Transcript Chapter 4

CH 04
Completing the Accounting Cycle
Learning Objectives
1.
2.
3.
4.
5.
6.
Work Sheet
Financial Statements
Adjusting and Closing Entries
Fiscal Year
Accounting Cycle
Financial Analysis and Interpretation
C4
C4 - 1
The work sheet
Accountants often use working papers for
collecting and summarizing Data they need
for preparing various analyses and reports.
The work sheet is a working paper that
accountants can use to summarize adjusting
entries and the account balances for the
financial statements.
C4 - 2
The Work Sheet
Trial Balance
Accounts
Dr
Cr
Adjustments
Dr
Cr
Adjusted TB
Dr
Cr
Prepared from general ledger.
Accounts are listed in order: A, L, OE, R, E
C4 - 3
The Work Sheet
Trial Balance
Accounts
Dr
Cr
Adjustments
Dr
Cr
Adjusted TB
Dr
Cr
Adjustments are entered here. Two possibilities:
1. Deferrals – Existing balances are changed.
2. Accruals – New information is entered.
C4 - 4
The Work Sheet
Trial Balance
Accounts
Dr
Cr
Adjustments
Dr
Cr
Adjusted TB
Dr
Cr
Adjustments are combined with the trial balance.
Account balances are now adjusted.
C4 - 5
NetSolutions - Work Sheet - Two Months Ended 12/31/99
Account
11
Cash
12Accounts Receivable
14
Supplies
15 Prepaid Insurance
17
Land
18 Office Equipment
19Accumulated Depr.
21 Accounts Payable
22 Wages Payable
23 Unearned Rent
31Chris Clark, Capital
32Chris Clark, Drawing
41 Fees Earned
42 Rent Revenue
51 Wages Expense
52 Rent Expense
53Depreciation Expense
54 Utilities Expense
55 Supplies Expense
56Insurance Expense
59 Misc. Expense
Trial Balance
Debit
Credit
2,065
2,220
2,000
2,400
20,000
1,800
Adjustments
Debit
Credit
(e) 500
(a) 1,240
(b) 100
0
900
0
360
25,000
2,065
2,720
760
2,300
20,000
1,800
(f) 50
50
900
250
240
25,000
(d) 250
(c) 120
4,000
4,000
16,340
0
4,275
1,600
0
985
800
0
455
42,600
Adj. Trial Balance
Debit
Credit
(e) 500
(c) 120
(d) 250
(f) 50
(a) 1,240
(b) 100
42,600
2,260
2,260
16,840
120
4,525
1,600
50
985
2,040
100
455
43,400
43,400
C4 - 6
NetSolutions - Work Sheet - Two Months Ended 12/31/99
Account
11
Cash
12Accounts Receivable
14
Supplies
15 Prepaid Insurance
17
Land
18 Office Equipment
19Accumulated Depr.
21 Accounts Payable
22 Wages Payable
23 Unearned Rent
31Chris Clark, Capital
32Chris Clark, Drawing
41 Fees Earned
42 Rent Revenue
51 Wages Expense
52 Rent Expense
53Depreciation Expense
54 Utilities Expense
55 Supplies Expense
56Insurance Expense
59 Misc. Expense
Trial Balance
Debit
Credit
2,065
2,220
2,000
2,400
20,000
1,800
Adjustments
Debit
Credit
(e) 500
(a) 1,240
(b) 100
0
900
0
360
25,000
2,065
2,720
760
2,300
20,000
1,800
(f) 50
50
900
250
240
25,000
(d) 250
(c) 120
4,000
4,000
16,340
0
4,275
1,600
0
985
800
0
455
42,600
Adj. Trial Balance
Debit
Credit
(e) 500
(c) 120
(d) 250
(f) 50
(a) 1,240
(b) 100
42,600
2,260
2,260
16,840
120
4,525
1,600
50
985
2,040
100
455
43,400
43,400
C4 - 7
NetSolutions - Work Sheet - Two Months Ended 12/31/99
Account
11
Cash
12Accounts Receivable
14
Supplies
15 Prepaid Insurance
17
Land
18 Office Equipment
19Accumulated Depr.
