apipa 20101 preparing components units for the financial statement year end close jeanne h. yamamura...
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APIPA 2010 1
PREPARING COMPONENTS UNITS FOR THE FINANCIAL
STATEMENT YEAR END CLOSE
Jeanne H. Yamamura
CPA, MIM, PhD
APIPA 2010 2
REVIEW OF TERMINOLOGY AND CONCEPTS
1. The set of accounts used by an entity to which transactions are posted is:
A. The book of original entry.B. The general ledger.C. A subsidiary ledger.D. A t-account.
2. The book of original entry used to record cash receipts is known as:
A. The Cash account.B. The general ledger.C. The cash receipts journal.D. The sales invoice.
APIPA 2010 3
REVIEW OF TERMINOLOGY AND CONCEPTS
3. The five types of accounts include:A. Cash, Fixed Assets, Accounts Payable, Fund Balance,
Sales.B. Debit, Credit, Contra-Asset, Contra-Liability,
Miscellaneous.C. Revenues, Expenses, Gains, Losses, Net Income.D. Assets, Liabilities, Equity, Revenue, Expenses.
4. Accounts Payable is:A. An Asset.B. A Liability.C. A Revenue.D. An Expense.
APIPA 2010 4
REVIEW OF TERMINOLOGY AND CONCEPTS
5. The set of rules followed by accountants in recording transactions and preparing financial statements is known as:
A. Accounting Rules for Dummies.B. Debits and credits.C. Generally accepted accounting principles.D. PCAOB auditing standards.
6. The rule that has expenses attached to the revenues they produce is known as:
A. The Revenue Recognition Principle.B. The Matching Principle.C. The Time Period Assumption.D. Accrual Accounting.
APIPA 2010 5
ACCOUNTING EQUATION
ASSETS = LIABILITIES + EQUITY
DR CR CR
+ REVENUES CR
- EXPENSES DRNormal balances
Increase
APIPA 2010 6
GASB 34• GASB Statement No. 34 “Basic Financial
Statements and Management Discussion and Analysis for State and Local Governments”
• Establishes standards for external financial reporting for state and local governments
• Requires that resources be classified for accounting and reporting purposes into certain categories
APIPA 2010 7
EQUITY – COMPONENT UNITS
• Equity – governmental funds – Fund Balance
• Equity – component units – Net Assets– Invested in Capital Assets
• Net of related debt
– Restricted Net Assets
– Unrestricted Net Assets
APIPA 2010 8
INVESTMENT IN CAPITAL ASSETS
• Capital assets– Net of accumulated depreciation– Net of outstanding principal balances of
related debt• Acquisition, construction, or improvement
APIPA 2010 9
RESTRICTED ASSETS
• Nonexpendable– Net assets subject to externally imposed
stipulations that require the entity to maintain them permanently
• Expendable– Net assets whose use by the entity is subject
to externally imposed stipulations that can be fulfilled by actions taken by the entity or that expire over time
APIPA 2010 10
UNRESTRICTED NET ASSETS
• Unrestricted Net Assets– Net assets that are not subject to externally
imposed stipulations– May be designated for specific purposes by
action of management or the Board of Directors
– May be limited by contractual agreements with outside parties
APIPA 2010 11
ACCOUNTING JOURNALS
• Where transactions are originally recorded• Books of original entry
– Cash receipts journal– Cash disbursements journal– Payroll journal– Revenue journal– Purchases journal– General journal
Complete Exercise No. 1 in the Workbook
APIPA 2010 12
MICRONESIAN FISHING CORPORATION
• Component unit of State Government
• Supports local fisheries
• Purchases and sells fish
• Purchases and sells fishing supplies
• Owns building
• Rents space to Micronesian Development Authority
APIPA 2010 13
ACCOUNTING CYCLE
Analyze transactions &verify documentation
Post toGeneralLedger
Journalize & post AJEs
Record inJournal
Prepare TB
Prepare & analyze FS
Prepare adjusted TB
Journalize & post
closing JEs
ACCOUNTING CYCLEPrepare
post closing TB
APIPA 2010 14
EXAMPLE: TRIAL BALANCE 12/31/09
AC# Account Name DR CR
101 Cash in Bank – Gen. Checking 15,400
110 Accounts Receivable 10,600
200 Accounts Payable 9,300
211 Withholding Taxes Payable 500
310 Unrestricted Net Assets 14,200
410 Grant Revenue 19,200
601 Salaries Expense 12,500
616 Travel Expense 4,700
TOTAL 43,200 43,200
APIPA 2010 15
ADJUSTING ENTRIES• Help ensure that the financial statements are
presented on an accrual basis. • Required every time the financial statements are
prepared.• Ensure revenue recognition and matching
principles are followed.– Record revenues in the period in which they are
earned.– Recognize expenses in the period in which they
are incurred and match against revenues earned
APIPA 2010 16
ADJUSTING ENTRIES• Adjusting entries are necessary because:
– Inefficient to record certain transactions daily (e.g., S&W)
– Certain costs occur over time and need to be recognized periodically (e.g., Insurance)
– Certain costs incurred but unknown until following period (e.g., Utilities)
APIPA 2010 17
PREPAYMENTS
Prepaid Expenses – Expenses originally paid in cash and initially recorded
as assets – Will benefit more than one accounting period. – Examples: Prepaid Insurance, Prepaid Rent, Office
Supplies, Fixed Assets (Depreciation). Unearned Revenues
– Revenues originally received in cash and initially recorded as liabilities
– Will be earned over more than one accounting period– Examples: Unearned Service Revenue, Unearned
Membership Revenue.
