# CHAPTER 5 THE ACCOUNTING CYCLE: REPORTING FINANCIAL RESULTS

Save this PDF as:

Size: px
Start display at page:

## Transcription

1 CHAPTER 5 THE ACCOUNTING CYCLE: REPORTING FINANCIAL RESULTS OVERVIEW OF BRIEF EXERCISES, EXERCISES, PROBLEMS AND CRITICAL THINKING CASES Brief Exercises Topic Learning Objectives Skills B. Ex. 5.1 B. Ex. 5.2 B. Ex. 5.3 Balancing the accounting equation Financial statement relationships Classifying balance sheet accounts 1, 2 1, 2 1, 2 Analysis Analysis Analysis B. Ex. 5.4 Closing temporary accounts 4 Analysis B. Ex. 5.5 B. Ex. 5.6 Closing entries of profitable firms Closing entries of unprofitable firms 4 4 Analysis Analysis B. Ex. 5.7 B. Ex. 5.8 B. Ex. 5.9 B. Ex. *5.10 After-closing trial balance Profitability and liquidity Measuring interim revenue The worksheet Analysis Analysis Analysis Judgment, communication, analysis Exercises Topic Learning Objectives Skills 5.1 Accounting terminology 1-7 Analysis 5.2 Financial statement preparation 1, 2, 6 Analysis 5.3 Financial statement preparation 1, 2, 6 Analysis 5.4 Closing and after-closing trial 2, 4, 5 Analysis, communication balance 5.5 Closing and after-closing trial 2, 4, 5 Analysis, communication balance 5.6 Real World: Best Buy Adequate 3 Analysis, communication Disclosure 5.7 Closing entries of profitable firms 2, 4 Analysis 5.8 Closing entries of unprofitable 2, 4 Analysis firms 5.9 Adjusting versus closing entries 2, 4 Analysis, communication 5.10 Profitability and liquidity 6 Analysis measures 5.11 Profitability and liquidity 6 Analysis measures 5.12 Interim results 1, 2, 7 Analysis 5.13 Interim results 1, 2, 7 Analysis 5.14 Effects of accounting errors 2, 3 Analysis 5.15 Real World: Home Depot, Inc. Using 3, 6 Communication, analysis an annual report *Supplemental Topic, " The Worksheet." Overview

2 Problems Learning Sets A, B Topic Objectives Skills 5.1 A,B Correcting classification errors 1, 2, 4, 6 Analysis, communication 5.2 A,B Statement preparation and closing 1, 2, 4-6 Analysis, communication process of a profitable firm 5.3 A,B Statement preparation and closing 1-4, 6 Analysis, communication process of an unprofitable firm 5.4 A,B Interim financial statements 1, 2, 7 Analysis, communication 5.5 A,B Comprehensive problem combining 1 4, 6 Analysis, communication Chapter 4 and Chapter A,B Comprehensive problem combining 1 4, 6 Analysis, communication Chapter 4 and Chapter 5 *5.7 A,B Comprehensive problem combining 8 Analysis, communication Chapter 4 and Chapter A,B Real World: Best Buy/The Gap 6 Analysis, communication Evaluating profitability and liquidity Critical Thinking Cases 5.1 Adequate disclosure Conflicts of interest 1 (Ethics, fraud & corporate governance) 5.3 Sarbanes-Oxley Act: CEO and CFO 3 personal certifications 5.4 Real World: Ford Motor Company 3 Annual report disclosures (Internet) *Supplemental Topic, "The Worksheet." Analysis, communication Communication, judgment, analysis, research Analysis, judgment, communication Communication, technology, research Overview (p.2)

4 Critical Thinking Cases 5.1 Adequate Disclosure Students are asked to analyze five items that may (or may not) require disclosure in the notes accompanying the financial statements. Students must defend their position. 25 Strong 5.2 Working for the Competition Ethics, Fraud & Corporate Governance This is a group assignment focusing on the following issues: "Is it ethical for a CPA to provide accounting services to companies that compete with each other?" Interviews are required. No time estimate 5.3 Sarbanes-Oxley Act and CEO/CFO Certifications 5 Easy Working in groups, students are required to discuss the meaning, purpose, and impact of CEO/CFO personal certifications required under the Sarbanes-Oxley Act. 5.4 Annual Report Disclosures Internet Students must identify and discuss topics disclosed in the company's financial statements. This is a good problem to assign in conjunction with Case Easy Desc. of Prob & Cases

5 SUGGESTED ANSWERS TO DISCUSSION QUESTIONS An annual report generally includes comparative financial statements, supporting information about the company s financial position, its business operations, and a discussion by management concerning the company s future prospects. Before the annual report is issued, the financial statements must be audited by a firm of Certified Public Accountants (CPAs). Publicly owned companies must file their financial statements and detailed supporting schedules with the Securities and Exchange Commission (SEC). Retained earnings is that portion of stockholders equity created by earning income and retaining all or part of the resources created in the business. Income is a function of revenue less expenses. We have learned that cash is not always received at the exact time that revenue is earned, nor is cash necessarily disbursed at the exact time that an expense is incurred. Thus, the income retained by a company is not in the form of cash. Even if a company s income did equal its net cash inflow, the amount retained would not be kept in the form of cash. As the company grew, the cash would be converted into property, plant, equipment, and other assets. The income statement, statement of retained earnings, and balance sheet are prepared directly from the amounts shown in the adjusted trial balance. The income statement reports revenue earned during the period less expenses incurred in generating that revenue. When revenue exceeds expenses, net income is reported, and an increase in stockholders equity results. When expenses exceed revenue, a net loss is reported, and a decrease in stockholders equity results. The net income (or net loss) from the income statement is added to the beginning Retained Earnings balance in the statement of retained earnings. Any dividends declared during the period are subtracted in arriving at the ending Retained Earnings balance to be reported in the balance sheet at the end of the period. Items that may require disclosure include, but are not limited to: pending lawsuits, scheduled plant closings, certain governmental investigations, significant events occurring after the balance sheet date but before the statements are issued, specific customers that account for a large portion of the company s business, names of stockholders that own large amounts of the company s stock, any changes in accounting principles having a significant impact on the company s financial position, and any unusual conflicts between the company and its officers. Q1-4

6 Temporary (or nominal) accounts include revenue, expenses, and dividend accounts. These are the accounts involved in the closing process at the end of the year. Generally speaking, all income statement accounts (and dividends reported in the statement of retained earnings) are considered temporary. Permanent (or real) accounts include assets, liability, and stockholders equity accounts. These accounts are not involved in the closing process at the end of the year. Generally speaking, all accounts reported in the balance sheet (and in the after-closing trial balance) are considered permanent. Dividends paid to stockholders are not considered an expense of the business and, therefore, are not taken into account in determining net income for the period. Since dividends are not an expense, the Dividends account is not closed to the Income Summary account. Instead, it is closed directly to the Retained Earnings account. After all revenue, expense, and dividend accounts have been closed, the only accounts that remain are the permanent (or real) accounts appearing in the balance sheet. In comparison to the adjusted trial balance, the after-closing trial balance contains only balance sheet accounts. Also, the Retained Earnings account is no longer reported at its beginning balance. A company can be both profitable and insolvent. For instance, the company s sales might be made only on account. If customers delay in paying what they owe, the average number of days that accounts receivable remain outstanding could be very high (say, 120 days). At the same time, the company s creditors may require payment at a much faster rate, say, 30 days. Thus even though this business might be profitable (i.e., its revenue exceed its expenses), it may not be able to remain solvent if its accounts receivable fail to convert to cash in time to settle its accounts payable. A company may close its accounts annually, but prepare financial reports monthly or quarterly. These monthly (or quarterly) statements are referred to as interim financial statements. General ledger accounts to be reported in the interim income statement require certain computations in order to determine their correct monthly or quarterly amounts. Computations are not required to ascertain interim balance sheet amounts because the balance is always based on the account balances at the balance sheet date. Adequate disclosure means that financial statements should include whatever supplemental information is necessary for an intelligent user to interpret the statements properly. Unlike most other operating expenses, depreciation does not require regular periodic outlays of cash. Depreciation is merely an estimate of that portion of a depreciable asset s cost which is to be matched against revenue earned during the current accounting period. Q4-12

7 Revenue, expense, and dividend accounts are called temporary accounts, or nominal accounts, because they accumulate the transactions of only one accounting period. At the end of the period, the changes in owners equity accumulated in these temporary accounts need to be transferred to the Retained Earnings account, and the temporary accounts need to have zero balances in order to be ready to measure the revenue, expenses, and dividends of the next accounting period. The closing process serves these purposes. Revenue and expense accounts are first closed to the Income Summary account which, in turn, is closed to the Retained Earnings account. Any dividends declared during the period are then closed directly to the Retained Earnings account. Return on equity is a measure of net income relative to a company's average stockholders' equity throughout the year. Thus, it conveys the amount of income generated for every dollar of equity capital. A high return on equity indicates that management efficiently used resources provided through owners' equity to generate income. A low return on equity indicates that management was not efficient in using resources provided through owners' equity to generate income. *15. A worksheet (or spreadsheet software): Provides a scratch pad for working out adjusting entries prior to actually entering these items in the accounts. Enables accountants to prepare interim financial statements without formally adjusting and closing the accounts. Without affecting the account balances, provides both accountants and management with a preview of the effects of proposed entries upon the financial statements. *Supplemental Topic, " The Worksheet." Q13-15

