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Financial Statements and Closing Procedures Chapter 13 Financial Statements and Closing Procedures Section 1: Preparing the Financial Statements Section Objectives Prepare a classified income statement from the worksheet. Prepare a statement of owner’s equity from the worksheet. Prepare a classified balance sheet from the worksheet.

The Classified Income Statement Prepare a classified income statement from the worksheet Objective 1 The Classified Income Statement A classified income statement is sometimes called a multiple-step income statement. At the end of the period, the three financial statements must be prepared. A newspaper’s classified section is similar to a business’s classified financial statements. Classifying like information together on financial statements makes them easier to interpret. A classified financial statement is a format in which items are divided into groups of similar accounts and a subtotal is given for each group. The Classification and order of information depends on the type of business and the expected use of the statement. We can use a worksheet to prepare a classified income statement. A classified income statement is sometimes called a multiple-step income statement. This type of income statement contains several subtotals which are computed before the net income is calculated.

What is a single-step income statement? QUESTION: What is a single-step income statement? A single-step income statement is a format in which only one computation is needed to determine the net income. ANSWER: (Total Revenue – Total Expenses = Net Income)

Cost of Goods Sold The Cost of Goods Sold section contains information about the cost of the merchandise that was sold during the period. Three elements are needed to compute the cost of goods sold: Beginning inventory Net delivered cost of purchases Ending inventory

Net Delivered Cost of Purchases Freight In (Purchases Returns and Allowances) (Purchases Discounts) Net Delivered Cost of Purchases

Cost of Goods Sold Beginning Merchandise Inventory Net Delivered Cost of Purchases Cost of Goods Available for Sale Less Ending Inventory Cost of Goods Sold Remember, the Cost of Goods Sold section contains information about the cost of the merchandise that was sold during the period.

Cost of Goods Sold Merchandise available for sale Cost of goods sold

Net income from operations

Other Income and Other Expenses

Net income for Whiteside Antiques

Prepare a Statement of Owner’s Equity from the worksheet Objective 2 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 Bill Whiteside, $84,576.80, is used to prepare the balance sheet.

Current Assets Current assets for Whiteside Antiques

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.

Total current liabilities Whiteside Antiques Partial Balance Sheet December 31, 2013 Assets Prepaid Interest 75.00 6,300.00 Total Current Assets 98,716.00 Total Plant and Equipment 31,900.00 Total Assets Total current liabilities 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 7,200.00 Total Current Liabilities 46,039.20

Long-Term Liabilities 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. After current liabilities comes long-term liabilities. Long-term liabilities are debts of a business that are due more than one year in the future. Long-term liabilities include mortgages, notes payable, and loans payable. There were no long term liabilities for Whiteside Antiques as of December 31, 2013.

Financial Statements and Closing Procedures Chapter 13 Financial Statements and Closing Procedures Section 2: Completing the Accounting Cycle Section Objectives Journalize and post the adjusting entries. Journalize and post the closing entries. Prepare a postclosing trial balance. Journalize and post reversing entries.

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. Recognizes interest earned in the period. The debit is to an asset account, (interest receivable) and the credit is to a revenue account. Accrued Interest (m)

There are four steps in the closing process: Close revenue accounts and cost of goods sold accounts with credit balances to Income Summary. Close expense accounts and cost of goods sold accounts with debit balances to Income Summary. Close Income Summary, which now reflects the net income or loss for the period, to owner's capital. Close the drawing account to owner's capital.