21 Accounts Payable
22 Wages Payable
23 Unearned Rent
31Chris Clark, Capital
32Chris Clark, Drawing
41 Fees Earned
42 Rent Revenue
51 Wages Expense
52 Rent Expense
53Depreciation Expense
54 Utilities Expense
55 Supplies Expense
56Insurance Expense
59 Misc. Expense
Trial Balance
Debit
Credit
2,065
2,220
2,000
2,400
20,000
1,800
Adjustments
Debit
Credit
(e) 500
(a) 1,240
(b) 100
0
900
0
360
25,000
2,065
2,720
760
2,300
20,000
1,800
(f) 50
50
900
250
240
25,000
(d) 250
(c) 120
4,000
4,000
16,340
0
4,275
1,600
0
985
800
0
455
42,600
Adj. Trial Balance
Debit
Credit
(e) 500
(c) 120
(d) 250
(f) 50
(a) 1,240
(b) 100
32,600
2,260
2,260
16,840
120
4,525
1,600
50
985
2,040
100
455
43,400
43,400
C4 - 8
NetSolutions - Work Sheet - Two Months Ended 12/31/99
Account
11
Cash
12Accounts Receivable
14
Supplies
15 Prepaid Insurance
17
Land
18 Office Equipment
19Accumulated Depr.
21 Accounts Payable
22 Wages Payable
23 Unearned Rent
31Chris Clark, Capital
32Chris Clark, Drawing
41 Fees Earned
42 Rent Revenue
51 Wages Expense
52 Rent Expense
53Depreciation Expense
54 Utilities Expense
55 Supplies Expense
56Insurance Expense
59 Misc. Expense
Trial Balance
Debit
Credit
2,065
2,220
2,000
2,400
20,000
1,800
Adjustments
Debit
Credit
(e) 500
(a) 1,240
(b) 100
0
900
0
360
25,000
2,065
2,720
760
2,300
20,000
1,800
(f) 50
50
900
250
240
25,000
(d) 250
(c) 120
4,000
4,000
16,340
0
4,275
1,600
0
985
800
0
455
42,600
Adj. Trial Balance
Debit
Credit
(e) 500
(c) 120
(d) 250
(f) 50
(a) 1,240
(b) 100
42,600
2,260
2,260
16,840
120
4,525
1,600
50
985
2,040
100
455
43,400
43,400
C4 - 9
NetSolutions - Work Sheet - Two Months Ended 12/31/99
Account
11
Cash
12Accounts Receivable
14
Supplies
15 Prepaid Insurance
17
Land
18 Office Equipment
19Accumulated Depr.
21 Accounts Payable
22 Wages Payable
23 Unearned Rent
31Chris Clark, Capital
32Chris Clark, Drawing
41 Fees Earned
42 Rent Revenue
51 Wages Expense
52 Rent Expense
53Depreciation Expense
54 Utilities Expense
55 Supplies Expense
56Insurance Expense
59 Misc. Expense
Trial Balance
Debit
Credit
2,065
2,220
2,000
2,400
20,000
1,800
Adjustments
Debit
Credit
(e) 500
(a) 1,240
(b) 100
0
900
0
360
25,000
2,065
2,720
760
2,300
20,000
1,800
(f) 50
50
900
250
240
25,000
(d) 250
(c) 120
4,000
4,000
16,340
0
4,275
1,600
0
985
800
0
455
42,600
Adj. Trial Balance
Debit
Credit
(e) 500
(c) 120
(d) 250
(f) 50
(a) 1,240
(b) 100
42,600
2,260
2,260
16,840
120
4,525
1,600
50
985
2,040
100
455
43,400
43,400
C4 - 10
NetSolutions - Work Sheet - Two Months Ended 12/31/99
Account
11
Cash
12Accounts Receivable
14
Supplies
15 Prepaid Insurance
17
Land
18 Office Equipment
19Accumulated Depr.
