FFAT Mod 3 –Adjusting

Accounts for Financial

Statements

MFIN5540 -Financial Reporting & Analysis

Day 4 – September 18, 2023

Dr. Jeff Power

Updates to Brightspace
▪ In the “Course Basics” folder:
‒ Copy of last year’s mid-term exam
‒ Copy of last year’s mid-term exam with solutions
▪ Three new news items
‒ Volunteer Fair, Sept. 26
‒ Discovering Retail, Oct. 2
‒ Women in Business, Oct. 17

2
“My ventures are not to one bottom trusted
Nor to one place; or is my whole estate
Upon the fortune of this present year.”

Merchant of Venice (Act I, Scene 1)

“My ventures are not to one bottom trusted
Nor to one place; or is my whole estate
Upon the fortune of this present year.”

Merchant of Venice (Act I, Scene 1)

Lesson: The merchant Antonio is describing how he has

invested in a portfolio of assets (‘bottom’ refers to a ship’s
hold) and has diversified his risk both in terms of location and
time-period. Despite investing as wisely as possible he still
has difficulty when his loan comes due because of
unforeseen catastrophic economic events – much like the
last 12 months.
 Dave Carroll
 Singer-songwriter-motivational speaker
 United Breaks Guitars
 https://www.marketplace.org/2019/07/05/a-broken-guitar-a-youtub
e-video-and-a-new-era-of-customer-service/

 When the World Stops Ending

 “Help one other, without keeping score”
 https://www.davecarrollmusic.com/
Accounting Cycle
▪ A sequence of activities to accumulate and report
financial statements.
Types of Adjustments
▪ Under accrual accounting, some revenues and
expenses arise with the passage of time, rather than
in a transaction. Adjustments must be made before
proper financial statements can be produced.
 Example of Accounting Adjustments
Power Photo Company, a commercial photography studio, completed its first year of operations on December 31.
Account balances, before year-end adjustments, follow. Assume all balances are normal balances.

An analysis of the firm’s records disclosed the following additional information.

1. Photography services of $1,850 were rendered in December, but customers have not yet paid or been billed.
2. Equipment, purchased on Jan. 1, has an estimated useful life of 10 years. Depreciation needs to be recorded.
3. Utilities bill for December of $400 was received in early January. It has not yet been paid or recorded.
4. Rental of the studio was prepaid on Jan. 1 for two years in advance. There is now one year remaining.
5. In November a customer paid $2,600 in advance for some holiday pictures. This transaction was recorded as
“Unearned photography fees”. The work is now complete, and the pictures delivered to the client.
6. A three-year insurance policy was paid in advance on Jan. 1. It was debited to “Prepaid insurance”.
7. An inventory count revealed that supplies available were only $1,020 on Dec. 31.
8. Employee wages earned for the last week of December was $375. These have not yet been recorded or paid.

Required:
Prepare a Trial Balance, adjusting journal entries, Adjusted Trial Balance, closing entries, and Post Closing Trial
Balance.

MFIN5540 8
 Unadjusted T-Accounts and Trial Balance
Cash
4,300 Accounts Debit Credit
Cash $4,300
Accounts Receivable Accounts receivable 3,800
3,800 Prepaid rent 12,600
Prepaid Insurance 2,970
Supplies 4,250
Prepaid rent Equipment 22,800
12,600 Accounts payable 4,060
Unearned photography fees 2,600
Prepaid insurance Common stock 24,000
2,970 Photography feeds earned 34,480
Supplies Wages expense 11,000
4,250 Utility expense 3,420
Total $65,140 $65,140
Equipment
22,800
Accounts Payable
4,060
Common Stock Wages Expense
24,000 11,000
Unearned photography fees
2,600 Photography fees earned Utilities expense
34,480 3,420

9
 Example of Accounting Adjustments (cont’d)

1. Photography services of $1,850 were rendered in December, but customers have not yet paid or been
billed.

December 31 Ledger
Accounts receivable
3,800

Photography fees earned

34,480

10
 Example of Accounting Adjustments (cont’d)

1. Photography services of $1,850 were rendered in December, but customers have not yet paid or been
billed.

December 31 Ledger
Accounts receivable 1,850 Accounts receivable
Photography fees earned 1,850 3,800
1,850
We must recognize the revenue in the period when it
is earned, not when billed or paid

Photography fees earned

34,480
1,850

11
 Example of Accounting Adjustments (cont’d)

2. Equipment, purchased on Jan. 1, has an estimated useful life of 10 years. Depreciation needs to be
recorded.

December 31 Ledger
Depreciation Expense

Accumulated Depreciation

12
 Example of Accounting Adjustments (cont’d)

2. Equipment, purchased on Jan. 1, has an estimated useful life of 10 years. Depreciation needs to be
recorded.

December 31 Ledger
Depreciation expense 2,280 Depreciation Expense
Accumulated depreciation 2,280 2,280
Depreciation expense for the year
= 22,800 / 10 = 2,280
NOTE: The Equipment account does
not change. We set up a contra asset
account called ‘accumulated Accumulated Depreciation
depreciation’ which shows the 2,280
relative decline in book value of
equipment.

