1. The Mechanics of Financial Accounting Presentations for Chapter 4 by Glenn Owen

2. Key Points Two criteria necessary for economic events to be reflected in the financial statements. The accounting equation and how it relates to the balance sheet, income statement, statement of retained earnings, and statement of cash flows. Journal entries (and T-accounts) and how they express the effect of economic events on the basic accounting equation and the financial statements. Why managers need to understand how economic events affect the financial statements. Why the financial statements are adjusted periodically to reflect certain economic events.

3. Economic Events Relevant events have economic significance to a company and include any occurrence that affects its financial condition. The dollar values assigned to these events must be determined in an objective manner.

4. The Fundamental Accounting Equation Assets = Liabilities + Stockholders’ Equity =+

5. The Journal Entry Box 2. What is the direction of the effect? Increase Decrease 3. What is the dollar value of the transaction? Asset Accounts $Debit (left) Asset Accounts $Credit (right) 1. What accounts are affected? Assets Liabilities and Stockholders’ Equity = Liab/Stock Eq. Accounts $Credit (right) Liab/Stock Eq. Accounts $Debit (left)

6. Recognizing Gains and Losses Often investments and noncurrent assets are sold for more or less than the amounts at which they are carried on the balance sheet. In such cases a gain or loss must be recognized.

7. Periodic Adjustments Accruals Deferrals and cost expirations Revaluation adjustments

8. Accruals The term accrue means to build up gradually. Accruals refer to amounts in asset and liability accounts that build up over time. Adjustments to record accruals are made at the end of an accounting period. Examples include – accrued wages. – accrued interest revenue.

9. Deferrals and Cost Expirations Deferrals are recorded to achieve an appropriate matching of revenues and expenses and do not reflect cash exchanges. Expense or capitalize? – Current expenses – Supplies inventory – Merchandise inventory – Prepaid expenses – Unearned revenue – Property, plant, and equipment – Intangible assets

10. Expense or Capitalize Incur cost in current period Decide what period revenue is generated If current then expense, if future, capitalize Cost Expiration SalariesCurrent period (expense) Salary Exp XX Salary Pay XX None required InterestCurrent period (expense) Interest Exp XX Interest Pay XX None required Receive Utility Bill Current period (expense) Utilities Exp XX Accounts Pay XX None required Purchase Supplies Future period (asset) Supplies XX Cash XX Supplies Exp XX Supplies XX Purchase Inventory Future period (asset) Inventory XX Accounts Pay XX COGS XX Inventory XX

11. Expense or Capitalize Incur cost in current period Decide what period revenue is generated If current then expense, if future, capitalize Cost Expiration Prepaid RentFuture period (asset) Prepaid Rent XX Cash XX Rent Exp XX Prepaid Rent XX Advance Payments Future period (liability) Cash XX Unearned Rev XX Revenue XX Purchase Equipment Future period (asset) Equipment XX Note Pay XX Depreciation XX Acc. Dep. XX Purchase Patent Future period (asset) Patent XX Cash XX Amort. Exp XX Acc. Amort. XX

12. Revaluation Adjustments These are adjustments that do not fall into the categories of accruals or cost expirations. They serve to restate certain accounts to keep their reported values in line with existing facts. Examples include the revaluation of: – short-term investments – accounts receivable – inventories

13. Review Problem Kelly Supply Beginning Balance Sheet as of December 31, 2002 Daily journal entries and T-accounts Adjusting journal entries and T-accounts Income Statement for the year ended December 31, 2003 Statement of Retained Earnings for the year ended December 31, 2003 Ending Balance Sheet as of December 31, 2003 Statement of Cash Flows for the year ended December 31, 2003

14. Kelly Supply Balance Sheet December 31, 2002 Assets: Cash$12,000 Accounts receivable15,000 Merchandise inventory12,000 Prepaid rent3,000 Machinery$25,000 Less: Accumulated depreciation. 5,000 20,000 Patent. 5,000 Total assets$67,000

15. Kelly Supply Balance Sheet December 31, 2002 Liabilities and Stockholders’ Equity: Accounts payable$ 8,000 Wages payable3,000 Interest payable1,000 Dividends payable2,000 Unearned revenue3,000 Short-term notes payable5,000 Long-term notes payable10,000 Common stock30,000 Retained earnings. 5,000 Total liabilities and stockholders’ equity$67,000

16. (1)Cash (+A) 10,000 Accounts Receivable (+A)15,000 Sales (R, +SE)25,000 Sold merchandise for cash and on account. Cash 12,00 0 10,00 0 Accounts Receivable 15,00 0 Sales 25,00 0 Daily Journal Entries and T-accounts

17. (2)Cash (+A) 8,000 Accounts Receivable (-A)8,000 Received cash on account. Cash 12,00 0 10,00 0 8,000 Accounts Receivable 15,00 0 8,000 Daily Journal Entries and T-accounts

18. (3)Merchandise Inventory (+A) 10,000 Cash (-A)3,000 Accounts Payable (+L)7,000 Purchased merchandise inventory for cash and on account. Merchandise Inv. 12,00 0 10,00 0 Cash 12,00 0 10,00 0 8,000 3,000 Accounts Payable 8,000 7,000 Daily Journal Entries and T-accounts

19. (4)Accounts Payable (-L) 10,000 Cash (-A)10,000 Paid cash on account. Accounts Payable 10,00 0 8,000 7,000 Cash 12,00 0 10,00 0 8,000 3,000 10,00 0 Daily Journal Entries and T-accounts

20. (5)Wages Payable (-L) 3,000 Wages Expense (E, -SE)7,000 Cash (-A)10,000 Paid accrued wages. Wages Payable 3,000 Wages Expense 7,000 Cash 12,00 0 10,00 0 8,000 3,000 10,00 0 Daily Journal Entries and T-accounts

