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 this 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 statements? 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:
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.
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 Yazici Advertising A.Ş. 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.
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 directly 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 Yazici Advertising A.Ş. 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 164).
Enter all ledger accounts with balances in the account titles column. Enter debit and credit amounts from the ledger in the trial balance columns. Illustration 4-2 shows the worksheet trial balance for Yazici Advertising A.Ş. This trial balance is the same one that appears in Illustration 2-32 (page 73) and Illustration 3-3 (page 105).
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 Yazici Advertising A.Ş. are the same as the adjustments in Illustration 3-23 (page 119). They are keyed in the adjustments columns of the worksheet as follows.
After Yazici has entered all the adjustments, the adjustments columns are totaled to prove their equality.
Yazici 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 121).
After Yazici 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 fi nancial statement columns will not balance and the fi nancial statements will be incorrect.
• HELPFUL HINT
Every adjusted trial balance amount must be extended to one of the four statement columns.
The fourth step is to extend adjusted trial balance amounts to the income statement and statement of financial position columns of the worksheet. Yazici 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. Yazici 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, Yazici 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.
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 4-2, 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 exceed total credits in the income statement columns? 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. The totals shown in the debit and credit statement of financial position columns will also match. 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.
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 4-3 (page 166) shows the financial statements prepared from Yazici’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 Yazici’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 of 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 follow the preparation of financial statements when a worksheet is used. The adjusting entries on October 31 for Yazici Advertising A.Ş. are the same as those shown in Illustration 3-23 (page 119).
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.
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.
• Alternative Terminology
Temporary accounts are sometimes called nominal accounts, and permanent accounts are sometimes called real accounts.
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 4-4 identifies the accounts in each category.
• HELPFUL HINT
A contra asset account, such as Accumulated Depreciation, is a permanent account.
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 4-11 on page 175.) 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
The Dividends account is closed directly to Retained Earnings and not to Income Summary because dividends are not an expense.
Illustration 4-5 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 4-5 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 Yazici Advertising A.Ş. closes its books monthly. Illustration 4-6 (page 170) shows the closing entries at October 31. (The numbers in parentheses before each entry correspond to the four entries diagrammed in Illustration 4-5.)
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 4-7 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 4-3. Yazici 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, Yazici totals, balances, and double-underlines its temporary accounts—revenues, expenses, and Dividends, as shown in T-account form in Illustration 4-7. It does not close its permanent accounts—assets, liabilities, and equity (Share Capital—Ordinary and Retained Earnings). Instead, Yazici 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).
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.
Q Who else benefits from a shorter closing process? (See page 214.)
The worksheet for Hancock Company shows the following in the financial statement columns:
Prepare the closing entries at December 31 that affect equity.
Related exercise material: BE4-4, BE4-5, BE4-6, E4-4, E4-7, E4-8, E4-11, and DO IT! 4-2.
Describe the content and purpose of a post-closing trial balance.
After Yazici 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 the 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 4-8 shows the post-closing trial balance for Yazici Advertising A.Ş.
Yazici prepares the post-closing trial balance from the permanent accounts in the ledger. Illustration 4-9 shows the permanent accounts in Yazici’s general ledger.
Note: The permanent accounts for Yazici Advertising A.Ş. are shown here; the temporary accounts are shown in Illustration 4-10. Both permanent and temporary accounts are part of the general ledger; we segregated them here to aid in learning.
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 Yazici 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 4-10. After Yazici correctly posts the closing entries, each temporary account has a zero balance. These accounts are double-underlined to finalize the closing process.
Note: The temporary accounts for Yazici Advertising A.Ş. are shown here; Illustration 4-9 shows the permanent accounts. Both permanent and temporary accounts are part of the general ledger; they are segregated here to aid in learning.
State the required steps in the accounting cycle.
Illustration 4-11 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 this chapter.
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 Bai Co. illustrate this approach.
On May 10, Bai Co. journalized and posted a NT$500 cash collection on account from a customer as a debit to Cash NT$500 and a credit to Service Revenue NT$500. 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 NT$500 is correct. However, the NT$500 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. Bai makes the following correcting entry.
On May 18, Bai purchased on account equipment costing NT$4,500. The transaction was journalized and posted as a debit to Equipment NT$450 and a credit to Accounts Payable NT$450. The error was discovered on June 3, when Bai received the monthly statement for May from the creditor.
