To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter Adjusting Accounts and Preparing Financial Statements QUESTIONS The cash basis of accounting reports revenues when cash is received while the accrual basis reports revenues when they are earned The cash basis reports expenses when cash is paid while the accrual basis reports expenses when they are incurred and matched with revenues they generated The accrual basis of accounting generally provides a better indication of company performance and financial condition than does the cash basis Also, the accrual basis increases the comparability of financial statements from one period to the next Thus, business decision makers generally prefer the accrual basis Businesses that have major seasonal variations in sales are most likely to select the natural business year as the fiscal year A prepaid expense is an item paid for in advance of receiving its benefits As such, it is reported as an asset on the balance sheet Long-term tangible plant assets such as equipment, buildings, and machinery lead to adjustments for depreciation Generally, land is the only long-term tangible plant asset that does not require depreciation The Accumulated Depreciation contra account is used for depreciation It provides financial statement users with additional information about the relative age of the assets Without the contra account information, the reader would not be able to tell whether the assets are new or in need of replacement Unearned revenue refers to cash received in advance of providing products and services Another name for an unearned revenue is deferred revenue It is reported as a liability on the balance sheet An accrued revenue is revenue that is earned but is not yet received in cash (and/or other assets) and the customer has not been billed prior to the end of the period Therefore, end-of-period adjustments are made to record accrued revenue Examples are interest income that has been earned but not collected and revenues from services performed that are neither collected nor billed 9.A If prepaid expenses are initially recorded with debits to expense accounts, then the prepaid expenses asset accounts are debited in the adjusting entries ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 119 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 10 For Best Buy, all of the accounts under the category of Property and Equipment (except for Land), require adjusting entries The expense related to the depreciation expense account would be understated on the income statement if Best Buy fails to adjust these asset accounts If the adjusting entries are not made, net income would be overstated Note: Students might also correctly identify accounts receivable, goodwill, and tradename as needing adjustment 11 Circuit City must make adjusting entries to Prepaid expenses and other current assets; Deferred income taxes; Accrued expenses and other current liabilities; Accrued income taxes; and possibly other assets and liabilities such as Receivables for bad debts (It is also possible that Circuit City would need to adjust Goodwill and Other intangible assets.) 12 The accrued Wages Expense would be reported as part of ―Accrued Expenses‖ on Apple’s balance sheet 13 Closing entries at the end of the current period prepare the revenues (and gains), expenses (and losses), and dividends accounts for the next period by giving them zero balances Closing entries also update the retained earnings account for the events of the year just finished Closing entries not affect the asset and liability accounts 14 (i) Closing entries prepare the temporary accounts—revenue and expense (and gain and loss) accounts and dividends—for the next period by giving them zero balances (ii) Closing entries also update the retained earnings account for the events of the period just completed 15 The four-step closing entry process is: (i) close the revenue (and gain) accounts to the Income Summary account, (ii) close the expense (and loss) accounts to the Income Summary account, (iii) close the Income Summary account to the Retained Earnings account, and (iv) close the Dividends account to the Retained Earnings account 16 The Income Summary account is used to summarize the period’s revenues and expenses As a result, it temporarily has a balance equal to the net income (or net loss) for the period (Instructor note: Closing can be accomplished without the Income Summary account by closing revenue and expense accounts directly to the retained earnings account.) 