Chapter 4 | Completing the Accounting Cycle |
Learning Objectives
After studying this chapter, you should be able to:
1 Prepare a worksheet.
2 Explain the process of closing the books.
3 Describe the content and purpose of a post-closing trial balance.
4 State the required steps in the accounting cycle.
5 Explain the approaches to preparing correcting entries.
6 Identify the sections of a classified statement of financial position.
Feature Story
Recent events in the global capital markets underscore the importance of financial disclosure and transparency in markets around the world. As a result, many countries are examining their accounting and financial disclosure rules. As indicated in the graphic on the next page, financial regulators in over 120 countries now use the IFRSs issued by the International Accounting Standards Board (IASB).
What are the potential benefits of having countries use similar standards to prepare their financial accounts? One benefit is that investors can compare the results of competing companies from different countries. A second benefit is it enhances efforts to finance growth. Companies (particularly in developing and emerging nations) need to raise funds from outside their borders. Companies that use IFRS gain credibility in the marketplace, which reduces financing costs.
The IASB's stated objectives are as follows:
While the IASB resides in London, U.K., it is truly international in nature. The IASB's 15 full-time members are from every part of the globe.
However, the adoption of international accounting standards by all nations is not a foregone conclusion. Officials in some countries are reluctant to turn over control for accounting standard-setting to an International body. Disagreements also exist regarding who should be on the standard-setting body, how the body should be funded, and how its standards should be interpreted and enforced. Even those countries adopting IFRS sometimes make changes to the standards for implementation in their particular country. This raises concerns among some observers regarding whether the resulting financial statements are truly comparable.
Accounting standards may never be absolutely identical around the world. However, financial statement users have already benefitted from the increased comparability that has resulted from efforts to minimize differences in accounting standards.
Preview of Chapter 4
Financial statements help employees understand what is happening in the business. In Chapter 3, we prepared financial statements directly from the adjusted trial balance. However, with so many details involved in the end-of-period accounting procedures, it is easy to make errors. One way to minimize errors in the records and to simplify the end-of-period procedures is to use a worksheet.
In this chapter, we will explain the role of the worksheet in accounting. We also will study the remaining steps in the accounting cycle, especially the closing process, again using Pioneer Advertising Agency Inc. as an example. Then, we will consider correcting entries and classified statements of financial position. The content and organization of Chapter 4 are as follows.
LEARNING OBJECTIVE 1
Prepare a worksheet.
A worksheet is a multiple-column form used in the adjustment process and in preparing financial statements. As its name suggests, the worksheet is a working tool. It is not a permanent accounting record; it is neither a journal nor a part of the general ledger. The worksheet is merely a device used in preparing adjusting entries and the financial statements. Companies generally computerize worksheets using an electronic spreadsheet program such as Excel.
Illustration 4-1 shows the basic form of a worksheet and the five steps for preparing it. Each step is performed in sequence. The use of a worksheet is optional. When a company chooses to use one, it prepares financial statements from the worksheet. It enters the adjustments in the worksheet columns and then journalizes and posts the adjustments after it has prepared the financial statements. Thus, worksheets make it possible to provide the financial statements to management and other interested parties at an earlier date.
We will use the October 31 trial balance and adjustment data of Pioneer Advertising Agency Inc., from Chapter 3, to illustrate how to prepare a worksheet. We describe each step of the process and demonstrate these steps in Illustration 4-2 (page 160) and transparencies 4-3A, B, C, and D.
Enter all ledger accounts with balances in the account titles space. Enter debit and credit amounts from the ledger in the trial balance columns. Illustration 4-2 shows the worksheet trial balance for Pioneer Advertising Agency Inc. This trial balance is the same one that appears in Illustration 2-32 (page 71) and Illustration 3-3 (page 101).
Turn over the first transparency, Illustration 4-3A. When using a worksheet, enter all adjustments in the adjustments columns. In entering the adjustments, use applicable trial balance accounts. If additional accounts are needed, insert them on the lines immediately below the trial balance totals. A different letter identifies the debit and credit for each adjusting entry. The term used to describe this process is keying. Companies do not journalize the adjustments until after they complete the worksheet and prepare the financial statements.
The adjustments for Pioneer Advertising Agency Inc. are the same as the adjustments in Illustration 3-23 (page 115). They are keyed in the adjustments columns of the worksheet as follows.
(a) Pioneer debits an additional account, Supplies Expense, 1,500 for the cost of supplies used, and credits Supplies 1,500.
(b) Pioneer debits an additional account, Insurance Expense, 50 for the insurance that has expired, and credits Prepaid Insurance 50.
(c) The company needs two additional depreciation accounts. It debits Depreciation Expense 40 for the month's depreciation, and credits Accumulated Depreciation—Equipment 40.
(d) Pioneer debits Unearned Service Revenue 400 for services provided, and credits Service Revenue 400.
(e) Pioneer debits an additional account, Accounts Receivable, 200 for services provided but not billed, and credits Service Revenue 200.
(f) The company needs two additional accounts relating to interest. It debits Interest Expense 50 for accrued interest, and credits Interest Payable 50.
(g) Pioneer debits Salaries and Wages Expense 1,200 for accrued salaries, and credits an additional account, Salaries and Wages Payable, 1,200.
After Pioneer has entered all the adjustments, the adjustments columns are totaled to prove their equality.
(Note: Text continues on page 161, following acetate overlays.)
Turn over the second transparency, Illustration 4-3B. Pioneer determines the adjusted balance of an account by combining the amounts entered in the first four columns of the worksheet for each account. For example, the Prepaid Insurance account in the trial balance columns has a 600 debit balance and a 50 credit in the adjustments columns. The result is a 550 debit balance recorded in the adjusted trial balance columns. For each account, the amount in the adjusted trial balance columns is the balance that will appear in the ledger after journalizing and posting the adjusting entries. The balances in these columns are the same as those in the adjusted trial balance in Illustration 3-25 (page 117).
After Pioneer has entered all account balances in the adjusted trial balance columns, the columns are totaled to prove their equality. If the column totals do not agree, the financial statement columns will not balance and the financial statements will be incorrect.
Helpful Hint
Every adjusted trial balance amount must be extended to one of the four statement columns.
Turn over the third transparency, Illustration 4-3C. The fourth step is to extend adjusted trial balance amounts to the income statement and statement of financial position columns of the worksheet. Pioneer enters statement of financial position accounts in the appropriate statement of financial position debit and credit columns. For instance, it enters Cash in the statement of financial position debit column, and Notes Payable in the credit column. Pioneer extends Accumulated Depreciation—Equipment to the statement of financial position credit column; the reason is that accumulated depreciation is a contra asset account with a credit balance.
Because the worksheet does not have columns for the retained earnings statement, Pioneer extends the balance in Share Capital—Ordinary and Retained Earnings, if any, to the statement of financial position credit column. In addition, it extends the balance in Dividends to the statement of financial position debit column because it is an equity account with a debit balance.
The company enters the expense and revenue accounts such as Salaries and Wages Expense and Service Revenue in the appropriate income statement columns. Illustration 4-3C shows all of these extensions.
Turn over the fourth transparency, Illustration 4-3D. The company now must total each of the financial statement columns. The net income or loss for the period is the difference between the totals of the two income statement columns. If total credits exceed total debits, the result is net income. In such a case, as shown in Illustration 4-3D, the company inserts the words “Net Income” in the account titles space. It then enters the amount in the income statement debit column and the statement of financial position credit column. The debit amount balances the income statement columns; the credit amount balances the statement of financial position columns. In addition, the credit in the statement of financial position column indicates the increase in equity resulting from net income.
What if total debits in the income statement columns exceed total credits? In that case, the company has a net loss. It enters the amount of the net loss in the income statement credit column and the statement of financial position debit column.
After entering the net income or net loss, the company determines new column totals. The totals shown in the debit and credit income statement columns will match. So will the totals shown in the debit and credit statement of financial position columns. If either the income statement columns or the statement of financial position columns are not equal after the net income or net loss has been entered, there is an error in the worksheet. Illustration 4-3D shows the completed worksheet for Pioneer Advertising Agency Inc.
After a company has completed a worksheet, it has at hand all the data required for preparation of financial statements. The income statement is prepared from the income statement columns. The statement of financial position and retained earnings statement are prepared from the statement of financial position columns. Illustration 4-4 (page 162) shows the financial statements prepared from Pioneer's worksheet. At this point, the company has not journalized or posted adjusting entries. Therefore, ledger balances for some accounts are not the same as the financial statement amounts.
The amount shown for Share Capital—Ordinary on the worksheet does not change from the beginning to the end of the period unless the company issues additional ordinary shares during the period. Because there was no balance in Pioneer's Retained Earnings, the account is not listed on the worksheet. Only after dividends and net income (or loss) are posted to retained earnings does this account have a balance at the end of the first year of the business.
Using a worksheet, companies can prepare financial statements before they journalize and post adjusting entries. However, the completed worksheet is not a substitute for formal financial statements. The format of the data in the financial statement columns of the worksheet is not the same as the format of the financial statements. A worksheet is essentially a working tool of the accountant; companies do not distribute it to management and other parties.
Helpful Hint
Note that writing the explanation to the adjustment at the bottom of the worksheet is not required.
A worksheet is not a journal, and it cannot be used as a basis for posting to ledger accounts. To adjust the accounts, the company must journalize the adjustments and post them to the ledger. The adjusting entries are prepared from the adjustments columns of the worksheet. The reference letters in the adjustments columns and the explanations of the adjustments at the bottom of the worksheet help identify the adjusting entries. The journalizing and posting of adjusting entries follows the preparation of financial statements when a worksheet is used. The adjusting entries on October 31 for Pioneer Advertising Agency Inc. are the same as those shown in Illustration 3-23 (page 115).
DO IT!
