1. APIPA 20101 PREPARING COMPONENTS UNITS FOR THE FINANCIAL STATEMENT YEAR END CLOSE Jeanne H. Yamamura CPA, MIM, PhD

2. APIPA 20102 REVIEW OF TERMINOLOGY AND CONCEPTS 1.The set of accounts used by an entity to which transactions are posted is: A. The book of original entry. B. The general ledger. C. A subsidiary ledger. D. A t-account. 2.The book of original entry used to record cash receipts is known as: A.The Cash account. B.The general ledger. C.The cash receipts journal. D.The sales invoice.

3. APIPA 20103 REVIEW OF TERMINOLOGY AND CONCEPTS 3. The five types of accounts include: A. Cash, Fixed Assets, Accounts Payable, Fund Balance, Sales. B. Debit, Credit, Contra-Asset, Contra-Liability, Miscellaneous. C. Revenues, Expenses, Gains, Losses, Net Income. D. Assets, Liabilities, Equity, Revenue, Expenses. 4. Accounts Payable is: A.An Asset. B.A Liability. C.A Revenue. D.An Expense.

4. APIPA 20104 REVIEW OF TERMINOLOGY AND CONCEPTS 5. The set of rules followed by accountants in recording transactions and preparing financial statements is known as: A. Accounting Rules for Dummies. B. Debits and credits. C. Generally accepted accounting principles. D. PCAOB auditing standards. 6. The rule that has expenses attached to the revenues they produce is known as: A.The Revenue Recognition Principle. B.The Matching Principle. C.The Time Period Assumption. D.Accrual Accounting.

5. APIPA 20105 ACCOUNTING EQUATION ASSETS = LIABILITIES + EQUITY DR CR CR + REVENUES CR - EXPENSES DR Normal balances Increase

6. APIPA 20106 GASB 34 GASB Statement No. 34 Basic Financial Statements and Management Discussion and Analysis for State and Local Governments Establishes standards for external financial reporting for state and local governments Requires that resources be classified for accounting and reporting purposes into certain categories

7. APIPA 20107 EQUITY – COMPONENT UNITS Equity – governmental funds – Fund Balance Equity – component units – Net Assets –Invested in Capital Assets Net of related debt –Restricted Net Assets –Unrestricted Net Assets

8. APIPA 20108 INVESTMENT IN CAPITAL ASSETS Capital assets –Net of accumulated depreciation –Net of outstanding principal balances of related debt Acquisition, construction, or improvement

9. APIPA 20109 RESTRICTED ASSETS Nonexpendable –Net assets subject to externally imposed stipulations that require the entity to maintain them permanently Expendable –Net assets whose use by the entity is subject to externally imposed stipulations that can be fulfilled by actions taken by the entity or that expire over time

10. APIPA 201010 UNRESTRICTED NET ASSETS Unrestricted Net Assets –Net assets that are not subject to externally imposed stipulations –May be designated for specific purposes by action of management or the Board of Directors –May be limited by contractual agreements with outside parties

11. APIPA 201011 ACCOUNTING JOURNALS Where transactions are originally recorded Books of original entry –Cash receipts journal –Cash disbursements journal –Payroll journal –Revenue journal –Purchases journal –General journal Complete Exercise No. 1 in the Workbook

12. APIPA 201012 MICRONESIAN FISHING CORPORATION Component unit of State Government Supports local fisheries Purchases and sells fish Purchases and sells fishing supplies Owns building Rents space to Micronesian Development Authority

13. APIPA 201013 ACCOUNTING CYCLE Analyze transactions & verify documentation Post to General Ledger Journalize & post AJEs Record in Journal Prepare TB Prepare & analyze FS Prepare adjusted TB Journalize & post closing JEs ACCOUNTING CYCLE Prepare post closing TB

14. APIPA 201014 EXAMPLE: TRIAL BALANCE 12/31/09 AC#Account NameDRCR 101Cash in Bank – Gen. Checking15,400 110Accounts Receivable10,600 200Accounts Payable9,300 211Withholding Taxes Payable500 310Unrestricted Net Assets14,200 410Grant Revenue19,200 601Salaries Expense12,500 616Travel Expense4,700 TOTAL43,200

15. APIPA 201015 ADJUSTING ENTRIES Help ensure that the financial statements are presented on an accrual basis. Required every time the financial statements are prepared. Ensure revenue recognition and matching principles are followed. –Record revenues in the period in which they are earned. –Recognize expenses in the period in which they are incurred and match against revenues earned

