

Retained Earnings30,000 15,000

45,000

Retained Earnings25,000 15,000

40,000

Close Income Summary to

Retained Earnings.


-

Expense Accounts10,000 10,000

-

Income Summary10,000 25,000 15,000

-



Slide 3-46

Using the adjusted trial balance, let’s prepare the

closing entries for

FastForward.

Exh.3--26


Slide 3-47

Close Revenue accounts to

Income Summary.

Exh.3--26


Slide 3-48


Prepare the entry to close Revenues by debiting the revenue accounts and crediting

Income Summary.

Prepare the entry to close Revenues by debiting the revenue accounts and crediting

Income Summary.

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

Close Revenue Accounts to Income Summary

Exh.3--26


Slide 3-49


Dec. 31 Consulting Revenue 7,850

Rental Revenue 300

Income Summary 8,150



Exh.3--26


Slide 3-50

Income Summary7,850

300

8,150

Consulting Revenue7,850 7,850

-

Rental Revenue300 300

-



Slide 3-51

Close Expense accounts to

Income Summary.

Exh.3--26


Slide 3-52


Close Expense Accounts to Income Summary

Exh.3--26


Slide 3-53

Income Summary375 7,850

1,610 300 100

1,000 1,050

230

3,785 Utilities Expense230 230

-

Depreciation Expense- Eq.

375 375 -

Salaries Expense1,610 1,610

-

Insurance Expense100 100

-

Supplies Expense1,050 1,050

-

Rent Expense1,000 1,000

-

Net Income

Close Expense Accounts to Income Summary


Slide 3-54

Close Income Summary to

Retained Earnings.

Exh.3--26


Slide 3-55


Dec. 31 Income Summary 3,785

Retained Earnings 3,785


Close Income Summary to Retained Earnings

Exh.3--26


Slide 3-56

Retained Earnings600 3,785

3,185

Income Summary375 7,850

1,610 300 100

1,000 1,050

230 3,785

-

Close Income Summary to Retained Earnings


Slide 3-57

Let’s look at FastForward’s

post-closing trial balance.

Post-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.


Slide 3-58

Exh.3-27


Slide 3-59

The profit margin ratio measures the company’s net income to sales.

ProfitMargin

Net Income Net Sales

=

Using the Information Profit Margin


Slide 3-60

Classified Balance Sheet

Typically, the sections of the balance sheet are subdivided based on the liquidity of the various

accounts

Exh.3-30


Slide 3-61

Classified Balance Sheet

Let’s look at the asset

section of a classified balance sheet.


Slide 3-62


Slide 3-63

Current assets are assets that will be turned into cash or

expire (be used up) within the longer of one

year or the operating cycle.

Current assets are assets that will be turned into cash or

expire (be used up) within the longer of one

year or the operating cycle.


Slide 3-64

Property, plant and equipment includes assets

with useful lives of more than one year acquired for use in the

business rather than for resale.

Property, plant and equipment includes assets

with useful lives of more than one year acquired for use in the

business rather than for resale.


Slide 3-65

Other assets and intangible assets include items such as

patents, goodwill,

copyrights, etc.

Other assets and intangible assets include items such as

patents, goodwill,

copyrights, etc.


Slide 3-66

Let’s look at the liability section of a classified balance sheet.


Slide 3-67


Slide 3-68

Current liabilities are obligations that will be paid with current assets, normally

within one year.

Current liabilities are obligations that will be paid with current assets, normally

within one year.


Slide 3-69

Long-term liabilities are debts that have maturity dates extending

beyond one year from the balance sheet date.

Long-term liabilities are debts that have maturity dates extending

beyond one year from the balance sheet date.


Slide 3-70

Let’s look at the

stockholders’ equity section of a classified balance sheet.


Slide 3-71


Slide 3-72

Contributed capital is often shown in two separate accounts . . .

Common stockPaid-in capital

Contributed capital is often shown in two separate accounts . . .

Common stockPaid-in capital


Slide 3-73

Comprehensive income includes gains and losses not included in the

computation of net income.

Comprehensive income includes gains and losses not included in the

computation of net income.


Slide 3-74

Retained earnings is the accumulated earnings of the company less the accumulated dividends declared.

Retained earnings is the accumulated earnings of the company less the accumulated dividends declared.


Slide 3-75

End of Chapter 3

© the mcgraw-hill companies, inc., 2003 mcgraw-hill/irwin slide 3-1 3 reporting and preparing...

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