Comparison of the two entries shows that two accounts are incorrect. Equipment is understated NT$4,050, and Accounts Payable is understated NT$4,050. Bai 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.
The accuracy of a company’s financial records is very important to investors, but other issues are also of concern. Recently, the Nigerian Stock Exchange adopted a corporate-goverance system to assess the 190 companies that are listed on the exchange. The rating system requires the companies to answer questions about business ethics, audit procedures, internal controls, disclosure practices, and other matters. Africa’s economy is growing rapidly, so it offers many opportunities to investors and companies. But the accounting practices of many African companies lag behind those of companies in other parts of the world. In order to attract more outside investment and therefore lower the cost of financing projects, many African companies have adopted IFRS. One financial advisor said that while trying to help one African company, she found accounts that were commingled and assets that had not been recorded because they had been purchased with cash. She emphasized, however, that “just because they don’t have the best accounting records doesn’t mean they don’t have a good business.”
Source: Kimberly S. Johnson, “Africa Makes Strides in Corporate Accounting, Governance,” Wall Street Journal Online (November 17, 2014).
Q What benefit is likely to result if African companies improve their accounting practices and adopt IFRS? (See page 214.)
Sanchez Company discovered the following errors made in January 2017.
Correct the errors without reversing the incorrect entry.
Related exercise material: BE4-9, E4-12, E4-13, and DO IT! 4-3.
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 4-16.
Illustration 4-16 Standard statement of financial position classifications
Assets |
Equity and Liabilities |
Intangible assets | Equity |
Property, plant, and equipment | Non-current liabilities |
Long-term investments | Current liabilities |
Current assets |
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 Ltd. shown in Illustration 4-17. 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 4-17, Cheng Ltd. reported intangible assets of NT$3,100,000.
• HELPFUL HINT
Recall that the basic accounting equation is .
Illustration 4-18 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 4-17, Cheng Ltd. 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 4-17, Cheng Ltd. reported accumulated depreciation of NT$5,000,000.
Illustration 4-19 presents the property, plant, and equipment of the Laclede 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 4-17, Cheng Ltd. 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 4-20.
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 4-17, Cheng Ltd. 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 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 4-21 presents the current assets of Tesco (GBR).
Appendix B at the end of this textbook contains the financial statements of Nestlé SA (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.
To learn more about Nestlé’s efforts to create shared value, go to http://www.nestle.com/csv.
Q What are some implications of Nestlé’s decision to measure its results using objective measures and then publicly report these results? (See page 214.)
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 discuss 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 4-17, Cheng Ltd. reported non-current liabilities of NT$11,300,000.
Illustration 4-23 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, salaries and 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 4-17, Cheng Ltd. reported five different types of current liabilities, for a total of NT$16,050,000.
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 4-24 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.
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).
Q What can various company managers do to ensure that working capital is managed efficiently to maximize net income? (See page 214.)
The following accounts were taken from the financial statements of Callahan Company.
_____ Salaries and wages payable | _____ Investment in real estate |
_____ Service revenue | _____ Equipment |
_____ Interest payable | _____ Accumulated depreciation—equipment |
_____ Goodwill | _____ Depreciation expense |
_____ Short-term investments | _____ Share capital—ordinary |
_____ Mortgage payable (due in 3 years) | _____ Unearned service revenue |
Match each of the 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.”
Intangible assets (IA) | Equity (E) |
Property, plant, and equipment (PPE) | Non-current liabilities (NCL) |
Long-term investments (LTI) | Current liabilities (CL) |
Current assets (CA) |
__CL__ | Salaries and wages payable | __LTI__ | Investment in real estate |
__NA__ | Service revenue | __PPE__ | Equipment |
__CL__ | Interest payable | __PPE__ | Accumulated depreciation—equipment |
__IA__ | Goodwill | ||
__CA__ | Short-term investments | __NA__ | Depreciation expense |
__NCL__ | Mortgage payable (due in 3 years) | __E__ | Share capital—ordinary |
__CL__ | Unearned service revenue |
Related exercise material: BE4-11, E4-14, E4-15, E4-16, E4-17, and DO IT! 4-4.