21 Accounts Payable
22 Wages Payable
23 Unearned Rent
31Chris Clark, Capital
32Chris Clark, Drawing
41 Fees Earned
42 Rent Revenue
51 Wages Expense
52 Rent Expense
53Depreciation Expense
54 Utilities Expense
55 Supplies Expense
56Insurance Expense
59 Misc. Expense
Trial Balance
Debit
Credit
2,065
2,220
2,000
2,400
20,000
1,800
Adjustments
Debit
Credit
(e) 500
(a) 1,240
(b) 100
0
900
0
360
25,000
2,065
2,720
760
2,300
20,000
1,800
(f) 50
50
900
250
240
25,000
(d) 250
(c) 120
4,000
4,000
16,340
0
4,275
1,600
0
985
800
0
455
42,600
Adj. Trial Balance
Debit
Credit
(e) 500
(c) 120
(d) 250
(f) 50
(a) 1,240
(b) 100
42,600
2,260
2,260
16,840
120
4,525
1,600
50
985
2,040
100
455
43,400
43,400
C4 - 11
NetSolutions - Work Sheet - Two Months Ended 12/31/99
Account
11
Cash
12Accounts Receivable
14
Supplies
15 Prepaid Insurance
17
Land
18 Office Equipment
19Accumulated Depr.
21 Accounts Payable
22 Wages Payable
23 Unearned Rent
31Chris Clark, Capital
32Chris Clark, Drawing
41 Fees Earned
42 Rent Revenue
51 Wages Expense
52 Rent Expense
53Depreciation Expense
54 Utilities Expense
55 Supplies Expense
56Insurance Expense
59 Misc. Expense
Trial Balance
Debit
Credit
2,065
2,220
2,000
2,400
20,000
1,800
Adjustments
Debit
Credit
(e) 500
(a) 1,240
(b) 100
0
900
0
360
25,000
2,065
2,720
760
2,300
20,000
1,800
(f) 50
50
900
250
240
25,000
(d) 250
(c) 120
4,000
4,000
16,340
0
4,275
1,600
0
985
800
0
455
42,600
Adj. Trial Balance
Debit
Credit
(e) 500
(c) 120
(d) 250
(f) 50
(a) 1,240
(b) 100
42,600
2,260
2,260
16,840
120
4,525
1,600
50
985
2,040
100
455
43,400
43,400
C4 - 12
NetSolutions - Work Sheet - Two Months Ended 12/31/99
Account
11
Cash
12Accounts Receivable
14
Supplies
15 Prepaid Insurance
17
Land
18 Office Equipment
19Accumulated Depr.
21 Accounts Payable
22 Wages Payable
23 Unearned Rent
31Chris Clark, Capital
32Chris Clark, Drawing
41 Fees Earned
42 Rent Revenue
51 Wages Expense
52 Rent Expense
53Depreciation Expense
54 Utilities Expense
55 Supplies Expense
56Insurance Expense
59 Misc. Expense
Trial Balance
Debit
Credit
2,065
2,220
2,000
2,400
20,000
1,800
Adjustments
Debit
Credit
(e) 500
(a) 1,240
(b) 100
0
900
0
360
25,000
2,065
2,720
760
2,300
20,000
1,800
(f) 50
50
900
250
240
25,000
(d) 250
(c) 120
4,000
4,000
16,340
0
4,275
1,600
0
985
800
0
455
42,600
Adj. Trial Balance
Debit
Credit
(e) 500
(c) 120
(d) 250
(f) 50
(a) 1,240
(b) 100
42,600
2,260
2,260
16,840
120
4,525
1,600
50
985
2,040
100
455
43,400
43,400
C4 - 13
NetSolutions - Work Sheet - Two Months Ended 12/31/99
Account
11
Cash
12Accounts Receivable
14
Supplies
15 Prepaid Insurance
17
Land
18 Office Equipment
19Accumulated Depr.
