The document discusses completing the accounting cycle, including the work sheet, financial statements, adjusting and closing entries, and the accounting cycle. It provides an example work sheet for NetSolutions for two months ended December 31, 2002, including the trial balance, adjustments, and adjusted trial balance. The work sheet lists accounts and adjustments to account balances.

1. Chapter 4 Power Notes
Completing the Accounting Cycle
Learning Objectives
1. Work Sheet
2. Financial Statements
3. Adjusting and Closing Entries
4. Fiscal Year
5. Accounting Cycle
6. Financial Analysis and Interpretation
C4
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2. Chapter 4 Power Notes
Completing the Accounting Cycle
Slide # Power Note Topics
3 • The Work Sheet
18 • Financial Statements
22 • The Closing Process
28 • Post-Closing Trial Balance
31 • Accounting Cycles
43 • Working Capital and
Current Ratio
Note: To select a topic, type the slide # and press Enter.
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3. The Work Sheet
Trial Balance Adjustments Adjusted TB
Accounts Dr Cr Dr Cr Dr Cr
Prepared from general ledger.
Accounts are listed in order: A, L, OE, R, E
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4. The Work Sheet
Trial Balance Adjustments Adjusted TB
Accounts Dr Cr Dr Cr Dr Cr
Adjustments are entered here. Two possibilities:
1. Deferrals – Existing balances are changed.
2. Accruals – New information is entered.
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5. The Work Sheet
Trial Balance Adjustments Adjusted TB
Accounts Dr Cr Dr Cr Dr Cr
Adjustments are combined with the trial balance.
Account balances are now adjusted.
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6. NetSolutions - Work Sheet - Two Months Ended 12/31/02
Trial Balance Adjustments Adj. Trial Balance
Account Debit Credit Debit Credit Debit Credit
11 Cash 2,065 2,065
12Accounts Receivable 2,220 (e) 500 2,720
14 Supplies 2,000 (a) 1,240 760
15 Prepaid Insurance 2,400 (b) 100 2,300
17 Land 20,000 20,000
18 Office Equipment 1,800 1,800
19Accumulated Depr. 0 (f) 50 50
21 Accounts Payable 900 900
22 Wages Payable 0 (d) 250 250
23 Unearned Rent 360 (c) 120 240
31Chris Clark, Capital 25,000 25,000
32Chris Clark, Drawing 4,000 4,000
41 Fees Earned 16,340 (e) 500 16,840
42 Rent Revenue 0 (c) 120 120
51 Wages Expense 4,275 (d) 250 4,525
52 Rent Expense 1,600 1,600
53Depreciation Expense 0 (f) 50 50
54 Utilities Expense 985 985
55 Supplies Expense 800 (a) 1,240 2,040
56Insurance Expense 0 (b) 100 100
59 Misc. Expense 455 455
42,600 42,600 2,260 2,260 43,400 43,400
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7. NetSolutions - Work Sheet - Two Months Ended 12/31/02
Trial Balance Adjustments Adj. Trial Balance
Account Debit Credit Debit Credit Debit Credit
11 Cash 2,065 2,065
12Accounts Receivable 2,220 (e) 500 2,720
14 Supplies 2,000 (a) 1,240 760
15 Prepaid Insurance 2,400 (b) 100 2,300
17 Land 20,000 20,000
18 Office Equipment 1,800 1,800
19Accumulated Depr. 0 (f) 50 50
21 Accounts Payable 900 900
22 Wages Payable 0 (d) 250 250
23 Unearned Rent 360 (c) 120 240
31Chris Clark, Capital 25,000 25,000
32Chris Clark, Drawing 4,000 4,000