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 117), 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 Yazici Advertising A.Ş. 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 Yazici 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 Yazici makes reversing entries, it can debit all cash payments of expenses to the expense account. This means that on November 9 (and every payday) Yazici 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 Yazici Advertising A.Ş., the adjusting entry was Accounts Receivable (Dr.) 200 and Service Revenue (Cr.) 200. Thus, the reversing entry on November 1 is:
When Yazici collects the accrued service revenue, it debits Cash and credits Service Revenue.
Journalize and post closing entries, and prepare a post-closing trial balance.
Prepare financial statements.
Prepare worksheet and classified statement of financial position, and journalize closing entries.
At the end of its first month of operations, Pampered Pet Service Ltd. has the following unadjusted trial balance.
PAMPERED PET SERVICE LTD. August 31, 2017 Trial Balance (NT$ in thousands) |
||
Debit |
Credit |
|
Cash | NT$ 5,400 |
|
Accounts Receivable | 2,800 |
|
Supplies | 1,300 |
|
Prepaid Insurance | 2,400 |
|
Equipment | 60,000 |
|
Notes Payable | NT$40,000 |
|
Accounts Payable | 2,400 |
|
Share Capital—Ordinary | 30,000 |
|
Dividends | 1,000 |
|
Service Revenue | 4,900 |
|
Salaries and Wages Expense | 3,200 |
|
Utilities Expense | 800 |
|
Advertising Expense | 400 |
|
NT$77,300 |
NT$77,300 |
Other data:
Explanation: (a) insurance expired, (b) supplies used, (c) depreciation expensed, and (d) interest accrued.
Brief Exercises, DO IT! Review, Exercises, and Problems, and many additional resources are available for practice in WileyPLUS.
NOTE: Asterisked Questions, Exercises, and Problems relate to material in the appendix to the chapter.
List the steps in preparing a worksheet.
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.
Prepare partial worksheet.
BE4-2 The ledger of Van Heiden Company, NV 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 performed €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.
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.
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.
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.
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.
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.
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.
Prepare correcting entries.
BE4-9 At Rafeul Company SA, 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.
BE4-10 The statement of financial position debit column of the worksheet for Alvin Company, Ltd. 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.
BE4-11 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) |
Match each of the following accounts to its proper statement of financial position classification.
_____ Accounts payable | _____ Income taxes payable |
_____ Accounts receivable | _____ Debt investment (long-term) |
_____ Accumulated depreciation—buildings | _____ Land |
_____ Buildings | _____ Inventory |
_____ Cash | _____ Patents |
_____ Copyrights | _____ Supplies |
Prepare reversing entries.
*BE4-12 At October 31, Prasad Company Ltd. 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.
DO IT!4-1 Mo Hu is preparing a worksheet. Explain to Mo 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—Equipment |
Share Capital—Ordinary | Utilities Expense |
Prepare closing entries.
DO IT!4-2 The worksheet for Olympic Company Ltd. 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 correcting entries.
DO IT!4-3 Hanson Company has an inexperienced accountant. During the first months on the job, the accountant made the following errors in journalizing transactions. All entries were posted as made.
Prepare the correcting entries.
Match accounts to statement of financial position classifications.
DO IT!4-4 The following accounts were taken from the financial statements of Popovic Company, OAO.
______ Interest revenue | ______ Share capital—ordinary |
______ Utilities payable | ______ Accumulated depreciation—equipment |
______ Accounts payable | ______ Equipment |
______ Supplies | ______ Salaries and wages expense |
______ Bonds payable | ______ Investment in real estate |
______ Trademarks | ______ Unearned rent revenue |
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.”
Intangible assets (IA) | Equity (E) |
Property, plant, and equipment (PPE) | Non-current liabilities (NCL) |
Long-term investments (LTI) | Current liabilities (CL) |
Current assets (CA) |
Complete the worksheet.
E4-1 The trial balance columns of the worksheet for Lim Company, Ltd. at June 30, 2017, are as follows (in thousands).
LIM COMPANY, LTD. Worksheet For the Month Ended June 30, 2017 |
||
Trial Balance |
||
Account Titles |
Dr. |
Cr. |
Cash | 4,120 |
|
Accounts Receivable | 2,640 |
|
Supplies | 1,900 |
|
Accounts Payable | 1,120 |
|
Unearned Service Revenue | 240 |
|
Share Capital—Ordinary | 5,000 |
|
Service Revenue | 3,400 |
|
Salaries and Wages Expense | 860 |
|
Miscellaneous Expense | 240 |
|
9,760 |
9,760 |
Other data:
Instructions
Enter the trial balance on a worksheet and complete the worksheet.
