Slides prepare income statement and balance sheet

Prepare Income Statement and Balance Sheet According to Accrual Basis Principles of Cost Analysis and Management... • Standard: with at least 80% accuracy: • Explain purpose of adjusting

Prepare Income Statement and Balance Sheet

According to Accrual Basis

Principles of Cost Analysis and

Management

Did Lacy Really Make $70?

Cash Other Assets Liabilities

Financial Position Revenues Expenses

(+)

200

15

5 50

-130

(-) 20 10 5 65 40 -

(+) 20 65 20 40 -

140

(-) 5

-(-) 40 -

(+) 40 -

(+) 10

(-)

(-) (+)

15 (-) (+)

200

Terminal Learning Objective

• Task: Prepare Income Statement and Balance Sheet According to

Accrual Basis

• Condition: You are a cost advisor technician with access to all

regulations/course handouts, and awareness of Operational

Environment (OE)/Contemporary Operational Environment (COE) variables and actors.

• Standard: with at least 80% accuracy:

• Explain purpose of adjusting transactions

• Describe types of adjusting transactions

• Record adjusting transactions in tabular format

• Identify and enter relevant report data (using macros provided in Excel

template) to prepare income statement and balance sheet according to

Review: The Accounting Cycle

Record Transactions

Post to Ledger

Prepare Trial Balance Prepare

Close Accounts

Post-Closing Trial Balance

Why Adjust Accounts?

• Allows financial statements to accurately

represent financial position of the entity

• Statement of Activities

• Correctly report revenues and expenses for the period

• Statement of Financial Position

• Correctly state ending balances for assets,

liabilities and financial position

Purpose for Adjustments

• Assign activity to proper time period

• Revenue recognition principle: Revenue is

reported on the Statement of Activities in the period in which it is EARNED

• Revenue is earned when service is provided or

product is sold

Purpose for Adjustments

• Assign activity to proper time period

• Matching principle: Expenses are reported on

the Statement of Activities in the period

RESOURCES ARE CONSUMED

Plan Order Receive Pay Consume

Asset & Liability  Remove Liability  Expense

2 Basic Types of Adjustments

• Prepayments: Cash is paid before the

resource is consumed

• When cash is paid in advance, an asset is created

• At the end of the period, some of the asset may have been consumed  expense

Consume Pay

Record Asset  Reduce Asset, Record Expense

2 Basic Types of Adjustments

• Accruals: Resources have been consumed but

no cash has been paid

• Results in a liability

Consume Pay Expense & Liability  Remove Liability

Inventory and Cost of Goods Sold

• Goods and materials that are manufactured or purchased for resale

• Hold as assets on the Statement of Financial Position until sold

• Record as expense “Cost of Goods Sold” on

the Statement of Activities when sold

Equipment and Depreciation

• Depreciation is the accounting process of

assigning a portion of equipment’s cost to the periods in which it is used

• A portion of the benefit of owning the

equipment has been received in the current

• The future benefit is reduced

Rules for Adjustments

• Each adjustment will affect ONE account from the Statement of Activities and ONE account from the Statement of Financial Position

• Adjustments will NEVER affect the cash

account

-(+) 10 5 -

-(+) 10 5 60 -

-(+) 10 5 60 -

75

(-)

Other Assets decrease

and Expenses increase

Remaining assets are:

Supplies $45

Other Assets decrease

and Expenses increase

Remaining assets are:

Supplies $45

(+) 10 5 60 1 -

76

(-)

Lacy paid $20 for

Utensils and plans to

Lacy paid $20 for

Utensils and plans to

(+) 10 5 60 1 -

Lacy’s Ledger

Expenses (+)

10 5 60 1 3 -

79

(-)

Lacy agrees to reimburse Madge $3 for

Lacy agrees to reimburse Madge $3 for

Liabilities

(-) 40 -

(+) 40 3 -

3

Lacy’s Ledger

Expenses (+)

10 5 60 1 3 -

79

(-)

Both Expenses and Liabilities Increase

Accrued Expense: benefit

received but no cash paid

Both Expenses and Liabilities Increase

Accrued Expense: benefit

received but no cash paid

Liabilities

(-) 40 -

(+) 40 3 -

3

Lacy‘s Adjusted Trial Balance

Lacy’s Statement of Activities

Other Financing Source –

-0-Lacy’s Statement of Financial Position

Practical Exercise

Accounting Cycle Spreadsheet

Post adjusting transactions to T-Accounts.

New balances calculate automatically

Post adjusting transactions to T-Accounts.

New balances calculate automatically

Accounting Cycle Spreadsheet

Remember:

Debits = Credits

Remember:

Debits = Credits

Accounting Cycle Spreadsheet

Accounting Cycle Spreadsheet

Enter details to complete the

Statement of Financial

Position Ending financial position is

calculated automatically.

Enter details to complete the

Statement of Financial

Position Ending financial position is

calculated automatically.

Practical Exercise