41 Fees Earned 16,340 (e) 500 16,840
42 Rent Revenue 0 (c) 120 120
51 Wages Expense 4,275 (d) 250 4,525
52 Rent Expense 1,600 1,600
53Depreciation Expense 0 (f) 50 50
54 Utilities Expense 985 985
55 Supplies Expense 800 (a) 1,240 2,040
56Insurance Expense 0 (b) 100 100
59 Misc. Expense 455 455
42,600 42,600 2,260 2,260 43,400 43,400
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8. NetSolutions - Work Sheet - Two Months Ended 12/31/02
Trial Balance Adjustments Adj. Trial Balance
Account Debit Credit Debit Credit Debit Credit
11 Cash 2,065 2,065
12Accounts Receivable 2,220 (e) 500 2,720
14 Supplies 2,000 (a) 1,240 760
15 Prepaid Insurance 2,400 (b) 100 2,300
17 Land 20,000 20,000
18 Office Equipment 1,800 1,800
19Accumulated Depr. 0 (f) 50 50
21 Accounts Payable 900 900
22 Wages Payable 0 (d) 250 250
23 Unearned Rent 360 (c) 120 240
31Chris Clark, Capital 25,000 25,000
32Chris Clark, Drawing 4,000 4,000
41 Fees Earned 16,340 (e) 500 16,840
42 Rent Revenue 0 (c) 120 120
51 Wages Expense 4,275 (d) 250 4,525
52 Rent Expense 1,600 1,600
53Depreciation Expense 0 (f) 50 50
54 Utilities Expense 985 985
55 Supplies Expense 800 (a) 1,240 2,040
56Insurance Expense 0 (b) 100 100
59 Misc. Expense 455 455
42,600 32,600 2,260 2,260 43,400 43,400
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9. NetSolutions - Work Sheet - Two Months Ended 12/31/02
Trial Balance Adjustments Adj. Trial Balance
Account Debit Credit Debit Credit Debit Credit
11 Cash 2,065 2,065
12Accounts Receivable 2,220 (e) 500 2,720
14 Supplies 2,000 (a) 1,240 760
15 Prepaid Insurance 2,400 (b) 100 2,300
17 Land 20,000 20,000
18 Office Equipment 1,800 1,800
19Accumulated Depr. 0 (f) 50 50
21 Accounts Payable 900 900
22 Wages Payable 0 (d) 250 250
23 Unearned Rent 360 (c) 120 240
31Chris Clark, Capital 25,000 25,000
32Chris Clark, Drawing 4,000 4,000
41 Fees Earned 16,340 (e) 500 16,840
42 Rent Revenue 0 (c) 120 120
51 Wages Expense 4,275 (d) 250 4,525
52 Rent Expense 1,600 1,600
53Depreciation Expense 0 (f) 50 50
54 Utilities Expense 985 985
55 Supplies Expense 800 (a) 1,240 2,040
56Insurance Expense 0 (b) 100 100
59 Misc. Expense 455 455
42,600 42,600 2,260 2,260 43,400 43,400
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10. NetSolutions - Work Sheet - Two Months Ended 12/31/02
Trial Balance Adjustments Adj. Trial Balance
Account Debit Credit Debit Credit Debit Credit
11 Cash 2,065 2,065
12Accounts Receivable 2,220 (e) 500 2,720
14 Supplies 2,000 (a) 1,240 760
15 Prepaid Insurance 2,400 (b) 100 2,300
17 Land 20,000 20,000
18 Office Equipment 1,800 1,800
19Accumulated Depr. 0 (f) 50 50
21 Accounts Payable 900 900
22 Wages Payable 0 (d) 250 250
23 Unearned Rent 360 (c) 120 240
31Chris Clark, Capital 25,000 25,000
32Chris Clark, Drawing 4,000 4,000
41 Fees Earned 16,340 (e) 500 16,840
42 Rent Revenue 0 (c) 120 120
51 Wages Expense 4,275 (d) 250 4,525
52 Rent Expense 1,600 1,600
53Depreciation Expense 0 (f) 50 50
54 Utilities Expense 985 985
55 Supplies Expense 800 (a) 1,240 2,040
56Insurance Expense 0 (b) 100 100
59 Misc. Expense 455 455
42,600 42,600 2,260 2,260 43,400 43,400
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11. NetSolutions - Work Sheet - Two Months Ended 12/31/02