Worksheet
Susan Elbe is preparing a worksheet. Explain to Susan how she should extend the following adjusted trial balance accounts to the financial statement columns of the worksheet.
Action Plan
Solution
Income statement debit column—Salaries and Wages Expense
Income statement credit column—Service Revenue
Statement of financial position debit column—Cash; Dividends
Statement of financial position credit column—Accumulated Depreciation; Accounts Payable
Related exercise material: BE4-1, BE4-2, BE4-3, E4-1, E4-2, E4-5, E4-6, and 4-1.
LEARNING OBJECTIVE 2
Explain the process of closing the books.
At the end of the accounting period, the company makes the accounts ready for the next period. This is called closing the books. In closing the books, the company distinguishes between temporary and permanent accounts.
Alternative Terminology
Temporary accounts are sometimes called nominal accounts, and permanent accounts are sometimes called real accounts.
Temporary accounts relate only to a given accounting period. They include all income statement accounts and the Dividends account. The company closes all temporary accounts at the end of the period.
In contrast, permanent accounts relate to one or more future accounting periods. They consist of all statement of financial position accounts, including equity accounts. Permanent accounts are not closed from period to period. Instead, the company carries forward the balances of permanent accounts into the next accounting period. Illustration 4-5 identifies the accounts in each category.
At the end of the accounting period, the company transfers temporary account balances to the permanent equity account, Retained Earnings, by means of closing entries.
Closing entries formally recognize in the ledger the transfer of net income (or net loss) and Dividends to Retained Earnings. The retained earnings statement shows the results of these entries. Closing entries also produce a zero balance in each temporary account. The temporary accounts are then ready to accumulate data in the next accounting period separate from the data of prior periods. Permanent accounts are not closed.
Journalizing and posting closing entries is a required step in the accounting cycle. (See Illustration 4-12 on page 171.) The company performs this step after it has prepared financial statements. In contrast to the steps in the cycle that you have already studied, companies generally journalize and post closing entries only at the end of the annual accounting period. Thus, all temporary accounts will contain data for the entire year.
In preparing closing entries, companies could close each income statement account directly to Retained Earnings. However, to do so would result in excessive detail in the permanent Retained Earnings account. Instead, companies close the revenue and expense accounts to another temporary account, Income Summary, and they transfer the resulting net income or net loss from this account to Retained Earnings.
Companies record closing entries in the general journal. A center caption, Closing Entries, inserted in the journal between the last adjusting entry and the first closing entry, identifies these entries. Then the company posts the closing entries to the ledger accounts.
Companies generally prepare closing entries directly from the adjusted balances in the ledger. They could prepare separate closing entries for each nominal account, but the following four entries accomplish the desired result more efficiently:
Helpful Hint
Dividends is closed directly to Retained Earnings and not to Income Summary because Dividends is not an expense.
Illustration 4-6 presents a diagram of the closing process. In it, the boxed numbers refer to the four entries required in the closing process.
If there were a net loss (because expenses exceeded revenues), entry 3 in Illustration 4-6 would be reversed: There would be a credit to Income Summary and a debit to Retained Earnings.
In practice, companies generally prepare closing entries only at the end of the annual accounting period. However, to illustrate the journalizing and posting of closing entries, we will assume that Pioneer Advertising Agency Inc. closes its books monthly. Illustration 4-7 shows the closing entries at October 31. (The numbers in parentheses before each entry correspond to the four entries diagrammed in Illustration 4-6.)
Note that the amounts for Income Summary in entries (1) and (2) are the totals of the income statement credit and debit columns, respectively, in the worksheet.
A couple of cautions in preparing closing entries: (1) Avoid unintentionally doubling the revenue and expense balances rather than zeroing them. (2) Do not close Dividends through the Income Summary account. Dividends are not an expense, and they are not a factor in determining net income.
Illustration 4-8 shows the posting of the closing entries and the underlining (ruling) of the accounts. Note that all temporary accounts have zero balances after posting the closing entries. In addition, you should realize that the balance in Retained Earnings represents the accumulated undistributed earnings of the corporation at the end of the accounting period. This balance is shown on the statement of financial position and is the ending amount reported on the retained earnings statement, as shown in Illustration 4-4. Pioneer uses the Income Summary account only in closing. It does not journalize and post entries to this account during the year.
Helpful Hint
The balance in Income Summary before it is closed must equal the net income or net loss for the period.
As part of the closing process, Pioneer totals, balances, and double-underlines its temporary accounts—revenues, expenses, and Dividends, as shown in T-account form in Illustration 4-8. It does not close its permanent accounts—assets, liabilities, and equity (Share Capital—Ordinary and Retained Earnings). Instead, Pioneer draws a single underline beneath the current-period entries for the permanent accounts. The account balance is then entered below the single rule and is carried forward to the next period (for example, see Retained Earnings).
DO IT!
Closing Entries
The worksheet for Hancock Company shows the following in the financial statement columns:
Prepare the closing entries at December 31 that affect equity.
Action Plan
Solution
Related exercise material: BE4-4, BE4-5, BE4-6, E4-4, E4-7, E4-8, E4-11, and 4-2.
ACCOUNTING ACROSS THE ORGANIZATION
Performing the Virtual Close
Technology has dramatically shortened the closing process. Recent surveys have reported that the average company now takes only six to seven days to close, rather than 20 days. But a few companies do much better. Some companies can perform a “virtual close”—closing within 24 hours on any day in the quarter. One company even improved its closing time by 85%. Not very long ago, it took 14 to 16 days. Managers at these companies emphasize that this increased speed has not reduced the accuracy and completeness of the data.
This is not just showing off. Knowing exactly where you are financially all of the time allows the company to respond faster than competitors. It also means that the hundreds of people who used to spend 10 to 20 days a quarter tracking transactions can now be more usefully employed on things such as mining data for business intelligence to find new business opportunities.
Source: “Reporting Practices: Few Do It All,” Financial Executive (November 2003), p. 11.
Who else benefits from a shorter closing process? (See page 206.)
LEARNING OBJECTIVE 3
Describe the content and purpose of a post-closing trial balance.
After Pioneer has journalized and posted all closing entries, it prepares another trial balance, called a post-closing trial balance, from the ledger. The post-closing trial balance lists permanent accounts and their balances after journalizing and posting of closing entries. The purpose of the post-closing trial balance is to prove the equality of the permanent account balances carried forward into the next accounting period. Since all temporary accounts will have zero balances, the post-closing trial balance will contain only permanent—statement of financial position—accounts.
Illustration 4-9 shows the post-closing trial balance for Pioneer Advertising Agency Inc.
Pioneer prepares the post-closing trial balance from the permanent accounts in the ledger. Illustration 4-10 shows the permanent accounts in Pioneer's general ledger.
A post-closing trial balance provides evidence that the company has properly journalized and posted the closing entries. It also shows that the accounting equation is in balance at the end of the accounting period. However, like the trial balance, it does not prove that Pioneer has recorded all transactions or that the ledger is correct. For example, the post-closing trial balance still will balance even if a transaction is not journalized and posted or if a transaction is journalized and posted twice.
The remaining accounts in the general ledger are temporary accounts, shown in Illustration 4-11. After Pioneer correctly posts the closing entries, each temporary account has a zero balance. These accounts are double-underlined to finalize the closing process.
LEARNING OBJECTIVE 4
State the required steps in the accounting cycle.
Illustration 4-12 summarizes the steps in the accounting cycle. You can see that the cycle begins with the analysis of business transactions and ends with the preparation of a post-closing trial balance.
Steps 1–3 may occur daily during the accounting period. Companies perform Steps 4–7 on a periodic basis, such as monthly, quarterly, or annually. Steps 8 and 9—closing entries, and a post-closing trial balance—usually take place only at the end of a company's annual accounting period.
There are also two optional steps in the accounting cycle. As you have seen, companies may use a worksheet in preparing adjusting entries and financial statements. In addition, they may use reversing entries, as explained below.
Some accountants prefer to reverse certain adjusting entries by making a reversing entry at the beginning of the next accounting period. A reversing entry is the exact opposite of the adjusting entry made in the previous period. Use of reversing entries is an optional bookkeeping procedure; it is not a required step in the accounting cycle. Accordingly, we have chosen to cover this topic in Appendix 4A at the end of the chapter.
LEARNING OBJECTIVE 5
Explain the approaches to preparing correcting entries.
Unfortunately, errors may occur in the recording process. Companies should correct errors, as soon as they discover them, by journalizing and posting correcting entries. If the accounting records are free of errors, no correcting entries are needed.
You should recognize several differences between correcting entries and adjusting entries. First, adjusting entries are an integral part of the accounting cycle. Correcting entries, on the other hand, are unnecessary if the records are error-free. Second, companies journalize and post adjustments only at the end of an accounting period. In contrast, companies make correcting entries whenever they discover an error. Finally, adjusting entries always affect at least one statement of financial position account and one income statement account. In contrast, correcting entries may involve any combination of accounts in need of correction. Correcting entries must be posted before closing entries.
To determine the correcting entry, it is useful to compare the incorrect entry with the correct entry. Doing so helps identify the accounts and amounts that should—and should not—be corrected. After comparison, the accountant makes an entry to correct the accounts. The following two cases for Mercato Co. illustrate this approach.
On May 10, Mercato Co. journalized and posted a $50 cash collection on account from a customer as a debit to Cash $50 and a credit to Service Revenue $50. The company discovered the error on May 20, when the customer paid the remaining balance in full.
Comparison of the incorrect entry with the correct entry reveals that the debit to Cash $50 is correct. However, the $50 credit to Service Revenue should have been credited to Accounts Receivable. As a result, both Service Revenue and Accounts Receivable are overstated in the ledger. Mercato makes the following correcting entry.
On May 18, Mercato purchased on account equipment costing $450. The transaction was journalized and posted as a debit to Equipment $45 and a credit to Accounts Payable $45. The error was discovered on June 3, when Mercato received the monthly statement for May from the creditor.
