Chapter Completing the Accounting Cycle Corporate Financial Accounting 14e Warren Reeve Duchac â 2017 Cengage Learningđ May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Income Statement • The income statement is prepared directly from the Adjusted Trial Balance columns of the endof-period spreadsheet, beginning with fees earned • The expenses in the income statement are listed in order of size, beginning with the larger items o Miscellaneous Expense is the last item, regardless of its amount © 2017 Cengage Learning® May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Retained Earnings Statement • The first item normally presented on the retained earnings statement is the balance of the retained earnings account at the beginning of the period • The amount of dividends is deducted from the net income to determine the ending retained earnings account balance © 2017 Cengage Learning® May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Balance Sheet (slide of 2) • The balance sheet is prepared directly from the Adjusted Trial Balance columns of the end-ofperiod spreadsheet, beginning with Cash • The asset and liability amounts are taken from the spreadsheet • The retained earnings amount is taken from the retained earnings statement â 2017 Cengage Learningđ May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Balance Sheet (slide of 2) • A balance sheet that shows subsections for assets and liabilities is a classified balance sheet o Assets are commonly divided into two sections on the balance sheet: (1) current assets and (2) property, plant, and equipment o Liabilities are commonly divided into two sections on the balance sheet: (1) current liabilities and (2) longterm liabilities © 2017 Cengage Learning® May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Current Assets (slide of 2) • Cash and other assets that are expected to be converted to cash or sold or used up usually within one year or less, through the normal operations of the business, are called current assets • Current assets include: o Cash o Notes receivable o Accounts receivable o Supplies o Other prepaid expenses â 2017 Cengage Learningđ May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Current Assets (slide of 2) • Notes receivable are written promises by the customer to pay the amount of the note and interest Like accounts receivable, notes receivable are amounts that customers owe, but they are more formal than accounts receivable • Notes receivable and accounts receivable are current assets because they are usually converted to cash within one year or less © 2017 Cengage Learning® May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Property, Plant, and Equipment • Property, plant, and equipment (also called fixed assets or plant assets) include land and assets that depreciate over a period of time o Assets that depreciate over time include: Equipment Machinery Buildings â 2017 Cengage Learningđ May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Current Liabilities • Amounts the business owes to creditors that will be due within a short time (usually one year or less) and that are to be paid out of current assets are called current liabilities • Current liabilities include: o Notes payable o Accounts payable o Wages payable o Interest payable o Taxes payable o Unearned fees â 2017 Cengage Learningđ May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Long-Term Liabilities • Amounts the business owes to creditors that will not be due for a long time (usually more than one year) are called long-term liabilities â 2017 Cengage Learningđ May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Closing Entries (slide of 4) • At the beginning of the next period, temporary accounts should have zero balances • To achieve this, temporary account balances are transferred to permanent accounts at the end of the accounting period through journal entries • The entries that transfer these balances are called closing entries The transfer process is called the closing process and is sometimes referred to as closing the books • After the closing entries are posted, all of the temporary accounts have zero balances â 2017 Cengage Learningđ May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Closing Entries (slide of 4) • The closing entries involves the following four steps: o Step Revenue account balances are transferred to an account called Income Summary o Step Expense account balances are transferred to an account called Income Summary o Step The balance of Income Summary (net income or net loss) is transferred to the retained earnings account o Step The balance of the dividends account is transferred to the retained earnings account © 2017 Cengage Learning® May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Closing Entries (slide of 4) • Income Summary is a temporary account that is only used during the closing process • At the beginning of the closing process, Income Summary has no balance • During the closing process, revenue and expense accounts are cleared by debiting or crediting Income Summary for their amounts o Because it has the effect of clearing the revenue and expense accounts of their balances, Income Summary is sometimes called a clearing account © 2017 Cengage Learning® May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Closing Entries (slide of 4) • The four closing entries required in the closing process are as follows: Debit each revenue account for its balance and credit Income Summary for the total revenue Credit each expense account for its balance and debit Income Summary