13 Financial Statements and Closing Procedures

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1 13-1

2 McGraw-Hill 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 13 Financial Statements and Closing Procedures Section 1: Preparing the Financial Statements Section Objectives 1. Prepare a classified income statement from the worksheet. 2. Prepare a statement of owner s equity from the worksheet. 3. Prepare a classified balance sheet from the worksheet.

3 Objective 1 Prepare a classified income statement from the worksheet 13-3 The Classified Income Statement A classified income statement is sometimes called a multiple-step income statement.

4 13-4 QUESTION: What is a single-step income statement? ANSWER: A single-step income statement is a format in which only one computation is needed to determine the net income. (Total Revenue Total Expenses = Net Income)

5 13-5 Operating Revenue Income Statement Year Ended December 31, 2010 Operating Revenue Sales 561, Less Sales Returns and Allowances 12, Net Sales 549, Cost of Goods Sold Net sales for Simpson Antiques

6 Cost of Goods Sold The Cost of Goods Sold section contains information about the cost of the merchandise that was sold during the period. Three elements are needed to compute the cost of goods sold: Beginning inventory Net delivered cost of purchases Ending inventory 13-6

7 13-7 Net Delivered Cost of Purchases Purchases + Freight In (Purchases Returns and Allowances) (Purchases Discounts) Net Delivered Cost of Purchases

8 13-8 Total Merchandise Available for Sale Beginning Merchandise Inventory + Net Delivered Cost of Purchases Total Merchandise Available for Sale

9 Cost of Goods Sold Beginning Merchandise Inventory + Net Delivered Cost of Purchases Total Merchandise Available for Sale (Ending Merchandise Inventory) Cost of Goods Sold 13-9

10 Merchandise Inventory is the one account that appears on both the income statement and the balance sheet. Beginning and ending merchandise inventory balances appear on the income statement. Ending merchandise inventory also appears on the balance sheet in the Assets section

11 13-11 Cost of Goods Sold Simpson Antiques Income Statement Year Ended December 31, 2010 Cost of Goods Sold Merchandise Inventory, Jan. 1, , Purchases 321, Freight In 9, Delivered Cost of Purchases 331, Less Purchases Returns and Allowances 3, Purchases Discounts 3, , Net Delivered Cost of Purchases 325, Total Merchandise Available for Sale 377, Less Merchandise Inventory, Dec. 31, , Cost of Goods Sold 330, Merchandise available for sale Cost of goods sold

12 13-12 Gross Profit on Sales For Simpson Antiques net sales is the revenue earned from selling clothes. Cost of goods sold is what Simpson Antiques paid for the clothes that were sold during the fiscal period. Gross profit is what is left to cover operating expenses and provide a profit. Gross profit is sales less the cost of goods sold.

13 13-13 Gross profit on sales for Simpson Antiques Simpson Antiques Income Statement Year Ended December 31, 2010 Operating Revenue Sales 561, Less Sales Returns and Allowances 12, Net Sales 549, Cost of Goods Sold Merchandise Inventory, Jan. 1, , Purchases 321, Freight In 9, Delivered Cost of Purchases 331, Less Purchases Returns and Allowances 3, Purchases Discounts 3, , Net Delivered Cost of Purchases 325, Total Merchandise Available for Sale 377, Less Merchandise Inventory, Dec. 31, , Cost of Goods Sold 330, Gross Profit on Sales 219,030.00

14 13-14 Operating Expenses Simpson Antiques Income Statement Year Ended December 31, 2010 Gross Profit on Sales 219, Operating Expenses Selling Expenses Salaries Expense - Sales 79, Advertising Expense 7, Cash Short or Over Supplies Expense 4, Depreciation Expense - Store Equipment 2, Total Selling Expenses 94, General and Administrative Expenses Salaries for salespersons and advertising Rent Expense 27, Salaries are examples Expense - Officeof selling expenses. 26, Insurance Expense 2, Payroll Taxes Expense 7, Telephone Expense 1, Uncollectible Accounts Expense Utilities Expense 5, Depreciation Expense - Office Equipment Total General and Administrative Expenses 73, Total Operating Expenses

