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Lecture slides_Chapter 3 _ 4.pptx

This document discusses key accounting concepts including fiscal versus calendar years, cash versus accrual accounting, adjusting entries, correcting entries, qualities of financial information, closing entries, and the accounting cycle. It provides definitions and examples of these concepts. Fiscal year refers to an accounting time period that is one year in length, while a calendar year runs from January 1 to December 31. Accrual accounting records transactions when events occur rather than when cash is received or paid. Adjusting entries ensure revenues and expenses are recorded in the proper periods according to accounting principles. Correcting entries fix posting errors. Closing entries transfer balances to prepare for a new accounting period.

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CHAPTER 3 & 4 1
KEY ACCOUNTING CONCEPTS 1. Fiscal vs Calendar Years 2. Cash vs Accrual Accounting 3. Adjusting Entries 4. Correcting Entries 5. Qualities of Financial Information 6. Closing Entries 7. Accounting Cycle 8. Classified Balance Sheet 2
 Monthly and quarterly time periods are called interim periods.  Most large companies must prepare both quarterly and annual financial statements.  Fiscal Year = Accounting time period that is one year in length.  Calendar Year = January 1 to December 31. Fiscal and Calendar Years LO 1 3
Accrual-Basis Accounting  Transactions recorded in the periods in which the events occur.  Companies recognize revenues when they perform services (rather than when they receive cash).  Expenses are recognized when incurred (rather than when paid).  In accordance with generally accepted accounting principles (GAAP). Accrual- versus Cash-Basis Accounting LO 1 4
Cash-Basis Accounting  Revenues recognized when cash is received.  Expenses recognized when cash is paid.  Cash-basis accounting is not in accordance with generally accepted accounting principles (GAAP). Accrual- versus Cash-Basis Accounting LO 1 5
REVENUE RECOGNITION PRINCIPLE Recognize revenue in the accounting period in which the performance obligation is satisfied. Recognizing Revenues and Expenses LO 1 6
EXPENSE RECOGNITION PRINCIPLE Match expenses with revenues in the period when the company makes efforts that generate those revenues. Recognizing Revenues and Expenses LO 1 “Let the expenses follow the revenues.” 7
Illustration 3-1 GAAP relationships in revenue and expense recognition LO 1 8
(a) Monthly and quarterly time periods. (b) Efforts (expenses) should be matched with results (revenues). (c) Accountants divide the economic life of a business into artificial time periods. (d) Companies record revenues when they receive cash and record expenses when they pay out cash. (e) An accounting time period that starts on January 1 and ends on December 31. (f) Companies record transactions in the period in which the events occur. A list of concepts is provided in the left column below, with a description of the concept in the right column below. There are more descriptions provided than concepts. Match the description of the concept to the concept. 1. ___ Accrual-basis accounting. 2. ___ Calendar year. 3. ___ Time period assumption. 4. ___ Expense recognition principle. f e c b 1 Timing Concepts DO IT! LO 1
Adjusting Entries  Ensure that the revenue recognition and expense recognition principles are followed.  Necessary because the trial balance may not contain up- to-date and complete data.  Required every time a company prepares financial statements.  Will include one income statement account and one balance sheet account. The Need for Adjusting Entries LO 1 10
Adjusting entries are made to ensure that: a. expenses are recognized in the period in which they are incurred. b. revenues are recorded in the period in which services are performed. c. balance sheet and income statement accounts have correct balances at the end of an accounting period. d. all of the above. Question The Need for Adjusting Entries LO 1 11
Illustration 3-2 Categories of adjusting entries 1. Prepaid Expenses. Expenses paid in cash before they are used or consumed. Deferrals 1. Accrued Revenues. Revenues for services performed but not yet received in cash or recorded. 2. Accrued Expenses. Expenses incurred but not yet paid in cash or recorded. 2. Unearned Revenues. Cash received before services are performed. Accruals Types of Adjusting Entries LO 1 13
Illustration: Pioneer Advertising purchased supplies costing $2,500 on October 5. Pioneer recorded the payment by increasing (debiting) the asset Supplies. This account shows a balance of $2,500 in the October 31 trial balance. An inventory count at the close of business on October 31 reveals that $1,000 of supplies are still on hand. Supplies 1,500 Supplies Expense 1,500 Oct. 31 Supplies LO 2 14
Illustration: On October 4, Pioneer Advertising paid $600 for a one-year fire insurance policy. Coverage began on October 1. Pioneer recorded the payment by increasing (debiting) Prepaid Insurance. This account shows a balance of $600 in the October 31 trial balance. Insurance of $50 ($600 ÷ 12) expires each month. Prepaid Insurance 50 Insurance Expense 50 Oct. 31 Insurance LO 2 15
 Buildings, equipment, and motor vehicles (assets that provide service for many years) are recorded as assets, rather than an expense, on the date acquired.  Depreciation is the process of allocating the cost of an asset to expense over its useful life.  Depreciation does not attempt to report the actual change in the value of the asset. ► Allocation concept, not a valuation concept. Depreciation LO 2 16
40 Illustration: For Pioneer Advertising, assume that depreciation on the equipment is $480 a year, or $40 per month. Accumulated depreciation 40 Depreciation expense Oct. 31 Accumulated Depreciation is called a contra asset account. Depreciation LO 2 17
Illustration 3-8 STATEMENT PRESENTATION  Accumulated Depreciation is a contra asset account (credit).  Offsets related asset account on the balance sheet.  Book value is the difference between the cost of any depreciable asset and its accumulated depreciation. Depreciation LO 2 18
Illustration: Pioneer Advertising received $1,200 on October 2 from R. Knox for advertising services expected to be completed by December 31. Unearned Service Revenue shows a balance of $1,200 in the October 31 trial balance. Analysis reveals that the company performed $400 of services in October. Service Revenue 400 Unearned Service Revenue 400 Oct. 31 Unearned Revenues LO 2 19
The ledger of Hammond Company, on March 31, 2017, includes these selected accounts before adjusting entries are prepared. Debit Credit Prepaid Insurance $ 3,600 Supplies 2,800 Equipment 25,000 Accumulated Depreciation—Equipment $5,000 Unearned Service Revenue 9,200 An analysis of the accounts shows the following. 1. Insurance expires at the rate of $100 per month. 2. Supplies on hand total $800. 3. The equipment depreciates $200 a month. 4. During March, services were performed for one-half of the unearned service revenue. Prepare the adjusting entries for the month of March. 2 Adjusting Entries for Deferrals DO IT! LO 2
