Nobles Finmgr6 PPT 04 Revised

Horngren’s Financial & Managerial
Accounting
Sixth Edition
Chapter 4
Completing the
Accounting Cycle
Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved
Learning Objectives (1 of 2)
4.1 Prepare the financial
statements including the classified
balance sheet
4.2 Use the worksheet to prepare
financial statements
4.3 Explain the purpose of,
journalize, and post closing
entries
4.4 Prepare the post-closing trial
balance
Learning Objectives (2 of 2)
4.5 Describe the accounting
cycle
4.6 Use the current ratio to
evaluate business
performance
Learning Objective 4.1
Prepare the financial
statements including the
classified balance sheet
How Do We Prepare Financial
Statements? (1 of 2)
The financial statements:
• Income statement
– Reports revenues and expenses and calculates net
income or net loss for the period
• Statement of retained earnings
– Shows how retained earnings changed during the
period due to net income (or net loss) and dividends.
• Balance sheet
– Reports assets, liabilities, and stockholders’ equity as
of the last day of the period.
How Do We Prepare Financial
Statements? (2 of 2)
The financial Exhibit 4-1 Adjusted Trial Balance
statements are
prepared from
the adjusted
trial balance.
Relationships Among the Financial
Statements
• The financial statements relate to each other.
– Net income or net loss from the income statement
flows to the statement of retained earnings.
– Ending Retained Earnings from the statement of
retained earnings flows to the balance sheet.
Exhibit 4-2 Smart Touch Learning Financial
Statements (1 of 3)
Statements (2 of 3)
Statements (3 of 3)
Classified Balance Sheet
• A classified balance sheet places each asset and each
liability into a specific category.
– Assets are shown in order of liquidity.
– Liabilities are classified as current (due within one
year) or long term (due after one year).
• Liquidity measures how quickly and easily an account can
be converted to cash.
Assets (1 of 2)
• Current assets will be converted to cash, sold, or used up
during the next 12 months or within the business’s
operating cycle if the cycle is longer than a year.
• The operating cycle is the time span when
1.Cash is used to acquire goods and services.
2.These goods and services are sold to customers.
3.The business collects cash from customers.
Assets (2 of 2)
• Long-term assets are all the assets that will not be
converted to cash or used up within the business’s
operating cycle or one year, whichever is greater.
– Long-term Investments are investments in bonds or
stocks that the company intends to hold for longer than
one year.
– Property, Plant, and Equipment are long-lived,
tangible assets, used in the operation of a business.
– Intangible Assets are assets with no physical form
that are valuable because of the special rights carried.
Liabilities
• Current liabilities must be paid either with cash or with
goods and services within one year or within the entity’s
operating cycle.
– Examples:
 Accounts Payable
 Salaries Payable
 Unearned Revenue
• Long-term liabilities are liabilities that do not need to be
paid within one year or within the operating cycle.
Stockholders’ Equity
• Stockholders’ equity represents the stockholders’ claims
to the assets of the business.
– Reflects the stockholders’ contributions through
common stock
– Represents the amount of assets left over after the
corporation has paid its liabilities
Exhibit 4-3 Classified Balance Sheet
Use the worksheet to
prepare financial statements
How Could a Worksheet Help in Preparing
Financial Statements?
• The first four sections of the worksheet (see Chapter 3)
helped determine the adjusted trial balance, from which we
prepare financial statements.
– Section 5—Income Statement
 Includes only revenue and expense accounts
– Section 6—Balance Sheet
 Includes asset, liability, and equity accounts except
revenues and expenses
– Section 7—Determine Net Income or Net Loss
 The balancing amount for the income statement and
balance sheet sections (will be the same amount)
Exhibit 4-4 Completed Worksheet
Explain the purpose of,
journalize, and post closing
entries
What Is the Closing Process, and How Do
We Close the Accounts? (1 of 3)
• The closing process zeroes out all revenue and expense
accounts in order to measure each period’s net income
separately from all other periods.
• Temporary accounts relate to a particular accounting
period and are closed at the end of that period
– Revenues, Expenses, Income Summary, and
Dividends accounts.
• Permanent accounts are not closed at the end of the
period
– Asset, Liability, Common Stock, and Retained
Earnings accounts.
• Closing entries transfer revenues, expenses, and
Dividends to Retained Earnings.
• Revenues and expenses may be transferred first to an
account titled Income Summary.
– Income Summary is a temporary account that
summarizes the net income (or net loss) for the period.
Exhibit 4-5 The Closing Process
Closing Temporary Accounts—Net Income
for the Period (1 of 8)
Step 1: Make the revenue accounts equal zero via the
Income Summary account.
Example: Smart Touch Learning has a $17,500 credit
balance in Service Revenue. The closing entry would be:
Step 2: Make expense accounts equal zero via the Income
Summary account.
Example: Smart Touch Learning has a $3,000 debit balance
in Rent Expense account. It will be closed with a credit to
Rent Expense:
In a compound closing entry, each individual expense
account is credited and the Income Summary account is
debited for the total amount of expenses:
The Income Summary T-account after closing revenues and
expenses is:
Step 3: Make the Income Summary account equal zero via the
Retained Earnings account.
Example: Smart Touch Learning’s $8,550 credit balance in the
Income Summary account will be closed to Retained Earnings:
Step 4: Make the Dividends account equal zero via the
Retained Earnings account.
Example: Smart Touch Learning’s $5,000 debit balance in
the Dividends account will be closed to Retained Earnings:
Smart Touch Learning’s $5,000 debit balance in the
Dividends account will be closed to Retained Earnings:
Closing Temporary Accounts—Net Loss for
the Period (8 of 8)
• If a business had a net loss for the period, the closing entry
to close the Income Summary account would be different.
• Example: If a business had a net loss of $2,000:
Closing Temporary Accounts—Summary (1 of 2)
Exhibit 4-6 Journalizing and Posting Closing Entries
Panel A: Journalizing
Closing Temporary Accounts—Summary (2 of 2)
[Exhibit 4-6 continued]
Panel B: Posting
Prepare the post-closing
trial balance
How Do We Prepare a Post-Closing Trial
Balance? (1 of 2)
• The accounting cycle ends with a post-closing trial
balance:
– A list of the accounts and their balances at the end of
the period, after journalizing and posting the closing
entries
– Includes only permanent accounts
How Do We Prepare a Post-Closing Trial
Balance? (2 of 2)
Exhibit 4-7 Post-Closing Trial Balance
Describe the
accounting cycle
What Is the Accounting Cycle?
• The accounting cycle is the process by which companies
produce their financial statements for a specific period.
– It is the steps that are followed throughout the time
period.
– It starts with the beginning asset, liability, and
stockholders’ equity account balances left over from
the preceding period.
Exhibit 4-8 The Accounting Cycle
Use the current ratio to
evaluate business performance
How Do We Use the Current Ratio to
Evaluate Business Performance? (1 of 2)
• The current ratio measures a company’s ability to pay its
current liabilities with its current assets.
• The ratio is computed as follows:
Total current
Current ratio =
Total current liabilities
• A company prefers to have a high current ratio.

