Explain 1. the purpose of the trial balance
- A trial balance is a list of all account w/ their debit or credit balances indicated in the
appropriate column to provide a check on the equality of the debits and credits. The trial
balance may be:
- Unadjusted before adjustments are made
- Adjusted after adjustments are made
- Post-closing after revenues and expenses are closed to Retained Earnings
2. Explain the purpose of adjustments and analyze the adjustments necessary at the end
of the period to update balance sheet and income statement accounts
- Adjusting entries are necessary at the end of the accounting period to measure income
properly, correct errors, and provide for adequate valuation of balance sheet accounts.
Four types:
- Deferred revenues previously recorded liabilities created when cash was received in
advance that must be adjusted for the amount of revenue earned during the period
- Accrued revenues revenues that were earned during the period but havent yet been
recorded (cash will be received in the future)
- Deferred expenses previously recorded assets (Prepaid Rent, Supplies, and
Equipment) that must be adjusted for the amount of expense incurred during the period
- Accrued expenses expenses that were incurred during the period but havent yet been
recorded (cash will be paid in the future)
The analysis involves:
Step 1: Determining if revenue was earned or an expense incurred. Record an
increase in the revenue or expense account
Step 2: Determining whether cash was received or paid in the past or will be
received or paid in the future. If in the past, the existing asset or liability is
overstated and needs to be reduced. If in the future, the related receivable or
payable account needs to be increased.
Step 3: Compute the amount of revenue earned or expense in incurred the period
- Recording adjusting entries has no effect on the Cash account
3. Present an income statement w/ earnings per share, statement of SE equity, balance
sheet, and statement of cash flows.
- Adjusted account balances are used in preparing the following financial statements:
- Income Statement: Revenues Expenses = Net income (including earnings per share,
computed as net income divided by the avg. number of shares of common stock
outstanding during the period)
- Statement of SE: (Beginning Contributed Capital + Stock Issuances Stock
Repurchases) + (Beginning Retained Earnings + Net income Dividends Declared) =
Ending Total SE
- Balance Sheet: Assets = Liabilities + SE
- Statement of Cash Flows: Since adjustments never affect cash, the statement of cash
flows is not changed.
4. Compute and interpret the net profit margin.
- Net profit margin (Net income / Net Sales) measures how much of every dollar of sales
generated during the period is profit. A rising net profit margin signals more efficient
management of sales and expenses.
4. Explain the closing process
- Temporary accounts (revenues, expenses, gains, and losses) are closed to a zero
balance at the end of the accounting period to allow for the accumulation of income items
in the following period and to update Retained Earnings for the periods net income. To
close these accounts, debit each revenue and gain account, credit each expense and loss
account, and record the difference (equal to net income) to Retained Earnings
Key Ratio Net profit margin measures how much of every sales dollar generated
during the period is profit. A high or rising ratio suggests that the company is managing
its sales and expenses efficiently. It is computed as follows:
Net profit margin = Net income / Net Sales