21 Accounts Payable
22 Wages Payable
23 Unearned Rent
31Chris Clark, Capital
32Chris Clark, Drawing
41 Fees Earned
42 Rent Revenue
51 Wages Expense
52 Rent Expense
53Depreciation Expense
54 Utilities Expense
55 Supplies Expense
56Insurance Expense
59 Misc. Expense
Trial Balance
Debit
Credit
2,065
2,220
2,000
2,400
20,000
1,800
Adjustments
Debit
Credit
(e) 500
(a) 1,240
(b) 100
0
900
0
360
25,000
2,065
2,720
760
2,300
20,000
1,800
(f) 50
50
900
250
240
25,000
(d) 250
(c) 120
4,000
4,000
16,340
0
4,275
1,600
0
985
800
0
455
42,600
Adj. Trial Balance
Debit
Credit
(e) 500
(c) 120
(d) 250
(f) 50
(a) 1,240
(b) 100
42,600
2,260
2,260
16,840
120
4,525
1,600
50
985
2,040
100
455
43,400
43,400
C4 - 14
NetSolutions - Work Sheet - Two Months Ended 12/31/99
Account
11
Cash
12Accounts Receivable
14
Supplies
15 Prepaid Insurance
17
Land
18 Office Equipment
19Accumulated Depr.
21 Accounts Payable
22 Wages Payable
23 Unearned Rent
31Chris Clark, Capital
32Chris Clark, Drawing
41 Fees Earned
42 Rent Revenue
51 Wages Expense
52 Rent Expense
53Depreciation Expense
54 Utilities Expense
55 Supplies Expense
56Insurance Expense
59 Misc. Expense
Net Income
Adj. Trial Balance
Debit
Credit
Income Statement
Debit
Credit
2,065
2,720
760
2,300
20,000
1,800
Balance Sheet
Debit
Credit
2,065
2,720
760
2,300
20,000
1,800
50
900
250
240
25,000
50
900
250
240
25,000
4,000
4,000
16,840
120
4,525
1,600
50
985
2,040
100
455
43,400
43,400
16,840
120
4,525
1,600
50
985
2,040
100
455
9,755
7,205
16,960
16,960
43,645
16,960
43,645
16,440
7,205
43,645
C4 - 15
NetSolutions - Work Sheet - Two Months Ended 12/31/99
Account
11
Cash
12Accounts Receivable
14
Supplies
15 Prepaid Insurance
17
Land
18 Office Equipment
19Accumulated Depr.
21 Accounts Payable
22 Wages Payable
23 Unearned Rent
31Chris Clark, Capital
32Chris Clark, Drawing
41 Fees Earned
42 Rent Revenue
51 Wages Expense
52 Rent Expense
53Depreciation Expense
54 Utilities Expense
55 Supplies Expense
56Insurance Expense
59 Misc. Expense
Net Income
Adj. Trial Balance
Debit
Credit
Income Statement
Debit
Credit
2,065
2,720
760
2,300
20,000
1,800
Balance Sheet
Debit
Credit
2,065
2,720
760
2,300
20,000
1,800
50
900
250
240
25,000
50
900
250
240
25,000
4,000
4,000
16,840
120
4,525
1,600
50
985
2,040
100
455
43,400
43,400
16,840
120
4,525
1,600
50
985
2,040
100
455
9,755
7,205
16,960
16,960
43,645
16,960
43,645
16,440
7,205
43,645
C4 - 16
NetSolutions - Work Sheet - Two Months Ended 12/31/99
Account
11
Cash
12Accounts Receivable
14
Supplies
15 Prepaid Insurance
17
Land
18 Office Equipment
19Accumulated Depr.