• Increases in current ratio indicates improvement in ability
to pay debts.
How Do We Use the Current Ratio to
Evaluate Business Performance? (2 of 2)
Kohl’s had the following total current assets and current
liabilities, found on the balance sheet.
January 30, 2015: January 30, 2016:

$5,580 $5,076
Current ratio = =1.95(rounded) Current ratio = =1.87(rounded)
$2,859 $2,714
The decrease in current ratio from 2015 to 2016 indicates

Kohl’s has deteriorated slightly in ability to pay current debts.
Revision Quiz
1. Which of the following is NOT a balance
sheet account?
• A) Unearned Revenue
• B) Prepaid Rent
• C) Accumulated Depreciation - Building
• D) Dividends
Answer
• D) Dividends
• Dividends is a temporary account. Only permanent
accounts appear on a Balance Sheet.
2. The financial statements are prepared
from the ________.
• A) adjusted trial balance

• B) chart of accounts
• C) statement of retained earnings
• D) unadjusted trial balance
Answer
• A) adjusted trial balance
It is the accounts in the adjusted trial balance that are used
in the financial statements.
3. All assets that will not be converted to
cash or used up within the business's
operating cycle or one year, whichever is
greater, are called ________.
• A) long-term assets
• B) fully depreciated assets
• C) current assets
• D) current liabilities
Answer
4. Which of the following is the most
liquid asset?
• A) Building
• B) Prepaid Expenses
• C) Accounts Receivable
• D) Cash
Answer
• D) Cash
The definition of liquidity is how quickly an asset can be
converted into cash.
5. Under which of the following categories
would Accounts Payable appear?
• B) current assets
• C) long-term liabilities
Answer
6. Regarding a classified balance sheet,
which of the following statements is
correct?
• A) Accounts are classified by their purchase dates.

• B) Account balances are listed from the highest amount to
the lowest amount.
• C) Assets are listed in the order of their liquidity.
• D) Assets are listed in alphabetical order.
Answer
• C) Assets are listed in the order of their liquidity.
7. An account that is not closed at the end
of the period is called a(n) ________.
• A) expense account
• B) temporary account
• C) permanent account
• D) revenue account
Answer
• C) permanent account
8. Which of the following entries is
necessary to close the appropriate
depreciation account at the end of the year?
• A) debit Accumulated Depreciation and credit Income Summary

• B) debit Depreciation Expense and credit Income Summary
• C) debit Income Summary and credit Accumulated Depreciation
• D) debit Income Summary and credit Depreciation Expense
Answer
• D) debit Income Summary and credit Depreciation
Expense
9. Martinville, Inc. earned revenues of $18,000 and
incurred expenses of $4,000. The company declared
and paid cash dividends of $3,500. What is the
balance in the Income Summary account prior to
closing net income or loss to the Retained Earnings
account?
• A) debit balance of $14,000
• B) debit balance of $10,500
• C) credit balance of $14,000
• D) credit balance of $18,000
Answer
C) credit balance of $14,000
• Revenue $18,000
• Expenses - 4,000
• Net Income $14,000
10. A list of the accounts and their balances
at the end of the period, after journalizing
and posting the closing entries, is called
________.
• A) chart of accounts
• B) adjusted trial balance
• C) post-closing trial balance
• D) pre-closing balance sheet
Answer
• C) post-closing trial balance
Thank You
Any Questions

Nobles Finmgr6 PPT 04 Revised

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Nobles Finmgr6 PPT 04 Revised

Uploaded by

Copyright:

Available Formats

Horngren’s Financial & Managerial

• A company prefers to have a high current ratio.

January 30, 2015: January 30, 2016:

The decrease in current ratio from 2015 to 2016 indicates

• A) adjusted trial balance

• A) Accounts are classified by their purchase dates.

• A) debit Accumulated Depreciation and credit Income Summary

C) credit balance of $14,000

You might also like