17 Yes, an error would have occurred because a post-closing trial balance should only include permanent accounts, and Depreciation Expense is a temporary account that should have been closed If an expense appears on the post-closing trial balance, the amounts of net income, total assets, and total equity are all in error (overstated) 18.B A work sheet can be used to collect and organize data for preparing (i) adjusting entries, (ii) closing entries, and (iii) financial statements A work sheet can also be used for what if analysis, for help with audit adjustments, and for preparing interim financial statements 19.B The adjustments in the Adjustments columns of a work sheet are identified by letter to link the debits with the credits to ensure that the entries are complete and in balance (debits = credits) and for reference purposes (audit trail) The letters can also be used to identify the reasons for the entries and help simplify preparation of the actual adjusting journal entries ©McGraw-Hill Companies, 2008 120 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 20 A company’s operating cycle is the normal time between paying cash for merchandise inventory or for employee salaries in providing customer services and the receipt of cash from customers in exchange for those products or services 21 Assets on a typical classified balance sheet include current assets and noncurrent assets—where noncurrent assets usually include long-term investments, plant assets, and intangible assets Liabilities are typically classified as current and noncurrent Note that the terms short-term and long-term are sometimes used for current and noncurrent 22 Unearned revenue is reported as a liability—usually a current liability 23 Plant assets (also called property, plant and equipment or long-lived assets) are tangible long-lived assets used to produce or sell goods or services 24.C Reversing entries simplify subsequent entries for accrued expenses and accrued revenues by eliminating the need to record the removal of the accrued liability or accrued receivable when the accrual is settled 25.C The following reversing entry could be made as of the first day of the next accounting period, after the post-closing trial balance is completed and financial statements are prepared Salaries Payable 500 Salaries Expense 500 26 The five categories of noncurrent assets on Best Buy’s balance sheet are: Property and equipment, Goodwill, Tradename, Long-term investments, and Other assets 27 Circuit City has six current liability accounts: Accounts payable, Accrued expenses and other current liabilities, Accrued income taxes, Deferred income taxes, Current installments of long-term debt, and Liabilities of discontinued operations 28 The closing entry recorded on September 25, 2004, to transfer the company’s net income to its Retained Earnings account would likely have been (in millions): Income Summary Retained Earnings 276 276 ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 121 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com QUICK STUDIES Quick Study 3-1 (10 minutes) a b c d e UR AE AR PE PE Unearned revenue Accrued expenses Accrued revenue Prepaid expenses Prepaid expenses (Depreciation) Quick Study 3-2 (15 minutes) Accounts Debited and Credited Financial Statement a Debit Credit Unearned Revenue Revenue Earned Balance Sheet Income Statement b Debit Credit Wages Expense Wages Payable Income Statement Balance Sheet c Debit Credit Accounts Receivable Revenue Earned Balance Sheet Income Statement d Debit Credit Insurance Expense Prepaid Insurance Income Statement Balance Sheet e Debit Credit Depreciation Expense Accumulated Depreciation Income Statement Balance Sheet Quick Study 3-3 (15 minutes) a Insurance Expense Prepaid Insurance 1,200 1,200 To record 6-month insurance coverage expired b Supplies Expense Supplies 1,700 1,700 To record supplies used during the year ($500 + $2,000 – [supplies used] = $800) ©McGraw-Hill Companies, 2008 122 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Quick Study 3-4 (10 minutes) a Depreciation Expense—Equipment Accumulated Depreciation—Equipment 3,600 3,600 To record depreciation expense for the year ($20,000 - $2,000) / years = $3,600 b No depreciation adjustment is made for land as it is expected to last indefinitely Quick Study 3-5 (10 minutes) Salaries Expense Salaries Payable 400 400 To record salaries incurred but not yet paid [The one student earns $100 x days M–R] Quick Study 3-6 (15 minutes) a Unearned Revenue Legal Revenue 7,500 7,500 To recognize revenue earned ($10,000 x 3/4) b Unearned Subscription Revenue Subscription Revenue 1,200 1,200 To recognize subscription revenue earned [100 x ($24 / 12 month) x months] Quick Study 3-7 (15 minutes) Adjusting entry Debit Credit Accrue salaries expense e c Adjust the Unearned Services Revenue account to