managerial accounting - 2.1 measuring business income: the adjusting process chapter 3
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Managerial Accounting - 2.2
It’s Just Lunch
Disappointed by blind dates and personal ads,
– Andrea McGinty founded a prescreened lunch dating service.
Managerial Accounting - 2.3
It’s Just Lunch
In 1996, the business earned revenues of $4.5 million.
Also, the business earned a net income of $400,000.
How was this number computed? Expenses were deducted from revenues to
determine net income.
Managerial Accounting - 2.4
Chapter Objectives
1 Distinguish accrual-basis accounting from cash-basis accounting.
2 Apply the revenue and matching principles.
Managerial Accounting - 2.5
Chapter Objectives
3 Make adjusting entries at the end of the accounting period.
4 Prepare an adjusted trial balance.5 Prepare the financial statements from the
adjusted trial balance.
Managerial Accounting - 2.6
Distinguish accrual-basis accounting from cash-basis
accounting.
Objective 1
Managerial Accounting - 2.8
Accrual Basis
Accountants record transactions...– when revenues are earned,– or when expenses are incurred,– regardless of when cash changes hands.
Managerial Accounting - 2.9
Cash Basis
Accountants record transactions...– when cash is paid,– or when cash is received,– regardless of when a revenue is earned or
an expense is incurred.
Managerial Accounting - 2.10
Remember GAAP?
Generally Accepted Accounting Principles GAAP requires that a business use the accrual
basis.
Managerial Accounting - 2.11
GAAP
Accountants record revenues as they are earned...
– and expenses as they are incurred,– not necessarily when cash is received or
paid.
Managerial Accounting - 2.12
Accrual Accounting
Using accrual accounting, Its’ Just Lunch records revenue when it sells dating services, not when it collects cash later.
Likewise, It’s Just Lunch records expenses when incurred.
Managerial Accounting - 2.13
Example
Salary expense not only includes amounts paid to employees,
– it includes any amount owed to employees.
Managerial Accounting - 2.14
Dennis’ Landscaping
Services performed during the month of July - $15,000.
Cash collected from customers - $6,000. Expenses for the month - $12,000. Cash paid out - $9,000.
Managerial Accounting - 2.15
Cash Basis
Revenues are the cash collected from customers - $6,000.
Expenses are the cash paid out during the month - $9,000.
Managerial Accounting - 2.17
Cash Basis Revenue: $15,000 Cash In: $6,000
Expenses: $12,000 Cash Out: $9,000
Dennis’ Landscaping Income Statement For the Month
Ended July 31, 19xx
Revenues $6,000
Expenses 9,000
Net Loss $3,000
Managerial Accounting - 2.18
Accrual Basis
Revenues of $15,000 are recognized for the services performed during the month.
Expenses are the $12,000 incurred during the month.
Managerial Accounting - 2.20
Cash Accrual
Dennis’ Landscaping Income Statement For the Month Ended July
31, 19xx Revenues $6,000 Expenses 9,000 Net Loss
$3,000
Dennis’ Landscaping Income Statement For the Month Ended July
31, 19xx Revenues $15,000 Expenses 12,000 Net Income $
3,000
Managerial Accounting - 2.21Why Does GAAP Requirethe Accrual Basis?
Because accrual accounting provides a more complete portrayal of operating performance and financial position.
Managerial Accounting - 2.22
Problems with Cash Basis
Over or understatement of...– Revenue– Expense– Accounts receivable– Accounts payable
Managerial Accounting - 2.23
The Time Period Concept...
– requires that accounting information be reported at regular intervals.
– requires that income be measured accurately each period.
Managerial Accounting - 2.24
Accounting Period
Managers adopt an artificial period of time to evaluate performance.
Managerial Accounting - 2.25The Annual Accounting Period Can Be...
– a calendar year (January 1st to December 31st), or
– a fiscal year (any consecutive 12-month period).
Managerial Accounting - 2.26
Interim Period Statements...
– are prepared for less than one year. Monthly Quarterly Semi-annually
Managerial Accounting - 2.28
Revenue Principle
Revenue is recognized when it is deemed earned.
Recognition of revenue and cash receipts do not necessarily occur at the same time.
Cash could be received at the same time. Cash could be received after the earning. Cash could be received before the earning.
Managerial Accounting - 2.29
The Matching Principle...
– is the basis for recording expenses. Expenses are the costs of assets and the
increase in liabilities incurred in the earning of revenues.