16. APIPA 201016 ADJUSTING ENTRIES Adjusting entries are necessary because: –Inefficient to record certain transactions daily (e.g., S&W) –Certain costs occur over time and need to be recognized periodically (e.g., Insurance) –Certain costs incurred but unknown until following period (e.g., Utilities)

17. APIPA 201017 PREPAYMENTS Prepaid Expenses –Expenses originally paid in cash and initially recorded as assets –Will benefit more than one accounting period. –Examples: Prepaid Insurance, Prepaid Rent, Office Supplies, Fixed Assets (Depreciation). Unearned Revenues –Revenues originally received in cash and initially recorded as liabilities –Will be earned over more than one accounting period –Examples: Unearned Service Revenue, Unearned Membership Revenue.

18. APIPA 201018 PREPAID EXPENSES Cash already paid Expense benefits more than one period Initially set up as an asset Expire over time through use Recognize expense through AJEs

19. APIPA 201019 PREPAID INSURANCE 7/31/08 TB - $1,200 Prepaid Insurance Annual premium for fire insurance on building Originally paid 7/1/08 – need to expense 1 month AJE needed –DR Insurance Expense 100 –CR Prepaid Insurance 100

20. APIPA 201020 T-ACCOUNTS Prepaid Insurance Insurance Expense 1200 100 100 1100 100 EFFECT ON ACCOUNTING EQUATION? ASSETS = LIAB + EQUITY

21. APIPA 201021 SUPPLIES 7/31/08 TB - $750 Office Supplies Physical count at 7/31 = $500 AJE needed –DR Office Supplies Expense 250 –CR Office Supplies 250 Note: What is the difference between Office Supplies Expense and Office Supplies?

22. APIPA 201022 T-ACCOUNTS Office Supplies Office Supplies Expense 750 250 250 500 250 EFFECT ON ACCOUNTING EQUATION? ASSETS = LIAB + EQUITY

23. APIPA 201023 SUPPLIES 7/31/08 TB - Office Supplies Expense $750 (originally expensed) Physical count at 7/31 = $500 AJE needed –DR Office Supplies 500 –CR Office Supplies Expense 500

24. APIPA 201024 T-ACCOUNTS Office Supplies Office Supplies Expense 750 500 500 500 250 EFFECT ON ACCOUNTING EQUATION? ASSETS = LIAB + EQUITY

25. APIPA 201025 DEPRECIATION Straight-line method Depreciable Cost Estimated Useful Life –Where depreciable cost = cost – salvage value 7/31/08 TB Building $25,000, 25 year life Monthly depreciation expense 25,000 / 25 years = 1,000 per year/12 months DR Depreciation Expense 83 CR Accum. Deprec. Bldg. 83 Note: No pennies necessary – would imply more accuracy than really exists

26. APIPA 201026 T-ACCOUNTS Accum. Depr.- Bldg. Depreciation Expense 1,000 83 83 1,083 83 EFFECT ON ACCOUNTING EQUATION? ASSETS = LIAB + EQUITY

27. APIPA 201027 UNEARNED REVENUES Cash already received Revenue earned in the future Initially set up as a liability Recognize revenues when earned through AJEs

28. APIPA 201028 UNEARNED REVENUES 7/31/08 TB - $4,200 Unearned Revenue Annual dues payments of $600 for 7 members 600 per year / 12 months = 50 per month * 7 members = 350 AJE needed –DR Unearned Revenue 350 –CR Membership Dues Revenue 350

29. APIPA 201029 T-ACCOUNTS Unearned Revenues Membership Dues Revenue 4,200 350 350 3,850 350 EFFECT ON ACCOUNTING EQUATION? ASSETS = LIAB + EQUITY

30. APIPA 201030 ACCRUALS Accrued Revenues –Revenues earned but not received or recorded –Examples: Services performed but not yet billed. Accrued Expenses –Expenses incurred but not yet been paid in cash or recorded –Examples: Interest expense, salaries and wages expense, tax expense.