The ledger of Hammond Company, on March 31, 2017, includes these selected accounts before adjusting entries are prepared. Debit Credit Prepaid Insurance $ 3,600 Supplies 2,800 Equipment 25,000 Accumulated Depreciation—Equipment $5,000 Unearned Service Revenue 9,200 Prepare the adjusting entries for the month of March. 1. Insurance expires at the rate of $100 per month. 2 Adjusting Entries for Deferrals DO IT! Insurance Expense 100 Prepaid Insurance 100 LO 2
The ledger of Hammond Company, on March 31, 2017, includes these selected accounts before adjusting entries are prepared. Debit Credit Prepaid Insurance $ 3,600 Supplies 2,800 Equipment 25,000 Accumulated Depreciation—Equipment $5,000 Unearned Service Revenue 9,200 Prepare the adjusting entries for the month of March. 2. Supplies on hand total $800. 2 Adjusting Entries for Deferrals DO IT! Supplies Expense 2,000 Supplies 2,000 LO 2
The ledger of Hammond Company, on March 31, 2017, includes these selected accounts before adjusting entries are prepared. Debit Credit Prepaid Insurance $ 3,600 Supplies 2,800 Equipment 25,000 Accumulated Depreciation—Equipment $5,000 Unearned Service Revenue 9,200 Prepare the adjusting entries for the month of March. 3. The equipment depreciates $200 a month. 2 Adjusting Entries for Deferrals DO IT! Depreciation Expense 200 Accumulated Depreciation—Equipment 200 LO 2
The ledger of Hammond Company, on March 31, 2017, includes these selected accounts before adjusting entries are prepared. Debit Credit Prepaid Insurance $ 3,600 Supplies 2,800 Equipment 25,000 Accumulated Depreciation—Equipment $5,000 Unearned Service Revenue 9,200 Prepare the adjusting entries for the month of March. 4. During March, services were performed for one-half of the unearned service revenue. 2 Adjusting Entries for Deferrals DO IT! Unearned Service Revenue 4,600 Service Revenue 4,600 LO 2
Illustration: In October Pioneer Advertising performed services worth $200 that were not billed to clients on or before October 31. Accounts Receivable 200 Cash 200 Nov. 10 200 Service Revenue 200 Accounts Receivable Oct. 31 On November 10, Pioneer receives cash of $200 for the services performed. Accrued Revenues LO 3 25
Illustration: Pioneer Advertising signed a three-month note payable in the amount of $5,000 on October 1. The note requires Pioneer to pay interest at an annual rate of 12%. Interest payable 50 Interest expense 50 Oct. 31 Illustration 3-17 Accrued Expenses ACCRUED INTEREST LO 3 26
Micro Computer Services began operations on August 1, 2017. At the end of August 2017, management prepares monthly financial statements. The following information relates to August. 1. At August 31, the company owed its employees $800 in salaries and wages that will be paid on September 1. 2. On August 1, the company borrowed $30,000 from a local bank on a 15-year mortgage. The annual interest rate is 10%. 3. Revenue for services performed but unrecorded for August totaled $1,100. Prepare the adjusting entries needed at August 31, 2017. 3 Adjusting Entries for Accruals DO IT! LO 3
Prepare the adjusting entries needed at August 31, 2017. 1. At August 31, the company owed its employees $800 in salaries and wages that will be paid on September 1. 2. On August 1, the company borrowed $30,000 from a local bank on a 15-year mortgage. The annual interest rate is 10%. 3. Revenue for services performed but unrecorded for August totaled $1,100. 3 Adjusting Entries for Accruals DO IT! Salaries and Wages Expense 800 Salaries and Wages Payable 800 Interest Expense 250 Interest Payable 250 Accounts Receivable 1,100 Service Revenue 1,100 LO 3
Illustration 3-22 Summary of Basic Relationships LO 3 29
4 Trial Balance DO IT! (a) Determine the net income for the quarter April 1 to June 30. (b) Determine the total assets and total liabilities at June 30, 2017, for Skolnick Co. (c) Determine the amount of owner’s capital at June 30, 2017. LO 4
4 Trial Balance DO IT! LO 4
4 Trial Balance DO IT! LO 4
4 Trial Balance DO IT! LO 4
 Unnecessary if accounting records are free of errors.  Made whenever an error is discovered.  Must be posted before closing entries. Instead of preparing a correcting entry, it is possible to reverse the incorrect entry and then prepare the correct entry. Correcting Entries—An Avoidable Step LO 3 34
CASE 1: On May 10, Mercato Co. journalized and posted a $50 cash collection on account from a customer as a debit to Cash $50 and a credit to Service Revenue $50. The company discovered the error on May 20, when the customer paid the remaining balance in full. Cash 50 Incorrect entry Service Revenue 50 Cash 50 Correct entry Accounts Receivable 50 Service Revenue 50 Correcting entry Accounts Receivable 50 Correcting Entries—An Avoidable Step LO 3 35
CASE 2: On May 18, Mercato purchased on account equipment costing $450. The transaction was journalized and posted as a debit to Equipment $45 and a credit to Accounts Payable $45. The error was discovered on June 3. Correcting Entries—An Avoidable Step Equipment 45 Incorrect entry Accounts Payable 45 Equipment 450 Correct entry Accounts Payable 450 Equipment 405 Correcting entry Accounts Payable 405 LO 3 36
Sanchez Company discovered the following errors made in January 2017 . 1. A payment of Salaries and Wages Expense of $600 was debited to Supplies and credited to Cash, both for $600. 2. A collection of $3,000 from a client on account was debited to Cash $200 and credited to Service Revenue $200. 3. The purchase of supplies on account for $860 was debited to Supplies $680 and credited to Accounts Payable $680. Correct the errors without reversing the incorrect entry. LO 3 DO IT! Correcting Entries 3
Sanchez Company discovered the following errors made in January 2017 . 1. A payment of Salaries and Wages Expense of $600 was debited to Supplies and credited to Cash, both for $600. Correct the error without reversing the incorrect entry. Salaries and Wages Expense 600 Supplies 600 LO 3 DO IT! Correcting Entries 3
Sanchez Company discovered the following errors made in January 2017 . 2. A collection of $3,000 from a client on account was debited to Cash $200 and credited to Service Revenue $200. Correct the error without reversing the incorrect entry. Service Revenue 200 Cash 2,800 Accounts Receivable 3,000 LO 3 DO IT! Correcting Entries 3
Sanchez Company discovered the following errors made in January 2017 . 3. The purchase of supplies on account for $860 was debited to Supplies $680 and credited to Accounts Payable $680. Correct the error without reversing the incorrect entry. Supplies ($860 - $680) 180 Accounts Payable 180 LO 3 DO IT! Correcting Entries 3
