Chapter+4+Slides+with+notes

Chapter+4+Slides+with+notes - Chapter 4 Adjustments,...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Chapter 4 Adjustments, Financial Statements, and the Quality of Earnings ACCT 2010 Fall 2011 Allen Huang Chapter Four Slide 1 Review • Operating cycle • NI = Revenues – Expenses + Gains – Losses Revenues Gains • Structure of income statements • Cash basis accounting vs. accrual basis accounting • Revenue recognition principle • Matching principle • Journal entries for recognizing revenues and expenses Chapter Four Slide 2 Direction of Transaction Effects • For Assets: DR = Left = Increase; CR = Right = Decrease CR Right Decrease • For Liab and SE: CR = Right = Increase; DR = Left = Decrease Chapter Four Slide 3 Double-Entry Bookkeeping Assets + DR Liabilities − CR Normal Balance Shareholders’ Equity − DR − DR + CR Normal Balance + CR Normal Balance Retained Earnings Contributed Capital − DR − DR + CR + CR Normal Balance Normal Balance Expenses + DR Normal Balance Chapter Four − CR Revenues − DR + CR Normal Balance Slide 4 Learning Objectives for Ch 4 1. What is accounting cycle? 2. The purpose of a trial balance. 3. Analyze the adjustments necessary at the end of the period to update balance sheet and income statement accounts. 4. Prepare four financial statements. fo financial statements 5. The closing process. Chapter Four Slide 5 Accounting Cycle During the period: Analyze transactions. Record journal entries. journal entries. Post amounts to general ledger. At the end of the period: Unadjusted trial balance Adjust revenues and expenses. Chapter Four Close revenues, gains, expenses, and losses to Retained Earnings. Prepare financial financial statements. Disseminate statements to users. Slide 6 The Unadjusted Trial Balance • A listing of individual accounts, usually in financial statement order. order. • Ending debit or credit balances are listed in two separate columns. • Total debit account balances should = total credit account balances. Trial Balance is NOT a F/S. Chapter Four Slide 7 Matrix, Inc. Unadjusted Trial Balance At December 31, 2009 Description Debit Cash $ Accounts receivable Accounts receivable Inventory Equipment Accumulated depreciation - equip. Furniture and fixtures Accumulated depreciation - furn. & fix. Accounts payable Notes payable Note that Common stock total debits = Retained earnings, 12/31/08 total credits Sales revenue Cost of goods sold Operating expenses Totals Chapter Four $ Credit 3,900 4,985 3,300 4,800 $ 1,440 6,600 2,200 2,985 4,000 10,000 1,760 35,000 27,500 6,300 57,385 $ 57,385 Slide 8 The Unadjusted Trial Balance If total debits do not equal total credits on the trial balance, errors have occurred . . . in preparing balanced journal entries. in posting the correct dollar effects of a transaction. of transaction in copying ending balances from the ledger to the trial balance. Chapter Four Slide 9 Prepare a trial balance Mr. Brown’s Dayspa for Horses: Account Balances 31-Dec-07 Cash Accounts Receivable Supplies Prepaid Rent Prepaid Insurance Notes Receivable (due Mar, 08) Equipment Accounts Payable Unearned Service Revenue Notes Payable (due May, 09) Common Stock Service Revenue Salary Expense Rent Expense Income Tax Expense 33,000 18,500 5,500 24,000 12,000 35,000 250,000 15,500 18,000 100,000 50,000 348,500 125,000 20,000 9,000 Chapter Four Slide 10 Unadjusted Trial Balance Mr. Brown’s Dayspa for Horses: Unadjusted Trial Balance 31-Dec-07 Cash Accounts Receivable Supplies Prepaid Rent Prepaid Insurance Notes Receivable (due Mar, 08) Equipment Accounts Payable Unearned Service Revenue Notes Payable (due May, 09) Capital Stock Service Revenue Salary Expense Rent Expense Income Tax Expense Chapter Four Debit Debit 33,000 18,500 5,500 24,000 12,000 35,000 250,000 Credit Credit 15,500 18,000 100,000 50,000 348,500 125,000 20,000 9,000 532,000 532,000 Slide 11 What to Adjust? Revenues are recorded when earned. Expenses are recorded when incurred. Because transactions occur over time, ADJUSTMENTS are ti ADJUSTMENTS required at the end of each fiscal period to get the revenues and expenses in the “right” period. Chapter Four Slide 12 Types of Adjustments There are four types of adjustments. Revenues 1. Unearned Revenues. Expenses 3. Prepaid Expenses. 2. Accrued Revenues. 