Complete the worksheet.
E4-2 The adjusted trial balance columns of the worksheet for Albanese Company, SpA are as follows.
Instructions
Complete the worksheet.
Prepare financial statements from worksheet.
E4-3 Worksheet data for Albanese Company, SpA are presented in E4-2. No ordinary shares were issued during April.
Instructions
Journalize and post closing entries and prepare a post-closing trial balance.
Prepare an income statement, a retained earnings statement, and a classified statement of financial position, using euros as the currency.
E4-4 Worksheet data for Albanese Company, SpA are presented in E4-2.
Instructions
Prepare adjusting entries from a worksheet, and extend balances to worksheet columns.
E4-5 The adjustments columns of the worksheet for Munoz Company SA are shown on the next page.
Adjustments |
||
Account Titles |
Debit |
Credit |
Accounts Receivable | 1,100 |
|
Prepaid Insurance | 400 |
|
Accumulated Depreciation—Equipment | 900 |
|
Salaries and Wages Payable | 500 |
|
Service Revenue | 1,100 |
|
Salaries and Wages Expense | 500 |
|
Insurance Expense | 400 |
|
Depreciation Expense | 900 |
|
2,900 |
2,900 |
Instructions
Derive adjusting entries from worksheet data.
E4-6 Selected worksheet data for Zugi Company, SJSC are presented below.
Instructions
Prepare closing entries, and prepare a post-closing trial balance.
E4-7 Lanza Company, SA had the following adjusted trial balance.
LANZA COMPANY, SA Adjusted Trial Balance For the Month Ended June 30, 2017 |
||
Adjusted Trial Balance |
||
Account Titles |
Debit |
Credit |
Cash | R$ 3,712 |
|
Accounts Receivable | 2,904 |
|
Supplies | 480 |
|
Accounts Payable | R$ 1,056 |
|
Unearned Service Revenue | 160 |
|
Share Capital—Ordinary | 3,000 |
|
Retained Earnings | 1,360 |
|
Dividends | 300 |
|
Service Revenue | 4,300 |
|
Salaries and Wages Expense | 1,344 |
|
Miscellaneous Expense | 180 |
|
Supplies Expense | 1,200 |
|
Salaries and Wages Payable | 244 |
|
R$10,120 |
R$10,120 |
Instructions
Journalize and post closing entries, and prepare a post-closing trial balance.
E4-8 Windsor Company, Ltd. ended its fiscal year on July 31, 2017. The company’s adjusted trial balance as of the end of its fiscal year is shown below.
WINDSOR COMPANY, LTD. Adjusted Trial Balance July 31, 2017 |
|||
No. |
Account Titles |
Debit |
Credit |
101 | Cash | £ 9,840 |
|
112 | Accounts Receivable | 8,140 |
|
157 | Equipment | 15,900 |
|
158 | Accumulated Depreciation—Equip. | £ 5,400 |
|
201 | Accounts Payable | 2,220 |
|
208 | Unearned Rent Revenue | 3,800 |
|
311 | Share Capital—Ordinary | 18,000 |
|
320 | Retained Earnings | 20,260 |
|
332 | Dividends | 12,000 |
|
400 | Service Revenue | 64,000 |
|
429 | Rent Revenue | 6,500 |
|
711 | Depreciation Expense | 3,700 |
|
726 | Salaries and Wages Expense | 55,700 |
|
732 | Utilities Expense | 14,900 |
|
£120,180 |
£120,180 |
Instructions
Prepare financial statements.
E4-9 The adjusted trial balance for Windsor Company, Ltd. is presented in E4-8.
Instructions
Answer questions related to the accounting cycle.
E4-10 Juan Aquino 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.
E4-11 Selected accounts for Michelle’s Salon SA are presented as follows. All June 30 postings are from closing entries.
Instructions
Prepare correcting entries.
E4-12 Karlsen Company, ASA discovered the following errors made in January 2017.
Instructions
Prepare correcting entries.
