Transcript Reporting and Preparing Financial Statements

Chapter
ACCT 201
ACCT 201
3
Reporting and
Preparing Financial
Statements
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UAA – ACCT 201
Principles of Financial Accounting
Dr. Fred Barbee
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What Have We Learned?
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I have
some bad
news . . .
Dr. Fred Barbee
3
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What Have We Learned?
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I have
some good
news . . .
Dr. Fred Barbee
4
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We Have Learned . . .
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The basic accounting equation - and
the definition of each of its
components
Assets =
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Liabilities +
Owners’ Equity
Dr. Fred Barbee
5
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We Have Learned . . .
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Double-entry accounting
Assets = Liabilities + Owners’ Equity
Debits=Credits
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Dr. Fred Barbee
6
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We Have Learned . . .
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The debit/credit rules and how each
impacts accounting.
ncrease
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Debit = “Left”
side of an account
- Nothing more,
nothing less.
Acronym:
Dr. Fred Barbee
ebits
xpenses
ssets
7
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We Have Learned . . .
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The debit/credit rules and how each
impacts accounting.
evenue
quity
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iabilities
ncrease
Credit = “Right”
side of an account
- Nothing more,
nothing less.
Acronym:
redits
Dr. Fred Barbee
8
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We Have Learned . . .
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Income
Statement
Net Income
Stmt of
Retained
Earnings
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About the
basic
financial statements and
how they interrelate.
Retained
Earnings
Balance
Sheet
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We Have Learned . . .
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The first five
steps in the
accounting
cycle.
Prepare
Trial Balance
Post Transactions
Record Transactions
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Analyze Transactions
Examine Source Documents
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Preparing Financial Statements
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Financial
Statements
Prepare
Trial Balance
Post Transactions
Record Transactions
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Analyze Transactions
Examine Source Documents
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Problems in Accounting
Measurements
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The identification of the
accounting period.
The proper point in time to
recognize revenue.
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The appropriate moment to
record an expense.
Dr. Fred Barbee
13
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Identification of the
Accounting Period
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Time Period Principle
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For reporting purposes, an
organization’s life can be divided
into separate accounting periods
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months,
quarters,
years, etc.
Dr. Fred Barbee
15
Time Period Principle
B
E
G
I
N
N
I
N
G
Discrete (separate) accounting
periods.
96
97
98
99
00
01
02
03
Life of the Firm
04
05
E
N
D
I
N
G
Exh.
3.1
The Accounting Period
Annual
1
2
Semiannual
1
2
3
4
Quarter
1
2
3
4
5
6
7
Month
8
9
10
11
12
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The proper point in time
to recognize revenues.
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Revenue Recognition . . .
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Revenues are recorded when two
main criteria have been met:
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The earnings process is
substantially complete (a sale has
taken place or service has been
rendered); and
An exchange has taken place.
Dr. Fred Barbee
19
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Revenue Recognition . . .
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Revenue is generally recognized
At the time services are
performed; or
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When goods are sold and delivered
to a customer.
Dr. Fred Barbee
20
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The proper point in time
to recognize expenses.
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The Matching Principle
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The matching principle requires
that all expenses incurred to
generate the revenues
recognized in an accounting
period be matched with those
revenues.
Dr. Fred Barbee
22
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The Matching Principle
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Another view . . .
Let the expense follow the revenue.
First the revenue . . .
Then the expense.
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Sometimes referred to as “The
Expense Recognition Principle.”
Dr. Fred Barbee
23
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Accrual Basis
Accounting
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Revenue
Recognition
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Matching
Principle
Accrual Basis
Accounting
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Yikes!! What
is Accrual
Basis
Accounting?
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Accrual Basis Accounting
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Revenues are recognized
(recorded) when earned, without
regard to when cash is received;
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Expenses are recorded as
incurred without regard to when
they are paid.
Dr. Fred Barbee
28
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The time period principle
Gives rise to the need for
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The Revenue Recognition Principle
and the Matching Principle
Resulting in . . .