Trial Balance Adjustments Adj. Trial Balance
Account Debit Credit Debit Credit Debit Credit
11 Cash 2,065 2,065
12Accounts Receivable 2,220 (e) 500 2,720
14 Supplies 2,000 (a) 1,240 760
15 Prepaid Insurance 2,400 (b) 100 2,300
17 Land 20,000 20,000
18 Office Equipment 1,800 1,800
19Accumulated Depr. 0 (f) 50 50
21 Accounts Payable 900 900
22 Wages Payable 0 (d) 250 250
23 Unearned Rent 360 (c) 120 240
31Chris Clark, Capital 25,000 25,000
32Chris Clark, Drawing 4,000 4,000
41 Fees Earned 16,340 (e) 500 16,840
42 Rent Revenue 0 (c) 120 120
51 Wages Expense 4,275 (d) 250 4,525
52 Rent Expense 1,600 1,600
53Depreciation Expense 0 (f) 50 50
54 Utilities Expense 985 985
55 Supplies Expense 800 (a) 1,240 2,040
56Insurance Expense 0 (b) 100 100
59 Misc. Expense 455 455
42,600 42,600 2,260 2,260 43,400 43,400
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12. NetSolutions - Work Sheet - Two Months Ended 12/31/02
Trial Balance Adjustments Adj. Trial Balance
Account Debit Credit Debit Credit Debit Credit
11 Cash 2,065 2,065
12Accounts Receivable 2,220 (e) 500 2,720
14 Supplies 2,000 (a) 1,240 760
15 Prepaid Insurance 2,400 (b) 100 2,300
17 Land 20,000 20,000
18 Office Equipment 1,800 1,800
19Accumulated Depr. 0 (f) 50 50
21 Accounts Payable 900 900
22 Wages Payable 0 (d) 250 250
23 Unearned Rent 360 (c) 120 240
31Chris Clark, Capital 25,000 25,000
32Chris Clark, Drawing 4,000 4,000
41 Fees Earned 16,340 (e) 500 16,840
42 Rent Revenue 0 (c) 120 120
51 Wages Expense 4,275 (d) 250 4,525
52 Rent Expense 1,600 1,600
53Depreciation Expense 0 (f) 50 50
54 Utilities Expense 985 985
55 Supplies Expense 800 (a) 1,240 2,040
56Insurance Expense 0 (b) 100 100
59 Misc. Expense 455 455
42,600 42,600 2,260 2,260 43,400 43,400
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13. NetSolutions - Work Sheet - Two Months Ended 12/31/02
Trial Balance Adjustments Adj. Trial Balance
Account Debit Credit Debit Credit Debit Credit
11 Cash 2,065 2,065
12Accounts Receivable 2,220 (e) 500 2,720
14 Supplies 2,000 (a) 1,240 760
15 Prepaid Insurance 2,400 (b) 100 2,300
17 Land 20,000 20,000
18 Office Equipment 1,800 1,800
19Accumulated Depr. 0 (f) 50 50
21 Accounts Payable 900 900
22 Wages Payable 0 (d) 250 250
23 Unearned Rent 360 (c) 120 240
31Chris Clark, Capital 25,000 25,000
32Chris Clark, Drawing 4,000 4,000
41 Fees Earned 16,340 (e) 500 16,840
42 Rent Revenue 0 (c) 120 120
51 Wages Expense 4,275 (d) 250 4,525
52 Rent Expense 1,600 1,600
53Depreciation Expense 0 (f) 50 50
54 Utilities Expense 985 985
55 Supplies Expense 800 (a) 1,240 2,040
56Insurance Expense 0 (b) 100 100
59 Misc. Expense 455 455
42,600 42,600 2,260 2,260 43,400 43,400
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14. NetSolutions - Work Sheet - Two Months Ended 12/31/02
Trial Balance Adjustments Adj. Trial Balance
Account Debit Credit Debit Credit Debit Credit
11 Cash 2,065 2,065
12Accounts Receivable 2,220 (e) 500 2,720
14 Supplies 2,000 (a) 1,240 760
15 Prepaid Insurance 2,400 (b) 100 2,300
17 Land 20,000 20,000
18 Office Equipment 1,800 1,800
19Accumulated Depr. 0 (f) 50 50
21 Accounts Payable 900 900
22 Wages Payable 0 (d) 250 250
23 Unearned Rent 360 (c) 120 240