E4-13 Souza Company, SA 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.
E4-14 The adjusted trial balance for Patel Bowling Alley Ltd. at December 31, 2017, contains the following accounts.
Debit |
Credit |
||
Buildings | £128,000 |
Share Capital—Ordinary | £ 80,000 |
Accounts Receivable | 7,540 |
Retained Earnings | 28,000 |
Prepaid Insurance | 4,680 |
Accumulated Depreciation—Buildings | 42,600 |
Cash | 18,040 |
Accounts Payable | 12,300 |
Equipment | 62,400 |
Notes Payable | 95,000 |
Land | 67,000 |
Accumulated Depreciation—Equipment | 18,720 |
Insurance Expense | 780 |
Interest Payable | 2,600 |
Depreciation Expense | 7,360 |
Service Revenue | 19,180 |
Interest Expense | 2,600 |
£ 298,400 |
|
£ 298,400 |
Instructions
Classify accounts on statement of financial position.
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.
E4-16 The following items were taken from the financial statements of Sexton Company Ltd. (All amounts are in thousands.)
Long-term debt | £ 1,000 |
Accumulated depreciation—equip. | £ 4,125 |
Prepaid insurance | 680 |
Accounts payable | 1,444 |
Equipment | 11,500 |
Notes payable (due after 2018) | 800 |
Long-term investments | 1,200 |
Share capital—ordinary | 10,000 |
Short-term investments | 3,619 |
Retained earnings | 4,750 |
Notes payable (due in 2018) | 500 |
Accounts receivable | 1,696 |
Cash | 2,668 |
Inventory | 1,256 |
Instructions
Prepare a classified statement of financial position in good form as of December 31, 2017.
Prepare financial statements.
E4-17 These financial statement items are for Van Dijk Company NV at year-end, July 31, 2017.
Salaries and wages payable | $ 2,040 |
Notes payable (long-term) | $ 1,800 |
Salaries and wages expense | 50,700 |
Cash | 14,200 |
Utilities expense | 22,600 |
Accounts receivable | 9,240 |
Equipment | 30,000 |
Accumulated depreciation—equip. | 6,000 |
Accounts payable | 4,100 |
Dividends | 3,000 |
Service revenue | 62,000 |
Depreciation expense | 2,400 |
Rent revenue | 8,500 |
Retained earnings (beginning of the year) | 22,700 |
Share capital—ordinary | 25,000 |
Instructions
Use reversing entries.
*E4-18 Ronaldo Company SA 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
Prepare closing and reversing entries.
*E4-19 On December 31, the adjusted trial balance of Feng Employment Agency, Ltd. shows the following selected data.
Accounts Receivable | NT$720,000 |
Service Revenue | NT$2,820,000 |
Interest Expense | 249,000 |
Interest Payable | 39,000 |
Analysis shows that adjusting entries were made to (1) accrue NT$153,000 of service revenue and (2) accrue NT$39,000 interest expense.
Instructions
Prepare worksheet, financial statements, and adjusting and closing entries.
P4-1A Hercules Poirot began operations as a private investigator on January 1, 2017. The trial balance columns of the worksheet for Hercules Poirot, P.I., SA at March 31 are as follows.
HERCULES POIROT, P.I., SA Worksheet For the Quarter Ended March 31, 2017 |
||
Trial Balance |
||
Account Titles |
Dr. |
Cr. |
Cash | 11,410 |
|
Accounts Receivable | 5,920 |
|
Supplies | 1,250 |
|
Prepaid Insurance | 2,400 |
|
Equipment | 15,000 |
|
Notes Payable | 10,000 |
|
Accounts Payable | 7,350 |
|
Share Capital—Ordinary | 14,000 |
|
Dividends | 600 |
|
Service Revenue | 10,200 |
|
Salaries and Wages Expense | 2,240 |
|
Travel Expense | 1,300 |
|
Rent Expense | 1,200 |
|
Miscellaneous Expense | 230 |
|
41,550 |
41,550 |
Other data:
Instructions
Complete worksheet; prepare financial statements, closing entries, and post-closing trial balance.
P4-2A The adjusted trial balance columns of the worksheet for Watson Company, Ltd. are as follows.