21. (6)Interest Payable (-L) 1,000 Interest Expense (E, -SE)1,000 Cash (-A)2,000 Paid accrued interest. Interest Payable 1,000 Interest Expense 1,000 Cash 12,00 0 10,00 0 8,000 3,000 10,00 0 2,000 Daily Journal Entries and T-accounts

22. (7)Short-Term Notes Payable (-L) 2,500 Cash (-A)2,500 Paid short-term note. S/T Notes Payable 2,500 5,000 Cash 12,00 0 10,00 0 8,000 3,000 10,00 0 2,000 2,500 Daily Journal Entries and T-accounts

23. (8) Cash (+A) 10,000 Long-Term Notes Payable (+L) 10,000 Issued long-term note for cash. L/T Notes Payable 10,00 0 Cash 12,00 0 10,00 0 8,000 10,00 0 3,000 10,00 0 2,000 2,500 Daily Journal Entries and T-accounts

24. (9)Dividends Payable (-L) 2,000 Cash (-A)2,000 Paid cash dividend. Dividends Payable 2,000 Cash 12,00 0 10,00 0 8,000 10,00 0 3,000 10,00 0 2,000 2,500 2,000 Daily Journal Entries and T-accounts

25. (10)Machinery (+A) 1,000 Cash (-A)1,000 Acquired machinery for cash. Machinery 25,00 0 1,000 Cash 12,00 0 10,00 0 8,000 10,00 0 3,000 10,00 0 2,000 2,500 2,000 1,000 Daily Journal Entries and T-accounts

26. (11)Dividends (-SE) 1,000 Dividends Payable (+L)1,000 Declared dividends. Dividends 1,000 Dividends Payable 2,000 1,000 Daily Journal Entries and T-accounts

27. (12)Cost of Goods Sold (E, -SE) 9,000 Merchandise Inventory (-A)9,000 Recognized $13,000 of inventory on hand. Cost of Goods Sold 9,000 Merchandise Inventory 12,00 0 10,00 0 13,00 0 9,000 Adjusting Journal Entries and T-accounts

28. (13)Unearned Revenue (-L) 2,000 Sales (R, +SE)2,000 Recognized 2/3 of goods delivered. 3,000 1,000 Unearned Revenue 2,000 Sales 25,00 0 2,000 Adjusting Journal Entries and T-accounts

29. (14)Interest Receivable (+A) 50 Interest Revenue (R,+SE)50 Recognized accrued interest on savings account. Interest Receivable 50 Interest Revenue 50 Adjusting Journal Entries and T-accounts

30. (15)Depreciation Expense (E, -SE) 3,000 Accumulated Depreciation (-A)3,000 Recognized depreciation on machinery. Depreciation Expense 3,000 Accumulated Depr. 5,000 3,000 Adjusting Journal Entries and T-accounts

31. (16)Amortization Expense (E, -SE) 500 Patent (-A)500 Recognized amortization of patent. Amortization Expense 500 Patent 5,000 4,500 500 Adjusting Journal Entries and T-accounts

32. (17)Wage Expense (E, -SE) 1,000 Wages Payable (+L)1,000 Recognized accrued wages. Wage Expense 7,000 1,000 Wages Payable 3,000 1,000 Adjusting Journal Entries and T-accounts

33. (18)Interest Expense (E, -SE) 2,000 Interest Payable (+L)2,000 Recognized accrued interest on long-term note. Interest Expense 1,000 2,000 Interest Payable 1,000 2,000 Adjusting Journal Entries and T-accounts

34. (19)Rent Expense (E, -SE) 1,000 Prepaid Rent (-A)1,000 Recognized 1/3 of rent period expired. Rent Expense 1,000 Prepaid Rent 3,000 2,000 1,000 Adjusting Journal Entries and T-accounts

35. Kelly Supply Income Statement For the Year Ended December 31, 2003 Revenues: Sales$27,000 Interest revenue50 Total revenues$27,050 Expenses: Cost of goods sold$ 9,000 Wages expense8,000 Rent expense1,000 Interest expense3,000 Depreciation expense3,000 Amortization expense500 Total expenses. 24,500 Net income$ 2,550

36. Kelly Supply Statement of Retained Earnings For the Year Ended December 31, 2003 Beginning balance$5,000 Plus: Net income2,550 Less: Dividends(1,000) Ending balance$6,550

37. Kelly Supply Balance Sheet December 31, 2003 Assets: Cash$ 9,500 Accounts receivable22,000 Interest receivable50 Merchandise inventory13,000 Prepaid rent2,000 Machinery$26,000 Less: Accumulated depreciation8,000 18,000 Patent4,500 Total assets$69,050

38. Kelly Supply Balance Sheet December 31, 2003 Liabilities and stockholders’ equity: Accounts payable$ 5,000 Wages payable1,000 Interest payable2,000 Dividends payable1,000 Unearned revenue1,000 Short-term notes payable2,500 Long-term notes payable20,000 Common stock30,000 Retained earnings6,550 Total liabilities and stockholders’ equity$69,050

39. Kelly Supply Statement of Cash Flows For the Year Ended December 31, 2003 Operating activities: Collections from sales$10,000 Collections of accounts receivable8,000 Payment for inventory purchases(3,000) Payments on accounts payable(10,000) Payments for wages(10,000) Payments for interest. (2,000) Net cash increase (decrease)$(7,000) Investing activities: Purchase of machinery$(1,000) Net cash increase (decrease)(1,000) Financing activities: Issuance of long-term notes payable$10,000 Payment of dividend(2,000) Payment of short-term notes payable. (2,500) Net cash increase (decrease). 5,500 Net cash increase (decrease) during 2003$(2,500) Beginning cash balance. 12,000 Ending cash balance$ 9,500