8 SOLUTIONS TO BRIEF EXERCISES B. Ex. 5.1 Decrease in assets during the year.. (60,000) Decrease in liabilities during the year. (300,000) Increase in stockholders' equity during the year 240,000 (100,000) (250,000) (110,000) B. Ex. 5.2 Capital stock (January 1, 2011). 200,000 Capital stock issued during the year Capital stock (December 31, 2011).. 60, ,000 Add: Retained earnings (December 31, 2011) Total stockholders' equity (December 31, 2011). 90, ,000 B. Ex. 5.3 a. b. c. d. e. f. g. h. B. Ex. 5.4 a. b. c. d. e. f. g. h. CA i. NCA j. CA N i. C j. N k. D l. C Less: New stock issued during the year Income for the year.. Decrease to equity attributed to dividends. Note: The depreciation of the truck is included in the net income which is included in the ending retained earnings given. Likewise, the dividend is also included in the ending retained earnings figure given. CA CL CL NCA* SHE LTL CL * Accumulated depreciation is a contra asset classified in the non current asset section of the balance sheet. C N D C C N D BE5.1-4

9 B. Ex. 5.5 Service Revenue 19,800 Income Summary 19,800 To close revenue to income summary. Income Summary... 18,700 Supplies Expense 525 Rent Expense 3,660 Depreciation Expense: Equipment 1,200 Salaries Expense.. 12,700 Income Taxes Expense To close expense accounts to income summary. Income Summary. 1,100 Retained Earnings 1,100 To transfer net income to retained earnings. Retained Earnings 600 Dividends To close dividends to retained earnings. B. Ex. 5.6 Consulting Fees Earned. 26,000 Interest Revenue 300 Income Summary.. 26,300 To close revenue to income summary. Income Summary.. 34,700 Insurance Expense.. 1,900 Rent Expense.. 10,800 Depreciation Expense: Office Equip... 5,600 Salaries Expense.. 16,400 To close expense accounts to income summary. Retained Earnings. 8,400 Income Summary.. 8,400 To transfer net loss to income summary. Retained Earnings Dividends To close dividends to retained earnings. BE5.5-6

10 B. Ex. 5.7 a. b. c. d. e. f. g. h. C C D N C N N C i. D j. N k. C l. C B. Ex. 5.8 a. Net Income (15,000) Total Revenue (60,000). 25% b. Net Income (15,000) Average Equity (37,500). 40% c. Current Assets (16,000) Current Liab. (4,000) 4-to-1 Computations: Total revenue 60,000 Total expenses. (45,000) Net income 15,000 Stockholders' equity (January 1, 2011) 37,000 Stockholders' equity (December 31, 2011). 38,000 75,000 2 Average stockholders' equity in ,500 B. Ex. 5.9 a. April through September (450, ,000). 310,000 b. October through December (680, ,000).. 230,000 c. April through December (680, ,000) 540,000 *B. Ex.5.10 a. Net income (540, ,000) 130,000 b. Income statement debits (380, ,000). 250, The amount needed to make the columns of the balance sheet equal is net income for the period. The credit column of the income statement represents total revenue whereas the debit column amount represents total expenses. Thus, total revenue (380,000 credit column amount) minus net income (130,000 computed in part a.), equals total expenses (i.e., the income statement debit column total). *Supplemental Topic, " The Worksheet." BE5.7-10

11 SOLUTIONS TO EXERCISES Ex 5.1 a. b. c. d. e. f. g. h. Adequate disclosure Liquidity Nominal accounts Real accounts After-closing trial balance Dividends Closing entries None (This is an example of a "correcting entry.") Ex. 5.2 a. TUTORS FOR RENT, INC. Income Statement For the Year Ended December 31, 2011 Revenues: Tutoring revenue earned 96,000 Expenses: Salary expense Supply expense Advertising expense Depreciation expense: equipment Income before taxes Income taxes expense Net income 52,000 1, ,000 54,500 41,500 11,600 29,900 Retained earnings (1/1/11) Add: Net Income Less: Dividends Retained earnings (12/31/11) TUTORS FOR RENT, INC. Statement of Retained Earnings For the Year Ended December 31, ,000 29,900 2,000 72,900 E5.1,2

12 Ex. 5.2 (concluded) TUTORS FOR RENT, INC. Balance Sheet December 31, 2011 Assets Cash Accounts receivable Supplies 91,100 4, Equipment 12,000 Less: Accumulated depreciation: equipment 5,000 7,000 Total assets 102,900 Liabilities Accounts payable Income taxes payable Total liabilities Stockholders' Equity Capital stock Retained earnings Total stockholders' equity Total liabilities and stockholders' equity 1,500 3,500 5,000 25,000 72,900 97, ,900 b. c. The company appears to be extremely liquid. Cash and accounts receivable comprise 93% of total assets. Together, these highly liquid assets total 95,600, compared to only 5,000 in liabilities coming due. In other words, the combined total of cash and accounts receivable are 19 times the obligations coming due in the near future. The 45,000 credit Retained Earnings balance reported in the company s adjusted trial balance is its beginning balance. In order to have retained 45,000 in earnings, the company must have been profitable in the past. E5.2 (p.2)

13 Ex. 5.3 a. Revenues: Guide revenue earned WILDERNESS GUIDE SERVICES, INC. Income Statement For the Year Ended December 31, ,000 Expenses: Salary expense Camping supply expense Insurance expense Depreciation expense: equipment Interest expense Net Loss 87,500 1,200 9,600 5,000 1, ,000 (3,000) Retained earnings (1/1/11) Less: Net loss Less: Dividends Retained earnings (12/31/11) WILDERNESS GUIDE SERVICES, INC. Statement of Retained Earnings For the Year Ended December 31, ,000 3,000 1,000 11,000 E5.3

14 Ex. 5.3 (Concluded) WILDERNESS GUIDE SERVICES, INC. Balance Sheet December 31, 2011 Assets Cash Accounts receivable Camping supplies Unexpired insurance policies Equipment Less: Accumulated depreciation: equipment Total assets 12,200 31,000 7,900 2,400 70,000 60,000 10,000 63,500 Liabilities Notes payable (due 4/1/12) Accounts payable Total liabilities Stockholders' Equity Capital stock Retained earnings Total stockholders' equity Total liabilities and stockholders' equity 18,000 9,500 27,500 25,000 11,000 36,000 63,500 b. c. The company appears to be liquid. Cash and accounts receivable comprise 68% of the company s total assets. These highly liquid assets total 43,200, in comparison to 27,500 in liabilities coming due in the near future. However, given that its equipment is nearly fully depreciated, it may have to invest in new equipment shortly. The company was not profitable in the current period as evidenced by the 3,000 net loss reported in the income statement. However, the 15,000 credit Retained Earnings balance reported in the company s adjusted trial balance is the balance carried forward from prior years. In order to have retained 15,000 in earnings, the company must have been profitable in the past. E5.3 (p.2)

15 Ex. 5.4 a. TUTORS FOR RENT General Journal December 31, 2011 (1) Dec. 31 Tutoring Revenue earned 96,000 Income Summary 96,000 To close Tutoring Revenue Earned. (2) 31 Income Summary 66,100 Salary Expense 52,000 Supply Expense 1,200 Advertising Expense 300 Depreciation Expense: Equipment 1,000 Income Taxes Expense 11,600 To close all expense accounts. (3) 31 Income Summary 29,900 Retained Earnings 29,900 To transfer net income earned in 2011 to the Retained Earnings account (96,000-66,100 = 29,900). (4) 31 Retained Earnings 2,000 Dividends 2,000 To transfer dividends declared in 2011 to the Retained Earnings account. E5.4

16 Ex. 5.4 (Concluded) b. TUTORS FOR RENT, INC. After-Closing Trial Balance December 31, 2011 Cash Accounts receivable Supplies Equipment Less: Accumulated depreciation: equipment Accounts payable Income taxes payable Capital stock Retained earnings Totals 91,100 4, ,000 5,000 1,500 3,500 25,000 72, , ,900 c. The 72,900 Retained Earnings balance reported in the after-closing trial balance is 27,900 more than the 45,000 balance reported in the unadjusted trial balance. By adding net income to the Retained Earnings balance in the unadjusted trial balance, and subtracting dividends, one arrives at the 72,900 reported in the after-closing trial balance (45, ,900-2,000 = 72,900). E5.4 (p.2)