4. Accrued Expenses. Chapter Four Slide 13 Three steps to complete the adjustments 1. Determine whether the adjustment is to an existing unearned revenue or prepaid expense or to an unrecorded accrued revenue and expense. 2. Compute the revenue earned and expense incurred up to the end of the accounting period 3. Record the adjusting journal entry. Chapter Four Slide 14 Unearned Revenues End of accounting period. Cash received. Revenues earned. Example includes rent received in includes rent received in advance (an unearned revenue). Chapter Four Slide 15 Unearned Revenues • On December 1, 2009, Tom’s Rentals received a check for $3,000, for the first four months’ rent from a new tenant tenant. The entry on December 1, 2009, to record the receipt of the prepaid rent payment would be . . . GENERAL JOURNAL Date Dec Page Description 1 Cash Unearned Rent Revenue Debit 3,000 1 Credit 3,000 This This is a LIABILITY account Chapter Four Slide 16 Unearned Revenues Received cash for rent < Dec 1 4-month prepayment of rent Dec 31 Year end Jan 31 Feb 28 > Mar 31 We must record the amount of rent EARNED during December. Since the prepayment is for 4 months, we can assume that 1/4 of the rent will be earned each month. Chapter Four Slide 17 Unearned Revenues • The adjustment on December 31, 2009, to reduce the liability and record the revenue earned would be: $3,000 x 1/4 = $750 per month. In effect, our obligation to let them occupy the space for a period of has decreased, because they used the space for 1 month. Chapter Four Slide 18 Unearned Revenues After we post the entry to the T-accounts, the Taccount balances look like this: Unearned Rent Revenue Rent Revenue Dec 1 3,000 Dec 31 750 Bal. 2,250 Bal. Dec 31 750 Chapter Four 750 Slide 19 Accrued Revenue End of accounting period. Revenues earned. Cash received. Example includes interest earned during the period (accrued revenue). Chapter Four Slide 20 Accrued Revenue At December 31st, Matrix, Inc. earned, but has not received, interest on its money market account of $150. The adjustment is made to debit Interest Receivable and credit Interest Revenue. Interest Receivable Interest Revenue Dec 31 150 Dec 31 150 Bal. Bal. 150 150 Chapter Four Slide 21 Prepaid Expenses End of accounting period. Cash paid. Expense incurred. Examples include prepaid rent, advertising, and insurance. Chapter Four Slide 22 Prepaid Expenses • On January 1, 2009, Matrix, Inc. paid $3,600 for a 3-year fire insurance policy. They are paying in advance for a resource they will use over a 3-year period. The The entry on January 1, 2009, to record the prepayment of insurance policy would be… GENERAL JOURNAL Date Jan. Page Description 1 Prepaid Insurance Expense Cash 1 Debit 3,600 Credit 3,600 This This is an ASSET ASSET account Chapter Four Slide 23 Prepaid Expenses Paid cash for insurance < Jan 1, 09 3-year insurance policy Dec 31, 09 Year end Dec 31, 10 Year end > Dec 31, 11 Year end At th At the end of 2009, we determine how much 2009 of the “prepaid expense” has been used up during the period. Since the policy is for 3 years, we can assume that 1/3 of the policy will expire each year. Chapter Four Slide 24 Prepaid Expenses At December 31st, Matrix must recognize the portion of the insurance that has been consumed and becomes the insurance that has been consumed and becomes an expense. $3,600 x 1/3 = $1,200 per year. In effect, the prepaid asset goes down, while the expense goes up. Chapter Four Slide 25 Prepaid Expenses After we post the entry to the T-accounts, the account balances look like this: Prepaid Insurance Expense Jan 1 3,600 Insurance Expense Dec 31 1,200 Dec 31 1,200 Bal. 2,400 Bal. 1,200 Remaining two years of insurance at $1,200 per year. Chapter Four Slide 26 Accrued Expenses End of accounting period. Expense incurred. Expense paid. Examples include accrued rent, accrued interest, and accrued wages. Chapter Four Slide 27 Accrued Expenses As of Dec 27, 2009, Denton, Inc. had already paid $1,900,000 in wages for the year. Denton pays its employees every Friday. Year end Dec 31 2009 falls on Thursday The employees Year-end, Dec 31, 2009, falls on a Thursday. The employees have have earned total wages of $50,000 for Monday through Thursday of the week ending Jan 2, 2010. GENERAL JOURNAL GENERAL JOURNAL Date Description Dec 31 Wages Expense What Should Denton's Wages Payable Entry Be on Dec 31, 2004? Chapter Four Debit 50,000 ? Credit 50,000 ? Slide 28 Accrued Expenses After we post the entry to the