Financial & Managerial

Accounting
The Basis for Business Decisions
FOURTEENTH EDITION

Williams Haka Bettner Carcello

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 Chapter

5
The Accounting Cycle
Reporting Financial Results

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 Learning
Learning Objective
Objective

To prepare an income
statement, a statement
of retained earnings,
and a balance sheet.

LO1
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 JJ's Lawn Care Service
Adjusted Trial Balance
This
This is
is the
the
May 31, 2007 Adjusted
Adjusted Trial
Trial
Cash
Accounts receivable
$ 3,925
75
Balance
Balance for
for JJ’s.
JJ’s.
Tools & equipm ent 2,650
Accum ulated depreciation: tools &
equipm ent $ 50
Truck 15,000
Accum um lated depreciation: truck 250
Notes payable 13,000
Accounts payable 150
Capital stock 8,000
Dividends 200 Now,
Now, let’s
let’s
Sales revenue 750
Gasoline expense 50 prepare
prepare the
the
Depreciation expense: tools & equipm ent
Depreciation expense: truck
50
250
financial
financial
Total $ 22,200 $ 22,200 statements
statements forfor
JJ’s
JJ’s Lawn
Lawn Care
Care
Service
Service for
for May.
May.

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 JJ's Lawn Care Service
Income Statement
For the month ending May 31, 2007
Sales revenue $ 750
Operating expenses:
Gasoline expense $ 50
Depreciation: tools & equipm ent 50
Depreciation: truck 250 350
Net incom e $ 400

Net
Net income
income also
also appears
appears on
on the the
Statement
Statement of
of Retained
Retained Earnings.
Earnings.
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 Statement
Statement of
of Retained
Retained Earnings
Earnings

This statement summarizes the increases

and decreases in Retained Earnings during
the period.

•Business •Dividends
Earnings •Business
Losses

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 Now, let’s prepare the Balance Sheet.
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 JJ's Lawn Care Service
Balance Sheet
May 31, 2007

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
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 Learning
Learning Objective
Objective

To explain how the

income statement and
the statement of
retained earnings relate
to the balance sheet.

LO2
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 Preparing
Preparing Financial
Financial Statements
Statements
JJ's Lawn Care Service JJ's Lawn Care Service
Balance Sheet Income Statement
May 31, 2007 For the month ending May 31, 2007
Sales revenue $ 750
Assets Operating expenses:
Cash $ 3,925 Gasoline expense $ 50
Accounts receivable 75 Depreciation: tools & equipment 50
Tools & equipment $ 2,650 Depreciation: truck 250 350
Less: Accumulated depreciation 50 2,600 Net income $ 400
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

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 Learning
Learning Objective
Objective

To explain the concept

of adequate disclosure.

LO3
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 Drafting
Drafting Notes
Notes to
to the
the Financial
Financial
Statements
Statements
Examples
Examplesofof Items
ItemsDisclosed
Disclosed

Lawsuits
Lawsuits pending
pending
Notes to the
Financial Statements 
Scheduled
Scheduledplant
plantclosings
closings

Governmental
Governmentalinvestigations
investigations

Significant
Significant events
eventsoccurring
occurring
after
afterthe
thebalance
balancesheet
sheetdate
date

Specific
Specific customers
customersthat
that
account
account for
foraalarge
largeportion
portionof
of
revenue
revenue

Unusual
Unusualtransactions
transactionsand
and
related
relatedparty
partytransactions
transactions
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 Learning
Learning Objective
Objective

To explain the purposes

of closing entries;
prepare these entries.

LO4
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 Closing
Closing the
the Temporary
Temporary Accounts
Accounts
The closing process
Close Revenue accounts
gets the temporary
to Income Summary.
accounts ready for the
Close Expense accounts next accounting
to Income Summary. period.

 Close Income Summary

account to Retained
Earnings.

Close Dividends to
Retained Earnings.

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 Closing
Closing the
the Temporary
Temporary Accounts
Accounts
JJ's Lawn Care Service
Adjusted Trial Balance
May 31, 2007
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 Let’s
Let’s prepare
prepare the
the
Accounts payable 150
Capital stock 8,000
closing
closing entries
entries
Dividends 200 for
for JJ’s
JJ’s Lawn
Lawn
Sales revenue 750
Gasoline expense 50 Care
Care Service.
Service.
Depreciation exp.: tools & eq. 50
Depreciation exp.: truck 250
Total $ 22,200 $ 22,200

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 Closing
Closing Entries
Entries for
for Revenue
Revenue Accounts
Accounts

Since
Since Sales
Sales Revenue
Revenue hashas aa credit
credit balance,
balance, the
the
closing
closing entry
entry requires
requires aa debit
debit to
to the
the Sales
Sales Revenue
Revenue
account.
account.

GENERAL JOURNAL
P
Date Account Titles and Explanation RDebit Credit
May 31 Sales Reveune 750
Income Summary 750
To close the revenue account.