recognize earned revenue d f Record the earning of services revenue for which cash will be received the following period g f ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 123 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Quick Study 3-8 (10 minutes) The answer is b Explanation: The debit balance in Prepaid Insurance was reduced by $400, implying a $400 debit to Insurance Expense The credit balance in Interest Payable increased by $800, implying an $800 debit to Interest Expense Quick Study 3-9 (20 minutes) Cash Accounting Revenues (cash receipts) Expenses (cash payments: $25,500 - $5,250 + $6,750) Net income (cash-basis) $37,000 27,000 $10,000 Accrual Accounting Revenues (earned) Expenses (incurred) Net income (accrual-basis) $45,000 25,500 $19,500 Quick Study 3-10 (15 minutes) The answer is Explanation: Insurance premium error Understates expenses (and overstates assets) by $1,600 Accrued salaries error Understates expenses (and understates liabilities) by 1,000 Combination of errors Understates expenses by Overstates assets by Understates liabilities by $2,600 $1,600 $1,000 ©McGraw-Hill Companies, 2008 124 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Quick Study 3-11 (20 minutes) Income Summary balance after closing revenues and expenses: Revenues: $45,000 + $6,000 Expenses: $29,000 + $9,000 + $3,000 Credit balance (equal to net income) = = = $51,000 - 41,000 $10,000 Cr Dr Cr Retained Earnings balance after all closing entries: Beginning balance Plus net income $28,000 10,000 38,000 7,200 $30,800 Less dividends Ending balance Quick Study 3-12 (5 minutes) (e) Analyzing transactions and events (h) Journalizing transactions and events (a) Posting the journal entries (g) Preparing the unadjusted trial balance (b) Journalizing and posting adjusting entries (c) Preparing the adjusted trial balance (f) Preparing the financial statements (d) Journalizing and posting closing entries (i) Preparing the post-closing trial balance Quick Study 3-13 (10 minutes) B A E E F D C A ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 125 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Quick Study 3-14 (15 minutes) Dec 31 Services Revenue Income Summary To close the revenue account 13,000 31 Income Summary Wages Expense Rent Expense To close the expense accounts 10,000 31 Income Summary Retained Earnings To close Income Summary 3,000 31 Retained Earnings Dividends To close the dividends account 13,000 8,400 1,600 3,000 800 800 Quick Study 3-15 (5 minutes) The only account from QS 3-15 that would appear in a post-closing trial balance is Retained Earnings Quick Study 3-16 (10 minutes) Profit margin = $48,152 / $425,000 = 11.3% Interpretation: For every one dollar that Sidone Company records as revenue, it earns 11.3 cents in net income Sidone’s 11.3% is markedly lower than its competitors’ average profit margin of 15% Accordingly, Sidone should focus on improving its profit margin to at least be competitive ©McGraw-Hill Companies, 2008 126 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Quick Study 3-17 (10 minutes) Current assets Cash Accounts receivable Office supplies Prepaid insurance Total current assets $ 7,000 18,000 2,800 3,500 $31,300 Current liabilities Accounts payable Unearned services revenue Total current liabilities $11,000 3,000 $14,000 Current ratio = $31,300 / $14,000 = 2.24 Quick Study 3-18A (10 minutes) The answer is d Quick Study 3-19B (10 minutes) a b c B B B d e f I B I ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 127 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Quick Study 3-20B (20 minutes) CLAUDELL COMPANY Work Sheet Account Title Unadjusted Trial Balance Dr Cr Adjustments Dr Cr Prepaid Rent 1,000 Services Revenue Adjusted Trial Balance Dr Cr 55,000 (a) 200 (b) 900 700 25,700 Accounts Receivable (b) 900 900 Rent Expense (a) 200 800 55,900 (c) (c) Balance Sheet Dr Cr 800 Wages Expense 25,000 Wages Payable Income Statement Dr Cr 700 55,900 25,700 900 700 200 700 200 ©McGraw-Hill Companies, 2008 128 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Serial Problem — SP (Concluded) Part SUCCESS SYSTEMS Post-Closing Trial Balance December 31, 2007 Debit Credit Cash $ 80,260 Accounts receivable 5,800 Computer supplies Prepaid insurance 775 1,800 Prepaid rent Office equipment Accumulated depreciation—Office equipment 875 10,000 $ Computer equipment Accumulated depreciation—Computer equipment 25,000 625 1,250 Accounts payable Wages payable Unearned computer services revenue Common stock Retained earnings 2,100 600 2,500 110,000 7,435 Totals $124,510 $124,510 ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 209 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Serial