T-accounts, the account balances look like this: Wages Expense As of Dec 27 $1,900,000 Dec 31 50,000 Bal. Wages Payable Dec 31 50,000 Bal. 50,000 $1,950,000 $1 Chapter Four Slide 29 Summary – adjusting accruals/deferrals • Unearned revenues (L) – Examples: Unearned ticket revenue, unearned rent revenue, deferred subscription revenue – Adjusting entries at the end of the period: Liability ↓, Revenue ↑ • Prepaid expenses (A) – Examples: all kinds of prepaid expense (rent, insurance, advertising), supplies, buildings, equipment – Adjusting entry at the end of the period : Expense ↑, Asset ↓ • Accrued revenues (A) – Examples: Interest receivable, utility receivable Interest receivable utility receivable – Adjusting entry at the end of the period : Asset ↑, Revenue ↑ • Accrued expenses (L) – Examples: Interest payable, wage payable, taxes payable – Adjusting entry at the end of the period : Expense ↑, Liability ↑ Chapter Four Slide 30 End-of-period adjustment errors • Failure to include items that should be accrued/deferred • Failure to recognize adequate expenses/revenues • End-of-period transactions recorded in the wrong period (cut-off errors) •… Chapter Four Slide 31 Accounting Estimates • Certain circumstances require adjusting entries to record accounting estimates. • Examples include . . . – Depreciation – Bad debts – Income taxes Chapter Four Let’s look at how we handle Depreciation expense. expense. Slide 32 Depreciation The accounting concept of of depreciation involves the systematic and rational allocation of a long-lived asset’s cost to the multiple periods it is used to generate revenue. This is a “cost allocation” concept, not a “valuation” concept. Chapter Four Slide 33 Recording Depreciation The required journal entry requires a debit to Depreciation expense and a credit to an contra-account expense credit to an contra called Accumulated depreciation. GENERAL JOURNAL Page Date Description Dec 31 Depreciation Expense Accumulated Depreciation Debit $$$$ 352 Credit $$$$ As discussed earlier, this is called a Contra-Asset account. Chapter Four Slide 34 Depreciation Let’s say you purchase a car, worth of $200,000 HKD, plan to use it for 10 years. Let’s also assume each year, the depreciation expense is $20,000. After first year, depreciation expense journal entry is: Depreciation Expense (+E, −SE) 20,000 Accumulated Depreciation (+XA, − A) 20,000 On balance sheet after the first year, we have: Equipment, Gross (Car) -Accumulated Depreciation Equipment, Net (Car) 200,000 (20,000) 180,000 Same journal entry as above for depreciation expense in the 2nd year. On balance sheet after the second year, we have: Equipment, Gross (Car) -Accumulated Depreciation Equipment, Net (Car) 200,000 (40,000) 160,000 Chapter Four Slide 35 Depreciation If we had treated the car like a prepaid expense: After first year, depreciation expense journal entry is: Depreciation Expense (+E, −SE) Prepaid Expense (Car) 20,000 (− A) 20,000 On balance sheet after the first year, we have: Prepaid Expense, Equipment (Car) 180,000 On balance sheet after the second year, we have: Prepaid Expense, Equipment (Car) 160,000 Compared that with the actual case: On balance sheet after the second year, we have: Equipment, Gross (Car) -Accumulated Depreciation Equipment, Net (Car) Chapter Four 200,000 (40,000) 160,000 Slide 36 Depreciation - Example At January 31, 2009, Papa John’s trial balance showed Property & equipment of $338,000 (all numbers in thousands and Accumulated depreciation of $83 thousands) and Accumulated depreciation of $83,000. For the period, Papa John’s needs to record an additional $2,500 in depreciation. GENERAL JOURNAL Page Date Description Jan 31 Depreci atti onouxpense John's Wha Sh E ld Papa Sh ' Accumulated 31, 2001? Entry Be on JanDepreciation Debit 2, 500 ? 352 Credit 2,500 ? Chapter Four Slide 37 Depreciation - Example After we post the entry to the T-accounts, the account balances look like this: the account balances look like this: Depreciation Expense Jan 31 2,500 Bal. 2,500 Accumulated Depreciation Jan 1 83,000 Jan 31 2,500 31 Bal. 85,500 Chapter Four Slide 38 Matrix, Inc. Unadjusted Trial Balance At December 31, 2009 Description Debit Credit Cash $ 3,900 Accounts receivable Accounts receivable 4,985 Inventory 3,300 Equipment 4,800 Accumulated depreciation - equip. $ 1,440 Furniture and fixtures 6,600 Accumulated depreciation - furn. & fix. 2,200 Accounts payable 2,985 Notes payable Accumulated depreciation 4,000 Common stock 10,000 is a contra-asset account. 