17 Ex. 5.5 a. WILDERNESS GUIDE SERVICES, INC. General Journal December 31, 2011 (1) Dec. 31 Guide Revenue Earned 102,000 Income Summary 102,000 To close Guide Revenue Earned. (2) 31 Income Summary 105,000 Salary Expense 87,500 Camping Supply Expense 1,200 Insurance Expense 9,600 Depreciation Expense: Equipment 5,000 Interest Expense 1,700 To close all expense accounts. (3) 31 Retained Earnings 3,000 Income Summary 3,000 To transfer net loss incurred in 2011 to the Retained Earnings account (102, ,000 = 3,000 loss). (4) 31 Retained Earnings 1,000 Dividends 1,000 To transfer dividends declared in 2011 to the Retained Earnings account. E5.5

18 Ex. 5.5 (Concluded) b. WILDERNESS GUIDE SERVICES, INC. After-Closing Trial Balance December 31, 2011 Cash Accounts receivable Camping supplies Unexpired insurance policies Equipment Accumulated depreciation: equipment Notes payable (due 4/1/12) Accounts payable Capital stock Retained earnings Totals 12,200 31,000 7,900 2,400 70,000 60,000 18,000 9,500 25,000 11, , ,500 c. The 11,000 Retained Earnings balance reported in the after-closing trial balance is 4,000 less than the 15,000 balance reported in the unadjusted trial balance. By subtracting both the net loss and dividends from the Retained Earnings balance in the unadjusted trial balance, one arrives at the 11,000 reported in the after-closing trial balance (15,000-3,000-1,000 = 11,000). E5.5 (p.2)

20 Ex. 5.7 a. Counseling Revenue 225,000 Income Summary To close counseling revenue earned. Close all expenses to the Income summary account: Income Summary Advertising Expense Salaries Expense Office Supplies Expense Utilities Expense Malpractice Insurance Expense Office Rent Expense Continuing Education Expense Depreciation Expense: Fixtures Miscellaneous Expense Income Taxes Expense To close all expense accounts. Income Summary Retained Earnings To transfer net income earned in 2011 (225, ,400) to Retained Earnings. 170,400 54, ,000 1,800 94,000 1, ,000 24,000 2,650 4,500 6,000 29,400 54,600 Retained Earnings Dividends To close dividends declared in 2011 to Retained Earnings. 6,000 6,000 b. Retained Earnings, January 1, ,000 Plus: Net Income 54, ,600 Less: Dividends Declared in 2011 Retained Earnings, December 31, 2011 (6,000) 140,600 E5.7

21 Ex. 5.8 a. Consulting Revenue - Individual Clients.. Consulting Revenue - Corporate Clients.. 40, ,000 Income Summary To close revenue accounts to income summary. Income Summary Advertising Expense Depreciation Expense: Computers..... Rent Expense. Office Supplies Expense Travel Expense.. Utilities Expense Telephone and Internet Expense Salaries Expense.. Interest Expense.. To close expense accounts to income summary. Retained Earnings. Income Summary To transfer a net loss for the period to retained earnings. 275,000 75, ,000 16,000 24,000 9,600 4,400 57,800 3,300 1, ,500 2,500 75,000 Retained Earnings Dividends.. To close dividends to retained earnings. 25,000 25,000 b. Retained Earnings, (January 1, 2011) ,000 Less: Net loss in Dividends in (75,000) (25,000) Retained Earnings, December 31, ,000 Ex. 5.9 a. Insurance Expense 600 Unexpired Insurance To record insurance expense for December. b. Income Summary 3,000 Insurance Expense To close Insurance Expense (5 months) to Income Summary ,000 c. No, the dollar amounts are not the same in the adjusting and closing entries. The accounts are adjusted monthly; therefore the adjusting entry reflects insurance expense for one month (600). The books are closed annually. By December 31, five months insurance expense (3,000) has been recognized for the period August through December. E5.8,9

22 Ex a. Net Income (5,100) Total Revenue (25,500) 20% Significance: All companies must consume resources (incur costs) in order to generate revenue. The net income percentage is a measure of management's ability to control these costs and use resources efficiently to generate revenue. b. Net Income (5,100) Average Equity (17,000) 30% Significance: Return on equity is a measure of net income relative to a company's stockholders' equity throughout the year. Thus, it reports how much income is generated for every dollar of equity capital. c. Current Assets (16,000) - Current Liabilities (4,000) 12,000 Significance: Current assets often convert to cash in the near future, whereas current liabilities often consume cash in the near future. Thus, working capital is a measure of a company's short-term liquidity. d. Current Assets (16,000) Current Liabilities (4,000) 4-to-1 Significance: The current ratio is simply working capital expressed as a proportion. Thus, it is also a measure of shortterm liquidity. Based on the above measures, this company appears to be profitable and potentially liquid. Computations: Total revenue 25,500 Total expenses. (20,400) Net income 5,100 Stockholders' equity (January 1, 2011) 14,800 Stockholders' equity (December 31, 2011).. 19,200 34,000 2 Average stockholders' equity in ,000 Total assets.. 23,200 Less: Equipment (net of depreciation) (7,200) Current assets 16,000 E5.10

23 Ex a. Net Income (3,040) Total Revenue (152,000) 2% Significance: All companies must consume resources (incur costs) in order to generate revenue. The net income percentage is a measure of management's ability to control these costs and use resources efficiently to generate revenue. b. Net Income (3,040) Average Equity (80,000) 3.8% Significance: Return on equity is a measure of net income relative to a company's stockholders' equity throughout the year. Thus, it reports how much income is generated for every dollar of equity capital. c. Current Assets (94,000) - Current Liabilities (235,000) (141,000) Significance: Current assets often convert to cash in the near future, whereas current liabilities often consume cash in the near future. Thus, working capital is a measure of a company's short-term liquidity. d. Current Assets (94,000) Current Liabilities (235,000) 0.4-to-1 Significance: The current ratio is simply working capital expressed as a proportion. Thus, it is also a measure of shortterm liquidity. Based on the above measures, this company appears to be marginally profitable but heading for liquidity problems. Computations: Total revenue 152,000 Total expenses (148,960) Net income.. 3,040 Stockholders' equity (January 1, 2011) 79,000 Stockholders' equity (December 31, 2011) 81, ,000 2 Average stockholders' equity in ,000 Total assets.. 316,000 Less: Equipment (net of depreciation) (222,000) Current assets.. 94,000 E5.11

24 Ex a. (1) (2) b. (1) (2) c. Lift Ticket Revenue, 210,000 (850, ,000) Cash, 116,000 Lift Ticket Revenue, 960,000 (990,000 30,000) Cash, 138,000 January was the best month with respect to lift ticket revenue (640, ,000 = 440,000). December, however, was the best month with respect to net cash flow (59,000 9,000 = 50,000). Ex a. Ranking of profitability by quarter (revenue minus expenses): 4th quarter (90,000-45,000). 1st quarter (69,000-48,000) 2nd quarter (60,000-42,000). 3rd quarter (30,000-40,000). Profit for the year ending December 31 (249, ,000) Computations: Revenue by Quarter January - March April - June (129,000-69,000) July - Sept. (159, ,000) Oct. - Dec. (249, ,000) Total revenue for the year Expenses by Quarter January - March April - June (90,000-48,000) July - Sept. (130,000-90,000) Oct. - Dec. ( 175, ,000) Total expenses for the year 45,000 21,000 18,000 (10,000) 74,000 69,000 60,000 30,000 90, ,000 48,000 42,000 40,000 45, ,000 b. September revenue (159, ,000) 25,000 September expenses (130, ,000) (15,000) September income 10,000 c. Third quarter loss (part a.) (10,000) Less: September income (part b.) (10,000) Loss in July and August (20,000) Given that this business provides janitorial services to schools, the poor performance in July and August is probably attributable to schools not being in session. E5.12,13

25 Ex Total Assets Total Liabilities Retained Earnings Error Net Income a. Recorded a dividend as an U NE NE NE expense in the income statement. b. Recorded unearned revenue O NE U O as earned revenue in the income statement. c. Failed to record accrued O NE U O wages payable at the end of the period. d. Recorded a declared but NE U U NE unpaid dividend by debiting Dividends and crediting Cash. e. Failed to disclose a pending lawsuit in the notes accompanying the financial statements. NE NE NE NE E5.14

26 Ex a. b. The company uses straight-line depreciation as discussed in the Summary of Significant Accounting Policies section of the notes accompanying the financial statements. Revenue is recognized at the time customers take possession of merchandise or receive services. Cash received prior to this point is reported as Deferred Revenue in the liability section of the balance sheet. c. Profitability: Net income for the year ended January 31, 2010, was billion, which was 401 million more than the year ended February 1, 2009, and billion less than the year ended February 3, Gross profit as a percentage of sales for the year ended January 31, 2010, was 34%, virtually unchanged from the previous two years reported. Net income as a percentage of average stockholders' for the year ended January 31, 2010, was an impressive 6.5%. Liquidity: The current ratio at January 31, 2010, was approximately 1.34-to-1, up from 1.20-to-1 reported at the end of the previous year. Cash flows from operating activities for the year ended January 31, 2010, were billion, down from billion reported in the previous year. E5.15