Managerial Accounting - 2.30
Expense Recognition
Expenses are recognized when the benefit from the expense is received.
Recognition of expenses and cash payments do not necessarily occur at the same time.
Managerial Accounting - 2.31
The Time Period Concept...
– allows businesses to report accounting information on a regular basis.
– interacts with the revenue principle and the matching principle to underlie the use of accruals.
Managerial Accounting - 2.32
The Time Period Concept
In order to measure income accurately, businesses update the revenue and expense accounts before the end of the period.
Managerial Accounting - 2.33
Objective 3
Make adjusting entries at the end of the accounting
period.
Managerial Accounting - 2.34
Adjusting Entries
At the end of the period accountants prepare financial statements.
This end-of-period process starts with the unadjusted trial balance.
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Adjusting Entries...
– are made to bring accounts to correct balances before preparing financial statements.
Managerial Accounting - 2.36
Adjusting Entries...
– assign revenue to period earned.– assign expenses to the period incurred.– bring related asset and liability accounts
into correct balance.
Managerial Accounting - 2.38
Prepaids
A prepaid, or deferral, is the postponement of the recognition of an expense already paid or incurred or a revenue already received.
Managerial Accounting - 2.39
Prepaid Expenses
These are goods or services paid for in advance that do not expire during the current accounting period.
They include miscellaneous assets that will expire or will be used up in the near future.
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Prepaid Expenses
Examples:– Prepaid rent– Prepaid insurance– Supplies– Buildings– Equipment
Managerial Accounting - 2.41
Prepaid Expenses
On January 2, 19x1, Dennis’ Landscaping paid $1,200 for a one year insurance policy. Prepaid Insurance Cash
1,200 1,200
Managerial Accounting - 2.42
Prepaid Expenses
Jan. 2, 19x1 Prepaid Insurance 1,200 Cash 1,200 Paid insurance
Managerial Accounting - 2.43
Prepaid Expenses
This insurance expense must be matched to the months to which it applies.
What is the journal entry on January 31, 19x1?
Managerial Accounting - 2.44
Prepaid Expenses
On January 31, 19x1, one month of the 12-month insurance policy has expired.
$1,200/12 = $100 Jan. 31, 19x1 Insurance
expense 100 Prepaid insurance 100 One month’s insurance premium
Managerial Accounting - 2.46
Supplies
Wordcrafters started business the beginning of the month.
$500 worth of office supplies were purchased on March 15, 19x1, for cash.
Managerial Accounting - 2.47
Supplies
Office Supplies Cash
500 500
Office Supplies 500 Cash or Accounts Payable 500
Purchased office supplies
Managerial Accounting - 2.48
Supplies
An inventory at month end indicated that $120 in office supplies remained.
Therefore, $380 worth of supplies was used during the month ($500 - $120).
Managerial Accounting - 2.49
Supplies
The cost of supplies must be matched to the period in which they were used.
What is the journal entry on March 31, 19x1?
Managerial Accounting - 2.50
Supplies
Mar. 31, 19x1 Office Supplies Expense 380 Office Supplies 380
One month’s usage of supplies Supplies Expense Supplies 380 500 380 Bal. 120
Managerial Accounting - 2.51
???????
What was the determining factor in matching this expense?
Usage
Managerial Accounting - 2.53
Depreciation...
– is a cost allocation of a long-lived asset. Depreciation expense is the cost converted
from an asset to an expense. Estimates are used.
Managerial Accounting - 2.54
Dennis’ Landscaping
On January 2nd, the business purchased a truck for $30,000 cash.
The truck is expected to last for 3 years.
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Journalizing
January 2, 19x1 Machinery 30,000 Cash 30,000
Purchase of truck
Managerial Accounting - 2.56
Matching Principle
The cost of the truck must be matched with the accounting periods in which it was used to earn income.
What would the journal entry be for the year ended December 31, 19x1?
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Straight Line Method
Cost: $30,000 Service life: 3 Years Cost/Estimated useful life $30,000/3 = $10,000 per year
Managerial Accounting - 2.58
Depreciation Expense
Dec. 31, 19x1 Depreciation Expense 10,000 Accumulated Depreciation 10,000
To record depreciation expense for a one-year period
Managerial Accounting - 2.59
Contra Accounts
A contra account is one that is paired with and deducted from another related account in the financial statements.
Normal balance is opposite its companion account.
Accumulated depreciation is a contra account to plant assets.