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The accrual basis of accounting
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Whoa! Let’s
back up a bit
here -- this
really does
make sense?
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Periodicity
Assumption
96
?
97
98
?
99
00
?
01
02
03
?
04
?
How do we recognize revenues?
Revenue Recognition
The
Principle
How do we recognize expenses?
The Matching Principle
Accrual Basis Accounting
05
?
Accrual Accounting . . .
BOP
EOP
Recognized
Revenues
Matched
Expenses
Recognized
Revenues

Matched
Expenses

Accrual Net
Income
Bertha, are
there any other
bases for
accounting?
Yikes! I don’t
know Claude. We
probably better
ask the professor!
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Absolutely.
You don’t
think we
would make it
that easy, do
you?
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Cash Basis Accounting
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Cash Basis Accounting
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With the cash basis . . .
Revenues are recognized in the
period cash is received; and
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Expenses are recognized in the
period when cash is paid out.
Dr. Fred Barbee
36
Cash Basis Accounting . . .
BOP
EOP
Revenue (Cash)
Expenses (Cash)
Revenue
(Cash)

Expenses
(Cash)

Cash Basis
Net Income
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Ahhh, but
there is yet
another one!
Fun! Fun!
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Modified Cash Basis
Accounting
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Modified Cash Basis
Accounting
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With the Modified Cash Basis . . .
Current period revenues and
expenses are treated exactly as in
the cash basis;
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Expenses covering more than one
accounting period are allocated
over the useful life of the asset.
Dr. Fred Barbee
40
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Exh.
3.4
Adjusting Accounts
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An adjusting entry is recorded to
bring an asset or liability account
balance to its proper amount.
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Dr. Fred Barbee
42
Framework for Adjustments
Exh.
3.4
Framework for Adjustments
Adjustments
Prepaid
Expenses
Depreciation
Unearned
Revenues
Accrued
Expenses
Accrued
Revenues
Transactions where cash is paid or
received before a related expense
or revenue is recognized.
Transactions where cash is paid or
received after a related expense
or revenue is recognized.
Framework for Adjustments
Framework for Adjustments
Adjustments
Prepaid
Expenses
Depreciation
Unearned
Revenues
Accrued
Expenses
Accrued
Revenues
Transaction where cash is paid
before a related expense is
recognized.
Exh.
3.4
Adjusting Prepaid Expenses
Resources paid
for prior to
receiving the
actual benefits.
Asset
Unadjusted
Balance
Credit
Adjustment
Here is the check
for my first
6 months’ rent.
Expense
Debit
Adjustment
Adjusting Prepaid Expenses
On December 1, 2001, Scott Company
paid $12,000 to cover rent for
December 2001 through May 2002.
Let’s look at the adjusting journal
entry needed on December 31, 2001.
GENERAL JOURNAL
Date
Description
Dec. 31 Rent Expense
Prepaid Rent
to record monthl y rent
Page 34
PR Debit Credit
2,000
2,000
Adjusting Prepaid Expenses
After posting, the accounts involved
look like this:
Prepaid Rent
12/1
$12,000 12/31
$2,000
Rent Expense
12/31
$2,000
Framework for Adjustments
Framework for Adjustments
Adjustments
Prepaid
Expenses
Depreciation
Unearned
Revenues
Accrued
Expenses
Accrued
Revenues
Transaction where cash is paid
before a related expense is
recognized.
Exh.
3.4
Adjusting for Depreciation
Depreciation is the process of
computing expense from allocating the
cost of plant and equipment over its
expected useful lives.
Straight-Line
Depreciation
=
Asset Cost – Salvage Value
Useful Life
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Adjusting for Depreciation
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On January 1, 2002, Monroe, Inc.
purchased oil pumping equipment for
$62,000 cash.
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The equipment has an estimated
useful life of 5 years.
Monroe expects to sell the equipment
at the end of its life for $2,000 cash.
Dr. Fred Barbee
51
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Adjusting for Depreciation
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Let’s compute depreciation expense
for the year ended December 31,
2002.