27 SOLUTIONS TO PROBLEMS SET A 20 Minutes, Easy PROBLEM 5.1A PARTY WAGON, INC. a. PARTY WAGON, INC. Income Statement For the Year Ended December 31, 2011 Revenues: Party revenue earned 130,000 Expenses: Insurance expense Office rent expense Supplies expense Salary expense Depreciation expense: van Depreciation expense: equipment & music Repair & maintenance expense Travel expense Miscellaneous expense Interest expense Income before taxes Income taxes expense Net income 1,800 12,000 1,200 75,000 8,000 7,000 2,000 6,000 3,600 4, ,000 9,000 2,000 7,000 Retained earnings (1/1/11) Add: Net Income Less: Dividends Retained earnings (12/31/11) PARTY WAGON, INC. Statement of Retained Earnings For the Year Ended December 31, ,000 7,000 1,000 21,000 P5.1A

28 a. (cont'd) PROBLEM 5.1A PARTY WAGON, INC. (continued) PARTY WAGON, INC. Balance Sheet December 31, 2011 Assets Cash Accounts receivable Unexpired insurance Prepaid rent Supplies Van Less: Accumulated depreciation: van Equipment & music Less: Accumulated depreciation: equipment & music Total Assets Liabilities Accounts payable Notes payable Salaries payable Interest payable Income taxes payable Unearned party revenue Total Liabilities Stockholders' Equity Capital stock Retained earnings Total Stockholders' Equity Total Liabilities and Stockholders' Equity 15,000 9,000 4,500 2, ,000 16,000 24,000 35,000 14,000 21,000 76,000 7,000 39,000 1, ,800 50,000 5,000 21,000 26,000 76,000 P5.1A(p.2)

29 PROBLEM 5.1A PARTY WAGON (concluded) b. PARTY WAGON, INC. General Journal December 31, 2011 (1) Dec. 31 Party Revenue Earned 130,000 Income Summary 130,000 To close Party Revenue Earned. (2) 31 Income Summary 123,000 Insurance Expense 1,800 Office Rent Expense 12,000 Supplies Expense 1,200 Salaries Expense 75,000 Depreciation Expense: Van 8,000 Depreciation Expense: Equip. & Music 7,000 Repair & Maintenance Expense 2,000 Travel Expense 6,000 Miscellaneous Expense 3,600 Interest Expense 4,400 Income Taxes Expense 2,000 To close all expense accounts. (3) 31 Income Summary 7,000 Retained Earnings 7,000 To transfer net income earned in 2011 to the Retained Earnings account (130, ,000 = 7,000). (4) 31 Retained Earnings 1,000 Dividends 1,000 To transfer dividends declared in 2011 to the Retained Earnings account. c. For the year ended December 31, 2011, the company generated net income of 7,000 on 130,000 sales. Thus, net income as a percentage of sales was approximately 5.4%. Moreover, the 7,000 profit represented a 30.4% return on stockholders equity, which is a fairly strong return on investment. The company s balance sheet at December 31, 2011, reports cash and accounts receivable totaling 24,000. It also reports various payables (liabilities) totaling 48,200. Thus, the company may or may not currently be liquid depending on when the 39,000 note payable reported in the balance sheet is due. If this obligation is not due in the near future, then the company appears to be solvent. If, however, this note is due shortly, the company may experience some cash flow difficulty. P5.1A(p.3)

30 30 Minutes, Medium PROBLEM 5.2A LAWN PRIDE, INC. a. LAWN PRIDE, INC. Income Statement For the Year Ended December 31, 2011 Revenues: Mowing revenue earned 170,000 Expenses: Insurance expense Office rent expense Supplies expense Salary expense Depreciation expense: trucks Depreciation expense: mowing equipment Repair & maintenance expense Fuel expense Miscellaneous expense Interest expense Income before taxes Income taxes expense Net income 2,400 36,000 5,200 60,000 30,000 4,000 3,000 1,500 5,000 3, ,100 19,900 6,000 13,900 LAWN PRIDE, INC. Statement of Retained Earnings For the Year Ended December 31, 2011 Retained earnings (1/1/11) Add: Net Income Less: Dividends Retained earnings (12/31/11) 30,000 13,900 5,000 38,900 P5.2A

31 a. (cont'd) PROBLEM 5.2A LAWN PRIDE, INC. (continued) LAWN PRIDE, INC. Balance Sheet December 31, 2011 Assets Cash Accounts receivable Unexpired insurance Prepaid rent Supplies Trucks Less: Accumulated depreciation: trucks Mowing equipment Less: Accumulated depreciation: mowing equipment Total assets 58,525 4,800 8,000 3,000 1, , ,000 30,000 20,000 12,000 8, ,400 Liabilities Accounts payable Notes payable Salaries payable Interest payable Income taxes payable Unearned mowing revenue Total liabilities Stockholders' Equity Capital stock Retained earnings Total stockholders' equity Total liabilities and stockholders' equity 1,500 50, , ,500 20,000 38,900 58, ,400 P5.2A(p.2)

32 PROBLEM 5.2A LAWN PRIDE, INC. (continued) b. LAWN PRIDE, INC. General Journal December 31, 2011 (1) Dec. 31 Mowing Revenue Earned 170,000 Income Summary 170,000 To close Mowing Revenue Earned. (2) 31 Income Summary 156,100 Insurance Expense 2,400 Office Rent Expense 36,000 Supplies Expense 5,200 Salary Expense 60,000 Depreciation Expense: Trucks 30,000 Depreciation Expense: Mowing Equip. 4,000 Repair & Maintenance Expense 3,000 Fuel Expense 1,500 Miscellaneous Expense 5,000 Interest Expense 3,000 Income Taxes Expense 6,000 To close all expense accounts. (3) 31 Income Summary 13,900 Retained Earnings 13,900 To transfer net income earned in 2011 to the Retained Earnings account (170, ,100 = 13,900). (4) 31 Retained Earnings 5,000 Dividends 5,000 To transfer dividends declared in 2011 to the Retained Earnings account. P5.2A(p.3)

33 c. Cash Accounts receivable Unexpired insurance Prepaid rent Supplies Trucks Accumulated depreciation: trucks PROBLEM 5.2A LAWN PRIDE, INC. (concluded) LAWN PRIDE, INC. After-Closing Trial Balance December 31, ,525 4,800 8,000 3,000 1, , ,000 Mowing equipment 20,000 Accumulated depreciation: mowing equipment Accounts payable Notes payable Salaries payable Interest payable Income taxes payable Unearned mowing revenue Capital stock Retained earnings 12,000 1,500 50, , ,000 38,900 Totals 245, ,400 d. For the year ended December 31, 2011, the company generated net income of 13,900 on 170,000 sales. Thus, net income as a percentage of sales was approximately 8.2%. Moreover, the 13,900 profit represented a return on stockholders equity of approximately 25.5%, which is a fairly strong return on investment. The company s balance sheet at December 31, 2011, reports cash and accounts receivable totaling 63,325. It also reports various payables (liabilities) totaling 53,600. Depending on when the 50,000 note payable reported in the balance sheet is due, the company may be extremely liquid. If this obligation is not due in the near future, the company has 63,325 in cash and accounts receivable to cover obligations of only 3,600. Even if this note is due shortly, the company still appears to be liquid. P5.2A(p.4)

34 45 Minutes, Strong PROBLEM 5.3A MYSTIC MASTERS, INC. a. MYSTIC MASTERS, INC. Income Statement For the Year Ended December 31, 2011 Revenues: Client revenue earned 52,000 Expenses: Insurance expense Office rent expense Supplies expense Salary expense Depreciation expense: furniture & fixtures Office and telephone expense Internet service expense Legal expense Interest expense Miscellaneous expense Net loss 6,000 9, ,000 1,400 3,000 4,900 1,500 4,000 5,000 83,240 (31,240) MYSTIC MASTERS, INC. Statement of Retained Earnings For the Year Ended December 31, 2011 Retained earnings (1/1/11) Less: Net loss Retained earnings (12/31/11) 2,600 31,240 (28,640) P5.3A

35 a. (cont'd) PROBLEM 5.3A MYSTIC MASTERS, INC. (continued) MYSTIC MASTERS, INC. Balance Sheet December 31, 2011 Assets Cash Accounts receivable Unexpired insurance Prepaid rent Supplies Furniture & fixtures Less: Accumulated depreciation: furniture & fixtures Total assets ,000 1, ,400 5,200 3,200 8,160 Liabilities Accounts payable Notes payable Salaries payable Interest payable Unearned client revenue Total liabilities Stockholders' Equity Capital stock Retained earnings (deficit) Total stockholders' equity Total liabilities and stockholders' equity 6,540 24,000 1, ,800 4,000 (28,640) (24,640) 8,160 P5.3(p.2)