1,760 Retained earnings, 12/31/08 It is directly related to an 35,000 Sales revenue Cost of goods sold asset account27,500has the but Operating expenses 6,300 opposite balance. Totals $ 57,385 $ 57,385 Chapter Four Slide 39 Matrix, Inc. Unadjusted Trial Balance At December 31, 2009 Description Debit Cash $ Accounts receivable Accounts receivable Inventory Equipment Accumulated depreciation - equip. Furniture and fixtures Accumulated depreciation - furn. & fix. Cost - Accumulated depreciation = Accounts payable Notes payable BOOK VALUE. Common stock Retained earnings, 12/31/08 Sales revenue Cost of goods sold Operating expenses Totals Chapter Four $ Credit 3,900 4,985 3,300 4,800 $ 1,440 6,600 2,200 2,985 4,000 10,000 1,760 35,000 27,500 6,300 57,385 $ 57,385 Slide 40 Chapter Four Slide 41 Chapter Four Slide 42 Recording Adjusting Entries 1 • Heald’s Store is completing the accounting process for the year just ended, Dec 31, 2011. The transactions during 2011 have been journalized and posted. The following data with respect to adjusting entries are available: a. Office supplies on hand at Jan 1, 2011, total $350. Office supplies purchased and debited to Office Supplies during the year amounted to $500. The year-end count showed $275 of supplies on hand. b. Wages earned by employees during Dec 2011, unpaid and unrecorded at Dec 31, 2011, amounted to $2,200. c. The basement of the store is rented for $1,600 per month to another merchant Dittman Inc. On Nov 1, 2011, the store collected six months’ rent in the amount of $9,600 in advance from Dittman; it was credited in full to Unearned Rent Revenue when collected. Chapter Four Slide 43 Recording Adjusting Entries 1 d. The remaining basement is rented to Kathy’s Specialty Shop for $480 per month, payable monthly. On Dec 31, 2011, the rent for Nov and Dec had not been collected or recorded. Collection is expected Jan 10, 2012. 10 2012 e. The store used delivery equipment that cost $30,500; $6,100 was the estimated depreciation for 2011. f. On July 1, 2011, a two-year insurance premium amounting to $2,200 was paid in cash and debited in full to Prepaid Insurance. Coverage began on July 1, 2011. g. Heald’s operates a repair shop to meet its own needs. The shop also does repairs for Dittman. At the end of Dec 31, 2011, Dittman had Ditt At th 31 2011 Ditt not paid $800 for completed repairs. This amount has not been recorded as Repair Shop Revenue. Collection is expected during Jan 2012. Chapter Four Slide 44 Recording Adjusting Entries 1 a. Office supplies on hand at Jan 1, 2011, total $350. Office supplies purchased and debited to Office Supplies during the year amounted to $500. The year-end count showed $275 of supplies on hand. Office supplies expense (+E, −SE) supplies expense (+E 575 Office supplies (−A) 575 b. Wages earned by employees during Dec 2011, unpaid and unrecorded at Dec 31, 2011, amounted to $2,200. Wages expense (+E, −SE) 2,200 Wages payable (+L) 2,200 c. The basement of the store is rented for $1,600 per month to another merchant Dittman Inc. On Nov 1, 2011, the store collected six months’ rent in the amount of $9,600 in advance from Dittman; it was credited in full to Unearned Rent Revenue when collected. Unearned rent revenue (−L) 3,200 Rent revenue (+R, +SE) 3,200 Chapter Four Slide 45 Recording Adjusting Entries 1 d. The remaining basement is rented to Kathy’s Specialty Shop for $480 per month, payable monthly. On Dec 31, 2011, the rent for Nov and Dec had not been collected or recorded. Collection is expected Jan 10, 2012. 10 2012 Rent receivable (+A) 960 Rent revenue (+R, +SE) 960 e. The store used delivery equipment that cost $30,500; $6,100 was the estimated depreciation for 2011. Depreciation expense (+E, −SE) 6,100 Accumulated depreciation (+XA, −A) 6,100 f. On July 1, 2011, a two-year insurance premium amounting to $2,200 was paid in cash and debited in full to Prepaid Insurance. Coverage began on July 1, 2011. Insurance expense (+E, −SE) 550 Prepaid insurance (−A) 550 Chapter Four Slide 46 Recording Adjusting Entries 1 g. Heald’s operates a repair shop to meet its own needs. The shop also does repairs for Dittman. At the end of Dec 31, 2011, Dittman had not paid $800 for completed repairs. This amount has not been recorded as Repair Shop