Comparison of the two entries shows that two accounts are incorrect. Equipment is understated $405, and Accounts Payable is understated $405. Mercato makes the following correcting entry.
Instead of preparing a correcting entry, it is possible to reverse the incorrect entry and then prepare the correct entry. This approach will result in more entries and postings than a correcting entry, but it will accomplish the desired result.
ACCOUNTING ACROSS THE ORGANIZATION
Yale Express Loses Some Transportation Bills
Yale Express (USA), a short-haul trucking firm, turned over much of its cargo to local truckers to complete deliveries. Yale collected the entire delivery charge; when billed by the local trucker, Yale sent payment for the final phase to the local trucker. Yale used a cutoff period of 20 days into the next accounting period in making its adjusting entries for accrued liabilities. That is, it waited 20 days to receive the local truckers' bills to determine the amount of the unpaid but incurred delivery charges as of the financial statement date.
On the other hand, Republic Carloading (USA), a nationwide and long-distance freight forwarder, frequently did not receive transportation bills from truckers to whom it passed on cargo until months after the year-end. In making its year-end adjusting entries, Republic waited for months in order to include all of these outstanding transportation bills.
When Yale Express merged with Republic Carloading, Yale's vice president employed the 20-day cutoff procedure for both firms. As a result, millions of dollars of Republic's accrued transportation bills went unrecorded. When the company detected the error and made correcting entries, these and other errors changed a reported profit of $1.14 million into a loss of $1.88 million!
What might Yale Express's vice president have done to produce more accurate financial statements without waiting months for Republic's outstanding transportation bills? (See page 206.)
LEARNING OBJECTIVE 6
Identify the sections of a classified statement of financial position.
The statement of financial position presents a snapshot of a company's financial position at a point in time. To improve users' understanding of a company's financial position, companies often use a classified statement of financial position. A classified statement of financial position groups together similar assets and similar liabilities, using a number of standard classifications and sections. This is useful because items within a group have similar economic characteristics. A classified statement of financial position generally contains the standard classifications listed in Illustration 4-17.
These groupings help financial statement readers determine such things as (1) the claims of long- and short-term creditors on the company's total assets, and (2) whether the company has enough assets to pay its debts as they come due. Many of these groupings can be seen in the statement of financial position of Cheng Corporation shown in Illustration 4-18 below. In the sections that follow, we explain each of these groupings.
Helpful Hint
Sometimes intangible assets are reported under a broader heading called “Other assets.”
Many companies have long-lived assets that do not have physical substance yet often are very valuable. We call these assets intangible assets. One significant intangible asset is goodwill. Others include patents, copyright, and trademarks or trade names that give the company exclusive right of use for a specified period of time. In Illustration 4-18, Cheng Corporation reported intangible assets of NT$3,100,000.
Illustration 4-19 shows the intangible assets of Nokia (FIN).
Property, plant, and equipment are assets with relatively long useful lives that a company is currently using in operating the business. This category (sometimes called fixed assets) includes land, buildings, machinery and equipment, delivery equipment, and furniture. In Illustration 4-18, Cheng Corporation reported property, plant, and equipment of NT$29,000,000.
Depreciation is the practice of allocating the cost of assets to a number of years. Companies do this by systematically assigning a portion of an asset's cost as an expense each year (rather than expensing the full purchase price in the year of purchase). The assets that the company depreciates are reported on the statement of financial position at cost less accumulated depreciation. The accumulated depreciation account shows the total amount of depreciation that the company has expensed thus far in the asset's life. In Illustration 4-18, Cheng Corporation reported accumulated depreciation of NT$5,000,000.
Illustration 4-20 presents the property, plant, and equipment of the LG Group (KOR).
Alternative Terminology
Long-term investments are often referred to simply as investments.
Long-term investments are generally, (1) investments in ordinary shares and bonds of other companies that are normally held for many years, and (2) non-current assets such as land or buildings that a company is not using in its operating activities. In Illustration 4-18, Cheng Corporation reported total long-term investments of NT$7,200,000 on its statement of financial position.
Weinberger AG (AUT) reported long-term investments in its statement of financial position as shown in Illustration 4-21 (page 176).
Current assets are assets that a company expects to convert to cash or use up within one year or its operating cycle, whichever is longer. In Illustration 4-18, Cheng Corporation had current assets of NT$22,100,000. For most businesses, the cutoff for classification as current assets is one year from the statement of financial position date. For example, accounts receivable are current assets because the company will collect them and convert them to cash within one year. Supplies is a current asset because the company expects to use it up in operations within one year.
Some companies use a period longer than one year to classify assets and liabilities as current because they have an operating cycle longer than one year. The operating cycle of a company is the average time that it takes to purchase inventory, sell it on account, and then collect cash from customers. For most businesses, this cycle takes less than a year, so they use a one-year cutoff. But, for some businesses, such as vineyards or airplane manufacturers, this period may be longer than a year. Except where noted, we will assume that companies use one year to determine whether an asset or liability is current or non-current.
Common types of current assets are (1) prepaid expenses (insurance and supplies), (2) inventories, (3) receivables (notes receivable, accounts receivable, and interest receivable), (4) short-term investments (such as short-term U.S. government securities), and (5) cash. On the statement of financial position, companies usually list these items in the reverse order in which they expect to convert them into cash.
Illustration 4-22 presents the current assets of Tesco (GBR).
As explained later in the chapter, a company's current assets are important in assessing its short-term debt-paying ability.
PEOPLE, PLANET, AND PROFIT INSIGHT
Creating Value
Appendix B at the end of this textbook contains the financial statements of Nestlé S.A. (CHE). Those financial statements report on the company's profitability and financial position. In addition to these financial statements, Nestlé, like many other companies today, also reports its achievements with regard to other, non-financial goals. In Nestlé's case, it calls these goals “Creating Shared Value.” Nestlé has set objectives to help society in areas most directly related to its particular expertise: nutrition, water and environmental sustainability, and rural development. The company evaluates its progress in each area using objective measures. Examples of measures used are provided below.
Nutrition: Products meeting or exceeding Nutritional Foundation profiling criteria (as percentage of total sales) and products with increase in nutritious ingredients or essential nutrients.
Water and Environmental Sustainability: Quality of water discharged (average mg COD/I) and packaging weight reduction (tonnes).
Rural Development: Farmers trained through capacity-building programs and suppliers audited for food safety, quality, and processing.
To learn more about Nestlé's efforts to create shared value, go to http://www.nestle.com/csv.
What are some implications of Nestlé's decision to measure its results using objective measures and then publicly report its results? (See page 206.)
DO IT!
Asset Section of Classified Statement of Financial Position
Baxter Hoffman recently received the following information related to Hoffman Company's December 31, 2014, statement of financial position.
Prepaid insurance | £ 2,300 |
Cash | 800 |
Equipment | 10,700 |
Inventory | £3,400 |
Accumulated depreciation—equipment | 2,700 |
Accounts receivable | 1,100 |
Prepare the asset section of Hoffman Company's classified statement of financial position.
Action Plan
Solution
Related exercise material: BE4-10 and 4-3.
The content of the equity section varies with the form of business organization. In a proprietorship, there is one capital account. In a partnership, there is a capital account for each partner. Corporations divide equity into two accounts—Share Capital—Ordinary and Retained Earnings. Corporations record shareholders' investments in the company by debiting an asset account and crediting the Share Capital—Ordinary account. They record in the Retained Earnings account income retained for use in the business. Corporations combine the Share Capital—Ordinary and Retained Earnings accounts and report them on the statement of financial position as equity. (We'll learn more about these corporation accounts in later chapters.) Unilever Group (GBR and NLD) recently reported its equity section as follows.
Non-current liabilities are obligations that a company expects to pay after one year. Liabilities in this category include bonds payable, mortgages payable, long-term notes payable, lease liabilities, and pension liabilities. Many companies report long-term debt maturing after one year as a single amount in the statement of financial position and show the details of the debt in notes that accompany the financial statements. Others list the various types of non-current liabilities. In Illustration 4-18, Cheng Corporation reported non-current liabilities of NT$11,300,000.
Illustration 4-24 shows the non-current liabilities that Siemens (DEU) reported in its statement of financial position.
Current liabilities generally are obligations that the company is to pay within the coming year or its operating cycle, whichever is longer. Common examples are accounts payable, wages payable, bank loans payable, interest payable, and taxes payable. Also included as current liabilities are current maturities of long-term obligations—payments to be made within the next year on long-term obligations. In Illustration 4-18, Cheng Corporation reported five different types of current liabilities, for a total of NT$16,050,000.
Ethics Note
A company that has more current assets than current liabilities can increase the ratio of current assets to current liabilities by using cash to pay off some current liabilities. This gives the appearance of being more liquid. Do you think this move is ethical?
Within the current liabilities section, companies usually list notes payable first, followed by accounts payable. Other items then follow in the order of their magnitude. In your homework, you should present notes payable first, followed by accounts payable.
Illustration 4-25 shows the current liabilities section adapted from the statement of financial position of Siemens (DEU).
Users of financial statements look closely at the relationship between current assets and current liabilities. This relationship is important in evaluating a company's liquidity—its ability to pay obligations expected to be due within the next year. When current assets exceed current liabilities, the likelihood for paying the liabilities is favorable. When the reverse is true, short-term creditors may not be paid, and the company may ultimately be forced into bankruptcy.
ACCOUNTING ACROSS THE ORGANIZATION
Can a Company Be Too Liquid?
There actually is a point where a company can be too liquid—that is, it can have too much working capital (current assets less current liabilities). While it is important to be liquid enough to be able to pay short-term bills as they come due, a company does not want to tie up its cash in extra inventory or receivables that are not earning the company money.