31. APIPA 201031 ACCRUED REVENUES 7/31/08 TB - $15,000 in advertising earned but not yet billed or paid AJE needed –DR Accounts Receivable 15,000 –CR Advertising Revenue 15,000

32. APIPA 201032 T-ACCOUNTS Accounts Receivable Advertising Revenue 29,330 15,000 15,000 44,330 15,000 EFFECT ON ACCOUNTING EQUATION? ASSETS = LIAB + EQUITY

33. APIPA 201033 ACCRUED INTEREST EXPENSE 7/31/08 TB - $20,000 Note Payable, 10% interest, dated 7/1/08, due 9/29/08 Need to accrue 1 month of interest 20,000 * 10% * 1/12 = 167 (rounded) AJE needed –DR Interest Expense167 –CR Interest Payable 167

34. APIPA 201034 T-ACCOUNTS Interest Payable Interest Expense 167 167 EFFECT ON ACCOUNTING EQUATION? ASSETS = LIAB + EQUITY

35. APIPA 201035 ACCRUED WAGES EXPENSE 7/31/08 TB – Need to accrue wages earned but unpaid as of 7/31/08 PPE 7/25/08 paid 8/1 1,000 7/28-7/31 paid 8/15 1,000 / 10 = 100 * 4 = 400 AJE needed –DR Wages Expense1,400 –CR Wages Payable 1,400

36. APIPA 201036 T-ACCOUNTS Wages Payable Wages Expense 2,000 1,400 1,400 7/31 1,400 7/31 3,400 EFFECT ON ACCOUNTING EQUATION? ASSETS = LIAB + EQUITY

37. APIPA 201037 REVERSING ENTRIES AJEs for accruals (revenues and expenses) can be reversed as of the beginning of the following period Why? To make it easier to record ongoing transactions What is a reversing entry? Exactly what it sounds like! A reversal of the AJE.

38. APIPA 201038 REVERSING ENTRY FOR ACCRUED WAGES EXPENSE Reversing entry 8/1/08 –DR Wages Payable1,400 –CR Wages Expense 1,400 Wages Payable Wages Expense 8/1 1,400 2,000 RJE 1,400 1,400 600

39. APIPA 201039 REVIEW OF SHIPPING TERMS FOB Shipping Point – ownership passes when goods shipped by seller FOB Destination – ownership passes when goods received by buyer Inventory in Transit –Asset account –Inventory owned but not yet received

40. APIPA 201040 RECONCILIATIONS Performed at least monthly For –Cash, Accounts Receivable, Accounts Payable, Fixed Assets –Any account supported by a subsidiary ledger Detects errors and unrecorded transactions

41. APIPA 201041 CASH AND BANK ACCOUNTS Cash and cash equivalents include: –Coins, currency on hand –Checks, money orders –Balances in checking and savings accounts Having sufficient cash is critical to the successful operation of ALL entities

42. APIPA 201042 BANK RECONCILIATION Agreement of two independently maintained sets of records –Bank (bank statement) –Books (CDJ, CRJ, GL) Why arent these the same? –Timing – check clearing, deposit clearing –Errors and omissions – bank or books

43. APIPA 201043 IN BOOKS BUT NOT BANK Outstanding checks: Issued and recorded but have not yet cleared the bank Deposits in transit: Mailed or taken to the bank but not recorded on the bank statement; Also includes deposits prepared but not yet taken to bank

44. APIPA 201044 IN BANK BUT NOT BOOKS Require adjusting entries because not yet in books Service charges: Bank fees –DR Bank Charges –CR Cash in Bank NSF (nonsufficient funds) checks: Checks deposited that are returned by the bank because of insufficient funds in the account of the check writer –DR NSF Checks Receivable –CR Cash in Bank

45. APIPA 201045 IN BANK BUT NOT BOOKS Interest income: Interest paid by the bank –DR Cash in Bank –CR Interest Income Miscellaneous charges and credits: –Bank charges for other services such as printing checks or stopping payment. DR Misc. Expense (Bank Charges) CR Cash in Bank –Bank receipt of direct deposit. DR Cash in Bank CR Grants from State

46. APIPA 201046 RECONCILIATION PROCESS Start with book balance and adjust for unrecorded items per the bank statement and any errors or corrections. Then adjust the bank balance for deposits in transit, outstanding checks, and any errors or corrections. When the two adjusted balances agree, the reconciliation process is complete.

47. APIPA 201047 DETAILED STEPS 1.Begin with the balance per the bank. This is the ending balance on the bank statement. 2.Identify deposits in transit as of the end of the period. Trace each of the deposits per the CRJ to the bank statement. a.Any deposits in transit from last month should appear on the bank statement (at the beginning of the month). b.New deposits in transit will usually be the latest deposits for the current month.

48. APIPA 201048 DEPOSITS IN TRANSIT 7/31/08 2,305.00 TOTAL 2,305.00

49. APIPA 201049 DETAILED STEPS 3.Identify outstanding checks as of the end of the period. Trace each of the checks per the CDJ to the bank statement identifying which checks have cleared the bank. Those that have not cleared the bank are outstanding. a.Checks that cleared at the beginning of the bank statement that are not listed in this periods CDJ were most likely issued in the prior period (and were outstanding in the last bank reconciliation).