15 13-15 Operating Expenses Simpson Antiques Income Statement Year Ended December 31, 2010 Gross Profit on Sales 219, Operating Rent, Expenses utilities, and salaries for office employees Selling Expenses are examples of general and administrative Salaries Expense - Sales 79, expenses. Advertising Expense 7, Cash Short or Over Supplies Expense 4, Depreciation Expense - Store Equipment 2, Total Selling Expenses 94, General and Administrative Expenses Rent Expense 27, Salaries Expense - Office 26, Insurance Expense 2, Payroll Taxes Expense 7, Telephone Expense 1, Uncollectible Accounts Expense Utilities Expense 5, Depreciation Expense - Office Equipment Total General and Administrative Expenses 73, Total Operating Expenses

16 13-16 Simpson Antiques Income Statement Year Ended December 31, 2010 Operating Revenue Sales 561, Less Sales Returns and Allowances 12, Net Sales 549, Cost of Goods Sold 330, Gross Profit on Sales 219, Operating Expenses Selling Expenses Salaries Expense - Sales 79, Advertising Expense 7, Cash Short Net or Over income from operations Supplies Expense 4, Depreciation Expense - Store Equipment 2, Total Selling Expenses 94, General and Administrative Expenses Rent Expense 27, Salaries Expense - Office 26, Insurance Expense 2, Payroll Taxes Expense 7, Telephone Expense 1, Uncollectible Accounts Expense Utilities Expense 5, Depreciation Expense - Office Equipment Total General and Administrative Expenses 73, Total Operating Expenses 167, Net Income from Operations 51,193.80

17 13-17 Other Income and Other Expenses Simpson Antiques Income Statement Year Ended December 31, 2010 Operating Expenses Net Income from Operations 51, Other Income Interest Income Miscellaneous Income Total Other Income Other Expenses Interest Expense Net Nonoperating Expense 22.00

18 13-18 Net income for Simpson Antiques Simpson Antiques Income Statement Year Ended December 31, 2010 Operating Revenue Net Sales 549, Cost of Goods Sold 330, Gross Profit on Sales 219, Operating Expenses Total Selling Expenses 94, Total Operating Expenses 167, Net Income from Operations 51, Other Income Interest Income Miscellaneous Income Total Other Income Other Expenses Interest Expense Net Nonoperating Expense Net Income for Year 51,171.80

19 Objective 2 Prepare a Statement of Owner s Equity from the worksheet The statement of owner's equity reports the changes that occurred in the owner's financial interest during the period. The ending capital balance for Patricia Simpson, $84,792.80, is used to prepare the balance sheet. Simpson Antiques Statement of Owner's Equity Year Ended December 31, 2010 Patricia Simpson, Capital, January 1, , Net Income for Year 51, Less Withdrawals for the Year 27, Increase in Capital 23, Patricia Simpson, Capital, December 31, ,792.80

20 Objective 3 Prepare a classified balance sheet from the worksheet QUESTION: What are current assets? ANSWER: Current assets are assets consisting of cash, items that normally will be converted into cash within one year, or items that will be used up within one year.

21 13-21 Current Assets Simpson Antiques Balance Sheet Year Ended December 31, 2010 Assets Current Assets Cash 13, Petty Cash Fund Notes Receivable 1, Accounts Receivable 32, Less Allow. for Doubtful Accounts 1, , Interest Receivable Merchandise Inventory 47, Prepaid Expenses Supplies 1, Prepaid Insurance 4, Prepaid Interest , Total Current Assets 98, Current assets for Simpson Antiques

