chapter03 the financial reporting process mcgraw-hill/irwin © the mcgraw-hill companies, inc
TRANSCRIPT
Chapter03
The Financial Reporting Process
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc.
Part A
Accrual-Basis Accounting
3-2
LO1 Revenue and Expense Reporting
o Accounting information – necessary for decision making.
o To be useful in decision making – accountants must report revenues and expenses in a way that reflects the ability of the company to create value for its owners.
o Accrual-basis accounting records revenues when earned (the revenue recognition principle) and expenses with related revenues (the matching principle).
o Accounting information – necessary for decision making.
o To be useful in decision making – accountants must report revenues and expenses in a way that reflects the ability of the company to create value for its owners.
o Accrual-basis accounting records revenues when earned (the revenue recognition principle) and expenses with related revenues (the matching principle).
3-3
Revenue Recognition Principle
Recognize revenue when it is earned
o Calvin books a cruise with Carnival Cruise Lines, the world’s largest cruise line. He makes reservations and pays for the cruise in November 2012, but the cruise is not scheduled to sail until April 2013.
o When does Carnival report revenue from the ticket sale?
Recognize revenue when it is earned
o Calvin books a cruise with Carnival Cruise Lines, the world’s largest cruise line. He makes reservations and pays for the cruise in November 2012, but the cruise is not scheduled to sail until April 2013.
o When does Carnival report revenue from the ticket sale?
3-4
Matching Principle
Expenses are reported with the revenues they
help to generate
Expenses are reported with the revenues they
help to generate
3-5
3-6
LO2 Accrual–Basis Compared with Cash–Basis Accounting
3-7
Part B
The Measurement Process
3-8
Closing ProcessClosing Process
LO3 Adjusting Entries
Reporting ProcessReporting Process
3-9
LO4 Post Adjusting Entries
o Post adjusting entries to the T-accounts in the general ledger to update the account balances.
o Prepare an adjusted trial balance.
o An adjusted trial balance is a list of all accounts and their balances after we have updated account balances for adjusting entries.
o Post adjusting entries to the T-accounts in the general ledger to update the account balances.
o Prepare an adjusted trial balance.
o An adjusted trial balance is a list of all accounts and their balances after we have updated account balances for adjusting entries.
3-10
Part C
The Reporting Process
3-11
LO5 Financial Statement1s
Accounts Debit CreditCash $6,200 Accounts receivable 2,700Supplies 1,500Prepaid rent 5,500 BALANCE
Equipment 24,000 SHEET
Accumulated Depreciation $400 Assets
Accounts payable 2,300 =
Unearned revenue 540 Liabilities
Salaries payable 300 +
Interest payable 100 Stockholders’ Equity
Utilities payable 960
Notes Payable 10,000STATEMENT OF Common stock 25,000
STOCKHOLDERS’ Retained earnings 0EQUITY Dividends 200
Common Stock Service revenue 6,360+ Supplies expense 800 INCOME
Retained Earnings Rent expense 500 STATEMENT
(= RE, Jan. 1 + NI – Div) Depreciation expense 400 Revenues
= Salaries expense 3,100 −
Stockholders’ Equity Utilities expense 960 Expenses
Interest expense 100 =
Totals $45,960 $45,960 Net Income
EAGLE GOLF ACADEMYAdjusted Trial Balance
January 31
3-12
Income Statement
Revenues:Service revenue $6,360
Expenses:Salaries expense $3,100 Rent expense 500 Supplies expense 800 Depreciation expense 400 Interest expense 100 Utilities expense 960
Total expenses 5,860Net income $500
EAGLE GOLF ACADEMYIncome Statement
For the month ended January 31
3-13
Statement of Stockholders’ Equity
TotalCommon Retained Stockholders
’Stock Earnings Equity
Balance at January 1 -0- -0- -0-Issuance of common stock $25,000 $25,000 Add: Net income for January $500 500Less: Dividends (200) (200)Balance at January 31 $25,000 $300 $25,300
EAGLE GOLF ACADEMYStatement of Stockholders’ EquityFor the month ended January 31
3-14
Classified Balance Sheet
EAGLE GOLF ACADEMYClassified Balance Sheet
January 31
Assets Liabilities Current assets: Current liabilities:
Cash $ 6,200 Accounts payable $ 2,300 Accounts receivable 2,700 Unearned revenue 540 Supplies 1,500 Salaries payable 300
Prepaid rent 5,500
Utilities payable
960
Total current assets 15,900 Interest payable 100 Total current liabilities 4,200
Long-term assets: Equipment 24,000 Long-term liabilities: Accum. depr., equip. (400) Notes payable 10,000
Total long-term assets 23,600 Total liabilities 14,200 Stockholders’ Equity
Common stock 25,000 Retained earnings 300
Total stockholders’ equity $ 25,300
Total liabilities and stockholders’ equity $ 39,500 Total assets $ 39,500
Total assets equal current plus long-term assets.Total liabilities equal current plus long-term liabilities.Total stockholders’ equity includes common stock and retained earnings from the statement of stockholders’ equity.Total assets must equal total liabilities plus stockholders’ equity.
3-15
Part D
The Closing Process
3-16
LO6 Closing Entries
o Transfer the balance of all revenue, expense, and dividend accounts to the balance of retained earnings.
o Increase the retained earnings account by the amount of revenues and decrease retained earnings by the amount of expenses and dividends.
o The balance of each revenue, expense, and dividend account equals zero after closing entries.
o Do not affect the balances of permanent accounts other than retained earnings.
o Transfer the balance of all revenue, expense, and dividend accounts to the balance of retained earnings.
o Increase the retained earnings account by the amount of revenues and decrease retained earnings by the amount of expenses and dividends.
o The balance of each revenue, expense, and dividend account equals zero after closing entries.
o Do not affect the balances of permanent accounts other than retained earnings.
3-17
Close to Retained Earnings
0 Beginning balance6,360 Total revenues
Total expenses 5,860 Total dividends 200
300 Ending balance
Retained Earnings
3-18
LO7 Post Closing Entries and Prepare Post–Closing Trial Balance
Accounts Debit CreditCash $6,200 Accounts receivable 2,700 Supplies 1,500 Prepaid rent 5,500 Equipment 24,000 Accumulated Depreciation $400 Accounts payable 2,300 Unearned revenue 540 Salaries Payable 300 Interest Payable 100 Utilities Payable 960 Notes Payable 10,000 Common stock 25,000 Retained earnings 300
Totals $39,900 $39,900
EAGLE GOLF ACADEMYPost-Closing Trial Balance
January 31
3-19
End of Chapter 03
3-20