Upload
others
View
12
Download
0
Embed Size (px)
Citation preview
Financial Statements
and Closing Procedures
Section 1: Preparing
the Financial Statements
Chapter
13
Section Objectives
1. Prepare a classified income statement
from the worksheet.
2. Prepare a statement of owner’s equity
from the worksheet.
3. Prepare a classified balance sheet from
the worksheet.
McGraw-Hill © 2009 The McGraw-Hill Companies, Inc. All rights reserved.
13-3
A classified income statement is sometimes
called a multiple-step income statement.
The Classified Income Statement
Objective 1 Prepare a classified income
statement from the worksheet
13-4
A single-step income statement is a
format in which only one computation
is needed to determine the net income.
ANSWER:
QUESTION:
What is a single-step income statement?
(Total Revenue – Total Expenses = Net Income)
13-5
Operating Revenue
Sales 561,650.00
Less Sales Returns and Allowances 12,500.00
Net Sales 549,150.00
Cost of Goods Sold
Income Statement
Year Ended December 31, 2010
Operating Revenue
Net sales for Simpson Antiques
13-6
Three elements are needed to compute the cost of
goods sold:
The Cost of Goods Sold section contains information
about the cost of the merchandise that was sold during
the period.
Cost of Goods Sold
Beginning inventory
Net delivered cost of purchases
Ending inventory
13-7
Purchases
+ Freight In
(Purchases Returns and Allowances)
(Purchases Discounts)
Net Delivered Cost of Purchases
Net Delivered Cost of Purchases
13-8
Beginning Merchandise Inventory
+ Net Delivered Cost of Purchases
Total Merchandise Available for Sale
Total Merchandise Available for Sale
13-9
(Ending Merchandise Inventory)
Cost of Goods Sold
Cost of Goods Sold
Beginning Merchandise Inventory
+ Net Delivered Cost of Purchases
Total Merchandise Available for Sale
13-10
Merchandise Inventory is the one account that appears on both
the income statement and the balance sheet.
Beginning and ending merchandise inventory balances appear on
the income statement.
Ending merchandise inventory also appears on the balance sheet
in the Assets section.
13-11
Cost of Goods Sold
Merchandise Inventory, Jan. 1, 2010 52,000.00
Purchases 321,500.00
Freight In 9,800.00
Delivered Cost of Purchases 331,300.00
Less Purchases Returns and Allowances 3,050.00
Purchases Discounts 3,130.00 6,180.00
Net Delivered Cost of Purchases 325,120.00
Total Merchandise Available for Sale 377,120.00
Less Merchandise Inventory, Dec. 31, 2010 47,000.00
Cost of Goods Sold 330,120.00
Simpson Antiques
Income Statement
Year Ended December 31, 2010
Cost of Goods Sold
Merchandise available for sale
Cost of goods sold
13-12
Gross Profit on Sales
For Simpson Antiques net sales is the revenue earned from selling clothes.
Cost of goods sold is what Simpson Antiques paid for the clothes that were sold during the fiscal period.
Gross profit is what is left to cover operating expenses and provide a profit.
Gross profit is sales less the cost of goods sold.
13-13
Operating Revenue
Sales 561,650.00
Less Sales Returns and Allowances 12,500.00
Net Sales 549,150.00
Cost of Goods Sold
Merchandise Inventory, Jan. 1, 2010 52,000.00
Purchases 321,500.00
Freight In 9,800.00
Delivered Cost of Purchases 331,300.00
Less Purchases Returns and Allowances 3,050.00
Purchases Discounts 3,130.00 6,180.00
Net Delivered Cost of Purchases 325,120.00
Total Merchandise Available for Sale 377,120.00
Less Merchandise Inventory, Dec. 31, 2010 47,000.00
Cost of Goods Sold 330,120.00
Gross Profit on Sales 219,030.00
Simpson Antiques
Income Statement
Year Ended December 31, 2010
Gross profit on sales for Simpson Antiques
13-14
Gross Profit on Sales 219,030.00
Operating Expenses
Selling Expenses
Salaries Expense - Sales 79,690.00
Advertising Expense 7,425.00
Cash Short or Over 125.00
Supplies Expense 4,975.00
Depreciation Expense - Store Equipment 2,400.00
Total Selling Expenses 94,615.00
General and Administrative Expenses
Rent Expense 27,600.00
Salaries Expense - Office 26,500.00
Insurance Expense 2,450.00
Payroll Taxes Expense 7,371.20
Telephone Expense 1,875.00
Uncollectible Accounts Expense 800.00
Utilities Expense 5,925.00
Depreciation Expense - Office Equipment 700.00
Total General and Administrative Expenses 73,221.20
Total Operating Expenses 167836.2
Simpson Antiques
Income Statement
Year Ended December 31, 2010
Salaries for salespersons and advertising
are examples of selling expenses.