Two fundamental qualities, relevance and faithful representation. Relevance  Make a difference in a business decision.  Provides information that has predictive value and confirmatory value.  Materiality is a company-specific aspect of relevance. ► An item is material when its size makes it likely to influence the decision of an investor or creditor. LEARNING OBJECTIVE APPENDIX 3B: Discuss financial reporting concepts. 6 Qualities of Useful Information LO 6 42
Two fundamental qualities, relevance and faithful representation. Faithful Representation  Information accurately depicts what really happened.  Information must be ► complete (nothing important has been omitted), ► neutral (is not biased toward one position or another), and ► free from error. Qualities of Useful Information LO 6 43
ENHANCING QUALITIES Comparability results when different companies use the same accounting principles. Consistency means that a company uses the same accounting principles and methods from year to year. Information is verifiable if independent observers, using the same methods, obtain similar results. For accounting information to have relevance, it must be timely. Information has the quality of understandability if it is presented in a clear and concise fashion. Qualities of Useful Information LO 6 44
 Multiple-column form used in preparing financial statements.  Not a permanent accounting record.  May be a computerized worksheet using an electronic spreadsheet program such as Excel.  Prepared using a five step process.  Use of worksheet is optional. Worksheet LEARNING OBJECTIVE Prepare a worksheet. 1 LO 1 49
Illustration 4-1 Steps in Preparing a Worksheet 50
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Cash 15,200 Supplies 2,500 Prepaid Insurance 600 Equipment 5,000 Notes Payable 5,000 Accounts Payable 2,500 Unearned Revenue 1,200 Owner's Capital 10,000 Owner's Drawings 500 Service Revenue 10,000 Salaries and Wages Exp. 4,000 Rent Exp. 900 Totals 28,700 28,700 Balance Sheet Adjusted Income Trial Balance Adjustments Trial Balance Statement Steps in Preparing a Worksheet Trial balance amounts come directly from ledger accounts. Include all accounts with balances. STEP 1: PREPARE A TRIAL BALANCE ON THE WORKSHEET Illustration 4-2 LO 1 51
Illustration 3-23 General journal showing adjusting entries Adjusting Journal Entries (Chapter 3) Steps in Preparing a Worksheet LO 1 52
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Cash 15,200 Supplies 2,500 1,500 Prepaid Insurance 600 50 Equipment 5,000 Notes Payable 5,000 Accounts Payable 2,500 Unearned Revenue 1,200 400 Owner's Capital 10,000 Owner's Drawings 500 Service Revenue 10,000 400 200 Salaries and Wages Exp. 4,000 1,200 Rent Exp. 900 Totals 28,700 28,700 Supplies Expense 1,500 Insurance Expense 50 Accumulated Depreciation 40 Depreciation Expense 40 Accounts Receivable 200 Interest Expense 50 Interest Payable 50 Salaries and Wages Payable 1,200 Totals 3,440 3,440 Balance Sheet Adjusted Income Trial Balance Adjustments Trial Balance Statement (a) (b) (a) (g) (c) (d) (d) (e) (b) (e) (f) (f) (g) (c) Steps in Preparing a Worksheet STEP 2: ENTER THE ADJUSTMENTS IN THE ADJUSTMENTS COLUMNS Enter adjustment amounts, total adjustments columns, and check for equality. Add additional accounts as needed. Adjustments Key: (a) Supplies Used. (b) Insurance Expired. (c) Depreciation Expensed. (d) Service Revenue Recognized. (e) Service Revenue Accrued. (f) Interest Accrued. (g) Salaries Accrued. Illustration 4-3 LO 1 53
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Cash 15,200 15,200 Supplies 2,500 1,500 1,000 Prepaid Insurance 600 50 550 Equipment 5,000 5,000 Notes Payable 5,000 5,000 Accounts Payable 2,500 2,500 Unearned Revenue 1,200 400 800 Owner's Capital 10,000 10,000 Owner's Drawings 500 500 Service Revenue 10,000 400 10,600 200 Salaries and Wages Exp. 4,000 1,200 5,200 Rent Exp. 900 900 Totals 28,700 28,700 Supplies Expense 1,500 1,500 Insurance Expense 50 50 Accumulated Depreciation 40 40 Depreciation Expense 40 40 Accounts Receivable 200 200 Interest Expense 50 50 Interest Payable 50 50 Salaries and Wages Payable 1,200 1,200 Totals 3,440 3,440 30,190 30,190 Net Income Totals Balance Sheet Adjusted Income Trial Balance Adjustments Trial Balance Statement (a) (b) (a) (g) (c) (d) (d) (e) (b) (e) (f) (f) (g) (c) Steps in Preparing a Worksheet STEP 3: COMPLETE THE ADJUSTED TRIAL BALANCE COLUMNS Total the adjusted trial balance columns and check for equality. Illustration 4-4 LO 1 54
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Cash 15,200 15,200 15,200 Supplies 2,500 1,500 1,000 1,000 Prepaid Insurance 600 50 550 550 Equipment 5,000 5,000 5,000 Notes Payable 5,000 5,000 5,000 Accounts Payable 2,500 2,500 2,500 Unearned Revenue 1,200 400 800 800 Owner's Capital 10,000 10,000 10,000 Owner's Drawings 500 500 500 Service Revenue 10,000 400 10,600 10,600 200 Salaries and Wages Exp. 4,000 1,200 5,200 5,200 Rent Exp. 900 900 900 Totals 28,700 28,700 Supplies Expense 1,500 1,500 1,500 Insurance Expense 50 50 50 Accumulated Depreciation 40 40 40 Depreciation Expense 40 40 40 Accounts Receivable 200 200 200 Interest Expense 50 50 50 Interest Payable 50 50 50 Salaries and Wages Payable 1,200 1,200 1,200 Totals 3,440 3,440 30,190 30,190 7,740 10,600 22,450 19,590 Net Income Totals Balance Sheet Adjusted Income Trial Balance Adjustments Trial Balance Statement (a) (b) (a) (g) (c) (d) (d) (e) (b) (e) (f) (f) (g) (c) Steps in Preparing a Worksheet Illustration 4-5 Extend adjusted trial balance amounts to appropriate financial statement columns. STEP 4: EXTEND AMOUNTS TO FINANCIAL STATEMENT COLUMNS LO 1 55
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Cash 15,200 15,200 15,200 Supplies 2,500 1,500 1,000 1,000 Prepaid Insurance 600 50 550 550 Equipment 5,000 5,000 5,000 Notes Payable 5,000 5,000 5,000 Accounts Payable 2,500 2,500 2,500 Unearned Revenue 1,200 400 800 800 Owner's Capital 10,000 10,000 10,000 Owner's Drawings 500 500 500 Service Revenue 10,000 400 10,600 10,600 200 Salaries and Wages Exp. 4,000 1,200 5,200 5,200 Rent Exp. 900 900 900 Totals 28,700 28,700 Supplies Expense 1,500 1,500 1,500 Insurance Expense 50 50 50 Accumulated Depreciation 40 40 40 Depreciation Expense 40 40 40 Accounts Receivable 200 200 200 Interest Expense 50 50 50 Interest Payable 50 50 50 Salaries and Wages Payable 1,200 1,200 1,200 Totals 3,440 3,440 30,190 30,190 7,740 10,600 22,450 19,590 Net Income 2,860 2,860 Totals 10,600 10,600 22,450 22,450 Balance Sheet Adjusted Income Trial Balance Adjustments Trial Balance Statement (a) (b) (a) (g) (c) (d) (d) (e) (b) (e) (f) (f) (g) (c) Compute Net Income or Net Loss. STEP 5: TOTAL COLUMNS, COMPUTE NET INCOME (LOSS) Steps in Preparing a Worksheet Illustration 4-6 LO 1 56
At the end of the accounting period, the company makes the accounts ready for the next period. LEARNING OBJECTIVE Prepare closing entries and a post-closing trial balance. 2 Illustration 4-8 Temporary versus permanent accounts LO 2 57 Hint: RED (rev,exp,drawin gs).