By one estimate, 1,000 large companies had cumulative excess working capital of $764 billion. Based on this figure, these companies could have reduced debt by 36% or increased net income by 9%. Given that managers throughout a company are interested in improving profitability, it is clear that they should have an eye toward managing working capital. They need to aim for a “Goldilocks solution”—not too much, not too little, but just right.
Source: K. Richardson, “Companies Fall Behind in Cash Management,” Wall Street Journal (June 19, 2007).
What can various company managers do to ensure that working capital is managed efficiently to maximize net income? (See page 206.)
Statement of Financial Position Classifications
The following accounts were taken from the financial statements of Callahan Company.
Match each of the following accounts to its proper statement of financial position classification, shown below. If the item would not appear on a statement of financial position, use “NA.”
Action Plan
Solution
__CL__ | Salaries and wages payable |
__NA__ | Service revenue |
__CL__ | Interest payable |
__IA__ | Goodwill |
__CA__ | Short-term investments |
__NCL__ | Mortgage payable (due in 3 years) |
__LTI__ | Investment in real estate |
__PPE__ | Equipment |
__PPE__ | Accumulated depreciation—equipment |
__NA__ | Depreciation expense |
__E__ | Share capital—ordinary |
__CL__ | Unearned service revenue |
Related exercise material: BE4-11, E4-14, E4-15, E4-16, E4-17, and 4-4.
Comprehensive DO IT!
At the end of its first month of operations, Watson Answering Service Inc. has the following unadjusted trial balance.
Action Plan
Instructions
(a) Prepare a worksheet.
(b) Prepare a classified statement of financial position assuming £35,000 of the notes payable are long-term.
(c) Journalize the closing entries.
Solution to Comprehensive
SUMMARY OF LEARNING OBJECTIVES
1 Prepare a worksheet. The steps in preparing a worksheet are as follows. (a) Prepare a trial balance on the worksheet. (b) Enter the adjustments in the adjustments columns. (c) Enter adjusted balances in the adjusted trial balance columns. (d) Extend adjusted trial balance amounts to appropriate financial statement columns. (e) Total the statement columns, compute net income (or net loss), and complete the worksheet.
2 Explain the process of closing the books. Closing the books occurs at the end of an accounting period. The process is to journalize and post closing entries and then underline and balance all accounts. In closing the books, companies make separate entries to close revenues and expenses to Income Summary, Income Summary to Retained Earnings, and Dividends to Retained Earnings. Only temporary accounts are closed.
3 Describe the content and purpose of a post-closing trial balance. A post-closing trial balance contains the balances in permanent accounts that are carried forward to the next accounting period. The purpose of this trial balance is to prove the equality of these balances.
4 State the required steps in the accounting cycle. The required steps in the accounting cycle are (1) analyze business transactions, (2) journalize the transactions, (3) post to ledger accounts, (4) prepare a trial balance, (5) journalize and post adjusting entries, (6) prepare an adjusted trial balance, (7) prepare financial statements, (8) journalize and post closing entries, and (9) prepare a post-closing trial balance.
5 Explain the approaches to preparing correcting entries. One way to determine the correcting entry is to compare the incorrect entry with the correct entry. After comparison, the company makes a correcting entry to correct the accounts. An alternative to a correcting entry is to reverse the incorrect entry and then prepare the correct entry.
6 Identify the sections of a classified statement of financial position. A classified statement of financial position categorizes assets as intangibles; property, plant, and equipment; long-term investments; and current assets. Liabilities are classified as either current or non-current. There is also an equity section, which varies with the form of business organization.
GLOSSARY
Classified statement of financial position A statement of financial position that contains standard classifications or sections. (p. 173).
Closing entries Entries made at the end of an accounting period to transfer the balances of temporary accounts to a permanent equity account, Retained Earnings. (p. 164).
Correcting entries Entries to correct errors made in recording transactions. (p. 171).
Current assets Assets that a company expects to convert to cash or use up within one year. (p. 176).
Current liabilities Obligations that a company expects to pay after one year. (p. 178).
Equity The combination of Share Capital—Ordinary and Retained Earnings accounts. Often referred to as the ownership claim of shareholders on total assets. It is to a corporation what owner's equity is to a proprietorship. (p. 178).
Income summary A temporary account used in closing revenue and expense accounts. (p. 164).
Intangible assets Non-current assets that do not have physical substance. (p. 174).
Liquidity The ability of a company to pay obligations expected to be due within the next year. (p. 179).
Long-term investments Generally, (1) investments in shares and bonds of other companies that companies normally hold for many years, and (2) non-current assets, such as land and buildings, not currently being used in operations. (p. 175).
Non-current liabilities Obligations that a company expects to pay after one year. (p. 178).
Operating cycle The average time that it takes to purchase inventory, sell it on account, and then collect cash from customers. (p. 176).
Permanent (real) accounts Accounts that relate to one or more accounting periods. Consist of all statement of financial position accounts. Balances are carried forward into the next accounting period. (p. 164).
Post-closing trial balance A list of permanent accounts and their balances after a company has journalized and posted closing entries. (p. 168).
Property, plant, and equipment Assets with relatively long useful lives and currently being used in operations. (p. 175).
Reversing entry An entry, made at the beginning of the next accounting period, that is the exact opposite of the adjusting entry made in the previous period. (p. 171).
Temporary (nominal) accounts Accounts that relate only to a given accounting period. Consist of all income statement accounts and the Dividends account. All temporary accounts are closed at the end of the accounting period. (p. 164).
Worksheet A multiple-column form that may be used in making adjusting entries and in preparing financial statements. (p. 158).
LEARNING OBJECTIVE 7
Prepare reversing entries.
After preparing the financial statements and closing the books, it is often helpful to reverse some of the adjusting entries before recording the regular transactions of the next period. Such entries are reversing entries. Companies make a reversing entry at the beginning of the next accounting period. Each reversing entry is the exact opposite of the adjusting entry made in the previous period. The recording of reversing entries is an optional step in the accounting cycle.
The purpose of reversing entries is to simplify the recording of a subsequent transaction related to an adjusting entry. For example, in Chapter 3 (page 113), the payment of salaries after an adjusting entry resulted in two debits: one to Salaries and Wages Payable and the other to Salaries and Wages Expense. With reversing entries, the company can debit the entire subsequent payment to Salaries and Wages Expense. The use of reversing entries does not change the amounts reported in the financial statements. What it does is simplify the recording of subsequent transactions.
Companies most often use reversing entries to reverse two types of adjusting entries: accrued revenues and accrued expenses. To illustrate the optional use of reversing entries for accrued expenses, we will use the salaries expense transactions for Pioneer Advertising Agency Inc. as illustrated in Chapters 2, 3, and 4. The transaction and adjustment data are as follows.
Illustration 4A-1 shows the entries with and without reversing entries.
The first three entries are the same whether or not Pioneer uses reversing entries. The last two entries are different. The November 1 reversing entry eliminates the 1,200 balance in Salaries and Wages Payable created by the October 31 adjusting entry. The reversing entry also creates a 1,200 credit balance in the Salaries and Wages Expense account. As you know, it is unusual for an expense account to have a credit balance. The balance is correct in this instance, though, because it anticipates that the entire amount of the first salaries and wages payment in the new accounting period will be debited to Salaries and Wages Expense. This debit will eliminate the credit balance. The resulting debit balance in the expense account will equal the salaries and wages expense incurred in the new accounting period (2,800 in this example).
If Pioneer makes reversing entries, it can debit all cash payments of expenses to the expense account. This means that on November 9 (and every payday) Pioneer can debit Salaries and Wages Expense for the amount paid, without regard to any accrued salaries and wages payable. Being able to make the same entry each time simplifies the recording process: The company can record subsequent transactions as if the related adjusting entry had never been made.
Illustration 4A-2 shows the posting of the entries with reversing entries.
A company can also use reversing entries for accrued revenue adjusting entries. For Pioneer Advertising Inc., the adjusting entry was Accounts Receivable (Dr.) 200 and Service Revenue (Cr.) 200. Thus, the reversing entry on November 1 is:
When Pioneer collects the accrued service revenue, it debits Cash and credits Service Revenue.
SUMMARY OF LEARNING OBJECTIVE FOR APPENDIX 4A
7 Prepare reversing entries. Reversing entries are the opposite of the adjusting entries made in the preceding period. Some companies choose to make reversing entries at the beginning of a new accounting period to simplify the recording of later transactions related to the adjusting entries. In most cases, only accrued adjusting entries are reversed.
Self-Test, Brief Exercises, Exercises, Problem Set A, and many more components are available for practice in WileyPLUS.
Note: All Questions, Exercises, and Problems marked with an asterisk relate to material in the appendix to the chapter.
SELF-TEST QUESTIONS
Answers are on page 206.
(a) The worksheet is essentially a working tool of the accountant.
(b) The worksheet is distributed to management and other interested parties.
(c) The worksheet cannot be used as a basis for posting to ledger accounts.
(d) Financial statements can be prepared directly from the worksheet before journalizing and posting the adjusting entries.
(a) income statement (Dr) and statement of financial position (Dr).
(b) income statement (Cr) and statement of financial position (Dr).
(c) income statement (Dr) and statement of financial position (Cr).
(d) income statement (Cr) and statement of financial position (Cr).
(a) A debit of $105,000 for Equipment in the statement of financial position column.
(b) A credit of $15,000 for Depreciation Expense—Equipment in the income statement column.
(c) A debit of $120,000 for Equipment in the statement of financial position column.
(d) A debit of $15,000 for Accumulated Depreciation—Equipment in the statement of financial position column.
(a) Service Revenue.
(b) Supplies.
(c) Prepaid Insurance.
(d) Accumulated Depreciation—Equipment.
(a) debited and Retained Earnings is credited.
(b) credited and Retained Earnings is debited.
(c) debited and Dividends is credited.
(d) credited and Dividends is debited.