Operating Expenses
13-15
Gross Profit on Sales 219,030.00
Operating Expenses
Selling Expenses
Salaries Expense - Sales 79,690.00
Advertising Expense 7,425.00
Cash Short or Over 125.00
Supplies Expense 4,975.00
Depreciation Expense - Store Equipment 2,400.00
Total Selling Expenses 94,615.00
General and Administrative Expenses
Rent Expense 27,600.00
Salaries Expense - Office 26,500.00
Insurance Expense 2,450.00
Payroll Taxes Expense 7,371.20
Telephone Expense 1,875.00
Uncollectible Accounts Expense 800.00
Utilities Expense 5,925.00
Depreciation Expense - Office Equipment 700.00
Total General and Administrative Expenses 73,221.20
Total Operating Expenses 167836.2
Simpson Antiques
Income Statement
Year Ended December 31, 2010
Operating Expenses
Rent, utilities, and salaries for office employees
are examples of general and administrative
expenses.
13-16
Operating Revenue
Sales 561,650.00
Less Sales Returns and Allowances 12,500.00
Net Sales 549,150.00
Cost of Goods Sold 330,120.00
Gross Profit on Sales 219,030.00
Operating Expenses
Selling Expenses
Salaries Expense - Sales 79,690.00
Advertising Expense 7,425.00
Cash Short or Over 125.00
Supplies Expense 4,975.00
Depreciation Expense - Store Equipment 2,400.00
Total Selling Expenses 94,615.00
General and Administrative Expenses
Rent Expense 27,600.00
Salaries Expense - Office 26,500.00
Insurance Expense 2,450.00
Payroll Taxes Expense 7,371.20
Telephone Expense 1,875.00
Uncollectible Accounts Expense 800.00
Utilities Expense 5,925.00
Depreciation Expense - Office Equipment 700.00
Total General and Administrative Expenses 73,221.20
Total Operating Expenses 167,836.20
Net Income from Operations 51,193.80
Simpson Antiques
Income Statement
Year Ended December 31, 2010
Net income from operations
13-17
Operating Expenses
Net Income from Operations 51,193.80
Other Income
Interest Income 166.00
Miscellaneous Income 582.00
Total Other Income 748.00
Other Expenses
Interest Expense 770.00
Net Nonoperating Expense 22.00
Simpson Antiques
Income Statement
Year Ended December 31, 2010
Other Income and Other Expenses
13-18
Operating Revenue
Net Sales 549,150.00
Cost of Goods Sold 330,120.00
Gross Profit on Sales 219,030.00
Operating Expenses
Total Selling Expenses 94,615.00
Total Operating Expenses 167,836.20
Net Income from Operations 51,193.80
Other Income
Interest Income 166.00
Miscellaneous Income 582.00
Total Other Income 748.00
Other Expenses
Interest Expense 770.00
Net Nonoperating Expense 22.00
Net Income for Year 51,171.80
Simpson Antiques
Income Statement
Year Ended December 31, 2010
Net income for Simpson Antiques
13-19
The statement of owner's equity reports the changes that occurred in the owner's financial interest during the period.
The ending capital balance for Patricia Simpson, $84,792.80, is used to prepare the balance sheet.
Patricia Simpson, Capital, January 1, 2010 61,221.00
Net Income for Year 51,171.80
Less Withdrawals for the Year 27,600.00
Increase in Capital 23,571.80
Patricia Simpson, Capital, December 31, 2010 84,792.80
Simpson Antiques
Statement of Owner's Equity
Year Ended December 31, 2010
Objective 2 Prepare a Statement of Owner’s
Equity from the worksheet
13-20
Current assets are assets consisting
of cash, items that normally will be
converted into cash within one year,
or items that will be used up within
one year.
ANSWER:
QUESTION:
What are current assets?
Objective 3 Prepare a classified balance
sheet from the worksheet
13-21
Current Assets
Assets
Current Assets
Cash 13,136.00
Petty Cash Fund 100.00
Notes Receivable 1,200.00
Accounts Receivable 32,000.00
Less Allow. for Doubtful Accounts 1,050.00 30,950.00
Interest Receivable 30.00
Merchandise Inventory 47,000.00
Prepaid Expenses
Supplies 1,325.00
Prepaid Insurance 4,900.00
Prepaid Interest 75.00 6,300.00
Total Current Assets 98,716.00
Simpson Antiques
Balance Sheet
Year Ended December 31, 2010
Current assets for Simpson Antiques
13-22
Plant and Equipment
Noncurrent assets are called long-term assets.
An important category of long-term assets is plant and equipment.
For many businesses plant and equipment represents a sizable
investment.