Closing entries formally recognize in the ledger the transfer of  net income (or net loss) and  owner’s drawings to owner’s capital. Companies generally journalize and post closing entries only at the end of the annual accounting period. Closing entries produce a zero balance in each temporary account. Preparing Closing Entries LO 2 58
Owner’s Capital is a permanent account. All other accounts are temporary accounts. Preparing Closing Entries Illustration 4-9 Diagram of closing process—proprietorship LO 2 59
CLOSING ENTRIES ILLUSTRATED Illustration 4-10 Closing entries journalized Preparing Closing Entries 60
Illustration 4-11 Posting Closing Entries LO 2 61
Purpose is to prove the equality of the permanent account balances carried forward into the next accounting period. Preparing a Post-Closing Trial Balance Illustration 4-12 Post-closing trial balance LO 2 62
The worksheet for Hancock Company shows the following in the financial statement columns: Owner’s Drawings $15,000 Owner’s Capital $42,000 Net income $18,000 Prepare the closing entries at December 31 that affect owner’s capital. Income Summary 18,000 Owner’s Capital 18,000 Owner’s Capital 15,000 Owner’s Drawings 15,000 LO 2 DO IT! Closing Entries 2
1. Analyze business transactions 2. Journalize the transactions 6. Prepare an adjusted trial balance 7. Prepare financial statements 8. Journalize and post closing entries 9. Prepare a post-closing trial balance 4. Prepare a trial balance 3. Post to ledger accounts 5. Journalize and post adjusting entries Illustration 4-15 LEARNING OBJECTIVE Explain the steps in the accounting cycle and how to prepare correcting entries. 3 LO 3 64
The Classified Balance Sheet Illustration 4-21 LO 4 65
The Classified Balance Sheet LO 4 Illustration 4-21 66
 Assets that a company expects to convert to cash or use up within one year or the operating cycle, whichever is longer.  Operating cycle is the average time that it takes to purchase inventory, sell it on account, and then collect cash from customers. Current Assets LO 4 67
Usually listed in the order they expect to convert them into cash. Illustration 4-22 Current Assets LO 4 68
The correct order of presentation in a classified balance sheet for the following current assets is: a. accounts receivable, cash, prepaid insurance, inventory. b. cash, inventory, accounts receivable, prepaid insurance. c. cash, accounts receivable, inventory, prepaid insurance. d. inventory, cash, accounts receivable, prepaid insurance. Question Current Assets LO 4 69
 Investments in stocks and bonds of other companies.  Investments in long-term assets such as land or buildings that is not currently being used in operating activities.  Long-term notes receivable. Long-Term Investments Illustration 4-23 LO 4 70
 Long useful lives.  Currently used in operations.  Depreciation - allocating the cost of assets to a number of years.  Accumulated depreciation - total amount of depreciation expensed thus far in the asset’s life. Property, Plant, and Equipment LO 4 71
Illustration 4-24 Property, Plant, and Equipment LO 4 72
 Long-lived assets that do not have physical substance. Intangible Assets Illustration 4-25 LO 4 73
Patents and copyrights are a. Current assets. b. Intangible assets. c. Long-term investments. d. Property, plant, and equipment. The Classified Balance Sheet Question LO 4 74
 Obligations the company is to pay within the coming year or its operating cycle, whichever is longer.  Usually list notes payable first, followed by accounts payable. Other items follow in order of magnitude.  Common examples are accounts payable, salaries and wages payable, notes payable, interest payable, income taxes payable current maturities of long-term obligations.  Liquidity - ability to pay obligations expected to be due within the next year. Current Liabilities LO 4 75
Illustration 4-26 Current Liabilities LO 4 76
LO 4 77
 Obligations a company expects to pay after one year. Long-Term Liabilities Illustration 4-27 LO 4 78
Which of the following is not a long-term liability? a. Bonds payable b. Current maturities of long-term obligations c. Long-term notes payable d. Mortgages payable The Classified Balance Sheet Question LO 4 79
 Proprietorship - one capital account.  Partnership - capital account for each partner.  Corporation - Common Stock and Retained Earnings. Owner’s Equity Illustration 4-28 LO 4 80
The following accounts were taken from the financial statements of Callahan Company. Match each of the following accounts to its proper balance sheet classification, shown below. If the item would not appear on a balance sheet, use “NA.” Current assets (CA) Current liabilities (CL) Long-term investments (LTI) Long-term liabilities (LTL) Property, plant, and equipment (PPE) Owner’s equity (OE) Intangible assets (IA) LO 4 DO IT! Balance Sheet Classifications 4

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Lecture slides_Chapter 3 _ 4.pptx

  • 1.
  • 2.
