1. Cengage – Century 21 Accounting -- Edited for Advanced Accounting Test Review Strategy. Understanding or Memorization: Promoting Long-Term Retention Why do we remember some lessons and forget others? Is it that some are perceived as more important, exciting, or possibly just easier to comprehend? Perhaps the answer has elements of all of those in its makeup; however, it is through true understanding—i.e., understanding rather than memorization. We don’t learn through memorization, we learn through understanding. When you go to the store to buy new smart phone, do you sit there in the store to study the instructions and ensure that you have properly memorized the correct way to use your new phone before leaving? Most people have the store associate show them the basics and then go home and use it. Through “playing” with our phone, we learn how to use it and ultimately understand the phone’s applications through its practicality. We essentially learn through understanding what we have to do to achieve our desired result. To do well in accounting, you need to work at understanding what you are learning to ensure that the concepts are retained after the course has ended. Make understanding your goal! Summary of article written by Dale Schlundt, Palo Alto History Professor Chapter 22 Vocab Test Review Chapter 22 Vocab Test Review

2. Cengage – Century 21 Accounting -- Edited for Advanced Accounting Unadjusted Trial Balance SLIDE 2 Lesson 22-1 Preparing an unadjusted trial balance ensures that debits equal credits in the general ledger. The unadjusted trial balance and other financial data are used to plan and record adjusting entries.

3. Cengage – Century 21 Accounting -- Edited for Advanced Accounting Adjusting Entry for Merchandise Inventory SLIDE 3 Lesson 22-1 If Merchandise Inventory decreases from the beginning to the end of the fiscal period, the adjusting entry requires a credit to Mdse. Inv. and a debit to Income Summary. Current Balance in Merchandise Inventory Account − Desired Balance in Merchandise Inventory Account = Amount of Adjustment $331,235.20−$307,613.20=$23,622.00 Merchandise Inventory Adjustment If Merchandise Inventory increased during the fiscal period, the adjusting entry would be just the opposite and would require a debit to Merchandise Inventory to increase the balance.

4. Cengage – Century 21 Accounting -- Edited for Advanced Accounting Adjusting Entries for Uncollectible Accounts SLIDE 4 Lesson 22-1 Desired Balance in Allowance Account − Current Balance in Allowance Account = Amount of Adjustment $2,099.25−$675.56=$1,423.69 Uncollectible Accounts Adjustment

5. Cengage – Century 21 Accounting -- Edited for Advanced Accounting Adjusting Entries for Supplies and Insurance SLIDE 5 3 3 Debit Insurance Expense 1 1 Debit Supplies Expense—Store 2 2 Credit Supplies—Store 4 4 Credit Prepaid Insurance Lesson 22-1

6. Cengage – Century 21 Accounting -- Edited for Advanced Accounting Calculating Federal Income Tax SLIDE 6 Taxable income: $109,595.43 Tax Rate Schedule If taxable income (line 30, Form 1120, or line 26, Form 1120-A) is: Of the amount Over—But not over—Tax is:over— $050,00015%-0- 50,00075,000$7,500 + 25%$50,000 75,000100,00013,750 + 34%75,000 100,000335,00022,250 + 39%100,000 335,00010,000,000113,900 + 34%335,000 10,000,00015,000,0003,400,000 + 35%10,000,000 15,000,00018,333,3335,150,000 + 38%15,000,000 18,333,333—35%-0- 100,000335,00022,250 + 39%100,000 Amount over $100,000: $9,595.43 39% × $9,595.43 = $3,742.22 $22,250.00 + $3,742.22 = $25,992.22 Lesson 22-1

7. Cengage – Century 21 Accounting -- Edited for Advanced Accounting Federal Income Tax Adjustment SLIDE 7 Total Federal Income Tax Expense − Estimated Federal Income Tax Already Paid = Accrued Federal Income Tax Expense $25,992.22−$23,000.00=$2,992.22 Credit Federal Income Tax Payable Lesson 22-1

8. Cengage – Century 21 Accounting -- Edited for Advanced Accounting Adjusting Entries SLIDE 8 Lesson 22-1

9. Cengage – Century 21 Accounting -- Edited for Advanced Accounting Adjusted Trial Balance SLIDE 9 Lesson 22-1 Once the adjusting entries are posted, an adjusted trial balance is prepared. Prove that your debits = your credits. The adjusted trial balance is used to prepare financial statements.