36 PROBLEM 5.3A MYSTIC MASTERS, INC. (continued) b. MYSTIC MASTERS, INC. General Journal December 31, 2011 (1) Dec. 31 Client Revenue Earned 52,000 Income Summary 52,000 To close Client Revenue Earned. (2) 31 Income Summary 83,240 Insurance Expense 6,000 Office Rent Expense 9,000 Supplies Expense 440 Salary Expense 48,000 Depreciation Expense: Furn. & Fixt. 1,400 Office & Telephone Expense 3,000 Internet Service Expense 4,900 Legal Expense 1,500 Interest Expense 4,000 Miscellaneous Expense 5,000 To close all expense accounts. (3) 31 Retained Earnings 31,240 Income Summary 31,240 To transfer net loss in 2011 to the Retained Earnings account (52,000-83,240 = 31,240 loss). Note: No dividends were declared in P5.3A(p.3)

37 c. PROBLEM 5.3A MYSTIC MASTERS, INC. (concluded) MYSTIC MASTERS, INC. After-Closing Trial Balance December 31, 2011 Cash 960 Accounts receivable Unexpired insurance Prepaid rent Supplies Furniture & fixtures 300 2,000 1, ,400 Accumulated depreciation: furniture & fixtures 5,200 Accounts payable Notes payable Salaries payable Interest payable Unearned client revenue Capital stock 6,540 24,000 1, ,000 Retained earnings 28,640 Totals 42,000 42,000 d. e. For the year ended December 31, 2011, the company suffered a net loss of 31,240 on 52,000 sales. Thus, the net loss as a percentage of sales was approximately 60%. The net loss, in combination with the deficit balance in stockholders equity, makes meaningful interpretations of return on equity impossible. It will suffice to say that the company is extremely unprofitable. The company s balance sheet at December 31, 2011, reports cash and accounts receivable totaling only 1,260. It reports various payables (liabilities) totaling 32,600, for a shortfall of 31,340. Thus, in addition to being unprofitable, the company also is not liquid. Even if the note payable reported in the balance sheet is not due in the near future, the company still faces a significant shortfall with respect to its ability to make good on its current obligations. The primary issue to be addressed in the notes to the financial statements is the company s ability, or lack thereof, to remain a going concern. In other words, just how much longer can this business stay afloat given its desperate financial condition? Information about the 24,000 note payable should also be disclosed. Who is the maker of this note? When is it due? Is it secured with company assets? Etc. The company may also have to disclose information concerning any legal problems it faces. The legal expenses reported in the income statement may suggest that one or more lawsuits are currently pending. P5.3A(p.4)

38 25 Minutes, Easy a. Revenue: Commissions earned Expenses: Advertising Salaries expense Rent expense Depreciation expense Total expenses Net Income Supporting computations September Commissions: 144, ,000 = 16,000 Third Quarter Commissions: 144,000-90,000 = 54,000 PROBLEM 5.4A GUARDIAN INSURANCE AGENCY GUARDIAN INSURANCE AGENCY Income Statement For the Following Time Periods Month Ended Quarter Ended 9 Months Ended Sept. 30 Sept. 30 Sept ,000 54, ,000 5,000 13,000 28,000 4,000 12,000 36,000 2,500 7,500 22, ,700 11,800 33,400 89,200 4,200 20,600 54,800 ` b. The balances in the revenue and expense accounts at September 30 represent the year to date. To determine revenue or expense for the month of September, the balance as of August 31 is subtracted from the September 30 balance. To determine the revenue or expense for the quarter ended September 30, the June 30 balance is subtracted from the September 30 balance. Revenue and expenses for the nine-month period ended September 30 are represented by the current balances in the accounts. No such computations are required for balance sheet accounts, because their balances describe financial position at a point in time, rather than for a period of time. c. If Guardian closed its accounts monthly, the current adjusted balances could be used in preparing financial statements for the month ended September 30. However, to prepare an income statement for the quarter ended September 30, it would be necessary to combine for each revenue and expense account the balances as of July 31, August 31, and September 30. To determine revenue and expenses for the nine months ended September 30, it would be necessary to combine the monthly amounts for each of the nine months. P5.4A

39 70 Minutes, Strong PROBLEM 5.5A SILVER LINING, INC. a. SILVER LINING, INC. General Journal December 31, 2011 (1) Dec. 31 Accounts Receivable 1,500 Consulting Services Revenue 1,500 To record revenue accrued at the end of Dec. (2) 31 Unearned Consulting Services Revenue 2,500 Consulting Services Revenue 2,500 To convert unearned revenue to earned revenue in Dec. (3) 31 Office Supplies Expense 95 Office Supplies 95 To record offices supplies used in December. (4) 31 Depreciation Expense: Office Equipment 750 Accumulated Depreciation: Office Equip. 750 To record depreciation expense in December. (5) 31 Rent Expense 300 Prepaid Rent 300 To record December rent expense. (6) 31 Insurance Expense 90 Unexpired Insurance 90 To record portion of insurance policies expired in December. (7) 31 Salaries Expense 1,900 Salaries Payable 1,900 To record accrued but unpaid salaries in Dec. (8) 31 Interest Expense 60 Interest Payable 60 To record interest expense accrued in December. (9) Income Taxes Expense 600 Income Taxes Payable 600 To record income taxes expense accrued in Dec. P5.5A

40 a. (cont'd) Computations for each of the adjusting journal entries: PROBLEM 5.5A SILVER LINING, INC. (continued) 1. Accounts receivable increased by the 1,500 of accrued revenue in December. 2. Unearned revenue is reduced by the 2,500 amount earned in December (supplies per trial balance) at 12/31 = 95 used in December ,000 (office equipment per trial balance) 72 months = 750 per month. 5. 1,200 (prepaid rent per trial balance) 4 mo. Remaining at 11/30 = 300 per month (unexpired insurance per trial balance) 3 mo. Remaining at 11/30 = 90 per month. 7. Salaries payable increased by the 1,900 of accrued salaries in December. 8. 9,000 (note payable per trial balance) x 8% x 1/12 = 60 interest expense per month. 9. 7,500 total income taxes expense - 6,900 (per trial balance) = 600 accrued in December. The company's adjusted trial balance dated December 31, 2011, appears on the following page. P5.5A(p.2)

41 PROBLEM 5.5A SILVER LINING, INC. (continued) a. (cont'd.) SILVER LINING, INC. Adjusted Trial Balance December 31, 2011 Cash 42,835 Accounts receivable Office supplies 3, Prepaid rent Unexpired insurance Office equipment ,000 Accumulated depreciation: office equipment 36,000 Accounts payable Notes payable (Due 3/1/12) Income taxes payable Unearned consulting services revenue Salaries payable Interest payable Capital stock 1,400 9,000 2,350 1,000 1, ,000 Retaining earnings 8,000 Dividends 1,000 Consulting services revenue 64,000 Office supplies expense 700 Depreciation expense: office equipment 9,000 Rent expense 3,825 Insurance expense 1,100 Salaries expense 29,000 Interest expense 420 Income taxes expense 7,500 Totals 154, ,070 P5.5A(p.3)

42 PROBLEM 5.5A SILVER LINING, INC. (continued) b. SILVER LINING, INC. Income Statement For the Year Ended December 31, 2011 Revenues: Consulting services revenue 64,000 Expenses: Office supplies expense Depreciation expense: office equipment Rent expense Insurance expense Salaries expense Interest expense Income before taxes Income taxes expense Net Income 700 9,000 3,825 1,100 29, ,045 19,955 7,500 12,455 Retained earnings (1/1/11) Add: Net income Less: Dividends Retained earnings (12/31/11) SILVER LINING, INC. Statement of Retained Earnings For the Year Ended December 31, ,000 12,455 (1,000) 19,455 P5.5A (p.4)

43 b. (cont'd) PROBLEM 5.5A SILVER LINING, INC. (continued) SILVER LINING, INC. Balance Sheet December 31, 2011 Assets Cash Accounts receivable Office supplies Prepaid rent Unexpired insurance Office equipment Less: Accumulated Depreciation: office equipment Total assets Liabilities Accounts payable Note payable (Due 3/1/12) Income taxes payable Unearned consulting services revenue Salaries payable Interest payable Total liabilities Stockholders' Equity Capital stock Retained earnings Total stockholders' equity Total liabilities and stockholders' equity 42,835 3, ,000 36,000 18,000 65,525 1,400 9,000 2,350 1,000 1, ,070 30,000 19,455 49,455 65,525 P5.5A(p.5)

44 PROBLEM 5.5A SILVER LINING, INC. (continued) c. SILVER LINING, INC. General Journal December 31, 2011 (1) Dec. 31 Consulting Services Revenue 64,000 Income Summary 64,000 To close revenue earned. (2) 31 Income Summary 51,545 Office Supply Expense 700 Depreciation Expense: Office Equipment 9,000 Rent Expense 3,825 Insurance Expense 1,100 Salaries Expense 29,000 Interest Expense 420 Income Taxes Expense 7,500 To close all expense accounts. (3) 31 Income Summary 12,455 Retained Earnings 12,455 To transfer net income earned in 2011 to the Retained Earnings account (64,000-51,545 = 12,455 ). (4) 31 Retained Earnings 1,000 Dividends 1,000 To close dividends declared in 2011 to Retained Earnings. P5.5A(p.6)