Assets
Prepaid Interest 75.00 6,300.00
Total Current Assets 98,716.00
Plant and Equipment
Store Equipment 30,000.00
Less Accumulated Depreciation 2,400.00 27,600.00
Office Equipment 5,000.00
Less Accumulated Depreciation 700.00 4,300.00
Total Plant and Equipment 31,900.00
Total Assets 130,616.00
Simpson Antiques
Balance Sheet
Year Ended December 31, 2010
13-23
Current Liabilities
Assets
Prepaid Interest 75.00 6,300.00
Total Current Assets 98,716.00
Total Plant and Equipment 31,900.00
Total Assets 130,616.00
Liabilities and Owner’s Equity
Current Liabilities
Notes Payable-Trade 2,000.00
Notes Payable-Bank 9,000.00
Accounts Payable 24,129.00
Interest Payable 20.00
Social Security Tax Payable 1,158.40
Medicare Tax Payable 267.40
Employee Income Tax Payable 990.00
Fed. Unemployment Tax Pay. 9.60
State Unemployment Tax Pay. 64.80
Salaries Payable 1,200.00
Sales Tax Payable 6,984.00
Total Current Liabilities 45,823.20
Simpson Antiques
Balance Sheet
Year Ended December 31, 2010
Total current liabilities
13-24
Although repayment of long-term liabilities might not be due
for several years, management must make sure that periodic
interest is paid promptly.
Long-term liabilities include mortgages, notes payable, and
loans payable.
Long-Term Liabilities
13-25
Owner's Equity
The ending balance from the statement of owner’s equity is
transferred to the Owner's Equity section of the balance sheet.
61,221.00
51,171.80
27,600.00
23,571.80
84,792.80
Simpson Antiques
Statement of Owner's Equity
Year Ended December 31, 2010
Patricia Simpson, Capital, January 1, 2010
Net Income for Year
Less Withdrawals for the Year
Increase in Capital
Patricia Simpson, Capital, December 31, 2010
Assets
Owner’s Equity
Patricia Simpson, Capital 84,792.80
Total Liabilities and Owner's Equity 130,616.00
Simpson Antiques
Balance Sheet
Year Ended December 31, 2010
Financial Statements
and Closing Procedures
Section 2: Completing the
Accounting Cycle
Chapter
13
Section Objectives
4. Journalize and post the adjusting entries.
5. Journalize and post the closing entries.
6. Prepare a postclosing trial balance.
7. Journalize and post reversing entries.
McGraw-Hill © 2009 The McGraw-Hill Companies, Inc. All rights reserved.
13-27
All adjustments are shown on the worksheet.
After the financial statements have been prepared, the adjustments are made a permanent part of the accounting records.
They are recorded in the general journal as adjusting journal entries and are posted to the general ledger.
Objective 4 Journalize and post the
adjusting entries
13-28
Adjusting Entries
Type of
Adjustment
Worksheet
Reference
Purpose
Inventory (a – b) Removes beginning inventory and adds ending
inventory to the accounting records.
Expense (c – e) Matches expense to revenue for the period; the
credit is to a contra asset account.
Accrued Expense (f – i) Matches expense to revenue for the period; the
credit is to a liability account.
Prepaid Expense (j – l) Matches expense to revenue for the period; the
credit is to an asset account.
Accrued Income (m – n) Recognizes income earned in the period.
The debit is to an asset account (Interest
Receivable) or a liability account (Sales Tax
Payable).
13-29
At the end of the period, the temporary accounts are closed.
The temporary accounts are:
Revenue accounts
Cost of goods sold accounts
Expense accounts
Drawing account
Journalize and Post the
Closing EntriesObjective 5
13-30
1. Close revenue accounts and cost of goods sold accounts with credit balances to Income Summary.
2. Close expense accounts and cost of goods sold accounts with debit balances to Income Summary.
3. Close Income Summary, which now reflects the net income or loss for the period, to owner's capital.
4. Close the drawing account to owner's capital.
There are four steps in the closing process:
13-31
GENERAL JOURNAL PAGE 28
DATE DESCRIPTION POST. DEBIT CREDIT
REF.
2010
Dec. 31
Closing Entries
Income Summary 568,578.00
Sales 561,650.00
Interest Income 166.00
Miscellaneous Income 582.00
Purchases Returns and Allowances 3,050.00
Purchases Discounts 3,130.00
Step 1: Closing the Revenue Accounts and the Cost of Goods Sold Accounts with
credit balances.
Debit each account, except Income Summary, for its balance. Credit Income Summary for the total.
13-32
GENERAL JOURNAL PAGE 28
DATE DESCRIPTION POST. DEBIT CREDIT
REF.