WATSON COMPANY, LTD. Worksheet For the Year Ended December 31, 2017 |
||||
Adjusted Trial Balance |
||||
Account No. |
Account Titles |
Dr. |
Cr. |
|
101 |
Cash | 17,800 |
||
112 |
Accounts Receivable | 14,400 |
||
126 |
Supplies | 2,300 |
||
130 |
Prepaid Insurance | 4,400 |
||
157 |
Equipment | 46,000 |
||
158 |
Accumulated Depreciation—Equipment | 18,000 |
||
200 |
Notes Payable | 20,000 |
||
201 |
Accounts Payable | 8,000 |
||
212 |
Salaries and Wages Payable | 2,600 |
||
230 |
Interest Payable | 1,000 |
||
311 |
Share Capital—Ordinary | 15,000 |
||
320 |
Retained Earnings | 9,800 |
||
332 |
Dividends | 12,000 |
||
400 |
Service Revenue | 86,200 |
||
610 |
Advertising Expense | 10,000 |
||
631 |
Supplies Expense | 3,700 |
||
711 |
Depreciation Expense | 6,000 |
||
722 |
Insurance Expense | 4,000 |
||
726 |
Salaries and Wages Expense | 39,000 |
||
905 |
Interest Expense | 1,000 |
||
Totals |
160,600 |
160,600 |
Instructions
Prepare financial statements, closing entries, and post-closing trial balance.
P4-3A The completed financial statement columns of the worksheet for Rahim Company, Ltd. are as follows.
Instructions
Complete worksheet; prepare classified statement of financial position, adjusting and closing entries, and post-closing trial balance.
P4-4A Teresina Amusement Park, SA has a fiscal year ending on September 30. Selected data from the September 30 worksheet are as follows.
Instructions
Complete all steps in accounting cycle.
P4-5A Zoe Parker opened Fresh Step Carpet Cleaners, Ltd. on March 1. During March, the following transactions were completed.
Mar. 1 |
Shareholders invested £14,000 cash in the business in exchange for ordinary shares. |
1 |
Purchased used truck for £10,000, paying £3,000 cash and the balance on account. |
3 |
Purchased cleaning supplies for £1,200 on account. |
5 |
Paid £1,800 cash on one-year insurance policy effective March 1. |
14 |
Billed customers £4,500 for cleaning services performed. |
18 |
Paid £1,500 cash on amount owed on truck and £500 on amount owed on cleaning supplies. |
Mar. 20 |
Paid £1,800 cash for employee salaries. |
21 |
Collected £1,600 cash from customers billed on March 14. |
28 |
Billed customers £2,500 for cleaning services performed. |
31 |
Paid £320 for the monthly gasoline bill for the truck. |
31 |
Declared and paid £800 cash dividends. |
The chart of accounts for Fresh Step Carpet Cleaners, Ltd. 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
Analyze errors and prepare correcting entries and trial balance.
P4-6A Sara Yu, CA, was retained by Info Cable, Ltd. to prepare financial statements for April 2017. Yu accumulated all the ledger balances per Info’s records and found the following.
INFO CABLE, LTD. Trial Balance April 30, 2017 |
||
Debit |
Credit |
|
Cash | £ 4,100 |
|
Accounts Receivable | 3,200 |
|
Supplies | 800 |
|
Equipment | 10,600 |
|
Accumulated Depreciation—Equip. | £ 1,250 |
|
Accounts Payable | 2,100 |
|
Salaries and Wages Payable | 700 |
|
Unearned Service Revenue | 890 |
|
Share Capital—Ordinary | 10,000 |
|
Retained Earnings | 2,880 |
|
Service Revenue | 5,450 |
|
Salaries and Wages Expense | 3,300 |
|
Advertising Expense | 480 |
|
Miscellaneous Expense | 290 |
|
Depreciation Expense | 500 |
|
£ 23,270 |
£ 23,270 |
Sara Yu reviewed the records and found the following errors.
Instructions
Prepare worksheet, financial statements, and adjusting and closing entries.
P4-1B The trial balance columns of the worksheet for Firmament Roofing, Ltd. at March 31, 2017, are as follows.