31Chris Clark, Capital 25,000 25,000
32Chris Clark, Drawing 4,000 4,000
41 Fees Earned 16,340 (e) 500 16,840
42 Rent Revenue 0 (c) 120 120
51 Wages Expense 4,275 (d) 250 4,525
52 Rent Expense 1,600 1,600
53Depreciation Expense 0 (f) 50 50
54 Utilities Expense 985 985
55 Supplies Expense 800 (a) 1,240 2,040
56Insurance Expense 0 (b) 100 100
59 Misc. Expense 455 455
42,600 42,600 2,260 2,260 43,400 43,400
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15. NetSolutions - Work Sheet - Two Months Ended 12/31/02
Adj. Trial Balance Income Statement Balance Sheet
Account Debit Credit Debit Credit Debit Credit
11 Cash 2,065 2,065
12Accounts Receivable 2,720 2,720
14 Supplies 760 760
15 Prepaid Insurance 2,300 2,300
17 Land 20,000 20,000
18 Office Equipment 1,800 1,800
19Accumulated Depr. 50 50
21 Accounts Payable 900 900
22 Wages Payable 250 250
23 Unearned Rent 240 240
31Chris Clark, Capital 25,000 25,000
32Chris Clark, Drawing 4,000 4,000
41 Fees Earned 16,840 16,840
42 Rent Revenue 120 120
51 Wages Expense 4,525 4,525
52 Rent Expense 1,600 1,600
53Depreciation Expense 50 50
54 Utilities Expense 985 985
55 Supplies Expense 2,040 2,040
56Insurance Expense 100 100
59 Misc. Expense 455 455
43,400 43,400 9,755 16,960 43,645 16,440
Net Income 7,205 7,205
16,960 16,960 43,645 43,645
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16. NetSolutions - Work Sheet - Two Months Ended 12/31/02
Adj. Trial Balance Income Statement Balance Sheet
Account Debit Credit Debit Credit Debit Credit
11 Cash 2,065 2,065
12Accounts Receivable 2,720 2,720
14 Supplies 760 760
15 Prepaid Insurance 2,300 2,300
17 Land 20,000 20,000
18 Office Equipment 1,800 1,800
19Accumulated Depr. 50 50
21 Accounts Payable 900 900
22 Wages Payable 250 250
23 Unearned Rent 240 240
31Chris Clark, Capital 25,000 25,000
32Chris Clark, Drawing 4,000 4,000
41 Fees Earned 16,840 16,840
42 Rent Revenue 120 120
51 Wages Expense 4,525 4,525
52 Rent Expense 1,600 1,600
53Depreciation Expense 50 50
54 Utilities Expense 985 985
55 Supplies Expense 2,040 2,040
56Insurance Expense 100 100
59 Misc. Expense 455 455
43,400 43,400 9,755 16,960 43,645 16,440
Net Income 7,205 7,205
16,960 16,960 43,645 43,645
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17. NetSolutions - Work Sheet - Two Months Ended 12/31/02
Adj. Trial Balance Income Statement Balance Sheet
Account Debit Credit Debit Credit Debit Credit
11 Cash 2,065 2,065
12Accounts Receivable 2,720 2,720
14 Supplies 760 760
15 Prepaid Insurance 2,300 2,300
17 Land 20,000 20,000
18 Office Equipment 1,800 1,800
19Accumulated Depr. 50 50
21 Accounts Payable 900 900
22 Wages Payable 250 250
23 Unearned Rent 240 240
31Chris Clark, Capital 25,000 25,000
32Chris Clark, Drawing 4,000 4,000
41 Fees Earned 16,840 16,840
42 Rent Income 120 120
51 Wages Expense 4,525 4,525
52 Rent Expense 1,600 1,600
53Depreciation Expense 50 50
54 Utilities Expense 985 985
55 Supplies Expense 2,040 2,040
56Insurance Expense 100 100
59 Misc. Expense 455 455
43,400 43,400 9,755 16,960 43,645 16,440
Net Income 7,205 7,205
16,960 16,960 43,645 43,645
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18. NetSolutions
Income Statement
For Two Months Ended December 31, 2002