50. APIPA 201050 OUTSTANDING CHECKS #596 135.00 #602 408.00 #603 515.96 #604 267.60 TOTAL 1,326.56

51. APIPA 201051 DETAILED STEPS 4.Now you are ready to compute the adjusted bank balance. a.Enter a total for deposits in transit. b.Enter a total for outstanding checks. c.Compute: Bank balance plus deposits in transit minus outstanding checks = Adjusted bank balance d.If there were any bank errors, include them as other.

52. APIPA 201052 BANK RECONCILIATION GENERAL CHECKING ACCOUNT 7/31/08 Balance per bank: 15,607.25 Adjustments: Add: Deposits in transit 2,305.00 Less: Outstanding checks (1,326.56) Add: Bank error ________ Adjusted balance per bank: $16,585.69

53. APIPA 201053 DETAILED STEPS 5.Enter the balance per the books. This is the ending balance in the Cash account in the general ledger.

54. APIPA 201054 GENERAL LEDGER – CASH Account Title: CASH – GEN. CHECKING ACCOUNT Account Number: DateDescriptionRefDebitCreditBalance 6/30/08Ending balance6,034.55 7/11/08Sales CRJ-7 1,715.00 7/15/08Checks #598-601 CDJ-7 2,967.30 7/25/08Sales CRJ-7 1,050.00 7/31/08Checks #602-605 CDJ-7 1,826.56 7/31/08Sales CRJ-7 2,305.006,310.69 This is the balance per books

55. APIPA 201055 DETAILED STEPS 6.Now based on the comparisons performed earlier, identify any bank charges (service charges, debit memos) or bank credits (direct deposits, interest income) that appear on the bank statement but not in the books. 7.Compute the adjusted book balance

56. APIPA 201056 BANK RECONCILIATION GENERAL CHECKING ACCOUNT 7/31/08 Balance per books: $6,310.69 Adjustments: Add: 7/7 Direct deposit 10,500.00 Add: Error – 7/11 deposit 100.00 Less: NSF check – FIT (275.00) Less: NSF check fee (15.00) Less: Service charge (35.00) Adjusted balance per books: $16,585.69

57. APIPA 201057 DETAILED STEPS 8.When the two adjusted balances (adjusted balance per bank and adjusted balance per books) agree, the account is reconciled. 9.Prepare an adjusting journal entry for each reconciling item used to compute the adjusted balance per books.

58. APIPA 201058 JOURNAL ENTRIES DR Cash in Bank 10,500 CR Grant Revenue 10,500 To record federal grant direct deposit 7/7/08 DR Cash in Bank 100 CR Sales Revenue 100 To correct deposit 7/11/08

59. APIPA 201059 JOURNAL ENTRIES DR NSF Checks Receivable 290 CR Cash in Bank 290 To record NSF check from FIT Corp. plus NSF fee (275 + 15 = 290) DR Misc. Expense 35 CR Cash in Bank 35 To record bank service charge 7/8/08

60. APIPA 201060 THE END RESULT The final cash balance will then appear as follows after the adjusting entries are recorded and posted. Note that the final cash balance will be equal to the adjusted balance per bank and per books.

61. APIPA 201061 GENERAL LEDGER – CASH Account Title: CASH – GEN. CHECKING ACCOUNT Account Number: DateDescriptionRefDebitCreditBalance 7/31/08Balance6,310.69 7/31/08Fed. Grant DD GJ-7 10,500.00 7/31/08Correction to 7/11 GJ-7 100.00 7/31/08NSF check GJ-7 290.00 7/31/08Bank service chg. GJ-7 35.00 7/31/0816,585.69

62. APIPA 201062 ACCOUNTS RECEIVABLE Agreement of two independently maintained sets of records –General Ledger Control Account –Subsidiary Ledger Why arent these the same? –Errors and omissions

63. APIPA 201063 RECONCILIATION PROCESS Prepare a schedule of customer accounts in Accounts Receivable subsidiary ledger. Compare to the balance in the Accounts Receivable account in the General Ledger. If the two amounts do not agree, prepare a 4-column reconciliation to reconcile the activity in the two records

64. APIPA 201064 GENERAL LEDGER – ACCOUNTS RECEIVABLE Account Title: ACCOUNTS RECEIVABLE Account Number: DateDescriptionRefDebitCreditBalance 6/30/08Balance12,005 7/19/08Sunset Restaurant account written off due to bankruptcy GJ-7 1,905 7/31/08July sales SJ-7 31,560 7/31/08July collections CRJ-7 9,600 7/31/0832,060 31,56011,505