    KEY ACCOUNTING CONCEPTS 1.Fiscal vs Calendar Years 2. Cash vs Accrual Accounting 3. Adjusting Entries 4. Correcting Entries 5. Qualities of Financial Information 6. Closing Entries 7. Accounting Cycle 8. Classified Balance Sheet 2
  • 3.
     Monthly andquarterly time periods are called interim periods.  Most large companies must prepare both quarterly and annual financial statements.  Fiscal Year = Accounting time period that is one year in length.  Calendar Year = January 1 to December 31. Fiscal and Calendar Years LO 1 3
  • 4.
    Accrual-Basis Accounting  Transactionsrecorded in the periods in which the events occur.  Companies recognize revenues when they perform services (rather than when they receive cash).  Expenses are recognized when incurred (rather than when paid).  In accordance with generally accepted accounting principles (GAAP). Accrual- versus Cash-Basis Accounting LO 1 4
  • 5.
    Cash-Basis Accounting  Revenuesrecognized when cash is received.  Expenses recognized when cash is paid.  Cash-basis accounting is not in accordance with generally accepted accounting principles (GAAP). Accrual- versus Cash-Basis Accounting LO 1 5
  • 6.
    REVENUE RECOGNITION PRINCIPLE Recognizerevenue in the accounting period in which the performance obligation is satisfied. Recognizing Revenues and Expenses LO 1 6
  • 7.
    EXPENSE RECOGNITION PRINCIPLE Matchexpenses with revenues in the period when the company makes efforts that generate those revenues. Recognizing Revenues and Expenses LO 1 “Let the expenses follow the revenues.” 7
  • 8.
    Illustration 3-1 GAAP relationshipsin revenue and expense recognition LO 1 8
  • 9.
    (a) Monthly andquarterly time periods. (b) Efforts (expenses) should be matched with results (revenues). (c) Accountants divide the economic life of a business into artificial time periods. (d) Companies record revenues when they receive cash and record expenses when they pay out cash. (e) An accounting time period that starts on January 1 and ends on December 31. (f) Companies record transactions in the period in which the events occur. A list of concepts is provided in the left column below, with a description of the concept in the right column below. There are more descriptions provided than concepts. Match the description of the concept to the concept. 1. ___ Accrual-basis accounting. 2. ___ Calendar year. 3. ___ Time period assumption. 4. ___ Expense recognition principle. f e c b 1 Timing Concepts DO IT! LO 1
  • 10.
    Adjusting Entries  Ensurethat the revenue recognition and expense recognition principles are followed.  Necessary because the trial balance may not contain up- to-date and complete data.  Required every time a company prepares financial statements.  Will include one income statement account and one balance sheet account. The Need for Adjusting Entries LO 1 10
  • 11.
    Adjusting entries aremade to ensure that: a. expenses are recognized in the period in which they are incurred. b. revenues are recorded in the period in which services are performed. c. balance sheet and income statement accounts have correct balances at the end of an accounting period. d. all of the above. Question The Need for Adjusting Entries LO 1 11
  • 12.
    Illustration 3-2 Categories ofadjusting entries 1. Prepaid Expenses. Expenses paid in cash before they are used or consumed. Deferrals 1. Accrued Revenues. Revenues for services performed but not yet received in cash or recorded. 2. Accrued Expenses. Expenses incurred but not yet paid in cash or recorded. 2. Unearned Revenues. Cash received before services are performed. Accruals Types of Adjusting Entries LO 1 13
  • 13.
    Illustration: Pioneer Advertising purchasedsupplies costing $2,500 on October 5. Pioneer recorded the payment by increasing (debiting) the asset Supplies. This account shows a balance of $2,500 in the October 31 trial balance. An inventory count at the close of business on October 31 reveals that $1,000 of supplies are still on hand. Supplies 1,500 Supplies Expense 1,500 Oct. 31 Supplies LO 2 14
  • 14.
    Illustration: On October4, Pioneer Advertising paid $600 for a one-year fire insurance policy. Coverage began on October 1. Pioneer recorded the payment by increasing (debiting) Prepaid Insurance. This account shows a balance of $600 in the October 31 trial balance. Insurance of $50 ($600 ÷ 12) expires each month. Prepaid Insurance 50 Insurance Expense 50 Oct. 31 Insurance LO 2 15
  • 15.
     Buildings, equipment,and motor vehicles (assets that provide service for many years) are recorded as assets, rather than an expense, on the date acquired.  Depreciation is the process of allocating the cost of an asset to expense over its useful life.  Depreciation does not attempt to report the actual change in the value of the asset. ► Allocation concept, not a valuation concept. Depreciation LO 2 16
  • 16.
    40 Illustration: For PioneerAdvertising, assume that depreciation on the equipment is $480 a year, or $40 per month. Accumulated depreciation 40 Depreciation expense Oct. 31 Accumulated Depreciation is called a contra asset account. Depreciation LO 2 17
  • 17.
    Illustration 3-8 STATEMENT PRESENTATION Accumulated Depreciation is a contra asset account (credit).  Offsets related asset account on the balance sheet.  Book value is the difference between the cost of any depreciable asset and its accumulated depreciation. Depreciation LO 2 18
  • 18.
    Illustration: Pioneer Advertisingreceived $1,200 on October 2 from R. Knox for advertising services expected to be completed by December 31. Unearned Service Revenue shows a balance of $1,200 in the October 31 trial balance. Analysis reveals that the company performed $400 of services in October. Service Revenue 400 Unearned Service Revenue 400 Oct. 31 Unearned Revenues LO 2 19
  • 19.
    The ledger ofHammond Company, on March 31, 2017, includes these selected accounts before adjusting entries are prepared. Debit Credit Prepaid Insurance $ 3,600 Supplies 2,800 Equipment 25,000 Accumulated Depreciation—Equipment $5,000 Unearned Service Revenue 9,200 An analysis of the accounts shows the following. 1. Insurance expires at the rate of $100 per month. 2. Supplies on hand total $800. 3. The equipment depreciates $200 a month. 4. During March, services were performed for one-half of the unearned service revenue. Prepare the adjusting entries for the month of March. 2 Adjusting Entries for Deferrals DO IT! LO 2
  • 20.
    The ledger ofHammond Company, on March 31, 2017, includes these selected accounts before adjusting entries are prepared. Debit Credit Prepaid Insurance $ 3,600 Supplies 2,800 Equipment 25,000 Accumulated Depreciation—Equipment $5,000 Unearned Service Revenue 9,200 Prepare the adjusting entries for the month of March. 1. Insurance expires at the rate of $100 per month. 2 Adjusting Entries for Deferrals DO IT! Insurance Expense 100 Prepaid Insurance 100 LO 2
  • 21.