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2002
Depreciation =
Expense
=
Dr. Fred Barbee
$62,000 - $2,000
5
$12,000
52
Adjusting for Depreciation
Prepare the journal entry.
GENERAL JOURNAL
Date
Description
Dec. 31 Depreciation Exp.
Page 2
PR
Debit
Credit
12,000
Accum. Depreciation
To record a nnua l depreci a ti on
Accumulated depreciation is
a contra asset account.
12,000
Adjusting for Depreciation
After posting, the accounts involved
look like this:
Equipment
1/1
$62,000
Depreciation Expense
12/31
$12,000
Accumulated Depreciation
12/31 $12,000
Adjusting for Depreciation
Monroe, Inc.
Balance Sheet
At December 31, 2002
Assets
Cash
.
.
.
Equipment
Less: accumulated deprec.
.
.
.
Total Assets
$
$ 62,000
(12,000)
18,000
50,000
$ 249,800
The
equipment
account is
shown on
the balance
sheet like
this.
Framework for Adjustments
Framework for Adjustments
Adjustments
Prepaid
Expenses
Depreciation
Unearned
Revenues
Accrued
Expenses
Transaction where cash is
received before a related
revenue is recognized.
Accrued
Revenues
Exh.
3.4
Adjusting Unearned Revenue
Cash received in
advance of
providing
products or
services.
Liability
Debit
Adjustment
Unadjusted
Balance
Buy your season tickets for
all home basketball games NOW!
“GO SEAWOLVES”
Revenue
Credit
Adjustment
Adjusting Unearned Revenue
On October 1, 2002, UAA sold 1,000
season tickets to its 20 home basketball
games for $100 each. UAA makes the
following entry:
GENERAL JOURNAL
Date
Description
Oct. 1 Cash
Unearned Basketball Revenue
Recei pts for 1,000 sea son ti ck ets
Page 34
PR
Debit
Credit
100,000
100,000
Adjusting Unearned Revenue
On December 31, UAA has played 10 of its
regular home games, winning 8 and
losing 2.
GENERAL JOURNAL
Date
Dec. 31
Description
Page 34
PR
Prepare the appropriate Adjusting
Entry on December 31
Debit
Credit
Adjusting Unearned Revenue
On December 31, UAA has played 10 of its
regular home games, winning 8 and
losing 2.
GENERAL JOURNAL
Date
Description
Dec. 31 Unearned Basketball Revenue
Basketball Revenue
to recogni ze ba sk etba l l revenue
Page 34
PR
Debit
Credit
50,000
50,000
Adjusting Unearned Revenue
After posting, the accounts involved
look like this
Unearned Basketball
Revenue
12/31 $50,000 10/1 $100,000
Basketball Revenue
12/31
$50,000
Framework for Adjustments
Framework for Adjustments
Adjustments
Prepaid
Expenses
Depreciation
Unearned
Revenues
Accrued
Expenses
Accrued
Revenues
Transaction where cash is paid
after a related expense is
recognized.
Exh.
3.4
Adjusting for Accrued Expenses
Costs incurred in a
period that are
both unpaid and
unrecorded.
Expense
Debit
Adjustment
We’re about one-half
done with this job and
want to be paid!
Liability
Credit
Adjustment
Adjusting for Accrued Expenses
Denton, Inc. pays its employees every Friday.
Year-end, 12/31/02, falls on a Wednesday. As of
12/31/02, the employees have earned salaries of
$47,250 for Monday through Wednesday of the
week ended 1/02/03.
Last pay
date
12/26/02
12/1/02
12/31/02
Year end
Next pay
date
1/2/03
Record adjusting
journal entry.
Adjusting for Accrued Expenses
Denton, Inc. pays its employees every Friday.
Year-end, 12/31/02, falls on a Wednesday. As of
12/31/02, the employees have earned salaries of
$47,250 for Monday through Wednesday of the
week ended 1/02/03.
GENERAL JOURNAL
Date
Description
Dec. 31 Salaries Expense
Salaries Payable
to record sa l a ry a ccrua l
Page 34
PR
Debit
Credit
47,250
47,250
Adjusting for Accrued Expenses
After posting, the accounts involved
will look like this . . .