21 Accounts Payable
22 Wages Payable
23 Unearned Rent
31Chris Clark, Capital
32Chris Clark, Drawing
41 Fees Earned
42 Rent Income
51 Wages Expense
52 Rent Expense
53Depreciation Expense
54 Utilities Expense
55 Supplies Expense
56Insurance Expense
59 Misc. Expense
Net Income
Adj. Trial Balance
Debit
Credit
Income Statement
Debit
Credit
2,065
2,720
760
2,300
20,000
1,800
Balance Sheet
Debit
Credit
2,065
2,720
760
2,300
20,000
1,800
50
900
250
240
25,000
50
900
250
240
25,000
4,000
4,000
16,840
120
4,525
1,600
50
985
2,040
100
455
43,400
43,400
16,840
120
4,525
1,600
50
985
2,040
100
455
9,755
7,205
16,960
16,960
43,645
16,960
43,645
16,440
7,205
43,645
C4 - 17
NetSolutions
Income Statement
For Two Months Ended December 31, 2002
Fees earned
Rent revenue
Total revenues
Expenses:
Wages expense
Supplies expense
Rent expense
Utilities expense
Insurance expense
Depreciation expense
Miscellaneous expense
Total expenses
Net income
$16,840
120
$16,960
$ 4,525
2,040
1,600
985
100
50
455
9,755
$ 7,205
C4 - 18
NetSolutions
Statement of Owner’s Equity
For Two Months Ended December 31, 2002
Chris Clark, capital, November 1, 2002
Investment on November 1, 2002
Net income for November and December
Less withdrawals
Increase in owner’s equity
Chris Clark, capital, December 31, 2002
$
0
$15,000
7,205
$22,205
4,000
18,205
$18,205
C4 - 19
NetSolutions
Balance Sheet
December 31, 2002
ASSETS
Current assets:
Cash
$ 2,065
Accounts receivable
2,720
Supplies
760
Prepaid insurance
2,300
Total current assets
$ 7,845
Property, plant, and
equipment:
Land
$20,000
Office equipment
1,800
Less accum. depr.
(50)
Total property, plant,
and equipment
11,750
Total assets
$29,595
C4 - 20
NetSolutions
Balance Sheet
December 31, 2002
LIABILITIES
Current liabilities:
Accounts payable
Wages payable
Unearned rent
Total liabilities
OWNER’S EQUITY
Chris Clark, capital
Total liabilities and
owner’s equity
$ 900
250
240
$ 1,390
28,205
$29,595
C4 - 21
The Closing Process
Wages Expense
Bal. 4,525
Fees Earned
Income Summary
Rent Expense
Bal. 1,600
Bal. 16,840
Rent Revenue
Bal.
120
Depreciation Expense
Bal.
50
Utilities Expense
Bal.
985
Chris Clark, Capital
Bal. 15,000
Supplies Expense
Bal. 2,040
Note: The balances
shown are adjusted
balances before closing.
The following sequence
demonstrates the closing
process.
Insurance Expense
Bal.
100
Chris Clark, Drawing
Miscellaneous Expense
Bal.
455
Bal.
4,000
C4 - 22
The Closing Process
Wages Expense
Bal. 4,525
Fees Earned
Income Summary
Rent Expense
Bal. 1,600
16,960
Total
Revenues
Depreciation Expense
Bal.
50
Utilities Expense
Bal.
985
Chris Clark, Capital
16,840
Bal. 16,840
Rent Revenue
120
Bal.
120
Close Revenues
Bal. 25,000
Supplies Expense
Bal. 2,040
Insurance Expense
Bal.
100
Chris Clark, Drawing
Miscellaneous Expense
Bal.
455
Bal.
4,000
C4 - 23
The Closing Process
Wages Expense
Bal. 4,525
4,525
Rent Expense
Bal. 1,600
1,600
Depreciation Expense
Bal.
50
50
Utilities Expense
Bal.
985
985
Fees Earned
Income Summary
9,755
Total
Expenses
Miscellaneous Expense
Bal.
455
455
Total
Revenues
Chris Clark, Capital
Bal. 25,000
Supplies Expense
Bal. 2,040
2,040
Insurance Expense
Bal.
100
100
16,960
16,840
Bal. 16,840
Rent Revenue
120
Bal.
120
Close Revenues
Close Expenses
Chris Clark, Drawing
Bal.