Revenue. Collection is Sh expected during Jan 2012. Repair accounts receivable (+A) 800 Repair shop revenue (+R, +SE) 800 Chapter Four Slide 47 Recording Adjusting Entries 2 • Johnson’s Boat Yard, Inc., is completing the accounting process for the year just ended, Nov 30, 2010. The transactions during 2010 have been journalized and posted. The following data with respect to adjusting entries are available: a. Johnson’s winterized (cleaned and covered) three boats for customers at the end of Nov, but did not record the service for $2,100. b. The carter family paid Johnson’s $3,000 on Nov 1, 2010, to store their sailboat for the winter until May 1, 2011. Johnson’s credited the full amount to Unearned Storage Revenue on Nov 1. amount to Unearned Storage Revenue on Nov 1. c. Wages earned by employees during Nov 2010, unpaid and unrecorded at Nov 30, 2010, amounted to $2,800. Chapter Four Slide 48 Recording Adjusting Entries 2 d. On Oct 1, 2010, Johnson’s paid $1,200 to the local newspaper for an advertisement to run every Thursday for 12 weeks. The $1,200 was recorded as Prepaid Advertising. All ads have been run except for three Thursdays in December to complete the 12-week contract. e. Johnson’s used boat-lifting equipment that cost $200,000; $20,000 was the estimated depreciation for 2010. f. Boat repair supplies on hand at Dec 1, 2009, totaled $15,500. Repair supplies purchased and debited to Supplies during the year amounted to $46,000. The year-end count showed $12,400 of the supplies on hand. g. Johnson’s borrowed $150,000 at a 12 percent annual interest rate on Apr 1, 2010, to expand its boat storage facility. The loan requires Johnson’s to pay the interest quarterly until the note is repaid in three years. Johnson’s paid quarterly interest on July 1 and Oct 1. Chapter Four Slide 49 Recording Adjusting Entries 2 a. Johnson’s winterized (cleaned and covered) three boats for customers at the end of Nov, but did not record the service for $2,100. Accounts receivable (+A) 2,100 Service revenue (+R, +SE) 2,100 b. The carter family paid Johnson’s $3,000 on Nov 1, 2010, to store their sailboat for the winter until May 1, 2011. Johnson’s credited the full amount to Unearned Storage Revenue on Nov 1. Unearned storage revenue (−L) 500 Storage revenue (+R, +SE) 500 c. Wages earned by employees during Nov 2010, unpaid and unrecorded at Nov 30, 2010, amounted to $2,800. Wages expense (+E, SE) 2,800 Wages payable (+L) 2,800 Chapter Four Slide 50 Recording Adjusting Entries 2 d. e. f. On Oct 1, 2010, Johnson’s paid $1,200 to the local newspaper for an advertisement to run every Thursday for 12 weeks. The $1,200 was recorded as Prepaid Advertising. All ads have been run except for three Thursdays in December to complete the 12 Thursdays in December to complete the 12-week contract. contract Advertising expense (+E, −SE) 900 Prepaid advertising (−A) 900 Johnson’s used boat-lifting equipment that cost $200,000; $20,000 was the estimated depreciation for 2010. Depreciation expense (+E, −SE) 20,000 Accumulated depreciation (+XA, −A) 20,000 Boat repair supplies on hand at Dec 1, 2009, totaled $15,500. Repair repair supplies on hand at Dec 2009 totaled $15 Repair supplies purchased and debited to Supplies during the year amounted to $46,000. The year-end count showed $12,400 of the supplies on hand. Supplies expense (+E, −SE) 49,100 Supplies (−A) 49,100 Chapter Four Slide 51 Recording Adjusting Entries 2 g. Chapter Four Johnson’s borrowed $150,000 at a 12 percent annual interest rate on Apr 1, 2010, to expand its boat storage facility. The loan requires Johnson’s to pay the interest quarterly until the note is repaid in three years. Johnson paid quarterly interest on July and Oct Johnson’s paid quarterly interest on July 1 and Oct 1. Interest expense (+E, −SE) 3,000 Interest payable (+L) 3,000 Slide 52 Financial Statement Preparation The next step in the accounting cycle is to prepare the financial statements. . . 0. 1. 2. 3. 