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Chapter

5

McGraw-Hill/Irwin

THE ACCOUNTING
CYCLE:
Reporting Financial Results

© The McGraw-Hill Companies, Inc., 2002
JJ's Lawn Care Service
Adjusted Trial Balance
May 31, 2003
Cash
$ 3,925
Accounts receivable
75
Tools & equipment
2,650
Acc...
JJ's Lawn Care Service
Income Statement
For the month ending May 31, 2003
Sales revenue
Operating expenses:
Gasoline expen...
Statement of Retained Earnings
Statement of Retained Earnings
This statement summarizes the increases
and decreases in Ret...
Now, let’s prepare the Balance Sheet.
McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2002
JJ's Lawn Care Service
Balance Sheet
May 31, 2003
Assets
Cash
Accounts receivable
Tools & equipment
$ 2,650
Less: Accum. d...
JJ's Lawn Care Service
Statement of Cash Flows
For the Month Ended May 31, 2003
Cash flows from operating activities:
Cash...
Drafting Notes to the Financial
Drafting Notes to the Financial
Statements
Statements
Notes to the
Financial Statements

E...
Closing the Temporary Equity
Closing the Temporary Equity
Accounts
Accounts
 Close Revenue accounts
to Income Summary.

...
Closing Entries for Revenue Accounts
Closing Entries for Revenue Accounts
Since Sales Revenue has a credit balance, the
Si...
Closing Entries for Revenue Accounts
Closing Entries for Revenue Accounts

Income Summary
750

Sales Revenue
750
750

-

7...
Closing Entries for Expense Accounts
Closing Entries for Expense Accounts
Since expense accounts have a debit balance, the...
Closing Entries for Expense Accounts
Closing Entries for Expense Accounts
Gasoline Exp.
50
50
Depr. Exp.: Tools &
Equipmen...
Closing the Income Summary Account
Closing the Income Summary Account
Since Income Summary has a $400 credit balance,
Sinc...
Closing the Income Summary Account
Closing the Income Summary Account

Retained
Earnings
400
400

McGraw-Hill/Irwin

Incom...
Closing the Dividends Account
Closing the Dividends Account
Since the Dividends account has a debit balance,
Since the Div...
Closing the Dividends Account
Closing the Dividends Account
Dividends
200
200

-

McGraw-Hill/Irwin

Retained
Earnings
200...
JJ's Lawn Care Service
After-Closing Trial Balance
May 31, 2003
Cash
Accounts receivable
Tools & equipment
Accumulated dep...
Evaluating the Business
Evaluating the Business
Evaluating
Evaluating
Profitability
Profitability

Evaluating
Evaluating
S...
Evaluating the Business
Evaluating the Business

Focusing
Focusing
Management’s
Management’s
Attention
Attention

McGraw-H...
Preparing Financial Statements
Preparing Financial Statements
Covering Different Periods of Time
Covering Different Period...
End of Chapter 5
End of Chapter 5

