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Assumptions
Understandability
Relevance
Comparability
Reliability
Principles
Monetary unit
Economic entity
Time period
Going concern
Purpose
Constraints
Revenue recognition
Matching
Full disclosure
Cost
1. Update the Retained Earnings account by transferring net earnings (loss) and
dividends to retained earnings.
2. Prepare the temporary accounts (revenue, expense, dividends) for the next
periods postings by reducing their balances to zero.
Materiality
Cost-benefit
Process
Assets
Liabilities
Assets
Liabilities
Expanded
Basic Equation
Debit / Credit
Rules
Dr.
+
Cr.
Dr.
Cr.
+
1. To close revenue accounts: Debit each individual revenue account for its balance (assuming
normal balances) and credit Income Summary for total revenues.
2. To close expense accounts: Debit Income Summary for total expenses and credit each
individual expense account for its balance (assuming normal balances).
3. To close income summary: Debit Income Summary for the balance in the account (or credit
if a net loss) and credit (debit) Retained Earnings.
4. To close dividends: Debit Retained Earnings and credit Dividends for the balance in the
account.
Shareholders Equity
Common
Shares
Dr.
Cr.
+
Revenues
Dr.
Cr.
+
Retained
Earnings
Dr.
Cr.
+
Expenses
Dr.
+
Cr.
STOP AND CHECK: Does the balance in the Retained Earnings account equal the ending
balance reported in the balance sheet and statement of retained earnings? Are all of the
temporary account balances zero?
Dividends
Dr.
+
Cr.
Accruals
1. Prepaid expenses
Prepare a post-closing
trial balance
Original Entry
Asset account
Cash
Expense account
Asset account
Liability account
Revenue account
1. Accrued revenues
Asset account
Revenue account
2. Accrued expenses
No entry
2
Journalize the
transactions
Adjusting Entry
Analyse business
transactions
Post to
general ledger accounts
7
Prepare financial statements:
Statement of earnings
Statement of retained
earnings
Balance sheet
Expense account
Liability account
Note: 1. Each adjusting entry will affect one or more statement of earnings accounts
and one or more balance sheet accounts.
2. Adjusting entries never include the Cash account.
4
Prepare a
trial balance
6
Prepare an adjusted
trial balance
Interest Calculation
Interest = Face value Annual interest rate Time (# of months 12)
CASH (Chapter 7)
Ownership
Ownership of Goods
Buyer
FOB Destination
Seller
Establishment of responsibility
Segregation of duties
Documentation procedures
Physical controls
Independent internal verification
Other controls
Bank Reconciliation
Perpetual
Purchase of goods
Inventory
Cash (A/P)
Purchases
Cash (A/P)
Inventory
Cash (A/P)
Freight In
Cash (A/P)
Return of purchased
goods
Cash (A/R)
Inventory
Cash (A/R)
Purchase Returns
Sale of goods
Cash (A/R)
Sales
Cost of Goods Sold
Inventory
Cash (A/R)
Sales
No entry
No entry
End of period
STOP AND CHECK: Does the balance in the general ledger cash account equal the adjusted
cash balance?
Books
Note: 1. Errors should be offset (added or deducted) on the side that made the error.
2. Adjusting journal entries should only be made on the books side.
No entry
Bank
Periodic
Accounts Receivable
Sales
Subsequent recovery
Accounts Receivable
Allowance for Doubtful Accounts
Cash
Accounts Receivable
Periodic
Specific identification
First-in, first-out (FIFO)
Moving average
Weighted average
Journal Entry
Intangible
Intangible assets, limited lives
Intangible assets, indefinite lives
Straight-line
Declining-balance
Units-of-activity
Face Value
Discount
Effective-interest
amortization
Retained
Earnings
Total Shareholders
Equity
Cash Dividend
Decrease
No effect
Decrease
Decrease
Stock Dividend
No effect
Increase
Decrease
No effect
Stock Split
No effect
No effect
No effect
No effect
Interest Expense
Cash
Cost
Equity
Acquisition
Equity Investments
Cash
Equity Investments
Cash
Investee reports
earnings
No entry
Equity Investments
Investment Revenue
Investee pays
dividends
Cash
Dividend Revenue
Cash
Equity Investments
$X
X
X
X
(X)
(X)
(X)
$X
Cash
Bonds Payable
Straight-line
amortization
Event
Investee
Note: If amortization is calculated for partial periods, the straight-line and decliningbalance methods must be adjusted for the relevant proportion of the year.
