kuaiji003 - 0 r 1 r:a m Identify the major steps in the...

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0 r- 1. Identify the major steps in the 4. Prepare financial statements from r:a m accounting cycle. (p. 96) adjusted accounts. (p. 112) c. ~ m::a 2. Review the process of journalizing 5. Describe the process of closing nz and posting transactions. (p. 97) temporary accounts. (p. 116) ... - _z 3. Describe the adjusting process and <I:) 6. Analyze changes in balance m illustrate adjusting entries. (p. 103) sheet accounts. (p. 119) CIl
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C HAP T E R Adjusting Accounts for Financial Statements Walgreen Co. 's traditional method ofgrowing salesandnetincome hasbeenadding drugstores, eitherthrough store openings or acquisitions of other drugstore companies. But with 7000 existing stores,that strategy has adiminishing impact onfinancial performance. Chief Executive Officer Gregory Wasson has charted a new approach to achieving profit growth by slowing store growth, cutting costs, and leveraging the existing store network. A "Rewiring for Growth" initiative should reduce operating costs by $1 billion annually by fiscal year 2011. The number of items offered in drug stores isbeing reduced to giveshoppers amore pleasant experience andto reducethe company's investment inslow-moving products. Thenumber of in-store clinics will increase. Stated differently, Walgreen's management is"adjusting" or "updating" its business plan inlight of the changing envi- ronment. Financial analysts arewaiting to see how these changes will impact Walgreen's financial resuits. Sincethe financial statements should reflect thefirm's underlying economic reality, Walgreen's management will need to "adjust" or "update" its financial statements to reflect the changes in its strategy and outlook. Accounting adjustments area key part of creatingthe financialstatements, and they are central tothe difference between accrualandcash accounting.Whilecash accounting only recordstransac- tionsthat involve cash receipts and disbursements,accrualaccounting records revenueswhen they areearned(evenif cash has notyet beenreceived)and expensesasthey are incurred(regardlessof whenthecash disbursement associatedwiththatexpenseismade).Thequality,or lackthereof, ofthe financialstatements oftenhingesonthequalityofthoseadjustments.Thus,understandinghowandwhy accountingadjustments occur isfundamentallyimportanttothosewhowishto analyzeandinterpretthe financialstatements. This chapter will describe the need for adjustments, how they are prepared, their financial statement effect and the needfor ethics and oversight inthis process. We illustrate how financial statements are prepared from those adjusted accounts. Then,we end the chapter with the closing process for the financial statements. Such "closing of the books" enables firms to report their per- formance for the year and then "open the books" anew for the next period.
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