    The ledger ofHammond Company, on March 31, 2017, includes these selected accounts before adjusting entries are prepared. Debit Credit Prepaid Insurance $ 3,600 Supplies 2,800 Equipment 25,000 Accumulated Depreciation—Equipment $5,000 Unearned Service Revenue 9,200 Prepare the adjusting entries for the month of March. 2. Supplies on hand total $800. 2 Adjusting Entries for Deferrals DO IT! Supplies Expense 2,000 Supplies 2,000 LO 2
  • 22.
    The ledger ofHammond Company, on March 31, 2017, includes these selected accounts before adjusting entries are prepared. Debit Credit Prepaid Insurance $ 3,600 Supplies 2,800 Equipment 25,000 Accumulated Depreciation—Equipment $5,000 Unearned Service Revenue 9,200 Prepare the adjusting entries for the month of March. 3. The equipment depreciates $200 a month. 2 Adjusting Entries for Deferrals DO IT! Depreciation Expense 200 Accumulated Depreciation—Equipment 200 LO 2
  • 23.
    The ledger ofHammond Company, on March 31, 2017, includes these selected accounts before adjusting entries are prepared. Debit Credit Prepaid Insurance $ 3,600 Supplies 2,800 Equipment 25,000 Accumulated Depreciation—Equipment $5,000 Unearned Service Revenue 9,200 Prepare the adjusting entries for the month of March. 4. During March, services were performed for one-half of the unearned service revenue. 2 Adjusting Entries for Deferrals DO IT! Unearned Service Revenue 4,600 Service Revenue 4,600 LO 2
  • 24.
    Illustration: In OctoberPioneer Advertising performed services worth $200 that were not billed to clients on or before October 31. Accounts Receivable 200 Cash 200 Nov. 10 200 Service Revenue 200 Accounts Receivable Oct. 31 On November 10, Pioneer receives cash of $200 for the services performed. Accrued Revenues LO 3 25
  • 25.
    Illustration: Pioneer Advertisingsigned a three-month note payable in the amount of $5,000 on October 1. The note requires Pioneer to pay interest at an annual rate of 12%. Interest payable 50 Interest expense 50 Oct. 31 Illustration 3-17 Accrued Expenses ACCRUED INTEREST LO 3 26
  • 26.
    Micro Computer Servicesbegan operations on August 1, 2017. At the end of August 2017, management prepares monthly financial statements. The following information relates to August. 1. At August 31, the company owed its employees $800 in salaries and wages that will be paid on September 1. 2. On August 1, the company borrowed $30,000 from a local bank on a 15-year mortgage. The annual interest rate is 10%. 3. Revenue for services performed but unrecorded for August totaled $1,100. Prepare the adjusting entries needed at August 31, 2017. 3 Adjusting Entries for Accruals DO IT! LO 3
  • 27.
    Prepare the adjustingentries needed at August 31, 2017. 1. At August 31, the company owed its employees $800 in salaries and wages that will be paid on September 1. 2. On August 1, the company borrowed $30,000 from a local bank on a 15-year mortgage. The annual interest rate is 10%. 3. Revenue for services performed but unrecorded for August totaled $1,100. 3 Adjusting Entries for Accruals DO IT! Salaries and Wages Expense 800 Salaries and Wages Payable 800 Interest Expense 250 Interest Payable 250 Accounts Receivable 1,100 Service Revenue 1,100 LO 3
  • 28.
    Illustration 3-22 Summary ofBasic Relationships LO 3 29
  • 29.
    4 Trial Balance DOIT! (a) Determine the net income for the quarter April 1 to June 30. (b) Determine the total assets and total liabilities at June 30, 2017, for Skolnick Co. (c) Determine the amount of owner’s capital at June 30, 2017. LO 4
  • 30.
  • 31.
  • 32.
  • 33.
     Unnecessary ifaccounting records are free of errors.  Made whenever an error is discovered.  Must be posted before closing entries. Instead of preparing a correcting entry, it is possible to reverse the incorrect entry and then prepare the correct entry. Correcting Entries—An Avoidable Step LO 3 34
  • 34.
    CASE 1: OnMay 10, Mercato Co. journalized and posted a $50 cash collection on account from a customer as a debit to Cash $50 and a credit to Service Revenue $50. The company discovered the error on May 20, when the customer paid the remaining balance in full. Cash 50 Incorrect entry Service Revenue 50 Cash 50 Correct entry Accounts Receivable 50 Service Revenue 50 Correcting entry Accounts Receivable 50 Correcting Entries—An Avoidable Step LO 3 35
  • 35.
    CASE 2: OnMay 18, Mercato purchased on account equipment costing $450. The transaction was journalized and posted as a debit to Equipment $45 and a credit to Accounts Payable $45. The error was discovered on June 3. Correcting Entries—An Avoidable Step Equipment 45 Incorrect entry Accounts Payable 45 Equipment 450 Correct entry Accounts Payable 450 Equipment 405 Correcting entry Accounts Payable 405 LO 3 36
  • 36.
    Sanchez Company discoveredthe following errors made in January 2017 . 1. A payment of Salaries and Wages Expense of $600 was debited to Supplies and credited to Cash, both for $600. 2. A collection of $3,000 from a client on account was debited to Cash $200 and credited to Service Revenue $200. 3. The purchase of supplies on account for $860 was debited to Supplies $680 and credited to Accounts Payable $680. Correct the errors without reversing the incorrect entry. LO 3 DO IT! Correcting Entries 3
  • 37.
    Sanchez Company discoveredthe following errors made in January 2017 . 1. A payment of Salaries and Wages Expense of $600 was debited to Supplies and credited to Cash, both for $600. Correct the error without reversing the incorrect entry. Salaries and Wages Expense 600 Supplies 600 LO 3 DO IT! Correcting Entries 3
  • 38.
    Sanchez Company discoveredthe following errors made in January 2017 . 2. A collection of $3,000 from a client on account was debited to Cash $200 and credited to Service Revenue $200. Correct the error without reversing the incorrect entry. Service Revenue 200 Cash 2,800 Accounts Receivable 3,000 LO 3 DO IT! Correcting Entries 3
  • 39.
    Sanchez Company discoveredthe following errors made in January 2017 . 3. The purchase of supplies on account for $860 was debited to Supplies $680 and credited to Accounts Payable $680. Correct the error without reversing the incorrect entry. Supplies ($860 - $680) 180 Accounts Payable 180 LO 3 DO IT! Correcting Entries 3
  • 40.