4. Update the trial balance Income statement, Statement of stockholders’ equity, Balance sheet, and Statement of cash flows. fl Chapter Four Slide 53 Preparing Financial Statements The next step in the accounting cycle is to prepare the financial statements. prepare the financial statements. . . •Income statement, •Statement of stockholders’ equity, •Balance sheet, and sheet and •Statement of cash flows. Chapter Four Slide 54 Financial Statement Relationships Net income increases retained earnings, The The income statement is created first while a net loss will decrease retained by determining the difference earnings. Dividends decrease retained earnings. retained between revenues and expenses. earnings. Chapter Four Slide 55 Papa John's International, Inc. and Subsidiaries Consolidated Statement of Income Month Ended January 31, 2007 (in thousands of dollars) Revenues: Restaurant sales revenue $ Franchise fees revenue Total revenues Costs and expenses: Cost of sales Salaries expense General & administrative expenses Depreciation expense Total costs and expenses Operating income Other revenues and gains (expenses and losses) Investment income Investment income Interest expense Gain on sale of land Income before income taxes Income tax expense Net income $ Earnings per share Chapter Four $ 66,000 4,730 70,730 30,000 16,000 14,100 2,500 62,600 8,130 1,070 (550) 3,000 11,650 3,961 7,689 The income statement contains contains revenues and expenses. Earnings Per Share (EPS) must be reported on the income statement. 0.23 Slide 56 Statement of Stockholders’ Equity Net income appears on the statement of stockholders’ equity as an increase in Retained Earnings. Papa John's International, Inc. and Subsidiaries Consolidated Statement of Stockholders' Equity For the Month Ended January 31, 2007 (in thousands of dollars) Beginning balance St Stock I ssuance Net income Dividends Ending balance Contributed Retained Stockholders' Capital Earnings Equity $ 1,000 $ 147,000 $ 148,000 2,000 2,000 7,689 7,689 (3,000) (3,000) $ 3,000 $ 151,689 $ 154,689 Chapter Four From the Income Statement Slide 57 Balance Sheet - Assets Papa John's International, Inc. & Subsidiaries Consolidated Balance Sheet January 31, 2007 (in thousands of dollars ) Assets Current Assets: Cash Accounts receivable Interest receivable Supplies Prepaid expenses Other current assets Total current assets Long-term investments Property and equipment (net of accumulated depreciation of $191,500) Long-term notes receivable Intangibles Other assets Total assets Chapter Four $ 43,900 20,030 70 22,000 14,500 14,000 114,500 $396,000 $396,000 cost – $191,500 accumulated depreciation is equal to $204,500. 2,000 $ 204,500 15,000 67,000 17,000 420,000 Slide 58 Balance Sheet – Liabilities & Stockholders’ Equity Papa John's International, Inc. & Subsidiaries Consolidated Balance Sheet January 31, 2007 (in t housands of dollars) (in thousands of dollars) Liabilities and stockholders' equity Current liabilities Accounts payable Dividends payable Accrued expenses payable Income taxes payable Total current liabilities Unearned franchise fees Notes pay able Other long-term liabilities Total liabilities Chapter Four Stockholders' equity Contributed capital Retained earnings Total stockholders' equity Total liabilities and stockholders' equity $ 39,000 3,000 76,150 3,961 122,111 6,200 110,000 27,000 265,311 From the Statement of Stockholders’ Equity. 3,000 151,689 154,689 $ 420,000 Slide 59 Statement of Cash Flows This This statement is a categorized list of all transactions of the period that affected the Cash account. The three categories categories are . . . 1. Operating activities, 2. Investing activities, and 3. Financing activities. act Chapter Four Slide 60 Statement of Cash Flows General Model Operating activities (from Chapter 3) Effect on Cash Flows +/– Investing activities (from Chapter 2) +/– Financing activities (from Chapter 2) +/– Total net cash flows for the period + Total Changes in cash + Beginning cash balance = Ending cash balance cash balance Supplemental Disclosure: (1) Interest paid, (2) income taxes paid, and (3) a listing of the nature and amounts of significant noncash transactions. Chapter Four Slide 61 Prepare Financial Statements Seneca Company prepared the following trial balance at the end of its first year of operations ending Dec 31, 2010. To simply the case, the amounts given are in thousands of dollars. Other data not yet recorded at Dec 31, 2010: a. Insurance expired during 2010, $5. b. Depreciation expense for 2010, $7. c. Wages payable, $5. d. Income tax expense, $9. 1. Prepare the adjusting entries for 2010. 2. Complete the trial balance Adjustments and Adjusted Columns. 