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The Accounting Cycle: Reporting Financial Results
The document discusses the accounting cycle, specifically focusing on the preparation and reporting of financial statements for publicly owned companies. It provides detailed examples of financial statements, including income statements, balance sheets, and the closing processes for temporary accounts. Additionally, it outlines the significance of financial analysis for decision-making and includes self-testing questions at the end.
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The Accounting Cycle: Reporting Financial Results
- 1. Copyright © 2010by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin The Accounting Cycle:The Accounting Cycle: Reporting Financial ResultsReporting Financial Results otaleem.blogspot.comotaleem.blogspot.com for more presentation(follow me)for more presentation(follow me) Chapter 5
- 2. 5-2 Preparing Financial StatementsPreparingFinancial Statements Publicly owned companies – those with shares listed on a stock exchange – have obligations to release annual and quarterly information to their stockholders and to the public. Publicly owned companies – those with shares listed on a stock exchange – have obligations to release annual and quarterly information to their stockholders and to the public. The annual report includes comparative financial statements and other information relating to the company’s financial position, business operations, and future prospects. The financial statements contained in the annual report must be audited by a firm of certified public accountants (CPAs).
- 3. 5-3 JJ's Lawn CareService Adjusted Trial Balance May 31, 2009 Cash 3,925$ Accounts receivable 75 Tools & equipment 2,650 Accumulated depreciation: tools & equipment 50$ Truck 15,000 Accumumlated depreciation: truck 250 Notes payable 13,000 Accounts payable 150 Capital stock 8,000 Dividends 200 Sales revenue 750 Gasoline expense 50 Depreciation expense: tools & equipment 50 Depreciation expense: truck 250 Total 22,200$ 22,200$ Now, let’s prepare the financial statements for JJ’s Lawn Care Service for May. Now, let’s prepare the financial statements for JJ’s Lawn Care Service for May.
- 4. 5-4 JJ's Lawn CareService Income Statement For the month ending May 31, 2009 Sales revenue 750$ Operating expenses: Gasoline expense 50$ Depreciation: tools & equipment 50 Depreciation: truck 250 350 Net income 400$ Net income also appears on the Statement of Retained Earnings. Net income also appears on the Statement of Retained Earnings. The Income StatementThe Income Statement
- 5. 5-5 Business Earnings Dividends Business Losses Summarizes the increasesand decreases in Retained Earnings during the period. The Statement of RetainedThe Statement of Retained EarningsEarnings
- 6. 5-6 Now, let’s preparethe Balance Sheet. The Statement of RetainedThe Statement of Retained EarningsEarnings
- 7. 5-7 JJ's Lawn CareService Balance Sheet May 31, 2009 Assets Cash 3,925$ Accounts receivable 75 Tools & equipment 2,650$ Less: Accumulated depreciation 50 2,600 Truck 15,000$ Less: Accumulated depreciation 250 14,750 Total assets 21,350$ Liabilities & Stockholders' Equity Liabilities: Notes payable 13,000$ Accounts payable 150 Total liabilities 13,150$ Stockholders' equity: Capital stock 8,000$ Retained earnings 200 Total stockholders' equity 8,200 Total liabilities & stockholders' equity 21,350$ The Balance SheetThe Balance Sheet
- 8. 5-8 Relationships among theFinancialRelationships among the Financial StatementsStatements JJ's Lawn Care Service Income Statement For the month ending May 31, 2009 Sales revenue 750$ Operating expenses: Gasoline expense 50$ Depreciation: tools & equipment 50 Depreciation: truck 250 350 Net income 400$ JJ's Lawn Care Service Balance Sheet May 31, 2009 Assets Cash 3,925$ Accounts receivable 75 Tools & equipment 2,650$ Less: Accumulated depreciation 50 2,600 Truck 15,000$ Less: Accumulated depreciation 250 14,750 Total assets 21,350$ Liabilities & Stockholders' Equity Liabilities: Notes payable 13,000$ Accounts payable 150 Total liabilities 13,150$ Stockholders' equity: Capital stock 8,000$ Retained earnings 200 Total stockholders' equity 8,200 Total liabilities & stockholders' equity 21,350$
- 9. 5-9 Notes to the FinancialStatements Examples of Items Disclosed Lawsuits pending Scheduled plant closings Governmental investigations Significant events occurring after the balance sheet date Specific customers that account for a large portion of revenue Unusual transactions and related party transactions Examples of Items Disclosed Lawsuits pending Scheduled plant closings Governmental investigations Significant events occurring after the balance sheet date Specific customers that account for a large portion of revenue Unusual transactions and related party transactions Drafting the Notes that AccompanyDrafting the Notes that Accompany Financial StatementsFinancial Statements
- 10. 5-10 Closing theTemporary AccountsClosingtheTemporary Accounts Close Revenue accounts to Income Summary. Close Expense accounts to Income Summary. Close Income Summary account to Retained Earnings. Close Dividends to Retained Earnings. The closing process gets the temporary accounts ready for the next accounting period.
