Chapter 4 Financial Accounting

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  • 1. the ing le let yc mp g C Co tin un r4 o cc pt e A ha C c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.

2. Learning Objectives 1. 2. 3. 4. 5. 6. 7.Describe the flow of accounting information from the unadjusted trial balance into the adjusted trial balance and financial statements. Prepare financial statements from adjusted account balances. Prepare closing entries. Describe the accounting cycle. Illustrate the accounting cycle for one period. Explain what is meant by the fiscal year and the natural business year. Describe and illustrate the use of working capital and the current ratio in evaluating a companys financial condition. 3. Lear ning Obje ctive Desc infor ribe the ma flo tr rial b w t alancion from of acco bala nce e into t the una unting and d h finan e adjus justed t ed t cial s tatem rial ents.1c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. 4. FLOW OF ACCOUNTING INFORMATION(continued) 5. FLOW OF ACCOUNTING INFORMATION 6. Flow of Accounting Information End-of-Period Spreadsheet (Work Sheet) Unadjusted TBAccountsoDrCrAdjustmentsAdjusted TBDrDrCrCrAccount balances are listed in the Unadjusted Trial Balance columns using the ending balances found in the general ledger. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. 7. Flow of Accounting Information End-of-Period Spreadsheet (Work Sheet) Unadjusted TBAccountsoDrCrAdjustmentsAdjusted TBDrDrCrCrAdjustments are entered here. Two possibilities: Deferrals Existing balances are changed Accruals New information is entered c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. 8. Flow of Accounting Information End-of-Period Spreadsheet (Work Sheet) Unadjusted TBAccountsDrCrAdjustmentsAdjusted TBDrDrCrCro Adjustments are combined with the unadjustedtrial balance amounts to provide balances for the Adjusted Trial Balance columns. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. 9. Flow of Accounting Information End-of-Period Spreadsheet (Work Sheet) Adjusted TBAccountsoDrCrIncome State.DrCrBalance SheetDrCrRevenue and expense balances in the Adjusted Trial Balance columns are extended to the Income Statement columns. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. 10. Flow of Accounting Information End-of-Period Spreadsheet (Work Sheet) Adjusted TBAccountsoDrCrIncome State.DrCrBalance SheetDrCrAsset, liability, and stockholders equity balances in the Adjusted Trial Balance columns are extended to the Balance Sheet columns. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. 11. Lear ning Obje Prep ctive are f i nan cia a l adjus ted a statemen ccou t nt ba s from lance s.2c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. 12. Income Statemento The income statement for NetSolutions isprepared directly from the Income Statement or Adjusted Trial Balance columns of the endof-period spreadsheet (work sheet) beginning with fees earned of $16,840.c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. 13. INCOME STATEMENTto retained earnings statement 14. Retained Earnings StatementoThe first item normally presented on the retained earnings statement is the balance of the Retained Earnings account at the beginning of the period.c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. 15. RETAINED EARNINGS STATEMENT from the income statementto the balance sheet 16. Balance Sheeto The balance sheet is prepared directly fromthe Balance Sheet or Adjusted Trial Balance columns of the end-of-period spreadsheet (or work sheet), beginning with Cash of $2,065.c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. 17. BALANCE SHEET from the retained earnings statement 18. Classified Balance SheetoA classified balance sheet is a balance sheet that was expanded by adding subsections for (1) current assets; (2) property, plant, and equipment; (3) current liabilities; and (4) longterm liabilities.c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. 19. CURRENT ASSETS Cash and other assets that are expected to be converted into cash, sold, or used up usually within a year or less, through the normal operations of the business, are called current assets. Cash AccountsReceivable Notes Receivable Supplies 20. Notes ReceivableoNotes receivable are written promises by the customer to pay the amount of the note and possibly interest at an agreed rate.c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. 21. FIXED ASSETS Property, plant, and equipment (also called fixed assets or plant assets) include assets that depreciate over a period of time. Land is an exception, since it is not subject to depreciation. Equipment Machinery Buildings Land 22. CURRENT LIABILITIES Liabilities 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. Accounts payable Wages payable Interest payable Unearned fees 23. LONG-TERM LIABILITIES Liabilities not due for a long time (usually more than one year) are called long-term liabilities. Long-term notes payable Mortgage payable Bond payable 24. STOCKHOLDERS EQUITY Stockholders equity is the stockholders right to the assets of the business. It is presented on the balance sheet below the liabilities section. Capital stock Retained earnings 25. Lear ning Obje ctive Prep are e clo sing ent r i es.3c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. 26. Closing Entrieso Accounts that are relatively permanent fromyear to year are called permanent accounts or real accounts. These accounts are carried forward from year to year.o Accounts that report amounts for only oneperiod are called temporary accounts or nominal accounts. Temporary accounts are not carried forward because they relate to only one period.c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. 27. Closing EntriesoTo report amounts for only one period, temporary accounts should have zero balances at the beginning of the next period.oTo achieve this, the revenue and expense account balances are transferred to Income Summary at the end of the period.c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. 28. Closing EntriesoThe balance of Income Summary (net income or net loss) is then transferred to the Retained Earnings account.oThe balance of the Dividends account is also transferred to the Retained Earnings account.oThe entries that transfer these balances are called closing entries.c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. 29. CLOSING ENTRIES 30. Closing Entrieso Income Summary is a temporary account that is only used during the closing process.o At the end of the closing process, the Income Summary account will have a zero balance.o Closing entries are recorded in the journal and dated as of the last date of the accounting period.c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. 31. JOURNALIZING AND POSTING CLOSING ENTRIES 32. JOURNALIZING AND POSTING CLOSING ENTRIES 33. JOURNALIZING AND POSTING CLOSING ENTRIES 34. JOURNALIZING AND POSTING CLOSING ENTRIES 35. CLOSING ENTRIESStep 1Step 2Step 3Step 4 36. Temporary Account BalancesoAfter the closing entries are posted, all of the temporary accounts have zero balances.c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. 37. LEDGER 38. LEDGER 39. LEDGER 40. LEDGER 41. Post-Closing Trial BalanceoA 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 and ready for the next accounting period.c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. 42. POST-CLOSING TRIAL BALANCE 43. Lear ning Obje ctive Desc r ibe the a ccou nting cycle .4c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. 44. Accounting CycleoThe accounting process that begins with analyzing and journalizing transactions and ends with preparing the accounting records fo