10. Cengage – Century 21 Accounting -- Edited for Advanced Accounting Income Statement SLIDE 10 Lesson 22-2 1 1 Other Income 2 2 Other Expenses Section: Interest Expense & Loss on Plant Assets 3 3 Net Deduction (more other expenses than other revenue) The adjusted trial balance is used to prepare the financial statements.

11. Cengage – Century 21 Accounting -- Edited for Advanced Accounting Statement of Stockholders’ Equity SLIDE 11 Paid-in Capital in Excess of Par— Common section 1 1 2 2 Preferred Stock section Lesson 22-2 Paid-in Capital in Excess of Par—Common, appears on the Statement of Stockholder’s Equity AND Balance Sheet too.

12. Cengage – Century 21 Accounting -- Edited for Advanced Accounting Balance Sheet SLIDE 12 1 1 New current liability accounts section 2 2 Long-term Liabilities section 3 3 Expanded Stockholders’ Equity section Lesson 22-2 Office Equipment is included in the Plant Assets section. Current Asset accounts A corporation’s total stockholders’ equity is increased by net income. (Dividends reduce it.)

13. Cengage – Century 21 Accounting -- Edited for Advanced Accounting Lesson 22-2 Audit Your Understanding 1.Why are other revenue and other expenses reported separately from sales, cost of merchandise sold, and operating expenses on the income statement? SLIDE 13 ANSWER Sales, cost of merchandise sold, and operating expenses are used to determine income from operations. Other revenue and other expenses, such as interest income, rent income, interest expense, and gains or losses on plant assets, are not normal business activities. Therefore, they are not included in calculating income from operations and are reported separately. (Note: Sales is a normal business activity and is not included in this section.) Lesson 22-2

14. Cengage – Century 21 Accounting -- Edited for Advanced Accounting Analyzing the Payment and Receipt of Corporate Cash ●Corporations are required to prepare one additional statement which addresses the changes in the business’s cash for the period. ●The cash receipts and cash payments of a company are called cash flow. ●A financial statement that summarizes cash receipts and cash payments resulting from business activities during a fiscal period is called a statement of cash flows. ●A statement of cash flows is prepared using the cash basis of accounting. SLIDE 14 Lesson 22-3

15. Cengage – Century 21 Accounting -- Edited for Advanced Accounting Cash Flows from Business Activities ●Cash Flows from Operating Activities ●The cash receipts and payments necessary to operate a business on a day-to-day basis are called operating activities. ●Examples: ●Paying cash for inventory AND Paying cash for utilities ●Cash Flows from Investing Activities ●Cash receipts and cash payments involving the sale or purchase of assets used to earn revenue over a period of time are called investing activities. ●Purchasing store equipment for cash AND Receiving cash from interest income ●Receiving cash from the sale of office equipment AND Paying cash for equipment ●Cash Flows from Financing Activities ●Cash receipts and payments involving debt or equity transactions are called financing activities. ●The issuance of bonds payable is an example of a financing activity. ●Paying the principal on a line of credit is a cash outflow OR Paying cash dividends SLIDE 15 Lesson 22-3

16. Cengage – Century 21 Accounting -- Edited for Advanced Accounting Cash Flows from Operating, Investing, and Financing Activities ActivityCash InflowsCash Outflows Operating Sale of merchandise Receipt of interest income Receipt of rent income Payment for daily operations (advertising, insurance, interest, inventory, rent, salaries, taxes, utilities) Investing Sale of office equipment Sale of store equipment Sale of other investments Purchase of office equipment Purchase of store equipment Purchase of other investments Financing Issuance of stock Issuance of long-term notes payable Issuance of bonds Borrowing cash against line of credit Payment of dividends Payment of principal from long- term notes payable Payment of bond principal Making principal payments SLIDE 16 Lesson 22-3

17. Cengage – Century 21 Accounting -- Edited for Advanced Accounting Completed Statement of Cash Flows SLIDE 17 Cash flows from operating activities Cash receipts from: Cash payments for: Net cash provided/(used) by operating activities Calculate and enter net cash provided by operating activities. Lesson 22-3

18. Cengage – Century 21 Accounting -- Edited for Advanced Accounting Investing Activities Section of a Statement of Cash Flows SLIDE 18 3 3 Calculate and enter net cash used by investing activities. 1 1 Cash flows from investing activities 2 2 Record source and amount for each type of cash received and paid for investing activities. Lesson 22-3