for the total expenses Debit Income Summary for its balance (net income) and credit the retained earnings account (In the case of a net loss, credit Income Summary for the amount of its balance and debit the retained earnings account for the amount of the net loss.) Debit the retained earnings account for the balance of the dividends account and credit the dividends account © 2017 Cengage Learning® May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Post-Closing Trial Balance • A post-closing trial balance is prepared after the closing entries have been posted • The purpose of the post-closing (after closing) trial balance is to verify that the ledger is in balance at the beginning of the next period â 2017 Cengage Learningđ May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Accounting Cycle (slide of 2) • The accounting process that begins with analyzing and journalizing transactions and ends with the post-closing trial balance is called the accounting cycle © 2017 Cengage Learning® May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Accounting Cycle (slide of 2) • The steps in the accounting cycle are as follows: o Step Transactions are analyzed and recorded in the journal o Step Transactions are posted to the ledger o Step An unadjusted trial balance is prepared o Step Adjustment data are assembled and analyzed o Step An optional end-of-period spreadsheet is prepared o Step Adjusting entries are journalized and posted to the ledger o Step An adjusted trial balance is prepared o Step Financial statements are prepared o Step Closing entries are journalized and posted to the ledger o Step 10 A post-closing trial balance is prepared â 2017 Cengage Learningđ May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Fiscal Year • The annual accounting period adopted by a business is known as its fiscal year • Fiscal years begin with the first day of the month selected and end on the last day of the following twelfth month • When a corporation adopts a fiscal year that ends when business activities have reached the lowest point in its annual operating cycle, such a fiscal year is called the natural business year © 2017 Cengage Learning® May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Analysis for Decision Making: Working Capital and Current Ratio • The ability to convert assets into cash is called liquidity • The ability of a business to pay its debts is called solvency • Two financial measures for evaluating a business’s short-term liquidity and solvency are working capital and the current ratio â 2017 Cengage Learningđ May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Analysis for Decision Making: Working Capital • Working capital is the excess of the current assets of a business over its current liabilities • Working capital is computed as follows: Working Capital = Current Assets – Current Liabilities • A positive working capital implies that the business is able to pay its current liabilities and is solvent © 2017 Cengage Learning® May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Analysis for Decision Making: Current Ratio • The current ratio is another means of expressing the relationship between current assets and current liabilities • The current ratio is computed by dividing current assets by current liabilities, as follows: Current Assets Current Ratio = Current Liabilities â 2017 Cengage Learningđ May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Appendix 1: End-of-Period Spreadsheet • Spreadsheets are usually prepared by using a computer program such as Microsofts Excelđ Some accountants prefer to expand the end-ofperiod spreadsheet to include financial statement columns â 2017 Cengage Learningđ May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Appendix 1: Steps in Preparing an Expanded End-of-Period Spreadsheet • • • • • Step Enter the title • Step Total the Income Statement and Balance Sheet columns, compute the net income or net loss, and complete the spreadsheet Step Enter the unadjusted trial balance Step Enter the adjustments Step Enter the adjusted trial balance Step Extend the accounts to the Income Statement and Balance Sheet columns © 2017 Cengage Learning® May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Appendix 1: Preparing the Financial Statements from the Spreadsheet • The spreadsheet can be used to prepare the income statement, the retained earnings statement, and the balance sheet • When a spreadsheet is used, the adjusting and closing entries are normally not journalized or posted until after the spreadsheet and financial statements have been prepared © 2017 Cengage Learning® May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Appendix 2: Reversing Entries • Reversing entries are journal entries recorded on the first day of the next period that are the exact opposite of the related adjusting entry from the last day of the prior period © 2017 Cengage Learning® May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part ... or in part Accounting Cycle (slide of 2) • The accounting process that begins with analyzing and journalizing transactions and ends with the post-closing trial balance is called the accounting. .. of 4) • At the beginning of the next period, temporary accounts should have zero balances • To achieve this, temporary account balances are transferred to permanent accounts at the end of the accounting. .. duplicated, or posted to a publicly accessible website, in whole or in part Accounting Cycle (slide of 2) • The steps in the accounting cycle are as follows: o Step Transactions are analyzed and recorded