22 13-22 Plant and Equipment Noncurrent assets are called long-term assets. An important category of long-term assets is plant and equipment. For many businesses plant and equipment represents a sizable investment. Simpson Antiques Balance Sheet Year Ended December 31, 2010 Assets Prepaid Interest , Total Current Assets 98, Plant and Equipment Store Equipment 30, Less Accumulated Depreciation 2, , Office Equipment 5, Less Accumulated Depreciation , Total Plant and Equipment 31, Total Assets 130,616.00

23 13-23 Current Liabilities Simpson Antiques Balance Sheet Year Ended December 31, 2010 Assets Prepaid Interest , Total Current Assets 98, Total Plant and Equipment 31, Total Assets 130, Total current liabilities Liabilities and Owner s Equity Current Liabilities Notes Payable-Trade 2, Notes Payable-Bank 9, Accounts Payable 24, Interest Payable Social Security Tax Payable 1, Medicare Tax Payable Employee Income Tax Payable Fed. Unemployment Tax Pay State Unemployment Tax Pay Salaries Payable 1, Sales Tax Payable 6, Total Current Liabilities 45,823.20

24 13-24 Long-Term Liabilities Although repayment of long-term liabilities might not be due for several years, management must make sure that periodic interest is paid promptly. Long-term liabilities include mortgages, notes payable, and loans payable.

25 13-25 Owner's Equity Simpson Antiques Statement of Owner's Equity Year Ended December 31, 2010 Patricia Simpson, Capital, January 1, 2010 Net Income for Year Less Withdrawals for the Year Increase in Capital Patricia Simpson, Capital, December 31, , , , , , Simpson Antiques Balance Sheet Year Ended December 31, 2010 Assets Owner s Equity Patricia Simpson, Capital 84, Total Liabilities and Owner's Equity 130, The ending balance from the statement of owner s equity is transferred to the Owner's Equity section of the balance sheet.

26 McGraw-Hill 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 13 Financial Statements and Closing Procedures Section 2: Completing the Accounting Cycle Section Objectives 4. Journalize and post the adjusting entries. 5. Journalize and post the closing entries. 6. Prepare a postclosing trial balance. 7. Journalize and post reversing entries.

27 Objective Journalize and post the adjusting entries All adjustments are shown on the worksheet. After the financial statements have been prepared, the adjustments are made a permanent part of the accounting records. They are recorded in the general journal as adjusting journal entries and are posted to the general ledger.

28 13-28 Adjusting Entries Type of Adjustment Worksheet Reference Purpose Inventory (a b) Removes beginning inventory and adds ending inventory to the accounting records. Expense (c e) Matches expense to revenue for the period; the credit is to a contra asset account. Accrued Expense (f i) Matches expense to revenue for the period; the credit is to a liability account. Prepaid Expense (j l) Matches expense to revenue for the period; the credit is to an asset account. Accrued Income (m n) Recognizes income earned in the period. The debit is to an asset account (Interest Receivable) or a liability account (Sales Tax Payable).

29 Objective 5 Journalize and Post the Closing Entries At the end of the period, the temporary accounts are closed. The temporary accounts are: Revenue accounts Cost of goods sold accounts Expense accounts Drawing account 13-29

30 13-30 There are four steps in the closing process: 1. Close revenue accounts and cost of goods sold accounts with credit balances to Income Summary. 2. Close expense accounts and cost of goods sold accounts with debit balances to Income Summary. 3. Close Income Summary, which now reflects the net income or loss for the period, to owner's capital. 4. Close the drawing account to owner's capital.

31 Step 1: Closing the Revenue Accounts and the Cost of Goods Sold Accounts with credit balances GENERAL JOURNAL PAGE 28 DATE DESCRIPTION POST. DEBIT CREDIT REF Dec. 31 Closing Entries Sales 561, Interest Income Miscellaneous Income Purchases Returns and Allowances 3, Purchases Discounts 3, Income Summary 568, Debit each account, except Income Summary, for its balance. Credit Income Summary for the total.