13
 Example of Accounting Adjustments (cont’d)

3. Utilities bill for December of $400 was received in early January. It has not yet been paid or recorded.

December 31 Ledger
Utility expense
3,420

Accounts payable
4,060

14
 Example of Accounting Adjustments (cont’d)

3. Utilities bill for December of $400 was received in early January. It has not yet been paid or recorded.

December 31 Ledger
Utility expense 400 Utility expense
Accounts payable 400 3,420
400

Accounts payable
4,060
400

15
 Example of Accounting Adjustments (cont’d)

4. Rental of the studio was prepaid on Jan. 1 for two years in advance. There is now one year remaining.

December 31 Ledger
Rent expense

Prepaid Rent
12,600

16
 Example of Accounting Adjustments (cont’d)

4. Rental of the studio was prepaid on Jan. 1 for two years in advance. There is now one year remaining.

December 31 Ledger
Rent expense 6,300 Rent expense
Prepaid rent 6,300 6,300

½ of the prepaid rent has now been used

and must be expensed

Prepaid Rent
12,600
6,300

17
 Example of Accounting Adjustments (cont’d)
5. In November a customer paid $2,600 in advance for some holiday pictures. This transaction was
recorded as “Unearned photography fees”. The work is now complete and the pictures delivered to the
client.

Ledger
December 31 Unearned photography fees
2,600

Photography fees earned

34,480
1,850

18
 Example of Accounting Adjustments (cont’d)
5. In November a customer paid $2,600 in advance for some holiday pictures. This transaction was
recorded as “Unearned photography fees”. The work is now complete and the pictures delivered to the
client.

Ledger
December 31 Unearned photography fees
Unearned Photography fees 2,600 2,600
2,600
Photography fees earned 2,600

The prepaid fees have now been earned

Photography fees earned
34,480
1,850
2,600

19
 Example of Accounting Adjustments (cont’d)

6. A three-year insurance policy was paid in advance on Jan. 1. It was debited to “Prepaid insurance”.

December 31 Ledger
Insurance expense

Prepaid insurance
2,970

20
 Example of Accounting Adjustments (cont’d)

6. A three-year insurance policy was paid in advance on Jan. 1. It was debited to “Prepaid insurance”.

December 31 Ledger
Insurance expense 990 Insurance expense
Prepaid insurance 990 990

1/3 of the prepaid insurance has now

been used and must be expensed

Prepaid insurance
2,970
990

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 Example of Accounting Adjustments (cont’d)

7. An inventory count revealed that supplies available were only $1,020 on Dec. 31.

December 31 Ledger
Supplies expense

Supplies
4250

1,020

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 Example of Accounting Adjustments (cont’d)

7. An inventory count revealed that supplies available were only $1,020 on Dec. 31.

December 31 Ledger
Supplies expense 3,230 Supplies expense
Supplies 3,230 3,230

Inventory of supplies used must equal

4,250 – 1,020 = 3,230

Supplies
4250
3,230
1,020

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 Example of Accounting Adjustments (cont’d)

8. Employee wages earned for the last week of December was $375. These have not yet been recorded, or
paid

Ledger
December 31
Wages expense
11,000

Wages payable

24
 Example of Accounting Adjustments (cont’d)

8. Employee wages earned for the last week of December was $375. These have not yet been recorded, or
paid

Ledger
December 31
Wages expense
Wages expense 375
11,000
Wages payable 375
375

Wages earned in December must be shown as an

expense in December even if not paid until January
Wages payable
375

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 Adjusted T-Accounts
Cash Accounts Payable Wages Expense
4,060 11,000
4,300 400 375
4,460 11,375
Accounts Receivable
3,800
1,850 Unearned Photography Fees
2,600 Utilities expense
5,650 2,600 3,420
0 400
Prepaid rent 3,820
12,600 6,300
6,300 Common Stock
24,000 Depreciation expense
Prepaid insurance 2,280
2,970 990 Wages Payable
1,980 375
Rent expense
Supplies 6,300
4,250 3,230
1,020
Photography fees earned Insurance expense
Equipment 34,480 990
22,800 1,850
2,600
38,930 Supplies Expense
Accumulated depreciation 3,230
2,280
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 Adjusted Trial Balance
Accounts Debit Credit
Cash $4,300
Accounts receivable 5,650
Prepaid rent 6,300
Prepaid Insurance 1,980
Supplies 1,020
Equipment 22,800
Accumulated depreciation $2,280
Accounts payable 4,460
Wages payable 375
Common stock 24,000
Retained earnings
Photography feeds earned 38,930
Wages expense 11,375
Utility expense 3,820
Depreciation expense 2,280
Rent expense 6,300
Insurance expense 990
Supplies expense 3,230
Total $70,045 $70,045
 Break Time