APIPA 2010 18
PREPAID EXPENSES
• Cash already paid
• Expense benefits more than one period
• Initially set up as an asset
• Expire over time through use
• Recognize expense through AJEs
APIPA 2010 19
PREPAID INSURANCE
• 7/31/08 TB - $1,200 Prepaid Insurance
• Annual premium for fire insurance on building
• Originally paid 7/1/08 – need to expense 1 month
• AJE needed– DR Insurance Expense 100– CR Prepaid Insurance 100
APIPA 2010 20
T-ACCOUNTS
Prepaid Insurance Insurance Expense 1200 100 100
1100 100
EFFECT ON ACCOUNTING EQUATION?
ASSETS = LIAB + EQUITY
APIPA 2010 21
SUPPLIES
• 7/31/08 TB - $750 Office Supplies
• Physical count at 7/31 = $500
• AJE needed– DR Office Supplies Expense 250– CR Office Supplies 250
• Note: What is the difference between Office Supplies Expense and Office Supplies?
APIPA 2010 22
T-ACCOUNTS
Office Supplies Office Supplies Expense
750
250 250
500 250
EFFECT ON ACCOUNTING EQUATION?
ASSETS = LIAB + EQUITY
APIPA 2010 23
SUPPLIES
• 7/31/08 TB - Office Supplies Expense $750 (originally expensed)
• Physical count at 7/31 = $500
• AJE needed– DR Office Supplies 500– CR Office Supplies Expense
500
APIPA 2010 24
T-ACCOUNTS
Office Supplies Office Supplies Expense
750
500 500
500 250
EFFECT ON ACCOUNTING EQUATION?
ASSETS = LIAB + EQUITY
APIPA 2010 25
DEPRECIATION
• Straight-line method• Depreciable Cost
Estimated Useful Life– Where depreciable cost = cost – salvage value
• 7/31/08 TB Building $25,000, 25 year life• Monthly depreciation expense
25,000 / 25 years = 1,000 per year/12 months
• DR Depreciation Expense 83
CR Accum. Deprec. Bldg. 83
Note: No pennies
necessary –
would imply more
accuracy than really
exists
APIPA 2010 26
T-ACCOUNTS
Accum. Depr.- Bldg. Depreciation Expense
1,000
83 83
1,083 83
EFFECT ON ACCOUNTING EQUATION?
ASSETS = LIAB + EQUITY
APIPA 2010 27
UNEARNED REVENUES
• Cash already received
• Revenue earned in the future
• Initially set up as a liability
• Recognize revenues when earned through AJEs
APIPA 2010 28
UNEARNED REVENUES
• 7/31/08 TB - $4,200 Unearned Revenue
• Annual dues payments of $600 for 7 members
• 600 per year / 12 months = 50 per month * 7 members = 350
• AJE needed– DR Unearned Revenue 350– CR Membership Dues Revenue 350
APIPA 2010 29
T-ACCOUNTS
Unearned Revenues Membership Dues Revenue
4,200
350 350
3,850 350
EFFECT ON ACCOUNTING EQUATION?
ASSETS = LIAB + EQUITY
APIPA 2010 30
ACCRUALSAccrued Revenues
– Revenues earned but not received or recorded
– Examples: Services performed but not yet billed.
• Accrued Expenses– Expenses incurred but not yet been paid in
cash or recorded– Examples: Interest expense, salaries and
wages expense, tax expense.
APIPA 2010 31
ACCRUED REVENUES
• 7/31/08 TB - $15,000 in advertising earned but not yet billed or paid
• AJE needed– DR Accounts Receivable 15,000– CR Advertising Revenue 15,000
APIPA 2010 32
T-ACCOUNTS
Accounts Receivable Advertising Revenue
29,330
15,000 15,000
44,330 15,000
EFFECT ON ACCOUNTING EQUATION?