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 Closing
Closing Entries
Entries for
for Revenue
Revenue Accounts
Accounts

Income Summary Sales Revenue

750 750 750

750

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 Closing
Closing Entries
Entries for
for Expense
Expense Accounts
Accounts

Since
Since expense
expense accounts
accounts have
have aa debit
debit balance,
balance, the
the
closing
closing entry
entry requires
requires aa credit
credit to
to the
the expense
expense
accounts.
accounts.

GENERAL JOURNAL
P
Date Account Titles and Explanation RDebit Credit
May 31 Income Summary 350
Gasoline Expense 50
Depreciation Exp.: Tools & Equipment 50
Depreciation Exp.: Truck 250
To close the expense accounts. © The McGraw-Hill Companies, Inc., 2008
McGraw-Hill/Irwin
 Closing
Closing Entries
Entries for
for Expense
Expense Accounts
Accounts

Gasoline Exp.
50 50
-
Income Summary
Depr. Exp.: Tools & 350 750
Equipment
50 50
-

Depr. Exp.: Truck 400

250 250
- Net Income

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 Closing
Closing the
the Income
Income Summary
Summary Account
Account

Since
Since Income
Income Summary
Summary hashas aa $400
$400 credit
credit balance,
balance,
the
the closing
closing entry
entry requires
requires aa debit
debit to
to Income
Income
Summary.
Summary.

GENERAL JOURNAL
P
Date Account Titles and Explanation RDebit Credit
May 31 Income Summary 400
Retained Earnings 400
To close Income Summary.

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 Closing
Closing the
the Income
Income Summary
Summary Account
Account

Income Summary
350 750
Retained Earnings 400
400

-
400
The balance in Income
Summary is now zero.

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 Closing
Closing the
the Dividends
Dividends Account
Account

Since
Since the
the Dividends
Dividends account
account has
has aa debit
debit balance,
balance,
the
the closing
closing entry
entry requires
requires aa credit
credit to
to the
the Dividends
Dividends
account.
account.

GENERAL JOURNAL
P
Date Account Titles and Explanation RDebit Credit
May 31 Retained Earnings 200
Dividends 200
To close the Dividends account.

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 Closing
Closing the
the Dividends
Dividends Account
Account

Dividends Retained Earnings

200 200 200 400

- 200

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 Learning
Learning Objective
Objective

To prepare an after-
closing trial balance.

LO5
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 JJ's Lawn Care Service After
After all
all
After-Closing Trial Balance closing
May 31, 2007
closing
Cash $ 3,925
entries
entries areare
Accounts receivable 75 made,
made, JJ’sJJ’s
Tools & equipment 2,650 After-Closing
After-Closing
Accum. depreciation: tools & eq. $ 50 Trial
Trial Balance
Balance
Truck 15,000
Accum. depreciation: truck 250
looks
looks like
like
Notes payable 13,000 this.
this.
Accounts payable 150
Capital stock 8,000
Retained earnings 200
Total $ 21,650 $ 21,650

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 Learning
Learning Objective
Objective

To use financial
statement information to
evaluate profitability and
liquidity.

LO6
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 Evaluating
Evaluating the
the Business
Business

Evaluating
Evaluating Evaluating
Evaluating
Profitability
Profitability Liquidity
Liquidity

Did the business earn a Does the business have

profit or loss in the assets available to pay
current period? debts as they become
due?
What is the business’s
future potential for a
profit?
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 Evaluating
Evaluating the
the Business
Business

Evaluating
Evaluating Evaluating
Evaluating
Profitability
Profitability Liquidity
Liquidity

Net Income Net Income Working Current Assets –

= =
Percentage Total Revenue Capital Current Liabilities

Return on Net Income Current Current Assets

= =
Equity Avg. Stockholders’ Ratio Current Liabilities
Equity

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 Learning
Learning Objective
Objective

To explain how interim

financial statements are
prepared in a business
that closes its accounts
only at year-end.

LO7
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 Preparing
Preparing Financial
Financial Statements
Statements
Covering
Covering Different
Different Periods
Periods of
of Time
Time

Many
Many companies
companies prepare
prepare financial
financial statements
statements at
at
various
various points
points throughout
throughout the
the year.
year.
Annually

Quarterly
Interim
Financial Monthly
Statements

Jan. 1 Dec. 31
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 Ethics,
Ethics, Fraud,
Fraud, and
and
Corporate
Corporate Governance
Governance

A company should disclose any facts that an

intelligent person would consider necessary for the
statements to be interpreted properly.

Public companies are required to file annual reports

with the Securities and Exchange Commission
(SEC). The SEC requires that companies include a
section labeled “Management Discussion and
Analysis” (MD&A) because the financial statements
and related notes may be inadequate for assessing
the quantity and sustainability of a company’s
earnings.
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 Learning
Learning Objective
Objective

To prepare a worksheet
and explain its uses.

LO8
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 The
The Worksheet
Worksheet
OVERNIGHT AUTO SERVICES
Worksheet
For the Year Ended December 31, 2007
Adjusted Trial
Trial Balance Adjustments Balance Income Statement Balance Sheet
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

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 End
End of
of Chapter
Chapter 55

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008