Managerial Accounting - 2.61
Dennis’ Landscaping
Partial Balance Sheet December 31, 19x1
Plant Assets Machinery $30,000 Less Accumulated Depreciation 10,000 $20,000
Contra account Book value
Managerial Accounting - 2.62
Dennis’ Landscaping
Partial Balance Sheet December 31, 19x2
Plant Assets Machinery $30,000 Less Accumulated Depreciation 20,000 $10,000
Contra account Book value
Managerial Accounting - 2.63
Accruals
An accrual is the recognition of an expense or revenue that has risen but has not yet been recorded.
Expenses or revenues are recorded before the cash settlement.
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Accrued Expenses...
– are expenses that have been incurred but not yet paid.
Managerial Accounting - 2.65
Accrued Expenses
Employees of Mary Business Services are paid every Friday.
Weekly salaries total $30,000.
Managerial Accounting - 2.66
Accrued Expenses
Mary’s is closed on Saturday and Sunday. The employees were last paid on April
26th, which was a Friday.
Managerial Accounting - 2.67
Accrued Expenses
The employees will be paid on May 3rd. What is the adjusting entry on April
30th? They worked April 29th and 30th. $30,000/5 = $6,000 per day $6,000 x 2 days = $12,000
Managerial Accounting - 2.68
Accrued Expenses
Apr. 30, 19x1 Salaries Expense 12,000 Salaries Payable 12,000
To accrue two days salaries
Managerial Accounting - 2.69
Accrued Revenues
These are revenues that have been earned but not yet received.
They are an asset.
Managerial Accounting - 2.70
Accrued Revenues
During the month of August, Dennis’ Landscaping rendered services to customers totaling $15,000.
At the end of August, the customers have not as yet been billed.
Managerial Accounting - 2.71
Accrued Revenues
What is the August 31st adjusting entry? August 31, 19x1 Accounts
Receivable 15,000 Service Revenue 15,000 To record unpaid invoices
Managerial Accounting - 2.72
????????
What is the determining factor in recognizing this service revenue?
Performance
Managerial Accounting - 2.73
Unearned Revenue
Collecting cash from customers in advance of doing work creates a liability called unearned revenue.
Managerial Accounting - 2.74
Unearned Revenue
Examples:– Commissions collected In advance– Season tickets to sporting events– Magazine subscriptions
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Unearned Revenue
On September 1, 19x1, a football team received $200,000 from season ticket holders to attend 16 games.
Managerial Accounting - 2.76
Unearned Revenue
Sept. 1, 19x1 Cash 200,000 Unearned Ticket Revenue 200,000
Season ticket receipts
Managerial Accounting - 2.77
Unearned Revenue
Four of the sixteen games had been played by September 30, 19x1.
What would the journal entry be?
Managerial Accounting - 2.78
Unearned Revenue
Revenue per game = $200,000/16 $12,500 $12,500 x 4 = $50,000
Managerial Accounting - 2.79
Unearned Revenue
Sept. 30, 19x1 Unearned ticket revenue 50,000 Ticket revenue 50,000
To record four games
Managerial Accounting - 2.80
Notice
Adjusting entries always have:– one income statement account and– one balance sheet account. Adjusting entries never involve cash.
Managerial Accounting - 2.82
Adjusted Trial Balance
The adjusting process starts with the unadjusted trial balance.
Adjusting entries are made at the end of the accounting period and then an adjusted trial balance is prepared.
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Adjusted Trial Balance
The adjusted trial balance verifies the equality of debits and credits after the adjusting process.
It serves as the basis for the preparation of the financial statements.
The adjusted trial balance is an internal statement.
Managerial Accounting - 2.84
Objective 5
Prepare the financial statements from the adjusted
trial balance.
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Prepare the Statements
The adjusted trial balance is an internal statement used to prepare the financial statements.
Financial statements are external statements.
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Financial Statements
The financial statements are:– Income Statement– Statement of Owners’ Equity– Cash Flow Statement– Balance Sheet
Managerial Accounting - 2.87
Financial Statements
Financial statements have two parts:1 The first part includes the following:– Name of the entity– Title of the statement– Date or period covered2 The second part is the body of the
statement.
Managerial Accounting - 2.88Relationships Among the Statements
The income statement reports net income or net loss.
Net income or net loss is determined by subtracting expenses from revenues.
Managerial Accounting - 2.89Relationships Among the Statements
Revenues and expenses are owners’ equity account.