ASSETS = LIAB + EQUITY
APIPA 2010 33
ACCRUED INTEREST EXPENSE
• 7/31/08 TB - $20,000 Note Payable, 10% interest, dated 7/1/08, due 9/29/08
• Need to accrue 1 month of interest
20,000 * 10% * 1/12 = 167 (rounded)
• AJE needed– DR Interest Expense 167– CR Interest Payable 167
APIPA 2010 34
T-ACCOUNTS
Interest Payable Interest Expense
167 167
167 167
EFFECT ON ACCOUNTING EQUATION?
ASSETS = LIAB + EQUITY
APIPA 2010 35
ACCRUED WAGES EXPENSE
• 7/31/08 TB – Need to accrue wages earned but unpaid as of 7/31/08 PPE 7/25/08 paid 8/1 1,000
7/28-7/31 paid 8/15
1,000 / 10 = 100 * 4 = 400
• AJE needed– DR Wages Expense 1,400– CR Wages Payable 1,400
APIPA 2010 36
T-ACCOUNTS
Wages Payable Wages Expense
2,000
1,400 1,400
7/31 1,400 7/31 3,400
EFFECT ON ACCOUNTING EQUATION?
ASSETS = LIAB + EQUITY
APIPA 2010 37
REVERSING ENTRIES
• AJEs for accruals (revenues and expenses) can be reversed as of the beginning of the following period
• Why? To make it easier to record ongoing transactions
• What is a reversing entry?
• Exactly what it sounds like! A reversal of the AJE.
APIPA 2010 38
REVERSING ENTRY FOR ACCRUED WAGES EXPENSE
• Reversing entry 8/1/08– DR Wages Payable 1,400– CR Wages Expense 1,400
Wages Payable Wages Expense
8/1 1,400 2,000
RJE 1,400 1,400
600
APIPA 2010 39
REVIEW OF SHIPPING TERMS
• FOB Shipping Point – ownership passes when goods shipped by seller
• FOB Destination – ownership passes when goods received by buyer
• Inventory in Transit– Asset account– Inventory owned but not yet received
APIPA 2010 40
RECONCILIATIONS
• Performed at least monthly
• For– Cash, Accounts Receivable, Accounts
Payable, Fixed Assets– Any account supported by a subsidiary ledger
• Detects errors and unrecorded transactions
APIPA 2010 41
CASH AND BANK ACCOUNTS
• Cash and cash equivalents include:– Coins, currency on hand– Checks, money orders– Balances in checking and savings accounts
• Having sufficient cash is critical to the successful operation of ALL entities
APIPA 2010 42
BANK RECONCILIATION
• Agreement of two independently maintained sets of records– Bank (bank statement)– Books (CDJ, CRJ, GL)
• Why aren’t these the same?– Timing – check clearing, deposit clearing– Errors and omissions – bank or books
APIPA 2010 43
IN BOOKS BUT NOT BANK
• Outstanding checks: Issued and recorded but have not yet cleared the bank
• Deposits in transit: Mailed or taken to the bank but not recorded on the bank statement; Also includes deposits prepared but not yet taken to bank
APIPA 2010 44
IN BANK BUT NOT BOOKS
• Require adjusting entries because not yet in books
• Service charges: Bank fees– DR Bank Charges– CR Cash in Bank
• NSF (nonsufficient funds) checks: Checks deposited that are returned by the bank because of insufficient funds in the account of the check writer– DR NSF Checks Receivable– CR Cash in Bank
APIPA 2010 45
IN BANK BUT NOT BOOKS
• Interest income: Interest paid by the bank– DR Cash in Bank– CR Interest Income
• Miscellaneous charges and credits: – Bank charges for other services such as printing
checks or stopping payment. • DR Misc. Expense (Bank Charges)• CR Cash in Bank
– Bank receipt of direct deposit.• DR Cash in Bank• CR Grants from State
APIPA 2010 46
RECONCILIATION PROCESS
• Start with book balance and adjust for unrecorded items per the bank statement and any errors or corrections.
• Then adjust the bank balance for deposits in transit, outstanding checks, and any errors or corrections.
• When the two adjusted balances agree, the reconciliation process is complete.
APIPA 2010 47
DETAILED STEPS
1. Begin with the balance per the bank. This is the ending balance on the bank statement.
2. Identify deposits in transit as of the end of the period. Trace each of the deposits per the CRJ to the bank statement.
a. Any deposits in transit from last month should appear on the bank statement (at the beginning of the month).
b. New deposits in transit will usually be the latest deposits for the current month.