(a) (4), (3), (2), (1)
(b) (1), (2), (3), (4)
(c) (3), (1), (4), (2)
(d) (3), (2), (1), (4)
(a) Permanent (real) accounts.
(b) Temporary (nominal) accounts.
(c) Accounts shown in the income statement columns of a worksheet.
(d) None of the above.
(a) journalizing and posting closing entries.
(b) preparing financial statements.
(c) journalizing the transactions.
(d) preparing a worksheet.
(a) prepare unadjusted trial balance, journalize transactions, post to ledger accounts, journalize and post adjusting entries.
(b) journalize transactions, prepare unadjusted trial balance, post to ledger accounts, journalize and post adjusting entries.
(c) journalize transactions, post to ledger accounts, prepare unadjusted trial balance, journalize and post adjusting entries.
(d) prepare unadjusted trial balance, journalize and post adjusting entries, journalize transactions, post to ledger accounts.
(a) Cash is overstated and Supplies is overstated.
(b) Cash is understated and Supplies is understated.
(c) Cash is understated and Supplies is overstated.
(d) Cash is overstated and Supplies is understated.
(a) debit Service Revenue $100 and credit Accounts Receivable $100.
(b) debit Accounts Receivable $100 and credit Service Revenue $100.
(c) debit Cash $100 and credit Service Revenue $100.
(d) debit Accounts Receivable $100 and credit Cash $100.
(a) accounts receivable, cash, prepaid insurance, inventories.
(b) cash, inventories, accounts receivable, prepaid insurance.
(c) prepaid insurance, inventories, accounts receivable, cash.
(d) inventories, cash, accounts receivable, prepaid insurance.
(a) property, plant, and equipment.
(b) land expense.
(c) a long-term investment.
(d) an intangible asset.
(a) current assets; non-current assets; property, plant, and equipment; intangible assets.
(b) tangible assets; property, plant, and equipment; long-term investments; current assets.
(c) current assets; long-term investments; tangible assets; intangible assets.
(d) intangible assets; property, plant, and equipment; long-term investments; current assets.
(a) by the reverse order of their expected conversion to cash.
(b) by importance.
(c) by longevity.
(d) alphabetically.
(a) Salaries and Wages Payable $1,400 and Salaries and Wages Expense $2,000.
(b) Salaries and Wages Payable $2,000 and Salaries and Wages Expense $1,400.
(c) Salaries and Wages Expense $3,400.
(d) Salaries and Wages Payable $3,400.
Go to the book's companion website, www.wiley.com/college/weygandt, for additional Self-Test Questions.
BRIEF EXERCISES
List the steps in preparing a worksheet. (LO 1)
BE4-1 The steps in using a worksheet are presented in random order below. List the steps in the proper order by placing numbers 1–5 in the blank spaces.
(a) _____ Prepare a trial balance on the worksheet.
(b) _____ Enter adjusted balances.
(c) _____ Extend adjusted balances to appropriate statement columns.
(d) _____ Total the statement columns, compute net income (loss), and complete the worksheet.
(e) _____ Enter adjustment data.
Prepare partial worksheet. (LO 1)
BE4-2 The ledger of Keo Company includes the following unadjusted balances: Prepaid Insurance $3,000, Service Revenue $61,000, and Salaries and Wages Expense $25,000. Adjusting entries are required for (a) expired insurance $1,300; (b) services provided $1,100, but unbilled and uncollected; and (c) accrued salaries payable $800. Enter the unadjusted balances and adjustments into a worksheet and complete the worksheet for all accounts. (Note: You will need to add the following accounts: Accounts Receivable, Salaries and Wages Payable, and Insurance Expense.)
Identify worksheet columns for selected accounts. (LO 1)
BE4-3 The following selected accounts appear in the adjusted trial balance columns of the worksheet for Cesar Company: Accumulated Depreciation; Depreciation Expense; Share Capital—Ordinary; Dividends; Service Revenue; Supplies; and Accounts Payable. Indicate the financial statement column (income statement Dr., statement of financial position Cr., etc.) to which each balance should be extended.
Prepare closing entries from ledger balances. (LO 2)
BE4-4 The ledger of Yilmaz Company contains the following balances: Retained Earnings 30,000; Dividends 2,000; Service Revenue 47,000; Salaries and Wages Expense 27,000; and Supplies Expense 5,000. Prepare the closing entries at December 31.
Post closing entries; underline and balance T-accounts. (LO 2)
BE4-5 Using the data in BE4-4, enter the balances in T-accounts, post the closing entries, and underline and balance the accounts.
Journalize and post closing entries using the three-column form of account. (LO 2)
BE4-6 The income statement for Mosquera Golf Club for the month ending July 31 shows Service Revenue $19,200, Salaries and Wages Expense $8,800, Maintenance and Repairs Expense $2,500, and Net Income $7,900. Prepare the entries to close the revenue and expense accounts. Post the entries to the revenue and expense accounts, and complete the closing process for these accounts using the three-column form of account.
Identify post-closing trial balance accounts. (LO 3)
BE4-7 Using the data in BE4-3, identify the accounts that would be included in a post-closing trial balance.
List the required steps in the accounting cycle in sequence. (LO 4)
BE4-8 The steps in the accounting cycle are listed in random order below. List the steps in proper sequence, assuming no worksheet is prepared, by placing numbers 1–9 in the blank spaces.
(a) _____ Prepare a trial balance.
(b) _____ Journalize the transactions.
(c) _____ Journalize and post closing entries.
(d) _____ Prepare financial statements.
(e) _____ Journalize and post adjusting entries.
(f) _____ Post to ledger accounts.
(g) _____ Prepare a post-closing trial balance.
(h) _____ Prepare an adjusted trial balance.
(i) _____ Analyze business transactions.
Prepare correcting entries. (LO 5)
BE4-9 At Rafeul Company, the following errors were discovered after the transactions had been journalized and posted. Prepare the correcting entries.
Prepare the current assets section of a statement of financial position. (LO 6)
BE4-10 The statement of financial position debit column of the worksheet for Kren Company includes the following accounts: Accounts Receivable £12,500; Prepaid Insurance £3,600; Cash £6,700; Supplies £5,200; and Short-Term Investments £4,900. Prepare the current assets section of the statement of financial position, listing the accounts in proper sequence.
Classify accounts on statement of financial position. (LO 6)
BE4-11 The following are the major statement of financial position classifications:
Match each of the following accounts to its proper statement of financial position classification.
Prepare reversing entries. (LO 7)
*BE4-12 At October 31, Prasad Company made an accrued expense adjusting entry of $1,680 for salaries. Prepare the reversing entry on November 1, and indicate the balances in Salaries and Wages Payable and Salaries and Wages Expense after posting the reversing entry.
Prepare a worksheet. (LO 1)
4-1 Janet Adams is preparing a worksheet. Explain to Janet how she should extend the following adjusted trial balance accounts to the financial statement columns of the worksheet.
Service Revenue | Accounts Receivable |
Notes Payable | Accumulated Depreciation |
Share Capital—Ordinary | Utilities Expense |
Prepare closing entries. (LO 2)
4-2 The worksheet for Olympic Company shows the following in the financial statement columns.
Dividends | $15,000 |
Share Capital—Ordinary | 70,000 |
Net Income | 47,000 |
Prepare the closing entries at December 31 that affect equity.
Prepare assets section of the statement of financial position. (LO 6)
4-3 Zermatt Company recently received the following information related to the company's December 31, 2014, statement of financial position.
Inventory | CHF 4,100 |
Cash | 3,900 |
Equipment | 21,700 |
Investments in ordinary shares (long-term) | 6,500 |
Short-term investments | CHF1,200 |
Accumulated depreciation | 5,200 |
Accounts receivable | 4,300 |
Prepare the assets section of Zermatt Company's classified statement of financial position.
Match accounts to statement of financial position classifications. (LO 6)
4-4 The following accounts were taken from the financial statements of Orville Company.
Match each of the accounts to its proper statement of financial position classification, as shown below. If the item would not appear on a statement of financial position, use “NA.”
EXERCISES
Complete the worksheet. (LO 1)
E4-1 The trial balance columns of the worksheet for Lim Company at June 30, 2014, are shown below and on the next page (in thousands).
Other data:
Instructions
Enter the trial balance on a worksheet and complete the worksheet.
Complete the worksheet. (LO 1)
E4-2 The adjusted trial balance columns of the worksheet for Albanese Company are as follows.
Instructions
Complete the worksheet.
Prepare financial statements from worksheet. (LO 1, 6)
E4-3 Worksheet data for Albanese Company are presented in E4-2. No ordinary shares were issued during April.
Instructions
Prepare an income statement, a retained earnings statement, and a classified statement of financial position, using euros as the currency.
Journalize and post closing entries and prepare a post-closing trial balance. (LO 2, 3)
E4-4 Worksheet data for Albanese Company are presented in E4-2.
Instructions
(a) Journalize the closing entries at April 30.
(b) Post the closing entries to Income Summary and Retained Earnings. Use T-accounts.
(c) Prepare a post-closing trial balance at April 30, using euros as the currency.
Prepare adjusting entries from a worksheet, and extend balances to worksheet columns. (LO 1)
E4-5 The adjustments columns of the worksheet for Munoz Company are shown on the next page.
Instructions
(a) Prepare the adjusting entries.
(b) Assuming the adjusted trial balance amount for each account is normal, indicate the financial statement column to which each balance should be extended.
Derive adjusting entries from worksheet data. (LO 1)
E4-6 Selected worksheet data for Freeman Company are presented below.
Instructions
(a) Fill in the missing amounts.
(b) Prepare the adjusting entries that were made.
Prepare closing entries, and prepare a post-closing trial balance. (LO 2, 3)
E4-7 Lanza Company had the following adjusted trial balance.
(a) Prepare closing entries at June 30, 2014.