- 11. 5-11 JJ's Lawn CareService After-Closing Trial Balance May 31, 2009 Cash 3,925$ Accounts receivable 75 Tools & equipment 2,650 Accum. depreciation: tools & eq. 50$ Truck 15,000 Accum. depreciation: truck 250 Notes payable 13,000 Accounts payable 150 Capital stock 8,000 Retained earnings 200 Total 21,650$ 21,650$ After-Closing Trial BalanceAfter-Closing Trial Balance
- 12. 5-12 Monthly Quarterly Jan. 1 Dec.31 Annually Many companies prepare financial statements at various points throughout the year. Many companies prepare financial statements at various points throughout the year. Interim Financial Statements Preparing Financial StatementsPreparing Financial Statements Covering Different Periods of TimeCovering Different Periods of Time
- 13.
- 14. 5-14 Financial Analysis andDecisionFinancial Analysis and Decision MakingMaking Profitability Net income percentage = Net Income/ Total Revenue Return on Equity ROE = Net Income/ Avg. Stockholder’s equity
- 15. 5-15 Financial Analysis andDecisionFinancial Analysis and Decision MakingMaking Working Capital WC = Current Assets – Current liabilities Current Ratio = Current Asset / Current Liabilities
- 16. 5-16 Supplemental Topic: TheSupplementalTopic: The WorksheetWorksheet Balance Sheet Accounts Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr Cash 18,592 18,592 18,592 Accounts Receivable 6,500 (h) 750 7,250 7,250 Shop Supplies 1,800 (a) 600 1,200 1,200 Notes Payable 4,000 4,000 4,000 Accounts Payable 2,690 2,690 2,690 Income Statement Accounts Repair Service Revenue 171,250 (h) 750 172,000 172,000 Advertising Expense 3,900 3,900 3,900 Wages Expense 56,800 (f) 1,950 58,750 58,750 272,000 272,000 12,200 12,200 279,100 279,100 135,058 175,000 144,042 104,100 Net Income 39,942 39,942 Totals 175,000 175,000 144,042 144,042 OVERNIGHT AUTO SERVICES Worksheet For the Year Ended December 31, 2009 Trial Balance Adjustments Adjusted Trial Balance Income Statement Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
- 17. 5-17 Self-testing QuestionSelf-testing Question Solvethe Demonstration problem Brief Exercise 5.3 Exercise 5.2, 5.3,
- 18. 5-18 End of Chapter5End of Chapter 5
Editor's Notes
- #2 Chapter 5: The Accounting Cycle—Reporting Financial Results
- #3 Publicly owned companies – those with shares listed on a stock exchange – have obligations to release annual and quarterly information to their stockholders and to the public. These companies don’t simply prepare financial statements – they publish annual reports. An annual report includes comparative financial statements for several years and a wealth of other information about the company’s financial position, business operations, and future prospects. Before the annual report is issued, the financial statements must be audited by a firm of certified public accounts (CPAs). Publicly owned companies must file their audited financial statements and detailed supporting schedules with the Securities and Exchange Commission.
- #4 Here is the Adjusted Trial Balance for JJ’s Lawn Care at May 31, 2009, that was completed at the end of Chapter 4. We will use the adjusted trial balance to prepare the financial statements. The first financial statement to prepare is the income statement. We prepare the income statement first because it determines the amount of net income to be reported in the statement of retained earnings.
