Corporate finance accounting 14e by warren reeve duchac chapter 4

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Income Statement

the Adjusted Trial Balance columns of the of-period spreadsheet, beginning with fees

end-earned

in order of size, beginning with the larger items

o Miscellaneous Expense is the last item, regardless of its amount.

Retained Earnings Statement

earnings statement is the balance of the retained earnings account at the beginning of the period

net income to determine the ending retained

earnings account balance

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Balance Sheet

(slide 1 of 2)

Adjusted Trial Balance columns of the period spreadsheet, beginning with Cash

the spreadsheet

retained earnings statement

Balance Sheet

(slide 2 of 2)

assets and liabilities is a classified balance

sheet.

o Assets are commonly divided into two sections on the balance sheet: (1) current assets and (2) property,

plant, and equipment.

o Liabilities are commonly divided into two sections on the balance sheet: (1) current liabilities and (2) long- term liabilities.

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Current Assets

(slide 1 of 2)

• Cash and other assets that are expected to be converted

to cash or sold or used up usually within one year or

less, through the normal operations of the business, are called current assets.

• Current assets include:

Current Assets

(slide 2 of 2)

• Notes receivable are written promises by the customer to pay the amount of the note and

interest Like accounts receivable, notes

receivable are amounts that customers owe, but they are more formal than accounts receivable

current assets because they are usually

converted to cash within one year or less

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Property, Plant, and Equipment

• Property, plant, and equipment (also called

fixed assets or plant assets) include land and assets that depreciate over a period of time

o Assets that depreciate over time include:

 Equipment

 Machinery

 Buildings

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Long-Term Liabilities

not be due for a long time (usually more than

Stockholders’ Equity

the assets of the business

liabilities section

liabilities, and this total must be equal to the total assets

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Permanent Accounts

accounts

forward from year to year

sheet

Temporary Accounts

accounts

year to year because they relate to only one

period

income statement as well as the dividends

account, which is reported on the retained

earnings statement

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Closing Entries

(slide 1 of 4)

• At the beginning of the next period, temporary accounts should have zero balances

• To achieve this, temporary account balances are

transferred to permanent accounts at the end of the

accounting period through journal entries.

• The entries that transfer these balances are called

closing entries The transfer process is called the

closing process and is sometimes referred to as

closing the books.

• After the closing entries are posted, all of the temporary accounts have zero balances.

Closing Entries

(slide 2 of 4)

• The closing entries involves the following four steps:

o Step 1 Revenue account balances are transferred to

an account called Income Summary.

o Step 2 Expense account balances are transferred to

an account called Income Summary.

o Step 3 The balance of Income Summary (net income

or net loss) is transferred to the retained earnings

account.

o Step 4 The balance of the dividends account is

transferred to the retained earnings account.

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Closing Entries

(slide 3 of 4)

• Income Summary is a temporary account that is only used during the closing process.

• At the beginning of the closing process, Income

Summary has no balance

• During the closing process, revenue and expense

accounts are cleared by debiting or crediting Income Summary for their amounts

o Because it has the effect of clearing the revenue and expense accounts of their balances, Income Summary is sometimes called a clearing account.

4 Debit the retained earnings account for the balance of the

dividends account and credit the dividends account.

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Post-Closing Trial Balance

closing entries have been posted

trial balance is to verify that the ledger is in

balance at the beginning of the next period

Accounting Cycle

(slide 1 of 2)

analyzing and journalizing transactions and ends with the post-closing trial balance is called the

accounting cycle

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Accounting Cycle

(slide 2 of 2)

• The steps in the accounting cycle are as follows:

Fiscal Year

selected and end on the last day of the following twelfth month

ends when business activities have reached the lowest point in its annual operating cycle, such a

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Analysis for Decision Making:

Working Capital and Current Ratio

liquidity

solvency

business’s short-term liquidity and solvency are

working capital and the current ratio.

Analysis for Decision Making:

Working Capital

• Working capital is the excess of the current assets of a business over its current liabilities

Working Capital = Current Assets – Current Liabilities

business is able to pay its current liabilities and

is solvent

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Analysis for Decision Making:

Current Ratio

• The current ratio is another means of

expressing the relationship between current

assets and current liabilities

assets by current liabilities, as follows:

Current Assets Current Ratio =

Current Liabilities

Appendix 1: End-of-Period Spreadsheet

end-of-period spreadsheet to include financial

statement columns

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Appendix 1: Steps in Preparing an

Expanded End-of-Period Spreadsheet

Statement and Balance Sheet columns

Sheet columns, compute the net income or net loss, and complete the spreadsheet

Appendix 1: Preparing the Financial

Statements from the Spreadsheet

income statement, the retained earnings

statement, and the balance sheet

closing entries are normally not journalized or posted until after the spreadsheet and financial statements have been prepared

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Appendix 2: Reversing Entries

• Reversing entries are journal entries recorded

on the first day of the next period that are the

exact opposite of the related adjusting entry from the last day of the prior period