Problem — SP (Continued) [Note: The ledger includes all entries from the prior three months The Working Papers shorten the solution by showing the balances of the accounts as of November 30, 2007.] General Ledger Cash Date Oct Nov Dec Explanation 15 17 20 22 31 31 18 22 28 30 30 10 14 20 28 29 31 PR Debit 75,000 6,200 1,950 3,600 5,000 7,000 2,500 3,620 3,000 Acct No 101 Credit Balance 75,000 3,500 71,500 2,400 69,100 1,600 67,500 73,700 900 72,800 1,790 71,010 72,960 1,050 71,910 4,000 67,910 384 67,526 71,126 1,750 69,376 74,376 300 74,076 480 73,596 2,100 71,496 2,500 68,996 1,200 67,796 500 67,296 74,296 900 73,396 75,896 79,516 82,516 256 82,260 2,000 80,260 ©McGraw-Hill Companies, 2008 210 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Serial Problem — SP (Continued) Date Oct Nov Dec Date Oct Nov Dec Date Oct Dec Date Oct Dec Date Oct Date Dec 12 15 22 28 18 24 28 Accounts Receivable Explanation PR Debit 6,200 1,950 7,300 6,500 7,000 Computer Supplies Explanation PR 15 31 Prepaid Insurance Explanation PR 31 Prepaid Rent Explanation PR 31 Office Equipment Explanation PR Acct No 106 Credit Balance 6,200 8,150 6,200 1,950 1,950 7,300 13,800 5,000 8,800 15,800 7,000 8,800 3,000 5,800 Debit 1,600 1,750 2,100 Acct No 126 Credit Balance 1,600 3,350 5,450 4,675 775 Debit 2,400 Acct No 128 Credit Balance 2,400 600 1,800 Debit 3,500 Acct No 131 Credit Balance 3,500 2,625 875 Debit 10,000 Acct No 163 Credit Balance 10,000 Accumulated Depreciation—Office Equipment Acct No 164 Explanation PR Debit Credit Balance 31 625 625 ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 211 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Serial Problem — SP (Continued) Date Oct Date Dec Date Oct Dec Date Dec Date Dec Date Oct Date Dec Date Oct Nov Dec Computer Equipment Explanation PR Debit 25,000 Acct No 167 Credit Balance 25,000 Accumulated Depreciation—Computer Equipment Acct No 168 Explanation PR Debit Credit Balance 31 1,250 1,250 Accounts Payable Explanation PR Debit 15 1,600 Explanation Wages Payable PR Acct No 210 Credit Balance 600 600 Debit 31 Unearned Computer Services Revenue Explanation PR Debit Acct No 236 Credit Balance 2,500 2,500 Common Stock Explanation PR Acct No 307 Credit Balance 110,000 110,000 14 Debit Retained Earnings Explanation PR Debit 31 31 Acct No 318 Credit Balance 15,935 15,935 7,435 8,500 Explanation 31 30 31 31 Acct No 201 Credit Balance 1,600 1,600 2,100 2,100 Closing Dividends PR Debit 4,000 2,500 2,000 Acct No 319 Credit Balance 4,000 6,500 8,500 8,500 ©McGraw-Hill Companies, 2008 212 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Serial Problem — SP (Continued) Date Oct Nov Dec Date Dec Date Dec Date Oct Nov Dec Date Dec Date Dec Computer Services Revenue Explanation PR Debit Acct No 403 Credit Balance 6,200 6,200 1,950 8,150 7,300 15,450 3,600 19,050 6,500 25,550 7,000 32,550 3,620 36,170 12 28 24 20 31 Closing 31 31 Depreciation Expense—Office Equipment Acct No 612 Explanation PR Debit Credit Balance 625 625 Closing 625 36,170 Depreciation Expense—Computer Equipment Acct No 613 Explanation PR Debit Credit Balance 31 1,250 1,250 31 Closing 1,250 Wages Expense Explanation PR 31 30 10 31 31 Debit 1,050 2,100 900 600 Closing Acct No 623 Credit Balance 1,050 3,150 4,050 4,650 4,650 31 31 Insurance Expense Explanation PR Debit 600 Closing Acct No 637 Credit Balance 600 600 Explanation 31 31 Closing Rent Expense PR Debit 2,625 Acct No 640 Credit Balance 2,625 2,625 ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 213 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Serial Problem — SP (Continued) Date Dec Date Oct Dec Date Nov Dec Date Nov Dec Date Oct Dec Date Dec 31 31 Computer Supplies Expense Explanation PR Debit 4,675 Closing Acct No 652 Credit Balance 4,675 4,675 20 31 Advertising Expense Explanation PR Debit 1,790 1,200 Closing Acct No 655 Credit Balance 1,790 2,990 2,990 Mileage Expense Explanation PR 28 29 31 Debit 384 480 256 Closing Acct No 676 Credit Balance 384 864 1,120 1,120 22 31 Miscellaneous Expense Explanation PR Debit 300 Closing Acct No 677 Credit Balance 300 300 17 31 Repairs Expense—Computer Explanation PR Debit 900 500 Closing Acct No 684 Credit Balance 900 1,400 1,400 31 31 31 Income Summary Explanation PR Debit Closing Closing 20,235 Closing 15,935 Acct No 901 Credit Balance 36,170 36,170 15,935 ©McGraw-Hill Companies, 2008 214 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Reporting in Action — BTN 3-1 The revenue recognition principle requires that revenue be recorded when earned, not before and not after Most companies earn revenue when they provide services and products to customers Best Buy provides information on revenue recognition in footnote entitled ―Summary of Significant Accounting Policies.