APIPA 2010 48
DEPOSITS IN TRANSIT
7/31/08 2,305.00
TOTAL 2,305.00
APIPA 2010 49
DETAILED STEPS3. Identify outstanding checks as of the end
of the period. Trace each of the checks per the CDJ to the bank statement identifying which checks have cleared the bank. Those that have not cleared the bank are outstanding.
a. Checks that cleared at the beginning of the bank statement that are not listed in this period’s CDJ were most likely issued in the prior period (and were outstanding in the last bank reconciliation).
APIPA 2010 50
OUTSTANDING CHECKS
#596 135.00#602 408.00 #603 515.96#604 267.60TOTAL 1,326.56
APIPA 2010 51
DETAILED STEPS
4. Now you are ready to compute the adjusted bank balance.
a. Enter a total for deposits in transit.
b. Enter a total for outstanding checks.
c. Compute: Bank balance plus deposits in transit minus outstanding checks = Adjusted bank balance
d. If there were any bank errors, include them as “other.”
APIPA 2010 52
BANK RECONCILIATIONGENERAL CHECKING ACCOUNT
7/31/08
Balance per bank: 15,607.25
Adjustments:
Add: Deposits in transit 2,305.00
Less: Outstanding checks (1,326.56)
Add: Bank error ________
Adjusted balance per bank: $16,585.69
APIPA 2010 53
DETAILED STEPS
5. Enter the balance per the books. This is the ending balance in the Cash account in the general ledger.
APIPA 2010 54
GENERAL LEDGER – CASH
Account Title: CASH – GEN. CHECKING ACCOUNT Account Number:
Date Description Ref Debit Credit Balance
6/30/08 Ending balance 6,034.55
7/11/08 Sales CRJ-7 1,715.00
7/15/08 Checks #598-601 CDJ-7 2,967.30
7/25/08 Sales CRJ-7 1,050.00
7/31/08 Checks #602-605 CDJ-7 1,826.56
7/31/08 Sales CRJ-7 2,305.00 6,310.69
This is the balance per
books
APIPA 2010 55
DETAILED STEPS
6. Now based on the comparisons performed earlier, identify any bank charges (service charges, debit memos) or bank credits (direct deposits, interest income) that appear on the bank statement but not in the books.
7. Compute the adjusted book balance
APIPA 2010 56
BANK RECONCILIATIONGENERAL CHECKING ACCOUNT
7/31/08Balance per books: $6,310.69Adjustments: Add: 7/7 Direct deposit 10,500.00 Add: Error – 7/11 deposit 100.00 Less: NSF check – FIT (275.00) Less: NSF check fee (15.00)
Less: Service charge (35.00)Adjusted balance per books: $16,585.69
APIPA 2010 57
DETAILED STEPS
8. When the two adjusted balances (adjusted balance per bank and
adjusted balance per books) agree, the account is reconciled.9. Prepare an adjusting journal entry for each reconciling item used to compute the adjusted balance per books.
APIPA 2010 58
JOURNAL ENTRIES
DR Cash in Bank 10,500
CR Grant Revenue 10,500
To record federal grant direct deposit 7/7/08
DR Cash in Bank 100
CR Sales Revenue 100
To correct deposit 7/11/08
APIPA 2010 59
JOURNAL ENTRIES
DR NSF Checks Receivable 290CR Cash in Bank 290To record NSF check from FIT Corp. plus
NSF fee (275 + 15 = 290)
DR Misc. Expense 35CR Cash in Bank 35To record bank service charge 7/8/08
APIPA 2010 60
THE END RESULT
The final cash balance will then appear as follows after the adjusting entries are recorded and posted.
Note that the final cash balance will be equal to the adjusted balance per bank and per books.
APIPA 2010 61
GENERAL LEDGER – CASH
Account Title: CASH – GEN. CHECKING ACCOUNT Account Number:
Date Description Ref Debit Credit Balance
7/31/08 Balance 6,310.69
7/31/08 Fed. Grant DD GJ-7 10,500.00
7/31/08 Correction to 7/11 GJ-7 100.00
7/31/08 NSF check GJ-7 290.00
7/31/08 Bank service chg. GJ-7 35.00
7/31/08 16,585.69
APIPA 2010 62
ACCOUNTS RECEIVABLE
• Agreement of two independently maintained sets of records– General Ledger Control Account– Subsidiary Ledger
• Why aren’t these the same?– Errors and omissions
APIPA 2010 63
RECONCILIATION PROCESS
• Prepare a schedule of customer accounts in Accounts Receivable subsidiary ledger.
• Compare to the balance in the Accounts Receivable account in the General Ledger.