- #5 Here is JJ’s Income Statement for the month ended May 31, 2009. JJ’s has produced net income of $400. Revenues total $750. Expenses include gasoline expense and depreciation on the company’s equipment and truck.When preparing financial statements, we always begin with the income because net income is an integral part of the statement of retained earnings. Once the income statement is completed, the statement of retained earnings can be prepared.
- #6 Remember that net income increases retained earnings. Dividends and net losses decrease retained earnings for the period.
- #7 Retained earnings is that portion of stockholders’ equity created by earning net income and retaining the related resources in the business. The statement of retained earnings summarizes the increases and decreases in retained earnings from business operations during the period. JJ’s Lawn Care was started in May, so the beginning balance in retained earnings was zero. We add net income of $400 to the beginning balance of zero and subtract the dividends paid of $200 to arrive at the ending retained earnings balance of $200.Retained earnings at May 31st will appear on the balance sheet of JJ’s Lawn Care.
- #8 The balance sheet lists the amounts of the company’s assets, liabilities, and owners’ equity at the end of the accounting period. The balances of the asset and liability accounts are taken directly from the adjusted trial balance. The amount of retained earnings at the end of the period is taken from the statement of retained earnings we just prepared. Note that the contra accounts, Accumulated Depreciation –Tools and Equipment and Accumulated Depreciation—Truck, reduce the balance in the related asset accounts.
- #9 Part I This is the income statement for JJ’s Lawn Care at the end of May. Part IINet income impacts the retained earnings of the company.Part III The ending balance of retained earnings appears on the balance sheet. Now, it’s clear to see how all the financial statements articulate with each other.
- #10 In addition to the basic financial statements, accountants must prepare notes to the financial statements. The purpose of the notes is to explain certain items or transactions to the reader. There is no comprehensive list of all information that should be disclosed in financial statements. The adequacy of disclosure is based on a combination of official rules, tradition, and accountants’ professional judgment. Two items always disclosed in the notes to financial statements are the accounting methods in use and the due dates of major liabilities. So, for example, JJ’s Lawn Care would disclose that straight-line depreciation was used to determine depreciation expense.The notes also explain any unusual or infrequent items that may be of interest to the reader. Almost all major corporations have a note disclosure about pending litigation.
- #11 Once the financial statements have been prepared, the books are closed and it’s time to get ready for the next accounting period. Net income is earned over a period of time. At the start of a new period we want all revenue and expense accounts to have a zero balance so we can start recording income in this period.The closing of a company’s books is a four step process.Step one is to close all revenue accounts to a temporary account called Income Summary.Step two is to close all expense accounts to the Income Summary account. At this point, net income is isolated in the Income Summary.Step three is to then close Income Summary to Retained Earnings. Net income transfers from Income Summary to Retained Earnings and zeros out Income Summary. The Income Summary account never appears in the financial statements.The forth and final step is to close Dividends to Retained earnings. Net income is added to Retained Earnings and Dividends is subtracted from Retained Earnings. This updates Retained Earnings.
- #12 After preparing all the closing entries, an after-closing trial balance is prepared. Here is the after-closing trial balance for JJ’s Lawn Care Service. The after-closing trial balance shows we have no revenues, expenses, or dividends. The proper balance of Retained Earnings appears on the after-closing trial balance.If there are any revenues, expenses, or dividends on the after-closing trial balance, an error has been made and the closing entries must be reviewed.
- #13 Almost all companies prepare annual and interim financial statements. An annual financial statement covers one year of operations. The year does not have to be a calendar year.Interim financial statements are usually prepared monthly and quarterly. Most large corporations publish quarterly reports for their shareholders.
- #17 Supplemental Topic: The Worksheet. A worksheet illustrates in one place the relationships among the unadjusted trial balance, proposed adjusting entries, and financial statements. A worksheet is prepared at the end of the period, but before the adjusting entries are formally recorded in the accounting records. On this slide we illustrated an abbreviated version of a worksheet. The dotted lines indicate that some accounts are not listed for illustrative purposes. To complete a worksheet follow these 5 steps. Enter the ledger account balances in the Trial Balance columns. Enter the adjustments in the Adjustments columns. Prepare an adjusted trial balance. Extend the adjusted trial balance amounts into the appropriate financial statement columns. Total the financial statement columns and determine and record net income or net loss.
- #19 End of chapter 5.