Salaries Expense
12/31 $47,250
Salaries Payable
12/31 $47,250
Framework for Adjustments
Framework for Adjustments
Adjustments
Prepaid
Expenses
Depreciation
Unearned
Revenues
Accrued
Expenses
Transaction where cash is
received after a related
revenue is recognized.
Accrued
Revenues
Exh.
3.4
Adjusting for Accrued Revenues
Revenues earned
in a period that
are both
unrecorded and
not yet received.
Asset
Debit
Adjustment
Yes, you can pay me
for your tax return
when I finish the work.
Revenue
Credit
Adjustment
Adjusting for Accrued Revenues
Smith & Jones, CPAs, had $31,200 of work completed but
not yet billed to clients. Let’s make the adjusting entry
necessary on December 31, 2002, the end of the
company’s fiscal year.
GENERAL JOURNAL
Date
Description
Dec. 31 Accounts Receivable
Service Revenues
Revenues ea rned but not recei ved
Page 34
PR
Debit
Credit
31,200
31,200
Adjusting for Accrued Revenues
After posting, the accounts involved
will look like this . . .
Accounts Receivable
12/31 $31,200
Service Revenue
12/31 $31,200
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Exhibit 3.18
Summary of Adjustments and
Financial Statement Links
Before Adjusting
Category
B/S
I/S
Adjusting
Entry
Expense
Dr. Expense
Cr. Asset
Unearned Revenue Liability
Revenue
Dr. Liability
Cr. Revenue
Accrued Expenses Liability
Expense
Dr. Expense
Cr. Liability
Accrued Revenues Asset
Revenue
Dr. Asset
Cr. Revenue
Prepaid Expense
Asset
Overstated
Understated
Exh.
3.18
FastForward
Trial Balance
December 31, 2001
Cash
Accounts receivable
Supplies
Prepaid insurance
Equipment
Accum. depr. - Equip.
Accounts payable
Salaries payable
Unearned revenue
Common Stock
Retained Earnings
Consulting revenue
Rental revenue
Depr. expense
Salaries expense
Insurance expense
Rent expense
Supplies expense
Utilities expense
Totals
Unadjusted
Trial Balance
Dr.
Cr.
3,950
9,720
2,400
26,000
Adjustments
Dr.
6,200
3,000
30,000
600
5,800
300
1,400
1,000
230
45,300
45,300
Exh.
3.19
Cr.
Adjusted
Trial Balance
Dr.
Cr.
First, the
initial
unadjusted
amounts are
added to the
worksheet.
FastForward
Trial Balance
December 31, 2001
Cash
Accounts receivable
Supplies
Prepaid insurance
Equipment
Accum. depr. - Equip.
Accounts payable
Salaries payable
Unearned revenue
Common Stock
Retained Earnings
Consulting revenue
Rental revenue
Depr. expense
Salaries expense
Insurance expense
Rent expense
Supplies expense
Utilities expense
Totals
Unadjusted
Trial Balance
Dr.
Cr.
3,950
9,720
2,400
26,000
Adjustments
Dr.
f
6,200
3,000 d
30,000
Exh.
3.19
Adjusted
Trial Balance
Dr.
Cr.
Cr.
1,800
b
a
1,050
100
c
375
e
210
d
f
250
1,800
250
600
5,800
300
1,400
1,000
230
45,300
45,300
c
e
a
375
210
100
b
1,050
3,785
3,785
Next,
FastForward’s
adjustments
are added.
Finally, the totals
are determined.
Cash
Accounts receivable
Supplies
Prepaid insurance
Equipment
Accum. depr. - Equip.
Accounts payable
Salaries payable
Unearned revenue
Common Stock
Retained Earnings
Consulting revenue
Rental revenue
Depr. expense
Salaries expense
Insurance expense
Rent expense
Supplies expense
Utilities expense
Totals
FastForward
Trial Balance
December 31, 2001
Unadjusted
Trial Balance
Dr.
Cr.