65. APIPA 201065 ACCOUNTS RECEIVABLE – SUBSIDIARY LEDGER Customer: Abacus Hotel DateDescriptionRefDebitCreditBalance 6/30/08Balance5,450 7/10/08Adj. for spoiled fish500 7/31/08July payment CRJ-7 4,950 7/31/08July sale SJ-7 10,560 Customer: Nikko Restaurant 6/30/08Balance1,500 7/31/08July payment CRJ-7 1,500 7/31/08July sale SJ-7 6,700 7/31/086,700

66. APIPA 201066 ACCOUNTS RECEIVABLE – SUBSIDIARY LEDGER Customer: Sunset Restaurant DateDescriptionRefDebitCreditBalance 6/30/08Balance1,905 Customer: Hotel Zero 6/30/08Balance3,150 7/31/08July payment CRJ-7 3,150 7/31/08July sale SJ-7 14,300 31,56010,10033,465

67. APIPA 201067 4-COLUMN RECONCILIATION Balance 6/30/08 DRCRBalance 7/31/08 Per General Ledger 12,00531,56011,50532,060 Account adjusted per SL, not posted to GL 500(500) Adjusted GL balance 12,00531,56010,10031,560

68. APIPA 201068 4-COLUMN RECONCILIATION Balance 6/30/08 DRCRBalance 7/31/08 Per Subsidiary Ledger 12,00531,56010,10033,465 Account W/O due to bankruptcy, not posted to SL 1,905(1,905) Adjusted GL balance 12,00531,56012,00531,560

69. APIPA 201069 JOURNAL ENTRIES DR Sales R&A - Fish 500 CR AR: Abacus Hotel 500 To record spoiled fish returned by Abacus Hotel for credit

70. APIPA 201070 JOURNAL ENTRIES DR Accounts Payable 300 CR Purchase Returns and Allowances – Fish. Supplies 300 To record adjustment for damaged merchandise returned to CHS, Inc.

71. APIPA 201071 SCHEDULE OF ACCOUNTS PAYABLE (AFTER ADJUSTMENTS) Bait and Switch, Inc. $2,700 Boggle Corp. 3,000 CHS Inc. -0- General Fishing Supplies3,125 Marx Company2,500 Sanders, Inc.1,375 TOTAL Per S/L $12,700 Year end accruals: Unpaid invoices 1,205 Inventory in transit 1,500 TOTAL per G/L $15,405

72. APIPA 201072 INVENTORY Merchandise for resale or being manufactured for sale If merchandising entity: only 1 inventory account –Merchandise Inventory or Inventory If manufacturer: 3 inventory accounts –Raw Materials Inventory –Work in Process Inventory –Finished Goods Inventory

73. APIPA 201073 PHYSICAL INVENTORY Complete count of goods on hand At least annually Preferable for business operations to be stopped during count

74. APIPA 201074 INVENTORY IN TRANSIT When does ownership pass? –FOB Shipping Point – when goods leave shipper –FOB Destination – when goods arrive at buyer If inventory in transit at YE and terms of sale are FOB Shipping Point – must accrue

75. APIPA 201075 CONSIGNMENT INVENTORY Still owned by vendor but held by entity EXCLUDE from physical inventory and from ending inventory balance

76. APIPA 201076 PERIODIC VS. PERPETUAL Whether or not inventory balances updated as sales/purchases occur Periodic – only at period end –Purchases account used –Cost of Goods Sold only at period end Perpetual – as sales/purchases occur –No Purchases account –Cost of Goods Sold updated as sales occur

77. APIPA 201077 COST FLOW ASSUMPTIONS When sales are made, which inventory item is being sold? Note: Cost flow assumptions made for recordkeeping purposes. Not actual physical flow of merchandise. Four methods –Specific identification –First-in, First-out (FIFO) –Last-in, Last-out (LIFO) –Average

78. APIPA 201078 SPECIFIC IDENTIFICATION Requires individually identifiable items Automobiles, real estate, antiques

79. APIPA 201079 FIFO Assumes that first items purchased are the first ones sold Cost of goods sold = older costs Ending inventory = newer costs

80. APIPA 201080 LIFO Assumes that last items purchased are the first ones sold Cost of goods sold = newer costs Ending inventory = older costs