3. Prepare an income statement, statement of stockholders’ equity, and balance sheet for 2010. Chapter Four Slide 62 Cash Accounts receivable Accounts receivable Prepaid insurance Machinery Accumulated depreciation Accounts payable Wages payable Income taxes payable Contributed capital (4k shares) Retained earnings Revenues (not detailed) Expenses (not detailed) Totals SENECA COMPANY Trial Balance December 31, 2010 (in thousands of dollars) Unadjusted Adjustments Debit Credit Debit Credit 38 9 6 80 Adjusted Debit Credit 9 76 4 84 32 169 169 Chapter Four Slide 63 Journal Entries (a) (b) (c) (d) Chapter Four Insurance expense (+E, −SE) Prepaid insurance (−A) 5 5 Depreciation expense (+E, −SE) 7 Accumulated depreciation (+XA, −A) 7 Wages expense (+E, −SE) Wages payable (+L) 5 5 Income tax expense (+E, −SE) Income tax payable (+L) 9 9 Slide 64 Cash Accounts receivable Accounts receivable Prepaid insurance Machinery Accumulated depreciation Accounts payable W ages payable Income taxes payable Contributed capital Retained earnings Retained earnings Revenues (not detailed) Expenses (not detailed) Totals SENECA COMPANY Trial Balance December 31, 2010 (in thousands of dollars) Unadjusted Adjustments Debit Credit Debit Credit 38 9 6 a 5 80 b 7 9 c 5 d 9 76 4 84 32 a 5 b 7 c 5 d 9 169 169 26 26 Chapter Four Adjusted Debit Credit 38 9 1 80 7 9 5 9 76 4 84 58 190 190 Slide 65 Income Statement SENECA COMPANY Income Statement For the Year En For the Year Ended December 31, 2010 December 31 20 (in thousands of dollars) Revenues (not detailed) Expenses ($32 + $5 + $7 + $5) Pretax income Income tax expense Net income EPS ($26,000 ÷ 4,000 shares) Chapter Four $84 49 35 9 $26 $6.50 Slide 66 Statement of Shareholders’ Equity SENECA COMPANY Statement of Stockholders' Equity For the Year Ended December 31, 2010 (in thousands of dollars) (in thousands of dollars) Beginning balances, 1/1/2010 Stock issuance Net income Dividends declared Ending balances 12/31/20 Ending balances, 12/31/2010 Contributed Capital $ 0 76 Retained Earnings $ 0 26 (4) * $ 76 76 $ 22 Total Stockholders' Equity $ 0 76 26 (4) $ 98 * The amount of dividends declared can be inferred because the unadjusted trial balance amount for retained earnings is a negative $4. Since this is the first year of operations, we can assume the entire amount is due to a dividend declaration. Chapter Four Slide 67 Balance Sheet SENECA COMPANY Balance Sheet At December 31, 2010 (in thousands of dollars) (in thousands of dollars) Assets Current Assets: Cash Accounts receivable Prepaid insurance ($6 - $5) Total current assets Machinery Machinery Accumulated depreciation Total assets Chapter Four $ 38 9 1 48 80 80 (7) $121 Liabilities and Stockholders’ Equity Current Liabilities: Accounts payable $9 Wages payable 5 Income taxes payable 9 Total current liabilities 23 Stockholders' Equity: Equity Contributed capital 76 Retained earnings 22 Total liabilities and stockholders' equity $121 Slide 68 Final Step – The Closing Process The following accounts are called temporary or nominal accounts and are closed to nominal accounts and are closed to zero at the end of the period . . . • Revenues, • Expenses, • Gains, and • Losses Chapter Four Slide 69 Final Step – The Closing Process Assets, liabilities, and stockholders’ equity are permanent or real accounts and are are permanent, or real accounts, and are never closed. • Assets • Liabilities • Stockholders’ Equity Chapter Four Slide 70 Final Step – The Closing Process • Permanent accounts are B/S accounts • Temporary accounts are I/S accounts Closing entries: 1. 1. Transfer net income (or loss) to Retained Earnings. • Even though the B/S account balances carry forward from period to period, the income statement accounts do not. 2. Establish a zero balance in each of the temporary accounts to start the next accounting period. Chapter Four Slide 71 Closing the Books Two steps are used in the steps are used in the closing process . . . 1. Close revenues and gains to Retained Earnings. 