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

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Presentation on theme: "APIPA 20101 PREPARING COMPONENTS UNITS FOR THE FINANCIAL STATEMENT YEAR END CLOSE Jeanne H. Yamamura CPA, MIM, PhD."— Presentation transcript:

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

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

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

9 APIPA 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 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 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 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 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 EXAMPLE: TRIAL BALANCE 12/31/09 AC#Account NameDRCR 101Cash in Bank – Gen. Checking15, Accounts Receivable10, Accounts Payable9, Withholding Taxes Payable Unrestricted Net Assets14, Grant Revenue19, Salaries Expense12, Travel Expense4,700 TOTAL43,200

15 APIPA 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 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 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 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 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 T-ACCOUNTS Prepaid Insurance Insurance Expense EFFECT ON ACCOUNTING EQUATION? ASSETS = LIAB + EQUITY

21 APIPA 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 T-ACCOUNTS Office Supplies Office Supplies Expense EFFECT ON ACCOUNTING EQUATION? ASSETS = LIAB + EQUITY

23 APIPA 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 T-ACCOUNTS Office Supplies Office Supplies Expense EFFECT ON ACCOUNTING EQUATION? ASSETS = LIAB + EQUITY

25 APIPA 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 T-ACCOUNTS Accum. Depr.- Bldg. Depreciation Expense 1, , EFFECT ON ACCOUNTING EQUATION? ASSETS = LIAB + EQUITY

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

28 APIPA 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 T-ACCOUNTS Unearned Revenues Membership Dues Revenue 4, , EFFECT ON ACCOUNTING EQUATION? ASSETS = LIAB + EQUITY

30 APIPA 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 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 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 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 T-ACCOUNTS Interest Payable Interest Expense EFFECT ON ACCOUNTING EQUATION? ASSETS = LIAB + EQUITY

35 APIPA 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 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 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 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,

39 APIPA 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 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 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 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 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 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 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 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 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 DEPOSITS IN TRANSIT 7/31/08 2, TOTAL 2,305.00

49 APIPA 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 OUTSTANDING CHECKS # # # # TOTAL 1,326.56

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

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

54 APIPA GENERAL LEDGER – CASH Account Title: CASH – GEN. CHECKING ACCOUNT Account Number: DateDescriptionRefDebitCreditBalance 6/30/08Ending balance6, /11/08Sales CRJ-7 1, /15/08Checks # CDJ-7 2, /25/08Sales CRJ-7 1, /31/08Checks # CDJ-7 1, /31/08Sales CRJ-7 2, , This is the balance per books

55 APIPA 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 BANK RECONCILIATION GENERAL CHECKING ACCOUNT 7/31/08 Balance per books: $6, Adjustments: Add: 7/7 Direct deposit 10, Add: Error – 7/11 deposit 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 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 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 JOURNAL ENTRIES DR NSF Checks Receivable 290 CR Cash in Bank 290 To record NSF check from FIT Corp. plus NSF fee ( = 290) DR Misc. Expense 35 CR Cash in Bank 35 To record bank service charge 7/8/08

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

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

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

76 APIPA 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 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 SPECIFIC IDENTIFICATION Requires individually identifiable items Automobiles, real estate, antiques

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

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

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

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

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

90 APIPA 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 inventory $1,256 Total cost of goods sold $6,844

91 APIPA 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 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 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 AGED SCHEDULE OF ACCOUNTS RECEIVABLE - 7/31/08 Debtor Balance Current >90 Antioch Hotel Black, Antonio Camacho, Evelyn Davis, Edward Fresh Fish Rest Lyle, Cynthia 3232 Monterey Bakery Smith, Fred Tyler, Caitlin TOTAL

95 APIPA ALLOWANCE COMPUTATION Aging Category Amount% UncollectibleTotal Current % %16.5 > %54 TOTAL ALLOWANCE78 Balance per GL120 Entry needed(42)

96 APIPA 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 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 Account Title: BAD DEBTS EXPENSE 7/31/08Ending balance150 7/31/08AJE per analysisGJ

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

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

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

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

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

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

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

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

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

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

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

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

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

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

131 APIPA 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 QUESTIONS?

133 APIPA 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 THE END!!


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