81. APIPA 201081 AVERAGE Weighted average cost computed and applied Cost of goods sold = weighted average cost * # units sold Ending inventory = weighted average cost * # units in ending inventory

82. APIPA 201082 EXAMPLE INVENTORY – BOOK – TAHOE HIKING TRAILS DateDescriptionUnitsUnit CostTotal Cost 6/30/07Beg. Inv.00 8/1/07Purchase100$5$500 9/3/07Purchase200$7$1,400 10/15/07Purchase100$8$800 12/5/07Purchase100$8$800 3/17/08Purchase400$9$3,600 6/9/08Purchase100$10$1,000 TOTAL1,000$8,100

83. APIPA 201083 ENDING INVENTORY 845 books sold during FY 6/30/08 Physical inventory 6/30/08 = 155 books

84. APIPA 201084 FIFO – ENDING INVENTORY INVENTORY – BOOK – TAHOE HIKING TRAILS DateDescriptionUnitsUnit CostTotal Cost 6/9/08Purchase100$10$1,000 3/17/08Purchase55$9$495 TOTAL$1,495

85. APIPA 201085 JOURNAL ENTRIES DR Inventory (ending)1,495 DR Cost of Goods Sold 6,605 CR Inventory (beg.) -0- CR Purchases 8,100 To record cost of goods sold and ending inventory at 6/30/08. Note: JE only required under periodic method.

86. APIPA 201086 LIFO – ENDING INVENTORY INVENTORY – BOOK – TAHOE HIKING TRAILS DateDescriptionUnitsUnit CostTotal Cost 8/1/07Purchase100$5$500 9/3/07Purchase55$7$385 TOTAL$885

87. APIPA 201087 JOURNAL ENTRIES DR Inventory (ending) 885 DR Cost of Goods Sold 7,215 CR Inventory (beg.) -0- CR Purchases 8,100 To record cost of goods sold and ending inventory at 6/30/08. Note: JE only required under periodic method.

88. APIPA 201088 EFFECT ON TOTAL ASSETS AND NET INCOME FIFO LIFO Inventory (ending) 1,495 885 Total Assets ++++ ------ Cost of Goods Sold6,6057,215 Net Income++++ ------ Note: In example, prices were rising.

89. APIPA 201089 AVERAGE INVENTORY – BOOK – TAHOE HIKING TRAILS DateDescriptionUnitsUnit CostTotal Cost TOTAL1,000$8,100

90. APIPA 201090 AVERAGE INVENTORY – BOOK – TAHOE HIKING TRAILS DateDescriptionUnitsUnit CostTotal Cost TOTAL1,000$8,100 Total cost / Total units = $8,100 / 1,000 = $8.10 weighted average cost per unit Total ending inventory1558.10$1,256 Total cost of goods sold 8458.10$6,844

91. APIPA 201091 JOURNAL ENTRIES DR Inventory (ending)1,256 DR Cost of Goods Sold 6,844 CR Inventory (beg.) -0- CR Purchases 8,100 To record cost of goods sold and ending inventory at 6/30/08. Note: JE only required under periodic method.

92. APIPA 201092 BAD DEBTS Estimation of uncollectible accounts Allowance method required by GAAP Two estimation methods –Income statement method % of credit sales Determines bad debt expense –Balance sheet method Aging of AR balances and est. collectibility of each aging category Determines allowance for bad debts

93. APIPA 201093 ISLAND UTILITY CORPORATION SCHEDULE OF ACCOUNTS RECEIVABLE 7/31/08 Debtor Balance Antioch Hotel254 Black, Antonio 97 Camacho, Evelyn 43 Davis, Edward 35 Fresh Fish Restaurant156 Lyle, Cynthia 32 Monterey Bakery123 Smith, Fred 78 Tyler, Caitlin 39 TOTAL857

94. APIPA 201094 AGED SCHEDULE OF ACCOUNTS RECEIVABLE - 7/31/08 Debtor Balance Current 31-60 61-90 >90 Antioch Hotel 254 254 Black, Antonio 97 32 3530 Camacho, Evelyn 43 43 Davis, Edward 35 10 1015 Fresh Fish Rest. 156 35 303259 Lyle, Cynthia 3232 Monterey Bakery 123 47 302917 Smith, Fred 78 18 4020 Tyler, Caitlin 39 39 TOTAL 857 439 145 165 128

95. APIPA 201095 ALLOWANCE COMPUTATION Aging Category Amount% UncollectibleTotal Current43900 31-601455%7.25 61-9016510%16.5 >9010850%54 TOTAL ALLOWANCE78 Balance per GL120 Entry needed(42)

96. APIPA 201096 BAD DEBT AJE NEEDED DR Allowance for Bad Debts $42 CR Bad Debts Expense $42 To adjust allowance at 7/31/08. Note: The current Allowance balance was larger than needed so the AJE reduced the Allowance.