(b) Prepare a post-closing trial balance.
Journalize and post closing entries, and prepare a post-closing trial balance. (LO 2, 3)
E4-8 Roth Company ended its fiscal year on July 31, 2014. The company's adjusted trial balance as of the end of its fiscal year is shown below.
Instructions
(a) Prepare the closing entries using page J15.
(b) Post to Retained Earnings and No. 350 Income Summary accounts. (Use the three-column form.)
(c) Prepare a post-closing trial balance at July 31.
Prepare financial statements. (LO 6)
E4-9 The adjusted trial balance for Roth Company is presented in E4-8.
Instructions
(a) Prepare an income statement and a retained earnings statement for the year.
(b) Prepare a classified statement of financial position at July 31.
Answer questions related to the accounting cycle. (LO 4)
BE4-10 Patrick Kellogg has prepared the following list of statements about the accounting cycle.
Instructions
Identify each statement as true or false. If false, indicate how to correct the statement.
Prepare closing entries. (LO 2)
E4-11 Selected accounts for Michelle's Salon are presented on the next page. All June 30 postings are from closing entries.
Instructions
(a) Prepare the closing entries that were made.
(b) Post the closing entries to Income Summary.
Prepare correcting entries. (LO 5)
E4-12 Joshua Company discovered the following errors made in January 2014.
Instructions
(a) Correct the errors by reversing the incorrect entry and preparing the correct entry.
(b) Correct the errors without reversing the incorrect entry.
Prepare correcting entries. (LO 5)
E4-13 Natal Company has an inexperienced accountant. During the first 2 weeks on the job, the accountant made the following errors in journalizing transactions. All entries were posted as made.
Instructions
Prepare the correcting entries.
Prepare a classified statement of financial position. (LO 6)
E4-14 The adjusted trial balance for Rego Bowling Alley at December 31, 2014, contains the following accounts.
Instructions
(a) Prepare a classified statement of financial position; assume that $15,000 of the note payable will be paid in 2015.
(b) Comment on the liquidity of the company.
E4-15 The following are the major statement of financial position classifications.
Intangible assets (IA) | Equity (E) |
Property, plant, and equipment (PPE) | Non-current liabilities (NCL) |
Long-term investments (LTI) | Current liabilities (CL) |
Current assets (CA) |
Instructions
Classify each of the following accounts taken from Geraldo Company's statement of financial position.
_____ Accounts payable | _____ Accumulated depreciation |
_____ Accounts receivable | _____ Buildings |
_____ Cash | _____ Land |
_____ Share capital—ordinary | _____ Long-term debt |
_____ Patents | _____ Supplies |
_____ Salaries and wages payable | _____ Equipment |
_____ Inventory | _____ Prepaid expenses |
_____ Investments |
Prepare a classified statement of financial position. (LO 6)
E4-16 The following items were taken from the financial statements of Sexton Company. (All amounts are in thousands.)
Long-term debt | £ 1,000 |
Prepaid insurance | 680 |
Equipment | 11,500 |
Long-term investments | 1,200 |
Short-term investments | 3,619 |
Notes payable (due in 2015) | 500 |
Cash | 2,668 |
Accumulated depreciation—equip. | £ 4,125 |
Accounts payable | 1,444 |
Notes payable (due after 2015) | 800 |
Share capital—ordinary | 10,000 |
Retained earnings | 4,750 |
Accounts receivable | 1,696 |
Inventory | 1,256 |
Instructions
Prepare a classified statement of financial position in good form as of December 31, 2014.
Prepare financial statements. (LO 1, 6)
E4-17 These financial statement items are for Emjay Company at year-end, July 31, 2014.
Salaries and wages payable | $ 2,080 |
Salaries and wages expense | 50,700 |
Utilities expense | 22,600 |
Equipment | 30,000 |
Accounts payable | 4,100 |
Service revenue | 62,000 |
Rent revenue | 8,500 |
Share capital—ordinary | 25,000 |
Notes payable (long-term) | $ 1,800 |
Cash | 14,200 |
Accounts receivable | 9,180 |
Accumulated depreciation—equip. | 6,000 |
Dividends | 3,000 |
Depreciation expense | 2,500 |
Retained earnings (beginning of the year) | 22,700 |
Instructions
(a) Prepare an income statement and a retained earnings statement for the year.
(b) Prepare a classified statement of financial position at July 31.
Use reversing entries. (LO 7)
*E4-18 Ronaldo Company pays salaries of R$9,000 every Monday for the preceding 5-day week (Monday through Friday). Assume December 31 falls on a Thursday, so Ronaldo's employees have worked 4 days without being paid.
Instructions
(a) Assume the company does not use reversing entries. Prepare the December 31 adjusting entry and the entry on Monday, January 4, when Ronaldo pays the payroll.
(b) Assume the company does use reversing entries. Prepare the December 31 adjusting entry, the January 1 reversing entry, and the entry on Monday, January 4, when Ronaldo pays the payroll.
Prepare closing and reversing entries. (LO 2, 4, 7)
*E4-19 On December 31, the adjusted trial balance of Select Employment Agency shows the following selected data.
Accounts Receivable | $24,500 |
Interest Expense | 8,300 |
Service Revenue | $93,800 |
Interest Payable | 1,300 |
Analysis shows that adjusting entries were made to (1) accrue $5,000 of service revenue and (2) accrue $1,300 interest expense.
(a) Prepare the closing entries for the temporary accounts shown above at December 31.
(b) Prepare the reversing entries on January 1.
(c) Post the entries in (a) and (b). Underline and balance the accounts. (Use T-accounts.)
(d) Prepare the entries to record (1) the collection of the accrued revenue on January 10 and (2) the payment of all interest due ($3,000) on January 15.
(e) Post the entries in (d) to the temporary accounts.
PROBLEMS: SET A
Prepare worksheet, financial statements, and adjusting and closing entries. (LO 1, 2, 6)
P4-1A Hercules Poirot began operations as a private investigator on January 1, 2014. The trial balance columns of the worksheet for Hercules Poirot, P.I., Inc. at March 31 are as follows.
Other data:
Instructions
(a) Adjusted trial balance €58,650
(a) Enter the trial balance on a worksheet and complete the worksheet.
(b) Net income €7,920
Total assets €49,970
(b) Prepare an income statement and a retained earnings statement for the quarter and a classified statement of financial position at March 31.
(c) Journalize the adjusting entries from the adjustments columns of the worksheet.
(d) Journalize the closing entries from the financial statement columns of the worksheet.
Complete worksheet; prepare financial statements, closing entries, and post-closing trial balance. (LO 1, 2, 3, 6)
P4-2A The adjusted trial balance columns of the worksheet for Watson Company are as follows.
Instructions
(a) Net income $22,500
(a) Complete the worksheet by extending the balances to the financial statement columns.
(b) Current assets $38,900
Current liabilities $16,600
(b) Prepare an income statement, a retained earnings statement, and a classified statement of financial position (amounts in U.S. dollars). (Note: $5,000 of the notes payable become due in 2015.)
(c) Prepare the closing entries. Use J14 for the journal page.
(d) Post the closing entries. Use the three-column form of account. Income Summary is account No. 350.
(e) Post-closing trial balance $84,900
(e) Prepare a post-closing trial balance.
Prepare financial statements, closing entries, and post-closing trial balance. (LO 1, 2, 3, 6)
P4-3A The completed financial statement columns of the worksheet for Hubbs Company are shown below.
(a) Net loss $1,800
Ending retained earnings $3,900
Total assets $38,600
(a) Prepare an income statement, a retained earnings statement, and a classified statement of financial position (amounts in U.S. dollars).
(b) Prepare the closing entries.
(c) Post the closing entries, and underline and balance the accounts. (Use T-accounts.) Income Summary is account No. 350.
(d) Post-closing trial balance $48,500
(d) Prepare a post-closing trial balance.
Complete worksheet; prepare classified statement of financial position, adjusting and closing entries, and post-closing trial balance. (LO 1, 2, 3, 6)
P4-4A Teresina Amusement Park has a fiscal year ending on September 30. Selected data from the September 30 worksheet are presented below.
Instructions
(a) Net income R$52,600
(a) Prepare a complete worksheet.
(b) Total current assets R$47,500
(b) Prepare a classified statement of financial position (amounts in Brazilian reais). (Note: R$15,000 of the mortgage note payable is due for payment in the next fiscal year.)
(c) Journalize the adjusting entries using the worksheet as a basis.
(d) Journalize the closing entries using the worksheet as a basis.
(e) Post-closing trial balance R$247,500
(e) Prepare a post-closing trial balance.
Complete all steps in accounting cycle. (LO 1, 2, 3, 4, 6)
P4-5A Lynda Hines opened Fresh Step Carpet Cleaners on March 1. During March, the following transactions were completed.
The chart of accounts for Fresh Step Carpet Cleaners contains the following accounts: No. 101 Cash, No. 112 Accounts Receivable, No. 126 Supplies, No. 130 Prepaid Insurance, No. 157 Equipment, No. 158 Accumulated Depreciation—Equipment, No. 201 Accounts Payable, No. 212 Salaries and Wages Payable, No. 311 Share Capital—Ordinary, No. 320 Retained Earnings, No. 332 Dividends, No. 350 Income Summary, No. 400 Service Revenue, No. 633 Gasoline Expense, No. 631 Supplies Expense, No. 711 Depreciation Expense, No. 722 Insurance Expense, and No. 726 Salaries and Wages Expense.
Instructions
(a) Journalize and post the March transactions. Use page J1 for the journal and the three-column form of account.
(b) Trial balance $25,500
(b) Prepare a trial balance at March 31 on a worksheet.
(c) Adjusted trial balance $27,270
(c) Enter the following adjustments on the worksheet and complete the worksheet.
(1) Unbilled revenue for services performed at March 31 was $750.
(2) Depreciation on equipment for the month was $300.