‖ A revenue recognition policy is stated for the sale of merchandise, service, gift cards, and extended service contracts Merchandise revenue is recognized when the customer takes possession of the merchandise Service revenue is recognized ―at the time the service is provided, the sales price is fixed or determinable, and collectibility is reasonably assured.‖ Gift card revenue is deferred until the customer redeems the card Extended service contracts are sold on behalf of an unrelated third party Some jurisdictions not deem Best Buy to be the guarantor, and those commissions are recognized at the date of sale For those jurisdictions where Best Buy is considered to be obligated under the contract, commissions are earned evenly over the course of the contract For fiscal year-end February 26, 2005, the profit margin is: $984,000,000 / $27,433,000,000 = 0.036 = 3.6% For fiscal year-end February 28, 2004, the profit margin is: $705,000,000 / $24,548,000,000 = 0.029 = 2.9% The total revenues that would be credited to Income Summary as step in the closing entry process must be computed Best Buy’s sales revenue for the fiscal year-ended February 26, 2005, is $27,433,000,000, its interest income is $1,000,000, and it has a gain on the disposal of discontinued operations of $50,000,000 Thus, its total revenue that is closed to Income Summary is $27,484,000,000 ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 215 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Reporting in Action — BTN 3-1 (continued) The total expenses that would be debited to Income Summary as step in the closing entry process must be computed Best Buy’s total expenses for the fiscal year ended February 26, 2005, are: Cost of goods sold $20,938,000,000 Selling, general and administrative 5,053,000,000 Income tax expense 509,000,000 Total expenses $26,500,000,000 The balance of Income Summary before it is closed as of February 26, 2005, equals the net income for Best Buy of $984,000,000 Solution depends on the financial statements accessed ©McGraw-Hill Companies, 2008 216 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Comparative Analysis — BTN 3-2 Best Buy Current year, profit margin = $984,000 / $27,433,000 Prior year, profit margin = $705,000 / $24,548,000 = 3.6% = 2.9% Circuit City Current year, profit margin = $ 61,658 / $10,472,364 Prior year, profit margin = $(89,269) / $9,857,057 = 0.6% =- 0.9% Best Buy is more successful on the basis of profit margin In the current year, Best Buy earned an average of 3.6 cents on each dollar while Circuit City earned only 0.6 cents on each dollar Best Buy’s current ratios Current year $6,903,000 / $4,959,000 = 1.39 Prior year $5,724,000 / $4,501,000 = 1.27 Circuit City’s current ratios Current year $2,685,715 / $1,263,846 = 2.13 Prior year $2,919,061 / $1,138,198 = 2.56 In both years, Circuit City has the higher current ratio (2.13 vs 1.39 for this year; 2.56 vs 1.27 in the prior year), suggesting a better ability to pay short-term obligations Overall, neither company is in immediate danger of failing to make payment on short-term obligations Best Buy’s current ratio improved, moving from 1.27 to 1.39 Circuit City’s current ratio declined from 2.56 to 2.13 Circuit City’s current ratio is above the industry average for both years, and Best Buy’s is below the industry average for both years However, neither company appears at risk of failing to pay its current creditors ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 217 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ethics Challenge — BTN 3-3 There are several courses of action that Tamira could have taken Two possibilities follow: a She could have consulted with the president and told him that finalized financial statements would not be ready by the time of the meeting She could explain that delay in financial statement preparation is a normal event given the need to wait for final information to prepare accurate adjustments Possibly the meeting could be rescheduled or Tamira could have asked how the president preferred her to proceed b The estimation decision was not a bad choice in itself But she should have informed the president Tamira probably should have used less optimistic estimates instead of recording expenses on the low side Users of financial statements usually prefer knowing worst-case scenarios over best-case outcomes Use of estimates gets the financial statements closer to their final form than ignoring the adjustments completely Students may offer one of the above alternatives or another response they may think of given the situation Try to generate a discussion of ethical