4,000
C4 - 24
The Closing Process
Wages Expense
Bal. 4,525
4,525
Rent Expense
Bal. 1,600
1,600
Fees Earned
Income Summary
9,755
7,205
Depreciation Expense
Bal.
50
50
Utilities Expense
Bal.
985
985
Miscellaneous Expense
Bal.
455
455
Bal. 16,840
Rent Income
120
Bal.
120
Closed
Chris Clark, Capital
Bal. 15,000
Supplies Expense
Bal. 2,040
2,040
Insurance Expense
Bal.
100
100
16,960
16,840
Close Revenues
Close Expenses
7,205
Net Income
Close Income Summary
Chris Clark, Drawing
Bal.
4,000
C4 - 25
The Closing Process
Wages Expense
Bal. 4,525
4,525
Rent Expense
Bal. 1,600
1,600
Depreciation Expense
Bal.
50
50
Utilities Expense
Bal.
985
985
Supplies Expense
Bal. 2,040
2,040
Insurance Expense
Bal.
100
100
Miscellaneous Expense
Bal.
455
455
Fees Earned
Income Summary
9,755
16,960
7,205
16,840
Bal. 16,840
Rent Income
120
Bal.
120
Closed
Chris Clark, Capital
Bal. 15,000
4,000
Close Revenues
Close Expenses
7,205
Drawing
Net Income
Close Income Summary
Close Drawing
Chris Clark, Drawing
Bal. 4,000
4,000
Closed
C4 - 26
The Closing Process
Fees Earned
Wages Expense
Income Summary
Rent Expense
Rent Income
Depreciation Expense
Utilities Expense
Chris Clark, Capital
Supplies Expense
4,000
Bal. 15,000
7,205
Insurance Expense
Net Income
Bal. 18,205
Chris Clark, Drawing
Miscellaneous Expense
Drawing
All temporary accounts
now have zero balances
and are ready for the
next accounting period.
C4 - 27
NetSolutions
Post-Closing Trial Balance
December 31, 2002
Assets
11
12
14
15
17
18
19
21
22
23
31
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accum. Depreciation
Accounts Payable
Wages Payable
Unearned Rent
Chris Clark, Capital
2,065
2,720
760
2,300
20,000
1,800
29,645
50
900
250
240
28,205
29,645
C4 - 28
NetSolutions
Post-Closing Trial Balance
December 31, 2002
Liabilities
11
12
14
15
17
18
19
21
22
23
31
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accum. Depreciation
Accounts Payable
Wages Payable
Unearned Rent
Chris Clark, Capital
2,065
2,720
760
2,300
20,000
1,800
29,645
50
900
250
240
28,205
19,645
C4 - 29
NetSolutions
Post-Closing Trial Balance
December 31, 2002
Owner’s
Equity
11
12
14
15
17
18
19
21
22
23
31
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accum. Depreciation
Accounts Payable
Wages Payable
Unearned Rent
Chris Clark, Capital
2,065
2,720
760
2,300
20,000
1,800
29,645
50
900
250
240
28,205
29,645
C4 - 30
Manual Accounting Cycle
1. Transactions are analyzed
and recorded in journal.
Documents
Journal
C4 - 31
Manual Accounting Cycle
1. Transactions are analyzed
and recorded in journal.
Documents
Journal
2. Transactions are posted
from journal to ledger.
Journal
Ledger
C4 - 32
Manual Accounting Cycle
1. Transactions are analyzed
and recorded in journal.
Documents
Journal
2. Transactions are posted
from journal to ledger.
Journal
3. Trial balance is prepared,
adjustment data is organized,
work sheet is completed.
Ledger
Work Sheet
C4 - 33
Manual Accounting Cycle
1. Transactions are analyzed
and recorded in journal.
Documents
Journal
2. Transactions are posted
from journal to ledger.
Journal
3. Trial balance is prepared,
adjustment data is organized,
work sheet is completed.
4. Financial statements are
prepared and distributed.
Ledger
Work Sheet
IS
SOE
BS
SCF
Financial Statements
C4 - 34
Manual Accounting Cycle
5. Adjusting entries are
journalized and posted
to ledger.