32 Step 2: Closing the Expense Accounts and the Cost of Goods Sold Accounts with Debit Balances GENERAL JOURNAL PAGE 28 DATE DESCRIPTION POST. DEBIT CREDIT REF. Dec. 31 Income Summary 512, Sales Returns and Allowances 13, Purchases 321, Freight In 9, Salaries Expense Sales 79, Advertising Expense 7, Cash Short or Over Supplies Expense 4, Depreciation Expense - Store Equip 2, Rent Expense 27, Salaries Expense - Office 26, Insurance Expense 2, Payroll Taxes Expense 7, Telephone Expense 1, Uncollectible Accounts Expense Utilities Expense 5, Depreciation Expense - Office Equip Interest Expense Credit each account, except Income Summary, for its balance. Debit Income Summary for the total.

33 Step 3: Closing the Income Summary Account. The third closing entry transfers the Income Summary balance to the owner's capital account. This closes the Income Summary account, which remains closed until it is used in the end-of-period process for the next year. For Simpson Antiques, the third closing entry is as follows: Income Summary Adjusting Entries (a-b) 12/31 52, Closing Entries 12/31 512, , /31 47, /31 568, , Bal. 51, GENERAL JOURNAL PAGE 28 DATE DESCRIPTION POST. DEBIT CREDIT REF. Dec. 31 Income Summary 51, Patricia Simpson, Capital 51,

34 13-34 Step 4: Closing the Drawing account. This entry closes the drawing account and updates the capital account. GENERAL JOURNAL PAGE 28 DATE DESCRIPTION POST. DEBIT CREDIT REF. Dec. 31 Patricia Simpson, Capital 27, Patricia Simpson, Drawing 27,600.00

35 13-35 Posting the Closing Entries The closing entries are posted from the general journal to the general ledger. This process brings the temporary account balances to zero. The word Closing is entered in the Description column.

36 Objective 6 Preparing a Postclosing Trial Balance Prepare a postclosing trial balance to confirm that the general ledger is in balance. Only the accounts that have balances the asset, liability and owner's capital accounts appear on the postclosing trial balance. The postclosing trial balance matches the amounts reported on the balance sheet. To verify this, compare the postclosing trial balance with the balance sheet.

37 Only the accounts that have balances the asset, liability and owner's capital accounts appear on the postclosing trial balance. Preparing a Postclosing Trial Balance Simpson Antiques Postclosing Trial Balance December 31, 2010 Cash 13, Petty Cash Fund Notes Receivable 1, Accounts Receivable 32, Allowance for Doubtful Accounts 1, Interest Receivable Merchandise Inventory 47, Supplies 1, Prepaid Insurance 4, Prepaid Interest Store Equipment 30, Accumulated Depreciation - Store Equipment 2, Office Equipment 5, Accumulated Depreciation - Office Equipment Notes Payable - Trade 2, Notes Payable - Bank 9, Accounts Payable 24, Interest Payable Social Security Tax Payable 1, Medicare Tax Payable Employees Income Taxes Payable Federal Unemployment Tax Payable 9.60 State Unemployment Tax Payable Salaries Payable 1, Sales Tax Payable 6, Patricia Simpson, Capital 84, Totals 134, , Temporary accounts do not appear on the postclosing trial balance. Revenue Expenses Cost of Goods Sold Withdrawals

38 Objective Journalize and post reversing entries QUESTION: What are reversing entries? ANSWER: Reversing entries are journal entries made to reverse the effect of certain adjusting entries involving accrued income or accrued expenses.

39 13-39 The Accounting Cycle Step 1 Analyze transactions Step 2 Journalize the data about transactions Step 3 Post the data about transactions Step 4 Prepare a worksheet Step 5 Prepare financial statements Step 9 Interpret the financial information Step 8 Prepare a postclosing trial balance Step 7 Journalize and post closing entries Step 6 Journalize and post adjusting entries

40 13-40 Thank You for using College Accounting, 12th Edition Price Haddock Farina

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