(3) One-twelfth of the insurance expired.
(4) An inventory count shows $250 of cleaning supplies on hand at March 31.
(5) Accrued but unpaid employee salaries were $720.
(d) Net income $3,810
Total assets $21,930
(d) Prepare the income statement and a retained earnings statement for March and a classified statement of financial position at March 31.
(e) Journalize and post adjusting entries. Use page J2 for the journal.
(f) Journalize and post closing entries and complete the closing process. Use page J3 for the journal.
(g) Post-closing trial balance $22,230
(g) Prepare a post-closing trial balance at March 31.
Analyze errors and prepare correcting entries and trial balance. (LO 5)
P4-6A Sara Yu, CA, was retained by Info Cable to prepare financial statements for April 2014. Yu accumulated all the ledger balances per Info's records and found the following.
Sara Yu reviewed the records and found the following errors.
Instructions
(a) Prepare an analysis of each error showing (1) the incorrect entry, (2) the correct entry, and (3) the correcting entry. Items 4 and 5 occurred on April 30, 2014.
(b) Trial balance £22,570
(b) Prepare a correct trial balance.
PROBLEMS: SET B
Prepare worksheet, financial statements, and adjusting and closing entries. (LO 1, 2, 6)
P4-1B The trial balance columns of the worksheet for Firmament Roofing at March 31, 2014, are as follows.
Other data:
Instructions
(a) Adjusted trial balance $21,330
(a) Enter the trial balance on a worksheet and complete the worksheet.
(b) Net income $3,300
Total assets $15,470
(b) Prepare an income statement and a retained earnings statement for the month of March and a classified statement of financial position at March 31. Ordinary shares were issued in exchange for $10,000 cash at the beginning of March.
(c) Journalize the adjusting entries from the adjustments columns of the worksheet.
(d) Journalize the closing entries from the financial statement columns of the worksheet.
Complete worksheet; prepare financial statements, closing entries, and post-closing trial balance. (LO 1, 2, 3, 6)
P4-2B The adjusted trial balance columns of the worksheet for Eagle Company, owned by Jeff Spiegel, are shown on the next page.
Instructions
(a) Net income £9,200
(a) Complete the worksheet by extending the balances to the financial statement columns.
(b) Current assets £19,600;
Current liabilities £10,600
(b) Prepare an income statement, a retained earnings statement, and a classified statement of financial position (amounts in British pounds). (Note: £3,000 of the notes payable become due in 2015.)
(c) Prepare the closing entries. Use J14 for the journal page.
(d) Post the closing entries. Use the three-column form of account. Income Summary is No. 350.
(e) Post-closing trial balance £46,600
(e) Prepare a post-closing trial balance.
Prepare financial statements, closing entries, and post-closing trial balance. (LO 1, 2, 3, 6)
P4-3B The completed financial statement columns of the worksheet for Lathrop Company are shown below and on the next page.
Instructions
(a) Ending retained earnings $29,600;
Total current assets $22,500
(a) Prepare an income statement, a retained earnings statement, and a classified statement of financial position (amounts in U.S. dollars).
(b) Prepare the closing entries.
(c) Post the closing entries, and underline and balance the accounts. (Use T-accounts.) Income Summary is account No. 350.
(d) Post-closing trial balance $50,500
(d) Prepare a post-closing trial balance.
Complete worksheet; prepare classified statement of financial position, adjusting and closing entries, and post-closing trial balance. (LO 1, 2, 3, 6)
P4-4B Carroll Management Services Inc. began business on January 1, 2014, with a capital investment of £120,000. The company manages condominiums for owners (Service Revenue) and rents space in its own office building (Rent Revenue). The trial balance and adjusted trial balance columns of the worksheet at the end of the first year are as follows.
Instructions
(a) Net income £24,700
(a) Prepare a complete worksheet.
(b) Total current assets £41,900
(b) Prepare a classified statement of financial position. (Note: £25,000 of the mortgage note payable is due for payment next year.)
(c) Journalize the adjusting entries.
(d) Journalize the closing entries.
(e) Post-closing trial balance £294,900
(e) Prepare a post-closing trial balance.
P4-5B Tom Brennan opened Brennan's Cleaning Service on July 1, 2014. During July the following transactions were completed.
July 1 | Shareholders invested $20,000 cash in the business in exchange for ordinary shares. |
1 | Purchased used truck for $12,000, paying $4,000 cash and the balance on account. |
3 | Purchased cleaning supplies for $2,100 on account. |
5 | Paid $1,800 cash on one-year insurance policy effective July 1. |
12 | Billed customers $5,900 for cleaning services. |
18 | Paid $1,500 cash on amount owed on truck and $1,400 on amount owed on cleaning supplies. |
20 | Paid $4,500 cash for employee salaries. |
21 | Collected $4,400 cash from customers billed on July 12. |
25 | Billed customers $8,000 for cleaning services. |
31 | Paid $350 for the monthly gasoline bill for the truck. |
31 | Declared and paid a $1,200 cash dividend. |
The chart of accounts for Brennan's Cleaning Service contains the following accounts: No. 101 Cash, No. 112 Accounts Receivable, No. 126 Supplies, No. 130 Prepaid Insurance, No. 157 Equipment, No. 158 Accumulated Depreciation—Equipment, No. 201 Accounts Payable, No. 212 Salaries and Wages Payable, No. 311 Share Capital—Ordinary, No. 320 Retained Earnings, No. 332 Dividends, No. 350 Income Summary, No. 400 Service Revenue, No. 633 Gasoline Expense, No. 631 Supplies Expense, No. 711 Depreciation Expense, No. 722 Insurance Expense, and No. 726 Salaries and Wages Expense.
Instructions
(a) Journalize and post the July transactions. Use page J1 for the journal and the three-column form of account.
(b) Trial balance $41,100
(b) Prepare a trial balance at July 31 on a worksheet.
(c) Adjusted trial balance $47,100
(c) Enter the following adjustments on the worksheet and complete the worksheet.
(1) Services provided but unbilled and uncollected at July 31 were $3,300.
(2) Depreciation on equipment for the month was $500.
(3) One-twelfth of the insurance expired.
(4) An inventory count shows $600 of cleaning supplies on hand at July 31.
(5) Accrued but unpaid employee salaries were $2,200.
(d) Net income $8,000;
Total assets $36,200
(d) Prepare the income statement and retained earnings statement for July and a classified statement of financial position at July 31.
(e) Journalize and post adjusting entries. Use page J2 for the journal.
(f) Journalize and post closing entries and complete the closing process. Use page J3 for the journal.
(g) Post-closing trial balance $36,700
(g) Prepare a post-closing trial balance at July 31.
COMPREHENSIVE PROBLEM: CHAPTERS 2 TO 4
CP4 Mary Coleman opened Mary's Maids Cleaning Service on July 1, 2014. During July, the company completed the following transactions.
July 1 | Shareholders invested $15,000 cash in the business in exchange for ordinary shares. |
1 | Purchased a used truck for $10,000, paying $3,000 cash and the balance on account. |
3 | Purchased cleaning supplies for $1,700 on account. |
5 | Paid $1,800 on a one-year insurance policy, effective July 1. |
12 | Billed customers $4,200 for cleaning services. |
18 | Paid $1,000 of amount owed on truck, and $400 of amount owed on cleaning supplies. |
20 | Paid $1,900 for employee salaries. |
21 | Collected $2,400 from customers billed on July 12. |
25 | Billed customers $2,100 for cleaning services. |
31 | Paid gasoline for the month on the truck, $400. |
31 | Declared and paid a $500 cash dividend. |
The chart of accounts for Mary's Maids Cleaning Service contains the following accounts: No. 101 Cash, No. 112 Accounts Receivable, No. 126 Supplies, No. 130 Prepaid Insurance, No. 157 Equipment, No. 158 Accumulated Depreciation—Equipment, No. 201 Accounts Payable, No. 212 Salaries and Wages Payable, No. 311 Share Capital—Ordinary, No. 320 Retained Earnings, No. 332 Dividends, No. 350 Income Summary, No. 400 Service Revenue, No. 633 Gasoline Expense, No. 631 Supplies Expense, No. 711 Depreciation Expense, No. 722 Insurance Expense, and No. 726 Salaries and Wages Expense.
Instructions
(a) Journalize and post the July transactions. Use page J1 for the journal.
(b) Trial balance totals $28,600
(b) Prepare a trial balance at July 31 on a worksheet.
(c) Enter the following adjustments on the worksheet, and complete the worksheet.
(1) Unbilled fees for services performed at July 31 were $1,300.
(2) Depreciation on equipment for the month was $200.
(3) One-twelfth of the insurance expired.
(4) An inventory count shows $280 of cleaning supplies on hand at July 31.
(5) Accrued but unpaid employee salaries were $630.
(d) Net income $2,900
Total assets $25,330
(d) Prepare the income statement and retained earnings statement for July, and a classified statement of financial position at July 31, 2014.
(e) Journalize and post the adjusting entries. Use page J2 for the journal.
(f) Journalize and post the closing entries, and complete the closing process. Use page J3 for the journal.
(g) Prepare a post-closing trial balance at July 31.
(g) Trial balance totals $25,530
(Note: This is a continuation of the Cookie Chronicle from Chapters 1-3.)
CCC4 Natalie had a very busy December. At the end of the month, after journalizing and posting the December transactions and adjusting entries, Natalie prepared the following adjusted trial balance.
Using the information in the adjusted trial balance, do the following.
(a) Prepare an income statement and a retained earnings statement for the 2 months ended December 31, 2014, and a classified statement of financial position at December 31, 2014. The note payable has a stated interest rate of 6%, and the principal and interest are due on November 16, 2016.
(b) Natalie has decided that her year-end will be December 31, 2014. Prepare closing entries as of December 31, 2014.
(c) Prepare a post-closing trial balance.