    Two fundamental qualities,relevance and faithful representation. Relevance  Make a difference in a business decision.  Provides information that has predictive value and confirmatory value.  Materiality is a company-specific aspect of relevance. ► An item is material when its size makes it likely to influence the decision of an investor or creditor. LEARNING OBJECTIVE APPENDIX 3B: Discuss financial reporting concepts. 6 Qualities of Useful Information LO 6 42
  • 41.
    Two fundamental qualities,relevance and faithful representation. Faithful Representation  Information accurately depicts what really happened.  Information must be ► complete (nothing important has been omitted), ► neutral (is not biased toward one position or another), and ► free from error. Qualities of Useful Information LO 6 43
  • 42.
    ENHANCING QUALITIES Comparability results whendifferent companies use the same accounting principles. Consistency means that a company uses the same accounting principles and methods from year to year. Information is verifiable if independent observers, using the same methods, obtain similar results. For accounting information to have relevance, it must be timely. Information has the quality of understandability if it is presented in a clear and concise fashion. Qualities of Useful Information LO 6 44
  • 43.
     Multiple-column formused in preparing financial statements.  Not a permanent accounting record.  May be a computerized worksheet using an electronic spreadsheet program such as Excel.  Prepared using a five step process.  Use of worksheet is optional. Worksheet LEARNING OBJECTIVE Prepare a worksheet. 1 LO 1 49
  • 44.
    Illustration 4-1 Steps inPreparing a Worksheet 50
  • 45.
    Account Titles Dr.Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Cash 15,200 Supplies 2,500 Prepaid Insurance 600 Equipment 5,000 Notes Payable 5,000 Accounts Payable 2,500 Unearned Revenue 1,200 Owner's Capital 10,000 Owner's Drawings 500 Service Revenue 10,000 Salaries and Wages Exp. 4,000 Rent Exp. 900 Totals 28,700 28,700 Balance Sheet Adjusted Income Trial Balance Adjustments Trial Balance Statement Steps in Preparing a Worksheet Trial balance amounts come directly from ledger accounts. Include all accounts with balances. STEP 1: PREPARE A TRIAL BALANCE ON THE WORKSHEET Illustration 4-2 LO 1 51
  • 46.
    Illustration 3-23 General journal showingadjusting entries Adjusting Journal Entries (Chapter 3) Steps in Preparing a Worksheet LO 1 52
  • 47.
    Account Titles Dr.Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Cash 15,200 Supplies 2,500 1,500 Prepaid Insurance 600 50 Equipment 5,000 Notes Payable 5,000 Accounts Payable 2,500 Unearned Revenue 1,200 400 Owner's Capital 10,000 Owner's Drawings 500 Service Revenue 10,000 400 200 Salaries and Wages Exp. 4,000 1,200 Rent Exp. 900 Totals 28,700 28,700 Supplies Expense 1,500 Insurance Expense 50 Accumulated Depreciation 40 Depreciation Expense 40 Accounts Receivable 200 Interest Expense 50 Interest Payable 50 Salaries and Wages Payable 1,200 Totals 3,440 3,440 Balance Sheet Adjusted Income Trial Balance Adjustments Trial Balance Statement (a) (b) (a) (g) (c) (d) (d) (e) (b) (e) (f) (f) (g) (c) Steps in Preparing a Worksheet STEP 2: ENTER THE ADJUSTMENTS IN THE ADJUSTMENTS COLUMNS Enter adjustment amounts, total adjustments columns, and check for equality. Add additional accounts as needed. Adjustments Key: (a) Supplies Used. (b) Insurance Expired. (c) Depreciation Expensed. (d) Service Revenue Recognized. (e) Service Revenue Accrued. (f) Interest Accrued. (g) Salaries Accrued. Illustration 4-3 LO 1 53
  • 48.
    Account Titles Dr.Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Cash 15,200 15,200 Supplies 2,500 1,500 1,000 Prepaid Insurance 600 50 550 Equipment 5,000 5,000 Notes Payable 5,000 5,000 Accounts Payable 2,500 2,500 Unearned Revenue 1,200 400 800 Owner's Capital 10,000 10,000 Owner's Drawings 500 500 Service Revenue 10,000 400 10,600 200 Salaries and Wages Exp. 4,000 1,200 5,200 Rent Exp. 900 900 Totals 28,700 28,700 Supplies Expense 1,500 1,500 Insurance Expense 50 50 Accumulated Depreciation 40 40 Depreciation Expense 40 40 Accounts Receivable 200 200 Interest Expense 50 50 Interest Payable 50 50 Salaries and Wages Payable 1,200 1,200 Totals 3,440 3,440 30,190 30,190 Net Income Totals Balance Sheet Adjusted Income Trial Balance Adjustments Trial Balance Statement (a) (b) (a) (g) (c) (d) (d) (e) (b) (e) (f) (f) (g) (c) Steps in Preparing a Worksheet STEP 3: COMPLETE THE ADJUSTED TRIAL BALANCE COLUMNS Total the adjusted trial balance columns and check for equality. Illustration 4-4 LO 1 54
  • 49.
    Account Titles Dr.Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Cash 15,200 15,200 15,200 Supplies 2,500 1,500 1,000 1,000 Prepaid Insurance 600 50 550 550 Equipment 5,000 5,000 5,000 Notes Payable 5,000 5,000 5,000 Accounts Payable 2,500 2,500 2,500 Unearned Revenue 1,200 400 800 800 Owner's Capital 10,000 10,000 10,000 Owner's Drawings 500 500 500 Service Revenue 10,000 400 10,600 10,600 200 Salaries and Wages Exp. 4,000 1,200 5,200 5,200 Rent Exp. 900 900 900 Totals 28,700 28,700 Supplies Expense 1,500 1,500 1,500 Insurance Expense 50 50 50 Accumulated Depreciation 40 40 40 Depreciation Expense 40 40 40 Accounts Receivable 200 200 200 Interest Expense 50 50 50 Interest Payable 50 50 50 Salaries and Wages Payable 1,200 1,200 1,200 Totals 3,440 3,440 30,190 30,190 7,740 10,600 22,450 19,590 Net Income Totals Balance Sheet Adjusted Income Trial Balance Adjustments Trial Balance Statement (a) (b) (a) (g) (c) (d) (d) (e) (b) (e) (f) (f) (g) (c) Steps in Preparing a Worksheet Illustration 4-5 Extend adjusted trial balance amounts to appropriate financial statement columns. STEP 4: EXTEND AMOUNTS TO FINANCIAL STATEMENT COLUMNS LO 1 55
  • 50.