• If the two amounts do not agree, prepare a 4-column reconciliation to reconcile the activity in the two records
APIPA 2010 64
GENERAL LEDGER – ACCOUNTS RECEIVABLE
Account Title: ACCOUNTS RECEIVABLE
Account Number:
Date Description Ref Debit Credit Balance
6/30/08 Balance 12,005
7/19/08 Sunset Restaurant account written off due to bankruptcy
GJ-7 1,905
7/31/08 July sales SJ-7 31,560
7/31/08 July collections CRJ-7 9,600
7/31/08 32,060
31,560 11,505
APIPA 2010 65
ACCOUNTS RECEIVABLE – SUBSIDIARY LEDGER
Customer: Abacus Hotel
Date Description Ref Debit Credit Balance
6/30/08 Balance 5,450
7/10/08 Adj. for spoiled fish 500
7/31/08 July payment CRJ-7 4,950
7/31/08 July sale SJ-7 10,560 10,560
Customer: Nikko Restaurant
6/30/08 Balance 1,500
7/31/08 July payment CRJ-7 1,500
7/31/08 July sale SJ-7 6,700
7/31/08 6,700
APIPA 2010 66
ACCOUNTS RECEIVABLE – SUBSIDIARY LEDGER
Customer: Sunset Restaurant
Date Description Ref Debit Credit Balance
6/30/08 Balance 1,905
Customer: Hotel Zero
6/30/08 Balance 3,150
7/31/08 July payment CRJ-7 3,150
7/31/08 July sale SJ-7 14,300 14,300
31,560 10,100 33,465
APIPA 2010 67
4-COLUMN RECONCILIATION
Balance 6/30/08
DR CR Balance 7/31/08
Per General Ledger
12,005 31,560 11,505 32,060
Account adjusted per SL, not posted to GL
500 (500)
Adjusted GL balance
12,005 31,560 10,100 31,560
APIPA 2010 68
4-COLUMN RECONCILIATION
Balance 6/30/08
DR CR Balance 7/31/08
Per Subsidiary
Ledger
12,005 31,560 10,100 33,465
Account W/O due to bankruptcy, not posted to SL
1,905 (1,905)
Adjusted GL balance
12,005 31,560 12,005 31,560
APIPA 2010 69
JOURNAL ENTRIES
DR Sales R&A - Fish 500
CR AR: Abacus Hotel 500
To record spoiled fish returned by Abacus Hotel for credit
APIPA 2010 70
JOURNAL ENTRIES
DR Accounts Payable 300
CR Purchase Returns and
Allowances – Fish. Supplies 300
To record adjustment for damaged merchandise returned to CHS, Inc.
APIPA 2010 71
SCHEDULE OF ACCOUNTS PAYABLE(AFTER ADJUSTMENTS)
Bait and Switch, Inc. $ 2,700Boggle Corp. 3,000CHS Inc. -0-General Fishing Supplies 3,125Marx Company 2,500Sanders, Inc. 1,375
TOTAL Per S/L $12,700Year end accruals: Unpaid invoices 1,205 Inventory in transit 1,500 TOTAL per G/L $15,405
APIPA 2010 72
INVENTORY
• Merchandise for resale or being manufactured for sale
• If merchandising entity: only 1 inventory account – Merchandise Inventory or Inventory
• If manufacturer: 3 inventory accounts– Raw Materials Inventory– Work in Process Inventory– Finished Goods Inventory
APIPA 2010 73
PHYSICAL INVENTORY
• Complete count of goods on hand
• At least annually
• Preferable for business operations to be stopped during count
APIPA 2010 74
INVENTORY IN TRANSIT
• When does ownership pass?– FOB Shipping Point – when goods leave
shipper– FOB Destination – when goods arrive at buyer
• If inventory in transit at YE and terms of sale are FOB Shipping Point – must accrue
APIPA 2010 75
CONSIGNMENT INVENTORY
• Still owned by vendor but held by entity
• EXCLUDE from physical inventory and from ending inventory balance
APIPA 2010 76
PERIODIC VS. PERPETUAL
• Whether or not inventory balances updated as sales/purchases occur
• Periodic – only at period end– “Purchases” account used– “Cost of Goods Sold” only at period end
• Perpetual – as sales/purchases occur– No “Purchases” account– “Cost of Goods Sold” updated as sales occur
APIPA 2010 77
COST FLOW ASSUMPTIONS• When sales are made, which inventory item is
being sold?• Note: Cost flow assumptions made for
recordkeeping purposes. Not actual physical flow of merchandise.