concerns and the impact of her decisions on the well-being of users (such as the bankers and the investors in the banks) ©McGraw-Hill Companies, 2008 218 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Communicating in Practice — BTN 3-4 TO: _ FROM: _ DATE: SUBJECT: CLARIFICATIONS—OBJECTIVE OF THE CLOSING PROCESS [Note: The following is a sample of what the memorandum’s contents might include.] When we speak of ―closing the books‖ or the closing process we are not talking about ending or closing the business nor doing anything that reflects this thinking in the financial statements Let me use an analogy to explain the concept of the closing process and then you will see the distinction more clearly Scoreboards are used to temporarily hold information that will allow us to determine who won or lost in an athletic game or event When the athletic event is over the result of the game is permanently recorded elsewhere-probably in the team’s record book If the scoreboard was not cleared before the start of a new game the scores from the second game would be combined with scores from the first game As a result, the scoreboard would reflect data or scores that were not relevant to either game You can see that the scoreboard must be zeroed out to prepare it for accumulating data to determine the outcome of the next game The revenue and expense accounts temporarily hold the information to determine if the owner(s) won or lost in the game of business Each fiscal period should be viewed as a separate game After the data in these accounts has allowed us to determine if the owner(s) won or lost, in other words, the net income or loss, these accounts must be cleared to accumulate data for the next game or period We record the score of the game of business, or the net income or loss, in the permanent recordbook or equity (the retained earnings account) A win or net income increases equity and a loss or net loss decreases equity I hope this memo clarifies the objective of the closing process [Note: The memorandum need not discuss the income summary account since the assignment requires explaining the concept, not the procedure.] ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 219 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Taking It to the Net — BTN 3-5 The Gap’s main brands (stores) are The Gap, Old Navy, and Banana Republic The Gap’s fiscal year-end is January 29, 2005 It appears that The Gap’s fiscal year-end is late January or early February Net sales for the year ended January 29, 2005 are $16,267,000,000 Net income for the year ended January 29, 2005 is $1,150,000,000 Profit margin = $1,150,000,000 / $16,267,000,000 = 7.1% The company probably chose a year-end at the end of January or early February to have it be consistent with their natural year For many retailers, the highest amount of sales is in November and December Taking It to the Net — BTN 3-6 The Motley Fool states that a benchmark of 1.5 is generally regarded as sufficient to meet near-term operating needs One should always check a company’s current ratio (as well as any other ratio) against its main competitors in a given industry A current ratio that is too high can suggest that a company is hoarding assets instead of using them to effectively grow the business—this is an inefficient use of resources that can potentially impair long-term returns ©McGraw-Hill Companies, 2008 220 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Teamwork in Action — BTN 3-7 Note that there is no specific solution to this activity Nevertheless, the presentation of each expert team should reflect the following summary points: Type Before Adjusting Balance Sheet Income Statement Account Account Prepaid expenses Asset overstated Expense understated Unearned revenues Liability overstated Revenue understated Accrued Expenses Liability understated Expense understated Accrued Revenues Asset understated Adjusting Entry Revenue understated Dr Expense Cr Asset* Dr Liability Cr Revenue Dr Expense Cr Liability Dr Asset Cr Revenue * For depreciation, one would Credit the Accumulated Depreciation contra account Some implementation notes: This activity allows all students to be actively involved in the learning process Encourage students to take the opportunity to ask questions in the small group environment the learning team provides Encourage the better students to serve as experts on unearned revenues The instructor’s observation of and reactions to expert teams’ development of presentation material as well as the delivery to learning teams will have a significant impact on the effectiveness of this activity BusinessWeek Activity — BTN 3-8 Estimates are to allow companies to