2. Close expenses and losses to expenses and losses to Retained Earnings. Chapter Four Slide 72 Closing the Books To close Papa John’s Restaurant Sales Revenue account, the following entry is required: GENERAL JOURNAL Page Date Description Jan 31 Restaurant Sales Revenue Retained Earnings Retained Earnings 144,000 1/31/07 66,000 Close Debit 66,000 365 Credit 66,000 Restaurant Sales Revenue 66,000 66,000 0 Chapter Four Slide 73 Closing the Books To close Papa John’s Cost of Sales - Restaurants account, the following entry is required: GENERAL JOURNAL Date Description Jan 31 Retained Earnings Cost of Sales - Restaurants Close Chapter Four Retained Earnings 30,000 144,000 66,000 Page Debit 30,000 365 Credit 30,000 Cost of Sales Restaurants 30,000 30,000 0 Slide 74 Closing the Books If we close the other expense and loss accounts in a similar fashion, the retained earnings account looks like this . . . End. RE = Beg. RE + (Rev – Exp + Gains – Losses) – Dividends Close Close Close Close Close Close Close Close Close Close Close Retained Earnings 30,000 144,000 16,000 66,000 7,000 4,730 4,000 1,070 2,000 3,000 500 600 2,500 550 3,961 67,111 218,800 151,689 1/1/07 Close Close Close Close Ending Bal. Chapter Four Slide 75 Post-Closing Trial Balance After all temporary accounts have been closed, we prepare a post-closing trial balance. Only assets, liabilities, and stockholders’ equity accounts will liabilities and stockholders’ eq acco appear. All revenue, expense, gain and loss accounts will have a zero balance. Chapter Four Slide 76 Exercise St. Denis, Inc., has the following unadjusted trial balance as of the end of the annual accounting period, Dec 31, 2011. Account Titles Cash Cash Accounts Receivable Supplies Prepaid Insurance Service trucks Accumulated depreciation Accounts Payable Other assets Wage payable Income Taxes payable Note payable (3 years; 10% interest due each Dec 31) Contributed Capital (5,000 shares outstanding) Retained earnings Service Revenue Remaining expenses (not detailed; excludes income tax) Income tax expense Totals Chapter Four Debit $48 $48,000 10,400 640 800 16,000 Credit $9,600 2,400 8,960 16,000 22,560 6,000 61,600 33,360 $118,160 $118,160 Slide 77 Exercise Data not yet recorded at Dec 31, 2011: a. The supplies counted on Dec 31, 2011, reflected $240 remaining on hand to be used in 2012 remaining on hand to be used in 2012. b. Insurance expired during 2011, $400. c. Depreciation expense for 2011, $3,200 d. Wages earned by employees not yet paid on Dec 31, 2011, $720. e. Income tax expense was $5,880 1. Record the 2011 adjusting entries. 2. Prepare an income statement and a balance sheet including the effects of the preceding five transactions. 3. Record the 2011 closing entries. Chapter Four Slide 78 Exercise December 31, 2011, Adjusting Entries: (a) Supplies expense (+E, −SE) Supplies (−A) 400 (b) Insurance expense (+E, −SE) Prepaid insurance (−A) 400 Depreciation expense (+E, −SE) Accumulated depreciation (+XA, −A) 3,200 Wages expense (+E, −SE) Wages payable (+L) 720 Income tax expense (+E, −SE) Income taxes payable (+L) 5,880 (c) (d) (e) 400 400 3,200 720 5,880 Chapter Four Slide 79 Exercise ST. DENIS, INC. Income Statement For the Year Ended December 31, 2011 Operating Revenue: Service revenue $61,600 Operating Expenses: Supplies expense ($640 - $240) Insurance expense ($800 - $400) Depreciation expense Wages expense Remaining expenses (not detailed) Total expenses Operating Income Income tax expense Net income 400 400 3,200 720 33,360 38 38,080 23,520 5,880 $17,640 Earnings per share ($17,640 ÷ 5,000 shares) Chapter Four $3.53 Slide 80 Exercise Assets Current Assets: Cash Accounts receivable Supplies Prepaid insurance Total current assets Service trucks Accumulated depreciation Other assets (not detailed) Total assets ST. DENIS, INC. Balance Sheet At December 31, 2011 Liabilities and Stockholders’ Equity Current Liabilities: $48,000 Accounts payable $ 2,400 10,400 Wages payable 720 240 Income taxes payable 5,880 400 Total current liabilities 9,000 59,040 Note payable, long term 16,000 16,000 Total liabilities 25,000 (12,800) Stockholders' Equity Equity 8,960 Contributed capital 22,560 Retained earnings* 23,640 Total stockholders' equity 46,200 Total liabilities and $71,200 stockholders' equity $71,200 *Unadjusted balance, $6,000 + Net income, $17,640 = Ending balance, $23,640. Chapter Four Slide 81 Exercise December 31, 2011, Closing Entry: Service revenue (−R) 61,600 Supplies expense (−E) Insurance expense (−E) Depreciation expense (−E) Wages expense (−E) Remaining expenses (not detailed) (−E) Income tax expense (−E) tax expense Retained earnings (+SE) Chapter Four 400 400 3,200 720 33,360 5,880 17,640 Slide 82 ...
View Full Document

This note was uploaded on 12/20/2011 for the course ACCT/MGMT 2010 taught by Professor A during the Spring '11 term at HKUST.

Ask a homework question - tutors are online