• Four methods– Specific identification– First-in, First-out (FIFO)– Last-in, Last-out (LIFO)– Average
APIPA 2010 78
SPECIFIC IDENTIFICATION
• Requires individually identifiable items
• Automobiles, real estate, antiques
APIPA 2010 79
FIFO
• Assumes that first items purchased are the first ones sold
• Cost of goods sold = “older” costs
• Ending inventory = “newer” costs
APIPA 2010 80
LIFO
• Assumes that last items purchased are the first ones sold
• Cost of goods sold = “newer” costs
• Ending inventory = “older” costs
APIPA 2010 81
AVERAGE
• Weighted average cost computed and applied
• Cost of goods sold = weighted average cost * # units sold
• Ending inventory = weighted average cost * # units in ending inventory
APIPA 2010 82
EXAMPLEINVENTORY – BOOK – TAHOE HIKING TRAILSDate Description Units Unit Cost Total Cost
6/30/07 Beg. Inv. 0 0
8/1/07 Purchase 100 $5 $500
9/3/07 Purchase 200 $7 $1,400
10/15/07 Purchase 100 $8 $800
12/5/07 Purchase 100 $8 $800
3/17/08 Purchase 400 $9 $3,600
6/9/08 Purchase 100 $10 $1,000
TOTAL 1,000 $8,100
APIPA 2010 83
ENDING INVENTORY
• 845 books sold during FY 6/30/08
• Physical inventory 6/30/08 = 155 books
APIPA 2010 84
FIFO – ENDING INVENTORYINVENTORY – BOOK – TAHOE HIKING TRAILSDate Description Units Unit Cost Total Cost
6/9/08 Purchase 100 $10 $1,000
3/17/08 Purchase 55 $9 $495
TOTAL $1,495
APIPA 2010 85
JOURNAL ENTRIESDR Inventory (ending) 1,495DR Cost of Goods Sold 6,605CR Inventory (beg.) -0-CR Purchases 8,100
To record cost of goods sold and ending inventory at 6/30/08.
Note: JE only required under periodic method.
APIPA 2010 86
LIFO – ENDING INVENTORYINVENTORY – BOOK – TAHOE HIKING TRAILSDate Description Units Unit Cost Total Cost
8/1/07 Purchase 100 $5 $500
9/3/07 Purchase 55 $7 $385
TOTAL $885
APIPA 2010 87
JOURNAL ENTRIESDR Inventory (ending) 885DR Cost of Goods Sold 7,215CR Inventory (beg.) -0-CR Purchases 8,100
To record cost of goods sold and ending inventory at 6/30/08.
Note: JE only required under periodic method.
APIPA 2010 88
EFFECT ON TOTAL ASSETS AND NET INCOME
FIFO LIFO
Inventory (ending) 1,495 885
Total Assets ++++ ------
Cost of Goods Sold 6,605 7,215
Net Income ++++ ------
Note: In example, prices were rising.
APIPA 2010 89
AVERAGEINVENTORY – BOOK – TAHOE HIKING TRAILSDate Description Units Unit Cost Total Cost
TOTAL 1,000 $8,100
APIPA 2010 90
AVERAGE
INVENTORY – BOOK – TAHOE HIKING TRAILSDate Description Units Unit Cost Total Cost
TOTAL 1,000 $8,100
Total cost / Total units = $8,100 / 1,000 = $8.10 weighted average cost per unit
Total ending inventory 155 8.10 $1,256
Total cost of goods sold
845 8.10 $6,844
APIPA 2010 91
JOURNAL ENTRIESDR Inventory (ending) 1,256DR Cost of Goods Sold 6,844CR Inventory (beg.) -0-CR Purchases 8,100
To record cost of goods sold and ending inventory at 6/30/08.
Note: JE only required under periodic method.
APIPA 2010 92
BAD DEBTS
• Estimation of uncollectible accounts• Allowance method required by GAAP• Two estimation methods
– Income statement method• % of credit sales• Determines bad debt expense
– Balance sheet method• Aging of AR balances and est. collectibility of each
aging category• Determines allowance for bad debts
APIPA 2010 93
ISLAND UTILITY CORPORATIONSCHEDULE OF ACCOUNTS RECEIVABLE
7/31/08Debtor Balance
Antioch Hotel 254
Black, Antonio 97
Camacho, Evelyn 43
Davis, Edward 35
Fresh Fish Restaurant 156
Lyle, Cynthia 32
Monterey Bakery 123
Smith, Fred 78
Tyler, Caitlin 39
TOTAL 857
APIPA 2010 94
AGED SCHEDULE OF ACCOUNTS RECEIVABLE - 7/31/08
Debtor Balance Current 31-60 61-90 >90
Antioch Hotel 254 254
Black, Antonio 97 32 35 30
Camacho, Evelyn 43 43
Davis, Edward 35 10 10 15
Fresh Fish Rest. 156 35 30 32 59
Lyle, Cynthia 32 32
Monterey Bakery 123 47 30 29 17
Smith, Fred 78 18 40 20
Tyler, Caitlin 39 39
TOTAL 857 439 145 165 128
APIPA 2010 95
ALLOWANCE COMPUTATIONAging Category Amount % Uncollectible Total
Current 439 0 0
31-60 145 5% 7.25
61-90 165 10% 16.5
>90 108 50% 54
TOTAL ALLOWANCE 78
Balance per GL 120
Entry needed (42)
APIPA 2010 96
BAD DEBT AJE NEEDED
DR Allowance for Bad Debts $42
CR Bad Debts Expense $42
To adjust allowance at 7/31/08.