Net income or net loss is transferred to the statement of owners’ equity.
Managerial Accounting - 2.90Relationships Among the Statements
Capital is a balance sheet account. The ending balance in the statement of
owners’ equity is transferred to the balance sheet.
Managerial Accounting - 2.91Relationships Among the Statements
The statement of cash flow explains the cause for the change in the cash balance between two balance sheets dates.
Managerial Accounting - 2.93
Motorola Company
This company is best known for its computer chips, cellular phones and other electronic products.
In order to successfully compete, Motorola gets its financial data to management quickly.
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Motorola
Motorola accomplishes this goal by rapidly closing its books.
Motorola can close its accounts in just two days.
Managerial Accounting - 2.95
Chapter Objectives
1 Prepare an accounting work sheet.2 Use the work sheet to complete the
accounting cycle.3 Close the revenue, expense and withdrawal
accounts.
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Chapter Objectives
4 Correct typical accounting errors.5 Classify assets and liabilities as current or
long-term.6 Use the current and debt ratios to evaluate a
business.
Managerial Accounting - 2.97
The Accounting Cycle
The accounting cycle is the process by which accountants prepare financial statements for an entity for a specific period of time.
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The Accounting Cycle
For a new business, begin by setting up ledger accounts.
For an established business, begin with account balances carried over from the previous period.
Managerial Accounting - 2.99
Work Performed This Period
Start with the account balances in the ledger at the beginning of the period.
Analyze and journalize transactions. Post journal entries to the ledger accounts.
Managerial Accounting - 2.100
End of Period Work
Compute the unadjusted balance in each account.
Make adjustments. Prepare the adjusted trial balance. Prepare the financial statements.
Managerial Accounting - 2.101
End of Period Work
Journalize and post the adjusting entries. Journalize and post the closing entries. Prepare the post closing trial balance. This
trial balance readies the accounts for the next period.
Managerial Accounting - 2.103
Accounting Work Sheet
A work sheet is a multi-columned document used by accountants to help move data from the trial balance to the financial statements.
It is an internal document.
Managerial Accounting - 2.104
Steps in Preparingthe Work Sheet
Enter the account titles. Then enter the unadjusted ending balances
in the trial balance column and total.
Managerial Accounting - 2.105
The Accounting Work SheetAdjusted Trial Balance
ACCOUNT TITLE DEBIT CREDIT DEBIT CREDIT DEBIT CREDITCASH 12,100ACCTS RECEIVABLE 1,350SUPPLIES 250EQUIPMENT 15,500ACCUM DEPRECIATION 7,500ACCOUNTS PAYABLE 1,200SALARY PAYABLE 1,100UNEARNED REVENUE 1,500CAPITAL 7,200WITHDRAWALS 1,000REVENUE 23,700SALARY EXPENSE 12,000
TOTALS 42,200 42,200
TRIAL BALANCE ADJUSTMENTS ADJ. TRIAL BAL.
Managerial Accounting - 2.106
Adjustments
a The company has earned revenue of $1,700 which will be collected next month.
b Inventory of supplies at month end totaled $150.
c Depreciation for the period was calculated as $200.
Managerial Accounting - 2.107
The Accounting Work SheetAdjusted Trial Balance
ACCOUNT TITLE DEBIT CREDIT DEBIT CREDIT DEBIT CREDITCASH 12,100ACCTS RECEIVABLE 1,350 a) 1,700SUPPLIES 250 b) 100EQUIPMENT 15,500ACCUM DEPRECIATION 7,500 c) 200ACCOUNTS PAYABLE 1,200SALARY PAYABLE 1,100UNEARNED REVENUE 1,500CAPITAL 7,200WITHDRAWALS 1,000REVENUE 23,700 a) 1,700SALARY EXPENSE 12,000SUPPLIES EXPENSE b) 100DEPRECIATION EXP c) 200 TOTALS 42,200 42,200 2,000 2,000
TRIAL BALANCE ADJUSTMENTS ADJ. TRIAL BAL.
