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Soln3-07 - PROBLEM SOLUTIONS 3-1 The Accounting Cycle 1...

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Problem Solutions – Chapter 3 69 PROBLEM SOLUTIONS 3-1 The Accounting Cycle 1. Step 1: Analyze and record journal entries Step 2: Post the journal entries to T-accounts Step 3: Prepare the (unadjusted) trial balance Step 4: Prepare and post the adjusting entries Step 5: Prepare the adjusted trial balance Step 6: Prepare the financial statements Step 7: Close the income statement accounts and dividends (the temporary accounts) to retained earnings 2. Step 4 uses the same process as Steps 1 & 2. 3. An unadjusted trial balance is necessary in order to prepare the adjusting entries. 4. Yes, the correct order is: 1) Income Statement; 2) Statement of Retained Earnings; 3) Balance Sheet; and 4) Statement of Cash Flows. The net income for the period from the Income statement is required in order to update the balance in Retained Earnings, and the Retained Earnings balance is needed for (the proof of) the Balance Sheet totals. Information from both the balance sheet and income statement are used to prepare the Statement of Cash Flows. 5. The final balances in all temporary accounts (essentially the revenue, expense, and dividends accounts) must be driven to zero so that the next period’s net income and dividends may be measured. Driving their balances to zero effectively closes their consequences to the Retained Earnings account, which is the cumulative effect of income and dividends for all prior periods. If these accounts were not closed it would not be feasible to measure periodic income and dividends.

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I NTRODUCTION TO F INANCIAL R EPORTING AND A NALYSIS 4 TH E DITION 70 3-2 Preparing a Trial Balance You can solve for the amount of Service Revenue by taking an algebraic sum of the numbers in the ledger (debits = + and credits = , for example), or you can just prepare the trial balance and solve for the missing credit amount. Superior Marketing, Inc. Trial Balance December 31, 2007 Account Debit Credit Cash \$ 30,400 Accounts Receivable 40,000 Supplies 54,000 Building and Equipment 265,000 Accounts Payable 31,000 Salaries Payable 11,000 Taxes Payable 8,000 Note Payable (noncurrent) 80,000 Contributed Capital 75,000 Retained Earnings (12/31/06) 145,000 Service Revenue 261,900 Advertising and Promotion Expense 23,300 General & Administrative Expense 147,000 Interest Expense 14,600 Income Tax Expense 37,600 Trial Balance totals \$ 611,900 \$ 611,900