Act 211,Chapter 3

Views:
 
Category: Entertainment
     
 

Presentation Description

No description available.

Comments

Presentation Transcript

Chapter 03:

Chapter 03 The Financial Reporting Process McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives:

Learning Objectives

Part A:

Part A Accrual-Basis Accounting 3- 3

LO1 Revenue and Expense Reporting:

3- 4 LO1 Revenue and Expense Reporting Accounting information – necessary for decision making. 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. Accrual-basis accounting records revenues when earned (the revenue recognition principle) and expenses with related revenues (the matching principle).

Revenue Recognition Principle:

3- 5 Revenue Recognition Principle Recognize revenue when it is earned 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. When does Carnival report revenue from the ticket sale?

Revenue Recognition Principle:

3- 6 Revenue Recognition Principle In November 2012??? No. Because it has not substantially fulfilled its obligation to Calvin. In April 2013??? Yes. Because it is in April 2013 that the cruise occurs.

Revenue Recognition Principle:

3- 7 3- 7 Revenue Recognition Principle Suppose that, anticipating the cruise, Calvin buys a Jimmy Buffet CD from Best Buy. Rather than paying cash, Calvin uses his Best Buy card to buy the CD on account. When does Best Buy recognize revenue?

Revenue Recognition Principle:

3- 8 3- 8 Revenue Recognition Principle Even though Best Buy doesn’t receive cash immediately from Calvin, it still records the revenue at the time it sells the CD.

PowerPoint Presentation:

Radford University - M. Chatham - Financial Accounting 211 i>clicker question

Matching Principle:

3- 10 3- 10 Matching Principle Expenses are reported with the revenues they help to generate

LO2 Accrual–Basis Compared with Cash–Basis Accounting:

3- 12 LO2 Accrual–Basis Compared with Cash–Basis Accounting

Accrual–Basis Compared with Cash–Basis Accounting:

3- 13 Accrual–Basis Compared with Cash–Basis Accounting

Accrual–Basis Compared with Cash–Basis Accounting:

3- 14 Accrual–Basis Compared with Cash–Basis Accounting

Part B:

Part B The Measurement Process

LO3 Adjusting Entries:

3- 16 3- 16 Closing Process LO3 Adjusting Entries Reporting Process

Purpose of Adjusting Entries:

3- 17 3- 17 Purpose of Adjusting Entries To record events that have occurred but which have not been recorded. To record revenues in the period earned. To record expenses in the period they are incurred in the generation of those revenues. To correctly state assets and liabilities in the balance sheet.

Grouping Adjusting Entries:

3- 18 3- 18 Grouping Adjusting Entries Prepayments (Deferrals): Prepaid expenses – we paid cash (or had an obligation to pay cash) for the purchase of an asset before we incurred the expense. Unearned revenues – we received cash and recorded a liability before we earned the revenue. Accruals: Accrued expenses – we paid cash after we incurred the expense and recorded a liability. Accrued revenues – we received cash after we earned the revenue and recorded an asset.

Prepaid Expenses:

3- 19 3- 19 Prepaid Expenses Costs of assets acquired in one period that will be expensed in a future period. Examples: Purchase of equipment or supplies, payment of rent in advance, payment of insurance in advance. Adjusting Entry: Debit expense account (increase an expense) Credit asset account (decrease an asset)

Example: Prepaid Rent:

3- 20 3- 20 Example: Prepaid Rent Prepaid rent expires $500 Adjusting entry $5,500 Remaining prepaid rent Jan. 31 $6,000 Cash paid for prepaid rent Jan. 1

Example: Prepaid Rent:

3- 21 3- 21 Example: Prepaid Rent

PowerPoint Presentation:

Radford University - M. Chatham - Financial Accounting 211 i>clicker question

Unearned Revenues:

3- 24 3- 24 Unearned Revenues Once a company has provided products or services, they can record revenue earned and reduce the obligation to the customer. The adjusting entry for an unearned revenue always includes a debit to a liability account (decrease a liability) and a credit to a revenue account (increase a revenue). Adjusting entry: Debit liability account (decrease a liability) Credit revenue account (increase a revenue)

Example: Unearned Training Revenue:

3- 25 3- 25 Example: Unearned Training Revenue Adjusting entry $540 Unearned revenue remains Jan. 31 $600 Cash received in advance Jan. 26 Services provided $60

Example: Unearned Training Revenue:

3- 26 3- 26 Example: Unearned Training Revenue

PowerPoint Presentation:

Radford University - M. Chatham - Financial Accounting 211 i>clicker question

Accrued Expenses:

3- 28 3- 28 Accrued Expenses When a company has incurred an expense but has not yet paid cash or recorded an obligation to pay, it still should record the expense. Examples: Accrued salaries, accrued interest, accrued utility costs. Adjusting entry: Debit expense account (increase an expense) Credit liability account (increase a liability)

Example: Accrued Utility Costs:

3- 29 3- 29 Example: Accrued Utility Costs At the end of January, Eagle receives a utility bill for $960 associated with operations in January. Eagle plans to pay the bill on February 6. Even though it will not pay the cash until February, Eagle must record the utility costs for January as an expense in January.

Example: Accrued Utility Costs:

3- 30 3- 30 Example: Accrued Utility Costs Adjusting entry $960 Utilities owed Jan. 31 $960 Cash paid for utilities Feb. 6 Utilities used $960 Jan. 1

Example: Accrued Utility Costs:

3- 31 3- 31 Example: Accrued Utility Costs

Accrued Revenues:

3- 32 3- 32 Accrued Revenues When a company has earned revenue but hasn’t yet received cash or recorded an amount receivable, it still should record the revenue. This is referred to as an accrued revenue. Examples: Interest receivable, accounts receivable Adjusting entry: Debit asset account (increase an asset) Credit revenue account (increase a revenue)

Example: Accounts Receivable:

3- 33 3- 33 Example: Accounts Receivable Suppose, Eagle provides $200 of golf training to customers from January 28 to January 31. However, it usually takes Eagle one week to mail bills to customers and another week for customers to pay. Therefore, Eagle expects to receive cash from these customers during February 8-14. Irrespective of when cash will be received, the revenue should be recognized in January.

Example: Accounts Receivable:

3- 34 3- 34 Example: Accounts Receivable Adjusting entry $200 Owed from customers Jan. 31 $200 Cash received from customers Feb. 8-14 Revenues earned $200 Jan. 28

Example: Accounts Receivable:

3- 35 3- 35 Example: Accounts Receivable

LO4 Post Adjusting Entries:

3- 37 3- 37 LO4 Post Adjusting Entries Post adjusting entries to the T-accounts in the general ledger to update the account balances. Prepare an adjusted trial balance. An adjusted trial balance is a list of all accounts and their balances after we have updated account balances for adjusting entries.

Unadjusted Trial Balance and Adjusted Trial Balance of Eagle Golf Academy:

3- 38 3- 38 Unadjusted Trial Balance and Adjusted Trial Balance of Eagle Golf Academy

Part C:

Part C The Reporting Process

LO5 Financial Statements:

3- 40 3- 40 LO5 Financial Statements

Income Statement:

3- 41 3- 41 Income Statement

Statement of Stockholders’ Equity:

3- 42 3- 42 Statement of Stockholders’ Equity

Classified Balance SheetSheet January 31 :

3- 43 3- 43 Classified Balance Sheet Sheet January 31 EAGLE GOLF ACADEMY Classified Balance 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.

Part D :

Part D The Closing Process

LO6 Closing Entries:

3- 45 LO6 Closing Entries Transfer the balance of all revenue, expense, and dividend accounts to the balance of retained earnings. Increase the retained earnings account by the amount of revenues and decrease retained earnings by the amount of expenses and dividends. The balance of each revenue, expense, and dividend account equals zero after closing entries. Do not affect the balances of permanent accounts other than retained earnings.

Closing the Books:

At the end of the accounting period, companies transfer the temporary account balances to the permanent stockholders’ equity account—Retained Earnings. Closing the Books

Closing the Books:

In addition to updating Retained Earnings to its correct ending balance, closing entries produce a zero balance in each temporary account. Closing the Books

Closing the Books:

Closing the Books

Closing the Books – Posting Closing Entries:

Closing the Books – Posting Closing Entries

Close to Retained Earnings:

3- 50 3- 50 Close to Retained Earnings This is not based on the Eagle Golf Academy example!

LO7 Post Closing Entries and Prepare Post–Closing Trial Balance:

3- 51 3- 51 LO7 Post Closing Entries and Prepare Post–Closing Trial Balance

PowerPoint Presentation:

Radford University - M. Chatham - Financial Accounting 211 i>clicker question

End of Chapter 03:

3- 53 End of Chapter 03 Good Luck on the Chapter 3 Homework!!!

authorStream Live Help