1. Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter 14 Merchandiser’s Financial Statements and the Closing Process

2. 14-2 Learning Objective 1 Prepare a work sheet for a merchandising business. Step 1: Enter unadjusted trial balance. Step 2: Enter adjustments. Step 3: Prepare adjusted trial balance. Step 4: Sort adjusted trial balance amounts to financial statements. Step 5: Total statement columns, compute income or loss, and balance columns. LO1

3. 14-3 Learning Objective 2 Define and prepare multiple-step and single-step income statements. The multi-step format has multiple subtotals before arriving at net income. This provides more detailed information for users. A multiple-step income statement has three main parts: 1.Gross profit, determined by subtracting cost of goods sold from net sales. 2.Income from operations, determined by subtracting operating expenses from gross profit. 3.Net income, determined by adjusting income from operations for nonoperating items. When a company has no reportable nonoperating activities, such as SuperSub, its income from operations is simple labeled net income. Operating expenses are classified into selling expenses and general and administrative expenses. Multiple-Step Income Statement LO2

4. 14-4 Multiple-Step Income Statement Nonoperating activities consist of other expenses, revenues, losses, and gains that are unrelated to a company’s operations. They are reported in two sections: 1.Other revenues and gains, which often include interest revenue, dividend revenue, rent revenue, and gains from asset disposals. 2.Other expenses and losses, which often include interest expense, losses from asset disposals, and casualty losses. LO2

5. 14-5 Single-Step Income Statement This is the same information for Z-MART presented as a single-step income statement. In a single-step income statement, all revenues are grouped together and totaled and all the expenses are grouped together and totaled. Then, a single step is needed to subtract total expenses from total revenues to arrive at Net Income. As you can see, the Net Income is the same whether the multi-step or the single-step is used. The only difference is in the amount of detail that is provided on the income statement. LO2

6. 14-6 Learning Objective 3 Prepare a statement of owner’s equity. The statement of owner’s equity summarizes changes in the owner’s equity account during the year due to: The owner’s capital account is updated during the year for additional owner investments. LO3

7. 14-7 Learning Objective 4 Explain and prepare a classified balance sheet. A classified balance sheet lists current assets before noncurrent assets and current liabilities before noncurrent liabilities. This consistency in presentation allows users to quickly identify current assets that are most easily converted to cash and current liabilities that are shortly coming due. Items in current assets and current liabilities are listed in the order of how quickly they will be converted to, or paid in cash. Categories for assets : Current Assets Plant Assets Long-term Investments Intangible Assets Categories for liabilities : Current Liabilities Long-Term Liabilities Equity: Equity LO4

8. 14-8 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. Learning Objective 5 Prepare journal entries to close temporary accounts. LO5

9. 14-9 Closing Entries  Close revenue accounts to Income Summary.  Close expense accounts to Income Summary. a. Close inventory and purchase- related accounts to Income Summary. b. Close other 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. a. Close inventory and purchase- related accounts to Income Summary. b. Close other expense accounts to Income Summary.  Close Income Summary account to owner’s capital.  Close Withdrawals to owner’s capital. Temporary Accounts Revenues Income Summary Expenses Withdrawals Permanent Accounts Assets Liabilities Owner’s Capital The closing process applies only to temporary accounts. LO5

10. 14-10 Learning Objective 6 Prepare a post-closing trial balance. Since all the temporary accounts have been closed, they have zero balances and do not appear on the post-closing trial balance. After journalizing and posting the closing entries a post-closing trial balance is prepared using only the balances in the permanent accounts from the work sheet. LO6

11. 14-11 Learning Objective 7 Prepare reversing entries and explain their purpose. The following adjusting entry is made to accrue earned but unpaid salaries on December 31: Employees are paid $700 on January 9. The $700 includes the $210 accrued on December 31. A reversing entry was not made on January 1. Reversing entries are optional and are intended to simplify a company’s bookkeeping. As a general rule, adjusting entries that create new asset or liability accounts are likely candidates for reversing entries. LO7

12. 14-12 Accounting without Reversing Entries December 31 adjusting entry January 9 payment entry LO7

13. 14-13 Accounting with Reversing Entries The following adjusting entry is made to accrue earned but unpaid salaries on December 31: Employees are paid $700 on January 9. The $700 includes the $210 accrued on December 31. The adjusting entry made on December 31 is reversed on January 1. LO7

14. 14-14 Accounting with Reversing Entries December 31 adjusting entry January 9 payment entry January 1 reversing entry LO7

15. 14-15 End of Chapter 14