97. APIPA 201097 GENERAL LEDGER – ALLOWANCE FOR BAD DEBTS, BAD DEBTS EXPENSE Account Title: ALLOWANCE FOR BAD DEBTS DateDescriptionRefDebitCreditBalance 7/31/08Ending balance120 7/31/08AJE per analysisGJ-74278 Account Title: BAD DEBTS EXPENSE 7/31/08Ending balance150 7/31/08AJE per analysisGJ-742108

98. APIPA 201098 BALANCE SHEET 7/31/08 ASSETS Accounts Receivable $ 857 Allowance for Bad Debts ( 78) Accounts Receivable, net $779

99. APIPA 201099 WRITE OFF OF ACCOUNT Adjusting entry to write off account DR Allowance for Bad Debts $32 CR AR – Cynthia Lyle $32 To write off account for Cynthia Lyle on 8/5/08

100. APIPA 2010100 GENERAL LEDGER – ACCOUNTS RECEIVABLE Account Title: ACCOUNTS RECEIVABLE Account Number: 110 DateDescriptionRefDebitCreditBalance 7/31/08Ending balance 857 8/5/08Write off Cynthia Lyle GJ-732825

101. APIPA 2010101 GENERAL LEDGER – ALLOWANCE FOR BAD DEBTS Account Title: ALLOWANCE FOR BAD DEBTS DateDescriptionRefDebitCreditBalance 7/31/08Ending balance120 7/31/08AJE per analysisGJ-74278 8/5/08Write off Cynthia Lyle GJ-73246

102. APIPA 2010102 SUBSEQUENT COLLECTION OF A/C WRITTEN OFF Entries to record subsequent collection DR AR – Cynthia Lyle$32 CR Allowance for Bad Debts $32 DR Cash$32 CR AR – Cynthia Lyle.$32 To reinstate Cynthia Lyle and record subsequent receipt

103. APIPA 2010103 ASSET DISPOSITIONS When a capital asset is sold: –Update depreciation –Calculate gain or loss on disposition

104. APIPA 2010104 UPDATE DEPRECIATION Calculation of annual depreciation using straight-line method Cost – Estimated Residual Value Estimated Useful Life Determine depreciation for current period

105. APIPA 2010105 GAIN OR LOSS CALCULATION Selling price (sales proceeds) Carrying value (book value) Cost Less accumulated depreciation Gain (loss) on disposal

106. APIPA 2010106 DISPOSAL OF CAPITAL ASSET - EXAMPLE Sale of truck for $9,000 on 7/1/08 Originally purchased 7/3/05 for $25,000 Depreciated over 5 year life with SV $500 Annual depreciation: 25,000 – 500=4,900 5

107. APIPA 2010107 DISPOSAL OF CAPITAL ASSET - EXAMPLE Accum. Depreciation through 6/30/08 = 3 years = 4,900 * 3 = 14,700 Note: If sale had occurred mid-year, calculation of partial year depreciation might have been needed. Sales proceeds 9,000 Cost 25,000 Accum. Deprec.(14,700)10,300 Loss on disposal (1,300)

108. APIPA 2010108 DISPOSAL OF CAPITAL ASSET - EXAMPLE Entry to record sale of asset DR Cash $ 9,000 DR Accum. Deprec.-Vehicles 14,700 DR Loss on disposal 1,300 CR Vehicles $25,000 To record disposal of asset

109. APIPA 2010109 WRITEOFF OF CAPITAL ASSET - EXAMPLE Water pump determined unusable as of 7/31/08 Originally purchased 1/31/06 for $5,000 Depreciated over 5 year life with zero SV Annual depreciation: 5,000 – 0=1,000 5

110. APIPA 2010110 UPDATE DEPRECIATION Assume entity has calendar year end Accum. Depreciation as of 12/31/07 –1/31/06 to 12/31/07 = 23 months –1,000 / 12 * 23 = $1,917 Depreciation for current period –12/31/07 to 7/31/08 = 7 months –1,000 / 12 * 7 = $583

111. APIPA 2010111 DEPRECIATION AJE NEEDED DR Depreciation Expense $583 CR Accum. Deprec. $583 To record depreciation on asset to date determined unusable.