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2002
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  1. 1. Chapter 5 McGraw-Hill/Irwin THE ACCOUNTING CYCLE: Reporting Financial Results © The McGraw-Hill Companies, Inc., 2002
  2. 2. JJ's Lawn Care Service Adjusted Trial Balance May 31, 2003 Cash $ 3,925 Accounts receivable 75 Tools & equipment 2,650 Accumulated depr.: tools & eq. $ 50 Truck 15,000 Accumulated depr.: truck 250 Notes payable 13,000 Accounts payable 150 Capital stock 8,000 Dividends 200 Sales revenue 750 Gasoline expense 50 Depr. exp.: tools & eq. 50 Depr. exp.: truck 250 Total $ 22,200 $ 22,200 McGraw-Hill/Irwin This is the This is the Adjusted Trial Adjusted Trial Balance for JJ’s. Balance for JJ’s. Now, let’s Now, let’s prepare the prepare the financial financial statements for statements for JJ’s Lawn Care JJ’s Lawn Care Service for May. Service for May. © The McGraw-Hill Companies, Inc., 2002
  3. 3. JJ's Lawn Care Service Income Statement For the month ending May 31, 2003 Sales revenue Operating expenses: Gasoline expense $ 50 Depr. exp.: tools & eq. 50 Depr. exp.: truck 250 Net income $ 750 350 $ 400 Net income also appears on the Net income also appears on the Statement of Owner’s Equity. Statement of Owner’s Equity. McGraw-Hill Companies, Inc., 2002 © The McGraw-Hill/Irwin
  4. 4. Statement of Retained Earnings Statement of Retained Earnings This statement summarizes the increases and decreases in Retained Earnings during the period. •Business Earnings McGraw-Hill/Irwin •Dividends •Business Losses © The McGraw-Hill Companies, Inc., 2002
  5. 5. Now, let’s prepare the Balance Sheet. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  6. 6. JJ's Lawn Care Service Balance Sheet May 31, 2003 Assets Cash Accounts receivable Tools & equipment $ 2,650 Less: Accum. depr.: tools & eq. 50 Truck $ 15,000 Less: Accum. depr.: truck 250 Total assets Liabilities & Stockholders' Equity Liabilities: Notes payable Accounts payable Total liabilities Stockholders' equity: Capital stock $ 8,000 Retained earnings 200 Total stockholders' equity Total liabilities & stockholders' equity McGraw-Hill/Irwin $ 3,925 75 2,600 14,750 $ 21,350 $ 13,000 150 $ 13,150 8,200 $ 21,350 Next, let’s Next, let’s prepare the prepare the Statement of Statement of Cash Flows Cash Flows for JJ’s Lawn for JJ’s Lawn Care Service Care Service for May. for May. © The McGraw-Hill Companies, Inc., 2002
  7. 7. JJ's Lawn Care Service Statement of Cash Flows For the Month Ended May 31, 2003 Cash flows from operating activities: Cash received from revenue transactions $ 750 Cash paid for expenses (50) Net cash provided by operating activities $ 700 Cash flows from investing activities: Purchase of lawn mower $ (2,500) Purchase of truck (2,000) Collection for sale of repair parts 75 Payment for repair parts (150) Net cash used by investing activities (4,575) Cash flows from financing activities: Investment by owners $ 8,000 Dividends (200) Net cash provided by financing activities 7,800 Increase in cash for month $ 3,925 Cash balance, May 1, 2003 Cash balance, May 31, 2003 $ 3,925 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  8. 8. Drafting Notes to the Financial Drafting Notes to the Financial Statements Statements Notes to the Financial Statements Examples of Items Disclosed Examples of Items Disclosed Lawsuits pending Lawsuits pending Scheduled plant closings Scheduled plant closings Governmental investigations Governmental investigations Significant events occurring Significant events occurring after the balance sheet date after the balance sheet date Specific customers that Specific customers that account for a large portion of account for a large portion of revenue revenue Unusual transactions and Unusual transactions and related party transactions related party transactions McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  9. 9. Closing the Temporary Equity Closing the Temporary Equity Accounts Accounts  Close Revenue accounts to Income Summary. Close Expense accounts to Income Summary.  The closing process gets the temporary accounts ready for the next accounting period. Close Income Summary account to Retained Earnings. Close Dividends to Retained Earnings. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  10. 