Broadening Your PERSPECTIVE
Financial Reporting and Analysis
Financial Reporting Problem: Samsung Electronics Co., Ltd.
BYP4-1 The financial statements of Samsung are presented in Appendix A at the end of this textbook. The complete annual report, including the notes to the financial statements, is available in the Investor Relations section of the company's website, www.samsung.com.
Instructions
Answer the questions below using the statement of financial position and the notes to consolidated financial statements section.
(a) What were Samsung's total current assets at December 31, 2010, and December 31, 2009?
(b) Are assets that Samsung included under current assets listed in proper order? Explain.
(c) How are Samsung's assets classified?
(d) What are “cash equivalents”?
(e) What were Samsung's total current liabilities at December 31, 2010, and December 31, 2009?
Comparative Analysis Problem: Nestlé S.A. vs. Zetar plc
BYP4-2 Nestlé's financial statements are presented in Appendix B. Financial statements for Zetar are presented in Appendix C.
Instructions
(a) Based on the information contained in these financial statements, determine each of the following for Nestlé at December 31, 2010, and for Zetar at April 30, 2011.
(1) Total current assets.
(2) Net amount of property, plant, and equipment (land, buildings, and equipment).
(3) Total current liabilities.
(4) Total equity.
(b) What conclusions concerning the companies' respective financial positions can be drawn from the companies' current assets and current liabilities?
Real-World Focus
BYP4-3 Numerous companies have established home pages on the Internet, e.g., Capt'n Eli Root Beer Company (www.captneli.com/rootbeer.php) and Kodak (www.kodak.com).
Instructions
Examine the home pages of any two companies and answer the following questions.
(a) What type of information is available?
(b) Is any accounting-related information presented?
(c) Would you describe the home page as informative, promotional, or both? Why?
Decision-Making Across the Organization
BYP4-4 Everclean Janitorial Service was started 2 years ago by Lauren Baird. Because business has been exceptionally good, Lauren decided on July 1, 2014, to expand operations by acquiring an additional truck and hiring two more assistants. To finance the expansion, Lauren obtained on July 1, 2014, a $25,000, 10% bank loan, payable $10,000 on July 1, 2015, and the balance on July 1, 2016. The terms of the loan require the borrower to have $10,000 more current assets than current liabilities at December 31, 2014. If these terms are not met, the bank loan will be refinanced at 15% interest. At December 31, 2014, the accountant for Everclean Janitorial Service prepared the statement of financial position shown below.
Lauren presented the statement of financial position to the bank's loan officer on January 2, 2015, confident that the company had met the terms of the loan. The loan officer was not impressed. She said, “We need financial statements audited by a public accountant.” A public accountant was hired and immediately realized that the statement of financial position had been prepared from a trial balance and not from an adjusted trial balance. The adjustment data at the statement of financial position date consisted of the following.
Instructions
With the class divided into groups, answer the following.
(a) Prepare a correct statement of financial position.
(b) Were the terms of the bank loan met? Explain.
Communication Activity
BYP4-5 The accounting cycle is important in understanding the accounting process.
Instructions
Write a memo to your instructor that lists the steps of the accounting cycle in the order they should be completed. End with a paragraph that explains the optional steps in the cycle.
BYP4-6 As the controller of Take No Prisoners Perfume Company, you discover a misstatement that overstated net income in the prior year's financial statements. The misleading financial statements appear in the company's annual report which was issued to banks and other creditors less than a month ago. After much thought about the consequences of telling the president, Phil McNally, about this misstatement, you gather your courage to inform him. Phil says, “Hey! What they don't know won't hurt them. But, just so we set the record straight, we'll adjust this year's financial statements for last year's misstatement. We can absorb that misstatement better in this year than in last year anyway! Just don't make such a mistake again.”
Instructions
(a) Who are the stakeholders in this situation?
(b) What are the ethical issues in this situation?
(c) What would you do as a controller in this situation?
Answers to Chapter Questions
Answers to Insight and Accounting Across the Organization Questions
p. 168 Performing the Virtual Close Q: Who else benefits from a shorter closing process? A: Investors benefit from a shorter closing process. The shorter the closing, the sooner the company can report its financial results. This means that the financial information is more timely and therefore more relevant to investors.
p. 173 Yale Express Loses Some Transportation Bills Q: What might Yale Express's vice president have done to produce more accurate financial statements without waiting months for Republic's outstanding transportation bills? A: Yale's vice president could have engaged his accountants and auditors to prepare an adjusting entry based on an estimate of the outstanding transportation bills. (The estimate could have been made using past experience and the current volume of business.)
p. 177 Creating Value Q: What are some implications of Nestlé's decision to measure its results using objective measures, and then publicly report its results? A: By choosing to measure its results using objective measures, Nestlé is better able to set goals and evaluate progress. By publishing these results, Nestlé strengthens the perception to its employees and to the public that it is committed to these goals.
p. 179 Can a Company Be Too Liquid? Q: What can various company managers do to ensure that working capital is managed efficiently to maximize net income? A: Marketing and sales managers must understand that by extending generous repayment terms, they are expanding the company's receivables balance and slowing the company's cash flow. Production managers must strive to minimize the amount of excess inventory on hand. Managers must coordinate efforts to speed up the collection of receivables, while also ensuring that the company pays its payables on time but never too early.
Answers to Self-Test Questions
1. b 2. c 3. c 4. a 5. b 6. c 7. a 8. d 9. c 10. d 11. b 12. c 13. c 14. d 15. a *16. c
The classified statement of financial position, although generally required internationally, contains certain variations in format when reporting under GAAP.
Key Points
Looking to the Future
The IASB and the FASB are working on a project to converge their standards related to financial statement presentation. A key feature of the proposed framework is that each of the statements will be organized in the same format, to separate an entity's financing activities from its operating and investing activities and, further, to separate financing activities into transactions with owners and creditors. Thus, the same classifications used in the statement of financial position would also be used in the income statement and the statement of cash flows. The project has three phases. You can follow the joint financial presentation project at the following link: http://www.fasb.org/project/financial_statement_presentation.shtml.
GAAP Practice
GAAP Self-Test Questions
(a) Assets equals liabilities plus stockholders' equity.
(b) Under IFRS, companies sometimes net liabilities against assets to report “net assets.”
(c) The FASB and IASB are working on a joint conceptual framework project.
(d) Under GAAP, the statement of financial position is usually referred to as the statement of assets and equity.
(a) land expense.
(b) property, plant, and equipment.
(c) an intangible asset.
(d) a long-term investment.
(a) by importance.
(b) in the reverse order of their expected conversion to cash.
(c) by order of liquidity.
(d) alphabetically.
(a) may report all their assets on their balance sheets at fair value.
(b) often offset assets against liabilities and show net assets and net liabilities on their balance sheets, rather than the underlying detailed line items.
(c) generally report current assets before non-current assets on their balance sheets.
(d) do not have any guidelines as to what should be reported on their balance sheets.
(a) current assets, long-term assets, current liabilities, long-term liabilities, stockholders' equity.
(b) long-term assets, long-term liabilities, current assets, current liabilities, stockholders' equity.
(c) long-term assets, current assets, stockholders' equity, long-term liabilities, current liabilities.
(d) stockholders' equity, long-term assets, current assets, long-term liabilities, current liabilities.
GAAP Exercises
GAAP4-1 In what ways does the format of a statement of financial of position under IFRS often differ from a balance sheet presented under GAAP?
GAAP4-2 What term is commonly used under GAAP in reference to the statement of financial position?
GAAP4-3 The balance sheet for Diaz Company includes the following accounts: Accounts Receivable $12,500; Prepaid Insurance $3,600; Cash $15,400; Supplies $5,200; and Short-Term Investments $6,700. Prepare the current assets section of the balance sheet, listing the accounts in proper sequence using GAAP.
GAAP4-4 Zurich Company recently received the following information related to the company's December 31, 2014, balance sheet.
Inventories | $ 2,700 |
Cash | 13,100 |
Equipment | 21,700 |
Investments in stocks (long term) | 6,500 |
Short-term investments | $ 120 |
Accumulated depreciation—equipment | 5,700 |
Accounts receivable | 4,300 |
Prepare the assets section of the company's classified balance sheet using GAAP.
GAAP4-5 The following information is available for Rego Bowling Alley at December 31, 2014.
Buildings | $128,000 |
Accounts Receivable | 7,540 |
Prepaid Insurance | 4,680 |
Cash | 18,040 |
Equipment | 62,400 |
Land | 67,000 |
Insurance Expense | 780 |
Depreciation Expense | 7,360 |
Interest Expense | 2,600 |
Common Stock | $90,000 |
Retained Earnings | 22,000 |
Accumulated Depreciation—Buildings | 42,600 |
Accounts Payable | 12,300 |
Notes Payable | 95,000 |
Accumulated Depreciation—Equipment | 18,720 |
Interest Payable | 2,600 |
Service Revenue | 15,180 |
Prepare a classified balance sheet; assume that $13,900 of the notes payable will be paid in 2015 using GAAP.
GAAP4-6 Brian Hopkins is interested in comparing the liquidity and solvency of a U.S. software company with a Chinese competitor. Is this possible if the two companies report using different currencies?
GAAP Financial Reporting Problem: Tootsie Roll Industries, Inc.
GAAP4-7 The financial statements of Tootsie Roll are presented in Appendix D. The company's complete annual report, including the notes to its financial statements, is available at www.tootsie.com.
(a) What were Tootsie Roll's total current assets at December 31, 2010 and December 31, 2009?
(b) Are the assets included in current assets listed in the proper order? Explain.
(c) How are Tootsie Roll's assets classified?
(d) What were Tootsie Roll's current liabilities at December 31, 2010, and December 31, 2009?
Answers to GAAP Self-Test Questions
1. d 2. d 3. c 4. c 5. a
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