Managerial Accounting - 2.108
The Accounting Work SheetAdjusted Trial Balance
ACCOUNT TITLE DEBIT CREDIT DEBIT CREDIT DEBIT CREDITCASH 12,100 12,100ACCTS RECEIVABLE 1,350 a) 1,700 3,050SUPPLIES 250 b) 100 150EQUIPMENT 15,500 15,500ACCUM DEPRECIATION 7,500 c) 200 7,700ACCOUNTS PAYABLE 1,200 1,200SALARY PAYABLE 1,100 1,100UNEARNED REVENUE 1,500 1,500CAPITAL 7,200 7,200WITHDRAWALS 1,000 1,000REVENUE 23,700 a) 1,700 25,400SALARY EXPENSE 12,000 12,000SUPPLIES EXPENSE b) 100 100DEPRECIATION EXP c) 200 200 TOTALS 42,200 42,200 2,000 2,000 44,100 44,100
TRIAL BALANCE ADJUSTMENTS ADJ. TRIAL BAL.
Managerial Accounting - 2.109
The Accounting Work SheetAdjusted Trial Balance
ACCOUNT TITLE DEBIT CREDIT DEBIT CREDIT DEBIT CREDITCASH 12,100 12,100ACCTS RECEIVABLE 3,050 3,050SUPPLIES 150 150EQUIPMENT 15,500 15,500ACCUM DEPRECIATION 7,700 7,700ACCOUNTS PAYABLE 1,200 1,200SALARY PAYABLE 1,100 1,100UNEARNED REVENUE 1,500 1,500CAPITAL 7,200 7,200WITHDRAWALS 1,000 1,000REVENUE 25,400SALARY EXPENSE 12,000SUPPLIES EXPENSE 100DEPRECIATION EXP 200 TOTALS 44,100 44,100 31,800 18,700
ADJ. TRIAL BAL. INC. STATEMENT BALANCE SHEET
Managerial Accounting - 2.110
The Accounting Work SheetAdjusted Trial Balance
ACCOUNT TITLE DEBIT CREDIT DEBIT CREDIT DEBIT CREDITCASH 12,100 12,100ACCTS RECEIVABLE 3,050 3,050SUPPLIES 150 150EQUIPMENT 15,500 15,500ACCUM DEPRECIATION 7,700 7,700ACCOUNTS PAYABLE 1,200 1,200SALARY PAYABLE 1,100 1,100UNEARNED REVENUE 1,500 1,500CAPITAL 7,200 7,200WITHDRAWALS 1,000 1,000REVENUE 25,400 25,400SALARY EXPENSE 12,000 12,000SUPPLIES EXPENSE 100 100DEPRECIATION EXP 200 200 TOTALS 44,100 44,100 12,300 25,400 31,800 18,700
ADJ. TRIAL BAL. INC. STATEMENT BALANCE SHEET
Managerial Accounting - 2.111
The Accounting Work SheetAdjusted Trial Balance
ACCOUNT TITLE DEBIT CREDIT DEBIT CREDIT DEBIT CREDITCASH 12,100 12,100ACCTS RECEIVABLE 3,050 3,050SUPPLIES 150 150EQUIPMENT 15,500 15,500ACCUM DEPRECIATION 7,700 7,700ACCOUNTS PAYABLE 1,200 1,200SALARY PAYABLE 1,100 1,100UNEARNED REVENUE 1,500 1,500CAPITAL 7,200 7,200WITHDRAWALS 1,000 1,000REVENUE 25,400 25,400SALARY EXPENSE 12,000 12,000SUPPLIES EXPENSE 100 100DEPRECIATION EXP 200 200 TOTALS 44,100 44,100 12,300 25,400 31,800 18,700
NET INCOME 13,100 13,10025,400 25,400 31,800 31,800
ADJ. TRIAL BAL. INC. STATEMENT BALANCE SHEET
Managerial Accounting - 2.113
Recording theAdjusting Entries
The work sheet helps identify the accounts that need adjustments.
Actual adjustment of the accounts requires journalizing and posting the entries.
Managerial Accounting - 2.114
Recording theAdjusting Entries
The adjusting entries may be recorded in the journal when they are entered on the work sheet.
Many accountants journalize and post the adjusting entries just before they make the closing entries.
Managerial Accounting - 2.116
Closing the Accounts
Closing the accounts is the end of period process that prepares the accounts for recording transactions during the next period.
Managerial Accounting - 2.117
Closing the Accounts
What accounts are closed at the end of the period?
Revenue, Expenses and Withdrawals. These relate to a specific period and are
called temporary accounts.
Managerial Accounting - 2.118
Income Summary
The Income Summary account is used to close the temporary accounts.
This is the “most temporary” account. It is used only to facilitate the closing
process.