Journal
Ledger
C4 - 35
Manual Accounting Cycle
5. Adjusting entries are
journalized and posted
to ledger.
Journal
Ledger
6. Closing entries are
journalized and posted
to ledger.
Journal
Ledger
C4 - 36
Manual Accounting Cycle
5. Adjusting entries are
journalized and posted
to ledger.
Journal
Ledger
6. Closing entries are
journalized and posted
to ledger.
Journal
Ledger
Assets
Liabilities
Owner’s Equity
7. Post-closing trial balance
is prepared.
Post-closing
Trial Balance
C4 - 37
Manual Accounting Cycle
5. Adjusting entries are
journalized and posted
to ledger.
Journal
Ledger
6. Closing entries are
journalized and posted
to ledger.
Journal
Ledger
Assets
Liabilities
Owner’s Equity
7. Post-closing trial balance
is prepared.
Post-closing
Trial Balance
8. Reports are analyzed and
interpreted for decisionmaking purposes.
?
C4 - 38
Computer Accounting Cycle
1. Transactions are analyzed
and entered in the computer.
Documents
Computer
C4 - 39
Computer Accounting Cycle
1. Transactions are analyzed
and entered in the computer.
Documents
Computer
2. Preliminary reports are
analyzed, adjustments are
prepared and entered in the
computer.
Computer
Reports
Computer
C4 - 40
Computer Accounting Cycle
1. Transactions are analyzed
and entered in the computer.
Documents
Computer
2. Preliminary reports are
analyzed, adjustments are
prepared and entered in the
computer.
3. Financial statements are
printed and distributed.
Computer
Reports
IS
SOE
Computer
BS
SCF
Financial Statements
C4 - 41
Computer Accounting Cycle
1. Transactions are analyzed
and entered in the computer.
Documents
Computer
2. Preliminary reports are
analyzed, adjustments are
prepared and entered in the
computer.
3. Financial statements are
printed and distributed.
Computer
Reports
SOE
IS
Computer
BS
SCF
Financial Statements
4. Reports are analyzed and
interpreted for decisionmaking purposes.
?
C4 - 42
Solvency Analysis
Solvency is the ability of a business to meet its
financial obligations (debts) as they are due.
Solvency analysis focuses on the ability of a
business to pay or otherwise satisfy its current
and noncurrent liabilities.
This ability is normally assessed by examining
balance sheet relationships.
C4 - 43
Solvency Measures — The Short-Term Creditor
Working Capital and Current Ratio
2003
Current assets
$550,000
Current liabilities 210,000
2002
$533,000
243,000
C4 - 44
Solvency Measures — The Short-Term Creditor
Working Capital and Current Ratio
2003
Current assets
$550,000
Current liabilities 210,000
Working capital
$340,000
2002
$533,000
243,000
$290,000
Use: To indicate the ability to meet
currently maturing obligations
C4 - 45
Solvency Measures — The Short-Term Creditor
Working Capital and Current Ratio
2003
Current assets
$550,000
Current liabilities 210,000
Working capital
$340,000
Current ratio
2.6 to 1
2002
$533,000
Divide
243,000
$290,000 current
2.2 to 1 assets by
current
liabilities
Use: To indicate the ability to meet
currently maturing obligations
C4 - 46
Working Capital and Current Ratio
Objective: Analyze and interpret the financial solvency of
a business by computing the working capital and the
current ratio.
Working Capital (WC)
Current Assets minus
Current Liabilities
Current Ratio (CR)
Current Assets
Current Liabilities
Example
NetSolutions
WC = $7,845 - $1,390 = $6,455
CR = $7,845 / $1,390 = 5.6
C4 - 47
HOME WORK
READING:
1. Illustrative problem
2. Self- examination questions
3. Multiple choice
Writing:
1. Exercise: 4-19; 4-21
2. Problem : 4-5A; 4-3B
Discussion:
1. Activity 4-2 Flanders Supplies Co.
C4 - 48
The end of Chapter 4.
C4 - 49