Fees earned $16,840
Rent revenue 120
Total revenues $16,960
Expenses:
Wages expense $ 4,525
Supplies expense 2,040
Rent expense 1,600
Utilities expense 985
Insurance expense 100
Depreciation expense 50
Miscellaneous expense 455
Total expenses 9,755
Net income $ 7,205
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19. NetSolutions
Statement of Owner’s Equity
For Two Months Ended December 31, 2002
Chris Clark, capital, November 1, 2002 $ 0
Investment on November 1, 2002 $25,000
Net income for November and December 7,205
$32,205
Less withdrawals 4,000
Increase in owner’s equity 28,205
Chris Clark, capital, December 31, 2002 $28,205
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20. NetSolutions
Balance Sheet
December 31, 2002
ASSETS
Current assets:
Cash $ 2,065
Accounts receivable 2,720
Supplies 760
Prepaid insurance 2,300
Total current assets $ 7,845
Property, plant, and
equipment:
Land $20,000
Office equipment 1,800
Less accum. depr. (50)
Total property, plant,
and equipment $21,750
Total assets $29,595
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21. NetSolutions
Balance Sheet
December 31, 2002
LIABILITIES
Current liabilities:
Accounts payable $ 900
Wages payable 250
Unearned rent 240
Total liabilities $ 1,390
OWNER’S EQUITY
Chris Clark, capital 28,205
Total liabilities and
owner’s equity $29,595
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22. The Closing Process
Wages Expense Fees Earned
Bal. 4,525 Income Summary Bal. 16,840
Rent Expense Rent Revenue
Bal. 1,600
Bal. 120
Depreciation Expense
Bal. 50
Utilities Expense Note: The balances
Bal. 985 Chris Clark, Capital shown are adjusted
balances before closing.
Bal. 25,000
Supplies Expense The following sequence
Bal. 2,040 demonstrates the closing
process.
Insurance Expense
Bal. 100
Chris Clark, Drawing
Miscellaneous Expense
Bal. 4,000
Bal. 455
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23. The Closing Process
Wages Expense Fees Earned
Bal. 4,525 Income Summary 16,840 Bal. 16,840
Rent Expense 16,960 Rent Revenue
Bal. 1,600 Total
120 Bal. 120
Revenues
Depreciation Expense
Bal. 50
Utilities Expense
Close Revenues
Bal. 985 Chris Clark, Capital
Bal. 25,000
Supplies Expense
Bal. 2,040
Insurance Expense
Bal. 100
Chris Clark, Drawing
Miscellaneous Expense
Bal. 455 Bal. 4,000
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24. The Closing Process
Wages Expense Fees Earned
Bal. 4,525 Income Summary 16,840 Bal. 16,840
4,525
Rent Expense 9,755 16,960 Rent Revenue
Bal. 1,600 1,600 Total Total
120 Bal. 120
Expenses Revenues
Depreciation Expense
Bal. 50
50
Utilities Expense
Close Revenues
Bal. 985 Chris Clark, Capital
985
Bal. 25,000 Close Expenses
Supplies Expense
Bal. 2,040 2,040
Insurance Expense
Bal. 100 100
Chris Clark, Drawing
Miscellaneous Expense
Bal. 455 Bal. 4,000
455
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25. The Closing Process
Wages Expense Fees Earned
Bal. 4,525 Income Summary 16,840 Bal. 16,840
4,525
Rent Expense 9,755 16,960 Rent Income
Bal. 1,600 1,600 7,205 120 Bal. 120
Depreciation Expense
Bal. 50 Closed
50
Utilities Expense
Close Revenues
Bal. 985 Chris Clark, Capital
985
Bal. 25,000 Close Expenses
Supplies Expense
Bal. 2,040 7,205