Note: The current Allowance balance was larger than needed so the AJE reduced the Allowance.
APIPA 2010 97
GENERAL LEDGER – ALLOWANCE FOR BAD DEBTS, BAD DEBTS
EXPENSE
Account Title: ALLOWANCE FOR BAD DEBTS
Date Description Ref Debit Credit Balance
7/31/08 Ending balance 120
7/31/08 AJE per analysis GJ-7 42 78
Account Title: BAD DEBTS EXPENSE
7/31/08 Ending balance 150
7/31/08 AJE per analysis GJ-7 42 108
APIPA 2010 98
BALANCE SHEET 7/31/08
ASSETS
Accounts Receivable $ 857
Allowance for Bad Debts ( 78)
Accounts Receivable, net $779
APIPA 2010 99
WRITE OFF OF ACCOUNT
Adjusting entry to write off account
DR Allowance for Bad Debts $32
CR AR – Cynthia Lyle $32
To write off account for Cynthia Lyle on 8/5/08
APIPA 2010 100
GENERAL LEDGER – ACCOUNTS RECEIVABLE
Account Title: ACCOUNTS RECEIVABLE Account Number: 110
Date Description Ref Debit Credit Balance
7/31/08 Ending balance
857
8/5/08 Write off Cynthia Lyle
GJ-7 32 825
APIPA 2010 101
GENERAL LEDGER – ALLOWANCE FOR BAD DEBTS
Account Title: ALLOWANCE FOR BAD DEBTS
Date Description Ref Debit Credit Balance
7/31/08 Ending balance 120
7/31/08 AJE per analysis GJ-7 42 78
8/5/08 Write off Cynthia Lyle
GJ-7 32 46
APIPA 2010 102
SUBSEQUENT COLLECTION OF A/C WRITTEN OFF
Entries to record subsequent collectionDR AR – Cynthia Lyle $32CR Allowance for Bad Debts $32DR Cash $32CR AR – Cynthia Lyle. $32
To reinstate Cynthia Lyle and record subsequent receipt
APIPA 2010 103
ASSET DISPOSITIONS
• When a capital asset is sold:– Update depreciation– Calculate gain or loss on disposition
APIPA 2010 104
UPDATE DEPRECIATION
• Calculation of annual depreciation using straight-line method
Cost – Estimated Residual Value
Estimated Useful Life• Determine depreciation for current period
APIPA 2010 105
GAIN OR LOSS CALCULATION
Selling price (sales proceeds)
Carrying value (book value)
Cost
Less accumulated depreciation
Gain (loss) on disposal
APIPA 2010 106
DISPOSAL OF CAPITAL ASSET - EXAMPLE
Sale of truck for $9,000 on 7/1/08
Originally purchased 7/3/05 for $25,000
Depreciated over 5 year life with SV $500
Annual depreciation:
25,000 – 500 = 4,900
5
APIPA 2010 107
DISPOSAL OF CAPITAL ASSET - EXAMPLE
Accum. Depreciation through 6/30/08 = 3 years = 4,900 * 3 = 14,700
Note: If sale had occurred mid-year, calculation of partial year depreciation might have been needed.
Sales proceeds 9,000Cost 25,000Accum. Deprec. (14,700) 10,300Loss on disposal (1,300)
APIPA 2010 108
DISPOSAL OF CAPITAL ASSET - EXAMPLE
Entry to record sale of asset
DR Cash $ 9,000
DR Accum. Deprec.-Vehicles 14,700
DR Loss on disposal 1,300
CR Vehicles $25,000
To record disposal of asset
APIPA 2010 109
WRITEOFF OF CAPITAL ASSET - EXAMPLE
Water pump determined unusable as of 7/31/08
Originally purchased 1/31/06 for $5,000
Depreciated over 5 year life with zero SV
Annual depreciation:
5,000 – 0 = 1,000
5
APIPA 2010 110
UPDATE DEPRECIATION• Assume entity has calendar year end
• Accum. Depreciation as of 12/31/07
– 1/31/06 to 12/31/07 = 23 months
– 1,000 / 12 * 23 = $1,917
• Depreciation for current period
– 12/31/07 to 7/31/08 = 7 months
– 1,000 / 12 * 7 = $583
APIPA 2010 111
DEPRECIATION AJE NEEDED
DR Depreciation Expense $583
CR Accum. Deprec. $583
To record depreciation on asset to date determined unusable.
