1. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Completing the Accounting Cycle Chapter 4 4

2. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Learning objective 1.Use of Worksheet 2.Closing Process 3.Accounting Cycle 4.Classification of Financial Statement 5.Decision Analysis: Current ratio 6.Review Exercise (6 Problems, Please be Prepared)

3. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin FastForward Work Sheet For Month Ended December 31, 2004 First, enter the unadjusted amounts to the worksheet.

4. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Next, enter the adjustments. FastForward Work Sheet For Month Ended December 31, 2004

5. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Prepare adjusted trial balance. FastForward Work Sheet For Month Ended December 31, 2004

6. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin FastForward Work Sheet For Month Ended December 31, 2004 Sort adjusted trial balance amounts to financial statements.

7. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin FastForward Work Sheet For Month Ended December 31, 2004 Total statement columns, compute income or loss, and balance columns. Total revenue Total expenses Profit

8. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin  Prepare the Income Statement. Prepare the Financial Statements A work sheet does not substitute for financial statements.

9. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin  Prepare the Statement of Changes in Owner’s Equity.

10. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin  Prepare the Balance Sheet.

11. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Benefits of a Work Sheet Aids the preparation of financial statements. Reduces possibility of errors. Assists in planning and organizing an audit. Helps in preparing interim financial statements. Shows the effects of proposed transactions. Not a required report. Links accounts and their adjustments.

12. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin  Resets revenue, expense and withdrawal account balances to zero at the end of the period.  Helps summarize a period’s revenues and expenses in the Income Summary account. Identify accounts for closing. Record and post closing entries. Prepare post-closing trial balance. 2. Closing Process

13. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Temporary and Permanent Accounts  Temporary accounts accumulate data related to one accounting period.  Permanent accounts report on activities related to one or more future accounting periods.

14. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Temporary Accounts Revenues Income Summary Expenses Withdrawals Permanent Accounts Assets Liabilities Owner’s Capital The closing process applies only to temporary accounts. Temporary and Permanent Accounts

15. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Let’s see how the closing process works! Recording Closing Entries  Close Revenue accounts to Income Summary.  Close Expense accounts to Income Summary.  Close Income Summary account to Owner’s Capital.  Close Withdrawals to Owner’s Capital.  Close Revenue accounts to Income Summary.  Close Expense accounts to Income Summary.  Close Income Summary account to Owner’s Capital.  Close Withdrawals to Owner’s Capital.

16. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Using the adjusted trial balance, let’s prepare the closing entries for FastForward.

17. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin  Close Revenue accounts to Income Summary.

18. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin  Close Revenue Accounts to Income Summary Now, let’s look at the ledger accounts after posting this closing entry.

19. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin  Close Revenue Accounts to Income Summary

20. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin  Close Expense accounts to Income Summary.

21. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Now, let’s look at the ledger accounts after posting this closing entry.  Close Expense Accounts to Income Summary

22. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Net Income  Close Expense Accounts to Income Summary

23. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin  Close Income Summary to Owner’s Capital.

24. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Now, let’s look at the ledger accounts after posting this closing entry.  Close Income Summary to Owner’s Capital

25. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin  Close Income Summary to Owner’s Capital

26. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin  Close Withdrawals to Owner’s Capital.

27. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Now, let’s look at the ledger accounts after posting this closing entry.  Close Withdrawals to Owner’s Capital

28. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin  Close Withdrawals to Owner’s Capital

29. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Let’s look at FastForward’s post-closing trial balance. Post-Closing Trial Balance  List of permanent accounts and their balances after posting closing entries.  Total debits and credits must be equal.  List of permanent accounts and their balances after posting closing entries.  Total debits and credits must be equal.

30. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Post-Closing Trial Balance

31. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 3. Accounting cycle 1. Analyze transactions 2. Journalize 3. Post 4. Prepare unadjusted Trial balance 5. Adjust 6. Prepare adjusted Trial balance 7. Prepare statements 8. Close 9. Prepare Post-closing Trial balance

32. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Let’s discuss the components of a classified balance sheet.

33. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Current items are those expected to come due (both collected and owed) within the longer of one year or the company’s normal operating cycle. 4. Classified Balance Sheet

34. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Classified Balance Sheet  Operating cycle is the time span from when cash is used to acquire goods and services until cash is received from the sale of those goods and services.  Operating cycle of supermarket (a few weeks) vs. operating cycle of a construction company (several years).

35. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Current assets are expected to be sold, collected, or used within one year or the company’s operating cycle.

36. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Long-term investments are expected to be held for the longer of one year or the operating cycle.

37. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Plant assets are tangible long-lived assets used to produce or sell products and services.

38. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Intangible assets are long-term resources used to produce or sell products and services and that lack physical form.

39. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Current liabilities are obligations due within the longer of one year or the company’s operating cycle.

40. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Long-term liabilities are obligations not due within the longer of one year or the company’s operating cycle.

41. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Equity is the owner’s claim on the assets.

42. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 5. Decision Analysis - Current Ratio  Helps assess the company’s ability to pay its debts in the near future  Liquidity measure

43. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Review Exercise Chapter 1-3

44. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Exercise 1: Business Entity (Chap 1) Sole proprietorship, Partnership, or Corporation?  Ownership of Spirit Company is divided into 1,000 shares of stock.  Delta is owned by Sarah Gomez, who is personally liable for the debts of the business.  Jo Chen and Al Fitch own Financial Services, a financial services provider. Neither Chen nor Fitch has personal responsibility for the debts of Financial Services.  Sung Kwon and Frank Heflin own Get-It-There, a courier service. Both are personally liable for the debts of the business.  XLT Services does not have separate legal existence apart from the one person who owns it.  BioProducts does not pay income taxes and has one owner.  Tampa Biz pays its own income taxes and has two owners.

45. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Exercise 1: Business Entity (Chap 1) Sole proprietorship, Partnership, or Corporation?  Ownership of Spirit Company is divided into 1,000 shares of stock.  Delta is owned by Sarah Gomez, who is personally liable for the debts of the business.  Jo Chen and Al Fitch own Financial Services, a financial services provider. Neither Chen nor Fitch has personal responsibility for the debts of Financial Services.  Sung Kwon and Frank Heflin own Get-It-There, a courier service. Both are personally liable for the debts of the business.  XLT Services does not have separate legal existence apart from the one person who owns it.  BioProducts does not pay income taxes and has one owner.  Tampa Biz pays its own income taxes and has two owners.

46. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Exercise 2: Accounting Equation & F/S (Chap 2) What is the number for ‘?’

47. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Exercise 3: Account Type (Chap 2) (1) What is the type of account as an asset, liability, equity, revenue, or expense? (2) should we debit (Dr.) or credit (Cr.) the account when account increase? (3) Which side is the normal balance of the account?

48. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Land Equipment Buildings Cash Notes Receivabl e Supplies Prepaid Accounts Accounts Receivable Asset Accounts Review Accounts: Asset Accounts

49. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Asset account  Cash: reflects a company’s cash balance.  Account receivable: held by a seller and refer to promises of payment from customers to sellers. (credit sales or sales on account)  Note receivable: a written promise of another entity to pay a definite sum of money on a specified future date to the holder of the note.  Prepaid account: represent prepayments of future expenses. (ex. prepaid insurance)

50. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Asset account  Supplies: belong to asset until they are used. When they are used, their costs are transferred from the asset accounts to expense accounts.  Equipment: When it is used and gets worn down its cost is gradually reported as an expense (called depreciation).

51. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Accrued Liabilities Unearned Revenues Notes Payable Accounts Payable Liability Accounts

52. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Liability accounts  Accounts payable: oral or implied promises to pay later, commonly arise from purchases of merchandise.  Note payable: a formal promise, usually denoted by the signing of a promissory note, to pay a future amount.  Accrued liabilities: They are amounts owed that are not yet paid (ex. Wages payable, taxes payable).

53. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Liability accounts  Unearned revenue: a liability that is settled in the future when a company delivers its products or services. When customers pay in advance for products or services (before revenue is earned), the revenue recognition principle requires that the seller consider this payment as unearned revenue (ex. Unearned ticket revenue).

54. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Equity Accounts Revenues Owner’s Capital Owner’s Withdrawals Expenses Equity Accounts

55. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Liabilities Equity Assets =+ Equity Accounts Owner’s Capital Owner’s Withdrawals Revenues Expenses ++ ––

56. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Equity accounts  Revenues: gross increase in equity from a company’s earnings activities.  Expenses: the cost of assets or services used to earn revenue. Expenses decrease owner’s equity.  Owner investments: the amounts an owner puts into the company.  Owner withdrawals: the amounts take away from the company for personal use.

57. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Exercise 4: T-Account, Debit & Credit (Chap 2) Use the information in each of the following separate cases to calculate the unknown amount: During October, Shandra Company had $97,500 of cash receipts and $101,250 of cash disbursements. The October 31 Cash balance was $16,800. What is the cash balance on September 30. On September 30, Li Ming Co. had a $97,500 balance in Accounts Receivable. During October, the company collected $88,950 from its credit customers. The October 31 balance in Accounts Receivable was $100,500. Determine the amount of sales on account that occurred in October. Nasser Co. had $147,000 of accounts payable on September 30 and $136,500 on October 31. Total purchases on account during October were $270,000. how much cash was paid on accounts payable during October.

58. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Exercise 5: Journal Entry, Posting, & Trial Balance (Chap 2) Roberto Ricci opens a computer consulting business called Viva Consultants and completes the following transactions in its first month of operations: Apr. 1: Ricci invests $100,000 cash along with office equipment valued at $24,000 in the business. Apr. 2: Prepaid $7,200 cash for twelve months' rent for office space. Apr. 3: Made credit purchases for $12,000 in office equipment and $2,400 in office supplies. Payment is due within 10 days. Apr. 6: Completed services for a client and immediately received $2,000 cash. Apr. 9: Completed an $8,000 project for a client, who must pay within 30 days. Apr. 13: Paid $14,400 cash to settle the account payable created on April 3. Apr. 19: Paid $6,000 cash for the premium on a 12-month insurance policy. Apr. 22: Received $6,400 cash as partial payment for the work completed on April 9. Apr. 25: Completed work for another client for $2,640 on credit. Apr. 28: Ricci withdrew $6,200 cash for personal use. Apr. 29: Purchased $800 of additional office supplies on credit. Apr. 30: Paid $700 cash for this month's utility bill.

59. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Exercise 6: Adjusting Journal Entry (Chap 3) Prepare Adjusting Journal Entry for year ended on 12/31/2005 1)Depreciation on equipment for 2005 is $16,000 2)Prepaid Insurance had $7,000 at 12/31/2005 before adjustment. An analysis show only $1,040 unexpired 3)Office supply had $300 debit balance on 12/31/204, during 2005, $2,680 supplies was purchased. On 12/31/2005, physical count show $345 supplies remain. 4)Half of work related to$10,000 cash received in advance was performed in 2005. 5)Prepaid insurance had debit balance of $5,600 before adjustment. An analysis show that $4,600 coverage had expired. 6)Wage expense of $4,000 have been incurred but are not paid yet as on 12/31/2005

60. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin End of Chapter 4