### Chapter 4: Adjusting the accounts and preparing Financial statements. 4.1 Measurement of Profit Income Expense = profit

Chapter 4: Adjusting the accounts and preparing Financial statements 4.1 Measurement of Profit Income Expense = profit Cash basis Income is recorded wen cash is received Expenses are recorded when cash

### Review of the Accounting Process THE BASIC MODEL

THE BASIC MODEL The accounting information system is designed to collect and organize data into information that is useful for stakeholders. The Accounting Equation The basic accounting equation is what

### CHAPTER 2 REVIEW OF THE ACCOUNTING PROCESS. Lecture Outline

CHAPTER 2 REVIEW OF THE ACCOUNTING PROCESS Overview Chapter 1 explained that the primary means of conveying financial information to investors, creditors, and other external users is through financial

### CHAPTER 4 THE ACCOUNTING CYCLE: ACCRUALS AND DEFERRALS

CHAPTER 4 THE ACCOUNTING CYCLE: ACCRUALS AND DEFERRALS OVERVIEW OF BRIEF EXERCISES, EXERCISES, PROBLEMS, AND CRITICAL THINKING CASES Brief Exercises B. Ex. 4.1 B. Ex. 4.2 B. Ex. 4.3 B. Ex. 4.4 Topic Deferred

### Supplement to CHAPTER 3 CLOSING ENTRIES AND THE WORK SHEET

Supplement to CHAPTER 3 CLOSING ENTRIES AND THE WORK SHEET Answers to Review Questions 1. No, the work sheet cannot be used as a substitute for the financial statements. It is a tool used in preparing

### Completing the Accounting Cycle

C H A P T E R 4 Completing the Accounting Cycle Financial Accounting 14e Warren Reeve Duchac human/istock/360/getty Images Flow of Accounting Information (slide 1 of 5) End-of-Period Spreadsheet (Work

### Chapter 4 Adjustments, Financial Statements, and the Quality of Earnings

Chapter 4 Adjustments, Financial Statements, and the Quality of Earnings ANSWERS TO QUESTIONS 1. Adjusting entries are made at the end of the accounting period to record all revenues and expenses that

### Chapter 4. Completing the accounting cycle

1 Chapter 4 Completing the accounting cycle 2 Learning objectives 1. Prepare an accounting worksheet and describe its purpose 2. Prepare a classified balance sheet and explain the major headings 3. Explain

EXERCISES Ex. 3 1 1. Prepaid expense 2. Accrued revenue 3. Unearned revenue 4. Accrued expense 5. Unearned revenue 6. Prepaid expense 7. Accrued expense 8. Accrued expense Ex. 3 2 Account Accounts Receivable...

### Exam 1 chapters 1-4 Needles 10ed

Exam 1 chapters 1-4 Needles 10ed Multiple Choice Identify the choice that best completes the statement or answers the question. 1. Which of the following is the most appropriate definition of accounting?

### Accumulated Depreciation Equipment

Chapter 4 Completing the Accounting Cycle > DO IT! Worksheet Balance sheet: Extend assets to debit column. Extend liabilities to credit column. Extend contra assets to credit column. Extend drawings account

### STATEMENT OF CASH FLOWS AND WORKING CAPITAL ANALYSIS

C H A P T E R 1 0 STATEMENT OF CASH FLOWS AND WORKING CAPITAL ANALYSIS I N T R O D U C T I O N Historically, profit-oriented businesses have used the accrual basis of accounting in which the income statement,

### HOFFMAN CORPORATION Balance Sheet (partial) December 31, 2014

1 Baxter Hoffman recently received the following information related to Hoffman Corporation s December 31, 2014, balance sheet. Prepaid insurance \$ 2,300 Inventory \$3,400 Cash 800 Accumulated depreciation

### CHAPTER 3 THE ACCOUNTING CYCLE: CAPTURING ECONOMIC EVENTS

CHAPTER 3 THE ACCOUNTING CYCLE: CAPTURING ECONOMIC EVENTS OVERVIEW OF BRIEF EXERCISES, EXERCISES, PROBLEMS, AND CRITICAL THINKING CASES Brief Exercises B. Ex. 3.1 B. Ex. 3.2 B. Ex. 3.3 B. Ex. 3.4 Topic

### 1. If the assets owned by a business total \$100,000 and liabilities total \$70,000, stockholders' equity totals \$30,000.

Rallis Page 1 Name: _ Date: 1. If the assets owned by a business total \$100,000 and liabilities total \$70,000, stockholders' equity totals \$30,000. A) True B) False 2. If total liabilities decreased by

### Accounting Cycle. Matching Principle

CHAPTER 3 Accounting Cycle Analyze and record the transactions Post the transactions and prepare trial balance Adjust the accounts and prepare trial balance Prepare the financial statements Close the accounts

### The worksheet for Hancock Company shows the following in the financial statement

Chapter 4 Do it! Susan Elbe is preparing a worksheet. Explain to Susan how she should extend the following adjusted trial balance accounts to the financial statement columns of the worksheet. Cash Accumulated

### CHAPTER 3: PREPARING FINANCIAL STATEMENTS

CHAPTER 3: PREPARING FINANCIAL STATEMENTS I. TIMING AND REPORTING A. The Accounting Period Time period assumption an organization s activities can be divided into specific time periods. Examples: a month,

### Dr. M. D. Chase BA 201 Examination 1J

Dr. M. D. Chase BA 201 Examination 1J Instructions: 1. Place your Name, Code Number of the Examination and the Examination Number on your Scantron form. Failure to follow these instructions will result

### Chapter 13 Financial Statements and Closing Procedures

Chapter 13 - Financial Statements and Closing Procedures Chapter 13 Financial Statements and Closing Procedures TEACHING OBJECTIVES 13-1) Prepare a classified income statement from the worksheet. 13-2)

### Study Guide - Final Exam Accounting I

Study Guide - Final Exam Accounting I True/False Indicate whether the sentence or statement is true or false. 1. Entries in a sales journal affect account balances in both the accounts receivable ledger

### CHAPTER 3 THE ADJUSTING PROCESS

1. a. Under cash-basis accounting, revenues are reported in the period in which cash is received and expenses are reported in the period in which cash is paid. b. Under accrual-basis accounting, revenues

### Chapter 6 Statement of Cash Flows

Chapter 6 Statement of Cash Flows The Statement of Cash Flows describes the cash inflows and outflows for the firm based upon three categories of activities. Operating Activities: Generally include transactions

### Module 3: Adjusting the accounts, preparing the statements, and completing the accounting cycle

Page 1 of 27 Module 3: Adjusting the accounts, preparing the statements, and completing the accounting cycle Overview In Module 2 you studied the fundamental steps in recording accounting information by

### Accrual vs Deferral Accrual vs Cash Basis

1 - Accrual vs Deferral Accrual vs Cash Basis - understanding debits and credits a transaction either increases or decreases the balance of accounts. increases and decreases in accounts are based on the

### Financial Statements Tutorial

Financial Statement Review: Financial Statements Tutorial There are four major financial statements used to communicate information to external users (creditors, investors, suppliers, etc.) - 1. Balance

### CHAPTER 3. The Accounting Information System. 3. Trial balance. 6, 10 2, 3, 4 1, 2, Adjusting entries. 8, 11, 13, 14 3, 4, 5, 6, 7, 8, 9, 10

CHAPTER 3 The Accounting Information System ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC) Topics Questions Brief Exercises Exercises Problems 1. Transaction identification. 1, 2, 3, 5, 6, 7, 8 1, 2 1, 2,

### PROFESSOR S NAME ACC 255 FALL 2011 COVER SHEET FOR COMPREHENSIVE PROBLEM 2 (CHAPTERS 2, 5-8)

COMPREHENSIVE PROBLEM 2 (CHAPTERS 2, 5-8) Page 137 NAME ANSWER KEY PROFESSOR S NAME SECTION SCORE ACC 255 FALL 2011 COVER SHEET FOR COMPREHENSIVE PROBLEM 2 (CHAPTERS 2, 5-8) INSTRUCTIONS: COMPLETE ALL

### In the event of a tie, the score on the last ten questions will be used as a tie-breaker.

NEW YORK STATE ASSOCIATION FUTURE BUSINESS LEADERS OF AMERICA SPRING DISTRICT MEETING ACCOUNTING II 2010 TEST DIRECTIONS 1. Complete the information requested on the answer sheet. PRINT your name on the

### Statement of Cash Flows. Study Objectives

Statement of Cash Flows Study Objectives Indicate the primary purpose of the statement of cash flows. Distinguish among operating, investing, and financing activities. Explain the impact of the product