2,040 Close Income Summary
Net Income
Insurance Expense
Bal. 100 100
Chris Clark, Drawing
Miscellaneous Expense
Bal. 455 Bal. 4,000
455
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26. The Closing Process
Wages Expense Fees Earned
Bal. 4,525 Income Summary 16,840 Bal. 16,840
4,525
Rent Expense 9,755 16,960 Rent Income
Bal. 1,600
1,600 7,205 120 Bal. 120
Depreciation Expense
Bal. 50 Closed
50
Utilities Expense
Close Revenues
Bal. 985 Chris Clark, Capital
985
4,000 Bal. 25,000 Close Expenses
Supplies Expense
Bal. 2,040 Drawing 7,205
2,040 Close Income Summary
Net Income
Insurance Expense
Bal. 100 100 Close Drawing
Chris Clark, Drawing
Miscellaneous Expense Bal. 4,000 4,000
Bal. 455 455
Closed
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27. The Closing Process
Wages Expense Fees Earned
Income Summary
Rent Expense Rent Income
Depreciation Expense
Utilities Expense
Chris Clark, Capital
4,000 Bal. 25,000 Drawing
Supplies Expense
7,205 Net Income
Bal. 28,205
Insurance Expense
All temporary accounts
Chris Clark, Drawing now have zero balances
Miscellaneous Expense and are ready for the
next accounting period.
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28. NetSolutions
Post-Closing Trial Balance
December 31, 2002
11 Cash 2,065
12 Accounts Receivable 2,720
Assets 14 Supplies 760
15 Prepaid Insurance 2,300
17 Land 20,000
18 Office Equipment 1,800
19 Accum. Depreciation 50
21 Accounts Payable 900
22 Wages Payable 250
23 Unearned Rent 240
31 Chris Clark, Capital 28,205
29,645 29,645
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29. NetSolutions
Post-Closing Trial Balance
December 31, 2002
11 Cash 2,065
12 Accounts Receivable 2,720
14 Supplies 760
15 Prepaid Insurance 2,300
17 Land 20,000
18 Office Equipment 1,800
19 Accum. Depreciation 50
21 Accounts Payable 900
Liabilities 22 Wages Payable 250
23 Unearned Rent 240
31 Chris Clark, Capital 28,205
29,645 29,645
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30. NetSolutions
Post-Closing Trial Balance
December 31, 2002
11 Cash 2,065
12 Accounts Receivable 2,720
14 Supplies 760
15 Prepaid Insurance 2,300
17 Land 20,000
18 Office Equipment 1,800
19 Accum. Depreciation 50
21 Accounts Payable 900
22 Wages Payable 250
Owner’s 23 Unearned Rent 240
31 Chris Clark, Capital 28,205
Equity 29,645 29,645
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31. Manual Accounting Cycle
1. Transactions are analyzed
and recorded in journal.
Documents Journal
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32. Manual Accounting Cycle
1. Transactions are analyzed
and recorded in journal.
Documents Journal
2. Transactions are posted
from journal to ledger.
Journal Ledger
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33. Manual Accounting Cycle
1. Transactions are analyzed
and recorded in journal.
Documents Journal
2. Transactions are posted
from journal to ledger.
Journal Ledger
3. Trial balance is prepared,
adjustment data is organized,
work sheet is completed.
Work Sheet
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34. Manual Accounting Cycle
1. Transactions are analyzed
and recorded in journal.
Documents Journal
2. Transactions are posted
from journal to ledger.