Managerial Accounting - 2.119
Closing the Accounts
Revenues and Expense accounts are closed to Income Summary.
Income Summary is closed to Capital. Withdrawals are closed to Capital.
Managerial Accounting - 2.120
Closing the Accounts
Net income will be represented by a credit balance in the Income Summary.
Net loss by a debit balance.
Managerial Accounting - 2.121
Flowchart of Closing Process
Revenue Income Summary12,000
7,500 9,000
Salary Exp 3,300
28,500
1,500 1,800
4,450 28,500
Rent Exp 800 800
Supplies Exp 350 350
24,050
24,050
(Close Revenue Account)
(Close Expense Accounts)
(Close Income Summary)
Withdrawals2,500 2,500
2,500
Capital Account
(Close Withdrawals Account)
Managerial Accounting - 2.122
Postclosing Trial Balance
The accounting cycle ends with the postclosing trial balance.
The postclosing trial balance is dated as of the end of the period for which the statements have been prepared.
Managerial Accounting - 2.123
Permanent Accounts
These never close :– Assets– Liabilities– Owners’ equity Balances of permanent accounts carry over
to the next period.
Managerial Accounting - 2.125
Correcting Errors
Suppose that Dennis’ Landscaping bought supplies for $3,000 and erroneously debited equipment.
Managerial Accounting - 2.126
Correcting Errors
What was the incorrect entry? Debit Equipment and credit Cash. What is the correcting entry? Debit Supplies and credit Equipment.
Managerial Accounting - 2.128
Liquidity
This is a measure of how quickly an item can be converted to cash.
Managerial Accounting - 2.129
Current or Long-term
On the balance sheet, assets and liabilities are classified as either current or long-term to indicate their relative liquidity.
Managerial Accounting - 2.130
Assets are Classified asCurrent or Long-term
Current assets are cash, or will be converted to cash, in one year or within the normal business operating cycle.
– Cash– Short term receivables– Inventory– Prepaid expenses
Managerial Accounting - 2.131
Assets are Classified asCurrent or Long-term
Long-term assets include all other assets.
– Property, equipment and intangibles
Managerial Accounting - 2.132
Liabilities are Classified as Current or Long-term
Current liabilities are debts or obligations due within one year or within the operating cycle.
– Accounts and salary payables– Short term notes payable– Unearned revenue
Managerial Accounting - 2.133
Liabilities are Classified as Current or Long-term
Long-term liabilities are all other debts due in longer than one year or the entity’s operating cycle.
Managerial Accounting - 2.134
The Classified Balance Sheet
The debit side– Current assets– Long-term assets Assets are listed in order of decreasing
liquidity.
Managerial Accounting - 2.135
The Classified Balance Sheet
The credit side– Current liabilities– Long-term liabilities Liabilities are listed in the order of how
soon they must be paid.
Managerial Accounting - 2.136 Classified Balance Sheet XYZ Services
January 31, 19xx Assets Liabilities
Current Assets Current Liabilities
Cash 12,100 Accounts Payable 1,200
Accounts Receivable 3,050 Salary Payable 1,100
Supplies 150 Unearned Revenue 1,500
Total Current Assets 15,300 Total Liabilities 3,800
Plant Assets Owners’ Equity
Equipment 15,500 Capital 19,300
Less Accum Deprec 7,700 7,800
Total Liabilities and Total Assets 23,100 Equity
23,100
Managerial Accounting - 2.137
Different Formats ofthe Balance Sheet
The report format lists assets first, then liabilities and then owners’ equity.
The account format reports assets on the left side and liabilities and owners’ equity on the right side.
Managerial Accounting - 2.139
Comparative Financial Statements...
– are statements that show two or more consecutive periods.
They enhance the user’s ability to analyze a company’s past performance.
Managerial Accounting - 2.140
Evaluating with Ratios
Two common ratios used to measure liquidity are:
1 Current ratio2 Debt ratio
Managerial Accounting - 2.141
Current Ratio
This measures the ability of a business to pay its current liabilities with its current assets.
Managerial Accounting - 2.142
Current Ratio
Current assets/Current liabilities A ratio of 1.0 or more indicates that a
business should have no trouble paying its current bills.
Managerial Accounting - 2.143
Debt Ratio
It indicates the proportion of a business’ assets that are financed with debt.
It measures their ability to pay both current and long-term debt.
Managerial Accounting - 2.144
Debt Ratio
Total liabilities/Total assets The lower the ratio, the safer.
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