### ACC Financial Accounting Review for Test 1 (includes chapters 1, 2 and 3)

ACC 201 - Financial Accounting Review for Test 1 (includes chapters 1, 2 and 3) From the following list of questions, I will pick 27 multiple choice questions(each worth 1.5 points=40.5points) and one

### Accounting 303 Exam 1, Chapters 1 3 & 5 Fall 2011 Section Row

1 Accounting 303 Name Exam 1, Chapters 1 3 & 5 Fall 2011 Section Row I. Multiple Choice Questions. (2 points each, 52 points in total) Read each question carefully and indicate your answer by circling

### CHAPTER 4. Completing the Accounting Cycle ASSIGNMENT CLASSIFICATION TABLE. Brief. A Problems. B Problems 1, 2, 3 1, 2, 3, 5, 6, 17 1B, 2B, 3B, 4B, 5B

CHAPTER 4 Completing the Accounting Cycle ASSIGNMENT CLASSIFICATION TABLE Study Objectives Questions Brief Exercises Exercises A Problems B Problems *1. Prepare a worksheet. 1, 2, 3, 4, 5 1, 2, 3 1, 2,

### 13 Financial Statements and Closing Procedures

13-1 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

### CHAPTER 4. Adjusting the accounts and preparing financial statements CONTENTS

CHAPTER 4 Adjusting the accounts and preparing financial statements CONTENTS Demonstration problem 4.1 Adjusting entries and corrections 4.2 Adjusting centries and effect on financial statements 4.3 Adjusting

### Basic Accounting Principles

Basic Accounting Principles Basic Accounting Model The basic accounting model represents the relationship between assets (what the company owns), liabilities (what the company owes), and owner s equity

### CASH FLOW STATEMENT (AND FINANCIAL STATEMENT)

CASH FLOW STATEMENT (AND FINANCIAL STATEMENT) - At the most fundamental level, firms do two different things: (i) They generate cash (ii) They spend it. Cash is generated by selling a product, an asset

### Accounting Self Study Guide for Staff of Micro Finance Institutions

Accounting Self Study Guide for Staff of Micro Finance Institutions LESSON 5 Summarizing Changes in Financial Position OBJECTIVES The purpose of this lesson is to show how to summarize the transactions

### Gold Run Snowmobile. Adjusting Entries and Closing Entries For The Quarter Ended December 31. Final Project Evaluation. 5 th Edition.

Gold Run Snowmobile 5 th Edition Adjusting Entries and Closing Entries For The Quarter Ended December 31 and the Final Project Evaluation Page 1 ADJUSTING ENTRIES FOR THE QUARTER Using a copy of the December

### ACCT1115. Review Package - Midterm SOLUTION Fall 2013

ACCT1115 Review Package - Midterm SOLUTION Fall 2013 Part I Multiple Choice 1) How should you record the purchase of an expensive automobile? a) Decrease cash, increase assets b) Decrease cash, increase

### CHAPTER 3. Understanding the Accounting Information System. 3. Trial balance. 6, 10 3, 4, 5 1, 2, Closing , 15, 16 1, 4, 8, 9, 11

CHAPTER 3 Understanding the Accounting Information System ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC) Topics Questions Brief Exercises Exercises Problems 1. Transaction identification. 1, 2, 3, 5, 6, 7,

Advanced Accounting Chapter 4: Financial Reporting for a Departmentalized Business Financial statements are used to summarize financial info and then are used to evaluate the financial position and progress

### MIDTERM EXAMINATION. Afaaq_tariq@yahoo.com. Fall 2009

MIDTERM EXAMINATION Afaaq_tariq@yahoo.com Fall 2009 FIN621- Financial Statement Analysis Asslam O Alikum FIN621- Financial Statement Analysis (Session 3) solved by Afaaq n Shani Bhai with reference n numerical

### CHAPTER 4 COMPLETING THE ACCOUNTING CYCLE SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM S TAXONOMY. True-False Statements

CHAPTER 4 COMPLETING THE ACCOUNTING CYCLE SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM S TAXONOMY Item SO BT Item SO BT Item SO BT Item SO BT Item SO BT True-False Statements 1. 1 K 9. 2 K 17. 4

### GBA 521 Midterm Review Dr. Markelevich

GBA 521 Midterm Review Dr. Markelevich Multiple Choice (3 points for each question) Identify the letter of the choice that best completes the statement or answers the question. Wynn Corp. Wynn Corp. reported

### SOLUTIONS. Learning Goal 16

Learning Goal 16: Prepare Closing Entries S1 Learning Goal 16 Multiple Choice 1. d 2. a 3. b 4. d Because drawing is closed directly into the capital account, not into income summary. 5. c 6. b This a

### (a) Prepaid Insurance to recognize insurance expired during the period.

BRIEF EXERCISE 4-1 (a) (b) (c) (d) (e) (f) Cash \$ 100 0 0 +800 2,500 0 Net Income \$0 20 +1,300 0 0 600 BRIEF EXERCISE 4-2 (a) Prepaid Insurance to recognize insurance expired during the period. (b) Depreciation

### Learning Objectives: Quick answer key: Question # Multiple Choice True/False. 14.1 Describe the important of accounting and financial information.

0 Learning Objectives: 14.1 Describe the important of accounting and financial information. 14.2 Differentiate between managerial and financial accounting. 14.3 Identify the six steps of the accounting

### PART 1. BASIC CONCEPTS AND ACCOUNTING MODEL

CHAPTER 1 PART 1. BASIC CONCEPTS AND ACCOUNTING MODEL OBJECTIVES The objectives of this part are: To introduce a definition of accounting, the need for accounting information, and the various accounting

### Accounting Skills Assessment Practice Exam Page 1 of 10

NAU ACCOUNTING SKILLS ASSESSMENT PRACTICE EXAM & KEY 1. A company received cash and issued common stock. What was the effect on the accounting equation? Assets Liabilities Stockholders Equity A. + NE +

### Chapter 5 Accounting for Merchandising Operations

Chapter 5 Accounting for Merchandising Operations Purchase Transactions Purchaser records goods at cost. When goods are returned, purchaser reduces Inventory. On September 5, De La Hoya Company buys merchandise

### TRANSACTIONS ANALYSIS EXAMPLE. Maxwell Partners Medical Diagnostic Services report the following information for 2011, their first year of operations:

TRANSACTIONS ANALYSIS EXAMPLE Maxwell Partners Medical Diagnostic Services report the following information for 2011, their first year of operations: 1. Billings to clients for services provided: \$350,000

### SOLUTIONS TO BRIEF EXERCISES

SOLUTIONS TO BRIEF EXERCISES B. Ex. 2.1 Walters Company's assets (machinery) will increase by \$20,000. The company's liabilities will also increase by \$20,000 to include the new obligation the company

### SOLUTIONS TO EXERCISES SET B

SOLUTIONS TO EXERCISES SET B EXERCISE 4-1B GREEN COMPANY Worksheet For the Month Ended June 30, 2008 Account Titles Trial Balance Adjustments Adj. Trial Balance Income Statement Balance Sheet Dr. Cr. Dr.

### Accounting 300A-10A The Operating Cycle: Worksheet/Closing Entries Page 1

Accounting 3A-1A The Operating Cycle: Worksheet/Closing Entries Page 1 THE WORKSHEET and CLOSING ENTRIES I. Review of Key Concepts and Terms: A. The purpose of the worksheet 1. To show that the accounts

### Vol. 1, Chapter 3 - Accounting Adjustments

Vol. 1, Chapter 3 - Accounting Adjustments Problem 1 1. (\$20,000 2,000) 48 = \$375 per month 2. Jan. 31 Depreciation Expense \$375 Accumulated Depreciation Van \$375 To record depreciation expense for January

### CHAPTER 3. The Accounting Information System. 1. Transaction identification. 1, 2, 3, 5 1, 2 1, 2, 3, 4, Trial balance. 6, 10 2, 3, 4 1, 2, 7

CHAPTER 3 The Accounting Information System ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC) Topics Questions Brief Exercises Exercises Problems 1. Transaction identification. 1, 2, 3, 5 1, 2 1, 2, 3, 4, 17

### Chapter 3 Adjusting the Accounts

Bennett S. LeBow College of Business Financial Accounting Professor Jane Kaplan Professor Notes Chapter 3 Adjusting the Accounts Measuring Revenues and Expenses o Accrual accounting is a form of accounting

### CHAE Review. Capital Leases & Forms of Business

CHAE Review Financial Statements, Capital Leases & Forms of Business This is a complete review of the two volume text book, Certified Hospitality Accountant Executive Study Guide, as published by The Educational

### Problem Solutions: Topics 1 and 2 ACCT Evaluating Financial Performance Fall 2015

Problem Solutions: Topics 1 and 2 ACCT 60601 Evaluating Financial Performance Fall 2015 Note: All problems are organized by Topic. Each problem is numbered with the topic number first followed by a dash

