1. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin1 Completing the Accounting Cycle Chapter 4 4

2. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin2 Learning objective  Prepare a work sheet and explain its usefulness.  Explain why temporary accounts are closed each period.  Describe and prepare closing entries.  Explain and prepare a post-closing trial balance.

3. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin3 Learning objective  Prepare a work sheet and explain its usefulness.

4. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin4 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.

5. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin5 FastForward Work Sheet For Month Ended December 31, 2004 First, enter the unadjusted amounts to the worksheet.

6. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin6 Next, enter the adjustments. FastForward Work Sheet For Month Ended December 31, 2004

7. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin7 Prepare adjusted trial balance. FastForward Work Sheet For Month Ended December 31, 2004

8. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin8 FastForward Work Sheet For Month Ended December 31, 2004 Sort adjusted trial balance amounts to financial statements.

9. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin9 FastForward Work Sheet For Month Ended December 31, 2004 Total statement columns, compute income or loss, and balance columns. Total revenue Total expenses Profit

10. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin10  Prepare the Income Statement. Prepare the Financial Statements A work sheet does not substitute for financial statements.

11. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin11  Prepare the Statement of Changes in Owner’s Equity.

12. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin12  Prepare the Balance Sheet.

13. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin13  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. Closing Process

14. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin14 Learning objective  Explain why temporary accounts are closed each period.

15. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin15 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.

16. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin16 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

17. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin17 Learning objective  Describe and prepare closing entries.

18. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin18 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.

19. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin19 Balances before closing. Closing Process

20. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin20  Close Revenue accounts to Income Summary. Closing Process

21. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin21  Close Expense accounts to Income Summary. Closing Process The balance in Income Summary equals net income.

22. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin22  Close Income Summary to Owner’s Capital. Closing Process

23. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin23 Closing Process  Close Withdrawals account to Owner’s Capital.

24. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin24 Using the adjusted trial balance, let’s prepare the closing entries for FastForward.

25. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin25  Close Revenue accounts to Income Summary.

26. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin26  Close Revenue Accounts to Income Summary Now, let’s look at the ledger accounts after posting this closing entry.

27. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin27  Close Revenue Accounts to Income Summary

28. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin28  Close Expense accounts to Income Summary.

29. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin29 Now, let’s look at the ledger accounts after posting this closing entry.  Close Expense Accounts to Income Summary

30. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin30 Net Income  Close Expense Accounts to Income Summary

31. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin31  Close Income Summary to Owner’s Capital.

32. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin32 Now, let’s look at the ledger accounts after posting this closing entry.  Close Income Summary to Owner’s Capital

33. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin33  Close Income Summary to Owner’s Capital

34. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin34  Close Withdrawals to Owner’s Capital.

35. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin35 Now, let’s look at the ledger accounts after posting this closing entry.  Close Withdrawals to Owner’s Capital

36. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin36  Close Withdrawals to Owner’s Capital

37. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin37 Learning objective  Explain and prepare a post-closing trial balance.

38. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin38 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.

39. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin39 Post-Closing Trial Balance

40. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin40 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

41. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin41 Let’s discuss the components of a classified balance sheet.

42. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin42 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. Classified Balance Sheet

43. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin43 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).

44. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin44 Current assets are expected to be sold, collected, or used within one year or the company’s operating cycle.

45. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin45 Long-term investments are expected to be held for the longer of one year or the operating cycle.

46. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin46 Plant assets are tangible long-lived assets used to produce or sell products and services.

47. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin47 Intangible assets are long-term resources used to produce or sell products and services and that lack physical form.

48. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin48 Current liabilities are obligations due within the longer of one year or the company’s operating cycle.

49. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin49 Long-term liabilities are obligations not due within the longer of one year or the company’s operating cycle.

50. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin50 Equity is the owner’s claim on the assets.

51. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin51 Current Ratio Helps assess the company’s ability to pay its debts in the near future

52. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin52 Homework for chapter 4  Ex 4-3, 4-4, 4-7  Problem 4-2A, 4-4A  Due on June 19, 2006 Monday

53. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin53 End of Chapter 4