    Account Titles Dr.Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Cash 15,200 15,200 15,200 Supplies 2,500 1,500 1,000 1,000 Prepaid Insurance 600 50 550 550 Equipment 5,000 5,000 5,000 Notes Payable 5,000 5,000 5,000 Accounts Payable 2,500 2,500 2,500 Unearned Revenue 1,200 400 800 800 Owner's Capital 10,000 10,000 10,000 Owner's Drawings 500 500 500 Service Revenue 10,000 400 10,600 10,600 200 Salaries and Wages Exp. 4,000 1,200 5,200 5,200 Rent Exp. 900 900 900 Totals 28,700 28,700 Supplies Expense 1,500 1,500 1,500 Insurance Expense 50 50 50 Accumulated Depreciation 40 40 40 Depreciation Expense 40 40 40 Accounts Receivable 200 200 200 Interest Expense 50 50 50 Interest Payable 50 50 50 Salaries and Wages Payable 1,200 1,200 1,200 Totals 3,440 3,440 30,190 30,190 7,740 10,600 22,450 19,590 Net Income 2,860 2,860 Totals 10,600 10,600 22,450 22,450 Balance Sheet Adjusted Income Trial Balance Adjustments Trial Balance Statement (a) (b) (a) (g) (c) (d) (d) (e) (b) (e) (f) (f) (g) (c) Compute Net Income or Net Loss. STEP 5: TOTAL COLUMNS, COMPUTE NET INCOME (LOSS) Steps in Preparing a Worksheet Illustration 4-6 LO 1 56
  • 51.
    At the endof the accounting period, the company makes the accounts ready for the next period. LEARNING OBJECTIVE Prepare closing entries and a post-closing trial balance. 2 Illustration 4-8 Temporary versus permanent accounts LO 2 57 Hint: RED (rev,exp,drawin gs).
  • 52.
    Closing entries formallyrecognize in the ledger the transfer of  net income (or net loss) and  owner’s drawings to owner’s capital. Companies generally journalize and post closing entries only at the end of the annual accounting period. Closing entries produce a zero balance in each temporary account. Preparing Closing Entries LO 2 58
  • 53.
    Owner’s Capital isa permanent account. All other accounts are temporary accounts. Preparing Closing Entries Illustration 4-9 Diagram of closing process—proprietorship LO 2 59
  • 54.
  • 55.
  • 56.
    Purpose is toprove the equality of the permanent account balances carried forward into the next accounting period. Preparing a Post-Closing Trial Balance Illustration 4-12 Post-closing trial balance LO 2 62
  • 57.
    The worksheet forHancock Company shows the following in the financial statement columns: Owner’s Drawings $15,000 Owner’s Capital $42,000 Net income $18,000 Prepare the closing entries at December 31 that affect owner’s capital. Income Summary 18,000 Owner’s Capital 18,000 Owner’s Capital 15,000 Owner’s Drawings 15,000 LO 2 DO IT! Closing Entries 2
  • 58.
    1. Analyze businesstransactions 2. Journalize the transactions 6. Prepare an adjusted trial balance 7. Prepare financial statements 8. Journalize and post closing entries 9. Prepare a post-closing trial balance 4. Prepare a trial balance 3. Post to ledger accounts 5. Journalize and post adjusting entries Illustration 4-15 LEARNING OBJECTIVE Explain the steps in the accounting cycle and how to prepare correcting entries. 3 LO 3 64
  • 59.
    The Classified BalanceSheet Illustration 4-21 LO 4 65
  • 60.
    The Classified BalanceSheet LO 4 Illustration 4-21 66
  • 61.
     Assets thata company expects to convert to cash or use up within one year or the operating cycle, whichever is longer.  Operating cycle is the average time that it takes to purchase inventory, sell it on account, and then collect cash from customers. Current Assets LO 4 67
  • 62.
    Usually listed inthe order they expect to convert them into cash. Illustration 4-22 Current Assets LO 4 68
  • 63.
    The correct orderof presentation in a classified balance sheet for the following current assets is: a. accounts receivable, cash, prepaid insurance, inventory. b. cash, inventory, accounts receivable, prepaid insurance. c. cash, accounts receivable, inventory, prepaid insurance. d. inventory, cash, accounts receivable, prepaid insurance. Question Current Assets LO 4 69
  • 64.
     Investments instocks and bonds of other companies.  Investments in long-term assets such as land or buildings that is not currently being used in operating activities.  Long-term notes receivable. Long-Term Investments Illustration 4-23 LO 4 70
  • 65.
     Long usefullives.  Currently used in operations.  Depreciation - allocating the cost of assets to a number of years.  Accumulated depreciation - total amount of depreciation expensed thus far in the asset’s life. Property, Plant, and Equipment LO 4 71
  • 66.
  • 67.
     Long-lived assetsthat do not have physical substance. Intangible Assets Illustration 4-25 LO 4 73
  • 68.
    Patents and copyrightsare a. Current assets. b. Intangible assets. c. Long-term investments. d. Property, plant, and equipment. The Classified Balance Sheet Question LO 4 74
  • 69.
     Obligations thecompany is to pay within the coming year or its operating cycle, whichever is longer.  Usually list notes payable first, followed by accounts payable. Other items follow in order of magnitude.  Common examples are accounts payable, salaries and wages payable, notes payable, interest payable, income taxes payable current maturities of long-term obligations.  Liquidity - ability to pay obligations expected to be due within the next year. Current Liabilities LO 4 75
  • 70.
  • 71.
  • 72.
     Obligations acompany expects to pay after one year. Long-Term Liabilities Illustration 4-27 LO 4 78
  • 73.
    Which of thefollowing is not a long-term liability? a. Bonds payable b. Current maturities of long-term obligations c. Long-term notes payable d. Mortgages payable The Classified Balance Sheet Question LO 4 79
  • 74.
     Proprietorship -one capital account.  Partnership - capital account for each partner.  Corporation - Common Stock and Retained Earnings. Owner’s Equity Illustration 4-28 LO 4 80
  • 75.
    The following accountswere taken from the financial statements of Callahan Company. Match each of the following accounts to its proper balance sheet classification, shown below. If the item would not appear on a balance sheet, use “NA.” Current assets (CA) Current liabilities (CL) Long-term investments (LTI) Long-term liabilities (LTL) Property, plant, and equipment (PPE) Owner’s equity (OE) Intangible assets (IA) LO 4 DO IT! Balance Sheet Classifications 4