### Financial Reporting and Analysis Chapter 2 Solutions Accrual Accounting and Income Determination Exercises

Financial Reporting and Analysis Chapter 2 Solutions Accrual Accounting and Income Determination Exercises Exercises E2-1. Determining accrual and cash basis revenue (AICPA adapted) Since the subscription

### Accounting for Accruals and Deferrals

CHAPTER 2 Accounting for Accruals and Deferrals LEARNING OBJECTIVES After you have mastered the material in this chapter, you will be able to: SECTION 1: SHOW HOW ACCRUALS AFFECT FINANCIAL STATEMENTS LO

### COMPLETION OF THE ACCOUNTING CYCLE - Closing Entries -

COMPLETION OF THE ACCOUNTING CYCLE - Closing Entries - Worksheet Overview Trial Balance Adjustments Adjusted Trial Balance Income Statement Balance Sheet Account Titles Debit Credit Debit Credit Debit

### Accounting 500 4A Balance Sheet Page 1

Accounting 500 4A Balance Sheet Page 1 I. PURPOSE A. The Balance Sheet shows the financial position of the company at a specific point in time (a date) 1. This differs from the Income Statement which measures

### The Statement of Cash Flows

CHAPTER The Statement of Cash Flows OBJECTIVES After careful study of this chapter, you will be able to: 1. Define operating, investing, and financing activities. 2. Know the categories of inflows and

### Financial Statements for a Corporation

CHAPTER 19 Financial Statements for a Corporation BEFORE YOU READ 1. 2. 3. 4. 5. 6. What You ll Learn Explain how to record ownership of a corporation. Explain the relationship between the work sheet and

### CHAPTER 1 INTRODUCTION TO ACCOUNTING AND BUSINESS

INTRODUCTION TO ACCOUNTING AND BUSINESS 1. Some users of accounting information include managers, employees, investors, creditors, customers, and the government. 2. The role of accounting is to provide

### Accounting II Second Semester Final

Name: Class: Date: Accounting II Second Semester Final Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. 1. Profit is the difference between:

### AAA PUBLIC ADJUSTING GROUP, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [ X] QUARTERLY REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended

### Accounting Basics. Prepared for First Year MBA

Accounting Basics Prepared for First Year MBA Overview S No Particulars 01 Introduction to Accounting 02 Accounting Equation 03 Types of Transactions 04 Purchase and Sales 05 Types of Accounts 06 Golden

### Closing the Books Section 7 Accounting 11

Closing the Books At the end of a fiscal year once all the transactions for the entity have been recorded, the revenue and expense accounts must be closed out to a zero balance. These accounts have been

### CHAPTER 14 THE STATEMENT OF CASH FLOWS

E14 1 CHAPTER 14 THE STATEMENT OF CASH FLOWS 1. Investing activity 2. Financing activity 3. Operating activity 4. Financing activity 5. Investing activity 6. Investing activity (for the cash paid for the

### CHAPTER 14: THE ROLE OF ACCOUNTANTS AND ACCOUNTING INFORMATION

CHAPTER 14: THE ROLE OF ACCOUNTANTS AND ACCOUNTING INFORMATION I. What Is Accounting and Who Uses Accounting Information? Accounting is a comprehensive system for collecting, analyzing, and communicating

### Financial Statements for Manufacturing Businesses

Management Accounting 31 Financial Statements for Manufacturing Businesses Importance of Financial Statements Accounting plays a critical role in decision-making. Accounting provides the financial framework

### The Accounting Cycle Capturing Economic Events

CHAPTER 3 The Accounting Cycle Capturing Economic Events AFTER STUDYING THIS CHAPTER, YOU SHOULD BE ABLE TO: Learning Objectives LO3-1 LO3-2 LO3-3 LO3-4 LO3-5 LO3-6 LO3-7 LO3-8 LO3-9 LO3-10 Identify the

### Accrual Accounting and the Financial Statements

Accrual Accounting and the Financial Statements 3 LEARNING OBJECTIVES SPOTLIGHT Le Château has been selling fashion apparel, footwear, and accessories in Canada for over 50 years. What started as a single,

### BAT 4M: Chapter 3 ANSWERS TO QUESTIONS

BAT 4M: Chapter 3 ANSWERS TO QUESTIONS 01. (a) Under the time period assumption, an accountant is required to determine the relevance of each business transaction to specific accounting periods, and its

### Understanding Basic Financial Statements

Understanding Basic Financial Statements During the accounting cycle, the accounting system is used to track, organize and record the financial transactions of an organization. At the close of each period,

### Accounting Norms and Principles January 7, 2003

1 Accounting Norms and Principles January 7, 2003 The purpose of an accounting system is to provide credit union management with complete and accurate financial information that can be used to operate

### CHAPTER 23. Statement of Cash Flows 1, 2, 7, 8, 12 3, 4, 5, 6, 16, 17, 19 9, 20 4, 5, 9, 10, 11 10, 13, 15, 16. 7. Worksheet adjustments.

CHAPTER 23 Statement of Cash Flows ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC) Topics Questions Brief Exercises Exercises Problems Concepts for Analysis 1. Format, objectives purpose, and source of statement.

### Chapter 21 The Statement of Cash Flows Revisited

Chapter 21 The Statement of Cash Flows Revisited AACSB assurance of learning standards in accounting and business education require documentation of outcomes assessment. Although schools, departments,

### Most of us have had to file a personal tax return. At

C H A P T E R Completing the Accounting Cycle AP Photo/Gregory Bull E L E C T R O N I C A R T S I N C. Most of us have had to file a personal tax return. At the beginning of the year, you estimate your

### CHAPTER 3 Solutions MEASURING BUSINESS INCOME

CHAPTER 3 Solutions MEASURING BUSINESS INCOME Chapter 3, SE 1. 1. 2. 3. 4. c b d a Chapter 3, SE 2. Dec. 31 Insurance Expense 800 Prepaid Insurance To record insurance expired during the year \$460 + \$1,040

### Statement of Cash Flow

Management Accounting 337 Statement of Cash Flow Cash is obviously an important asset to all, both individually and in business. A shortage or lack of cash may mean an inability to purchase needed inventory

### FINANCIAL ACCOUNTING. Robert Libby Patricia A. Libby Daniel G. Short. Irwin/McGraw-Hill

FINANCIAL ACCOUNTING Robert Libby Patricia A. Libby Daniel G. Short Chapter 1 Financial Statements and Business Decisions The Objectives of Financial Accounting Financial statements are the primary means

### SOLUTIONS. Learning Goal 30

S1 Learning Goal 30 Multiple Choice 1. c A corporation wants to reissue treasury stock at a higher price than it paid. In this way, a greater amount of capital can be obtained than was returned to the

### UNIVERSITY OF WATERLOO School of Accounting and Finance

UNIVERSITY OF WATERLOO School of Accounting and Finance AFM 101 Professor Duane Kennedy Mid-Term Examination Fall 2008 Date and Time: October 16, 2008, 7:15 8:45pm Pages: 16, including cover Name: Student

### Objective Evidence. Unit of Measurement. Accounting Period Cycle. Business Entity. Going Concern. Adequate Disclosure. Matching Expenses with Revenue

Accounting Concept: A source document is prepared for each transaction Objective Evidence Accounting Concept: Business transactions are stated in numbers that have common values; that is, using a common

### Statement of Cash Flows

PREPARING THE STATEMENT OF CASH FLOWS: THE INDIRECT METHOD OF REPORTING CASH FLOWS FROM OPERATING ACTIVITIES The work sheet method described in the text book is not the recommended approach. We will provide

### PREPARING FINAL ACCOUNTS. part

15_1312MH_CH09 27/1/05 8:38 am Page 87 PREPARING part 3 FINAL ACCOUNTS 9 The final accounts of sole traders 10 Accounting principles, concepts and policies 11 Depreciation and fixed assets 12 Bad debts

### Most economic transactions involve two unrelated entities, although

139-210.ch04rev.qxd 12/2/03 2:57 PM Page 139 CHAPTER4 INTERCOMPANY TRANSACTIONS LEARNING OBJECTIVES After reading this chapter, you should be able to: Understand the different types of intercompany transactions

### TOPIC LEARNING OBJECTIVE

Topic Mapping 1 Transaction Analysis Understand the effect of various types of transactions on the accounting equation, accounting journal and accounting ledger. Concepts and Skills Accounting Equation

### Reporting and Analyzing Cash Flows. Learning Objectives coverage by question 34, 35, 36, 37, 38, 39, 40, 41, 42, 43

Chapter 4 Reporting and Analyzing Cash Flows Learning Objectives coverage by question Mini-exercises Exercises Problems Cases LO1 Explain the purpose of the statement of cash flows and how it complements

Understanding Financial Statements: What do they say about your business? This workbook is not designed to be your only guide to understanding financial statements. A much wider range of resources is available

### EXERCISES. The cash from operating activities detail is provided as follows for class discussion:

EXERCISES Ex. 14 1 There were net additions, such as depreciation and amortization of intangible assets of \$389 million, to the net loss reported on the income statement to convert the net loss from the