19. Cengage – Century 21 Accounting -- Edited for Advanced Accounting Financing Activities Section of the Statement of Cash Flows SLIDE 19 3 3 Calculate and enter net cash used by financing activities. 1 1 Cash flows from financing activities 2 2 Record source and amount for each type of cash received and paid for financing activities. Lesson 22-3

20. Cengage – Century 21 Accounting -- Edited for Advanced Accounting Completing the Statement of Cash Flows SLIDE 20 3 3 Record cash balance on December 31. Verify change in cash balance. 1 1 Calculate net change in cash. 2 2 Record cash balance on January 1. Lesson 22-3

21. Cengage – Century 21 Accounting -- Edited for Advanced Accounting Closing Entry for Accounts with Credit Balances SLIDE 21 2 2 Enter the total of the debit entries as a credit to Income Summary. 1 1 Debit the balance of every income statement account with a credit balance. Lesson 22-4

22. Cengage – Century 21 Accounting -- Edited for Advanced Accounting Closing Entry for Accounts with Debit Balances SLIDE 22 1 1 Enter Income Summary. 2 2 Enter the total of the credit entries as a debit to Income Summary. 3 3 Note: A Loss on Plant Assets is classified as an expense. Expenses accounts are credited to close them. Lesson 22-4 The closing entry with a Loss on Plant Assets requires a debit to Income Summary.

23. Cengage – Century 21 Accounting -- Edited for Advanced Accounting Closing Entry to Record Net Income SLIDE 23 Lesson 22-4 If a company has a net income, the entry to close the Income Summary account includes a debit to Income Summary. Net Income increases Retained Earnings If the corporation made money, Retained Earnings needs to be increased with a credit. Retained Earnings represents previous years’ earnings that have been “retained” and not distributed as dividends. If a company has a net income, the entry to close the Income Summary account includes a debit to Income Summary. Net Income increases Retained Earnings If the corporation made money, Retained Earnings needs to be increased with a credit. Retained Earnings represents previous years’ earnings that have been “retained” and not distributed as dividends.

24. Cengage – Century 21 Accounting -- Edited for Advanced Accounting Closing Entry for Dividends SLIDE 24 Lesson 22-4 Dividends decrease the earnings retained by a corporation. The closing entry requires a credit to Dividends to return the balance to zero.

25. Cengage – Century 21 Accounting -- Edited for Advanced Accounting Reversing Entries SLIDE 25 Lesson 22-4 A reversing entry should be made for every adjusting entry that created a balance in an asset or a liability account. Accrued Interest Expense Adjusting Entry: you must reverse the entry that created a balance in Interest Payable. So the reversing entry for Interest Expense requires a debit to Interest Payable.

26. Cengage – Century 21 Accounting -- Edited for Advanced Accounting Reversing Entries SLIDE 26 You also need to reverse the entry that created a balance in Federal Income Tax Payable. A reversing entry for Accrued Interest Income would be a debit to Interest Income and a Credit to Interest Receivable. You must also reverse the entry that created a balance in Interest Receivable. Lesson 22-4

27. Cengage – Century 21 Accounting -- Edited for Advanced Accounting 1. 1.Source documents are checked for accuracy, and transactions are analyzed into debit and credit parts. 2. 2.Transactions, from information on source documents, are recorded in journals. 3. 3.Journal entries are posted to the accounts payable, accounts receivable, and general ledgers. 4. 4.Schedules of accounts payable and accounts receivable are prepared from the subsidiary ledgers. 5. 5.An unadjusted trial balance is prepared from the general ledger. 6. 6.Adjusting entries are journalized. 7. 7.Adjusting entries are posted to the general ledger. 8. 8.An adjusted trial balance is prepared from the general ledger. 9. 9.Financial statements are prepared from the adjusted trial balance. 10. 10.Closing entries are journalized. Accounting Cycle for a Merchandising Business Organized as a Corporation SLIDE 27 1 1 9 9 2 2 4 4 5 5 10 6 6 11 3 3 7 7 12 8 8 3 3 13 11. 11.Closing entries are posted to the general ledger. 12. 12.A post-closing trial balance is prepared from the general ledger. 13. 13.Reversing entries are journalized and posted to the general ledger. Lesson 22-4 If a company does not use reversing entries, preparing the post-closing trial balance is the last step in the accounting cycle. (Step #12)

28. Cengage – Century 21 Accounting -- Edited for Advanced Accounting Test Review Strategy. The End Remember: Work at Understanding Chapter 22 Vocab Test Review Chapter 22 Vocab Test Review