make sure revenues and expenses are recorded in the proper time periods For instance, a company must estimate a plant asset’s useful life in order to calculate depreciation Companies can use these estimates to manipulate revenues, expense, and income In the depreciation example, the longer the useful life estimated, the smaller the depreciation expanse for a period (and the higher the income will be) The shorter the useful life estimated, the higher the depreciation expense for a period (and the lower the net income will be) ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 221 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com BusinessWeek Activity — BTN 3-8 (concluded) The five ways suggested by the article are: a Estimate sales – An example is a company that estimates future sales discounts The higher the discounts estimated, the lower the net sales (and the lower the income) The lower the discounts estimated, the higher the net sales (and the higher the net income) b Predict bad debts – Companies can change the estimate of amounts they reasonably expect to collect from customers, thereby manipulating revenues and expenses c Forecast unusual gains or losses – A company may choose which accounting period to report big and unusual gains or expenses d Adjust inventory – Companies can estimate that their inventories must be written down (and a loss recorded) In a future year, when the inventory is sold, no further loss is needed e Massage cash – Companies can improve cash flow from operating activities An example is to sell receivables to a financing company This is accounted for as an operating activity The article suggests the following solutions: a The FASB should turn its attention to making the form and presentation of financial information cleaner and more consistent b The cash flow statement should define more clearly what constitutes an operating, investing, and financing item c Companies should report their statements and cash flow for the same periods In addition, companies should report cumulative earnings and cash flows for the previous four quarters along with annual data d Auditors should be on increased alert, knowing that investors are interested Entrepreneurial Decision — BTN 3-9 a To record cash collection in advance of the sale of apparel Cash Unearned revenue 3,000 3,000 b To record the shipment of apparel to the customer Unearned revenue Revenue earned 3,000 3,000 ©McGraw-Hill Companies, 2008 222 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Entrepreneurial Decision — BTN 3-9 (concluded) Not carrying inventory allows Janet Freeman to save costs associated with carrying inventory – such as warehousing costs, insurance, and losses Saving these costs can increase income (In addition, not having any uncollectible accounts from sales on credit would increase income as well.) By increasing income, profit margin should be increased as well When carrying sufficient inventories, Janet Freeman of Betty Rides can provide her apparel to customers more quickly This might increase sales as her reputation for quick delivery becomes known On the other hand, carrying inventory has risks The most important for a company like Betty Rides is that of obsolescence (missing trends) Consumer tastes and trends are constantly changing, and by carrying no inventory, Janet Freeman can be flexible in the products offered Hitting the Road — BTN 3-10 There is no formal solution to this field activity The instructor may wish to tally students’ findings to show results across companies as to use of work sheets, software preferences, and time it takes to prepare finalized annual financial statements Global Decision — BTN 3-11 Dixons titles its sales revenue account ―Turnover.‖ Its Note 1.3 reports that revenue for merchandise is recognized at the point of sale or upon delivery to the customer Revenue from extended warranties and service contracts is recognized over the life of the agreement Profit margin = ₤243,600,000 / ₤6,458,000,000 = 3.8% Current ratio This year: ₤2,303,900,000 / ₤1,565,800,000 = 1.47 Last year: ₤2,220,400,000 / ₤1,679,000,000 = 1.32 ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 223 ... overstates assets) by $1,600 Accrued salaries error Understates expenses (and understates liabilities) by 1,000 Combination of errors Understates expenses by Overstates assets by Understates... Understates liabilities by $2,600 $1,600 $1,000 ©McGraw-Hill Companies, 2008 124 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit... procedures yield identical results in the financial statements.] ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 139 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com