Completing the Accounting Cycle Principles of Financial and Managerial Accounting 11e Principles of Corporate Financial Accounting 11e Chapter 4 Principles of Financial and Managerial Accounting Using excel for Success Student Version These slides should be viewed using the presentation mode (left click your mouse on the icon). Prepared by: C. Douglas Cloud Professor Emeritus of Accounting Pepperdine University Reeve Warren Duchac © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Learning Objective 1 Describe the flow of accounting information from the unadjusted trial balance into the adjusted trial balance and financial statements.

Flow of Accounting Information (continued)

Flow of Accounting Information (continued)

Flow of Accounting Information (concluded)

Prepare financial statements from adjusted account balances. Learning Objective 2 Prepare financial statements from adjusted account balances.

LO 2 Income Statement The income statement for NetSolutions is prepared directly from the Income Statement or Adjusted Trial Balance columns of the end-of-period spreadsheet (work sheet) beginning with fees earned of $16,840.

Retained Earnings Statement LO 2 Retained Earnings Statement The first item presented on the retained earnings statement is the balance of the Retained Earnings account at the beginning of the period.

LO 2 Balance Sheet The balance sheet is prepared directly from the Balance Sheet or Adjusted Trial Balance columns of the end-of-period spreadsheet (or work sheet), beginning with Cash of $2,065.

Classified Balance Sheet LO 2 Classified Balance Sheet A classified balance sheet is a balance sheet that was expanded by adding subsections for current assets; property, plant, and equipment; current liabilities; and long-term liabilities.

LO 2 Current Assets Cash and other assets that are expected to be converted into cash, sold, or used up usually within a year or less, through the normal operations of the business, are called current assets. Cash Accounts Receivable Notes Receivable Supplies

LO 2 Notes Receivable Notes receivable are written promises by the customer to pay the amount of the note and possibly interest at an agreed rate.

LO 2 Fixed Assets Property, plant, and equipment (also called fixed assets or plant assets) include assets that depreciate over a period of time. Land is an exception, as it is not subject to depreciation. Equipment Machinery Buildings Land

LO 2 Current Liabilities Liabilities that will be due within a short time (usually one year or less) and that are to be paid out of current assets are called current liabilities. Accounts payable Wages payable Interest payable Unearned fees

Long-Term Liabilities Liabilities not due for a long time (usually more than one year) are called long-term liabilities. Long-term notes payable Mortgage payable Bond payable

LO 2 Stockholders’ Equity Stockholders’ equity is the stockholders’ right to the assets of the business. It is presented on the balance sheet below the liabilities section. Capital stock Retained earnings

Prepare closing entries. Learning Objective 3 Prepare closing entries.

LO 3 Closing Entries Accounts that are relatively permanent from year to year are called permanent accounts or real accounts. These accounts are carried forward from year to year.

LO 3 Closing Entries Accounts that report amounts for only one period are called temporary accounts or nominal accounts. Temporary accounts are not carried forward because they relate to only one period.

LO 3 Closing Entries To report amounts for only one period, temporary accounts should have zero balances at the beginning of the next period. To achieve this, the revenue and expense account balances are transferred to Income Summary at the end of the period.

LO 3 Closing Entries The balance of Income Summary (net income or net loss) is then transferred to the Retained Earnings account. The balance of the Dividends account is also transferred to the Retained Earnings account. The entries that transfer these balances are called closing entries.

LO 3 Closing Entries Income Summary is a temporary account that is only used during the closing process. At the end of the closing process, the Income Summary account will have a zero balance. Closing entries are recorded in the journal and dated as of the last date of the accounting period.

Journalizing and Posting Closing Entries

Journalizing and Posting Closing Entries

Journalizing and Posting Closing Entries

Journalizing and Posting Closing Entries

LO 3 Closing Entries Step 1 Step 2 Step 3 Step 4

Temporary Account Balances LO 3 Temporary Account Balances After the closing entries are posted, all of the temporary accounts have zero balances.

Post-Closing Trial Balance A post-closing trial balance is prepared after the closing entries have been posted. The purpose of the post-closing (after closing) trial balance is to verify that the ledger is in balance and ready for the next accounting period.

Describe the accounting cycle. Learning Objective 4 Describe the accounting cycle.

LO 4 Accounting Cycle The accounting process that begins with analyzing and journalizing transactions and ends with preparing the accounting records for the next period’s transactions is called the accounting cycle. There are ten steps in the accounting cycle.

LO 4 Accounting Cycle Transactions are analyzed and recorded in the journal. Transactions are posted to the ledger. An unadjusted trial balance is prepared. Adjustment data are assembled and analyzed. An optional end-of-period spreadsheet (work sheet) is prepared. (continued)

LO 4 Accounting Cycle Adjusting entries are journalized and posted to the ledger. An adjusted trial balance is prepared. Financial statements are prepared. Closing entries are journalized and posted to the ledger. A post-closing trial balance is prepared.

Illustrate the accounting cycle for one period. Learning Objective 5 Illustrate the accounting cycle for one period.

LO 5 Accounting Cycle Kelly Consulting (continued)

LO 5 Accounting Cycle Kelly Consulting (continued)

LO 5 Accounting Cycle Kelly Consulting (continued)

LO 5 Accounting Cycle Kelly Consulting

Unadjusted Trial Balance LO 5 Unadjusted Trial Balance Kelly Consulting

End-of-Period Spreadsheet LO 5 End-of-Period Spreadsheet Kelly Consulting

LO 5 Adjusting Entries Kelly Consulting

Learning Objective 6 Explain what is meant by the fiscal year and the natural business year.

LO 6 Accounting Period The annual accounting period adopted by a business is known as its fiscal year. When a business adopts a fiscal year that ends when business activities have reached the lowest point in its annual operation, such a fiscal year is also called the natural business year.

Learning Objective 7 Describe and illustrate the use of working capital and the current ratio in evaluating a company’s financial condition.

Working Capital and Current Ratio LO 7 Working Capital and Current Ratio The ability to convert assets into cash is called liquidity. The ability of a business to pay its debts is called solvency. Working capital is the excess of the current assets of a business over its current liabilities.

Working Capital and Current Ratio LO 7 Working Capital and Current Ratio NetSolutions’ working capital at the end of 2011 is $6,355 as computed below. This amount of working capital implies that NetSolutions is able to pay its current liabilities. Working Capital = Current Assets – Current Liabilities = $7,745 – $1,390 = $6,355

Working Capital and Current Ratio LO 7 Working Capital and Current Ratio The current ratio is another means of expressing the relationship between current assets and current liabilities. The current ratio is computed by dividing current assets by current liabilities.

Working Capital and Current Ratio LO 7 Working Capital and Current Ratio The current ratio for NetSolutions at the end of 2011 is 5.6, computed as follows: Current Ratio = Current Assets Current Liabilities = $7,745 $1,390 = 5.6 (rounded)

Completing the Accounting Cycle The End