ACO 201 Chapter 5, Spring 2013

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin The Accounting Cycle: The Accounting Cycle: Reporting Financial Results Reporting Financial Results Chapter 5 McGraw-Hill/Irwin 5-2 Preparing Financial Preparing Financial Statements Statements Publicly owned companies – those with shares listed on a stock exchange – have obligations to release annual and quarterly information to their stockholders and to the public. Publicly owned companies – those with shares listed on a stock exchange – have obligations to release annual and quarterly information to their stockholders and to the public. The annual report includes comparative financial statements and other information relating to the company’s financial position, business operations, and future prospects. The financial statements contained in the annual report must be audited by a firm of certified public accountants (CPAs). McGraw-Hill/Irwin 5-3 JJ's Lawn Care Service Adjusted Trial Balance May 31, 2009 Cash 3,925 $ Accounts receivable 75 Tools & equipment 2,650 Accumulated depreciation: tools & equipment 50 $ Truck 15,000 Accumumlated depreciation: truck 250 Notes payable 13,000 Accounts payable 150 Capital stock 8,000 Dividends 200 Sales revenue 750 Gasoline expense 50 Depreciation expense: tools & equipment 50 Depreciation expense: truck 250 Total 22,200 $ 22,200 $ Now, let’s prepare the financial statements for JJ’s Lawn Care Service for May. Now, let’s prepare the financial statements for JJ’s Lawn Care Service for May. 5-4 JJ's Lawn Care Service Income Statement For the month ending May 31, 2009 Sales revenue 750 $ Operating expenses: Gasoline expense 50 $ Depreciation: tools & equipment 50 Depreciation: truck 250 350 Net income 400 $ Net income also appears on the Statement of Retained Earnings. Net income also appears on the Statement of Retained Earnings. The Income Statement The Income Statement 5-5 Business Earnings Dividends Business Losses Summarizes the increases and decreases in Retained Earnings during the period. The Statement of Retained The Statement of Retained Earnings Earnings 5-6 Now, let’s prepare the Balance Sheet. The Statement of Retained The Statement of Retained Earnings Earnings 5-7 JJ's Lawn Care Service Balance Sheet May 31, 2009 Assets Cash 3,925 $ Accounts receivable 75 Tools & equipment 2,650 $ Less: Accumulated depreciation 50 2,600 Truck 15,000 $ Less: Accumulated depreciation 250 14,750 Total assets 21,350 $ Liabilities & Stockholders' Equity Liabilities: Notes payable 13,000 $ Accounts payable 150 Total liabilities 13,150 $ Stockholders' equity: Capital stock 8,000 $ Retained earnings 200 Total stockholders' equity 8,200 Total liabilities & stockholders' equity 21,350 $ The Balance Sheet The Balance Sheet 5-8 Relationships among the Relationships among the Financial Statements Financial Statements JJ's Lawn Care Service Income Statement For the month ending May 31, 2009 Sales revenue 750 $ Operating expenses: Gasoline expense 50 $ Depreciation: tools & equipment 50 Depreciation: truck 250 350 Net income $ 400 JJ's Lawn Care Service Balance Sheet May 31, 2009 Assets Cash 3,925 $ Accounts receivable 75 Tools & equipment 2,650 $ Less: Accumulated depreciation 50 2,600 Truck 15,000 $ Less: Accumulated depreciation 250 14,750 Total assets 21,350 $ Liabilities & Stockholders' Equity Liabilities: Notes payable 13,000 $ Accounts payable 150 Total liabilities 13,150 $ Stockholders' equity: Capital stock 8,000 $ Retained earnings 200 Total stockholders' equity 8,200 Total liabilities & stockholders' equity 21,350 $ 5-9 Notes to the Financial Statements Examples of Items Disclosed Lawsuits pending Scheduled plant closings Governmental investigations Significant events occurring after the balance sheet date Specific customers that account for a large portion of revenue Unusual transactions and related party transactions Examples of Items Disclosed Lawsuits pending Scheduled plant closings Governmental investigations Significant events occurring after the balance sheet date Specific customers that account for a large portion of revenue Unusual transactions and related party transactions Drafting the Notes that Drafting the Notes that Accompany Financial Accompany Financial Statements Statements McGraw-Hill/Irwin 5-10 Closing the Temporary Closing the Temporary Accounts Accounts Close Revenue accounts to Income Summary. Close Expense accounts to Income Summary.  