FIRMAMENT ROOFING, LTD. Worksheet For the Month Ended March 31, 2017 |
||
Trial Balance |
||
Account Titles |
Dr. |
Cr. |
Cash | 2,720 |
|
Accounts Receivable | 2,700 |
|
Supplies | 1,500 |
|
Equipment | 11,000 |
|
Accumulated Depreciation—Equipment | 1,250 |
|
Accounts Payable | 2,500 |
|
Unearned Service Revenue | 650 |
|
Share Capital—Ordinary | 10,000 |
|
Dividends | 1,100 |
|
Service Revenue | 6,300 |
|
Salaries and Wages Expense | 1,300 |
|
Miscellaneous Expense | 380 |
|
20,700 |
20,700 |
Other data:
Instructions
Complete worksheet; prepare financial statements, closing entries, and post-closing trial balance.
P4-2B The adjusted trial balance columns of the worksheet for Bleecker Street, Ltd., owned by Raymond Pearson, are as follows.
BLEECKER STREET, LTD. Worksheet For the Year Ended December 31, 2017 |
|||
Adjusted Trial Balance |
|||
Account No. |
Account Titles |
Dr. |
Cr. |
101 |
Cash | 5,300 |
|
112 |
Accounts Receivable | 10,800 |
|
126 |
Supplies | 1,500 |
|
130 |
Prepaid Insurance | 2,000 |
|
157 |
Equipment | 27,000 |
|
158 |
Accumulated Depreciation—Equipment | 5,600 |
|
200 |
Notes Payable | 15,000 |
|
201 |
Accounts Payable | 4,600 |
|
212 |
Salaries and Wages Payable | 2,400 |
|
230 |
Interest Payable | 600 |
|
311 |
Share Capital—Ordinary | 10,000 |
|
320 |
Retained Earnings | 4,200 |
|
332 |
Dividends | 5,000 |
|
400 |
Service Revenue | 59,000 |
|
610 |
Advertising Expense | 8,400 |
|
631 |
Supplies Expense | 4,000 |
|
711 |
Depreciation Expense | 5,600 |
|
722 |
Insurance Expense | 3,200 |
|
726 |
Salaries and Wages Expense | 28,000 |
|
905 |
Interest Expense | 600 |
|
Totals |
101,400 |
101,400 |
Instructions
Prepare financial statements, closing entries, and post-closing trial balance.
P4-3B The completed financial statement columns of the worksheet for Yulon Company, Ltd. are as follows.
Instructions
Complete worksheet; prepare classified statement of financial position, adjusting and closing entries, and post-closing trial balance.
P4-4B Carroll Management Services, Ltd. began business on January 1, 2017, 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.
CARROLL MANAGEMENT SERVICES, LTD. Worksheet For the Year Ended December 31, 2017 |
||||
Trial Balance |
Adjusted Trial Balance |
|||
Account Titles |
Dr. |
Cr. |
Dr. |
Cr. |
Cash | 13,800 |
13,800 |
||
Accounts Receivable | 26,300 |
26,300 |
||
Prepaid Insurance | 3,600 |
1,800 |
||
Land | 67,000 |
67,000 |
||
Buildings | 127,000 |
127,000 |
||
Equipment | 59,000 |
59,000 |
||
Accounts Payable | 12,500 |
12,500 |
||
Unearned Rent Revenue | 8,000 |
3,500 |
||
Mortgage Payable | 120,000 |
120,000 |
||
Share Capital—Ordinary | 80,000 |
80,000 |
||
Retained Earnings | 54,000 |
54,000 |
||
Dividends | 16,000 |
16,000 |
||
Service Revenue | 90,700 |
90,700 |
||
Rent Revenue | 26,000 |
30,500 |
||
Salaries and Wages Expense | 42,000 |
42,000 |
||
Advertising Expense | 17,500 |
17,500 |
||
Utilities Expense | 19,000 |
19,000 |
||
Totals | 391,200 |
391,200 |
||
Insurance Expense | 1,800 |
|||
Depreciation Expense | 6,600 |
|||
Accumulated Depreciation—Buildings | 3,000 |
|||
Accumulated Depreciation—Equipment | 3,600 |
|||
Interest Expense | 9,600 |
|||
Interest Payable | 9,600 |
|||
Totals | 407,400 |
407,400 |
Instructions
Complete all steps in accounting cycle.