Journal Ledger
3. Trial balance is prepared,
adjustment data is organized,
work sheet is completed.
Work Sheet
4. Financial statements are IS SOE BS SCF
prepared and distributed.
Financial Statements
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35. Manual Accounting Cycle
5. Adjusting entries are
journalized and posted
to ledger. Journal Ledger
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36. Manual Accounting Cycle
5. Adjusting entries are
journalized and posted
to ledger. Journal Ledger
6. Closing entries are
journalized and posted
to ledger. Journal Ledger
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37. Manual Accounting Cycle
5. Adjusting entries are
journalized and posted
to ledger. Journal Ledger
6. Closing entries are
journalized and posted
to ledger. Journal Ledger
Assets
7. Post-closing trial balance Liabilities
is prepared. Owner’s Equity
Post-closing
Trial Balance
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38. Manual Accounting Cycle
5. Adjusting entries are
journalized and posted
to ledger. Journal Ledger
6. Closing entries are
journalized and posted
to ledger. Journal Ledger
Assets
7. Post-closing trial balance Liabilities
is prepared. Owner’s Equity
Post-closing
Trial Balance
8. Reports are analyzed and
interpreted for decision- ?
making purposes.
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39. Computer Accounting Cycle
1. Transactions are analyzed
and entered in the computer.
Documents
Computer
C4 - 39

40. Computer Accounting Cycle
1. Transactions are analyzed
and entered in the computer.
Documents
Computer
2. Preliminary reports are
analyzed, adjustments are
prepared and entered in the
Computer
computer. Reports Computer
C4 - 40

41. Computer Accounting Cycle
1. Transactions are analyzed
and entered in the computer.
Documents
Computer
2. Preliminary reports are
analyzed, adjustments are
prepared and entered in the
Computer
computer. Reports Computer
3. Financial statements are IS SOE BS SCF
printed and distributed.
Financial Statements
C4 - 41

42. Computer Accounting Cycle
1. Transactions are analyzed
and entered in the computer.
Documents
Computer
2. Preliminary reports are
analyzed, adjustments are
prepared and entered in the
Computer
computer. Reports Computer
3. Financial statements are IS SOE BS SCF
printed and distributed.
Financial Statements
4. Reports are analyzed and
interpreted for decision- ?
making purposes.
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43. Solvency Analysis
Solvency is the ability of a business to meet its
financial obligations (debts) as they are due.
Solvency analysis focuses on the ability of a
business to pay or otherwise satisfy its current
and noncurrent liabilities.
This ability is normally assessed by examining
balance sheet relationships.
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44. Solvency Measures — The Short-Term Creditor
Working Capital and Current Ratio
2003 2002
Current assets $550,000 $533,000
Current liabilities 210,000 243,000
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45. Solvency Measures — The Short-Term Creditor
Working Capital and Current Ratio
2003 2002
Current assets $550,000 $533,000
Current liabilities 210,000 243,000
Working capital $340,000 $290,000
Use: To indicate the ability to meet
currently maturing obligations
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46. Solvency Measures — The Short-Term Creditor
Working Capital and Current Ratio
2003 2002
Current assets $550,000 $533,000
Current liabilities 210,000 243,000 Divide
Working capital $340,000 $290,000 current
Current ratio 2.6 to 1 2.2 to 1 assets by
current
Use: To indicate the ability to meet liabilities
currently maturing obligations
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47. Working Capital and Current Ratio
Objective: Analyze and interpret the financial solvency of
a business by computing the working capital and the
current ratio.
Working Capital (WC) Current Ratio (CR)
Current Assets minus Current Assets
Current Liabilities Current Liabilities
Example
NetSolutions WC = $7,845 - $1,390 = $6,455
CR = $7,845 / $1,390 = 5.6
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48. Chapter 4 Power Notes
Completing the Accounting Cycle
This is the last slide in Chapter 4.
Note: To see the topic slide, type 2 and press Enter.
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