Let’s relax for a few minutes

MFIN5540 28
Preparing Financial Statements
Prepare the Financial Statements

Power Photo
Income Statement

Photography Fees Earned $ 38,930

Expenses:
Wages $ 11,375
Utilities 3,820
Depreciation 2,280
Rent 6,300
Insurance 990
Supplies 3,230 27,995
Net Income $ 10,935

MFIN5540
 Prepare the Financial Statements

Power Photo
Statement of Equity

Beginning Common Stock $ 24,000

Changes in Common Stock 0
Ending Common Stock $ 24,000

Beginning Retained Earnings $ 0

Net Income for the year 10,935
Ending Retained Earnings $ 10,935

MFIN5540
 Prepare the Financial Statements
Power Photo
Balance Sheet

Assets Liabilities
Cash$ 4,300 Accounts payable $ 4,460
Accounts receivable 5,650 Wages payable 375
Prepaid rent 6,300 Total Liabilities$ 4,835
Prepaid insurance 1,980
Supplies 1,020 Shareholders Equity
Total Current Assets $19,250 Common stock $24,000
Retained earnings 10,935
Equipment 22,800 Total Equity $34,935
Acc. Depreciation (2,280) Total Liabilities and Equity
Total Assets $39,770 $39,770

MFIN5540
Closing Temporary Accounts
▪ Temporary accounts consist primarily of revenues and expenses. They
summarize information for a specific accounting period.
▪ A few other period specific accounts such as Dividends are also closed
at the end of the period.
▪ At the end of the period, the balances of these temporary accounts
are transferred to a permanent account – Retained Earnings.
 Preparing Closing Entries
Journal Entry
Photography fees earned 38,930
Retained earnings 38,930

Retained earnings 27,995

Wages expense 11,375
Utility expense 3,820
Depreciation expense 2,280
Rent expense 6,300
Insurance expense 990
Supplies expense 3,230

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 Summarizing T-Accounts (Post Closing)
Cash Accounts Payable Wages Expense
4,060 11,000
4,300 400 375
4,460 11,375 11,375
Accounts Receivable 0
3,800 Unearned photography fees
1,850 2,600 2,600 Utilities expense
5,650 0 3,420
400
Prepaid rent Wages Payable 3,820 3,820
12,600 6,300 375 0
6,300
Common Stock Depreciation expense
Prepaid insurance 24,000 2,280 2,280
2,970 990 0
1,980 Retained Earnings
38,930 Rent expense
Supplies 27,995 6,300 6,300
4,250 3,230 10,935 0
1,020
Photography fees earned Insurance expense
Equipment 34,480 990 990
22,800 1,850 0
2,600
38,930 38,930 Supplies Expense
Accumulated depreciation 3,230 3,230
2,280 0
0
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 Post Closing Trial Balance
Accounts Debit Credit
Cash $4,300
Accounts receivable 5,650
Prepaid rent 6,300
Prepaid Insurance 1,980
Supplies 1,020
Equipment 22,800
Accumulated depreciation $2,280
Accounts payable 4,460
Unearned Photography Fees
Wages payable 375
Common stock 24,000
Retained earnings 10,935
Photography feeds earned
Wages expense
Utility expense
Depreciation expense
Rent expense
Insurance expense
Supplies expense
Total $42,050 $42,050

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 Statement Analysis

▪ For the following financial statements of

Saputo Inc., identify items of interest or
questions/assessments about the
company’s performance.

MFIN5540
Saputo Inc.

MFIN5540 38
Saputo Inc.

MFIN5540 39
Saputo Inc.

MFIN5540 40
 Summary

▪ Accountants must match Revenues and Expenses in the period

when they are earned or incurred.
▪ Adjusting entries record the amounts needed to properly reflect
and update the accounts so a more accurate estimate of what
the Revenues and Expenses were for the reporting period.
▪ Trial Balances are schedules listing all the ending amounts in
each account and is used as a quick check to see if the total of
the ending debit and credit balances equal each other.
▪ Financial Statements and closing entries are derived from the
Adjusted Trial Balance.
▪ The Post Closing Trial Balance shows the beginning balances for
each account to start the new period.

MFIN5540
 What’s Next?

▪ Next class we will move on to Module 4

▪ Focus on Cash Flow
▪ More on Financial Statements

▪ Thanks for Coming

MFIN5540