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Unformatted text preview: Module 3: Module 3: Accounting Adjustments and Constructing Financial Statements The Accounting Cycle The Accounting Cycle TAccounts and Journal Entries TAccounts and Journal Entries Capital Investment Capital Investment Asset (Inventory) Transaction Asset (Inventory) Transaction Revenue and Expense Recognition Revenue and Expense Recognition Revenue Recognition Principle: Revenue should be recognized when: Revenues are earned, and Criteria is met when the company has done whatever it is required to do (provided the good or service) Criteria is met when the seller has either received cash or will receive cash at some point in the future Revenues are realized or realizable Matching Principle Cost incurred to generate revenues should be recognized in the same period as the revenue (matching of costs and benefits). Cash Dividends Cash Dividends • All transactions between the company and its shareholders are considered financing transactions. This includes payment of dividends, the issuance of stock, and any subsequent stock repurchase. • Financing transactions affect only the balance sheet; they do not affect the income statement. • Dividends are not an expense, they do not reduce net income • Remember: Ending R/E = Beginning R/E +NI Dividends Adjusting Accounts Adjusting Accounts Types of Adjustments Types of Adjustments Cash received or paid before recognition of revenue or expense: Cash received or paid after recognition of revenue or expense
Accrued expenses Accrued revenues Prepaid expenses Unearned revenues Prepaid Expenses (Assets) Prepaid Expenses (Assets) Assume that Apple pays $200 to purchase time on MTV for future iPod ads. Apple’s cash account decreases by $200, and an asset called prepaid advertising increases by the same amount. Unearned Revenues (Liabilities) Unearned Revenues (Liabilities) Assume that Apple receives $400 cash from a customer as advance payment on a multiunit iPod sale to be delivered next month. Recognition of Unearned Revenue Recognition of Unearned Revenue as Earned Revenue Assume that Apple delivers the iPods a month later (but still within the fiscal quarter). Accrued Expenses (Liabilities) Accrued Expenses (Liabilities) Assume that Apple’s sales staff earns $100 of sales commissions this period that will not be paid until next period. Accrued Revenues (Assets) Accrued Revenues (Assets) Assume that Apple delivers iPods to a customer in Germany who will pay next quarter. The sales price for those units is $500 and the cost is $400. Apple’s transactions thus far …
Unadjusted Trial Balance (not 100% Accrual Basis) Adjustin g Entries Adjusted Trial Balance (100% Accrual Basis) Create Financial Statement s I/S B/S SCF SE Trial Balance Trial Balance The trial balance is a listing of all accounts and their balances at a point in time. Its purpose is to prove the mathematical equality of debits and credits, provide a useful tool to uncover any accounting errors, and help prepare the financial statements. Adjusted Trial Balance For Adjusted Trial Balance For Apple Preparation of the Preparation of the Financial Statements Income Statement Preparation of the Preparation of the Financial Statements Retained Earnings Computation Preparation of the Preparation of the Financial Statements Balance Sheet Preparation of the Preparation of the Financial Statements Statement of Stockholders’ Equity Preparation of the Preparation of the Financial Statements Statement of Cash Flows (from cash column) Statement of Cash Flows – Statement of Cash Flows – Indirect Method Operating cash flows: Cash Generated (Used) from Cash Generated (Used) from changes in Balance Sheet Accounts ASSET A/R Beg balance xx Accrual Basis # Credit Sales xxx Ending balance xx xxx Cash Collections Cash Basis # Cash Generated (Used) from Cash Generated (Used) from changes in Balance Sheet Accounts LIABLITY A/P Cash Basis # Cash Payments xxx xx Beg balance xxx Purchases on Credit xx Ending balance Accrual Basis # Changes to Working Capital Accounts Changes to Working Capital Accounts Formal Presentation of Apple’s SCF Formal Presentation of Apple’s SCF Closing Process Closing Process The closing process refers to the ‘zeroing out’ of revenue and expense accounts (the temporary accounts) by transferring their ending balances to retained earnings. Balance sheet accounts carry over from period to period and are called permanent accounts.) The result is that all income statement accounts begin the next period with zero balances. Closing Process Journal Entries Closing Process Journal Entries ...
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This note was uploaded on 11/08/2010 for the course ACC 5056 taught by Professor J.goslinga during the Spring '10 term at University of Florida.
- Spring '10