10. Closing Entries for Revenue Accounts Closing Entries for Revenue Accounts Since Sales Revenue has a credit balance, the Since Sales Revenue has a credit balance, the closing entry requires a debit to the Sales Revenue closing entry requires a debit to the Sales Revenue account. account. GENERAL JOURNAL Date Account Titles and Explanation May 31 Sales Reveune Income Summary P RDebit Credit 750 750 To close the revenue account. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  11. 11. Closing Entries for Revenue Accounts Closing Entries for Revenue Accounts Income Summary 750 Sales Revenue 750 750 - 750 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  12. 12. Closing Entries for Expense Accounts Closing Entries for Expense Accounts Since expense accounts have a debit balance, the Since expense accounts have a debit balance, the closing entry requires a credit to the expense closing entry requires a credit to the expense accounts. accounts. GENERAL JOURNAL Date P RDebit Account Titles and Explanation May 31 Income Summary Credit 350 Gasoline Expense 50 Depreciation Exp.: Tools & Equipment 50 Depreciation Exp.: Truck To close the expense accounts. McGraw-Hill/Irwin 250 © The McGraw-Hill Companies, Inc., 2002
  13. 13. Closing Entries for Expense Accounts Closing Entries for Expense Accounts Gasoline Exp. 50 50 Depr. Exp.: Tools & Equipment 50 50 - Depr. Exp.: Truck 250 250 McGraw-Hill/Irwin Income Summary 350 750 400 Net Income © The McGraw-Hill Companies, Inc., 2002
  14. 14. Closing the Income Summary Account Closing the Income Summary Account Since Income Summary has a $400 credit balance, Since Income Summary has a $400 credit balance, the closing entry requires a debit to Income the closing entry requires a debit to Income Summary. Summary. GENERAL JOURNAL Date Account Titles and Explanation May 31 Income Summary Retained Earnings P R Debit Credit 400 400 To close Income Summary. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  15. 15. Closing the Income Summary Account Closing the Income Summary Account Retained Earnings 400 400 McGraw-Hill/Irwin Income Summary 350 750 400 The balance in Income Summary is now zero. © The McGraw-Hill Companies, Inc., 2002
  16. 16. Closing the Dividends Account Closing the Dividends Account Since the Dividends account has a debit balance, Since the Dividends account has a debit balance, the closing entry requires a credit to the Dividends the closing entry requires a credit to the Dividends account. account. GENERAL JOURNAL Date Account Titles and Explanation May 31 Retained Earnings Dividends P R Debit Credit 200 200 To close the Dividends account. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  17. 17. Closing the Dividends Account Closing the Dividends Account Dividends 200 200 - McGraw-Hill/Irwin Retained Earnings 200 400 200 © The McGraw-Hill Companies, Inc., 2002
  18. 18. JJ's Lawn Care Service After-Closing Trial Balance May 31, 2003 Cash Accounts receivable Tools & equipment Accumulated depr.: tools & equipment Truck Accumulated depr.: truck Notes payable Accounts payable Capital stock Retained earnings Total McGraw-Hill/Irwin $ 3,925 75 2,650 $ 15,000 After all After all closing closing entries are entries are made, JJ’s made, JJ’s After-Closing After-Closing Trial Balance Trial Balance looks like looks like 50 this. this. 250 13,000 150 8,000 200 $ 21,650 $ 21,650 The McGraw-Hill Companies, Inc., 2002 ©
  19. 19. Evaluating the Business Evaluating the Business Evaluating Evaluating Profitability Profitability Evaluating Evaluating Solvency Solvency Did the business earn a profit or loss in the current period? Does the business have assets available to pay debts as they are due? What is the business’s future potential for a profit? McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  20. 20. Evaluating the Business Evaluating the Business Focusing Focusing Management’s Management’s Attention Attention McGraw-Hill/Irwin Are product lines profitable? Are resources being used efficiently? Are production processes efficient? © The McGraw-Hill Companies, Inc., 2002
  21. 21. Preparing Financial Statements Preparing Financial Statements Covering Different Periods of Time Covering Different Periods of Time Many companies prepare financial statements at Many companies prepare financial statements at various points throughout the year. various points throughout the year. Annually Interim Financial Statements Quarterly Monthly Jan. 1 McGraw-Hill/Irwin Dec. 31 © The McGraw-Hill Companies, Inc., 2002
  22. 22. End of Chapter 5 End of Chapter 5 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
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