Chapter03

The Financial Reporting Process

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc.

Part A

Accrual-Basis Accounting

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LO1 Revenue and Expense Reporting

o Accounting information – necessary for decision making.

o To be useful in decision making – accountants must report revenues and expenses in a way that reflects the ability of the company to create value for its owners.

o Accrual-basis accounting records revenues when earned (the revenue recognition principle) and expenses with related revenues (the matching principle).

o Accounting information – necessary for decision making.

o To be useful in decision making – accountants must report revenues and expenses in a way that reflects the ability of the company to create value for its owners.

o Accrual-basis accounting records revenues when earned (the revenue recognition principle) and expenses with related revenues (the matching principle).

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Revenue Recognition Principle

Recognize revenue when it is earned

o Calvin books a cruise with Carnival Cruise Lines, the world’s largest cruise line. He makes reservations and pays for the cruise in November 2012, but the cruise is not scheduled to sail until April 2013.

o When does Carnival report revenue from the ticket sale?

Recognize revenue when it is earned

o Calvin books a cruise with Carnival Cruise Lines, the world’s largest cruise line. He makes reservations and pays for the cruise in November 2012, but the cruise is not scheduled to sail until April 2013.

o When does Carnival report revenue from the ticket sale?

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Matching Principle

Expenses are reported with the revenues they

help to generate

Expenses are reported with the revenues they

help to generate

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LO2 Accrual–Basis Compared with Cash–Basis Accounting

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Part B

The Measurement Process

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Closing ProcessClosing Process

LO3 Adjusting Entries

Reporting ProcessReporting Process

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LO4 Post Adjusting Entries

o Post adjusting entries to the T-accounts in the general ledger to update the account balances.

o Prepare an adjusted trial balance.

o An adjusted trial balance is a list of all accounts and their balances after we have updated account balances for adjusting entries.

o Post adjusting entries to the T-accounts in the general ledger to update the account balances.

o Prepare an adjusted trial balance.

o An adjusted trial balance is a list of all accounts and their balances after we have updated account balances for adjusting entries.

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Part C

The Reporting Process

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LO5 Financial Statement1s

Accounts Debit CreditCash $6,200 Accounts receivable 2,700Supplies 1,500Prepaid rent 5,500 BALANCE

Equipment 24,000 SHEET

Accumulated Depreciation $400 Assets

Accounts payable 2,300 =

Unearned revenue 540 Liabilities

Salaries payable 300 +

Interest payable 100 Stockholders’ Equity

Utilities payable 960

Notes Payable 10,000STATEMENT OF Common stock 25,000

STOCKHOLDERS’ Retained earnings 0EQUITY Dividends 200

Common Stock Service revenue 6,360+ Supplies expense 800 INCOME

Retained Earnings Rent expense 500 STATEMENT

(= RE, Jan. 1 + NI – Div) Depreciation expense 400 Revenues

= Salaries expense 3,100 −

Stockholders’ Equity Utilities expense 960 Expenses

Interest expense 100 =

Totals $45,960 $45,960 Net Income

EAGLE GOLF ACADEMYAdjusted Trial Balance

January 31

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Income Statement

Revenues:Service revenue $6,360

Expenses:Salaries expense $3,100 Rent expense 500 Supplies expense 800 Depreciation expense 400 Interest expense 100 Utilities expense 960

Total expenses 5,860Net income $500

EAGLE GOLF ACADEMYIncome Statement

For the month ended January 31

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Statement of Stockholders’ Equity

TotalCommon Retained Stockholders

’Stock Earnings Equity

Balance at January 1 -0- -0- -0-Issuance of common stock $25,000 $25,000 Add: Net income for January $500 500Less: Dividends (200) (200)Balance at January 31 $25,000 $300 $25,300

EAGLE GOLF ACADEMYStatement of Stockholders’ EquityFor the month ended January 31

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Classified Balance Sheet

EAGLE GOLF ACADEMYClassified Balance Sheet

January 31

Assets Liabilities Current assets: Current liabilities:

Cash $ 6,200 Accounts payable $ 2,300 Accounts receivable 2,700 Unearned revenue 540 Supplies 1,500 Salaries payable 300

Prepaid rent 5,500

Utilities payable

960

Total current assets 15,900 Interest payable 100 Total current liabilities 4,200

Long-term assets: Equipment 24,000 Long-term liabilities: Accum. depr., equip. (400) Notes payable 10,000

Total long-term assets 23,600 Total liabilities 14,200 Stockholders’ Equity

Common stock 25,000 Retained earnings 300

Total stockholders’ equity $ 25,300

Total liabilities and stockholders’ equity $ 39,500 Total assets $ 39,500

Total assets equal current plus long-term assets.Total liabilities equal current plus long-term liabilities.Total stockholders’ equity includes common stock and retained earnings from the statement of stockholders’ equity.Total assets must equal total liabilities plus stockholders’ equity.

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Part D

The Closing Process

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LO6 Closing Entries

o Transfer the balance of all revenue, expense, and dividend accounts to the balance of retained earnings.

o Increase the retained earnings account by the amount of revenues and decrease retained earnings by the amount of expenses and dividends.

o The balance of each revenue, expense, and dividend account equals zero after closing entries.

o Do not affect the balances of permanent accounts other than retained earnings.

o Transfer the balance of all revenue, expense, and dividend accounts to the balance of retained earnings.

o Increase the retained earnings account by the amount of revenues and decrease retained earnings by the amount of expenses and dividends.

o The balance of each revenue, expense, and dividend account equals zero after closing entries.

o Do not affect the balances of permanent accounts other than retained earnings.

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Close to Retained Earnings

0 Beginning balance6,360 Total revenues

Total expenses 5,860 Total dividends 200

300 Ending balance

Retained Earnings

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LO7 Post Closing Entries and Prepare Post–Closing Trial Balance

Accounts Debit CreditCash $6,200 Accounts receivable 2,700 Supplies 1,500 Prepaid rent 5,500 Equipment 24,000 Accumulated Depreciation $400 Accounts payable 2,300 Unearned revenue 540 Salaries Payable 300 Interest Payable 100 Utilities Payable 960 Notes Payable 10,000 Common stock 25,000 Retained earnings 300

Totals $39,900 $39,900

EAGLE GOLF ACADEMYPost-Closing Trial Balance

January 31

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End of Chapter 03

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