APIPA 2010 112
CALCULATION OF LOSS ON WRITE OFF
Cost 5,000
Accum. Deprec.
As of 12/31/07 1,917
To 7/31/08 583 2,500
Loss on writeoff (2,500)
APIPA 2010 113
WRITE OFF OF CAPITAL ASSET - AJE
Entry to record writeoff of asset
DR Accum. Deprec. – Equip. $2,500
DR Loss on writeoff 2,500
CR Equipment $5,000
To record writeoff of asset
APIPA 2010 114
WRITE-OFF OF CAPITAL ASSET NO LONGER IN USE
Entry to record write off of asset
DR Accum. Deprec.-Equip. $5,000
CR Equipment $5,000
To record write off of fully depreciated asset
APIPA 2010 115
WORKSHEET• Used to draft financial statements• Start by entering unadjusted TB numbers (done
in Exercise 2)• Identify adjustments needed (done in Exercises
3 to 9)• Determine the adjusted TB numbers• Extend the adjusted TB numbers to the IS and
BS columns• Draft financial statements• Journalize adjusting entries
APIPA 2010 116
WORKSHEET
A/C
Unadj.TB AJEs Adj. TB Income Stmt.
Stmt. of Net
Assets
DR CR DR CR DR CR DR CR DR CR
APIPA 2010 117
OTHER AJES NEEDED
DR Investment in Capital
Assets 10,350
CR Unrestricted Net Assets 10,350
To adjust balance in Investment in Capital Assets for current year activity.
APIPA 2010 118
OTHER AJES NEEDED
DR Restricted NA – Expendable 3,500
CR Unrestricted Net Assets 3,500
To adjust restricted net asset balance for grant revenue earned.
APIPA 2010 119
OTHER AJES NEEDED
DR Unrestricted Net Assets 22,500
CR Restricted NA - Expendable 22,500
To adjust restricted net asset balance for grant revenue received but unearned.
APIPA 2010 120
CLOSING
• Occurs at end of fiscal period
• “Closes out” nominal accounts, leaving zero balances
• May close directly to Unrestricted Net Assets or to temporary holding account, Income Summary
APIPA 2010 121
CLOSING ENTRIES
DR Revenue and gain accounts
CR Income Summary
To close revenue and gain accounts
DR Income Summary
CR Expense and loss accounts
To close expense and loss accounts
APIPA 2010 122
CLOSING ENTRIES
DR Income Summary
CR Unrestricted Net Assets
To close change in net assets to unrestricted net assets (net increase)
DR Unrestricted Net Assets
CR Income Summary
To close change in net assets to unrestricted net assets (net decrease)
APIPA 2010 123
POST CLOSING TRIAL BALANCE
• Verifies proper closing of all nominal accounts
• Verifies DR = CR
• Displays balances in real accounts only (balance sheet accounts)
APIPA 2010 124
FINANCIAL STATEMENT ANALYSIS
• Trend analysis– Evaluation of financial data over time– Two years is not enough!
• Common size analysis– Each item expressed as a % of base amount– Enables comparison of different sized entities
• Ratio analysis– Can be used for many analytical purposes– Must compare over time and with industry and
competitors– Can be computed differently by different
services/analysts
APIPA 2010 125
LIQUIDITY AND SOLVENCY
• Liquidity - Identify entity’s ability to meet short-term obligations
• Solvency – Ability of entity to survive in the long run
APIPA 2010 126
LIQUIDITY
• Current ratio: Current assets
Current liabilities
• Quick ratio: Quick assets
Current liabilities
where quick assets = Cash, receivables,
and short term investments
APIPA 2010 127
SOLVENCY
• Working capital to total assets:
Current assets - Current liabilities
Total assets
• Defensive interval:
Quick assets
Projected daily operational expenditures
APIPA 2010 128
SOLVENCY
• Debt to total assets:
Total liabilities
Total assets
APIPA 2010 129
OPERATIONAL EFFICIENCY
• How effectively and efficiently the entity is using its resources
• Receivables turnover:
Net credit sales
Average gross accounts receivable
• Average collection period:
365 days / receivables turnover ratio
APIPA 2010 130
OPERATIONAL EFFICIENCY
• Inventory turnover:
Cost of goods sold
Average inventory
• Days in inventory:
365 days / inventory turnover ratio
APIPA 2010 131
PROFITABILITY
• How well the entity has performed operationally
• Profit margin on sales: Net income / net sales
• Return on assets:Net income / Average total assets
• Asset turnover:Net sales / Average total assets
APIPA 2010 133
POST TEST
• Circle your best guess at the right answer (A, B, C or D)
• Don’t worry – you may not know all the answers – but, hopefully, you know more than when you started!
APIPA 2010 134
THE END!!