112. APIPA 2010112 CALCULATION OF LOSS ON WRITE OFF Cost 5,000 Accum. Deprec. As of 12/31/07 1,917 To 7/31/08 5832,500 Loss on writeoff (2,500)

113. APIPA 2010113 WRITE OFF OF CAPITAL ASSET - AJE Entry to record writeoff of asset DR Accum. Deprec. – Equip. $2,500 DR Loss on writeoff 2,500 CR Equipment $5,000 To record writeoff of asset

114. APIPA 2010114 WRITE-OFF OF CAPITAL ASSET NO LONGER IN USE Entry to record write off of asset DR Accum. Deprec.-Equip. $5,000 CR Equipment $5,000 To record write off of fully depreciated asset

115. APIPA 2010115 WORKSHEET Used to draft financial statements Start by entering unadjusted TB numbers (done in Exercise 2) Identify adjustments needed (done in Exercises 3 to 9) Determine the adjusted TB numbers Extend the adjusted TB numbers to the IS and BS columns Draft financial statements Journalize adjusting entries

116. APIPA 2010116 WORKSHEET A/C Unadj.TBAJEsAdj. TBIncome Stmt. Stmt. of Net Assets DRCRDRCRDRCRDRCRDRCR

117. APIPA 2010117 OTHER AJES NEEDED DR Investment in Capital Assets10,350 CR Unrestricted Net Assets 10,350 To adjust balance in Investment in Capital Assets for current year activity.

118. APIPA 2010118 OTHER AJES NEEDED DR Restricted NA – Expendable 3,500 CR Unrestricted Net Assets 3,500 To adjust restricted net asset balance for grant revenue earned.

119. APIPA 2010119 OTHER AJES NEEDED DR Unrestricted Net Assets 22,500 CR Restricted NA - Expendable 22,500 To adjust restricted net asset balance for grant revenue received but unearned.

120. APIPA 2010120 CLOSING Occurs at end of fiscal period Closes out nominal accounts, leaving zero balances May close directly to Unrestricted Net Assets or to temporary holding account, Income Summary

121. APIPA 2010121 CLOSING ENTRIES DR Revenue and gain accounts CR Income Summary To close revenue and gain accounts DR Income Summary CR Expense and loss accounts To close expense and loss accounts

122. APIPA 2010122 CLOSING ENTRIES DR Income Summary CR Unrestricted Net Assets To close change in net assets to unrestricted net assets (net increase) DR Unrestricted Net Assets CR Income Summary To close change in net assets to unrestricted net assets (net decrease)

123. APIPA 2010123 POST CLOSING TRIAL BALANCE Verifies proper closing of all nominal accounts Verifies DR = CR Displays balances in real accounts only (balance sheet accounts)

124. APIPA 2010124 FINANCIAL STATEMENT ANALYSIS Trend analysis –Evaluation of financial data over time –Two years is not enough! Common size analysis –Each item expressed as a % of base amount –Enables comparison of different sized entities Ratio analysis –Can be used for many analytical purposes –Must compare over time and with industry and competitors –Can be computed differently by different services/analysts

125. APIPA 2010125 LIQUIDITY AND SOLVENCY Liquidity - Identify entitys ability to meet short-term obligations Solvency – Ability of entity to survive in the long run

126. APIPA 2010126 LIQUIDITY Current ratio: Current assets Current liabilities Quick ratio: Quick assets Current liabilities where quick assets = Cash, receivables, and short term investments

127. APIPA 2010127 SOLVENCY Working capital to total assets: Current assets - Current liabilities Total assets Defensive interval: Quick assets Projected daily operational expenditures

128. APIPA 2010128 SOLVENCY Debt to total assets: Total liabilities Total assets

129. APIPA 2010129 OPERATIONAL EFFICIENCY How effectively and efficiently the entity is using its resources Receivables turnover: Net credit sales Average gross accounts receivable Average collection period: 365 days / receivables turnover ratio

130. APIPA 2010130 OPERATIONAL EFFICIENCY Inventory turnover: Cost of goods sold Average inventory Days in inventory: 365 days / inventory turnover ratio

131. APIPA 2010131 PROFITABILITY How well the entity has performed operationally Profit margin on sales: Net income / net sales Return on assets: Net income / Average total assets Asset turnover: Net sales / Average total assets

132. APIPA 2010132 QUESTIONS? yamamura@unr.edu

133. APIPA 2010133 POST TEST Circle your best guess at the right answer (A, B, C or D) Dont worry – you may not know all the answers – but, hopefully, you know more than when you started!

134. APIPA 2010134 THE END!!