3,950
9,720
2,400
26,000
Adjustments
Dr.
f
6,200
3,000 d
30,000
Exh.
3.19
Cr.
1,800
b
a
1,050
100
c
375
e
210
Adjusted
Trial Balance
Dr.
Cr.
3,950
1,800
8,670
2,300
26,000
250
600
600
5,800
d
f
250
1,800
7,850
300
1,400
1,000
230
45,300
45,300
375
6,200
210
2,750
30,000
300
c
e
a
375
210
100
b
1,050
3,785
3,785
375
1,610
100
1,000
1,050
230
47,685
47,685
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Preparing Financial
Statements
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Let’s use
FastForward’s
adjusted trial
balance to prepare
the company’s
financial
statements.
Dr. Fred Barbee
77
Adjusted
Trial Balance
Dr.
Cr.
Cash
Accounts receivable
Supplies
Prepaid insurance
Equipment
Accum. depr. - Equip.
Accounts payable
Salaries payable
Unearned revenue
Common Stock
Retained Earnings
Consulting revenue
Rental revenue
Depr. expense
Salaries expense
Insurance expense
Rent expense
Supplies expense
Utilities expense
Totals
$
3,950
1,800
8,670
2,300
26,000
$
375
6,200
210
2,750
30,000
600
7,850
300
$
375
1,610
100
1,000
1,050
230
47,685
$
47,685
Step One:
Prepare the Income
Statement.
FastForward
Income Statement
For the Month Ended December 31,
Revenues:
Consulting revenue
$
Rental revenue
Operating expenses:
Depr. expense - Equip. $
375
Salaries expense
1,610
Insurance expense
100
Rent expense
1,000
Supplies expense
1,050
Utilities expense
230
Total expenses
Net income
$
Exh.
3.20
2001
7,850
300
4,365
3,785
FastForward
Income Statement
For the Month Ended December 31, 2001
Revenues:
Consulting revenue
$
7,850
Rental revenue
300
Operating expenses:
Depr. expense - Equip. $
375
Salaries expense
1,610
Insurance expense
100
Rent expense
1,000
Supplies expense
1,050
Utilities expense
230
Total expenses
4,365
Net income
$
3,785
Step Two:
Prepare the Statement
of Retained Earnings.
Exh.
3.20
Note: The Net Income
from the Income
Statement carries to the
Statement of Retained
Earnings.
FastForward
Statement of Retained Earnings
For the Month Ended December 31, 2001
Retained Earnings 12/1/01
Add: Net income
Less: Dividends
Retained Earnings 12/31/01
$
3,785
(600)
$ 3,185
Adjusted
Trial Balance
Dr.
Cr.
Cash
$
3,950
Accounts receivable
1,800
Supplies
8,670
Prepaid insurance
2,300
Equipment
26,000
Accum. depr. - Equip.
$
375
Accounts payable
6,200
Salaries payable
210
Unearned revenue
2,750
Common Stock
30,000
Retained Earnings
600
Consulting revenue
7,850
FastForward
Rental revenue
300
Statement of Retained375
Earnings
Depr. expense
Forexpense
the Month Ended December
31, 2001
Salaries
1,610
Insurance expense
100
Retained
Earnings 12/1/01
$
Rent expense
1,000
Supplies
expense
1,050
Add:
Net income
3,785
Utilities
expense
230
Less:
Dividends
(600)
Totals Earnings 12/31/01$ 47,685
$ 47,685
Retained
$ 3,185
Exh.
3.20
FastForward
Balance Sheet
December 31, 2001
Assets
Cash
Accounts receivable
Supplies
Prepaid insurance
Equipment
Less: accum. depr.
Total assets
$
26,000
(375)
3,950
1,800
8,670
2,300
$
25,625
42,345
$
9,160
$
30,000
3,185
42,345
Liabilities
Accounts payable
Salaries payable
Unearned revenue
Total liabilities
$
6,200
210
2,750
Owner's Equity
Common Stock
Retained Earnings
Total liabilities and equity
Step Three:
Prepare the Balance
Sheet.