P4-5B Lori Callebaut opened Callebaut Cleaning Service, AG on July 1, 2017. 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 €3,600 cash on one-year insurance policy effective July 1. |
12 |
Billed customers €5,900 for cleaning services performed. |
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 €9,400 for cleaning services performed. |
31 |
Paid €400 for the monthly gasoline bill for the truck. |
31 |
Declared and paid a €1,200 cash dividend. |
The chart of accounts for Callebaut 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
CP4 Tara Harris opened Tara’s Maids Cleaning Service, Ltd. on July 1, 2017. 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 performed. |
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 performed. |
31 |
Paid gasoline for the month on the truck, £400. |
31 |
Declared and paid a £500 cash dividend. |
The chart of accounts for Tara’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
(Note: This is a continuation of the Matcha Creations problem from Chapters 1–3.)
MC4 Mei-ling had a very busy December. At the end of the month, after journalizing and posting the December transactions and adjusting entries, Mei-ling prepared the following adjusted trial balance.
MATCHA CREATIONS Adjusted Trial Balance December 31, 2017 |
||
Debit |
Credit |
|
Cash | NT$1,180 | |
Accounts Receivable | 875 |
|
Supplies | 350 |
|
Prepaid Insurance | 1,210 |
|
Equipment | 1,200 |
|
Accumulated Depreciation—Equipment | NT$ 40 | |
Accounts Payable | 75 |
|
Salaries and Wages Payable | 56 |
|
Unearned Service Revenue | 300 |
|
Notes Payable | 2,000 |
|
Interest Payable | 15 |
|
Share Capital—Ordinary | 800 |
|
Dividends | 500 |
|
Service Revenue | 4,515 |
|
Salaries and Wages Expense | 1,006 |
|
Utilities Expense | 125 |
|
Advertising Expense | 165 |
|
Supplies Expense | 1,025 |
|
Depreciation Expense | 40 |
|
Insurance Expense | 110 |
|
Interest Expense | 15 |
|
NT$7,801 |
NT$7,801 |
Instructions
Using the information in the adjusted trial balance, do the following.
BYP4-1 The financial statements of TSMC are presented in Appendix A at the end of this textbook. The company’s complete annual report, including the notes to the financial statements, is available in the Investors section of the company’s website, www.tsmc.com.
Instructions
Answer the questions below using the statement of financial position and the notes to consolidated financial statements section.
BYP4-2 Nestlé’s financial statements are presented in Appendix B. Financial statements for Petra Foods are presented in Appendix C.
Instructions
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.
BYP4-4 Everclean Janitorial Service, Ltd. was started 2 years ago by Lauren Baird. Because business has been exceptionally good, Lauren decided on July 1, 2017, to expand operations by acquiring an additional truck and hiring two more assistants. To finance the expansion, Lauren obtained on July 1, 2017, a £25,000, 10% bank loan, payable £10,000 on July 1, 2018, and the balance on July 1, 2019. The terms of the loan require the borrower to have £10,000 more current assets than current liabilities at December 31, 2017. If these terms are not met, the bank loan will be refinanced at 15% interest. At December 31, 2017, 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, 2018, 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.
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, SA, 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, Fabien LaRue, about this misstatement, you gather your courage to inform him. Fabien 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
Compare the procedures for the closing process under IFRS and U.S. GAAP.
The classified statement of financial position, although generally required internationally, contains certain variations in format when reporting under GAAP.
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.
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, 2017, 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, 2017.
Buildings | $128,000 |
Common Stock | $90,000 |
Accounts Receivable | 7,540 |
Retained Earnings | 22,000 |
Prepaid Insurance | 4,680 |
Accumulated Depreciation—Buildings | 42,600 |
Cash | 18,040 |
Accounts Payable | 12,300 |
Equipment | 62,400 |
Notes Payable | 95,000 |
Land | 67,000 |
Accumulated Depreciation—Equipment | 18,720 |
Insurance Expense | 780 |
Interest Payable | 2,600 |
Depreciation Expense | 7,360 |
Service Revenue | 15,180 |
Interest Expense | 2,600 |
Prepare a classified balance sheet; assume that $13,900 of the notes payable will be paid in 2018 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?
GAAP4-7 The financial statements of Apple are presented in Appendix D. The company’s complete annual report, including the notes to its financial statements, is available at http://investor.apple.com.
Remember to go back to the Navigator box on the chapter opening page and check off your completed work.