Multiply the annual amortization expense by the number of months expired in
the year divided by 12 months. The total amortization under the declining
balance method is limited to cost salvage value.
Premium
Investor
Extraordinary items
Changes in accounting
principle
Name of Company
Statement of Earnings
Period Ended
Sales revenues
Sales
Less: Sales returns and allowances
Sales discounts
Net sales
Cost of goods sold
Beginning inventory
Purchases
Less: Purchase returns and allowances
Net purchases
Add: Freight in
Cost of goods purchased
Cost of goods available for sale
Less: Ending inventory
Cost of goods sold
Gross profit
Operating expenses
(Examples: store salaries, advertising, delivery, rent,
amortization, utilities, insurance)
Earnings from operations
Other revenues
(Examples: interest, gains)
Other expenses
(Examples: interest, losses)
Earnings before income taxes
Income tax expense
Net earnings
FINANCIAL STATEMENTS
Order of Preparation
Date
1. Statement of earnings
Period ended
Period ended
3. Balance sheet
Period ended
$X
X
$X
X
X
X
X
$X
X
$X
X
X
X
X
X
X
X
X
X
$X
Deduct: Dividends
Retained earnings, end of period
$X
X
$X
X
X
X
$X
STOP AND CHECK: Net earnings (loss) presented on the statement of retained
earnings must equal the net earnings (loss) presented on the income statement.
X
X
X
X
Name of Company
Statement of Retained Earnings
Period Ended
$X
X
X
$X
$X
X
X
X
$X
Name of Company
Cash Flow Statement
Period Ended
Balance Sheet
Name of Company
Balance Sheet
End of the Period
Assets
Current assets
(Examples: cash, short-term investments, accounts
receivable, merchandise inventory, prepaids)
Long-term investments
(Examples: equity investments, debt investments)
Property, plant, and equipment
(Examples: land, land improvements, buildings,
equipment, natural resources)
Less: Accumulated amortization
Intangible assets
Limited life intangibles (Examples: patents,
copyrights) (net of accumulated amortization)
Indefinite life intangibles (Examples: trademarks,
franchises, goodwill)
Total assets
Operating activities
Note: May be prepared using the direct or indirect method
Cash provided (used) by operating activities
Investing activities
(Examples: purchase / sale of long-term assets)
Cash provided (used) by investing activities
Financing activities
(Examples: issue / repayment of long-term liabilities,
issue of shares, payment of dividends)
Cash provided (used) by financing activities
Net increase (decrease) in cash
Cash, beginning of the period
Cash, end of the period
$X
X
$X
X
$X
X
$X
X
X
$X
X
X
X
X
$X
STOP AND CHECK: Cash, end of the period, on the cash flow statement must equal cash
presented on the balance sheet.
X
$X
$X
X
$X
STOP AND CHECK: Total assets on the balance sheet must equal total liabilities and
shareholders equity; and, ending retained earnings on the balance sheet must equal
ending retained earnings on the statement of retained earnings.
LIQUIDITY RATIOS
Ratio
Working capital
PROFITABILITY RATIOS
Formula
Purpose
Current ratio
Current assets
Current liabilities
Discussion
Ch. 2, p. 68
Measures short-term
debt-paying ability
Ch. 2, p. 69
Measures short-term
debt-paying ability (cash
basis)
Ch. 2, p. 73
Cash provided by
operating activities
Average current liabilities
Inventory turnover
Measures liquidity of
inventory
Ch. 6, p. 278
Days in inventory
365 days
Inventory turnover
Ch. 6, p. 278
Measures liquidity of
receivables
Ch. 8, p. 371
Receivables turnover
Average collection
period
Acid-test ratio
365 days
Receivables turnover
Cash Short-term investments
Accounts receivable
Current liabilities
SOLVENCY RATIOS