Close Income Summary account to Retained Earnings. Close Dividends to Retained Earnings. The closing process gets the temporary accounts ready for the next accounting period. McGraw-Hill/Irwin 5-11 JJ's Lawn Care Service Adjusted Trial Balance May 31, 2009 Cash 3,925 $ Accounts receivable 75 Tools & equipment 2,650 Accum. depreciation: tools & eq. 50 $ Truck 15,000 Accum. depreciation: truck 250 Notes payable 13,000 Accounts payable 150 Capital stock 8,000 Dividends 200 Sales revenue 750 Gasoline expense 50 Depreciation exp.: tools & eq. 50 Depreciation exp.: truck 250 Total 22,200 $ 22,200 $ Closing the Temporary Closing the Temporary Accounts Accounts 5-12 GENERAL JOURNAL Date Account Titles and Explanation P RDebit Credit May 31 Sales Reveune 750 Income Summary 750 To close the revenue account. Since Sales Revenue has a credit balance, the closing entry requires a debit to the Sales Revenue account. Since Sales Revenue has a credit balance, the closing entry requires a debit to the Sales Revenue account. Closing Entries for Revenue Closing Entries for Revenue Accounts Accounts 5-13 Income Summary 750 750 Sales Revenue 750 750 - Closing Entries for Revenue Closing Entries for Revenue Accounts Accounts 5-14 GENERAL JOURNAL Date Account Titles and Explanation P RDebit Credit May 31 Income Summary 350 Gasoline Expense 50 Depreciation Exp.: Tools & Equipment 50 Depreciation Exp.: Truck 250 To close the expense accounts. Since expense accounts have a debit balance, the closing entry requires a credit to the expense accounts. Since expense accounts have a debit balance, the closing entry requires a credit to the expense accounts. Closing Entries for Expense Closing Entries for Expense Accounts Accounts 5-15 Closing Entries for Expense Closing Entries for Expense Accounts Accounts Income Summary 350 750 400 Net Income Gasoline Exp. 50 50 - Depr. Exp.: Truck 250 250 - Depr. Exp.: Tools & Equipment 50 50 - 5-16 Since Income Summary has a $400 credit balance, the closing entry requires a debit to Income Summary. Since Income Summary has a $400 credit balance, the closing entry requires a debit to Income Summary. GENERAL JOURNAL Date Account Titles and Explanation P RDebit Credit May 31 Income Summary 400 Retained Earnings 400 To close Income Summary. Closing the Income Closing the Income Summary Account Summary Account 5-17 Retained Earnings 400 400 Income Summary 350 750 400 - The balance in Income Summary is now zero. Closing the Income Closing the Income Summary Account Summary Account McGraw-Hill/Irwin 5-18 Since the Dividends account has a debit balance, the closing entry requires a credit to the Dividends account. Since the Dividends account has a debit balance, the closing entry requires a credit to the Dividends account. GENERAL JOURNAL Date Account Titles and Explanation P RDebit Credit May 31 Retained Earnings 200 Dividends 200 To close the Dividends account. Closing the Dividends Closing the Dividends Account Account McGraw-Hill/Irwin 5-19 Closing the Dividends Closing the Dividends Account Account Retained Earnings 200 400 200 Dividends 200 200 - 5-20 JJ's Lawn Care Service After-Closing Trial Balance May 31, 2009 Cash 3,925 $ Accounts receivable 75 Tools & equipment 2,650 Accum. depreciation: tools & eq. 50 $ Truck 15,000 Accum. depreciation: truck 250 Notes payable 13,000 Accounts payable 150 Capital stock 8,000 Retained earnings 200 Total $ 21,650 21,650 $ After-Closing Trial Balance After-Closing Trial Balance 5-21 Evaluating Profitability Evaluating Profitability Evaluating Liquidity Evaluating Liquidity Evaluating the Business Evaluating the Business Net Income Percentage Net Income Total Revenue = Return on Equity Net Income Avg. Stockholders’ Equity = Current Ratio Current Assets Current Liabilities = Working Capital Current Assets – = Current Liabilities 5-22 Monthly Quarterly Jan. 1 Dec. 31 Annually Many companies prepare financial statements at various points throughout the year. Many companies prepare financial statements at various points throughout the year. Interim Financial Statements Preparing Financial Preparing Financial Statements Covering Different Statements Covering Different Periods of Time Periods of Time 5-23 Ethics, Fraud, and Ethics, Fraud, and Corporate Governance Corporate Governance A company should disclose any facts that an intelligent person would consider necessary for the statements to be interpreted properly. Public companies are required to file annual reports with the Securities and Exchange Commission (SEC). The SEC requires that companies include a section labeled “Management Discussion and Analysis” (MD&A) because the financial statements and related notes may be inadequate for assessing the quantity and sustainability of a company’s earnings. 5-24 Supplemental Topic: The Supplemental Topic: The Worksheet Worksheet Balance Sheet Accounts Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr Cash 18,592 18,592 18,592 Accounts Receivable 6,500 (h) 750 7,250 7,250 Shop Supplies 1,800 (a) 600 1,200 1,200 Notes Payable 4,000 4,000 4,000 Accounts Payable 2,690 2,690 2,690 Income Statement Accounts Repair Service Revenue 171,250 (h) 750 172,000 172,000 Advertising Expense 3,900 3,900 3,900 Wages Expense 56,800 (f) 1,950 58,750 58,750 272,000 272,000 12,200 12,200 279,100 279,100 135,058 175,000 144,042 104,100 Net Income 39,942 39,942 Totals 175,000 175,000 144,042 144,042 OVERNIGHT AUTO SERVICES Worksheet For the Year Ended December 31, 2009 Trial Balance Adjustments Adjusted Trial Balance Income Statement Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-25 End of Chapter 5 End of Chapter 5