Dec. 31
Sales Returns and Allowances 13,000.00
Income Summary 512,406.20
Purchases 321,500.00
Salaries Expense – Sales 79,990.00
Advertising Expense 7,425.00
Cash Short or Over 125.00
Supplies Expense 4,975.00
Depreciation Expense - Store Equip 2,400.00
Rent Expense 27,600.00
Freight In 9,800.00
Salaries Expense - Office 26,500.00
Telephone Expense 1,875.00
Uncollectible Accounts Expense 800.00
Utilities Expense 5,925.00
Depreciation Expense - Office Equip. 700.00
Interest Expense 770.00
Payroll Taxes Expense 7,371.20Insurance Expense 2,450.00
Step 2: Closing the Expense Accounts and the Cost of Goods Sold Accounts with
Debit Balances.
Credit each account, except Income Summary, for its balance. Debit Income Summary for the total.
13-33
Income Summary
12/31 47,000.00
12/31 568,578.00
615,578.00
Bal. 51,171.80
Adjusting Entries (a-b) 12/31 52,000.00
Closing Entries 12/31 512,406.20564,406.20
GENERAL JOURNAL PAGE 28
DATE DESCRIPTION POST. DEBIT CREDIT
REF.
Dec. 31 Income Summary 51,171.80
Patricia Simpson, Capital 51,171.80
The third closing entry transfers the Income Summary balance to the owner's capital account.
This closes the Income Summary account, which remains closed until it is used in the end-of-period process for the next year.
For Simpson Antiques, the third closing entry is as follows:
Step 3: Closing the Income Summary Account.
13-34
GENERAL JOURNAL PAGE 28
DATE DESCRIPTION POST. DEBIT CREDIT
REF.
Dec. 31 Patricia Simpson, Capital 27,600.00
Patricia Simpson, Drawing 27,600.00
Step 4: Closing the Drawing account.
This entry closes the drawing account and updates the capital account.
13-35
Posting the Closing Entries
The closing entries are posted from the general journal to the general ledger.
This process brings the temporary account balances to zero.
The word Closing is entered in the Description column.
13-36
Preparing a Postclosing Trial
Balance
Prepare a postclosing trial balance to confirm that the general ledger is in balance.
Only the accounts that have balances – the asset, liability and owner's capital accounts – appear on the postclosing trial balance.
The postclosing trial balance matches the amounts reported on the balance sheet.
To verify this, compare the postclosing trial balance with the balance sheet.
Objective 6
13-37
Revenue
Preparing a Postclosing Trial Balance
Cost of
Goods Sold
Expenses Withdrawals
Temporary accounts do not
appear on the postclosing trial
balance.Cash 13,136.00Petty Cash Fund 100.00Notes Receivable 1,200.00Accounts Receivable 32,000.00Allowance for Doubtful Accounts 1,050.00Interest Receivable 30.00Merchandise Inventory 47,000.00Supplies 1,325.00Prepaid Insurance 4,900.00Prepaid Interest 75.00Store Equipment 30,000.00Accumulated Depreciation - Store Equipment 2,400.00Office Equipment 5,000.00Accumulated Depreciation - Office Equipment 700.00Notes Payable - Trade 2,000.00Notes Payable - Bank 9,000.00Accounts Payable 24,129.00Interest Payable 20.00Social Security Tax Payable 1,158.40Medicare Tax Payable 267.40Employees Income Taxes Payable 990.00Federal Unemployment Tax Payable 9.60State Unemployment Tax Payable 64.80Salaries Payable 1,200.00Sales Tax Payable 6,984.00Patricia Simpson, Capital 84,792.80Totals 134,766.00 134,766.00
Simpson AntiquesPostclosing Trial Balance
December 31, 2010
Only the accounts that have balances—the asset, liability and owner's
capital accounts—appear on the postclosing trial balance.
13-38
Reversing entries are journal entries
made to reverse the effect of certain
adjusting entries involving accrued
income or accrued expenses.
ANSWER:
QUESTION:
What are reversing entries?
Objective 7 Journalize and post reversing entries
13-39
The Accounting Cycle
Step 1
Analyze
transactions
Step 2
Journalize the
data about
transactions
Step 3
Post the
data about
transactions
Step 4
Prepare
a
worksheet
Step 5
Prepare
financial
statements
Step 6
Journalize and
post adjusting
entriesStep 7
Journalize and
post closing
entries
Step 8
Prepare a
postclosing
trial balance
Step 9
Interpret
the financial
information
Step 9
Interpret
the financial
information Step 8
Prepare a
postclosing
trial balance
Step 5
Prepare
financial
statements
Step 4
Prepare
a
worksheet
Step 3
Post the
data about
transactions
Step 2
Journalize the
data about
transactionsStep 1
Analyze
transactions
Step 6
Journalize and
post adjusting
entriesStep 7
Journalize and
post closing
entries